<PAGE>
As filed with the Securities and Exchange Commission on October 31 , 1997.
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CPS SYSTEMS, INC.
(NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
TEXAS 7379 75-1607857
(STATE OR OTHER (PRIMARY STANDARD (I.R.S EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
3400 CARLISLE
SUITE 500
DALLAS, TEXAS 75204
(214) 855-5277
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE
OFFICES AND PRINCIPAL PLACE OF BUSINESS)
PAUL E. KANA
CHIEF EXECUTIVE OFFICER
C/O CPS SYSTEMS, INC.
3400 CARLISLE
SUITE 500
DALLAS, TEXAS 75204
(214) 855-5277
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
COPIES TO:
EDWARD H. BROWN, ESQ. MICHAEL J. ERICKSON, ESQ.
CHESTER J. HOSCH, ESQ. LAURA A. BERTIN, ESQ.
SCHREEDER, WHEELER & FLINT, LLP SUMMIT LAW GROUP, P.L.L.C.
1600 THE CANDLER BUILDING 1505 WESTLAKE AVENUE NORTH
127 PEACHTREE STREET, N.E. SUITE 300
ATLANTA, GEORGIA 30303 SEATTLE, WASHINGTON 98109
(404) 681-3450 (206) 281-9881
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER PROPOSED MAXIMUM REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) UNIT(2) AGGREGATE OFFERING PRICE FEE
- -------------------------------------------------------------------------------------------------------
Common Stock, par value
$.01(1).................... 1,437,500 $9.00 $12,937,500.00 $3,920.45
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Representative's Warrant to
purchase
shares of Common Stock.... 143,750 $0.01 $1,437.50 $ 0.44
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Common Stock, par value
$.01, issuable upon
exercise of
Representative's Warrant.. 143,750 $10.80 $1,552,500.00 $ 470.45
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Total...................... $4,391.34
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</TABLE>
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(1) Includes 187,500 shares that the Underwriters have the option to purchase
solely to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD, NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
Subject to Completion Dated December , 1997
1,250,000 SHARES
LOGO
COMMON STOCK
CPS Systems, Inc. ("CPS" or the "Company") hereby offers 1,250,000 shares of
its common stock (the "Common Stock"). Prior to this offering, there has been
no public market for the Common Stock. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
It is currently estimated that the initial public offering price will be
between $7.00 and $9.00 per share. The Company anticipates that the Common
Stock will be quoted on the Nasdaq National Market under the symbol "CPSI"
effective upon the closing of this offering.
-----------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
UNDERWRITING
PRICE DISCOUNTS AND PROCEEDS TO
TO PUBLIC COMMISSIONS(1) COMPANY(2)
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Per share....................... $ $ $
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Total (3)....................... $ $ $
</TABLE>
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(1) Excludes a non-accountable expense allowance payable to Cruttenden Roth
Incorporated, representative of the Underwriters (the "Representative" or
"Cruttenden Roth"), and the value of warrants to purchase up to 125,000
shares of Common Stock (143,750 shares if the Underwriters' over-allotment
option is exercised in full) at an exercise price of 120% of the public
offering price to be issued to the Representative (the "Representative's
Warrant"). The Company and the Selling Shareholders have agreed to
indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting offering expenses, including the nonaccountable expenses
allowance in the amount of $300,000 ($345,000 if the Underwriters' over-
allotment option is exercised in full), estimated at $650,000, payable by
the Company.
(3) Certain shareholders have granted to the Underwriters a 45-day option to
purchase up to 187,500 additional shares of Common Stock on the same terms
and conditions as set forth above, solely to cover over-allotments, if any.
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to the Selling
Shareholders will be $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are offered by the several Underwriters, when, as
and if delivered to and accepted by the Underwriters and subject to various
prior conditions, including their right to withdraw, cancel or modify such
offer and to reject orders in whole or in part. It is expected that delivery of
share certificates will be made against payment therefor at the offices of
Cruttenden Roth Incorporated in Irvine, California, or through the facilities
of the Depository Trust Company on or about , 1997.
-----------
Cruttenden Roth
INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
[Map showing the locations of the Company's
customer installations and of the
Company's personnel and sales offices.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
The Company intends to furnish annual reports to shareholders containing
audited financial statements and make available quarterly reports and such
other periodic reports as it may determine to be appropriate or as may be
required by law.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise indicated, the information in this Prospectus assumes that the over-
allotment option granted to the underwriters has not been exercised. See
"Underwriting." Investors should carefully consider the information set forth
under the heading "Risk Factors."
THE COMPANY
CPS develops, markets, implements and supports fully integrated software
applications designed specifically for public sector organizations, including
states, counties, townships, city governments and other municipal agencies. The
Company's products address the following functional areas: (i) property tax
appraisal and assessment, (ii) property tax billing and collection, (iii) city
and municipal systems and (iv) remittance processing systems. Currently, the
Company's public sector software applications are installed in six states
(Colorado, Florida, North Carolina, New Mexico, Oklahoma and Texas), serving
more than 250 customers. The majority of its customers are county governments
with taxable parcel counts over 10,000 or cities with populations between 5,000
and 35,000. These potential customers make up approximately 76% of the total
counties and 85% of the total cities in the United States. The Company's focus
on the public sector allows it to design solutions that address the precise
needs of these organizations.
The Company has identified three significant growth opportunities in the
public sector marketplace. First, CPS intends to geographically expand its core
product business to address the following functional areas: property tax
appraisal and assessment, property tax billing and collection and city and
municipal systems. This opportunity represents a key segment of the Company's
business strategy due to the growing recurring revenue streams generated by
license agreements entered into by customers of the Company's core business.
Second, the Company plans to leverage its 17 years of public sector experience
to capitalize on the opportunity created by the Year 2000 ("Y2K") problem. The
Y2K problem results from the inability of certain computer systems to properly
interpret dates for the year 2000 and beyond. For example, unless Y2K
compliance is completed in certain systems, credit cards and ATM cards will
expire prematurely and insurance policies that span more than three years
cannot be written. Public sector entities are faced with the prospect of
competing with the private sector for recruiting, hiring and retaining top data
processing talent, despite limited ability to match competitive salaries for
attracting new hires or retaining existing staff. Third, CPS intends to
leverage the interoperability of the Company's core products to manage
information flow between departments as organizations shift from mainframe
computers to client/server systems.
The public sector marketplace is composed of state, county and city
governments, other municipal agencies and publicly owned utilities. This market
comprises over 3,000 counties and over 19,000 municipalities in the U.S.
According to one industry source, state and local government agencies spent
approximately $34.5 billion on information technology and related products in
1996. This total includes approximately $5.0 billion for software, $6.7 billion
for external services, $7.4 billion for hardware and $15.4 billion for internal
services (e.g., in-house management information systems departments).
Management estimates the remaining $1.9 billion was spent on the software in
the Company's core product areas. While the business community is taking steps
to address the Y2K problem, due to budgetary and other constraints many public
sector organizations lack the resources to achieve a timely solution. One
industry source estimates that the overall cost of solving the Y2K problem
worldwide will be in the range of $300 to $600 billion. CPS believes the Y2K
problem will cause many public sector organizations to explore further the
possibility of migrating all or portions of their legacy systems to Y2K
compliant client/server systems. As computing technology evolves and
information processing requirements expand, medium to large public sector
organizations are seeking to preserve the investment in their existing systems
by integrating or replacing mainframe computers with modern distributed
computer processing architectures, such as client/server systems.
3
<PAGE>
CPS currently markets 41 applications to public sector organizations,
offering customers the following: (i) compliance with periodically changing
legislation, (ii) simplification of data entry, (iii) extensive security
features, (iv) flexible report configuration and (v) open system technology.
CPS has developed a proprietary tool that converts client data into a Y2K
compliant format that can be run by CPS applications which are Y2K compliant.
Management believes this tool offers a significant competitive advantage in
marketing software applications. The Company's application software products
are readily adaptable to meet a customer's initial needs and are designed with
sufficient flexibility to respond to a customer's specific system refinements
and ongoing changes. The Company's tiered software architecture enables the CPS
to utilize multiple platforms and effectively integrate new technologies with
existing software.
The Company sees the Y2K opportunity as a means of becoming a dominant leader
in providing public sector solutions on a national basis. To accomplish this,
CPS plans to expand geographically the size of its direct sales and marketing
force and concurrently hire additional technical support and systems personnel.
Expansion benefits include the execution of additional long-term service
agreements, generating recurring revenue from continuing monthly maintenance
and service fees, typically at a rate equal to approximately 32% of the
software license fee. The Company believes that the public sector marketplace
is highly fragmented with many small, closely-held companies and views
acquisitions as a means of acquiring technology and application expertise,
broadening its customer base and expanding geographically. To support its
growth, the Company has entered into strategic alliances with external software
developers and Y2K service providers enabling it to provide the necessary
technical resources in a timely manner. The Company believes a substantial
opportunity exists to sell additional products to current customers who have
only one installed CPS product. CPS believes its customer base offers
considerable leverage to new business as references from existing customers
often result in future sales opportunities.
The Company was incorporated under the laws of the state of Texas in July
1978. The Company's executive offices are located at 3400 Carlisle, Suite 500,
Dallas, Texas 75204, and its telephone number is (214) 855-5277.
THE OFFERING
Common Stock offered by the 1,250,000
Company...........................
Common Stock to be outstanding
after this offering..............
6,082,502(1)
Use of Proceeds................... Repayment of certain indebtedness, working
capital, potential acquisitions and other
general corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market CPSI
Symbol............................
- --------
(1) Gives effect to the exercise of outstanding warrants to purchase an
aggregate of 927,766 shares of Common Stock, exercisable at a price per
share of $0.0026, which will be exercisable on the earlier of December 31,
1999 or completion of an initial public offering. Does not give effect to
(i) 335,000 shares of Common Stock reserved for issuance upon exercise of
outstanding options under the Company's 1997 Equity Participation Plan with
a per share exercise price equal to the initial offering price, (ii)
265,000 shares of Common Stock reserved for issuance upon exercise of
options reserved for future grant under the Company's 1997 Equity
Participation Plan, (iii) 100,000 shares of Common Stock reserved under the
Company's Employee Stock Purchase Plan and (iv) 125,000 shares (143,750
shares if the Underwriters' over-allotment option is exercised in full) of
Common Stock issuable upon exercise of the Representative's Warrant at an
exercise price of $10.80 per share. See "Management--Employee Equity
Plans," "Description of Capital Stock--Warrants" and "Underwriting."
4
<PAGE>
SUMMARY FINANCIAL DATA
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------- ----------------
1995 1996 1996 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Total revenue................................ $6,253 $8,363 $3,994 $5,405
Gross profit................................. 5,056 6,613 3,192 3,919
Operating expenses........................... 4,440 5,528 2,565 3,199
Earnings from operations before amortization
of intangible assets........................ 616 1,085 627 720
Net earnings (loss).......................... (230) (246) (78) 133
Net earnings (loss) per common share(1)....... $(0.06) $(0.06) $ (0.02) $ 0.03
Weighted average shares used in computing net
earnings (loss) per common share(1).......... 3,905 3,905 3,905 3,905
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- ---------
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Balance Sheet Data:
Cash................................................... $ 385 $ 592 $ 447
Working capital........................................ 200 303 368
Total assets........................................... 6,025 6,134 6,137
Long-term debt, net of current portion................. 3,041 2,741 2,560
Shareholders' equity................................... 770 524 657
</TABLE>
- --------
(1) Does not give effect to (i) the exercise of outstanding warrants to
purchase an aggregate of 927,766 shares of Common Stock, exercisable at a
price per share of $0.0026, which will be exercisable on the earlier of
December 31, 1999 or completion of an initial public offering, (ii) 335,000
shares of Common Stock reserved for issuance upon exercise of outstanding
options under the Company's 1997 Equity Participation Plan with a per share
exercise price equal to the initial offering price, (iii) 265,000 shares of
Common Stock reserved for issuance upon exercise of options reserved for
future grant under the Company's 1997 Equity Participation Plan, (iv)
100,000 shares of Common Stock reserved under the Company's Employee Stock
Purchase Plan and (v) 125,000 shares (143,750 shares if the Underwriters'
over-allotment option is exercised in full) of Common Stock issuable upon
exercise of the Representative's Warrant at an exercise price of $10.80 per
share. See "Management--Employee Equity Plans," "Description of Capital
Stock--Warrants" and "Underwriting."
----------------
The Company desires to take advantage of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. Certain statements in this
Prospectus that are not historical fact constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Discussions containing such forward-looking statements may be found in the
material set forth under "Summary," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business,"
as well as within this Prospectus generally. In addition, when used in this
Prospectus, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
statements are subject to a number of risks and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth in this Prospectus and the matters
set forth in this Prospectus generally. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
5
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the
Company and its business before purchasing any of the Common Shares offered
hereby.
RISKS ASSOCIATED WITH PUBLIC SECTOR MARKET
A substantial portion of the Company's revenue to date has been attributable
to sales of software and services to state, county and city governments and
other municipal agencies. The Company expects that sales to such public sector
customers will account for substantially all of the Company's revenue in the
future. Virtually all of these public sector organizations have existing
information processing systems. Accordingly, in order to continue to increase
its sales to this market, the Company must persuade these organizations to
replace or upgrade existing information processing systems. Change to an
organization's information system is a costly, time consuming and
operationally disruptive process for the customer. Conversion to a new
information processing system must typically be done without any disruption of
service and, accordingly, the Company's potential customers perceive a high
degree of risk in connection with the adoption of a new system. In addition,
the purchase of the Company's products involves a significant commitment of
capital, with attendant delays frequently associated with large capital
expenditures by an organization. For these and other reasons, the sales cycle
associated with the purchase of the Company's products is typically lengthy
and subject to a number of significant risks, including customers' budgetary
constraints and internal acceptance reviews, over which the Company has little
or no control. There can be no assurance that potential customers for the
Company's products in the public sector market will continue to make
information processing system replacement decisions at rates necessary to
maintain demand for the Company's products and sustain market growth or that
the Company's products will be accepted by public sector organizations that
consider replacing their current information processing systems. A significant
reduction in demand or acceptance of the Company's products could have a
material adverse effect on the Company's business, financial condition and
operating results.
UNCERTAINTY OF DEMAND FOR YEAR 2000 SOLUTIONS
The Company anticipates focusing a significant portion of its marketing and
sales efforts on products and solutions addressing the Y2K problem. The
Company's current plans involve developing solutions for current and potential
customers based upon modifications to the Company's existing software product
lines. Although the Company believes that the market for Y2K solutions will
grow significantly as the Y2K approaches, there can be no assurance that the
market will develop to the extent anticipated by the Company. Moreover, the
Company's efforts are directed at addressing the Y2K problem within the
framework of its traditional software products. Consequently, the Company's
market for its Y2K solution products is limited to current and potential
public sector customers of its existing software products. In addition, the
Company's customers may seek alternative solutions for the Y2K problem. Many
customers may attempt to resolve the problem internally rather than purchase
products and solutions from the Company or may seek to solve the Y2K problem
by retaining consultants or other competitors who may address the Y2K problem
through enterprise solutions covering the customer's entire computer system.
Due to these factors, development of a market for the Company's Y2K solution
is uncertain and unpredictable. Furthermore, the demand for Y2K products and
solutions is likely to diminish after the year 2000. The failure of the market
to increase, or to increase more slowly than anticipated, could have a
material adverse effect on the Company's business, financial condition and
operating results. See "Business--Industry Overview."
COMPETITION
The market in which the Company competes is highly fragmented, with a large
number of competitors that vary in size, primary computer platforms and
overall product scope. Within its traditional public sector markets, the
Company competes from time to time with (i) custom software and services
providers (such as
6
<PAGE>
Andersen Consulting, KPMG Peat Marwick and Oracle Corporation), (ii) companies
which focus on selected segments of the public sector market (including
Systems Computer & Technology, Inc., Manatron, Inc., H.T.E., Inc., American
Management Systems, Inc., BRC Holdings, Inc.) and (iii) a significant number
of smaller private companies. The Company also competes with in-house
management information services staff. In addition, within the market for its
Y2K solution products, the Company anticipates that it will compete with
companies who focus upon overall enterprise solutions to the Y2K problem. Many
of the Company's competitors are more established, benefit from greater name
recognition and have substantially greater resources than the Company.
Moreover, the Company could face additional competition as other established
and emerging companies enter the public sector software application market
and/or the Y2K market and new products and technologies are introduced.
Increased competition could result in price reductions, fewer customer orders,
reduced gross margins and loss of market share, any of which could have a
material adverse effect on the Company's business, financial condition and
operating results. In addition, current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third parties, thereby increasing the ability of their products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, financial condition and operating
results. See "Business--Competition."
MANAGEMENT OF GROWTH
The Company has recently experienced a period of significant expansion in
the number of its employees, the scope of its operating and financial systems
and the geographic area of its operations, and anticipates that growth may
continue in the future. To accommodate future growth, if any, the Company must
continue to implement and improve information systems, procedures and controls
and hire and train management, technical and sales personnel. The Company
believes there is significant competition for software development
professionals with the skills and expertise necessary to perform services
offered by the Company. Although the Company invests, and plans to continue
investing, significant resources in retaining and expanding its qualified
management, technical and sales force, the Company may experience difficulty
in recruiting and retaining capable personnel. There can be no assurance that
the Company will be able to expand successfully its management, technical or
sales personnel or that any such expansion will increase revenue. Failure by
the Company to implement and improve the Company's operational, financial and
management systems or maintain and expand personnel could have a material
adverse effect on the Company's business, financial condition and operating
results. See "Risk Factors--Dependence on Key Personnel" and "Business--
Employees."
POTENTIAL FLUCTUATIONS OF OPERATING RESULTS; FUTURE OPERATING RESULTS
UNCERTAINTY
The Company's revenue and operating results are subject to fluctuations
resulting from a variety of factors, including the effect of budgeting and
purchasing practices of its customers, the length of customer evaluation
processes for the Company's solutions, the timing of customer system
conversions, announcements of new products by the Company or its competitors,
and the Company's sales practices. In addition, since a significant portion of
the Company's operating expenses is fixed, the Company may not be able to
adjust or reduce spending in response to sales shortfalls or delays. Many of
these factors are not within the Company's control. These factors can cause
significant variations in operating results from quarter to quarter, which may
also adversely affect and cause volatility in the market price of the
Company's common stock. The Company believes that quarter to quarter
comparisons of its financial results are not necessarily meaningful and should
not be relied upon as an indication of future quarterly performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results of Operations."
7
<PAGE>
ABILITY TO RESPOND TO TECHNOLOGICAL CHANGE
The Company's future success will depend significantly upon its ability to
enhance its current products, develop or acquire and market new products which
keep pace with technological developments, evolving industry standards and
legislative amendments and respond to changes in customer needs. There can be
no assurance that the Company will be successful in developing or acquiring
product enhancements or new products to address changing technologies and
customer requirements, or that its competitors will not develop products that
are superior to the Company's products or achieve greater market acceptance
than the Company's products. Failure by the Company to respond to
technological change or the development of superior products by its
competitors could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Growth Strategy."
DEPENDENCE ON KEY PERSONNEL
The Company's continued success will depend upon the availability and
performance of its senior management team, particularly Paul E. Kana, Chairman
and Chief Executive Officer, and James K. Hoofard, Jr., President and Chief
Operating Officer, each of whom possess unique and extensive industry
knowledge and experience. While the Company currently maintains key-man life
insurance policies on Paul E. Kana and James K. Hoofard, Jr., the loss of
either man could have a material adverse effect on the Company's business,
financial condition and operating results. See "Management--Directors,
Executive Officers and Key Employees."
PROPRIETARY RIGHTS AND RISKS OF INFRINGEMENT
The Company regards certain features of its internal operations, software
and documentation as confidential and proprietary, and relies on a combination
of contract and trade secret laws and other measures to protect its
proprietary intellectual property. Despite these precautions, it may be
possible for unauthorized parties to copy the Company's software or reverse
engineer or otherwise obtain and use information the Company regards as
proprietary. The Company has no patents and, under existing copyright laws,
has only limited protection. In addition, certain provisions of the license
agreements entered into by the Company, including provisions against
unauthorized use, transfer and disclosure, may be unenforceable under the laws
of certain jurisdictions. There can be no assurance that the steps taken by
the Company to protect its proprietary rights will be adequate to deter
misappropriation of its technology or independent development by others of
technologies that are substantially equivalent or superior to the Company's
technology. Any such misappropriation or development could have a material
adverse effect on the Company's business, financial condition and operating
results. As the number of competitors providing similar products increases,
overlapping methodologies used in such products will become more likely.
Although the Company's methodology has never been the subject of an
infringement claim, there can be no assurance that third parties will not
assert infringement claims against the Company in the future, that assertion
of such claims will not result in litigation or that the Company would prevail
in such litigation or be able to obtain a license for the use of any infringed
intellectual property from a third party on commercially reasonable terms.
Litigation, regardless of its outcome, could result in substantial cost to the
Company and divert resources and management from the Company's operations. Any
infringement claim or litigation against the Company could, have a material
adverse effect on the Company's business, financial condition and operating
results. See "Business--Intellectual Property, Proprietary Rights and
Licenses."
POTENTIAL PRODUCT LIABILITY AND RISK OF SOFTWARE DEFECTS
The Company markets to its customers complex, mission-critical applications.
Any failure in a customer's system could result in a claim for damages,
regardless of the Company's responsibility for such failure. The Company has
never been involved in product liability litigation, and the Company's license
agreements with its customers typically contain provisions designed to limit
the Company's exposure to potential product liability claims. However, there
can be no assurance that the limitation of liability provisions contained in
the
8
<PAGE>
Company's license agreements would be enforceable or would otherwise protect
the Company from liability for damages. The Company currently carries general
liability insurance protecting against product liability claims. There can be
no assurance that such insurance will continue to be available, or available
at a cost acceptable to Company, or that the policy's limits will be
sufficient to satisfy any judgment or claim. The successful assertion of one
or more large claims against the Company that exceed available insurance
coverage or changes in the Company's insurance policies, including premium
increases or the imposition of a large deductible or co-insurance requirements
could have a material adverse effect on the Company's business, financial
condition and operating results. Furthermore, litigation, regardless of its
outcome, could result in substantial cost to the Company and divert
management's attention from the Company's operations, which could have a
material adverse effect on the Company's business, financial condition and
operating results.
Software products as complex as those developed by the Company may contain
errors or defects, particularly when first introduced or when new versions or
enhancements are released. Errors, bugs or viruses could result in loss or
delay of market acceptance, a failure in a client's system or complete loss of
client data. Although the Company has not experienced material adverse effects
resulting from any such defects or errors to date, there can be no assurance
that defects and errors will not be found after commencement of product
shipments. Any such defects could have a material adverse effect upon the
Company's business, financial condition and operating results. See "Business--
Research and Development."
ACQUISITION RISK
As part of its growth strategy, the Company intends to evaluate the
acquisition of other companies, assets or product lines that would complement
or expand its existing business in attractive geographic or service markets or
that would broaden its customer relationships. Although the Company
periodically considers possible acquisitions, no specific acquisitions are
being negotiated. In addition, although the Company conducts due diligence
reviews of potential acquisition candidates, the Company may not be able to
identify all material liabilities or risks related to potential acquisition
candidates. There can be no assurance that the Company will be able to locate
and acquire any business, retain key personnel and customers of an acquired
business or integrate any acquired business successfully. Additionally, there
can be no assurance that financing for any acquisition, if necessary, will be
available on acceptable terms, if at all, or that the Company will be able to
accomplish its strategic objectives in connection with any acquisition. See
"Business--Growth Strategy."
DEPENDENCE ON KEY SUPPLIERS AND RELATIONSHIPS
The Company purchases certain key components of its products from limited
source suppliers. Establishing relationships with additional or replacement
suppliers for any of the components used in the Company's products, if
required, could involve significant additional costs. The inability of any of
the Company's suppliers to provide functional components on a timely basis, or
the inability of the Company to locate qualified alternative suppliers or
coding programmers on acceptable terms, could have a material adverse effect
on the Company's business, financial condition and operating results. The
Company may also need to establish additional alliances and relationships in
order to keep pace with evolutions in technology and enhance its service
offerings, and there can be no assurance such additional alliances will be
established. See "Business--Growth Strategy" and "--Sales and Marketing."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after this offering. The initial public offering price
has been determined through negotiations among the Company and the
Representative of the Underwriters based on several factors and may not be
indicative of the market price of the Common Stock after this offering. The
market price of the shares of Common Stock is likely to be highly volatile and
may be significantly affected by factors such as actual or anticipated
fluctuations in the Company's operating results,
9
<PAGE>
announcements of technological innovations, new products or new contracts by
the Company or its competitors, developments with respect to patents,
copyrights or proprietary rights, conditions and trends in the software and
other technology industries, adoption of new accounting standards affecting
the software industry, changes in financial estimates by securities analysts,
general market conditions and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have particularly affected the market prices for the common stock of
technology companies. These broad market fluctuations may adversely affect the
market price of the Common Stock.
CONTROL BY PRINCIPAL SHAREHOLDERS, OFFICERS AND DIRECTORS
Upon completion of this offering and giving effect to the exercise of
outstanding warrants to purchase 927,766 shares, the six existing directors,
executive officers and principal shareholders of the Company and their
affiliates will beneficially own approximately 76% of the outstanding Common
Stock (71% if the over-allotment option is exercised in full). As a result,
these shareholders will be able to exercise control over all matters requiring
shareholder approval, including the election of directors and approval of
significant corporate transactions. Such concentration of ownership may have
the effect of delaying or preventing a change in control of the Company. In
addition, each of the Company's current shareholders has pledged his shares to
secure certain of the Company's outstanding indebtedness. The Company believes
that operating revenue and reserves will be sufficient to pay such
indebtedness. However, there can be no assurance that the Company will be able
to repay such indebtedness and failure to do so could result in a change of
control of the Company and/or have a material adverse effect on the Company's
business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Principal Shareholders."
BROAD MANAGEMENT DISCRETION AS TO USE OF PROCEEDS
The principal purposes of this offering are to retire certain indebtedness,
obtain additional working capital, create a public market for the Company's
Common Stock and facilitate the Company's future access to public equity
markets. The Company expects to use most of the net proceeds of this offering
for working capital and general corporate purposes. Accordingly, the Company's
management will retain broad discretion as to the allocation of a substantial
portion of the net proceeds from this offering. Pending such uses, the Company
intends to invest the net proceeds in short-term, investment-grade, interest-
bearing securities. See "Use of Proceeds."
RISK OF LOW-PRICED STOCKS
The Company will concurrently apply to have its Common Stock listed on the
Nasdaq National Market effective upon the closing of this offering. In order
to continue to be listed on the Nasdaq National Market, a company must meet
certain financial maintenance criteria. Although the Company currently meets
these criteria, there can be no assurance that the Company will continue to do
so in the future. Failure to meet these maintenance criteria in the future may
result in the delisting of the Common Stock from the Nasdaq National Market.
As a result of such delisting, the Common Stock would be traded on the over-
the-counter market, in which case investors may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value of, the
Common Stock. If the Company's Common Stock was delisted from the Nasdaq
National Market, and the trading price of the Common Stock were less than
$5.00 per share, the Common Stock might be considered "penny stock" and
trading in the Common Stock might be subject to the requirements of certain
rules under the Securities Exchange Act of 1934. These rules could adversely
affect the ability and willingness of broker-dealers to sell the Common Stock,
which could reduce the liquidity of the Common Stock and have a material
adverse effect on the trading market for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POSSIBLE ADVERSE EFFECT
ON FUTURE MARKET PRICES
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price of the Common
Stock. Upon completion of this offering, the Company
10
<PAGE>
will have outstanding 6,082,502 shares (6,270,002 if the Underwriters' over-
allotment option is exercised in full) of Common Stock (based upon the number
of shares outstanding as of October 31, 1997 and assuming the exercise of
outstanding warrants to purchase 927,766 shares of Common Stock), of which the
1,250,000 shares sold in this offering (1,437,500 shares if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable.
Approximately 4,832,502 (4,645,002 if the Underwriters' over-allotment option
is exercised in full) of the remaining shares are subject to agreements with
the Underwriters under which such shares may not be offered, sold or otherwise
disposed of for a period of one year after the date of this Prospectus without
the prior written consent of Cruttenden Roth, but will thereafter be eligible
for sale pursuant to Rule 144 of the Securities Act. The holders of 927,766
shares of Common Stock (865,000 if the Underwriters' over-allotment option is
exercised in full) are entitled to certain piggyback and demand registration
rights with respect to such shares. By exercising their rights, such holders
could cause additional shares to be sold in the public market. Sales pursuant
to Rule 144 or other exemptions from registration, or pursuant to registration
rights, may have an adverse effect on the market price for the common stock
and could impair the Company's ability to raise capital through an offering of
its equity securities. See "Shares Eligible for Future Sale," "Underwriting"
and "Description of Capital Stock--Registration Rights of Certain Holders."
DILUTION
Investors purchasing shares of Common Stock in this offering will incur
immediate and substantial dilution in the net tangible book value of the
Common Stock from the initial public offering price and will incur additional
dilution upon the exercise of stock options and warrants. See "Dilution."
NO CASH DIVIDENDS
The Company intends to retain any future earnings for its business and does
not anticipate paying any cash dividends in the foreseeable future. See
"Dividend Policy."
EFFECT OF CERTAIN CHARTER AND BYLAW PROVISIONS; ANTITAKEOVER EFFECTS
Certain provisions of the Company's Articles of Incorporation, as amended
(the "Restated Articles"), may deter or frustrate a takeover attempt of the
Company that a shareholder might consider in his best interest. The Company's
Restated Articles or Bylaws, among other things, provide that (i) any action
required or permitted to be taken by the shareholders of the Company may be
effected only at an annual or special meeting of shareholders, and not by
written consent of the shareholders, (ii) the annual meeting of shareholders
shall be held on such date and at such time fixed from time to time by the
Board of Directors, provided that there shall be an annual meeting held every
calendar year, (iii) any special meeting of the shareholders may be called
only by the Chairman of the Board, President or upon the affirmative vote of
at least a majority of the members of the Board of Directors, or upon the
written demand of the holders of not less than 50% of the votes entitled to be
cast at a special meeting, (iv) an advance notice procedure must be followed
for nomination of directors and for other shareholder proposals to be
considered at annual shareholders' meetings and (v) the Company's Board of
Directors be divided into three classes, each of which serves for different
two-year periods, and for which shareholders have no cumulative voting rights.
In addition, the Company will be authorized to issue additional shares of
Common Stock and up to 10 million shares of preferred stock in one or more
series, having terms fixed by the Board of Directors without shareholder
approval, including voting, dividend or liquidation rights that could be
greater than or senior to the rights of holders of Common Stock. Shareholders
will have no preemptive rights with respect to any additional common stock or
preferred stock. Issuance of additional shares of Common Stock or new shares
of Preferred Stock could also be used as an anti-takeover device. Except as
set forth herein, the Company has no current intentions or plans to issue
additional Common Stock or issue preferred stock. See "Description of Capital
Stock."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,250,000 shares of
Common Stock offered by the Company at the assumed public offering price of
$8.00 per share are estimated to be $8.4 million ($9.7 million if the over-
allotment option granted to the Underwriters is exercised in full), after
deducting the estimated underwriting discounts and commissions and other
estimated offering expenses payable by the Company. The Company intends to use
a portion of the net proceeds from this offering to repay approximately $1.0
million of indebtedness. As of October 31, 1997 the outstanding principal
amount under the Company's senior term loan with FINOVA Capital Corporation
("FINOVA") was approximately $800,000, bearing interest at prime plus 2 1/2%
and maturing December 30, 1998, and the loans from shareholders to the
Company's subsidiary, CDP Systems, Inc., amounted to approximately $128,000,
bearing interest at 8% and maturing July 1, 2000. The Company expects to use
the balance of net proceeds of approximately $7.4 million for working capital,
possible acquisitions or investments in products, technologies or businesses
that broaden or enhance the Company's current product or service offerings and
general corporate purposes. There are no current agreements or understandings
with respect to any acquisitions, investments or other transactions. Pending
such uses, the Company intends to invest the remaining net proceeds in short-
term, investment grade, interest-bearing securities. See "Risk Factors--
Acquisition Risk," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and
"Certain Transactions."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company intends to retain earnings, if any, for use in its business and to
support growth and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The Company's credit facilities currently
place certain restrictions on the Company's ability to declare and pay
dividends.
12
<PAGE>
DILUTION
The net tangible book value of CPS as of June 30, 1997 was approximately
($.40) per share of Common Stock. Net tangible book value per share of the
Common Stock is equal to the book value of the Company's total tangible assets
less the book value of its total liabilities, divided by the total number of
shares of Common Stock outstanding as of June 30, 1997. After giving effect to
the sale by CPS of the 1,250,000 shares of Common Stock offered hereby, the
exercise of the put warrants and after deducting the underwriting discount and
the estimated offering expenses payable by CPS, the pro forma net tangible
book value of CPS at June 30, 1997 would have been $7,100,110, or $1.17 per
share. This represents an immediate increase in the net tangible book value of
$1.57 per share to existing holders of Common Stock and an immediate dilution
of $6.83 per share to the persons purchasing shares of Common Stock at the
assumed public offering price. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Public offering price............................................. $8.00
Net tangible book value before the offering...................... ($.40)
Increase attributable to new investors........................... 1.57
------
Pro forma net tangible book value after the offering.............. 1.17
-----
Dilution to new investors (85.4%)................................. $6.83
=====
</TABLE>
The following table compares, as of June 30, 1997, the number of shares of
Common Stock purchased from CPS by its existing shareholders prior to this
offering and to be purchased by new investors in this offering, the total
consideration paid or to be paid to CPS and the average price per share paid
or to be paid to the Company by the Company's existing shareholders and by new
investors purchasing shares in this offering, assuming no exercise of the
Underwriters' over-allotment option:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........... 4,832,502 80% $ 1,002,376 9% $ .21
New investors................... 1,250,000 20 10,000,000 91 $8.00
--------- --- ----------- ---
Total......................... 6,082,502 100% $11,002,376 100%
========= === =========== ===
</TABLE>
The foregoing table assumes exercise of outstanding options or warrants.
Subsequent to June 30, 1997, CPS granted options to purchase 335,000 shares of
Common Stock under the Stock Option Plan. In addition, CPS will issue to the
Representative, effective upon consummation of this offering, the
Representative's Warrant. See "Management--Employee Equity Plans," "Principal
Shareholders" and "Underwriting."
13
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of June 30, 1997 on an actual and as adjusted basis. The information set
forth in the table below should be read in conjunction with the Company's
Financial Statements and Notes thereto appearing elsewhere in this Prospectus.
See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
(AMOUNTS IN
THOUSANDS)
AS
ACTUAL ADJUSTED(2)
------ -----------
<S> <C> <C>
Cash and cash equivalents.................................. $ 447 $ 7,937
====== =======
SHORT-TERM DEBT:
Current portion of long-term debt.......................... 316 -0-
------ -------
LONG-TERM DEBT:
Senior term loan........................................... 546 -0-
Senior subordinated note................................... 2,014 2,014
Other debt(3).............................................. 315 -0-
------ -------
Total long-term debt...................................... $2,875 $ 2,014
------ -------
SHAREHOLDERS' EQUITY:
Common stock and paid-in capital
$.01 par value, 50,000 shares authorized;
4,833 shares issued and outstanding; 6,083 shares issued
and outstanding,
as adjusted (1)............................................ 1,000 9,667
Accumulated deficit........................................ (343) (343)
------ -------
Total stockholders' equity................................. $ 657 $ 9,324
------ -------
Total capitalization....................................... $3,532 $11,338
====== =======
</TABLE>
- --------
(1) Gives effect to the exercise of outstanding warrants to purchase an
aggregate of 927,766 shares of Common Stock, exercisable at a price per
share of $0.0026, which will be exercisable on the earlier of December 31,
1999 or completion of an initial public offering. Does not give effect to
(i) 335,000 shares of Common Stock reserved for issuance upon exercise of
outstanding options under the Company's 1997 Equity Participation Plan
with a per share exercise price equal to the initial offering price, (ii)
265,000 shares of Common Stock reserved for issuance upon exercise of
options reserved for future grant under the Company's 1997 Equity
Participation Plan and (iii) 100,000 shares of Common Stock reserved under
the Company's Employee Stock Purchase Plan. See "Management--Employee
Equity Plans," "Description of Capital Stock--Warrants" and
"Underwriting."
(2) Reflects the issuance and sale by the Company of 1,250,000 shares of the
Common Stock offered hereby and the application of a portion of the net
proceeds therefrom to repay certain indebtedness, after deducting the
underwriting discount and estimated offering expenses.
(3) Represents recorded amount of put warrants as of June 30, 1997. Warrant
holders have agreed to exercise all warrants upon closing of the Company's
initial public offering.
14
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the years ended December 31,
1996 and 1995, and as of December 31, 1996 are derived from the Company's
Financial Statements, which appear elsewhere in this Prospectus and which have
been audited by Grant Thornton LLP, independent accountants. The selected
financial data as of December 31, 1995 are derived from the Company's audited
financial statements which are not included in this Prospectus. The selected
financial data as of June 30, 1996 are derived from the Company's unaudited
financial statements, which are not included in this Prospectus. The selected
financial data for the six months ended June 30, 1997 and 1996, and as of June
30, 1997, are derived from the Company's unaudited financial statements which
appear elsewhere in this Prospectus. In the opinion of management, the
unaudited financial statements have been prepared on a basis consistent with
the Financial Statements which appear elsewhere in this Prospectus, and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such unaudited financial statements. The
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Financial Statements, including the Notes thereto, included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
-------------- ----------------
1995 1996 1996 1997
------ ------ ------- -------
(AMOUNTS IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
License fees................................ $ 424 $1,635 $ 852 $ 1,365
Recurring maintenance and service fees...... 3,907 3,851 1,928 1,911
Product sales............................... 1,594 2,052 978 1,648
Other service fees.......................... 328 825 236 481
------ ------ ------- -------
Total revenue.............................. 6,253 8,363 3,994 5,405
------ ------ ------- -------
Cost of revenue:
Product sales............................... 1,033 1,465 703 1,236
Purchased software.......................... 153 274 94 210
Distribution................................ 11 11 5 40
------ ------ ------- -------
Total cost of revenues..................... 1,197 1,750 802 1,486
------ ------ ------- -------
Gross profit................................. 5,056 6,613 3,192 3,919
Operating expenses:
Support and customer service................ 2,276 2,743 1,301 1,459
Selling and marketing....................... 601 772 379 409
Research and development.................... 692 866 337 729
General and administrative.................. 871 1,147 548 602
------ ------ ------- -------
Total operating expenses................... 4,440 5,528 2,565 3,199
------ ------ ------- -------
Earnings from operations before amortization
of intangible assets........................ 616 1,085 627 720
Amortization of intangible assets............ 430 434 223 221
------ ------ ------- -------
Earnings from operations..................... 186 651 404 499
Interest and financing costs................. 440 732 371 192
------ ------ ------- -------
Earnings (loss) before income taxes.......... (254) (81) 33 307
Income tax expense (benefit)................. (24) 165 111 174
------ ------ ------- -------
Net earnings (loss).......................... $ (230) $ (246) $ (78) $ 133
====== ====== ======= =======
Net earnings (loss) per common share(1)...... $(0.06) $(0.06) $ (0.02) $ 0.03
Weighted average shares used in computing net
earnings (loss) per common share(1)......... 3,905 3,905 3,905 3,905
<CAPTION>
DECEMBER 31, JUNE 30,
-------------- ----------------
1995 1996 1996 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash......................................... $ 385 $ 592 $ 218 $ 447
Working capital.............................. 200 303 181 368
Total assets................................. 6,025 6,134 5,987 6,137
Long-term debt, net of current portion....... 3,041 2,741 2,877 2,560
Shareholders' equity......................... 770 524 657 657
</TABLE>
- --------
(1) Does not give effect to (i) the exercise of outstanding warrants to
purchase an aggregate of 927,766 shares of Common Stock, exercisable at a
price per share of $0.0026, which will be exercisable on the earlier of
December 31, 1999 or completion of an initial public offering, (ii)
335,000 shares of Common Stock reserved for issuance upon exercise of
outstanding options under the Company's 1997 Equity Participation Plan
with a per share exercise price equal to the initial offering price, (iii)
265,000 shares of Common Stock reserved for issuance upon exercise of
options reserved for future grant, under the Company's 1997 Equity
Participation Plan, (iv) 100,000 shares of Common Stock reserved under the
Company's Employee Stock Purchase Plan and (v) 125,000 shares (143,750
shares if the Underwriters' over-allotment option is exercised in full) of
Common Stock issuable upon exercise of the Representative's Warrant at an
exercise price of $10.80 per share. See "Management--Employee Equity
Plans," "Description of Capital Stock--Warrants" and "Underwriting."
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains certain forward-looking statements. Actual
results could differ materially. See "Risk Factors."
OVERVIEW
The Company offers fully integrated, Y2K compliant, software solutions
designed to automate and integrate the operations of public sector
organizations. CPS serves the public sector market through three core product
groups: property tax appraisal and assessment, property tax billing and
collection and city and municipal systems. The Company provides its software
applications to customers in public sector markets under license agreements
and service contracts generally ranging from one to five years with automatic
renewals thereafter. The Company also markets to the private sector its
remittance processing systems ("RPS") solutions and related network and
communications products. The Company derives its revenue from four principal
sources: software license fees; recurring monthly maintenance and service
fees; hardware and product sales; and recurring monthly hardware maintenance
fees. Revenue from software licenses is generated from the initial contracts
that grant customers the right to use the Company's software products. Revenue
from recurring monthly maintenance and service fees is generated from the
continued use of the Company's software products. Revenue from hardware and
product sales includes sales of computers, data collection equipment,
peripherals, RPS solutions and related network and communications products
purchased from third parties and sold by the Company to its customers.
Maintenance and other revenue includes revenue associated with hardware
maintenance and support services.
The Company recognizes revenue from software licenses when the related
license agreement has been executed and the software has been installed.
Revenue from recurring maintenance and service fees is recognized ratably over
the term of the applicable license agreement. The Company begins to realize
recurring revenue approximately three to 12 months after the initial license
is executed. Hardware revenue is recognized at the time the products are
shipped. The Company derives all of its revenue from domestic operations.
The Company capitalizes software development costs associated with the
development of products. These costs relate primarily to the development of
new products and major enhancements to existing products to accommodate new
markets or platforms using existing technologies and programming methods.
These capitalized costs are amortized on a straight line basis over a 72-120
month period, commencing when each product is available to the market.
16
<PAGE>
RESULTS OF OPERATIONS
Certain of the Company's operating data for fiscal years 1995 and 1996 and
for the six months ended June 30, 1997 are set forth below as percentages of
total revenue:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
--------------- -------------
1995 1996 1996 1997
------ ------ ----- -----
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenue:
License fees................................ 6.8% 19.5% 21.3% 25.2%
Recurring maintenance and service fees...... 62.5 46.1 48.3 35.4
Product sales............................... 25.5 24.5 24.5 30.5
Other service fees.......................... 5.2 9.9 5.9 8.9
------ ------ ----- -----
Total revenue............................. 100.0 100.0 100.0 100.0
------ ------ ----- -----
Cost of revenue:
Product sales............................... 16.5 17.5 17.6 22.9
Purchased software.......................... 2.4 3.3 2.4 3.9
Distribution................................ 0.2 0.1 0.1 0.7
------ ------ ----- -----
Total cost of revenue..................... 19.1 20.9 20.1 27.5
------ ------ ----- -----
Gross profit.................................. 80.9 79.1 79.9 72.5
Operating expenses
Support and customer service................ 36.4 32.8 32.6 27.0
Selling and marketing....................... 9.6 9.2 9.5 7.6
Research and development.................... 11.1 10.4 8.4 13.5
General and administrative.................. 13.9 13.7 13.7 11.1
------ ------ ----- -----
Operating expenses........................ 71.0 66.1 64.2 59.2
------ ------ ----- -----
Earnings from operations before amortization
of intangible assets......................... 9.9 13.0 15.7 13.3
Amortization of intangible assets............. 6.9 5.2 5.6 4.1
------ ------ ----- -----
Earnings from operations...................... 3.0 7.8 10.1 9.2
Interest and financing costs.................. 7.1 8.7 9.3 3.5
------ ------ ----- -----
Earnings (loss) before income taxes........... (4.1) (0.9) 0.8 5.7
Income tax expense (benefit).................. (0.4) 2.0 2.8 3.2
------ ------ ----- -----
Net earnings (loss)........................... (3.7)% (2.9)% (2.0)% 2.5%
====== ====== ===== =====
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
REVENUE
The Company's total revenue was $5.4 million for the six months ended June
30, 1997 compared to $4.0 million for the six months ended June 30, 1996, an
increase of $1.4 million or 35.3%. This increase was primarily due to an
increase in the initial licensing of the Company's property tax appraisal and
assessment ("CAMA") systems software and related hardware sales, as well as
from increases in RPS hardware and software sales.
License Fees. The Company's revenue from license fees was $1.4 million for
the six months ended June 30, 1997, compared to $900,000 for the six months
ended June 30, 1996, an increase of $500,000 or 60.3%. This increase was
primarily attributable to the installation of CAMA software and, to a lesser
extent, the installations of RPS software.
17
<PAGE>
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $1.9 million for the six months ended June 30, 1997, compared to $1.9
million for the six months ended June 30, 1996. Although initial license fees
increased, recurring license fees remain flat due to the timing lag between
execution of the license agreement and realization of recurring maintenance
and service revenue.
Product Sales. Revenue from hardware product sales was $1.6 million for the
six months ended June 30, 1997, compared to $1.0 million for the six months
ended June 30, 1996, an increase of $600,000 or 68.5%. This increase was
primarily attributable to the delivery of hardware associated with the
increased sales of the Company's CAMA and RPS systems and, to a lesser extent,
in hardware for property tax billing and collection systems.
Other Service Fees. The Company had revenue from other service fee income of
$480,000 for the six months ended June 30, 1997, compared to $240,000 for the
six months ended June 30, 1996, an increase of $250,000 or 104.0%. This
increase resulted principally from increased RPS software customization and
hardware installation to public and private sector entities and, to a lesser
extent, an increase in training revenue.
COST OF REVENUE
The Company's cost of revenue includes the cost of hardware product sales,
the cost of purchased software and distribution and other miscellaneous costs.
Product Sales. The cost of product sales was $1.2 million for the six months
ended June 30, 1997, compared to $700,000 for the six months ended June 30,
1996, an increase of $500,000 or 75.8%. This increase was directly related to
the increased sales of RPS hardware and hardware associated with CAMA systems.
Purchased Software. The cost of purchased software was $210,000 for the six
months ended June 30, 1997, compared to $90,000 for the six months ended June
30, 1996, an increase of $120,000 or 123.6%. This increase was primarily a
result of increased RPS installations, which incorporate purchased software
and, to a lesser extent, installations associated with CAMA and property tax
billing and collection systems.
Distribution. The costs attributable to distribution and other miscellaneous
costs were $40,000 for the six months ended June 30, 1997 compared to $5,000
for the six months ended June 30, 1996, an increase of $34,000 or 634.4%. This
increase was principally a result of systems engineering costs and, to a
lesser extent, RPS hardware distribution charges.
The total cost of revenue was $1.5 million for the six months ended June 30,
1997, compared to $800,000 for the six months ended June 30, 1996, an increase
of $680,000 or 85.2%. This yielded a gross profit for the six months ended
June 30, 1997 of $3.9 million compared to a gross profit of $3.2 million for
the six months ended June 30, 1996, an increase of $730,000 or 22.8%. This
increase in gross profit resulted primarily from increased sales of CAMA
systems and related hardware sales and, to a lesser extent, increases in RPS
hardware and software sales.
OPERATING EXPENSES
The Company's operating expenses include support and customer services,
selling and marketing expenses, research and development expenses as well as
general and administrative expenses.
Support and Customer Service. The Company's expenses related to support and
customer service, which includes personnel costs, travel and other costs
related to the service business, were $1.5 million for the six months ended
June 30, 1997, compared to $1.3 million for the six months ended June 30,
1996, an increase of $200,000 or 12.2%. This increase resulted primarily from
increased staffing to enhance customer service and support growth.
18
<PAGE>
Selling and Marketing. The Company's selling and marketing expenses were
$410,000 for the six months ended June 30, 1997, compared to $380,000 for the
six months ended June 30, 1996, an increase of $30,000 or 7.8%. This increase
in selling and marketing expenses resulted primarily from increased
commissions generated by increased CAMA sales.
Research and Development. Research and development expenses, which are
comprised primarily of salaries and a portion of the Company's overhead for
in-house staff as well as amounts paid to outside consultants to supplement
product development efforts, were $730,000 for the six months ended June 30,
1997, compared to $340,000 for the six months ended June 30, 1996, an increase
of $390,000 or 116.8%. This increase resulted primarily from product
enhancement of CAMA and property tax billing and collection systems and
development of Y2K tools.
General and Administrative. The Company's general and administrative
expenses, which include cost of corporate operations, finance and accounting,
human resources and other general operations of the Company, were $600,000 for
the six months ended June 30, 1997, compared to $550,000 for the six months
ended June 30, 1996, an increase of $50,000 or 9.9%. The increase in general
and administrative expenses was primarily due to higher professional fees and
increases in other general corporate expenses.
Earnings from Operations Before Amortization of Intangible Assets. The
earnings from operations before non-cash amortization of intangible assets for
the six months ended June 30, 1997 were $720,000 compared to $630,000 for the
six months ended June 30, 1997. The increase of $90,000 or 14.8%, resulted
primarily from increased CAMA and RPS installations.
Amortization of Intangible Assets. The Company incurred a non-cash expense
for amortization of goodwill, non-compete agreements and loan fees related to
the 1994 Acquisition (as defined below) of $221,000 for the six months ended
June 30, 1997, compared to $223,000 for the six months ended June 30, 1996.
This resulted in a reduction of $2,000 or 1.0%.
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense for its long-
term debt was $190,000 for the six months ended June 30, 1997, compared to
$370,000 for the six months ended June 30, 1996, a reduction of $180,000 or
48.3%. This decrease was primarily attributable to a decrease in the put
warrant adjustments.
Provision for Income Taxes. The Company's provision for income taxes was
$170,000 for the six months ended June 30, 1997, compared to $110,000 for the
six months ended June 30, 1996, an increase of $60,000 or 57.7%. This increase
was attributable primarily to increased earnings from operations.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
REVENUE
The Company's total revenue was $8.4 million for the year ended December 31,
1996, compared to $6.3 million for the year ended December 31, 1995, an
increase of $2.1 million or 33.7%. This increase was primarily due to
increased initial license fees related to installation of the Company's
property tax billing and collection systems software, sales of related
hardware and RPS software and hardware sales.
License Fees. The Company's revenue from license fees was $1.6 million for
the year ended December 31, 1996, compared to $420,000 for the year ended
December 31, 1995, an increase of $1.2 million or 285.6%. This increase was
primarily the result of increased initial license fees related to installation
of the Company's property tax billing and collection system and, to a lesser
extent, RPS and the Company's city and municipal systems software.
19
<PAGE>
Recurring Maintenance and Service Fees. The Company's revenue from recurring
fees was $3.9 million for the year ended December 31, 1996, compared to $3.9
million for the year ended December 31, 1995. Although initial license fees
increased, recurring license fees remain flat due to the timing lag between
execution of the license agreement and realization of recurring maintenance
and service revenue.
Product Sales. Revenue from hardware product sales was $2.1 million for the
year ended December 31, 1996, compared to $1.6 million for the year ended
December 31, 1995, an increase of $460,000 or 28.7%. This increase was
primarily attributable to sales of RPS hardware and, to a lesser extent,
increased delivery of hardware associated with the increased sales of property
tax billing and collection systems software.
Other Service Fees. The Company had revenue from other service fee income of
$820,000 for the year ended December 31, 1996, compared to $330,000 for the
year ended December 31, 1995, an increase of $500,000, or 151.2%. This
increase resulted principally from increased RPS hardware installations and,
to a lesser extent, RPS software customizations and customer conversions of
the property tax billing and collection systems.
COST OF REVENUE
Product Sales. The cost of product sales was $1.5 million for the year ended
December 31, 1996, compared to $1.0 million for the year ended December 31,
1995, an increase of $500,000 or 41.7%. This increase resulted primarily from
expanded sales of RPS hardware and, to a lesser extent, hardware sales
associated with the Company's property tax billing and collection systems.
Purchased Software. The cost of purchased software was $270,000 for the year
ended December 31, 1996 compared to $150,000 for the year ended December 31,
1995, an increase of $120,000, or 79.8%. This increase was primarily a result
of increased RPS installations.
Distribution. The costs attributed to distribution and other miscellaneous
costs were $11,000 for the year ended December 31, 1996, compared to $11,400
for the year ended December 31, 1995, a decrease of 2.1%.
The total cost of revenue was $1.8 million for the year ended December 31,
1996, compared to $1.2 million for the year ended December 31, 1995, an
increase of $550,000 or 46.2%. This yielded a gross profit for the year ended
December 31, 1996 of $6.6 million compared to a gross profit of $5.1 million
for the year ended December 31, 1995, an increase of $1.5 million or 30.8%.
The increase in gross profit resulted primarily from increased sales of the
Company's property tax billing and collection system and related hardware and,
to a lesser extent, sales of RPS systems.
OPERATING EXPENSES
Support and Customer Service. The Company's expenses related to support and
customer service, which include personnel costs, travel and other costs
related to the service business, were $2.7 million for the year ended December
31, 1996, compared to $2.3 million for the year ended December 31, 1995, an
increase of $470,000 or 20.5%. This increase resulted primarily from increased
staffing to enhance customer support and service and to support growth.
Selling and Marketing. The Company's selling and marketing expenses were
$770,000 for the year ended December 31, 1996, compared to $600,000 for the
year ended December 31, 1995, an increase of $170,000 or 28.4%. This increase
resulted primarily from expansion of the Company's RPS sales force, increased
marketing efforts, travel and commissions directly related to increased sales.
Research and Development. Research and development expenses, which consist
primarily of salaries and a portion of the Company's overhead for in-house
staff as well as amounts paid to outside consultants to supplement product
development efforts, were $870,000 for the year ended December 31, 1996,
compared
20
<PAGE>
to $690,000 for the year ended December 31, 1995, an increase of $180,000 or
25.3%. This increase resulted primarily from the use of outside professional
services to supplement the product development efforts of the Company's in-
house staff.
General and Administrative. The Company's general and administrative
expenses, which include the cost of corporate operations, finance and
accounting, human resources, interest expense and other general operations of
the Company, were $1.1 million for the year ended December 31, 1996, compared
to $870,000 for the year ended December 31, 1995, an increase of $280,000 or
31.7%. This increase resulted primarily from staff additions and increases in
other general corporate expenses.
Earnings from Operations before Amortization of Intangible Assets. The
earnings from operations before non-cash amortization of intangible assets for
the year ended December 31, 1996 were $1.1 million, compared to $620,000 for
the year ended December 31, 1995, an increase of $470,000 or 76.1%. This
increase resulted primarily from increased sales in property tax billing and
collection systems.
Amortization of Intangible Assets. The Company incurred a non-cash expense
for amortization of goodwill, non-compete agreements and loan fees related to
the 1994 Acquisition (as defined below) of $430,000 for the year ended
December 31, 1996, compared to $430,000 for the year ended December 31, 1995.
NON-OPERATING EXPENSES
Interest and Financing Costs. The Company's interest expense for its long-
term debt was $730,000 for the year ended December 31, 1996, compared to
$440,000 for the year ended December 31, 1995, a reduction of $290,000 or
66.1%. This increase was attributable to an increase in the put warrant
adjustment.
Provision for Income Taxes. The Company's provision for income taxes was
$170,000 for the year ended December 31, 1996, compared to a benefit of
($24,000) for the year ended December 31, 1995, an increase of $194,000 or
788.3%. This increase was attributable primarily to an increase in earnings
from operations.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth a summary of the Company's unaudited
quarterly operating results for each of the eight quarters in the period ended
June 30, 1997. This information has been derived from unaudited interim
financial statements that, in the opinion of management, have been prepared on
a basis consistent with the Financial Statements contained elsewhere in this
Prospectus and include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of such information when read in
conjunction with the Company's Financial Statements and Notes thereto. The
operating results for any quarter are not necessarily indicative of results
for any future period. See "Risk Factors--Potential Fluctuations of Operating
Results; Future Operating Results Uncertainty."
21
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees........... $ 46 $ 138 $ 123 $ 729 $ 584 $ 199 $ 190 $1,175
Recurring maintenance
and service fees...... 980 985 969 959 943 980 955 956
Product sales.......... 361 598 360 618 593 481 501 1,147
Other service fees..... 82 141 68 168 242 347 146 335
----- ----- ----- ----- ----- ----- ----- ------
Total revenue........ 1,469 1,862 1,520 2,474 2,362 2,007 1,792 3,613
----- ----- ----- ----- ----- ----- ----- ------
Cost of revenue:
Product sales.......... 202 438 238 465 445 317 363 873
Purchased software..... 12 48 32 62 75 105 57 153
Distribution........... 2 6 1 4 3 3 3 37
----- ----- ----- ----- ----- ----- ----- ------
Total cost of
revenue............. 216 492 271 531 523 425 423 1,063
----- ----- ----- ----- ----- ----- ----- ------
Gross profit............ 1,253 1,370 1,249 1,943 1,839 1,582 1,369 2,550
Operating expenses:
Support and customer
service............... 546 588 587 714 677 765 732 727
Selling and marketing.. 117 252 165 214 206 187 145 264
Research and
development........... 205 66 137 200 216 313 353 376
General and
administrative........ 216 277 273 275 290 309 337 265
----- ----- ----- ----- ----- ----- ----- ------
Total operating
expense............. 1,084 1,183 1,162 1,403 1,389 1,574 1,567 1,632
----- ----- ----- ----- ----- ----- ----- ------
Earnings from operations
before amortization of
intangible assets...... 169 187 87 540 450 8 (198) 918
Amortization of
intangible assets...... 111 95 112 111 112 99 110 111
----- ----- ----- ----- ----- ----- ----- ------
Earnings from
operations............. 58 92 (25) 429 338 (91) (308) 807
Interest and financing
costs.................. 101 132 186 185 182 179 96 96
----- ----- ----- ----- ----- ----- ----- ------
Earnings (loss) before
income taxes........... (43) (40) (211) 244 156 (270) (404) 711
Income tax expense
(benefit).............. (4) (4) (31) 142 108 (54) (125) 299
----- ----- ----- ----- ----- ----- ----- ------
Net earnings (loss)..... $ (39) $ (36) $(180) $ 102 $ 48 $(216) $(279) $ 412
===== ===== ===== ===== ===== ===== ===== ======
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fees........... 3.1% 7.4% 8.1% 29.4% 24.7% 9.9% 10.6% 32.5%
Recurring maintenance
and service fees...... 66.7 52.9 63.8 38.8 39.9 48.8 53.3 26.5
Product sales.......... 24.6 32.1 23.7 25.0 25.1 24.0 28.0 31.7
Other service fees..... 5.6 7.6 4.4 6.8 10.3 17.3 8.1 9.3
----- ----- ----- ----- ----- ----- ----- ------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- ----- ----- ------
Cost of revenue:
Product sales.......... 13.8 23.5 15.6 18.8 18.8 15.8 20.2 24.2
Purchased software..... 0.8 2.6 2.1 2.5 3.2 5.2 3.2 4.2
Distribution........... 0.1 0.3 0.1 0.2 0.1 0.2 0.2 1.0
----- ----- ----- ----- ----- ----- ----- ------
Total cost of
revenue............. 14.7 26.4 17.8 21.5 22.1 21.2 23.6 29.4
----- ----- ----- ----- ----- ----- ----- ------
Gross profit............ 85.3 73.6 82.2 78.5 77.9 78.8 76.4 70.6
Operating expenses:
Support and customer
service............... 37.2 31.6 38.6 28.9 28.7 38.1 40.9 20.1
Selling and marketing.. 8.0 13.5 10.9 8.6 8.7 9.3 8.1 7.3
Research and
development........... 13.9 3.6 9.0 8.1 9.2 15.6 19.7 10.4
General and
administrative........ 14.7 14.9 18.0 11.1 12.3 15.4 18.8 7.4
----- ----- ----- ----- ----- ----- ----- ------
Total operating
expense............. 73.8 63.6 76.5 56.7 58.9 78.4 87.5 45.2
----- ----- ----- ----- ----- ----- ----- ------
Earnings (loss) from
operations before
amortization of
intangible assets...... 11.5 10.0 5.7 21.8 19.0 0.4 (11.1) 25.4
Amortization of
intangible assets...... 7.6 5.1 7.4 4.5 4.7 4.9 6.1 3.1
----- ----- ----- ----- ----- ----- ----- ------
Earnings from
operations............. 3.9 4.9 (1.7) 17.3 14.3 (4.5) (17.2) 22.3
Interest and financing
costs.................. 6.9 7.0 12.2 7.4 7.7 8.9 5.4 2.6
----- ----- ----- ----- ----- ----- ----- ------
Earnings (loss) before
income taxes........... (3.0) (2.1) (13.9) 9.9 6.6 (13.4) (22.6) 19.7
Income tax expense
(benefit).............. (0.3) (0.2) (2.1) 5.8 4.6 (2.7) (7.0) 8.3
----- ----- ----- ----- ----- ----- ----- ------
Net earnings (loss)..... (2.7)% (1.9)% (11.8)% 4.1% 2.0% (10.7)% (15.6)% 11.4%
===== ===== ===== ===== ===== ===== ===== ======
</TABLE>
22
<PAGE>
The Company's revenue and operating results are subject to fluctuations
resulting from a variety of factors, including the effect of budgeting and
purchasing practices of its customers, the length of the customer evaluation
process for the Company's products, the timing of customer system conversions,
announcements of new products by the Company or its competitors and the
Company's sales cycle. In addition, since a significant portion of the
Company's operating expenses is fixed, the Company may not be able to adjust
or reduce spending in response to sales shortfalls or delays. These factors
can cause significant variations in operating results from quarter to quarter.
Thus, the Company believes that quarter to quarter comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future quarterly performance. See "Risk Factors--Potential
Fluctuations of Operating Results; Future Operating Results Uncertainty."
LIQUIDITY AND CAPITAL RESOURCES
The Company was acquired by an private investor group on December 30, 1994
for approximately $4.6 million (including a non-compete payment of $250,000)
in a leveraged transaction (the "1994 Acquisition"). The 1994 Acquisition was
financed with a $1.5 million senior term loan due December 1998 provided by
FINOVA and a $2.1 million senior subordinated note due in two equal
installments in December 1999 and December 2000 with 12% interest paid
quarterly provided by Hanifen Imhoff Mezzanine Fund, L.P. ("Hanifen"). Each of
FINOVA and Hanifen hold a security interest in substantially all of the
Company's assets and the Company's currently outstanding Common Stock.
Moreover, each contains certain restrictive covenants relating to coverage
ratios, current ratios, payment of cash dividends and other matters. The
Company intends to retire the FINOVA senior term loan with proceeds from this
offering, as well as certain shareholder indebtedness in the amount of
$128,000. However, the Company does not intend to use any of the proceeds to
retire the Hanifen senior subordinated note. The balance of the funding was
provided by certain officers and directors of the Company in the form of
equity capital. In connection with the 1994 Acquisition, FINOVA agreed to
provide a $1.0 million revolving credit facility (the "Revolver") for working
capital and general corporate purposes. Subsequent to the closing of the
transaction, the Company has funded its business solely with cash generated
from operations and therefore to date has not utilized the Revolver. See "Use
of Proceeds" and "Risk Factors--Control by Principal Shareholders, Officers
and Directors."
The Company's cash balances were $450,000, $600,000 and $390,000 as of June
30, 1997, December 31, 1996 and December 31, 1995, respectively. In 1996 and
1995, the Company generated cash from operating activities of $550,000 and
$470,000, respectively, which was principally attributable to an increase in
net earnings. Cash used in investing activities totaled $250,000 and $290,000
in fiscal 1996 and 1995, respectively. Investing activities include capital
expenditures, software development costs and costs of acquisitions. The
Company's capital expenditures for 1996 and 1995 were $210,000 and $100,000,
respectively, principally for investments in equipment, tooling and related
software associated with increased staffing. Net cash used in financing
activities was $100,000 and $210,000 in fiscal 1996 and 1995, respectively.
Included in fiscal 1996 is a reimbursement of $170,000 from the seller's
escrow entered into in connection with the 1994 Acquisition.
The Company believes that the proceeds of this offering when combined with
its cash balances, cash generated from operations, borrowings under the
Revolver and proceeds from this offering will satisfy the Company's working
capital, business development and capital expenditure requirements for at
least the next 12 months. In the longer term, the Company may require
additional sources of liquidity to fund future growth. Such sources of
liquidity may included additional equity offerings, or debt financings. In the
normal course of business, the Company evaluates acquisitions of businesses,
products and technologies that complement the Company's business. The Company
has no present commitments or agreements with respect to any such transaction.
There can be no assurance, however, that the Company will have sufficient
working capital to satisfy all of the anticipated needs for the next twelve
months. Increased costs or expenses, acquisition prospects and opportunities
for growth or expansion may increase the demand for working capital thereby
making an additional infusion of capital necessary. See "Risk Factors--
Acquisition Risk."
23
<PAGE>
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued the following
Statements of Financial Accounting Standards (SFAS):
SFAS 128, Earnings Per Share, which is effective for financial statements
for periods ending after December 15, 1997. The new standard eliminates
primary and fully diluted earnings per share and requires presentation of
basic and diluted earnings per share together with disclosure of how the per
share amounts were computed.
SFAS 129, Disclosure of Information about Capital Structure, which is
effective for financial statements for periods ending after December 15, 1997.
SFAS 129 requires disclosure of certain information about a Company's
securities.
SFAS 130, Reporting Comprehensive Income, which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires companies to
include details about comprehensive income that arise during a reporting
period. Comprehensive income includes revenue, expenses, gains and losses that
bypass the income statement and are reported directly in a separate component
of equity.
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, which is effective for financial statements for periods beginning
after December 15, 1997. SFAS 131 requires companies to report information
about an entity's different types of business activities and the different
economic environments in which it operates, referred to as operating segments.
Management does not expect the adoption of these new standards to have a
material impact on the Company's results of operations or financial condition.
24
<PAGE>
BUSINESS
INTRODUCTION
CPS develops, markets, implements and supports fully integrated software
applications designed specifically for public sector organizations, including
states, counties, townships, city governments and other municipal agencies.
The Company's products address the following functional areas: (i) property
tax appraisal and assessment, (ii) property tax billing and collection, (iii)
city and municipal systems and (iv) remittance processing systems. Currently,
the Company's public sector software applications are installed in six states
(Colorado, Florida, North Carolina, New Mexico, Oklahoma and Texas), serving
more than 250 customers. The majority of its customers are county governments
with taxable parcel counts over 10,000 or cities with populations between
5,000 and 35,000. These potential customers make up approximately 76% of the
total counties and 85% of the total cities in the United States. The Company's
focus on the public sector allows it to design solutions that address the
precise needs of these organizations. The Company has identified three
significant growth opportunities in the public sector marketplace.
Expand Core Public Sector Business. The Company intends to geographically
expand its core product business to address the following functional areas:
property tax appraisal and assessment; property tax billing and collection;
and city and municipal systems. Recently, this core business has been growing
rapidly due to the ability of the Company's software to improve delivery of
service, reduce costs, enhance revenue collection, operate successfully within
budget constraints, comply with rapidly changing local, state and federal
regulations and improve management economics. This opportunity represents a
key segment of the Company's business strategy due to the growing recurring
revenue streams generated by license agreements entered into by customers of
the Company's core business.
Provide Y2K Solutions. The Company plans to leverage its 17 years of public
sector experience to capitalize on the opportunity to provide Y2K-compliant
software applications to public sector organizations. The Y2K problem results
from the traditional use of two-digit date fields to perform computations and
decision-making functions. For example, a program using a two-digit date field
may misinterpret "00" as the year 1900 rather than the year 2000. This problem
has been magnified in the public sector due to the substantially greater
allocation of resources to the higher-paying private sector. Public sector
entities are faced with the prospect of competing with the private sector for
recruiting, hiring and retaining top data processing talent, despite limited
ability to match competitive salaries for attracting new hires or retaining
existing staff. As a result, many public sector organizations are seeking
cost-effective, non-labor intensive solutions such as those offered by CPS.
Leverage Client/Server-Based products. The Company intends to leverage the
interoperability of the Company's core products to manage information flow
between departments as organizations shift from mainframe computers to
client/server systems. When local governments began to use computerized
operations in the 1970s and 1980s, management systems were originally based on
mainframe computers and later based on minicomputers. These legacy systems
typically were developed on a customized basis using proprietary and often in-
house operating systems and database software. Many public sector
organizations currently are faced with a pressing need to integrate mission
critical functions and databases by replacing standalone applications and
customized, out-dated software with integrated software applications similar
to those offered by CPS.
INDUSTRY OVERVIEW
PUBLIC SECTOR MARKETPLACE
The public sector marketplace is composed of state, county and city
governments, other municipal agencies and publicly owned utilities. The local
government market comprises over 3,000 counties and over 19,000 municipalities
in the U.S., not including school districts, townships and special government
districts.
25
<PAGE>
According to one industry source, state and local government agencies spent
approximately $34.5 billion on information technology and related products in
1996. This total included approximately $5.0 billion for software, $6.7
billion for external services, $7.4 billion for hardware, and $15.4 billion on
internal services (e.g., in-house management information systems departments).
Of the $5.0 billion in 1996 software expenditures, approximately $3.1
billion was spent on law enforcement, child welfare, education and emergency
services. Management estimates the remaining $1.9 billion was spent on
software in the four areas CPS markets applications: property tax appraisals
and assessments, property tax billing and collection, city and municipal
systems and remittance processing systems. As local jurisdictions experience
increasing pressure to provide more services without raising taxes, management
believes state legislatures will raise needed revenue by amending tax laws.
However, these same legislatures cannot appropriate sufficient resources to
modify existing information systems. Thus, the public sector is faced with the
dilemma of responding to frequent legislative change during a period of budget
cuts.
YEAR 2000 OPPORTUNITY
The Y2K problem relates to the highly publicized inability of many existing
computer legacy systems to accurately process information involving the year
2000 and beyond. For example, unless Y2K compliance is completed in certain
systems, credit cards and ATM cards will expire prematurely and insurance
policies that span more than three years cannot be written. Date-dependent
programs are commonly found in legacy software applications used in many
critical business operations, including those used by public sector
organizations. Awareness and recognition of the Y2K crisis has been spreading
rapidly as the millennium approaches.
While the business community is taking steps to address the Y2K problem, due
to budgetary and other constraints many public sector organizations lack the
resources to achieve a timely solution. One industry source estimates that the
overall cost of solving the Y2K problem worldwide will be in the range of $300
to $600 billion. Another industry source estimates that for an average entity
with 35,000 programs, it would take 75 to 100 person-years to complete the
necessary analysis and coding for year 2000 compliance, which translates into
a three year period for a team of 25 to 50 programmers, assuming such entity
had the ability to maintain or hire a staff suitable to this task. As a result
of the significant resources required to resolve an enterprise-wide Y2K
problem, many public sector organizations may adopt temporary or partial
solutions. The failure by public sector organizations to install permanent Y2K
solutions is expected to provide opportunities for CPS to provide Y2K
solutions for years after the year 2000.
DELIVERY OF CLIENT/SERVER TECHNOLOGY
As computing technology evolves and information processing requirements
expand, medium to large public sector organizations are seeking to preserve
the investment in their existing systems by integrating or replacing mainframe
computers with modern distributed computer processing architectures, such as
client/server systems. Distributed computing refers to computer transactions
that may take place among different types of computers at one or more
locations, thereby permitting enterprise-wide information exchanges to occur
that otherwise might not be possible. In a client/server environment, a mid-
range computer serves as the network's hub or server. The server is connected
to possibly hundreds of desktop personal computers or workstations known as
"clients" throughout an organization. The client/server approach has several
benefits over mainframe-based systems, including user friendliness,
flexibility in creating new applications in response to changes in an
organization's informational requirements such as tax code changes,
accessibility of enterprise-wide data from a variety of databases, and the
ability to present data in different formats. Moreover, client/server
architectures are becoming more cost effective as a result of technological
advances in personal computers, networking, disk storage, operating systems
and tiered software applications. As the public sector marketplace
increasingly recognizes the benefits of client/server technology, the Company
believes that there will be an increased demand for software and services that
assist such organizations in making this transition.
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THE CPS SOLUTION
PUBLIC SECTOR MARKETPLACE
Extensive Public Sector Experience. The Company's products are the result of
more than 17 years of focusing on the public sector. Each product was
developed specifically for the public sector, addressing specific needs at an
attractive price. CPS software is designed to help organizations streamline
and automate administrative intensive processes such as property tax billing
and collection, property tax appraisal and assessment and improve timeliness
and quality of services.
Integrated Solution and Depth of Functionality. CPS currently markets 41
applications, which provide feature-rich systems for property tax appraisal
and assessment, property tax billing and collection, as well as city and
municipal systems. The Company's software applications offer customers the
following: (i) simplification of data entry, (ii) compliance with periodically
changing legislation, (iii) extensive security features, (iv) flexible report
configuration and (v) open system technology. The Company's products operate
as stand-alone applications or as integrated suites which provide users with a
consistent graphical user interface ("GUI") and the ability to easily access
data and share information between different departments. The Company's
applications are based upon proven technologies and are designed to function
in mission critical environments.
Cost Effective Implementation Technology. The Company employs a highly
responsive implementation and planning process, offering rapid product
deployment and easy migration among its product lines. The Company minimizes
the productivity interruption that typically results from the introduction of
new technology, thereby enabling organizations to realize the associated
benefits more quickly.
YEAR 2000 OPPORTUNITY
Y2K Solutions and Applications. The CPS solution methodology incorporates
the following process: (i) complete assessment of the customer's information
systems using a proprietary technique to identify critical software components
and related Y2K compliance, (ii) demonstrate the benefits of the Company's Y2K
software applications, (iii) implement consulting and programming services to
convert the non-Y2K data, (iv) install the Company's Y2K software application
and (v) commence user training.
Proprietary Software Conversion Tool. The most important part of the
solution methodology is the conversion of the non-Y2K compliant data into Y2K
compliance. CPS has developed a proprietary tool that converts data into a
form that can be run by CPS applications. Management believes this tool offers
a significant competitive advantage in marketing software applications.
Elimination Rather than Correction of Legacy Code. The principal issues
facing all Y2K solution providers are finding the hidden date codes embedded
within legacy systems and locating any original lost source codes. The CPS
solution overcomes these obstacles through the following process: (i) applying
field expansion to the year field, (ii) running the newly-converted Y2K-
compliant database on the Company's software, thereby eliminating the
possibility of lost source codes and (iii) replacing the legacy source code
with the Company's Y2K compliant application, thus eliminating the costly and
time-consuming process of searching the legacy system for hidden date codes.
CPS believes the Y2K problem will cause many public sector organizations to
explore further the possibility of migrating all or portions of their legacy
systems to Y2K compliant client/server systems.
DELIVERY OF CLIENT/SERVER TECHNOLOGY
Adaptability/Flexibility/Scalability. The Company's application software
products are readily adaptable to meet a customer's initial needs and are
designed with sufficient flexibility to respond to a customer's specific
system refinements and ongoing changes once the system is fully in service.
The scalability of the Company's software applications and the customer's
ability to migrate within the Company's product family allow state
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and local governments to increase operating levels and expand application
functionality. In addition, the Company offers several application programming
interfaces to enable customers to develop customized reporting and satisfy
unique requirements.
Multi-Platform Tiered Software Architecture. The Company's tiered software
architecture separates the application logic from the GUI and database. This
feature enables the Company to utilize multiple platforms and effectively
integrate new technologies with existing software. The tiered architecture
also allows customers to protect their investments in information systems
while positioning them to adopt new object-based solutions, high performance
servers and database management systems with no loss of functionality.
Centralized System Administration. System administration is simplified in
the Company's software applications, thereby simplifying system management,
reducing the need for in-house system administrators and programmers and
mitigating the need for third-party services. The Company's software
applications incorporate extensive security features designed to protect data
from unauthorized retrieval or modification. Simplified menus and data access
can be tailored to meet each organization's requirements.
GROWTH STRATEGY
The Company's growth strategy with respect to serving the public sector
marketplace, providing Y2K solutions, and capitalizing on the shift to
client/server-based systems includes the following elements:
Recurring Revenue. The Company's customers typically enter into long-term
service agreements, generating recurring revenue from continuing monthly
maintenance and service fees. Recurring monthly maintenance and service fees,
typically at a rate equal to approximately 32% of the software license fee,
represented approximately 46% of the Company's revenues in fiscal 1996.
Customers benefit from continually updated software and service in response to
technological and legislative changes. In addition, long-term agreements serve
as competitive barriers to entry in the Company's markets. Furthermore, the
Company believes that its service, support and singular knowledge of its
customers' hardware and software requirements ensure service and support
revenues continue. See "Product Description."
Leverage the Y2K Opportunity. The Company sees the Y2K opportunity as a
means of becoming a dominant leader in providing public sector solutions on a
national basis. The Company's history in servicing the public sector coupled
with the need for timely Y2K problem solutions creates a significant growth
opportunity for the Company. The Company believes the Y2K opportunity will
allow it to establish an installed base of large public sector accounts
nationwide.
Expand Geographic Initiatives. The Company intends to increase its
penetration of the public sector market by expanding the distribution of its
products into new and existing geographic markets. Currently, the Company has
installations in six states and is actively pursuing new business
opportunities in additional states, including Kentucky, Montana, Ohio and
California. To accomplish this expansion, the Company plans to actively
increase the size of its direct sales and marketing force and concurrently,
hire additional technical, support and systems personnel. In addition, the
Company intends to continue to build collaborative relationships with
customers in order to develop new applications and assist customers in keeping
pace with technology and in maintaining compliance with changing governmental
regulations. The Company intends to leverage its installed customer base in
order to enhance its ability to capture additional statewide accounts, as
exemplified by the Company's market penetration in the state of Florida. Since
entering the Florida market in 1988, the Company has completed 25 county
installations out of a total of 67 counties in the state.
Strategic Acquisitions. The Company views acquisitions as a means of
acquiring technology and application expertise, broadening its customer base
and expanding geographically. The Company believes that the public sector
marketplace is highly fragmented with many small, closely-held companies. The
Company's strong management team, the ability to leverage its core
technologies and expertise, proven marketing programs and strategies, as well
as access to capital, should provide the Company with a competitive advantage
and position it to capitalize on acquisition and integration opportunities
which may become available over the
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next several years. Its only corporate acquisition to date has been the
acquisition of its subsidiary CDP Systems, Inc. in July 1997. See "Risk
Factors--Acquisition Risk."
Leverage Software Development Relationship. In 1995, the Company entered
into an agreement with a subsidiary of Mastek, Ltd. ("Mastek"), an offshore
provider of economical programming services, to provide coding services. All
work is communicated to Mastek's Bombay, India office. Due to the difference
in time zones, the Company can send a new specification or design by the end
of the U.S. workday and obtain, in many cases, the development code by the
next working day. The Company believes this relationship provides several
competitive advantages. First, the Company can respond rapidly to state and
local regulatory changes through prompt software modifications and updates.
Second, the costs of recruitment, hiring and traditional employee overhead
expenses are minimized (if not completely eliminated). Third, by utilizing a
team of offshore developers that can be modified upon request, the Company can
maintain a level of development resources to match existing market needs
without incurring corresponding fixed personnel expenses.
Capitalize on Public Sector Expertise. The Company intends to capitalize on
its public sector knowledge and experience to enhance sales in existing
markets and new markets. For the past 17 years, the Company has focused
exclusively on the public sector marketplace, resulting in the development of
core expertise. The Company believes its customer base offers considerable
leverage to new business since references from existing customers often result
in future sales opportunities.
Maximize Integrated Solutions to Become Sole Source Provider. The Company
believes a substantial opportunity exists to sell additional products to
current customers who have only one installed CPS product. For example, where
a customer has employed the property tax appraisal and assessment product, a
demand is created for the Company's property tax billing and collection
product since both products share a common database and processes.
Leverage Relationships with Y2K Tool and Service Providers. CPS plans to
leverage relationships with leading Y2K tool and service providers. In certain
circumstances, CPS solutions may be unavailable to some public sector
organizations who have already committed to in-house remedial measures. These
public sector organizations can be referred to a Y2K tool and service provider
partner of CPS for a fee. CPS will then use corresponding referrals from these
Y2K tool and service providers of public sector organizations who desire a
replacement application.
PRODUCT DESCRIPTION
CPS offers fully integrated, Y2K compliant software solutions designed to
automate and integrate the operations of county governments with taxable
parcel counts over 10,000 or cities with populations between 5,000 and 35,000.
The Company has designed its products based upon the philosophy that complete
application integration is essential for the effective sharing of information
across an organization.
CPS seeks to be an innovative leader in each market served and set the
standard through high perceived value. This perception results in premium
pricing for its application software and related services which serves to
strengthen the Company's market position. Upon contract signing, customers pay
a license fee and a recurring maintenance and service fee equal to a rate of
approximately 32% (depending upon a variety of factors) of the software
license fee, which compares favorably with the industry average of 12-18%. The
Company can command such premium in most markets it serves because it offers:
(i) the ability to maintain legislative compliance, (ii) a strong service and
support organization with a single point of contact, (iii) fully-integrated,
proven and feature-rich software applications, and (iv) a complete system
solution. Pricing for most applications is generally transaction based on a
parcel count which allows the larger, more affluent governmental units to bear
a proportionately higher cost in a way that is readily justifiable. The
Company also provides RPS hardware and software to regulated utilities and
commercial markets to meet the needs of public and private sector
organizations with high speed processing of check payments. Currently, the
Company has RPS solutions installed in eleven states with applications in such
areas as utility payments,
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<PAGE>
subscription payments, and county property tax collections. The Company also
offers Windows NT-based integrated voice response and document imaging
systems.
The Company's technological strategy is to continue to offer applications
that run across the most popular operating systems. Currently, supported
systems include UNIX, AIX, and Microsoft NT. The Company's products are
supported on databases including Oracle, Informix, Microsoft SQL Server, and
C-ISAM.
The following table sets forth a summary description of a sampling of the
Company's products.
<TABLE>
<CAPTION>
CAMA
COMPUTER ASSISTED MASS TAX MANAGER CITY MANAGER
APPRAISAL TAX BILLING AND COLLECTIONS MUNICIPAL SOLUTIONS
--------------------------------- -------------------------------------- ----------------------------------
<S> <C> <C> <C>
PRODUCT POSITIONING Exceeding 100,000 taxable parcels Exceeding 100,000 taxable parcels Population up to 35,000
SOLUTIONS Software and Y2K tools/services Software and Y2K tools/services Software and Y2K tools/services
PRODUCTS/FEATURES CAMA System Tax Manager General Ledger
--------------------------------- -------------------------------------- ----------------------------------
-- Appeals tracking -- Integrated Current/Delinquent taxes -- Flexible chart of accounts
-- Real time valuation -- Unlimited paid and audit history -- Integrated budgeting
-- Valuations by all methods -- Comprehensive distribution of taxes -- Financial reporting
-- Sketching/Field Automation
-- Integrated real and personal
systems
Occupational License Utility Billing
----------------------------------
-- Mutliple services tracked
Tourism Tax -- Hand held meter reading
-- Extensive billing parameters
Game and Fish Licensing -- Cycle billing
Vessel Registration Accounts Payable
----------------------------------
-- Unlimited vendor history
Non-Ad Valorem Assessment System -- Integrated with Purchase Orders
-- Allows for one time vendors
<CAPTION>
RPS
REMITTANCE PROCESSING
-----------------------
<S> <C>
PRODUCT POSITIONING 50,000 peak items
per day or less
SOLUTIONS Services
PRODUCTS/FEATURES
Integrators for various
software systems
designed for the NCR
7780
</TABLE>
PROPERTY TAX APPRAISAL AND ASSESSMENT SYSTEMS
The Company's CAMA system, designed and written using computer-aided
software engineering tools, is a fully integrated suite of programs with
applications for mass property tax appraisal, assessment administration
(appeals processing, statistical analysis of property values and sketching of
property and buildings), integrated imaging and GIS/911 interfacing and is
designed to meet the needs of county property appraisers and/or tax assessors.
The CAMA system adheres to IAAO standards and provides a powerful set of tools
to establish an equitable, defensible set of property values for a variety of
property types including residential, agricultural, multi-family, commercial,
industrial, business, personal and household goods.
The CPS CAMA system incorporates regression and feedback methodologies to
produce direct market values and market adjusting techniques which are
available for costing out location and depreciation. The system also provides
the user with the ability to: (i) specify which valuation appraisal method
(cost, market or income) will be used as the default valuation for each type
of property, (ii) maintain a comprehensive history file on each parcel,
including transactions affecting it, which can be displayed or printed upon
request and (iii) maintain sales data and descriptive information on each
parcel at the time of sale, thereby generating a "snapshot" vital in market
valuation and appraisal analyses.
Representative current licensees and users of the CPS CAMA system product
include Martin County (Florida), Union County (North Carolina) and the
Canadian County (Oklahoma). The initial license fee for a typical client
currently ranges from approximately $225,000 to $1,800,000, depending on
hardware configurations, number of users and applications licensed.
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PROPERTY TAX BILLING AND COLLECTION SYSTEMS
Designed to meet the needs of county tax collectors and/or treasurers, the
Company's property tax billing and collection product (the "Tax Manager")
provides public sector organizations with a comprehensive integrated property
tax billing and collection reporting system designed to improve and streamline
revenue tracking, processing and payment collection. The Tax Manager provides
multiple terminal cash drawer, payment processing and validation capability
and eliminates redundant data entry. The product is designed to handle a full
range of services including posting, recording, universal cashiering,
reconciliation, cash control, auditing, distribution of funds, report
generation and interfacing to various high speed remittance processors.
The Tax Manager encompasses the following property tax billing and
collection applications: (i) current ad valorem tax system, (ii) installment
processing, (iii) mortgage processing, (iv) non ad valorem assessments, (v)
distribution systems, (vi) splits and corrections, (vii) advertising, (viii)
current tax roll billing, (ix) personal property system, (x) tax sale (real
estate, non ad valorem assessments), (xi) delinquent tax and assessment
system, (xii) tax deed processing, (xiii) boat licensing system and (xiv)
hunting and fishing licensing systems.
Representative current licensees and users of the Tax Manager product
include the Florida counties of Broward (Fort Lauderdale), Okaloosa (Fort
Walton Beach/Destin) and Volusia (Daytona Beach). The initial license fee for
a typical client currently ranges from approximately $225,000 to $1,800,000,
depending on hardware configurations, number of users and applications
licensed.
CITY AND MUNICIPAL SYSTEMS
The Company's city and municipal systems products provide key operating and
financial management functions for public city and municipal governments. The
Company's City Manager ("City Manager") and Financial Manager ("Financial
Manager") are both state-of-the-art libraries of software applications which
can be completely integrated with each other. CPS provides its users with
customization capabilities and updated applications which are the result of
changes mandated by state and local legislatures.
The Financial Manager serves the needs of governmental financial officers
and human resource managers in public sector organizations by providing the
following benefits: (i) serves as an integrated financial reporting system
designed to monitor organizational goals, (ii) complies with all Governmental
Accounting, Auditing, and Financial Reporting ("GAAFR") and state standards,
(iii) streamlines reporting requirements, and (iv) eliminates redundant data
entry and minimizes record management. The Financial Manager is integrated
with the following applications: (i) general ledger, (ii) payroll, (iii)
purchase order, (iv) inventory management, (v) accounts payable, (vi) account
receivable, (vii) fixed asset management and (viii) investment management.
Representative current licensees and users of the City Manager and Financial
Manager products include the City of Port Lavaca (Texas), City of Cedar Hill
(Texas) and City of Altus (Oklahoma). The initial license fee for a typical
sale currently ranges from approximately $25,000 to $150,000, depending on
hardware configurations, number of users and applications licensed.
REMITTANCE PROCESSING SYSTEMS
The Company also provides remittance processing hardware and software to
regulated utilities and commercial markets to meet the needs of public and
private sector organizations for high speed processing of check payments with
applications in such areas as utility payments, subscription payments, and
county property tax collections. Currently, the Company has RPS installations
in eleven states (California, Florida, Kansas, New York, Georgia,
Massachusetts, Minnesota, Utah, Oregon, Idaho and Texas) and has completed 21
installations since commencing RPS activities in June 1995. Representative
installations in the public sector market include San Diego County, Texas
Department of Public Safety, Georgia Department of Revenue and Tax and
Hillsborough County, Florida. In the private sector, representative
installations include Guidepost, Feature Films, Palm Coast Data, Snapping
Shoals Utility and Eugene, Oregon Water and Electric Board. A
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typical RPS sale currently ranges from approximately $100,000 to $650,000,
depending on hardware configuration and software conversion.
CPS PROPRIETARY Y2K CONVERSION PROCESS
CPS utilizes a unique, step-by-step process by which the client's legacy
data is removed, re-engineered with compliant date fields and then loaded into
an industry standard relational database of the client's choosing. Prior to
entering into a contract, the CPS analyzes the data formats, sources and types
in anticipation of using the CPS Y2K tools. Immediately after the contract
process is complete, both on-site and in the Company's conversion centers, CPS
begins the process of extracting the raw data, analyzing it field by field,
mapping to the CPS database layout by application, and tests the system
through use of the Company's Y2K compliant application software.
The primary advantage of the CPS approach is that the time to conversion and
compliance is much shorter than a tedious legacy conversion of data and source
code. In addition, the CPS Y2K compliant application will be offering the
client a multi-tiered client/server approach allowing for extensive data
mining using standard structured query language ("SQL") tools.
[CHART OF CPS PROPRIETARY Y2K CONVERSION PROCESS APPEARS HERE]
As shown above, the Y2K conversion process involves numerous steps to
interrogate the legacy data, inventory all date fields, and create a data
dictionary map for use in the CPS Y2K compliant software. Each date field is
expanded, tested for proper validation, formatted to the proper Y2K compliant
format of the target database and then loaded for testing. All date fields are
converted in this process. By making the legacy
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source code obsolete and eventually discarding it, the unique CPS approach
ensures that no non-Y2K compliant processes inherent in the legacy code
survive the conversion. In addition, this approach eliminates the problems of
hidden date codes and lost source code.
CPS TIERED SOFTWARE ARCHITECTURE
The Company's tiered software architecture separates the application logic
from the GUI and the database, thereby enabling the Company's products to
operate on any Windows NT, UNIX or any UNIX derivative platform including IBM
(AIX), NCR (UNIX), Hewlett-Packard (HP-UX) and Sun Microsystems (Solaris). The
Company offers customers CPS GUI, internet browser and character-based
interface. The Company's tiered software architecture also operates on any
platform that supports UNIX, AIX, and Windows NT operating system.
Furthermore, the applications can be implemented on multiple platforms with no
loss of functionality. The Company's applications operate on systems running
databases such as Oracle, Informix, Microsoft SQL and C-ISAM. The Company's
tiered software architecture does not require the application code to be
reconfigured to enable the applications to operate on different platforms,
databases or operating systems. The tiered architecture permits customers to
protect their investment in the Company's system while enabling them to adapt
to emerging operating systems, servers and databases.
CPS TIERED APPLICATION ARCHITECTURE
[Chart appears here]
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SALES AND MARKETING
The Company sells its products in the United States through a direct sales
force. As of September 1, 1997, the Company had 17 employees in its sales and
marketing organization. The Company employs a variety of business development
and marketing techniques to communicate directly with current and prospective
customers. These techniques include exhibiting at trade shows, holding
seminars for clients and prospective clients on technology and industry issues
and marketing through targeted mail campaigns.
The Company believes in establishing a strong local presence in order to
effectively address the needs of local governments and establish long-term
relationships. For that reason, CPS has established regional offices in
Dallas, Texas; Tampa, Florida; and Tulsa, Oklahoma. The Company also operates
customer service and sales offices in San Antonio, Houston, Abilene, Wichita
Falls and Austin, Texas. Additionally, CPS maintains sales and software
development personnel in Los Angeles and San Francisco, California; Boston,
Massachusetts; Atlanta, Georgia; and Tallahassee, Florida.
The Company's sales and marketing strategy focuses on building and
maintaining strong relationships with businesses that the Company believes
play a role in the successful marketing of its software products. These
providers include software and hardware vendors and technology consulting
firms, some of which are active in the selection and implementation of
information systems for organizations that comprise the Company' principal
customer base.
In connection with the sales and marketing of software application products,
the Company has established direct and indirect value-added re-seller
arrangements with IBM, NCR and Compaq Computer for the sale of hardware and
related products. In turn, the sales force of these manufacturers work closely
with the Company's sales and marketing personnel in an effort to promote sales
of the Company's products and services in conjunction with hardware sales by
such manufacturer.
A sales cycle is the period between the confirmation of interest and the
consummation of the sale. Historically, the sales cycle for the Company ranges
from nine to 18 months on average. Since public sector entities are subject to
and bound by budgets formally approved by the appropriate governing board, the
length of the sales cycle depends on (i) when the entity becomes a prospect,
(ii) the size of the appropriation and (iii) the availability of budgeted
funds for the purchase of a new system. In the future, management has
experienced and expects to continue to experience a trend towards a shorter
sales cycle. Entities who are experiencing a dilemma due to a Y2K problem are
accelerating their purchasing requirements. Moreover, CPS employs creative
software financing techniques that shorten the sales cycle.
RESEARCH AND DEVELOPMENT
The Company's research and development activities are focused on the
enhancement of its existing products and the introduction of new products. The
Company outsources certain product development and enhancement activities to
independent contractors. CPS continually updates its products for amendments
to the various tax laws and regulations. Research and development expenses
were $870,000 for the year ended December 31, 1996, compared to $700,000 for
the year ended December 31, 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation."
The Company sees a strong competitive advantage in its relationship with
Mastek in the areas of cost containment and time to market with key technology
for its clients. Costs of recruitment, hiring and traditional employee
overhead expenses are minimized or eliminated. By utilizing a team of offshore
developers, which can be added or subtracted with a simple phone call, the
Company can maintain a level of development resources to match existing market
needs.
The Company plans to continue to enhance its applications to suit the
evolving needs of the public sector market. In particular, the Company intends
to develop additional functionality on existing application modules and to
create new modules. Additionally, the Company seeks to improve and expand its
object development
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<PAGE>
environment, with two fundamental objectives: (i) continued user empowerment
with an emphasis on ease-of-use and (ii) increased flexibility to modify base
products in order to suit specific customer requirements. The Company plans to
continue to add new products and services, both through internal development
and potential acquisitions, to leverage the Company's core technologies and
expertise.
COMPETITION
The market in which the Company competes is highly fragmented, with a large
number of competitors that vary in size, primary computer platforms and
overall product scope. Within its traditional public-sector markets, the
Company competes from time to time with (i) custom software and services
providers (such as Andersen Consulting, KPMG Peat Marwick and Oracle
Corporation), (ii) companies which focus on selected segments of the public
sector market (including Systems Computer & Technology, Inc., Manatron, Inc.,
H.T.E., Inc., American Management Systems, Inc., BRC Holdings, Inc.), and
(iii) a significant number of smaller private companies. The Company also
competes with in-house management information services staff. In addition,
within the market for its Y2K solution products, the Company anticipates that
it will compete with companies who focus upon overall enterprise solutions to
the Y2K problem. Many of the Company's competitors are more established,
benefit from greater name recognition and have substantially greater resources
than the Company. Moreover, the Company could face additional competition as
other established and emerging companies enter the public sector software
application market and/or the Y2K market and new products and technologies are
introduced. Increased competition could result in price reductions, fewer
customer orders, reduced gross margins and loss of market share, any of which
could materially adversely affect the Company's business, financial condition
and operating results. In addition, current and potential competitors may make
strategic acquisitions or establish cooperative relationships among themselves
or with third-parties, thereby increasing the ability of their products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among current and new competitors
may emerge and rapidly gain significant market share. CPS believes it can
differentiate its own products and services from these current and future
competitors, focusing on the Company's functionality, product flexibility,
ease of implementation and adaptability to customer needs without custom
programming, enterprise product breadth, individual product features, service
reputation and price. The Company believes that many of its competitors lack
these essential qualities because they do not focus exclusively on the public
sector market or offer fully-integrated software applications. However, there
can be no assurance that the Company will be able to compete successfully
against current and future competitors, and the failure to do so would have a
material adverse effect upon the Company's business, financial condition and
operating results. See "Risk Factors--Competition."
The following table sets forth a representative list of the Company's
competitors.
<TABLE>
<CAPTION>
CAMA TAX MANAGER CITY MANAGER RPS
COMPUTER ASSISTED MASS APPRAISAL TAX BILLING AND COLLECTIONS MUNICIPAL SOLUTIONS REMITTANCE PROCESSING
- -------------------------------- ---------------------------- ------------------- ---------------------
<S> <C> <C> <C>
Cole Layer Trumble ASIX, Inc. H.T.E., Inc. Wassau Financial*
American Management Systems Business Records Corporation INCODE J & B Software, Inc.*
Sigma New World
Kb Systems, Inc. Pentamation
Business Records
Corporation
</TABLE>
NOTES:
*--Also acts as a supplier for Company
INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES
The Company regards certain features of its internal operations, software
and documentation as confidential and proprietary, and relies on a combination
of contract and trade secret laws and other measures to protect its
proprietary intellectual property. Despite these precautions, it may be
possible for unauthorized
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parties to copy the Company's software or reverse engineer or otherwise obtain
and use information the Company regards as proprietary. The Company has no
patents and, under existing copyright laws, has only limited protection. In
addition, certain provisions of the license agreements entered into by the
Company, including provisions against unauthorized use, transfer and
disclosure, may be unenforceable under the laws of certain jurisdictions.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to deter misappropriation of its
technology or independent development by others of technologies that are
substantially equivalent or superior to the Company's technology. Any such
misappropriation or development could have a material adverse effect on the
Company's business, financial condition and operating results. As the number
of competitors providing similar products increases, overlapping methodologies
used in such products will become more likely. Although the Company's
methodology has never been the subject of an infringement claim, there can be
no assurance that third parties will not assert infringement claims against
the Company in the future, that assertion of such claims will not result in
litigation or that the Company would prevail in such litigation or be able to
obtain a license for the use of any infringed intellectual property from a
third party on commercially reasonable terms. Litigation, regardless of its
outcome, could result in substantial cost to the Company and divert resources
and management from the Company's operations. Any infringement claim or
litigation against the Company could, have a material adverse effect on the
Company's business, financial condition and operating results. See "Risk
Factors--Proprietary Rights and Risks of Infringement."
CUSTOMERS
The following table sets forth a representative list of the Company's
customers.
<TABLE>
<CAPTION>
CAMA TAX MANAGER CITY MANAGER
CLIENT LOCATION COMPUTER ASSISTED MASS APPRAISAL TAX BILLING AND COLLECTIONS MUNICIPAL SOLUTIONS
- --------------- --------------------------------- --------------------------- -------------------
<S> <C> <C> <C>
California
Colorado Douglas County City of Alamosa
Florida Martin County Propoerty Appraiser Broward County
Charlotte County
Sarasota County
New Mexico City of Artesia
North Carolina Union County
Oklahoma Canadian County Assessor Rogers County Treasurer City of Altus
City of El Reno
Texas Cooke County Appraisal District City of Port Lavaca
City of Cedar Hill
<CAPTION>
RPS
CLIENT LOCATION REMITTANCE PROCESSING
- --------------- ---------------------------------
<S> <C>
California San Bernardino County
San Diego County
Colorado
Florida Sarasota County Tax Collector
Hillsborough County Tax Collector
New Mexico
North Carolina
Oklahoma
Texas City of Arlington
Texas Department of Public
Safety
</TABLE>
EMPLOYEES
As of September 1, 1997, the Company had 83 full-time and 3 part-time
employees. This total includes 17 people in sales and marketing, 20 in
research and development, 35 in customer support and field services and 14 in
general administration. None of the Company's employees is represented by a
labor union or is subject to a collective bargaining agreement. The Company
believes its relations with its employees are good.
DESCRIPTION OF PROPERTIES
The Company maintains its headquarters in Dallas, Texas where it leases an
aggregate of approximately 14,250 square feet under a lease expiring in April
2000. General and administrative, marketing, product development and customer
support and service operations are located in this space. The Company also
leases an aggregate of approximately 7,500 square feet of office space in
various other locations throughout the U.S.
36
<PAGE>
for sales and service offices. These leases typically have terms of one year or
less. CPS believes its facilities are in good condition and adequate for
present needs.
LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation relating to claims
arising out of its operations in the normal course of business. The Company is
not a party to any legal proceedings, the adverse outcome of which,
individually or in the aggregate, would have a material adverse effect on the
Company's results of operations or financial position.
37
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning the directors,
executive officers and key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Paul E. Kana............ 64 Chairman and Chief Executive Officer
James K. Hoofard, Jr. .. 38 Director, President and Chief Operating Officer
Kevin L. Figge.......... 39 Chief Financial Officer
Michael P. Brown........ 47 Vice President
Janice H. LaRue......... 38 Vice President
John C. Thomas.......... 51 Vice President
Lisa D. Hargiss......... 36 Assistant Vice President
Randy A. Sellers........ 35 Assistant Vice President
G. Dean Booth, Jr. ..... 58 Director and Secretary
Sidney H. Cordier....... 52 Director
Brian R. Wilson......... 45 Director
</TABLE>
PAUL E. KANA has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since December 1994. From 1988 to 1994, Mr.
Kana served as President, Chief Executive Officer and a member of the Board of
Directors of Delaware-based MR Data Management, Inc., ("MR"), a wholly-owned
subsidiary of MR Data Management Group PLC ("MR Data Management"), which
engages in data transcription and document image-processing. In 1988, MR
acquired Computer Microfilm Corporation ("CMC"), a publicly-held company
founded by Mr. Kana in 1968. CMC engages in digital image processing,
conversion of computer output to microfilm and CD-ROM, computer processing,
high volume laser printing services and micro-publishing. He is a graduate of
Columbia University of New York with a Bachelor of Science in Engineering.
JAMES K. HOOFARD, JR. has served as a Director, President and Chief
Operating Officer of CPS since December 1994. From 1991 to 1994, Mr. Hoofard
served as Vice President of Marketing and Sales, and was responsible for the
Property Tax Billing and Collection group. He joined the Company as a
Programmer/Analyst in May 1982 and moved into the marketing and sales area in
September 1987, focusing on developing the Florida market. From 1982 to 1987,
he served as a Revenue Analyst, Software Product Manager, and as a Product
Manager for the Florida Tax Manager product. Mr. Hoofard is a graduate of the
University of Texas at Arlington with a Bachelor of Business Administration in
Systems Analysis.
KEVIN L. FIGGE has served as Chief Financial Officer since October 1997. Mr.
Figge's responsibilities since December 1994 have been encompassed within the
Administrative Services group which is comprised of the Accounting and the
Finance Department, as well as the Personnel and Corporate Services
Department. He joined the Company in July 1992 as Controller and was made an
officer of the Company in December 1994. Prior to joining CPS, Mr. Figge
served as Controller of Aarberg Printing Inks, Inc. and was an Accounting
Manager with the Army and Air Force Exchange Service. Mr. Figge graduated with
a Bachelor of Science degree in Business Administration from the University of
Maryland and also obtained a Bachelor of Science degree in Accounting from the
same university. Mr. Figge is a certified public accountant.
MICHAEL P. BROWN has served as Vice President--Product Development since
October 1996. From June 1995 to October 1996, Mr. Brown was responsible for
the Property Tax Appraisal and Assessment. He served as Vice President of
Special Projects from 1993 to 1995 with responsibility for the development of
Property Tax Billing and Collection. Prior thereto Mr. Brown was the Vice
President of the City and Municipal group primarily in Florida. Mr. Brown
joined CPS in November 1980. He is a graduate of Louisiana Tech University
with a Bachelor of Science degree in Computer Science.
38
<PAGE>
JANICE H. LARUE has served as Vice President--Systems Engineering and
Remittance Processing since November 1996. From March 1995 to November 1996,
Ms. LaRue managed the Systems Engineering group. From 1994 to March 1995, she
managed the City and Municipal Group, supervised customer support activities
for the City and Municipal Group, Property Tax Billing and Collection
products, and from 1991 to 1994 was responsible for marketing and contract
administration, proposal administration and system documentation within the
Corporate Services Group. Prior to joining the Company in April 1989, Ms.
LaRue was employed by Briggs-Weaver, Inc., a distribution company, where she
served in various sales, inventory control and purchasing positions. Ms. LaRue
graduated magna cum laude from Texas A&M University with a Bachelor of Science
degree in Industrial Distribution.
JOHN C. THOMAS has served as Vice President--Property Tax Appraisal and
Assessment since June 1997. Mr. Thomas was previously employed by Clearwater,
Kb Systems, Inc., a developer of property tax appraisal assessment software
("Kb Systems"), where he served in various corporate management and marketing
positions, focusing on the areas of administration, CAMA and Property Tax
Billing and Collection software. Prior to joining Kb Systems in 1989, Mr.
Thomas authored the Thomas Sales Prospecting and Territory Management
Directory, which was published by the American Management Association. Prior
thereto, he served as Vice President of Sales of Citicorp Information
Services, a division of Citibank, N.A. and as Regional Sales Manager of
Interactive Data Corporation, a wholly-owned subsidiary of Chase Manhattan
Corporation. Mr. Thomas earned a Bachelor of Science degree in Industrial
Management from Wayne State University.
LISA D. HARGISS has served as Assistant Vice President--Property Tax Billing
and Collection since September 1995. She joined the Company in August 1987 as
a Client Support Representative, becoming an integral part of the design team
for the Florida Property Tax Billing and Collection product and the Computer
Assisted Mass Appraisal product. Ms. Hargiss obtained a Bachelor of Science
degree in Computer Science from Texas A&M University at Commerce.
RANDY A. SELLERS has served as Assistant Vice President--City and Municipal
since November 1996. Prior to joining CPS in March 1994, Mr. Sellers served
two years as MIS director and four years in technical support with DacEasy,
Inc., a provider of accounting software. Mr. Sellers received a Bachelor of
Science degree in Management Science and Computer Systems from Oklahoma State
University.
G. DEAN BOOTH, JR. has served as a Director and the Secretary of CPS since
December 1994. Mr. Booth is a partner at the law firm of Schreeder, Wheeler &
Flint, LLP of Atlanta, Georgia. Prior to joining Schreeder, Wheeler & Flint in
March 1996, he was the founder and managing partner of Booth, Wade and
Campbell from 1990. He currently serves as Honorary Chairman and Member of the
Executive Council for the International Bar Association, Trustee and Secretary
for the Institute for Political Economy, and Chairman of the Bar Council,
United States District Court, Northern District of Georgia.
SIDNEY H. CORDIER has served as a Director of the Company since December
1994. From January 1994 to present, Mr. Cordier has served as Chairman of the
Board of Directors of Cedardata PLC, a publicly-held U.K. company listed on
the London Stock Exchange, specializing in commercial and financial accounting
systems software ("Cedardata"). From 1984 to 1993, Mr. Cordier was Chief
Executive Officer of MR Data Management.
BRIAN R. WILSON has served as a Director of CPS since 1994. From 1993 to the
present, Mr. Wilson has been a management consultant, advising companies on
restructurings and serving as a manager of a private investment trust, and in
May 1996, was appointed a director of Cedardata. From 1987 to 1993 Mr. Wilson
served as Finance Director and a member of the Board of Directors of MR Data
Management where his responsibilities included mergers and acquisitions, cash
management, pensions, insurance, certain legal matters and investor relations.
Prior to joining MR Data Management in 1987, Mr. Wilson was the chief
financial officer for European Properties with the Pension Fund Property Unit
Trust in the United Kingdom.
39
<PAGE>
The Company's Board of Directors is divided into three classes, with two
classes composed of two directors and one class with one director. The classes
serve staggered two-year terms. G. Dean Booth, Jr.'s term as Director shall
expire as of the 1998 annual meeting, Brian P. Wilson's and Sidney H.
Cordier's terms shall expire as of the 1999 annual meeting, and James K.
Hoofard, Jr.'s and Paul E. Kana's terms shall expire at the 2000 annual
meeting. The Company's executive officers are appointed by and serve at the
discretion of the Board of Directors. No family relationships exists between
any directors or executive officers of CPS.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board maintains an Audit Committee and Compensation Committee. The Audit
Committee is responsible for reviewing the results and scope of audits and
other services provided by the Company's independent auditors. The Audit
Committee is comprised of Messrs. Kana and Wilson. The Compensation Committee
is comprised of Messrs. Booth, Wilson and Kana. The Compensation Committee
makes recommendations concerning the salaries and incentive compensation of
employees and consultants to the Company, and will oversee and administer the
Company's stock option plans.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to its
Chief Executive Officer and the four next most highly compensated executive
officers of the Company (collectively, the "Named Executive Officers") for
services rendered during the fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- ------------------ -------
RESTRICTED
NAME AND OTHER ANNUAL STOCK OPTION/ LTIP OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS SARS PAYOUTS COMPENSATION
- ------------------ ---- -------- ----- ------------ ---------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paul E. Kana............ 1996 $110,000 -- -- -- -- -- --
Chairman and Chief
Executive Officer
James K. Hoofard, Jr.... 1996 $125,000 -- -- -- -- -- --
Director, President and
Chief Operating Officer
</TABLE>
COMPENSATION OF DIRECTORS
All directors are reimbursed for their usual and customary expenses incurred
in attending all Board and committee meetings. CPS currently pays directors
who are not also employees (Messrs. Cordier, Wilson and Booth) $650 per day of
service as it relates to attending such meetings. Directors who are also
employees of the Company receive no remuneration for serving as directors.
BONUS PLAN
The Company has adopted bonus programs for employees, including executive
officers, whereby bonus payments are made based on achievement of individual
performance and consolidated corporate operating results. Business unit
performance also will be a factor in determining compensation awards with
respect to key employees who are not executive officers. The specified
qualitative and quantitative criteria employed by the Board of Directors of
the Company in determining bonus awards will vary for each individual and from
year to year.
40
<PAGE>
401(K) SAVINGS PLAN
The Company sponsors a deferred savings plan (the "401(k) Plan") qualified
under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). All employees over the age of 21 who have completed one
year of service are eligible to participate in the 401(k) Plan. Eligible
employees may contribute to the 401(k) Plan up to 15% of their salary subject
to an annual maximum established under the Code. Presently, the Company does
not match employee contributions to the 401(k) Plan.
EMPLOYEE EQUITY PLANS
1997 Equity Participation Plan. The Company has established an equity
participation plan (the "1997 Equity Participation Plan") to enable executive
officers, other key employees, independent directors and consultants of CPS to
participate in the ownership of the Company. The 1997 Equity Participation
Plan is designed to attract and retain executive officers, other key
employees, independent directors and consultants of the Company and to provide
incentives to such persons to maximize the Company's performance. The 1997
Equity Participation Plan provides for the award to executive officers, other
key employees, independent directors and consultants of the Company of a broad
variety of stock-based compensation alternatives such as nonqualified stock
options, incentive stock options, restricted stock and performance awards and
provides for the grant to executive officers, other key employees, independent
directors and consultants of nonqualified stock options. Awards under the 1997
Equity Participation Plan may provide participants with rights to acquire
shares of Common Stock.
The 1997 Equity Participation Plan is administered by the Compensation
Committee, which is authorized to select from among the eligible participants
the individuals to whom options, restricted stock purchase rights and
performance awards are to be granted and to determine the number of shares to
be subject thereto and the terms and conditions thereof. The members of the
Compensation Committee who are not affiliated with the Company will select
from among the eligible participants the individuals to whom nonqualified
stock options are to be granted, except as set forth below, and will determine
the number of shares to be subject thereto and the terms and conditions
thereof. The Compensation Committee is also authorized to adopt, amend and
rescind rules relating to the administration of the 1997 Equity Participation
Plan.
Nonqualified stock options will provide for the right to purchase Common
Stock at a specified price which may be less than fair market value on the
date of grant (but not less than par value), and usually will become
exercisable in installments after the grant date. Nonqualified stock options
may be granted for any reasonable term.
Incentive stock options will be designed to comply with the provisions of
the Code and will be subject to restrictions contained in the Code, including
exercise prices equal to at least 100% of fair market value of Common Stock on
the grant date and a ten year restriction on their term, but may be
subsequently modified to disqualify them from treatment as an incentive stock
option.
Restricted stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions
are not met. In general, restricted stock may not be sold, or otherwise
transferred or hypothecated, until restrictions are removed or expire.
Purchasers of restricted stock, unlike recipients of options, will have voting
rights and will receive dividends prior to the time when the restrictions
lapse.
Performance awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these awards will be based upon specific
agreements and may be paid in cash or in Common Stock or in a combination of
cash and Common Stock. Performance awards may include "phantom" stock awards
that provide for payments based upon increases in the price of the Common
Stock over a predetermined period. Performance awards may also include bonuses
which may be granted by the Compensation
41
<PAGE>
Committee on an individual or group basis and which may be payable in cash or
in Common Stock or in a combination of cash and Common Stock.
There are 600,000 shares of Common Stock reserved for issuance pursuant to
the 1997 Equity Participation Plan, of which options to purchase 335,000
shares have been granted to certain directors, officers and employees to be
effective upon the closing of this offering, with an exercise price equal to
the initial public offering price.
Employee Stock Purchase Plan. The Company has established the CPS Systems,
Inc. Employee Stock Purchase Plan (the "Employee Stock Purchase Plan") to
assist employees of the Company in acquiring a stock ownership interest in CPS
and to encourage them to remain in the employment of the Company. The Employee
Stock Purchase Plan permits employees to purchase shares of Common Stock
through payroll deductions at a price equal to 85% of fair market value. A
total of 100,000 shares of Common Stock are reserved for issuance pursuant to
the Employee Stock Purchase Plan. Each employee is limited to purchasing
Common Stock having an aggregate market value of $25,000 in any calendar year.
CERTAIN TRANSACTIONS
G. Dean Booth, Jr., a director of the Company, is a partner in the law firm
of Schreeder, Wheeler & Flint, LLP of Atlanta, Georgia. Schreeder, Wheeler &
Flint, LLP has acted as counsel to the Company and has been retained by the
Company to assist in the preparation of this offering. During fiscal 1996, the
firm was paid a total of $31,945 in legal fees. The Company did not make any
payments to the firm in fiscal 1995. It is anticipated the firm's fees from
services in the preparation of this offering will total approximately $75,000.
In May 1997, the Company's shareholders formed Thor Concepts, Inc., a
Georgia corporation ("Thor"), for the sole purpose of acquiring CDP Systems,
Inc., a Florida corporation ("CDP"), for nominal consideration. In addition,
the Company's shareholders advanced approximately $123,000 to CDP to cover CDP
expenses (the "CDP Loans"). Effective July 1997, the Company purchased the
shares of CDP from Thor in exchange for nominal consideration and assumption
of the CDP Loans. As of October 31, 1997, there was approximately $128,000 in
principal and accrued interest outstanding under the CDP Loans. See "Use of
Proceeds."
42
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of October 31, 1997, and as adjusted to
reflect the sale of the shares of the Common Stock offered hereby, by (i) each
of the directors of CPS, (ii) each of the Named Executive Officers, (iii) each
person or entity known to CPS to own beneficially more than 5% of the
Company's Common Stock and (iv) all directors and executive officers as a
group. To the Company's knowledge, none of these entities has a relationship
with any Underwriters of this offering or their respective affiliates. Except
as otherwise indicated below, each person or entity named in the table has
sole voting and investment power (or shares such power with his or her spouse)
with respect to his or her Common Stock shown as beneficially owned by each.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
SHARES BENEFICIALLY OWNED AFTER THE
NAME AND ADDRESS OF PRIOR TO THE OFFERING(1)(2) OFFERING(1)(2)
DIRECTOR, OFFICER AND -------------------------------- --------------------
OTHER PRINCIPAL SHAREHOLDER NUMBER PERCENTAGE NUMBER PERCENTAGE
- --------------------------- ---------------- --------------- --------- ----------
<S> <C> <C> <C> <C>
Paul E. Kana.............. 1,139,402 23.6% 1,139,402 18.7%
3400 Carlisle, Suite 500
Dallas, Texas 75204
Sidney H. Cordier(3)...... 1,139,402 23.6% 1,139,402 18.7%
Weybourne
10 Wray Park Road
Reigate Surrey
RH2 2 ODD
United Kingdom
Brian R. Wilson(3)........ 1,139,402 23.6% 1,139,402 18.7%
Drymen House
Horn Lane
East Hendren, Near
Wantage,
Oxon OX128LD United
Kingdom
G. Dean Booth, Jr......... 243,265 5.0% 243,265 4.0%
Schreeder, Wheeler &
Flint LLP
1600 The Candler Building
127 Peachtree Street,
N.E.
Atlanta, Georgia 30303
James K. Hoofard, Jr...... 243,265 5.0% 243,265 4.0%
3400 Carlisle, Suite 500
Dallas, Texas 75204
Hanifen Imhoff Mezzanine
Fund, L.P.(3)............ 724,719 15.0% 724,719 11.9%
1125 17th Street, Suite
1600
Denver, Colorado 80202
All directors and
executive officers as a
group (5 persons)........ 3,904,736 81.0% 3,904,736 64.2%
</TABLE>
- --------
(1) The number of shares beneficially owned by each shareholder is determined
under rules and regulations promulgated by the Securities and Exchange
Commission, and the information is not necessarily indicative of
beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has sole or
shared voting power or investment power, as well as any shares which the
individual has the right to acquire within 60 days of the date of this
Prospectus through the exercise of any stock option, warrant or other
right. The inclusion herein of such shares, however, does not constitute
an admission that the named shareholder is a direct or indirect beneficial
owner of such shares.
(2) Assumes exercise of outstanding warrants to purchase 927,766 shares of
Common Stock, exercisable on the earlier of December 31, 1999 or
completion of an initial public offering.
(3) Does not assume the sale of any shares of Common Stock. See "Selling
Shareholders."
43
<PAGE>
SELLING SHAREHOLDERS
In the event that the Underwriter's over-allotment option is exercised in
full, the following shareholders (the "Selling Shareholders") will sell the
number of shares indicated below:
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR NUMBER OF OWNERSHIP AFTER
TO OVER-ALLOTMENT SHARES OVER-ALLOTMENT
NAME EXERCISE BEING OFFERED EXERCISE
- ---- ----------------- ------------- ---------------
<S> <C> <C> <C>
Sidney H. Cordier............... 1,139,402 62,371 1,077,031
Brian R. Wilson................. 1,139,402 62,371 1,077,031
Hanifen Imhoff Mezzanine
Fund, L.P...................... 724,719 41,758 682,961
John K. Percival................ 103,476 14,000 89,476
Robert J. Newcorn............... 30,457 7,000 23,457
</TABLE>
In the event that the Underwriter elects to exercise less than its full
over-allotment option, the number of shares being offered by the Selling
Shareholders will be reduced proportionately.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of (i) 50 million shares of
Common Stock, par value $.01 per share, (ii) 10 million shares of Preferred
Stock, par value $.01 per share. As of the date of this Prospectus an
aggregate of 4,832,502 shares of Common Stock were outstanding and held by
nine Shareholders (assuming the exercise by four holders of warrants to
purchase 927,766 shares of Common Stock). No shares of Preferred Stock have
been issued or are outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of stockholders.
Subject to preferential rights with respect to any series of preferred stock
which may issued, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors on the Common Stock out
of funds legally available therefor (subject to the terms and conditions
contained in the Company's existing credit agreements with its lenders), and
in the event of a liquidation, dissolution or winding-up of the affairs of the
Company, are entitled to share equally and ratably in all remaining assets and
funds of the Company. The holders of Common Stock have no preemptive rights,
cumulative voting rights, or rights to convert shares of Common Stock into any
other securities and are not subject to future calls or assessments by the
Company. All outstanding shares of Common Stock are fully paid and non-
assessable.
PREFERRED STOCK
The Board of Directors is authorized, subject to limitations prescribed by
law, without shareholder approval, to issue such shares of Preferred Stock in
one or more series. Each series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences,
as shall be determined by the Board of Directors. No shares are issued and
outstanding as of the date hereof, and the Company has no present plans to
issue any of the Preferred Stock in the foreseeable future. The issuance of
the Preferred Stock, while providing desirable flexibility for corporate
acquisitions and other corporate purposes, could make it more difficult for
third-parties to acquire, or discourage third-parties from acquiring, a
majority of the outstanding voting stock of the Company. See "Risk Factors--
Effect of Certain Charter and Bylaw Provisions; Antitakeover Effects."
44
<PAGE>
WARRANTS
As of June 30, 1997, CPS had four outstanding warrants to purchase an
aggregate of 927,766 shares of the Common Stock at an exercise price of $.0026
per share. These warrants become exercisable upon the earlier of December 30,
1999 or the completion of an initial public offering and expire on December
29, 2004.
REGISTRATION RIGHTS OF CERTAIN HOLDERS
Upon the completion of this offering, the holders of 927,766 shares of
Common Stock (the "Registrable Securities") or their transferees are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the Company and the holders of the Registrable Securities. If the
Company registers any of its Common Stock either for its own account or for
the account of other security holders, the holders of Registrable Securities
are entitled to include their shares of Common Stock in the registration,
subject to the ability of the underwriters to limit the number of shares
included in the registration to not more than 10% of the offering. All
registration expenses must be borne by the Company; provided, however, that
all underwriting discounts and selling commissions applicable to the sale of
shares in connection with any registration shall be borne by the holders of
the securities registered pro rata on the basis of the number of shares of
such securities being registered.
REPRESENTATIVE'S WARRANT
For a description of the warrant to be sold to the Representative in
connection with this offering, see "Underwriting."
CERTAIN STATUTORY AND CHARTER PROVISIONS REGARDING LIMITATIONS OF LIABILITIES
OF DIRECTORS
As permitted by the Texas Business Corporation Act, the Company's Restated
Articles include a provision that eliminates the personal liability of its
directors with respect to any acts or omissions in the performance of his
duties to the full extent permitted by law.
The Company's Restated Articles further provide that, if the Texas Business
Corporation Act is amended to authorize the elimination or limitation of
director liability which is greater than therein provided, then the liability
of a director of the Company will be eliminated or limited to the fullest
extent permitted by such law, as so amended.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CERTAIN CHARTER AND BYLAW PROVISIONS REGARDING CHANGE OF CONTROL
Certain provisions of the Company's Articles of Incorporation, as amended
(the "Restated Articles"), may deter or frustrate a takeover attempt of the
Company that a shareholder might consider in his best interest. The Company's
Restated Articles or Bylaws, among other things, provide that (i) any action
required or permitted to be taken by the shareholders of the Company may be
effected only at an annual or special meeting of shareholders, and not by
written consent of the shareholders, (ii) the annual meeting of shareholders
shall be held on such date and at such time fixed from time to time by the
Board of Directors, provided that there shall be an annual meeting held every
calendar year, (iii) any special meeting of the
45
<PAGE>
shareholders may be called only by the Chairman of the Board, President or
upon the affirmative vote of at least a majority of the members of the Board
of Directors, or upon the written demand of the holders of not less than 50%
of the votes entitled to be cast at a special meeting, (iv) an advance notice
procedure must be followed for nomination of directors and for other
shareholder proposals to be considered at annual shareholders' meetings, and
(v) the Company's Board of Directors be divided into three classes, each of
which serves for different two-year periods, and for which shareholders have
no cumulative voting rights. In addition, the Company will be authorized to
issue additional shares of Common Stock and up to ten million shares of
preferred stock in one or more series, having terms fixed by the Board of
Directors without shareholder approval, including voting, dividend or
liquidation rights that could be greater than or senior to the rights of
holders of Common Stock. Shareholders will have no preemptive rights with
respect to any additional common stock or preferred stock. Issuance of
additional shares of Common Stock or new shares of Preferred Stock could also
be used as an anti-takeover device. Except as set forth herein, the Company
has no current intentions or plans to issue additional Common Stock or issue
Preferred Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's securities is American
Securities Transfer and Trust Company.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering there will be 6,082,502 shares (6,270,002
shares if the Underwriters' over-allotment option is exercised in full) of
Common Stock outstanding (assuming exercise of warrants to purchase 927,766
shares of Common Stock). Immediately following the completion of this
offering, a total of 1,250,000 shares of Common Stock (1,437,500 shares if the
Underwriters' over-allotment is exercised in full) will be freely tradeable
without restriction. An additional 4,832,502 (4,645,002 if the Underwriters'
over-allotment option is exercised in full) shares of Common Stock may be sold
subject to the limitations of Rule 144 under the Securities Act, following
expiration of a lock-up agreements executed by the Company's directors,
executive officers, certain key employees and certain other shareholders,
which expire one year after the date of this Prospectus.
In general, under Rule 144 a person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year, including
any persons who may be deemed to be an affiliate of the Company, is entitled
to sell, within any three-month period, a number of shares that does not
exceed the greater of 1% of the total number of then-outstanding shares of
Common Stock or the average weekly trading volume in the Common Stock as
reported by Nasdaq during the four calendar weeks preceding such sale. Sales
pursuant to Rule 144 also are subject to certain other requirements relating
to the manner of sale, notice and availability of current public information
about the Company.
Affiliates may publicly sell shares not constituting restricted securities
under Rule 144 in accordance with the foregoing volume limitations and other
restrictions but without regard to the one-year holding period. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days immediately preceding a sale by such person, and
who has beneficially owned restricted shares for at least two years, is
entitled to sell such shares under Rule 144 without regard to any of the
limitations described above.
47
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated is acting as Representative, have severally agreed to purchase
from the Company and the Company has agreed to sell to the Underwriters, the
respective number of shares of Common Stock set forth opposite each
Underwriter's name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Cruttenden Roth Incorporated....................................
----
Total.........................................................
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company's
counsel and independent public accountants. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of Common Stock if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Common Stock directly to the public on the
terms set forth on the cover page of this Prospectus. The Underwriters may
allow selected dealers, a concession of not more than $ per share, and
the Underwriters may allow, and such selected dealers may reallow, a
concession of not more than $ per share to other dealers. After the initial
public offering of the shares, the public offering price and other selling
terms may be changed by the Representative. No change in such terms shall
change the amount of proceeds to be received by the Company as set forth on
the cover page of this Prospectus.
The Selling Shareholders have granted an option to the Underwriters,
exercisable for a period of 45 days after the date of this Prospectus, to
purchase up to an additional 187,500 shares of Common Stock at the same price
per share as the initial shares to be purchased by the Underwriters to cover
over-allotments, if any. To the extent that the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares of Common Stock in
approximately the same proportion as set forth in the above table.
The Representative has advised the Company that they do not expect any sales
of the shares of Common Stock offered hereby to be made to discretionary
accounts controlled by the Underwriters.
The Company has agreed to issue to the Representative at the closing of this
offering five-year warrants (the "Representative's Warrants") to purchase up
to 10% of number of shares of Common Stock sold in this offering (including
shares sold in the event the over-allotment option is exercised in full) at an
exercise price per share equal to 120% of the initial per share public
offering price. The Representative's Warrants are exercisable for a period of
four years beginning one year from the date of this Prospectus and contain
standard net-issuance provisions. The holders of the Representative's Warrants
will have no voting, dividend or other shareholder rights until the
Representative's Warrants are exercised. The terms of the Representative's
Warrants were established as the result of negotiations between the Company
and the Representative. If the
48
<PAGE>
Representative's Warrants are exercised, the Representative may realize
additional compensation. By their terms, the Representative's Warrants will be
restricted from sale, transfer, assignment or hypothecation, except to persons
that are officers of the Representative. The number of shares covered by the
Representative's Warrants and the exercise price thereof are subject to
adjustment in certain events to prevent dilution. In addition, the Company has
granted certain rights to the holders of the Representative's Warrants to
register the Representative's Warrants and the Common Stock underlying the
Representative's Warrants under the Securities Act, all of which are being
registered as part of this offering.
The Company has agreed to reimburse the Representative up to $50,000 for its
accountable expenses and to reimburse the Representative for its legal
expenses incurred in connection with this offering (together, the "Accountable
Expenses"). In addition, the Company has agreed to pay the Representative a
non-accountable expense allowance equal to 3.0% of the aggregate Price to
Public (including with respect to shares of Common Stock underlying the over-
allotment option, if and to the extent it is exercised) set forth on the front
cover of this Prospectus, less amounts paid for Accountable Expenses. The
Representative's expenses in excess of such allowance will be borne by the
Representative. To the extent that the expenses of the Representative are less
than the non-accountable expense allowance, the excess may be deemed to be
compensation to the Representative.
The Company, its officers and directors have entered into lock-up agreements
with the Representative which provide that they will not offer, sell or
otherwise dispose of any of the Company's Common Stock for a period of 365
days after the commencement of the offering without the prior written consent
of the Representative. See "Shares Eligible for Future Sale."
Prior to this offering, there has been no established trading market for the
Common Stock. Consequently, the initial public offering price for the Common
Stock offered hereby has been determined by negotiation between the Company
and the Representative. Among the factors considered in such negotiations were
the preliminary demand for the Common Stock, the prevailing market and
economic conditions, the Company's results of operations, estimates of the
business potential and prospects of the Company, the present state of the
Company's business operations, an assessment of the Company's management, the
consideration of these factors in relation to the market valuation of
comparable companies in related businesses, the current condition of the
markets in which the Company operates, and other factors deemed relevant.
There can be no assurance that an active trading market will develop for the
Common Stock or that the Common Stock will trade in the public market
subsequent to this offering at or above the initial public offering price.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters and their controlling persons
against certain liabilities under the Securities Act or will contribute to
payments the Underwriters and their controlling persons may be required to
make in respect thereof.
LEGAL MATTERS
The law firm of Schreeder, Wheeler & Flint, LLP, Atlanta, Georgia, has acted
as counsel to the Company in connection with this offering and will render an
opinion as to the legality of the shares of Common Stock being offered hereby.
Summit Law Group, P.L.L.C., Seattle, Washington, has acted as counsel to the
Underwriters in connection with certain legal matters relating to this
offering. See "Certain Transactions."
EXPERTS
The Company's financial statements as of December 31, 1996, and for each of
the two years in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of
49
<PAGE>
Grant Thornton LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has not previously been subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, accordingly, has not filed reports and other information with the
Securities and Exchange Commission (the "Commission"). The Company has filed
with the Commission a registration statement (the "Registration Statement")
with respect to the shares of Common Stock offered hereby. This Prospectus,
which constitutes part of the Registration Statement, does not contain all of
the information contained in the Registration Statement and the exhibits
thereto. For further information with respect to the Company and the shares of
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, which may be examined without charge at, and
copies of all or part of which may be obtained at prescribed rates from, the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its regional offices located at 7 World
Trade Center, 13th Floor, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Electronic filings made through the Electronic Data Gathering and Retrieval
system are publicly available through the Commission's website at
"http://www.sec.gov". Statements contained in this Prospectus as to the
contents of any contract or any other document are not necessarily complete
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statement, each statement
being qualified in all respects by such reference.
50
<PAGE>
CPS SYSTEMS, INC.
Index to Financial Statements
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants.......................... F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Shareholders' Equity.......................................... F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
CPS Systems, Inc.
We have audited the accompanying balance sheet of CPS Systems, Inc. as of
December 31, 1996, and the related statements of operations, shareholders'
equity, and cash flows for each of the two years in the period then ended.
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 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 CPS Systems, Inc. as of
December 31, 1996, and the results of its operations and its cash flows for
each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Atlanta, Georgia
January 22, 1997 (except for
Note I, as to which the date
is October 23, 1997)
F-2
<PAGE>
CPS SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
ASSETS ------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash................................................ $ 591,698 $ 447,005
Accounts receivable, less allowance for doubtful
accounts of $27,000 and $42,000.................... 1,509,087 1,590,736
Deferred income taxes............................... 146,000 152,000
Inventories......................................... 91,599 174,780
Prepaid expenses.................................... 74,976 76,439
Other receivable.................................... -- 123,925
---------- ----------
Total current assets.............................. 2,413,360 2,564,885
PROPERTY AND EQUIPMENT................................ 455,633 483,799
SOFTWARE DEVELOPMENT COSTS............................ 799,438 843,682
OTHER ASSETS
Costs in excess of net assets acquired.............. 2,119,675 1,981,027
Debt issue costs.................................... 241,759 200,945
Non-compete agreements.............................. 83,333 41,667
Other assets........................................ 20,948 20,948
---------- ----------
2,465,715 2,244,587
---------- ----------
$6,134,146 $6,136,953
========== ==========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Current portion of long term debt................... $ 299,927 $ 315,828
Accounts payable.................................... 403,635 668,031
Accrued salaries, wages and payroll taxes........... 122,090 --
Other accrued expenses.............................. 81,880 141,272
Unearned revenue, current portion................... 1,025,743 930,118
Income taxes payable................................ 176,904 141,427
---------- ----------
Total current liabilities......................... 2,110,179 2,196,676
OTHER LIABILITIES
Long-term debt...................................... 2,741,118 2,559,625
Deferred income taxes............................... 284,000 295,000
Unearned revenue.................................... 95,551 45,871
Other liabilities................................... 54,710 68,388
---------- ----------
3,175,379 2,968,884
---------- ----------
Total liabilities................................. 5,285,558 5,165,560
PUT WARRANTS.......................................... 324,801 314,843
COMMITMENTS AND CONTINGENCIES......................... -- --
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized
10,000,000 shares, none issued and outstanding..... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized; 3,904,736 shares issued................ 39,047 39,047
Additional paid-in capital.......................... 960,953 960,953
Accumulated deficit................................. (476,213) (343,450)
---------- ----------
Total shareholders' equity........................ 523,787 656,550
---------- ----------
$6,134,146 $6,136,953
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CPS SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
---------------------- ----------------------
1995 1996 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue
License fees.................. $ 423,964 $1,634,835 $ 851,541 $1,364,902
Recurring maintenance and
service fees................. 3,906,499 3,851,308 1,928,343 1,911,558
Product sales................. 1,594,388 2,052,148 978,362 1,648,007
Other service fees............ 328,262 824,486 235,819 481,176
---------- ---------- ---------- ----------
6,253,113 8,362,777 3,994,065 5,405,643
---------- ---------- ---------- ----------
Cost of revenue
Product sales................. 1,033,334 1,464,664 703,004 1,236,233
Purchase software............. 152,671 274,438 94,081 210,342
Distribution.................. 11,358 11,115 5,406 39,702
---------- ---------- ---------- ----------
1,197,363 1,750,217 802,491 1,486,277
---------- ---------- ---------- ----------
Gross profit................ 5,055,750 6,612,560 3,191,574 3,919,366
Operating expenses
Support and customer service.. 2,276,131 2,743,217 1,301,023 1,459,091
Selling....................... 600,979 771,470 378,891 408,537
Research and development...... 691,447 866,366 336,407 729,399
General and administrative.... 870,975 1,146,669 547,878 602,227
Amortization of intangible
assets......................... 429,919 434,250 223,294 221,128
---------- ---------- ---------- ----------
4,869,451 5,961,972 2,787,493 3,420,382
---------- ---------- ---------- ----------
Earnings from operations.... 186,299 650,588 404,081 498,984
Interest and financing costs.... 440,439 731,461 371,084 191,921
---------- ---------- ---------- ----------
Earnings (loss) before
income taxes............... (254,140) (80,873) 32,997 307,063
Income tax expense (benefit).... (24,000) 165,200 110,500 174,300
---------- ---------- ---------- ----------
Net earnings (loss)......... $ (230,140) $ (246,073) $ (77,503) $ 132,763
========== ========== ========== ==========
Net earnings (loss) per common
share.......................... $ (.06) $ (.06) $ .(02) $ .03
========== ========== ========== ==========
Weighted average shares used in
computing net earnings (loss)
per common share............... 3,904,736 3,904,736 3,904,736 3,904,736
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CPS SYSTEMS, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ADDITIONAL
NUMBER PAR PAID IN ACCUMULATED
OF SHARES VALUE CAPITAL DEFICIT TOTAL
--------- ------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, December 31,
1994..................... 3,904,736 $39,047 $960,953 $ -- $1,000,000
Net loss for the year..... -- -- -- (230,140) (230,140)
--------- ------- -------- --------- ----------
Balance, December 31,
1995..................... 3,904,736 39,047 960,953 (230,140) 769,860
Net loss for the year..... -- -- -- (246,073) (246,073)
--------- ------- -------- --------- ----------
Balance, December 31,
1996..................... 3,904,736 39,047 960,953 (476,213) 523,787
Net earnings for the
period (unaudited)....... -- -- -- 132,763 132,763
--------- ------- -------- --------- ----------
Balance, June 30, 1997
(unaudited).............. 3,904,736 $39,047 $960,953 $(343,450) $ 656,550
========= ======= ======== ========= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
CPS SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------- -------------------
1995 1996 1996 1997
--------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net earnings (loss)............... $(230,140) $(246,073) $(77,503) $ 132,763
Adjustments to reconcile net earn-
ings (loss) to net cash provided
(used) by operating activities:
Deferred income tax (benefit)
expense........................ (13,000) (16,000) (37,000) 5,000
Depreciation and amortization... 691,474 702,318 341,503 372,770
Accretion of put warrants....... (56,831) 271,632 135,816 (9,958)
Loss on disposal of assets...... -- 820 -- --
Change in assets and liabili-
ties:
Accounts receivable........... 344,670 (612,648) (668,979) (81,649)
Refundable income taxes....... (118,134) 118,134 118,134 --
Inventories................... (32,407) (58,552) (13,488) (83,181)
Prepaid expenses.............. 42,423 9,480 33,016 (1,463)
Other assets.................. 87,599 963 2,469 --
Accounts payable.............. 194,359 70,476 105,736 264,396
Accrued expenses.............. (379,763) 116,488 47,340 (62,698)
Unearned revenue.............. (87,162) (8,210) (148,681) (145,305)
Income taxes payable.......... -- 176,904 76,800 (35,477)
Other liabilities............. 27,356 27,354 13,677 13,678
--------- --------- -------- ---------
Net cash provided (used) by
operating activities....... 470,444 553,086 (71,160) 368,876
--------- --------- -------- ---------
Cash flows from investing
activities:
Purchase of property and equip-
ment............................. (104,758) (209,450) (75,865) (119,272)
Software development costs........ (180,428) (41,016) (37,341) (104,780)
Proceeds from sale of property and
equipment........................ -- 1,299 -- --
Other receivables................. -- -- -- (123,925)
--------- --------- -------- ---------
Net cash used by investing
activities................. (285,186) (249,167) (113,206) (347,977)
--------- --------- -------- ---------
Cash flows from financing activi-
ties:
Principal payments on long-term
debt............................. (210,311) (262,644) (148,346) (165,592)
Other receivable.................. -- 165,000 165,000 --
--------- --------- -------- ---------
Net cash (used) provided by
financing activities....... (210,311) (97,644) 16,654 (165,592)
--------- --------- -------- ---------
Net increase (decrease) in cash..... (25,053) 206,275 (167,712) (144,693)
Cash at beginning of period......... 410,476 385,423 385,423 591,698
--------- --------- -------- ---------
Cash at end of period............... $ 385,423 $ 591,698 $217,711 $ 447,005
========= ========= ======== =========
Supplementary Cash Flow Disclosure:
Interest and financing costs paid. $ 465,584 $ 432,048 $215,341 $ 188,790
Income taxes (refunded) paid, net. $ 107,234 $(113,839) $ 70,700 $ 204,777
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CPS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE A--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES
1. BUSINESS
CPS Systems, Inc. (the Company), a Texas corporation, engages primarily in
developing, marketing, licensing and supporting proprietary software and
selling hardware and related products to appraisal/assessment districts, tax
collection agencies, municipalities and law enforcement agencies located
primarily in Texas, Oklahoma and Florida.
2. REVENUE RECOGNITION
The Company licenses its software products. Revenue from software license
fees is recognized when an agreement has been executed, software has been
delivered and installed, all significant contractual obligations have been met
and collection of the related receivable is probable. Post contract customer
support revenue, consisting of continuing maintenance and service fees,
including that bundled with initial license fees, is deferred and recognized
ratably over the contractual periods the services are provided. Product sales,
consisting primarily of computer hardware, are recognized upon delivery of the
product.
Other fees consist primarily of training, conversion, customization and
installation fees and are recognized as the services are provided.
3. INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Accelerated methods are utilized for income tax purposes.
5. SOFTWARE DEVELOPMENT COSTS
In accordance with SFAS No. 86, all software development costs are charged
to expense as incurred until technological feasibility has been established
for the product. Software development costs incurred after technological
feasibility has been established are capitalized and amortized, commencing
with product release, on a straight line basis over a period of six to ten
years. Amortization of software development costs was approximately $103,000
and $116,000 during 1995 and 1996, respectively. Software development costs
are net of accumulated amortization of approximately $219,000 at December 31,
1996.
6. COSTS IN EXCESS OF NET ASSETS ACQUIRED
The excess acquisition cost over the fair value of net assets acquired of
CPS Systems, Inc. is amortized over a ten-year period on a straight line
basis. Costs in excess of net assets acquired is net of accumulated
amortization of $529,918 at December 31, 1996. Amortization of costs in excess
of net assets acquired charged to operations was $264,959 annually in 1995 and
1996.
7. DEBT ISSUE COSTS
Costs incurred in connection with obtaining financing have been capitalized
and are amortized on a straight-line basis over the term of the loan
agreements, which range from four to six years. Debt issue costs are stated
net of accumulated amortization of $163,255 at December 31, 1996. Amortization
of debt issue costs charged to operations was $81,627 annually in 1995 and
1996.
F-7
<PAGE>
CPS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. NON-COMPETE AGREEMENTS
Cost of non-compete agreements have been capitalized and are amortized on a
straight line basis over the three year term of the agreements. Non-compete
agreements are net of accumulated amortization of $166,667 at December 31,
1996. Amortization of non-compete agreements charged to operations was $83,333
annually in 1995 and 1996.
9. INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates applied to taxable income. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation allowance is provided for
deferred tax assets when it is more likely than not that the asset will not be
realized.
10. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
In preparing financial statements in conformity with General Accepted
Accounting Principles ("GAAP"), management is required to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from those estimates.
11. LONG-LIVED ASSETS
Management periodically evaluates the realizability of its property and
equipment, software development costs and intangible assets in light of
current technology, as it may relate to the Company's products, and the
current environment of its industry and markets. Management believes that no
impairment of property and equipment, software development costs and
intangible assets exists at December 31, 1996.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments include cash, cash equivalents and long-
term debt. The carrying value of cash and cash equivalents approximates fair
value due to the relatively short period to maturity of the instruments. The
carrying value of the Company's long-term obligations approximates fair value
based upon borrowing rates currently available to the Company for borrowings
with comparable maturities.
13. INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying balance sheet as of June 30, 1997 and the accompanying
statements of operations and cash flows for the six months ended June 30, 1997
and 1996, included herein have been prepared by the Company and are unaudited.
The information furnished in the unaudited financial statements referred to
above includes all adjustments which are, in the opinion of management,
necessary for a fair presentation of such financial statements. These
adjustments are all of a normal recurring nature.
14. NET EARNINGS (LOSS) PER COMMON SHARE
Net earnings (loss) per share is based on the weighted average number of
common shares and common equivalent shares outstanding during the period.
Common stock equivalents, regardless of their anti-dilutive impact, issued
at prices below the offering price per share during the twelve months
preceding the initial filing of the Company's Registration Statement and
through the effective date of the initial public offering of the Company's
common stock have been considered in the calculation of net earnings (loss)
per share as if outstanding since the beginning of each period presented.
F-8
<PAGE>
CPS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
ESTIMATED
SERVICE LIVES
-------------
<S> <C> <C>
Computer equipment and purchased software............. $562,597 5 years
Furniture and fixtures................................ 160,201 5-7 years
Vehicle............................................... 15,686 3 years
Leasehold improvements................................ 17,194 4 years
--------
755,678
Accumulated depreciation.............................. 300,045
--------
$455,633
========
</TABLE>
Depreciation of property and equipment charged to operations was $154,121
and $151,839 in 1995 and 1996, respectively.
NOTE C--LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
LONG-TERM DEBT
Long-term debt consisted of the following at December 31, 1996:
<TABLE>
<S> <C>
Senior term loan. Requires monthly payments of $32,614 including
interest at prime plus 2.5% (effective rate of 10.25% at
December 31, 1996). All outstanding principal and interest due
December 1998................................................... $1,027,045
Subordinated note. Requires annual principal payments of
$1,050,000 in December 1999 and December 2000. Interest is
payable quarterly............................................... 2,014,000
----------
3,041,045
Less current portion............................................. 299,927
----------
$2,741,118
==========
</TABLE>
In accordance with the subordination and intercreditor agreement, the
Company can make no payments on the subordinated note until all indebtedness
under the senior term loan and revolving line of credit has been repaid, with
the exception of interest payments required under the subordinated note. Each
loan is collateralized by substantially all assets of the Company.
Each loan agreement contains covenants which, among other things, restrict
the payment of dividends and the level of capital expenditures, and require
the Company to maintain certain minimum financial ratios. The Company was in
compliance or has obtained waivers for any events of noncompliance with these
covenants at December 31, 1996.
The senior term loan requires the payment of a monthly maintenance fee of
$4,167 through December 1998. The lender may also require additional principal
payments not to exceed fifty percent of the Company's annual excess cash
flows, as defined.
In connection with the issuance of the subordinated note, CPS issued a
warrant to purchase 724,719 shares of the Company's common stock for $.0026
per share to the note holder. Interest on this note is payable at a stated
rate of 12%. Giving effect to the issuance of the warrants, the imputed
interest rate on this note is 13.25%.
F-9
<PAGE>
CPS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997............................................................ $ 299,927
1998............................................................ 727,118
1999............................................................ 975,725
2000............................................................ 1,038,275
----------
$3,041,045
==========
</TABLE>
REVOLVING LINE OF CREDIT
The Company executed a revolving line of credit agreement with the senior
lender which provides for maximum borrowings of $1,000,000. Borrowings are
restricted to 70% of eligible accounts receivable. Interest is payable monthly
at the prime rate plus 2%. The agreement is collateralized by substantially
all assets of the Company. The provisions of the agreement contain covenants
identical to those of the senior term loan. No amounts were outstanding under
this revolving line of credit at December 31, 1996.
NOTE D--INCOME TAXES
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current expense (benefit)................................ $(11,000) $181,200
Deferred benefit......................................... (13,000) (16,000)
-------- --------
$(24,000) $165,200
======== ========
</TABLE>
The Company's temporary differences result in a deferred income tax
liability, summarized as follows at December 31, 1996:
<TABLE>
<S> <C>
Deferred tax liabilities:
Capitalized software costs....................................... $303,800
Depreciation..................................................... 30,100
Other............................................................ 1,000
--------
Gross deferred tax liability................................... 334,900
--------
Deferred tax assets:
Unearned revenue................................................. 129,400
Amortization of intangible assets................................ 50,700
Accruals and allowances.......................................... 16,800
--------
196,900
--------
Net deferred tax liability..................................... $138,000
========
</TABLE>
The net deferred tax liability is classified in the December 31, 1996
balance sheet as follows:
<TABLE>
<S> <C>
Current deferred tax asset....................................... $(146,000)
Long-term deferred tax liability................................. 284,000
---------
Net deferred tax liability....................................... $ 138,000
=========
</TABLE>
F-10
<PAGE>
CPS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes differs from the amount of income tax
determined by applying the applicable federal rates due to the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1995 1996
-------- --------
<S> <C> <C>
Tax benefit at applicable federal rate of 34%........... $(86,400) $(27,500)
State tax (benefit), net................................ (12,400) 14,500
Non deductible amortization of goodwill................. 90,100 90,100
Non deductible (taxable) warrant accretion.............. (19,300) 92,400
Other non deductible items.............................. 4,000 15,200
Tax credits............................................. -- (19,500)
-------- --------
$(24,000) $165,200
======== ========
</TABLE>
NOTE E--COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has entered into noncancelable operating lease agreements for
office space which expire at various dates through March 2001. Approximate
minimum future payments under noncancelable leases with initial or remaining
terms in excess of one year at December 31, are due as follows:
<TABLE>
<S> <C>
Year ending December 31,
1997............................................................ $209,000
1998............................................................ 192,000
1999............................................................ 204,000
2000............................................................ 76,000
2001............................................................ 2,000
--------
$683,000
========
</TABLE>
Rental expense for the year ended December 31, 1995 and 1996 was
approximately $217,000 and $177,000, respectively.
CONTINGENCIES
A former employee has filed a complaint with the Equal Employment
Opportunity Commission alleging discrimination and other illegal acts on
behalf of the Company. Management believes this claim to be without merit and
intends to vigorously defend itself. However, the ultimate outcome of this
uncertainty cannot be determined at this time. Accordingly, no provision for
any liabilities that may result based on the ultimate outcome of this claim
has been made.
NOTE F--WARRANTS
The Company issued warrants to purchase 724,719 shares of common stock in
connection with the subordinated note. Additionally, warrants to purchase
203,047 shares of common stock were issued in connection with costs of
obtaining financing. All warrants issued entitle the holders to purchase
common stock at an exercise price of $.0026 per share and expire in December
2004. The terms of the warrant also entitle the holders to require the Company
to purchase the warrant for cash on or after December 31, 1999, or upon an
initial public offering of the Company's common stock if earlier, for a price
as defined in the warrant agreements.
F-11
<PAGE>
CPS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Upon issuance, the Company recorded the put warrants at their estimated
value. The Company is adjusting the put warrants to the highest redemption
price of the put warrants (the put feature adjustment). The put feature
adjustments are accrued over the period from the date of issuance to the
earliest put date of the warrants. Such put feature adjustments are classified
as interest and financing costs in the accompanying statements of operations.
NOTE G--RETIREMENT PLAN
The Company has a retirement savings plan covering substantially all of its
employees. The Company matches employee contributions at a rate determined
annually by the Board of Directors. No Company contributions were made for the
years ended December 31, 1995 and 1996.
NOTE H--NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) has issued the following
Statements of Financial Accounting Standards (SFAS):
SFAS 128, Earnings Per Share, which is effective for financial statements
for periods ending after December 15, 1997. The new standard eliminates
primary and fully diluted earnings per share and requires presentation of
basic and diluted earnings per share together with disclosure of how the per
share amounts were computed.
SFAS 129, Disclosure of Information about Capital Structure, which is
effective for financial statements for periods ending after December 15, 1997.
SFAS 129 requires disclosure of certain information about a Company's
securities.
SFAS 130, Reporting Comprehensive Income, which is effective for fiscal
years beginning after December 15, 1997. SFAS 130 requires companies to
include details about comprehensive income that arise during a reporting
period. Comprehensive income includes revenue, expenses, gains and losses that
bypass the income statement and are reported directly in a separate component
of equity.
SFAS 131, Disclosures about Segments of an Enterprise and Related
Information, which is effective for financial statements for periods beginning
after December 15, 1997. SFAS 131 requires companies to report information
about an entity's different types of business activities and the different
economic environments in which it operates, referred to as operating segments.
Management does not expect the adoption of these new standards to have a
material impact on the Company's results of operations or financial condition.
NOTE I--SUBSEQUENT EVENT
On October 23, 1997, the board of directors approved the following items:
A stock split of approximately 390 to 1 was approved, effective October 23,
1997. Additionally, the articles of incorporation were amended to authorize
50,000,000 common shares and 10,000,000 preferred shares. The board can issue
such shares of preferred stock in one or more series and shall have rights,
preferences, privileges and restrictions as determined by the board of
directors. All per share amounts and references to common and preferred stock
have been retroactively restated.
F-12
<PAGE>
CPS SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The 1997 Equity Participation Plan and Employee Stock Purchase Plan (the
"Plans") were adopted. The Plans provide for the issuance of stock options and
other performance awards as may be approved by the board of directors. 335,000
stock options were granted under this plan pending the successful closing of
the Company's initial public offering, with an exercise price equal to the
offering price per share of the Company's common stock in its initial public
offering.
F-13
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CON-
TAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Dividend Policy........................................................... 12
Dilution.................................................................. 13
Capitalization............................................................ 14
Selected Financial Data................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 16
Business ................................................................. 25
Management................................................................ 38
Certain Transactions...................................................... 42
Principal Shareholders.................................................... 43
Selling Shareholders...................................................... 44
Description of Capital Stock.............................................. 44
Shares Eligible for Future Sale........................................... 47
Underwriting.............................................................. 48
Legal Matters............................................................. 49
Experts................................................................... 49
Additional Information.................................................... 50
Index to Financial Statements............................................. F-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,250,000 SHARES
[LOGO OS CPS SYSTEMS, INC. APPEARS HERE]
COMMON STOCK
----------------
PROSPECTUS
----------------
Cruttenden Roth
Incorporated
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Restated Articles of Incorporation ("Restated Articles")
contains a provision that requires the Registrant to indemnify its directors,
officers, agents and employees to the extent permitted under Texas law. The
Registrant's Restated Articles provide that the Registrant shall indemnify its
directors, officers, employees and other agents to the fullest extent
permitted by law. The Registrant believes that indemnification under its
Restated Articles covers at least negligence and gross negligence on the part
of the indemnified parties. The Registrant's Restated Articles also require it
to maintain insurance, to the extent reasonably available and at its expense,
to protect any person entitled to indemnity thereunder against any liability
for which indemnification would be provided thereunder, whether or not the
Registrant has the power to indemnify such person against such liability under
Texas law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of the Common Stock being registered:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee................... $ 4,392
National Association of Securities Dealers, Inc. Filing Fee........... 1,794
Nasdaq Filing Fee..................................................... 17,500
Non-accountable expense allowance * .................................. 300,000
Blue Sky Fees and Expenses * ......................................... 15,000
Legal Fees and Expenses *............................................. 175,000
Accounting Fees and Expenses *........................................ 75,000
Printing and Engraving Expenses *..................................... 55,000
Transfer Agent Fee *.................................................. 3,000
Miscellaneous Expenses *.............................................. 3,314
--------
Total................................................................. $650,000
========
</TABLE>
- --------
* Estimated for the purpose of this filing.
In the event the Underwriters' over-allotment option is exercised in full,
an additional $45,000 in non-accountable expenses will be payable by the
Registrant.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
None.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
1.1 Form of Underwriting Agreement
1.2* Form of Warrant Agreement
3.1 Restated Articles of Incorporation and all amendments thereto
4.1* Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions in the Certificate of
Incorporation and Amended and Restated Bylaws of the Company defining
the rights of the holders of Common Stock
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
5.1 Opinion of Schreeder, Wheeler & Flint, LLP regarding legality
10.1 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to Hanifen Imhoff Mezzanine Fund, L.P. granting the
right to purchase from the Company 724,719 shares of the Company's
Common Stock
10.2 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to John K. Percival granting the right to purchase from
the Company 103,476 shares
10.3 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to Samuel E. Hudgins granting the right to purchase from
the Company 69,114 shares
10.4 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to Robert J. Newcorn granting the right to purchase from
the Company 30,457 shares
10.5 401(k) Retirement Plan
10.6 1997 Equity Participation Plan
10.7 CPS Systems, Inc. Employee Stock Purchase Plan
10.8 Standard Office Building Lease Agreement between Aetna Life Insurance
Company and CPS Business Systems, Inc., dated February 13, 1990, as
amended by Amendment No. 1 between Dallas Metro Real Estate Fund I,
Aetna Life Insurance Company and CPS Systems, Inc. dated January 31,
1995
10.9 Term Loan Agreement dated as of December 29, 1994 between CPS
Acquisition Corp. and Greyhound Financial Corporation**
10.10* Term Loan Promissory Note dated December 29, 1994 in the amount of
$1,500,000
10.11* Guaranty and Subordination Agreement (Term Loan) dated December 29,
1994 by CPS Systems, Inc. in favor of Greyhound Financial Corporation**
10.12* Form of Stock Pledge and Security Agreement (with Irrevocable Proxy)
dated December 29, 1994 between each of the Company's Shareholders and
Greyhound Financial Corporation**
10.13* Assignment of contract dated December 29, 1994 between CPS Acquisition
Corp. and Greyhound Financial Corporation**
10.14* Stock Pledge and Security Agreement (with Irrevocable Proxy) dated
December 29, 1994 between CPS Acquisition Corp. and Greyhound Financial
Corporation**
10.15* Assumption Agreement dated December 29, 1994 between CPS Systems, Inc.
and Greyhound Financial Corporation**
10.16* Revolver Loan and Security Agreement dated December 29, 1994 between
CPS Systems, Inc. and Greyhound Financial Corporation**
10.17* Revolver Loan Promissory Note dated December 29, 1994 in the amount of
$1,000,000
10.18* Assignment of Contracts, Intangibles, Licenses and Permits dated
December 29, 1994 between CPS Systems, Inc. and Greyhound Financial
Corporation**
10.19* Guaranty and Subordination Agreement (Revolver Loan) dated December 29,
1994 by CPS Acquisition Corp. in favor of Greyhound Financial
Corporation**
10.20* Subordination and Intercreditor Agreement dated December 29, 1994 among
Greyhound Financial Corporation, Hanifen Imhoff Mezzanine Fund, L.P.,
CPS Acquisition Corp. and CPS Systems, Inc.**
10.21 CPS Acquisition Corp. and CPS Systems, Inc. Note Agreement dated as of
December 29, 1994 for $2,100,000 12% Senior Subordinated Secured Note
Due December 31, 2000
10.22* Security Agreement (general) dated December 29, 1994 between CPS
Systems, Inc. and Hanifen Imhoff Mezzanine Fund, L.P.
10.23* Security Agreement (Stock) dated December 29, 1994 from Paul E. Kana to
and for the benefit of Hanifen Imhoff Mezzanine Fund, L.P.
10.24* Agreement for Ongoing Maintenance & Enhancement of Software Products
entered between CPS Systems, Inc. and Majesco Software, Inc. dated
January 1997
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.25* Value Added Reseller Agreement by and between CPS Systems, Inc. and NCR
Corporation dated June 13, 1996
10.26* Industry Remarketer Affiliate Document of Understanding by and between
IBM Corporation and CPS Systems, Inc. dated September 12, 1996
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
23.2 Consent of Schreeder, Wheeler and Flint, LLP (see Exhibit 5.1)
24.1 Power of Attorney (see page II-IV)
27.1 Financial Data Schedules
</TABLE>
- --------
* To be filed by Amendment.
** Greyhound Financial Corporation changed its name to FINOVA Capital
Corporation.
(B) FINANCIAL STATEMENT SCHEDULES
Report of Independent Auditors on Financial Statement Schedules
ITEM 28. UNDERTAKINGS
The small business issuer will provide to the underwriters at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
For determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the small business issuer under Rule 424(b)(1), or 497(h) under the
Securities Act will be treated as part of this Registration Statement as of
the time the Commission declares it effective.
For determining any liability under the Securities Act, each post-effective
amendment that contains a form of prospectus will be treated as a new
Registration Statement for the securities offered in the Registration
Statement, and the offering of the securities at that time will be treated as
the initial bona fide offering of those securities.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and has authorized this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Dallas, State of Texas, on October
31, 1997.
CPS SYSTEMS, INC.
By /s/ Paul E. Kana,
_____________________________________
Paul E. Kana,
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Paul E.
Kana and James K. Hoofard, Jr., and each of them, with full power to act
without the other, such person's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign this Registration
Statement, and any and all amendments thereto (including pre- and post-
effective amendments) or any registration statement for the same offering that
is to be effective upon filing pursuant to Rule 462(b) under the Securities
Act of 1933, as amended, and to file the same, with exhibits and schedules
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and
thing necessary or desirable to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them, or
their or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Paul E. Kana Chairman of the Board and October 31, 1997
____________________________________ Chief Executive Officer
Paul E. Kana (Principal Executive
Officer)
/s/ Kevin L. Figge Chief Financial Officer October 31, 1997
____________________________________ (Principal Financial Officer)
Kevin L. Figge
/s/ James K. Hoofard, Jr. Director, President, and October 31, 1997
____________________________________ Chief Operating Officer
James K. Hoofard, Jr.
/s/ G. Dean Booth Director, Secretary October 31, 1997
____________________________________
G. Dean Booth
/s/ Sidney H. Cordier Director October 31, 1997
____________________________________
Sidney H. Cordier
/s/ Brian R. Wilson Director October 31, 1997
____________________________________
Brian R. Wilson
</TABLE>
II-4
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULE
Board of Directors
CPS Systems, Inc.
In connection with our audit of the financial statements of CPS Systems,
Inc. and referred to in our report dated January 22, 1997 (except for Note I,
as to which the date is October 23, 1997), which is included in the Prospectus
constituting Part I of this Registration Statement, we have also audited
Schedule II of CPS Systems, Inc. for the years ended December 31, 1996 and
1995. In our opinion, this schedule presents fairly, in all material respects,
the information required to be set forth therein.
/s/ Grant Thornton
Atlanta, Georgia
January 22, 1997
<PAGE>
CPS SYSTEMS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------- ------------ ----------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE (1) PERIOD
----------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts
receivable..................... $40,000 $-- $13,000 $27,000
Year ended December 31, 1995
Allowance for doubtful accounts
receivable..................... $49,000 $-- $ 9,000 $40,000
</TABLE>
- --------
(1) Bad debt write off.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
1.1 Form of Underwriting Agreement
1.2* Form of Warrant Agreement
3.1 Restated Articles of Incorporation and all amendments thereto
3.2 Bylaws
4.1* Form of Common Stock Certificate
4.2 See Exhibits 3.1 and 3.2 for provisions in the Certificate of
Incorporation and Amended and Restated Bylaws of the Company defining
the rights of the holders of Common Stock
5.1 Opinion of Schreeder, Wheeler & Flint, LLP regarding legality
10.1 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to Hanifen Imhoff Mezzanine Fund, L.P. granting the
right to purchase from the Company 724,719 shares of the Company's
Common Stock
10.2 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to John K. Percival granting the right to purchase from
the Company 103,476 shares
10.3 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to Samuel E. Hudgins granting the right to purchase from
the Company 69,114 shares
10.4 Warrant to Purchase Shares of Common Stock issued on December 29, 1994
by the Company to Robert J. Newcorn granting the right to purchase from
the Company 30,457 shares
10.5 401(k) Retirement Plan
10.6 1997 Equity Participation Plan
10.7 CPS Systems, Inc. Employee Stock Purchase Plan
10.8 Standard Office Building Lease Agreement between Aetna Life Insurance
Company and CPS Business Systems, Inc., dated February 13, 1990, as
amended by Amendment No. 1 between Dallas Metro Real Estate Fund I,
Aetna Life Insurance Company and CPS Systems, Inc. dated January 31,
1995
10.9 Term Loan Agreement dated as of December 29, 1994 between CPS
Acquisition Corp. and Greyhound Financial Corporation**
10.10* Term Loan Promissory Note dated December 29, 1994 in the amount of
$1,500,000
10.11* Guaranty and Subordination Agreement (Term Loan) dated December 29,
1994 by CPS Systems, Inc. in favor of Greyhound Financial Corporation**
10.12* Form of Stock Pledge and Security Agreement (with Irrevocable Proxy)
dated December 29, 1994 between each of the Company's Shareholders and
Greyhound Financial Corporation**
10.13* Assignment of contract dated December 29, 1994 between CPS Acquisition
Corp. and Greyhound Financial Corporation**
10.14* Stock Pledge and Security Agreement (with Irrevocable Proxy) dated
December 29, 1994 between CPS Acquisition Corp. and Greyhound Financial
Corporation**
10.15* Assumption Agreement dated December 29, 1994 between CPS Systems, Inc.
and Greyhound Financial Corporation**
10.16* Revolver Loan and Security Agreement dated December 29, 1994 between
CPS Systems, Inc. and Greyhound Financial Corporation**
10.17* Revolver Loan Promissory Note dated December 29, 1994 in the amount of
$1,000,000
10.18* Assignment of Contracts, Intangibles, Licenses and Permits dated
December 29, 1994 between CPS Systems, Inc. and Greyhound Financial
Corporation**
10.19* Guaranty and Subordination Agreement (Revolver Loan) dated December 29,
1994 by CPS Acquisition Corp. in favor of Greyhound Financial
Corporation**
10.20* Subordination and Intercreditor Agreement dated December 29, 1994 among
Greyhound Financial Corporation, Hanifen Imhoff Mezzanine Fund, L.P.,
CPS Acquisition Corp. and CPS Systems, Inc.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION
--- -----------
<C> <S>
10.21 CPS Acquisition Corp. and CPS Systems, Inc. Note Agreement dated as of
December 29, 1994 for $2,100,000 12% Senior Subordinated Secured Note
Due December 31, 2000
10.22* Security Agreement (general) dated December 29, 1994 between CPS
Systems, Inc. and Hanifen Imhoff Mezzanine Fund, L.P.
10.23* Security Agreement (Stock) dated December 29, 1994 from Paul E. Kana to
and for the benefit of Hanifen Imhoff Mezzanine Fund, L.P.
10.24* Agreement for Ongoing Maintenance & Enhancement of Software Products
entered between CPS Systems, Inc. and Majesco Software, Inc. dated
January 1997
10.25* Value Added Reseller Agreement by and between CPS Systems, Inc. and NCR
Corporation dated June 13, 1996
10.26* Industry Remarketer Affiliate Document of Understanding by and between
IBM Corporation and CPS Systems, Inc. dated September 12, 1996
21.1 List of Subsidiaries
23.1 Consent of Independent Auditors
23.2 Consent of Schreeder, Wheeler and Flint, LLP (see Exhibit 5.1)
24.1 Power of Attorney (see pages II-IV)
27.1 Financial Data Schedules
</TABLE>
- --------
* To be filed by Amendment.
** Greyhound Financial Corporation changed its name to FINOVA Capital
Corporation.
<PAGE>
___________ SHARES/1/
CPS SYSTEMS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
December__, 1997
CRUTTENDEN ROTH INCORPORATED
As Representative of the several Underwriters
18301 Von Karman, Suite 100
Irvine, California 92612
Ladies and Gentlemen:
CPS Systems, Inc., a Texas corporation (the "Company"), addresses you as the
Representative of each of the persons, firms and corporations listed in Schedule
A hereto (herein collectively called the "Underwriters") and hereby confirms its
agreement with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
---------------------
__________ shares of its authorized and unissued Common Stock, [$.001] par value
per share (the "Firm Shares"), to the several Underwriters. In addition, [the
Company and] certain stockholders of the Company listed on Schedule B hereto
(the "Selling Stockholders") propose to grant to the Underwriters an option to
purchase up to[ _________ and] ________ additional shares [, respectfully, ] of
the Company's Common Stock (the "Option Shares"), as provided in Section 5
hereof. The Company also proposes to sell to you, individually and not in your
capacity as Representative, warrants (the "Representative's Warrants") to
purchase up to _________ shares of Common Stock of the Company (the
"Representative's Warrant Stock"), which sale will be consummated in accordance
with the terms and conditions of the Representative's Warrant Agreement (the
"Representative's Warrant Agreement"), the form of which is filed as an exhibit
to the Registration Statement described below. As used in this Agreement, the
term "Shares" shall include the Firm Shares and the Option Shares. All shares
of Common Stock of the Company to be outstanding after giving effect to the
sales contemplated hereby, including the sale of the Shares, are hereinafter
referred to as "Common Stock." Unless the context otherwise requires,
references herein to the "Company" include CPS Systems, Inc. together with its
subsidiaries described in the Prospectus (hereinafter defined).
________________
/1/ Plus an option to purchase up to _____________ additional shares from the
[Company] certain selling stockholders to cover over-allotments, if any.
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2. Representations, Warranties and Agreements of the Company.
----------------------------------------------------------
The Company represents and warrants to and agrees with each
Underwriter and each Selling Stockholder that:
(a) A registration statement on Form SB-2 (File No. 333-
____) with respect to the Shares, the Representative's Warrants and the
Representative's Warrant Stock, including a prospectus subject to completion,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the applicable rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") under the Act and has been filed with the
Commission; such amendments to such registration statement and such amended
prospectuses subject to completion as may have been required prior to the date
hereof have been similarly prepared and filed with the Commission; and the
Company will file such additional amendments to such registration statement and
such amended prospectuses subject to completion as may hereafter be required.
Copies of such registration statement and amendments and of each related
prospectus subject to completion (the "Preliminary Prospectuses") have been
delivered to you.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information previously omitted from the
registration statement pursuant to Rule 430A(a) of the Rules and Regulations
pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations
or as part of a post-effective amendment to the registration statement
(including a final form of prospectus). If the registration statement relating
to the Shares has not been declared effective under the Act by the Commission,
the Company will prepare and promptly file an amendment to the registration
statement, including a final form of prospectus. The term "Registration
Statement" as used in this Agreement shall mean such registration statement,
including financial statements, schedules and exhibits, in the form in which it
became or becomes, as the case may be, effective (including, if the Company
omitted information from the registration statement pursuant to Rule 430A(a) of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
of the Rules and Regulations) and, in the event of any amendment thereto after
the effective date of such registration statement, shall also mean (from and
after the effectiveness of such amendment) such registration statement as so
amended. The term "Prospectus" as used in this Agreement shall mean the
prospectus relating to the Shares as included in such Registration Statement at
the time it becomes effective (including, if the Company omitted information
from the Registration Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the Registration Statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations), except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus on file with the Commission at the time
the Registration Statement became or becomes, as the case may be, effective
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use.
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<PAGE>
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus, at the time of filing
thereof, has conformed in all material respects to the requirements of the Act
and the Rules and Regulations and, as of its date, has not included any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; and at the time the Registration Statement became or
becomes, as the case may be, effective and at all times subsequent thereto up to
and on the Closing Date (hereinafter defined) and on any later date on which
Option Shares are to be purchased, (i) the Registration Statement and the
Prospectus, and any amendments or supplements thereto, contained and will
contain all material information required to be included therein by the Act and
the Rules and Regulations and will in all material respects conform to the
requirements of the Act and the Rules and Regulations, (ii) the Registration
Statement, and any amendments or supplements thereto, did not and will not
include any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and (iii) the Prospectus, and any amendments or supplements thereto,
did not and will not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
-------- -------
that none of the representations and warranties contained in this subparagraph
(b) shall apply to information contained in or omitted from the Registration
Statement or Prospectus, or any amendment or supplement thereto, in reliance
upon, and in conformity with, written information relating to any Underwriter
furnished to the Company by such Underwriter specifically for use in the
preparation thereof.
(c) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
subsidiaries listed in Exhibit 21 of the Registration Statement. The Company and
each of its subsidiaries has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as described in the
Prospectus; the Company and each of its subsidiaries is duly qualified to do
business as a foreign corporation and is in good standing in each jurisdiction
in which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be so
qualified or be in good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company taken as a whole; no proceeding has been instituted in any such
jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or
curtail, such power and authority or qualification; the Company is in possession
of and operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from state, federal and other regulatory
authorities that are material to the conduct of its business, all of which are
valid and in full force and effect; the Company is not in material violation of
its charter or bylaws or in default in the performance or observance of any
material obligation, agreement, covenant or condition contained in any material
bond, debenture, note
3
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or other evidence of indebtedness, or in any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company is a party or by which it or its
properties or assets may be bound; and the Company is not in violation of any
law, order, rule, regulation, writ, injunction, judgment or decree of any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over the Company or over its properties or assets.
(d) The Company has full legal right, power and authority
to enter into this Agreement and the Representative's Warrant Agreement and to
perform the transactions contemplated hereby and thereby. Each of this Agreement
and the Representative's Warrant Agreement has been duly authorized, executed
and delivered by the Company and is a valid and binding agreement on the part of
the Company, enforceable in accordance with its terms, except as rights to
indemnification under this Agreement or the Representative's Warrant Agreement
may be limited by applicable law and except as the enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles; the performance of this Agreement and the Representative's
Warrant Agreement and the consummation of the transactions herein or therein
contemplated will not violate any provisions of the charter, bylaws or other
organizational document of the Company and will not result in a breach or
violation of any of the terms and provisions of, or constitute, either by itself
or upon notice or the passage of time or both, a default under any bond,
debenture, note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which the Company is a party or by which its
properties or assets may be bound, or any law, order, rule, regulation, writ,
injunction, judgment or decree of any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or over its
properties or assets. No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body,
domestic or foreign, having jurisdiction over the Company or over its properties
or assets is required for the execution and delivery of this Agreement or the
Representative's Warrant Agreement and the consummation by the Company of the
transactions herein and therein contemplated, except such as may be required
under the Act or under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.
(e) There is not any pending or, to the best of the
Company's knowledge, threatened action, suit, claim or proceeding against the
Company, or any of its officers or any of its properties, assets or rights
before any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or over its officers or properties
or otherwise that (i) is reasonably likely to result in any material adverse
change in the condition (financial or otherwise), earnings, operations, business
or business prospects of the Company or might materially and adversely affect
its properties, assets or rights, (ii) might prevent consummation of the
transactions contemplated hereby or (iii) is required to be disclosed
4
<PAGE>
in the Registration Statement or Prospectus and is not so disclosed; and there
are no agreements, contracts, leases or documents of the Company of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the Act
or the Rules and Regulations or by the Securities Exchange Act of 1934 (the
"Exchange Act") or the rules and regulations of the Commission thereunder that
have not been accurately described in all material respects in the Registration
Statement or Prospectus or filed as exhibits to the Registration Statement.
(f) All outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, were not issued in violation of or subject to any preemptive
rights or other rights to subscribe for or purchase securities, and the
authorized and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization" and conforms to the statements
relating thereto contained in the Registration Statement and the Prospectus (and
such statements correctly state the substance of the instruments defining the
capitalization of the Company); the Firm Shares and the Option Shares have been
duly authorized for issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly and validly issued
and fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest; and no
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders exists with respect to any of the Firm
Shares or Option Shares or the issuance and sale thereof other than those that
will automatically expire upon the consummation of the transactions contemplated
on the Closing Date. No further approval or authorization of any stockholder,
the Board of Directors of the Company or others is required for the issuance and
sale or transfer of the Shares except as may be required under the Act, the
Rules and Regulations or under state or other securities or Blue Sky laws.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights under the Act and the Rules and
Regulations.
(g) Grant Thornton LLP, which has expressed its opinion
with respect to the financial statements of the Company filed with the
Commission as a part of the Registration Statement, which are included in the
Prospectus, are independent accountants within the meaning of the Act and the
Rules and Regulations. The audited financial statements of the Company, together
with the related schedules and notes, and the unaudited financial information,
5
<PAGE>
included in the Registration Statement and Prospectus, fairly present the
financial position and the results of operations of the Company at the
respective dates and for the respective periods to which they apply. Such
financial statements of the Company, together with the related schedules and
notes, filed with the Commission as part of the Registration Statement, have
been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods as certified by Grant Thornton LLP.
The selected and summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are required to be
included in the Registration Statement.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, except as
specifically disclosed or contemplated therein, there has not been (i) any
material adverse change in the condition (financial or otherwise), earnings,
operations or business of the Company, (ii) incurred by the Company any
transaction that is material to the Company, (iii) any obligation, direct or
contingent incurred by the Company that is material to the Company, (iv) any
change in the capital stock or outstanding indebtedness of the Company that is
material to the Company, (v) any dividend or distribution of any kind declared,
paid or made on the capital stock of the Company, or (vi) any loss or damage
(whether or not insured) to the property of the Company which has a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of the Company.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) the Company has good and marketable title to all properties and
assets described in the Registration Statement and Prospectus as owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest, other than such as would not have a material adverse effect
on the condition (financial or otherwise), earnings, operations or business of
the Company, (ii) the agreements to which the Company is a party described in
the Registration Statement are valid agreements, enforceable by the Company,
except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles and, to
the best of the Company's knowledge, the other contracting party or parties
thereto are not in material breach or material default under any of such
agreements, and (iii) the Company has valid and enforceable leases for all
properties described in the Registration Statement and Prospectus as leased by
it, except as the enforcement thereof may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles. Except
as set forth in the Registration Statement and Prospectus, the Company owns or
leases all such properties as are necessary to its operations as now conducted
and as described in the Registration Statement and the Prospectus.
6
<PAGE>
(j) The Company has timely filed all federal, state, local
and foreign tax returns required to be filed by it and has paid all taxes shown
thereon as due, and there is no tax deficiency that has been or, to the best of
the Company's knowledge, is reasonably likely to be asserted against the
Company, which might have a material adverse effect on the condition (financial
or otherwise), earnings, operations or business of the Company, and all tax
liabilities are adequately provided for on the books of the Company.
(k) The Company maintains insurance with insurers of
recognized financial responsibility of the types and in the amounts generally
deemed adequate for its business including, but not limited to, insurance
covering real and personal property owned or leased by the Company against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect; the Company
has not been refused any insurance coverage sought or applied for; and the
Company does have any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), earnings, operations or business of the Company.
(l) To the best of Company's knowledge, no labor
disturbance by the employees of the Company exists or is imminent. No collective
bargaining agreement exists with any of the Company's employees and, to the best
of the Company's knowledge, no such agreement is imminent.
(m) Except as disclosed in or specifically contemplated by
the Prospectus, the Company owns or possesses adequate rights to use all patent
rights, trade secrets, mask works, know-how, trademarks, copyrights, licenses,
service marks and trade names that are necessary to conduct its businesses as
described in the Registration Statement and Prospectus; the Company has not
received any notice of, and has no knowledge of, any infringement of or conflict
with asserted rights of the Company by others with respect to any patent rights,
trade secrets, mask works, know-how, trademarks, copyrights, licenses, service
marks or trade names; and the Company has not received any notice of, and has no
knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent rights, trade secrets, mask works, know-how,
trademarks, copyrights, licenses, service marks or trade names which, singly or
in the aggregate, in the event of an unfavorable decision, ruling or finding,
would have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company.
(n) The Common Stock is registered pursuant to Section
12(g) of the Exchange Act and is approved for quotation on the Nasdaq SmallCap
Market, and the Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act or delisting the Common Stock from the Nasdaq SmallCap Market, nor has the
Company received any notification that the
7
<PAGE>
Commission or the National Association of Securities Dealers, Inc. ("NASD") is
contemplating terminating such registration or listing.
(o) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(p) The Company has not distributed and will not distribute
prior to the later of (i) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(q) The Company has not at any time during the last five
(5) years (i) made any unlawful contribution to any candidate for foreign office
or failed to disclose fully any contribution in violation of law, or (ii) made
any payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(r) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization in violation of law or manipulation of the
price of the Common Stock to facilitate the sale or resale of the Shares.
(s) Each officer, director and director-nominee of the
Company and each beneficial owner of [five (5)] percent or more of the Company's
Common Stock has agreed in writing that such person will not without the prior
written consent of Cruttenden Roth Incorporated, for a period of 365 days from
the date that the Registration Statement is declared effective by the Commission
(the "Lock-up Period"), (which consent may be withheld in its sole discretion),
directly or indirectly, sell, offer, contract or grant any option to sell
(including without limitation, any short sale), pledge, transfer, establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under the Exchange Act) by such person
(collectively, "Securities") or publicly announce the undersigned's intention to
do any of the foregoing. Furthermore, such person will also agree and consent to
the entry of stop transfer instructions with the Company's
8
<PAGE>
transfer agent against the transfer of the Securities held by such person except
in compliance with this restriction. The Company has provided to counsel for the
Underwriters a complete and accurate list of all securityholders of the Company
and the number and type of securities held by each securityholder. The Company
has provided to counsel for the Underwriters true, accurate and complete copies
of all of the agreements pursuant to which its officers, directors, director-
nominees and stockholders have agreed to such restrictions (the "Lock-up
Agreements"). The Company hereby represents and warrants that it will not
release any of its officers, directors or director-nominees or other
stockholders from any Lock-up Agreements currently existing or hereafter
effected without the prior written consent of Cruttenden Roth Incorporated.
(t) Except as set forth in the Registration Statement and
Prospectus, (i) the Company is in material compliance with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
that are applicable to its business, (ii) the Company has received no notice
from any governmental authority or third party of an asserted claim under
Environmental Laws, which claim is required to be disclosed in the Registration
Statement and the Prospectus, (iii) to its best knowledge, the Company is not
likely to be required to make future material capital expenditures to comply
with Environmental Laws and (iv) no property which is owned, leased or occupied
by the Company has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
-- ----
applicable state or local law.
(u) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorizations,
(ii) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, including without limitation cash receipts,
(iii) access to assets is permitted only in accordance with management's general
or specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(v) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers,
directors or director-nominees of the Company or any of the members of the
families of any of them, except as disclosed in the Registration Statement and
the Prospectus.
(w) The Representative's Warrants have been duly and
validly authorized by the Company and upon delivery to you in accordance with
the Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company.
9
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(x) The Representative's Warrant Stock has been duly
authorized and reserved for issuance upon the exercise of the Representative's
Warrants and when issued upon payment of the exercise price therefor will be
validly issued, fully paid and nonassessable shares of Common Stock of the
Company.
3. Representations, Warranties and Covenants of the Selling Stockholders.
----------------------------------------------------------------------
Each of the Selling Stockholders severally, and not jointly,
represents and warrants to, and agrees with, the several Underwriters that:
(a) Such Selling Stockholder has, and on the Closing Date
and on any later date on which the Option Shares are to be purchased
will have, good and marketable title to the Shares proposed to be sold
by such Selling Stockholder hereunder on such closing date and full
right, power and authority to enter into this Agreement and to sell,
assign, transfer and deliver such Option Shares hereunder, free and
clear of all voting trust arrangements, liens, encumbrances, equities,
security interests, restrictions and claims whatsoever, other than
pursuant to this Agreement and the Stockholders' Agreement (as defined
below); and upon delivery of and payment for such Shares hereunder,
the Underwriters will acquire good and marketable title thereto, free
and clear of all liens, encumbrances, equities, claims, restrictions,
security interests, voting trusts or other defects of title
whatsoever.
(b) Such Selling Stockholder has executed and delivered a
Power of Attorney and caused to be executed and delivered on his
behalf a Custody Agreement (hereinafter collectively referred to as
the "Stockholders' Agreement") and in connection herewith such Selling
Stockholder further represents, warrants and agrees that such Selling
Stockholder has deposited in custody, under the Stockholders'
Agreement, with the agent named therein (the "Agent") as custodian,
certificates in negotiable form for the Shares or warrants to purchase
the Shares to be sold hereunder by such Selling Stockholder, for the
purpose of further delivery pursuant to this Agreement. Such Selling
Stockholder agrees that the Shares or warrants to purchase the Shares
to be sold by such Selling Stockholder on deposit with the Agent are
subject to the interests of the Company and the Underwriters, that the
arrangements made for such custody are to that extent irrevocable, and
that the obligations of such Selling Stockholder hereunder shall not
be terminated, except as provided in this Agreement or in the
Stockholders' Agreement, by any act of such Selling Stockholder, by
operation of law, by the death or incapacity of such Selling
Stockholder or by the occurrence of any other event. If the Selling
Stockholder should die or become incapacitated, or if any other event
should occur, before the delivery of the Shares hereunder, the
documents evidencing Shares or warrants to purchase the
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<PAGE>
Shares then on deposit with the Agent shall be delivered by the Agent
in accordance with the terms and conditions of this Agreement and the
Stockholders' Agreement as if such death, incapacity or other event
had not occurred, regardless of whether or not the Agent shall have
received notice thereof. This Agreement and the Stockholders'
Agreement have been duly executed and delivered by or on behalf of
such Selling Stockholder and the form of such Stockholders' Agreement
has been delivered to you.
(c) The performance of this Agreement and the Stockholders'
Agreement and the consummation of the transactions contemplated hereby
and thereby will not result in a breach or violation by such Selling
Stockholder of any of the terms or provisions of, or constitute a
default by such Selling Stockholder under, any indenture, mortgage,
deed of trust, trust (constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder or
any of its properties is bound, any statute, or any judgment, decree,
order, rule or regulation of any court or governmental agency or body
applicable to such Selling Stockholder or any of its properties, other
than breaches or violations which do not adversely affect such Selling
Stockholder's ability to perform under this Agreement or the
Stockholders' Agreement.
(d) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares, except usual
and customary market maker and brokerage transactions up to two
business days prior to the offering contemplated hereby in each case
in accordance with applicable Commission regulations.
(e) To the extent that any statements or omissions made in
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto, are made in reliance upon and
in conformity with written information furnished to the Company by
such Selling Stockholder specifically for use therein, such
Preliminary Prospectus and the Registration Statement did, and the
Prospectus and any further amendments or supplements to the
Registration Statement and the Prospectus will, when they become
effective or are filed with the Commission, as the case may be, not
contain any untrue statement of material fact or omit any material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they
were made.
(f) To the best of its knowledge, such Selling Stockholder
is
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<PAGE>
not aware that any of the representations and warranties set forth in
Section 2 above is untrue or inaccurate in any material respect.
4. Representation, Warranties and Agreements of the Underwriters.
-------------------------------------------------------------
The information set forth in the last paragraph on the front cover page (insofar
as such information relates to the Underwriters), in the first paragraph on page
__, concerning stabilization and over-allotment by the Underwriters, and in
third and eighth paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement, and you, on behalf of the respective Underwriters, represent and
warrant to the Company that the statements made therein do not include any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
5. Purchase, Sale and Delivery of Shares. On the basis of the
-------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 11).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 5 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in next-day funds, payable to the order
of the Company (and the Company agrees not to deposit any such check in the bank
on which it is drawn until the day following the date of its delivery to the
Company) at the offices of the Representative or such other place as may be
agreed upon among the Representative and the Company, at 7:00 A.M., California
time, on the third (3rd) full business day following the first day that Shares
are traded (or at such time and date to which payment and delivery shall have
been postponed pursuant to Section 11 hereof), such time and date of payment and
delivery being herein called the "Closing Date." The certificates for the Firm
Shares to be so delivered will be made available to you at such office or such
other location as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representative so elects,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representative.
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It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
[Company and the] Selling Stockholders hereby grant to the several Underwriters,
for the purpose of covering over-allotments in connection with the distribution
and sale of the Firm Shares only, a nontransferable option to purchase, in the
respective amounts set forth on the Schedule B, up to an aggregate of _________
Option Shares at the purchase price per share for the Firm Shares set forth in
this Section 5. Such option may be exercised by the Representative on behalf of
the several Underwriters on one or more occasions in whole or in part during the
forty-five (45) day period after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company and the Agent.
The number of Option Shares to be purchased by each Underwriter upon the
exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representative in such manner as to avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be
purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 5 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Agent [and the
Company, respectively,] (and the Agent [and the Company] agree[s] not to deposit
any such check in the bank on which it is drawn until the day following the date
of its delivery). Such delivery and payment shall take place at the offices of
the Representative, or at such other place as may be agreed upon by the
Representative and the Agent (i) on the Closing Date, if written notice of the
exercise of such option is received by the Agent at least three (3) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the fifth (5th) full business day following the date the Agent
receives written notice of the exercise of such option, if such notice is
received by the Agent less than three (3) full business days prior to the
Closing Date.
[To the extent that the Company is also selling in the over-
allotment, describe whether Shares to come first from the Company or
Stockholders if not all exercised.] To the extent that the option is not
exercised for the entire __________ Option Shares, the number of Option Shares
to be sold by each Selling Stockholder shall be that number which bears the same
relationship to the aggregate number of Option Shares being purchased as the
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maximum number of Option Shares being sold by each Selling Stockholder bears to
_________ .
The certificates for the Option Shares to be so delivered will be
made available to you at such office or such other location as you may
reasonably request for inspection at least two (2) full business days prior to
the date of payment and delivery and will be in such names and denominations as
you may request, such request to be made at least three (3) full business days
prior to such date of payment and delivery. If the Representative so elects,
delivery of the Option Shares may be made by credit through full fast transfer
to the accounts at The Depository Trust Company designated by the
Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
Upon exercise of any option provided for in this Section 5, the
obligations of the several Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment and delivery for
such Option Shares) to the accuracy of and compliance with the representations,
warranties and agreements of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made pursuant to the
provisions hereof, to the performance by the Company of its obligations
hereunder, and to the condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such Option Shares
shall be reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may reasonably request in order to
evidence the accuracy and completeness of any of the representations, warranties
or statements, the performance of any of the covenants or agreements of the
Company or the compliance with any of the conditions herein contained in each
case in all material respects.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 13 hereof) of the Firm Shares at an initial public offering
price of $_____ per share. After the initial public offering, the several
Underwriters may, in their discretion, vary the public offering price.
6. Further Agreements of the Company. The Company agrees with the
---------------------------------
several Underwriters that:
(a) The Company will use best efforts to cause the
Registration
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Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to such Registration
Statement as originally declared effective which is declared effective by the
Commission; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, it will provide
evidence satisfactory to you that the Prospectus contains such information and
has been filed with the Commission within the time period prescribed; it will
notify you promptly of any request by the Commission for the amending or
supplementing of the Registration Statement or the Prospectus or for additional
information; promptly upon your request, it will prepare and file with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several Underwriters
("Underwriters' Counsel"), may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters; it will promptly prepare and
file with the Commission, and promptly notify you of the filing of, any
amendments or supplements to the Registration Statement or Prospectus which may
be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; in case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the rules and regulations of the Commission
thereunder and the provisions of this Agreement.
(b) The Company will advise you promptly after it shall
received notice or obtained knowledge of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of
15
<PAGE>
any stop order or to obtain its withdrawal at the earliest possible moment if
such stop order should be issued.
(c) The Company will use reasonable efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
copies of the Registration Statement (three of which will be signed and which
will include all exhibits), each Preliminary Prospectus, the Prospectus and any
amendments or supplements to such documents, including any prospectus prepared
to permit compliance with Section 10(a)(3) of the Act (three of which will
include all exhibits) all in such quantities as you may from time to time
reasonably request.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statement.
(f) During a period of five (5) years after the date hereof
and for so long as the Company is subject to Section 13 or 15 of the Exchange
Act, the Company will furnish to its stockholders as soon as practicable after
the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and unaudited
quarterly reports of operations for each of the first three quarters of the
fiscal year, and will furnish to you and the other several Underwriters
hereunder, upon request (i) concurrently with furnishing such reports to its
stockholders, statements of operations of the Company for each of the first
three (3) quarters in the form furnished to the Company's stockholders, (ii)
concurrently with furnishing to its stockholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
stockholders' equity, and of cash flows of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants, (iii) as soon as they are available, copies of all
reports (financial or other) mailed to stockholders, (iv) as soon as they are
available, copies of all reports and financial statements furnished to or filed
with the Commission, any securities exchange or the NASD, (v) every material
press
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release and every material news item or article in respect of the Company or its
affairs which was generally released to stockholders or prepared by the Company,
and (vi) any additional information of a public nature concerning the Company or
its business which you may reasonably request. During such five (5) year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary that is not so
consolidated.
(g) The Company will apply the net proceeds from the sale
of the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and a
registrar (which may be the same entity) for its Common Stock.
(i) The Company will file Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(j) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 12(a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 12(b)(i),
and, in the judgment of the Representative, a public offering price of $5.00 or
more per share is available, then the Company shall pay the Representative an
amount equal to one and one half percent (1.5%) of the gross amount of the
proposed offering (assuming a $5.00 per share price) less any amounts previously
paid to the Representative.
(k) If at any time during the ninety (90) day period after
the Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
if reasonably requested by you, forthwith prepare, and, if permitted by law,
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(l) During the Lock-up Period, the Company will not,
without the prior written consent of the Representative, effect the Disposition
of, directly or indirectly, any Securities other than (i) the sale of the Firm
Shares and the Option Shares hereunder and, (ii) the Company's issuance of
options or Common Stock under the Company's presently authorized stock option
plans or restricted stock plans (collectively, the "Option Plans").
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7. Expenses.
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(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreement, the Preliminary Blue Sky Survey and any supplemental
Blue Sky Survey, the Underwriters' Questionnaire and Power of Attorney, and any
instruments related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes, if any,
the cost of all certificates representing the Shares and transfer agents' and
registrars' fees; the fees and disbursements of counsel and accountants for the
Company; the fees and disbursements of counsel for the several Underwriters, all
fees and other charges of the Company's independent certified public
accountants; the cost of furnishing to the several Underwriters copies of the
Registration Statement (including appropriate exhibits), Preliminary Prospectus
and the Prospectus, and any amendments or supplements to any of the foregoing;
NASD filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of counsel for the Underwriters related to such qualification);
the Company's road show costs and expenses, the cost of preparing bound volumes
of the documents relating to the public offering of Common Stock contemplated
hereby; and all other expenses directly incurred by the Company in connection
with the performance of its obligations hereunder.
(ii) To the extent that the Representative's accountable
expenses (including without limitation, travel expenses) exceed $20,000 (which
amount has preveiously been advanced to the Representative by the Company), the
Company shall reimburse the Representative on the Closing Date up to an
additional $30,000 (exclusive of the Representative's legal expenses) for such
accountable expenses.
(iii) In addition to its other obligations under Section
7(a)(i) hereof, if the Shares are sold pursuant to this Agreement, the Company
will pay to the Representative a nonaccountable expense allowance equal to 3.0%
of the aggregate sales price of the Shares to the public. This nonaccountable
expense allowance with respect to the Firm Shares shall be paid to you on the
Closing Date and the nonaccountable expense allowance with respect to the Option
Shares shall be paid to you on the closing of the sale to you of such Option
Shares. The $20,000 previously paid to the Representative by the Company and
any amount owed to the Representative pursuant to Section 7(a)(ii) hereof shall
be credited against this nonaccountable expense allowance.
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(iv) In addition to its other obligations under Section 9
hereof, the Company agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding described in
Section 9(a) hereof, it will reimburse the Underwriters and Selling
Stockholders, as the case may be, on a monthly basis for all reasonable legal or
other expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the Company's obligation to reimburse the Underwriters for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Underwriters shall
promptly return such payment to the Company together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) listed from time to time in
The Wall Street Journal which represents the base rate on corporate loans posted
by a substantial majority of the nation's five (5) largest banks (the "Prime
Rate"). Any such interim reimbursement payments which are not made to the
Underwriters within thirty (30) days of a request for reimbursement shall bear
interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section
9(b) hereof, the Underwriters severally and not jointly agree that, as an
interim measure during the pendency of any claim, action, investigation, inquiry
or other proceeding described in Section 9(b) hereof, they will reimburse the
Company and Selling Stockholders, as the case may be, on a monthly basis for all
reasonable legal or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Underwriters' obligation to reimburse the Company for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
shall promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
7(a)(iv) and 7(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted pursuant to the Code of Arbitration Procedure of the NASD
in Orange County, California (or as close geographically to Orange County,
California as is reasonably practical). Any such arbitration must be commenced
by service of a written demand for arbitration or a written notice of intention
to arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation
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of an arbitration tribunal in such demand or notice, then the party responding
to said demand or notice is authorized to do so. Any such arbitration will be
limited to the operation of the interim reimbursement provisions contained in
Sections 7(a)(iv) and 7(b) hereof and will not resolve the ultimate propriety or
enforceability of the obligation to indemnify for expenses which is created by
the provisions of Sections 9(a) and 9(b) hereof or the obligation to contribute
to expenses which is created by the provisions of Section 9(d) hereof.
8. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the performance by the
Company of its obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 2:00 P.M., California time, on the date of this Agreement, or
such later date as shall be consented to in writing by you; and no stop order
suspending the effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been initiated or, to the knowledge of the Company
or any Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issuance, sale and delivery of
the Shares, shall have been reasonably satisfactory to Underwriters' Counsel,
and such counsel shall have been furnished with such documents and information
as they may reasonably have requested to enable them to pass upon the matters
referred to in this Section.
(c) You shall be satisfied that since the respective dates as of
which information is given in the Registration Statement and Prospectus, (i)
there shall not have been any change in the capital stock of the Company other
than pursuant to the exercise of outstanding options and warrants disclosed in
the Prospectus or any material change in the indebtedness of the Company, (ii)
except as set forth or contemplated by the Registration Statement or the
Prospectus, no material verbal or written agreement or other transaction shall
have been entered into by the Company, which is not in the ordinary course of
business, (iii) no loss or damage (whether or not insured) to the property of
the Company shall have been sustained which materially and adversely affects the
condition (financial or otherwise), business, results of operations or prospects
of the Company, (iv) no legal or governmental action, suit or proceeding
affecting the Company which is material to the Company or which affects or may
affect the transactions contemplated by this Agreement shall have been
instituted or threatened
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and (v) there shall not have been any material change in the condition
(financial or otherwise), business, management, results of operations or
prospects of the Company which makes it impractical or inadvisable in the
judgment of the Representative to proceed with public offering or purchase the
Common Shares as contemplated hereby.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, an opinion
of Schreeder, Wheeler, Flint, counsel for the Company, dated the Closing Date or
such later date on which Option Shares are purchased, addressed to the
Underwriters (and stating that it may be relied upon by Underwriters' Counsel in
rendering its opinion pursuant to Section 8 (d) of this Agreement) and with
reproduced copies or signed counterparts thereof for each of the Underwriters,
to the effect that:
(i) The Company and each of its subsidiaries has been
duly incorporated and is validly existing and in good standing under
the laws of the jurisdiction of its incorporation;
(ii) The Company and each of its subsidiaries has full
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Registration
Statement;
(iii) The Company and each of its subsidiaries is duly
qualified to do business as a foreign corporation and is in good
standing in each jurisdiction, if any, in which the ownership or
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in
good standing would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business
of the Company taken as a whole. To such counsel's knowledge, Company
has no subsidiaries or other than as listed in Exhibit 21 to the
Registration Statement;
(iv) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the
caption "Capitalization"; all outstanding shares of capital stock of
the Company have been duly and validly issued and are fully paid and
nonassessable, and, to such counsel's knowledge, have not been issued
in violation of or subject to any preemptive right, co-sale right,
registration right, right of first refusal or other similar right;
without limiting the foregoing, to such counsel's knowledge, there are
no preemptive or other rights to subscribe for or purchase any of the
Shares;
(v) The certificates evidencing the Shares to be
delivered hereunder are in due and proper form under Texas law and
when duly countersigned by the Company's transfer agent and registrar
and delivered to you
21
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against payment of the agreed compensation in accordance with this
Agreement, the Firm Shares and the Option Shares, represented thereby
will be duly and validly issued and fully paid and nonassessable, and
will not have been issued in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or
other similar right of stockholders and will conform in all respects
to the description thereof in the Registration Statement;
(vi) the Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the
Underwriters the Shares to be issued and sold by it hereunder;
(vii) The Company has the corporate power and authority
to enter into the Representative's Warrant Agreement and to issue,
sell and deliver to the Representative the Representative's Warrants
to be issued and sold by it thereunder;
(viii) Each of this Agreement, the Representative's
Warrant Agreement and the Representative's Warrants has been duly
authorized by all necessary corporate action on the part of the
Company and has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by you, is a valid
and binding agreement of the Company, enforceable in accordance with
its terms, except insofar as indemnification provisions may be limited
by applicable law and to which counsel need not express any opinion
and except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(ix) The Registration Statement has become effective
under the Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Act;
(x) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial
statements and schedules included in the Registration Statement as to
which such counsel need express no opinion), as of the effective date
of the Registration Statement, complied as to form in all material
respects with the requirements of the Act and the applicable Rules and
Regulations;
(xi) The statements in the Registration Statement and
Prospectus under the captions "Management," "Certain Transactions,"
"Description of Capital Stock" and "Shares Eligible For Future Sale,"
and in the
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Registration Statement in Items 24 and 26 insofar as they constitute
matters of law or legal conclusions or are descriptions of contracts,
agreements or other documents are accurate and complete in all
material respects and fairly present the information contained herein;
(xii) The description in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of
statutes are accurate and fairly present the information required to
be presented by the Act and the applicable Rules and Regulations and
the Company is not in violation of its charter or bylaws, or other
organizational documents;
(xiii) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company is a
party of a character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement that are not described or referred to
therein or filed as required;
(xiv) The execution and delivery of this Agreement and
the Representative's Warrant Agreement and the performance by the
Company of its obligations hereunder and thereunder will not (a)
result in any violation of the Company's charter, bylaws or other
organizational documents, or (b) result in a material breach or
violation of any of the terms and provisions of, or constitute a
material default under, any material bond, debenture, note or other
evidence of indebtedness, or under any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which the Company is a party or by
which its properties are bound, or any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court, government or governmental agency
or body having jurisdiction over the Company or over any of its
properties or operations;
(xv) To counsel's best knowledge, no consent, approval,
authorization or order of or qualification with any court, government
or governmental agency or body having jurisdiction over the Company or
over any of its properties or operations is necessary in connection
with the consummation by the Company of the transactions contemplated
in this Agreement and the Representative's Warrant Agreement, except
such as have been obtained under the Act or such as may be required
under state or other securities or Blue Sky laws in connection with
the purchase and the distribution of the Shares by the Underwriters;
(xvi) To such counsel's knowledge, there are no legal or
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governmental proceedings pending or threatened against the Company of
a character required to be disclosed in the Registration Statement or
the Prospectus by the Act or the Rules and Regulations or by the
Exchange Act or the applicable rules and regulations of the Commission
thereunder, other than those described therein;
(xvii) The Representative's Warrants have been duly and
validly authorized by the Company and upon delivery to you in
accordance with the Representative's Warrant Agreement will be duly
issued and legal, valid and binding obligations of the Company;
(xviii) The Representative's Warrant Stock to be issued by
the Company pursuant to the terms of the Representative's Warrant has
been duly authorized and, upon issuance and delivery against payment
therefor in accordance with the terms of the Representative's Warrant
Agreement, will be duly and validly issued and fully paid and
nonassessable, and to such counsel's knowledge, will not have been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right of stockholders;
(xix) To such counsel's knowledge, no holders of Common
Stock or other securities of the Company have registration rights with
respect to securities of the Company that have not been waived; and
(xx) The offer and sale of all securities of the
Company made within the last three years as set forth in Item 15 of
the Registration Statement were exempt from the registration
requirements of the Securities Act, pursuant to the provisions set
forth in such Item, and from the registration or qualification
requirements of all relevant state securities laws.
(xxi) The Company has satisfied the conditions for use
of Form SB-2 as set forth in the General Instructions thereto.
(xxii) No transfer taxes are required to be paid in
connection with the sale and delivery of the Shares to the
Underwriters.
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives of the
Company, the Representative, Underwriters' Counsel and the independent certified
public accountants of the Company, at which the contents of the Registration
Statement and Prospectus and related matters were discussed, and although they
have not verified the accuracy or completeness of the statements contained in
the Registration Statement or the Prospectus, nothing has come to the attention
of
24
<PAGE>
such counsel that leads them to believe that, at the time the Registration
Statement became effective and at all times subsequent thereto up to and on the
Closing Date and on any later date on which Option Shares are purchased, the
Registration Statement and any amendment or supplement thereto, when such
documents became effective or were filed with the Commission (other than the
financial statements and supporting schedules included in the Registration
Statement as to which such counsel need express no comment) contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or at
the Closing Date or any later date on which the Option Shares are purchased, as
the case may be, the Registration Statement, the Prospectus and any amendment or
supplement thereto contained any untrue statement of a material fact or omitted
to state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States upon opinions of local
counsel, and as to questions of fact upon representations or certificates of
officers of the Company, and of government officials, in which case its opinion
is to state that they are so relying and that they have no knowledge of any
material misstatement or inaccuracy in any such opinion, representation or
certificate. Copies of any opinion, representation or certificate so relied upon
shall be delivered to you, as Representatives of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the date on which any Option
Shares are purchased an opinion or opinions of counsel for the Selling
Stockholders, addressed to the Underwriters and stating that it may be relied
upon by Underwriters' Counsel in rendering its opinion pursuant to Section 8(f)
and dated the date on which any Option Shares are purchased, to the effect that:
(1) To the best of such counsel's knowledge, this
Agreement and the Stockholders' Agreement have been duly
authorized, executed and delivered by or on behalf of each of the
Selling Stockholders; the Agent has been duly and validly
authorized to act as the custodian of the Shares and, where
applicable, warrants to purchase the Shares, to be sold by each
such Selling Stockholder; and the performance of this Agreement
and the Stockholders' Agreement and the consummation of the
transactions herein contemplated by the Selling Stockholders will
not result in a breach of, or constitute a default under, any
indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other
agreement or instrument to which any of the Selling Stockholders
is a party or by which any of the Selling Stockholders or any of
their properties may be bound, or violate any statute, judgment,
decree, order, rule or regulation known to such counsel of any
court or governmental body having jurisdiction over any of the
25
<PAGE>
Selling Stockholders or any of their properties; and to the best
of such counsel's knowledge, no approval, authorization, order or
consent of any court, regulatory body, administrative agency or
other governmental body is required for the execution and
delivery of this Agreement or the Stockholders' Agreement or the
consummation by the Selling Stockholders of the transactions
contemplated by this Agreement, except such as have been obtained
and are in full force and effect under the Act and such as may be
required under the rules of the NASD and applicable Blue Sky
laws;
(2) To the best of such counsel's knowledge, the
Selling Stockholders have full right, power and authority to
enter into this Agreement and the Stockholders' Agreement and to
sell, transfer and deliver the Shares to be sold on such closing
date by such Selling Stockholders and good and marketable title
to such Shares so sold, free and clear of all liens,
encumbrances, equities, claims, restrictions, security interests,
voting trusts, or other defects of title whatsoever, has been
transferred to the Underwriters (whom counsel may assume to be
bona fide purchasers) who have purchased such Shares hereunder;
(3) To the best of such counsel's knowledge, this
Agreement and the Stockholders' Agreement are valid and binding
agreements of each of the Selling Stockholders in accordance with
their terms except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization,
moratorium or other laws affecting creditors' rights generally
and except with respect to those provisions relating to
indemnities or contributions for liabilities under the Act, as to
which no opinion need be expressed; and
(4) No transfer taxes are required to be paid in
connection with the sale and delivery of the Shares to the
Underwriters hereunder.
(f) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, an opinion
of Summit Law Group PLLC in form and substance satisfactory to you, with respect
to the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
letter from Grant
26
<PAGE>
Thornton LLP, addressed to the Company and the Underwriters, dated the Closing
Date or such later date on which Option Shares are purchased, as the case may
be, confirming that they are independent certified public accountants with
respect to the Company within the meaning of the Act and the applicable
published Rules and Regulations and based upon the procedures described in such
letter delivered to you concurrently with the execution of this Agreement
(herein called the "Original Letter"), but carried out to a date not more than
three (3) business days prior to the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, (i) confirming, to the
extent true, that the statements and conclusions set forth in the Original
Letter are accurate as of the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, and (ii) setting forth any
revisions and additions to the statements and conclusions set forth in the
Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of such letter, or to reflect
the availability of more recent financial statements, data or information. The
letter shall not disclose any change in the condition (financial or otherwise),
earnings, operations or business of the Company from that set forth in the
Registration Statement or Prospectus, which, in your sole judgment, is material
and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the public offering of the Shares as contemplated by
the Prospectus. The Original Letter from Grant Thornton LLP shall be addressed
to or for the use of the Underwriters in form and substance satisfactory to the
Underwriters and shall (i) represent, to the extent true, that they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the applicable published Rules and Regulations, (ii) set
forth its opinion with respect to its examination of the balance sheets of the
Company as of September 30, 1997, and December 31, 1996 and related statements
of operations, stockholders' equity, and cash flows for the years ended December
31, 1995 and 1996, and (iii) address other matters agreed upon by Grant Thornton
LLP and you. In addition, you shall have received from Grant Thornton LLP a
letter addressed to the Company and made available to you for the use of the
Underwriters stating that its review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of its examination of the Company's financial statements as of September
30, 1997, did not disclose any weaknesses in internal controls that they
considered to be material weaknesses.
(h) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the President
and Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied, in all
material aspects, with all the agreements and satisfied all the
conditions on its part to be performed or satisfied, in all
27
<PAGE>
material respects, at or prior to the Closing Date or any later date
on which Option Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to their knowledge, are pending or
threatened under the Act;
(iii) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any
amendments or supplements thereto, contained all material information
required to be included therein by the Act and the Rules and
Regulations or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may be, and in
all material respects conformed to the requirements of the Act and the
Rules and Regulations or the Exchange Act and the applicable rules and
regulations of the Commission thereunder, as the case may be, the
Registration Statement, and any amendment or supplement thereto, did
not and does not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, the
Prospectus, and any amendment or supplement thereto, did not and does
not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and,
since the effective date of the Registration Statement, there has
occurred no event required to be set forth in an amended or
supplemented Prospectus that has not been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus,
there has not been (a) any material adverse change in the condition
(financial or otherwise), earnings, operations or business of the
Company, (b) any transaction that is material to the Company, (c) any
obligation, direct or contingent incurred by the Company, that is
material to the Company, (d) any change in the capital stock or
outstanding indebtedness of the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock
of the Company, or (f) any loss or damage (whether or not insured) to
the property of the Company which has a material adverse effect on the
condition (financial or otherwise), earnings, operations or business
of the Company.
(i) The Company shall have obtained and delivered to you an
agreement from each officer, director and director-nominee of the Company, and
each beneficial owner of five percent or more of the Common Stock immediately
after the offering contemplated hereby, in writing prior to the date hereof that
such person will not, during the Lock-up Period,
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effect the Disposition of any Securities now owned or hereafter acquired
directly by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) as a bona fide gift or
gifts, provided the donee or donees thereof agree in writing to be bound by this
restriction, (ii) as a distribution to limited partners or stockholders of such
person, provided that the distributees thereof agree in writing to be bound by
the terms of this restriction, or (iii) with the prior written consent of
Cruttenden Roth Incorporated. The foregoing restriction is expressly agreed to
preclude the holder of the Securities from engaging in any hedging or other
transaction which is designed to or reasonably expected to lead to or result in
a Disposition of Securities during the Lock-up Period, even if such Securities
would be disposed of by someone other than the such holder. Such prohibited
hedging or other transactions would include, without limitation, any short sale
(whether or not against the box) or any purchase, sale or grant of any right
(including, without limitation, any put or call option) with respect to any
Securities or with respect to any security (other than a broad-based market
basket or index) that includes, relates to or derives any significant part of
its value from Securities. Furthermore, such person will have also agreed and
consented to the entry of stop transfer instructions with the Company's transfer
agent against the transfer of the Securities held by such person except in
compliance with this restriction.
(j) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request, including
certificates of officers of the Company as to the accuracy of the
representations and warranties of the Company, as to the performance by the
Company of its obligations hereunder and as to the other conditions concurrent
and precedent to the obligations of the Underwriters hereunder.
(k) The Representative's Warrant Agreement shall have been
entered into by the Company and you, and the Representative's Warrants shall
have been issued and sold to you pursuant thereto.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
9. Indemnification and Contribution.
--------------------------------
(a) The Company and each of the Selling Stockholders
severally agrees to indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, to which such
Underwriter may become subject (including, without limitation, in its capacity
as an Underwriter or as a "qualified independent underwriter" within the meaning
of Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are
29
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based upon (i) with respect to the Company, any breach of any representation,
warranty, agreement or covenant of the Company herein contained, or any failure
of the Company to perform its obligations hereunder or under law, (ii) with
respect to each of the Selling Stockholders, arise out of or are based in whole
or in part on any inaccuracy in the representations and warranties of such
Selling Stockholder contained herein or any failure of such Selling Stockholder
to perform its obligations hereunder or under law, (iii) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (but, with respect to each of the Selling Stockholder only to the
extent that such untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with written
information furnished by such Selling Stockholder, in its capacity as such, to
the Company or the Underwriters, directly or through such Selling Stockholders'
representatives, specifically for inclusion therein) and agrees to reimburse
each Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that neither the Company nor any Selling
-------- -------
Stockholder shall be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement thereto, in reliance upon, and in conformity
with, written information relating to any Underwriter furnished to the Company
as described in Section 4 hereof, and, provided further, that the indemnity
-------- -------
agreement provided in this Section 9(a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, damages, liabilities or actions based upon
any untrue statement or alleged untrue statement of material fact or omission or
alleged omission to state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 6(d)
hereof.
The indemnity agreement in this Section 9(a) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls any Underwriter within the meaning of the Act or
the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and the Selling Stockholders against any
losses, claims, damages or liabilities, joint or several, to which the Company
may become subject under the Act or otherwise, specifically including, but not
limited to, losses, claims, damages or liabilities, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof)
30
<PAGE>
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company as described in Section 4 hereof,
and agrees to reimburse the Company and the Selling Stockholders for any legal
or other expenses reasonably incurred by the Company in connection with
investigating or defending any such loss, claim, damage, liability or action.
The indemnity agreement in this Section 9(b) shall extend upon the
same terms and conditions to, and shall inure to the benefit of, each officer of
the Company who signed the Registration Statement and each director of the
Company and each person, if any, who controls the Company or any of the Selling
Stockholders within the meaning of the Act or the Exchange Act. This indemnity
agreement shall be in addition to any liabilities which each Underwriter may
otherwise have.
(c) Promptly after receipt by an indemnified party under
this Section 9 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 9, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 9. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
---------
however, that if the defendants in any such action include both the indemnified
- -------
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party which pose a conflict of interest for such counsel, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of the indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel
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(together with appropriate local counsel) approved by the indemnifying party
representing all the indemnified parties under Section 9(a) or 9(b) hereof who
are parties to such action), (ii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
--------
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such indemnification.
(d) In order to provide for just and equitable contribution
in any action in which a claim for indemnification is made pursuant to this
Section 9 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the initial public
offering price, and the Company is responsible for the remaining portion,
provided, however, that (i) no Underwriter shall be required to contribute any
- -------- -------
amount in excess of the underwriting discount applicable to the Shares purchased
by such Underwriter and (ii) no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who is not guilty of such fraudulent
misrepresentation. The contribution agreement in this Section 9(d) shall extend
upon the same terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls the Underwriters or the Company within the meaning
of the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that
they are sophisticated business persons who were represented by counsel during
the negotiations regarding the provisions hereof including, without limitation,
the provisions of this Section 9, and are fully informed regarding said
provisions. They further acknowledge that the provisions of this Section 9
fairly allocate the risks in light of the ability of the parties to investigate
the Company and its business in order to assure that adequate disclosure is made
in the Registration Statement and Prospectus as required by the Act and the
Exchange Act. The parties are advised that federal or state public policy, as
interpreted by the courts in certain jurisdictions, may be
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contrary to certain of the provisions of this Section 9, and the parties hereto
hereby expressly waive and relinquish any right or ability to assert such public
policy as a defense to a claim under this Section 9 and further agree not to
attempt to assert any such defense.
10. Representations, Warranties, Covenants and Agreements to Survive
----------------------------------------------------------------
Delivery. All representations, warranties, covenants and agreements of the
- --------
Company and the Underwriters herein or in certificates delivered pursuant
hereto, and the indemnity and contribution agreements contained in Sections 7
and 9 and hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter or any controlling
person within the meaning of the Act or the Exchange Act, or by or on behalf of
the Company or any of its officers, directors or controlling persons within the
meaning of the Act or the Exchange Act, and shall survive the delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
11. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for twenty-
four (24) hours to allow the several Underwriters the privilege of substituting
within twenty-four (24) hours (including non-business hours) another underwriter
or underwriters (which may include any nondefaulting Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four (24) hours,
if necessary, to allow the Company the privilege of finding another underwriter
or underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting Underwriter or Underwriters so agreed but failed to purchase. If it
shall be arranged for the remaining Underwriters or substituted underwriter or
underwriters to take up the Firm Shares of the defaulting Underwriter or
Underwriters as provided in this Section 11, (i) the Company shall have the
right to postpone the time of delivery for a period of not more than seven (7)
full business days, in order to effect whatever changes may thereby
33
<PAGE>
be made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Shares to
be purchased by the remaining Underwriters and substituted underwriter or
underwriters shall be taken as the basis of their underwriting obligation. If
the remaining Underwriters shall not take up and pay for all such Firm Shares so
agreed to be purchased by the defaulting Underwriter or Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, the Company shall not be liable to any
Underwriter (except as provided in Sections 7 and 9 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 7 and 9 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 11.
12. Effective Date of this Agreement and Termination.
------------------------------------------------
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., California time, on the second full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 13 before the time this Agreement becomes effective, you, as
Representative of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 6(j), 7 and 9 hereof.
(b) You, as Representative of the several Underwriters,
shall have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the Closing Date or on or prior to any
later date on which Option Shares are purchased, as the case may be, (i) if the
Company shall have failed, refused or been unable to perform any agreement on
its part to be performed, or (ii) because any other condition of the
34
<PAGE>
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
from that set forth in the Registration Statement or Prospectus, which, in your
sole judgment, is material and adverse, or (iii) if additional material
governmental restrictions, not in force and effect on the date hereof, shall
have been imposed upon trading in securities generally or minimum or maximum
prices shall have been generally established on the New York Stock Exchange or
on the American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
exchange or in the over the counter market by the NASD, or if a banking
moratorium shall have been declared by federal, New York or California
authorities, or (iv) if the Company shall have sustained a loss by strike, fire,
flood, earthquake, accident or other calamity of such character as to interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured, or (v) if there
shall have been a material adverse change in the general political or economic
conditions or financial markets as in your reasonable judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (vi) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. Any termination
pursuant to any of subparagraphs (ii) through (vi) above shall be without
liability of any party to any other party except as provided in Sections 7 and 9
hereof. In the event of termination pursuant to subparagraph (i) above, the
Company shall also remain obligated to pay costs and expenses pursuant to
Sections 6(j), 7 and 9 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
13. Notices. All notices or communications hereunder, except as
-------
herein otherwise specifically provided, shall be in writing and if sent to you
shall be mailed, delivered, telegraphed (and confirmed by letter) or telecopied
(and confirmed by letter) to you c/o Cruttenden Roth Incorporated, 18301 Von
Karman, Suite 100, Irvine, California 92715, telecopier number (714) 852-9603,
Attention: James Stearns; if sent to the Company, such notice shall be mailed,
delivered, telegraphed (and confirmed by letter) or telecopied (and confirmed by
letter) to 3400 Carlisle Suite 500, Dallas, TX, telecopier number (214) 855-
5277, Attention: Ken Hoofard.
14. Parties. This Agreement shall inure to the benefit of and be
-------
binding upon the several Underwriters and the Company and their respective
executors, administrators,
35
<PAGE>
successors and assigns. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person or corporation, other than the
parties hereto and their respective executors, administrators, successors and
assigns, and their controlling persons within the meaning of the Act or the
Exchange Act, officers and directors referred to in Section 9 hereof, any legal
or equitable right, remedy or claim in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective executors, administrators, successors and
assigns and said controlling persons and said officers and directors, and for
the benefit of no other person or corporation. No purchaser of any of the Shares
from any Underwriter shall be construed a successor or assign by reason merely
of such purchase. The Agreement constitutes the entire agreement and
understanding of the parties with respect to the subject matter hereof.
In all dealings with the Company under this Agreement, you shall act
on behalf of each of the several Underwriters, and the Company shall be entitled
to act and rely upon any statement, request, notice or agreement made or given
by you on behalf of each of the several Underwriters.
15. Applicable Law. This Agreement shall be governed by, and
--------------
construed in accordance with, the laws of the State of California.
16. Counterparts. This Agreement may be signed in several
------------
counterparts, each of which will constitute an original.
If the foregoing correctly sets forth the understanding among the
Company and the several Underwriters, please so indicate in the space provided
below for that purpose, whereupon this letter shall constitute a binding
agreement among the Company and the several Underwriters.
Very truly yours,
CPS SYSTEMS, INC.
By:_____________________________________
Name:________________________________
Title:_______________________________
SELLING STOCKHOLDERS
By:_____________________________________
36
<PAGE>
Attorney-in-fact
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
On their behalf and on behalf of each of the
several Underwriters named in Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By:_____________________
Name:________________
Title:_______________
37
<PAGE>
SCHEDULE A
Underwriters Number of
Firm Shares
To Be
Purchased
-----------
Cruttenden Roth Incorporated............
-----------
Total.................................
===========
38
<PAGE>
RESTATED ARTICLES OF INCORPORATION
----------------------------------
OF
--
CPS SYSTEMS, INC.
-----------------
ARTICLE I
---------
CPS Systems, Inc., pursuant to the provisions of Article 4.07 of the Texas
Business Corporation Act, hereby adopts Restated Articles of Incorporation which
accurately copy the Articles of Incorporation and all amendments thereto that
are in effect to date and as further amended by such Restated Articles of
Incorporation as hereinafter set forth and which contain no other change in any
provision thereof.
ARTICLE II
----------
The Articles of Incorporation of the Corporation are amended by the
Restated Articles of Incorporation as follows:
(a) The language in Article IV is deleted and replaced with the following:
ARTICLE IV
----------
Section 4.1
-----------
The total number of shares of stock which the Corporation has
authority to issue is Sixty Million (60,000,000) shares of capital stock,
Fifty Million (50,000,000) of which shall be designated as common stock
with the par value of one cent ($.01) each, Ten Million (10,000,000) of
which shall be designated as preferred stock with a par value of one cent
($.01) each.
Section 4.2
-----------
All shares of common stock shall have rights identical to those of all
other such shares. Shares of common stock shall have unlimited voting
rights and shall be entitled to receive the net assets of the Corporation
upon liquidation or dissolution.
<PAGE>
Section 4.3
-----------
Preferred stock may be issued in one or more series. The Board of
Directors is hereby authorized to issue the shares of preferred stock in
such series and to fix from time to time before issuance the number of
shares to be included in any such series to determine the designations,
preferences, limitations and relative rights, including voting rights, of
all shares of such series. The authority of the Board of Directors with
respect to each such series will include, without limiting the generality
of the foregoing, the determination of any or all of the following:
(a) The number of shares of any series and the designation to
distinguish the shares of such series from the shares of all
other series;
(b) The voting powers, if any, and whether such voting powers are
full or limited in such series;
(c) The redemption provisions, if any, applicable to such series,
including the redemption price or prices to be paid;
(d) Whether dividends, if any, will be cumulative or noncumulative,
the dividend rate of such series, and the dates and preferences
of dividends of such series;
(e) The rights of such series upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, the
Corporation;
(f) The provisions, if any, pursuant to which the shares of such
series are convertible into, or exchangeable for, shares of any
other class or classes of any other series of the same or any
other class or classes of stock, or any other security, of the
Corporation or any other corporation or other entity, and the
price or prices of the rates of exchange applicable thereto;
(g) The right, if any, to subscribe for or to purchase any securities
of the Corporation or any other corporation or other entity;
(h) The provisions, if any, of a sinking fund applicable to such
series; and
(i) Any other relative, participating, optional or other special
powers, preferences, rights, qualifications, limitations or
restrictions thereof.
<PAGE>
(b) The language in Article VII is deleted and replaced with the
following:
ARTICLE VII
-----------
Directors
---------
The names of the current Directors of the Corporation are:
Paul E. Kana
Sidney H. Cordier
Brian R. Wilson
G. Dean Booth, Jr.
James K. Hoofard, Jr.
The address of each of the Directors is 3400 Carlisle Street, Suite
500, Dallas, Texas 75204.
(c) The language in Article VIII is deleted and hereby replaced with the
following:
ARTICLE VIII
------------
Election of Directors
---------------------
Subject to the rights of the holders of any series of preferred stock
to elect additional Directors, the number of the Directors of the
Corporation shall be fixed from time to time by or pursuant to the Bylaws
of the Corporation. The Directors shall be classified with respect to the
time for which they severally hold office into three classes, as nearly
equal in number as possible. At each annual meeting of the shareholders of
the Corporation, the successors of the class of Directors whose term
expires at that meeting shall be elected by plurality vote of all shares
cast at such meeting to hold office for a term expiring at the annual
meeting of shareholders held in the third year following the year of their
election.
Advance notice of shareholder nominations for the election of
Directors and advance notice of business to be brought by shareholders
before an annual meeting shall be given in a manner provided in the Bylaws
of the Corporation.
(d) The language in Article XII is deleted and hereby replaced with the
following:
ARTICLE XII
-----------
Indemnification
---------------
Each person who is or was a Director or officer of the Corporation, or
each such person who is or was serving at the request of the Board of
Directors or an officer of the Corporation as a Director, officer, partner,
venturer,
<PAGE>
proprietor, trustee, employee, agent or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust or
other enterprise or employee benefit plan (including the heirs, executors,
administrators or estate of such person) shall be indemnified by the
Corporation to the fullest extent that a corporation is required or
permitted to grant indemnification to such person under the Texas Business
Corporation Act and the Texas Miscellaneous Corporation Act as the same may
exist or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights than said law permitted the Corporation to
provide prior to such amendment) or any other applicable laws as presently
or hereafter in effect. Without limiting the generality or the effect of
the foregoing, the Corporation may enter into one or more agreements with
any person which provide for indemnification greater or different than that
provided in this Article to the extent provided by applicable laws. Any
amendment or repeal of this Article shall not adversely affect any right or
protection existing hereunder immediately prior to such amendment or
repeal.
(e) The language in Article XIII is deleted and hereby replaced with the
following:
ARTICLE XIII
------------
Liability of Directors
----------------------
To the full extent permitted by the Texas Business Corporation Act or
any other applicable laws presently or hereafter in effect, no Director of
the Corporation shall be personally liable to the Corporation or its
shareholders for or with respect to any acts or omissions in the
performance of his or her duties
<PAGE>
as a Director of the Corporation. Any repeal or modification of this
Article shall not adversely affect any right or protection of a Director of
the Corporation existing immediately prior to such repeal or modification.
(f) The following amendment is an addition to the Articles of
Incorporation and the full text of this provision is added as follows:
ARTICLE XIV
-----------
Special Meetings of Shareholders
--------------------------------
Special meetings of the shareholders, unless otherwise prescribed by
statute, may be called by the chairman of the board, president or the Board
of Directors or by the holders of at least fifty percent of all shares
entitled to vote at the meeting.
ARTICLE III
-----------
Each such amendment made by these Restated Articles of Incorporation has
been effected in conformity with the provisions of the Texas Business
Corporation Act and such Restated Articles of Incorporation and each such
amendment made by the Restated Articles of Incorporation were duly adopted by
the shareholders of the Corporation on the 28th day of October, 1997.
ARTICLE IV
----------
The number of shares outstanding was Ten Thousand (10,000), and the number
of shares entitled to vote on the Restated Articles of Incorporation as so
amended was Ten Thousand (10,000), the holders of all of which have signed a
written consent to the adoption of such Restated Articles of Incorporation as so
amended.
<PAGE>
ARTICLE V
---------
The manner in which any exchange, reclassification or cancellation of
issued shares provided for in this Amendment shall be effected is as follows:
Upon the filing of these Amended and Restated Articles of Incorporation
with the Secretary of State of the State of Texas, each then issued and
outstanding share of the Corporation's stock shall continue to be
designated as common stock. Each holder of the Corporation's existing
stock shall automatically receive, without any action on the part of the
respective holders thereof, an additional 403.0077569 shares of common
stock for each share of stock held at the time of this amendment.
ARTICLE VI
----------
The manner in which such amendment effects a change in the amount of stated
capital, and the amount of stated capital has changed by such amendment, are as
follows:
Upon the filing of these Amended and Restated Articles of Incorporation
with the Secretary of State of the State of Texas, the stated capital of
the Corporation shall be increased from One Hundred and No/100ths Dollars
($100.00) to Forty Thousand Four Hundred and 79/100ths Dollars ($40,400.79)
to reflect the Corporation's recapitalization by stock split.
ARTICLE VII
-----------
The Articles of Incorporation and all amendments and supplements thereto
are hereby superseded by the following Restated Articles of Incorporation which
accurately copy the entire text thereof and as amended as set forth:
<PAGE>
ARTICLES OF INCORPORATION OF
----------------------------
CPS SYSTEMS, INC.
-----------------
ARTICLE I
---------
Name
----
The name of the Corporation is CPS Systems, Inc.
ARTICLE II
----------
Duration
--------
The period of its duration is perpetual.
ARTICLE III
-----------
Purpose
-------
The purposes for which this Corporation is organized are, subject to
the provisions of part four of the Texas Miscellaneous Corporation Laws Act, as
follows:
1. To engage in the business of furnishing computer programming services
and all related businesses;
2. To engage in any lawful business which may be incorporated under the
Texas Business Corporation Act.
The foregoing shall be construed as objects, purposes and powers and the
enumeration thereof shall not be held to limit or restrict in any manner the
powers now or hereafter conferred on this Corporation by the laws of the State
of Texas.
<PAGE>
ARTICLE IV
----------
Capitalization
--------------
Section 4.1
-----------
The total number of shares of stock which the Corporation has
authority to issue is Sixty Million (60,000,000) shares of capital stock, Fifty
Million (50,000,000) of which shall be designated as common stock with the par
value of one cent ($.01) each, Ten Million (10,000,000) of which shall be
designated as preferred stock with a par value of one cent ($.01) each.
Section 4.2
-----------
All shares of common stock shall have rights identical to those of all
other such shares. Shares of common stock shall have unlimited voting rights
and shall be entitled to receive the net assets of the Corporation upon
liquidation or dissolution.
Section 4.3
-----------
Preferred stock may be issued in one or more series. The Board of
Directors is hereby authorized to issue the shares of preferred stock in such
series and to fix from time to time before issuance the number of shares to be
included in any such series to determine the designations, preferences,
limitations and relative rights, including voting rights, of all shares of such
series. The authority of the Board of Directors with respect to each such
series will include, without limiting the generality of the foregoing, the
determination of any or all of the following:
(a) The number of shares of any series and the designation to distinguish
the shares of such series from the shares of all other series;
<PAGE>
(b) The voting powers, if any, and whether such voting powers are full or
limited in such series;
(c) The redemption provisions, if any, applicable to such series,
including the redemption price or prices to be paid;
(d) Whether dividends, if any, will be cumulative or noncumulative, the
dividend rate of such series, and the dates and preferences of
dividends of such series;
(e) The rights of such series upon the voluntary or involuntary
dissolution of, or upon any distribution of the assets of, the
Corporation;
(f) The provisions, if any, pursuant to which the shares of such series
are convertible into, or exchangeable for, shares of any other class
or classes of any other series of the same or any other class or
classes of stock, or any other security, of the Corporation or any
other corporation or other entity, and the price or prices of the
rates of exchange applicable thereto;
(g) The right, if any, to subscribe for or to purchase any securities of
the Corporation or any other corporation or other entity;
(h) The provisions, if any, of a sinking fund applicable to such series;
and
(i) Any other relative, participating, optional or other special powers,
preferences, rights, qualifications, limitations or restrictions
thereof.
ARTICLE V
---------
Issuance of Shares
------------------
The Corporation will not commence business until it has received for the
issuance of shares consideration of the value of one thousand dollars ($1,000)
consisting of money, labor done or property actually received.
<PAGE>
ARTICLE VI
----------
Registered Office
-----------------
The street address of its initial registered office is 3400 Carlisle
Street, Suite 500, Dallas, Texas 75204, and the name of its initial registered
agent at such address is Kevin Figge.
ARTICLE VII
-----------
Directors
---------
The names of the current Directors of the Corporation are:
Paul E. Kana
Sidney H. Cordier
Brian R. Wilson
G. Dean Booth, Jr.
James K. Hoofard, Jr.
The address of each of the Directors is 3400 Carlisle Street, Suite 500,
Dallas, Texas 75204.
ARTICLE VIII
------------
Election of Directors
---------------------
Subject to the rights of the holders of any series of preferred stock
to elect additional Directors, the number of the Directors of the Corporation
shall be fixed from time to time by or pursuant to the Bylaws of the
Corporation. The Directors shall be classified with respect to the time for
which they severally hold office into three classes, as nearly equal in number
as possible. At each annual meeting of the shareholders of the Corporation, the
successors of the class of Directors whose term expires at that meeting shall be
elected by plurality vote of all
<PAGE>
shares cast at such meeting to hold office for a term expiring at the annual
meeting of shareholders held in the third year following the year of their
election.
Advance notice of shareholder nominations for the election of Directors and
advance notice of business to be brought by shareholders before an annual
meeting shall be given in a manner provided in the Bylaws of the Corporation.
ARTICLE IX
----------
Denial of Preemptive Rights
---------------------------
No holder of any shares of capital stock of the Corporation, whether
now or hereafter authorized, shall, as such holder, have any preemptive or
preferential right to receive, purchase, or subscribe to (a) any unissued or
treasury shares of any class of stock (whether now or hereafter authorized) of
the Corporation, (b) any obligations, evidences of indebtedness, or other
securities of the Corporation convertible into or exchangeable for, or carrying
or accompanied by any rights to receive, purchase, or subscribe to, any such
unissued or treasury shares, (c) any right of subscription to or to receive, or
any warrant or option for the purpose of, any of the foregoing securities, or
(d) any other securities that may be issued or sold by the Corporation.
ARTICLE X
---------
Denial of Cumulative Voting
---------------------------
Cumulative voting for the election of Directors is expressly denied and
prohibited.
ARTICLE XI
----------
Conflict of Interest
--------------------
No contract or transaction between the Corporation and one or more of
its Directors or officers, or between the Corporation and any other corporation,
partnership, association, or other organization in which one or more of its
Directors or officers are Directors or officers or have
<PAGE>
a financial interest, shall be void or voidable solely for this reason, solely
because the Director or officer is present at or participates in the meeting of
the Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
(a) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority of
the disinterested Directors, even though the disinterested Directors be less
than a quorum; or
(b) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the shareholders; or
(c) The contract or transaction is fair as to the Corporation as of
the time it is authorized, approved, or ratified by the Board of Directors, a
committee thereof, or the shareholder.
Common or interested Directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
This provision shall not be construed to invalidate a contract or
transaction which would be valid in the absence of this provision or to subject
any Director or officer to any liability that he would not be subject to in the
absence of this provision.
<PAGE>
ARTICLE XII
-----------
Indemnification
---------------
Each person who is or was a Director or officer of the Corporation, or
each such person who is or was serving at the request of the Board of Directors
or an officer of the Corporation as a Director, officer, partner, venturer,
proprietor, trustee, employee, agent or similar functionary of another
corporation, partnership, joint venture, sole proprietorship, trust or other
enterprise or employee benefit plan (including the heirs, executors,
administrators or estate of such person) shall be indemnified by the Corporation
to the fullest extent that a corporation is required or permitted to grant
indemnification to such person under the Texas Business Corporation Act and the
Texas Miscellaneous Corporation Act as the same may exist or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights than
said law permitted the Corporation to provide prior to such amendment) or any
other applicable laws as presently or hereafter in effect. Without limiting the
generality or the effect of the foregoing, the Corporation may enter into one or
more agreements with any person which provide for indemnification greater or
different than that provided in this Article to the extent provided by
applicable laws. Any amendment or repeal of this Article shall not adversely
affect any right or protection existing hereunder immediately prior to such
amendment or repeal.
ARTICLE XIII
------------
Liability of Directors
----------------------
To the full extent permitted by the Texas Business Corporation Act or
any other applicable laws presently or hereafter in effect, no Director of the
Corporation shall be personally liable to the Corporation or its shareholders
for or with respect to any acts or
<PAGE>
omissions in the performance of his or her duties as a Director of the
Corporation. In any repeal or modification of this Article shall not adversely
affect any right or protection of a Director of the Corporation existing
immediately prior to such repeal or modification.
ARTICLE XIV
-----------
Special Meetings of Shareholders
--------------------------------
Special meetings of the shareholders, unless otherwise prescribed by
statute, may be called by the chairman of the board, president or the Board of
Directors or by the holders of at least fifty percent of all shares entitled to
vote at the meeting.
<PAGE>
Dated: ____________________, 1997 CPS SYSTEMS, INC.
By:____________________________________________
Title: Chief Executive Officer
and
By:____________________________________________
Title: Secretary
<PAGE>
PUBLIC NOTARY
-------------
STATE OF _________________
COUNTY OF ________________
Before me, a notary public, on this day personally appeared
_______________________, known to me to be a person whose name is subscribed to
the foregoing document and, being by me first duly sworn, declared that the
statements therein contained are true and correct.
Given under my hand and seal this ______ day of _____________, 1997.
---------------------------------------------------
NOTARY PUBLIC, State of __________
My commission expires __________________, 1997.
(NOTARIAL SEAL)
<PAGE>
ARTICLES OF CORRECTION
----------------------
The undersigned submits these articles pursuant to Texas Civil Statutes article
1302.7.01 to correct a document which is an inaccurate record of the entity
action, contains an inaccurate or erroneous statement, or was defectively or
erroneously executed, sealed, acknowledged, or verified.
ARTICLE ONE
The name of the entity is CPS Systems, Inc.
ARTICLE TWO
The document to be corrected is the Restated Articles of Incorporation of CPS
Systems, Inc., which was filed in the Office of the Secretary of State on the
28th day of October, 1997.
ARTICLE THREE
The inaccuracy, error, or defect to be corrected is:
The additional shares in Article V of the Restated Articles of Incorporation and
the stated capital in Article VI of the Restated Articles of Incorporation. The
following corrections also need to be made, adding a comma after "effected" in
Article V and changing "has" to "as" in Article VI.
ARTICLE FOUR
As corrected, the inaccurate, erroneous, or defective portion of the document
reads as follows:
ARTICLE V
---------
The manner in which any exchange, reclassification or cancellation of
issued shares provided for in this Amendment shall be effected, is as follows:
Upon the filing of these Amended and Restated Articles of Incorporation
with the Secretary of State of the State of Texas, each then issued and
outstanding share of the Corporation's stock shall continue to be
designated as common stock. Each holder of the Corporation's existing
stock shall automatically receive, without any action on the part of the
respective holders thereof, an additional
<PAGE>
389.4735 shares of common stock for each share of stock held at the time of
this amendment.
ARTICLE VI
----------
The manner in which such amendment effects a change in the amount of stated
capital, and the amount of stated capital as changed by such amendment, are as
follows:
Upon the filing of these Amended and Restated Articles of Incorporation
with the Secretary of State of the State of Texas, the stated capital of
the Corporation shall be increased from One Hundred and No/100ths Dollars
($100.00) to Thirty-Nine Thousand Forty-Seven and 35/100ths Dollars
($39,047.35) to reflect the Corporation's recapitalization by stock split.
By:_________________________________________
Its: Chief Executive Officer
<PAGE>
BYLAWS
OF
CPS SYSTEMS, INC.
<PAGE>
TABLE OF CONTENTS
-----------------
Page
PREAMBLE
ARTICLE ONE: Offices
1.01 Registered Office and Agent....................... 1
1.02 Other Offices..................................... 1
ARTICLE TWO: Shareholders
2.01 Annual Meetings................................... 1
2.02 Special Meetings.................................. 1
2.03 Place of Meetings................................. 2
2.04 Notice............................................ 2
2.05 Voting List....................................... 2
2.06 Voting of Shares.................................. 2
2.07 Quorum; Withdrawal of Quorum...................... 3
2.08 Majority Vote..................................... 3
2.09 Method of Voting; Proxies......................... 3
2.10 Closing of Transfer Records; Record Date.......... 3
2.11 Officers Duties at Meeting........................ 4
2.12 Advance Notice of Shareholder Nominations
and Proposals..................................... 4
ARTICLE THREE: Directors
3.01 Management........................................ 6
3.02 Number; Election; Term; Qualification............. 6
3.03 Changes in Number................................. 6
3.04 Removal........................................... 7
3.05 Vacancies......................................... 7
3.06 Place of Meetings................................. 7
3.07 First Meeting..................................... 7
3.08 Regular Meetings.................................. 8
3.09 Special Meetings; Notice.......................... 8
3.10 Quorum; Majority Vote............................. 8
3.11 Procedure; Minutes................................ 8
3.12 Presumption of Assent............................. 8
3.13 Compensation...................................... 8
3.14 Action Without Meeting............................ 8
ARTICLE FOUR: Committees
4.01 Designation....................................... 9
4.02 Number; Qualification; Term....................... 9
4.03 Authority......................................... 9
<PAGE>
Page
4.04 Committee Changes................................. 10
4.05 Regular Meetings.................................. 10
4.06 Special Meetings.................................. 10
4.07 Quorum; Majority Vote............................. 10
4.08 Minutes........................................... 11
4.09 Compensation...................................... 11
4.10 Responsibility.................................... 11
ARTICLE FIVE: General Provisions Relating to Meetings
5.01 Notice............................................ 11
5.02 Waiver of Notice.................................. 11
5.03 Telephone and Similar Meetings.................... 11
ARTICLE SIX: Officers and Other Agents
6.01 Number; Titles; Election; Term; Qualification..... 12
6.02 Removal........................................... 12
6.03 Vacancies......................................... 12
6.04 Authority......................................... 12
6.05 Compensation...................................... 12
6.06 Chairman of the Board............................. 12
6.07 Chief Executive Officer........................... 12
6.08 President......................................... 13
6.09 Vice Presidents................................... 13
6.10 Treasurer......................................... 13
6.11 Assistant Treasurers.............................. 13
6.12 Secretary......................................... 14
6.13 Assistant Secretaries............................. 14
ARTICLE SEVEN: Certificates and Shareholders
7.01 Certificated and Uncertificated Shares............ 14
7.02 Certificates for Certificated Shares.............. 14
7.03 Issuance.......................................... 15
7.04 Consideration for Shares.......................... 15
7.05 Lost, Stolen, or Destroyed Certificates........... 15
7.06 Transfer of Shares................................ 16
7.07 Registered Shareholders........................... 16
7.08 Legends........................................... 16
7.09 Regulations....................................... 16
ARTICLE EIGHT: Miscellaneous Provisions
8.01 Dividends......................................... 17
8.02 Books and Records................................. 17
8.03 Fiscal Year....................................... 17
8.04 Seal.............................................. 17
<PAGE>
Page
8.05 Attestation by the Secretary...................... 17
8.06 Indemnification................................... 17
8.07 Insurance......................................... 18
8.08 Resignation....................................... 18
8.09 Securities of Other Corporations.................. 18
8.10 Amendment of Bylaws............................... 18
8.11 Invalid Provisions................................ 19
8.12 Headings, Table of Contents....................... 19
<PAGE>
BYLAWS
OF
CPS SYSTEMS, INC.
PREAMBLE
These bylaws are subject to, and governed by, the Texas Business
Corporation Act and the articles of incorporation of CPS Systems, Inc. (the
"Corporation"). In the event of a direct conflict between the provisions of
these bylaws and the mandatory provisions of the Texas Business Corporation Act
or the provisions of the articles of incorporation of the Corporation, such
provisions of the Texas Business Corporation Act or the articles of
incorporation of the Corporation, as the case may be, will be controlling.
ARTICLE ONE
Offices
1.01 Registered Office and Agent. The registered office and registered
---------------------------
agent of the Corporation shall be as designated from time to time by the
appropriate filing by the Corporation in the office of the Secretary of State of
Texas.
1.02 Other Offices. The Corporation may also have offices at such other
-------------
places, both within and without the State of Texas, as the board of directors
may from time to time determine or the business of the Corporation may require.
ARTICLE TWO
Shareholders
2.01 Annual Meetings. An annual meeting of shareholders of the Corporation
---------------
shall be held during each calendar year on such date and at such time as shall
be designated from time to time by the board of directors and stated in the
notice of the meeting, if not a legal holiday in the place where the meeting is
to be held, and, if a legal holiday in such place, then on the next business day
following, at the time specified in the notice of the meeting. At such meeting,
the shareholders shall elect directors and transact such other business as may
properly be brought before the meeting.
2.02 Special Meetings. Special meetings of shareholders, unless otherwise
----------------
prescribed by statute, may be called by the chairman of the board, president,
the board of directors, or by the holders of at least fifty percent of all
shares entitled to vote at the meeting. Only business
<PAGE>
within the purpose or purposes described in the notice of special meeting may be
conducted at such special meeting.
2.03 Place of Meetings. The annual meeting of shareholders may be held at
-----------------
any place within or without the State of Texas designated by the board of
directors. Special meetings of shareholders may be held at any place within or
without the State of Texas designated by the person or persons calling such
special meeting as provided in Section 2.02 above. Meetings of shareholders
shall be held at the principal office of the Corporation unless another place is
designated for meetings in the manner provided herein.
2.04 Notice. Except at otherwise provided by law, written or printed
------
notice stating the place, day, and hour of each meeting of the shareholders and,
in case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered not less than ten nor more than sixty days before the
date of the meeting by or at the direction of the president, the secretary, or
the person calling the meeting, to each shareholder of record entitled to vote
at such meeting.
2.05 Voting List. At least ten days before each meeting of shareholders,
-----------
the secretary shall prepare a complete list of shareholders entitled to vote at
such meeting, arranged in alphabetical order, including the address of each
shareholder and the number of voting shares held by each shareholder. For a
period of ten days prior to such meeting, such list shall be kept on file at the
registered office or principal place of business of the Corporation and shall be
subject to inspection by any shareholder during usual business hours. Such list
shall be produced at such meeting, and at all times during such meeting shall be
subject to inspection by any shareholder. The original share transfer records
shall be prima facie evidence as to who are the shareholders entitled to examine
such list.
2.06 Voting of Shares. Treasury shares, shares of the Corporation's own
----------------
stock owned by another corporation the majority of the voting stock of which is
owned or controlled by the Corporation, and shares of the Corporation's own
stock held by the Corporation in a fiduciary capacity shall not be shares
entitled to vote or to be counted in determining the total number of outstanding
shares. Shares standing in the name of another domestic or foreign corporation
of any type or kind may be voted by such officer, agent, or proxy as the bylaws
of such corporation may authorize or, in the absence of such authorization, as
the board of directors of such corporation may determine. Shares held by an
administrator, executor, guardian, or conservator may be voted by him, either in
person or by proxy, without transfer of such shares into his name so long as
such shares form a part of the estate served by him and are in the possession of
such estate. Shares held by a trustee may be voted by him, either in person or
by proxy, only after the shares have been transferred into his name as trustee.
Shares standing in the name of a receiver may be voted by such receiver, and
shares held by or under the control of a receiver may be voted by such receiver
without transfer of such shares into his name if authority to do so is contained
in the court order by which such receiver was appointed. A shareholder whose
shares are pledged shall be entitled to vote such shares until they have been
<PAGE>
transferred into the name of the pledgee, and thereafter, the pledgee shall be
entitled to vote such shares.
2.07 Quorum; Withdrawal of Quorum. A quorum shall be present at a meeting
----------------------------
of shareholders if the holders of a majority of the shares entitled to vote are
represented at the meeting in person or by proxy, except as otherwise provided
by law or the articles of incorporation. If a quorum shall not be present at
any meeting of shareholders, the shareholders represented in person or by proxy
at such meeting may adjourn the meeting until such time and to such place as may
be determined by a vote of the holders of a majority of the shares represented
in person or by proxy at that meeting. Once a quorum is present at a meeting of
shareholders, the shareholders represented in person or by proxy at the meeting
may conduct such business as may be properly brought before the meeting until it
is adjourned, and the subsequent withdrawal from the meeting of any shareholder
or the refusal of any shareholder represented in person or by proxy to vote
shall not affect the presence of a quorum at the meeting.
2.08 Majority Vote. Directors of the Corporation shall be elected by a
-------------
plurality of the votes case by the holders of shares entitled to vote in the
election of directors of the Corporation at a meeting of shareholders at which a
quorum is present. Except as otherwise provided by law, the articles of
incorporation, or these bylaws, with respect to any matter, the affirmative vote
of the holders of a majority of the Corporation's shares entitled to vote on
that matter and represented in person or by proxy at a meeting at which a quorum
is present shall be the act of the shareholders.
2.09 Method of Voting; Proxies. Every shareholder of record shall be
-------------------------
entitled at every meeting of shareholders to one vote on each matter submitted
to a vote, for every share standing in his name on the original share transfer
records of the Corporation except to the extent that the voting rights of the
shares of any class or classes are increased, limited, or denied by the articles
of incorporation. Such share transfer records shall be prima facie evidence as
to the identity of shareholders entitled to vote. At any meeting of
shareholders, every shareholder having the right to vote may vote either in
person or by a proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. Each such proxy shall be filed with the secretary
of the Corporation before, or at the time of, the meeting. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy. If no date is stated on a proxy, such proxy shall be
presumed to have been executed on the date of the meeting at which it is to be
voted. Each proxy shall be revocable unless the proxy form conspicuously states
that the proxy is irrevocable and the proxy is coupled with an interest.
2.10 Closing of Transfer Records; Record Date. For the purpose of
----------------------------------------
determining shareholders entitled to notice of, or to vote at, any meeting of
shareholders or any adjournment thereof, or entitled to receive a distribution
(other than a distribution involving a purchase or redemption by the Corporation
of any of its own shares) or a share dividend, or in order to make a
determination of shareholders for any other proper purpose (other than
determining shareholders entitled to consent to action by shareholders proposed
to be taken without a meeting
<PAGE>
of shareholders), the board of directors may provide that the share transfer
records of the Corporation shall be closed for a stated period but not to exceed
in any event sixty days. If the share transfer records are closed for the
purpose of determining shareholders entitled to notice of, or to vote at, a
meeting of shareholders, such records shall be closed for at least ten days
immediately preceding such meeting. In lieu of closing the share transfer
records, the board of directors may fix in advance a date as the record date for
any such determination of shareholders, such date in any case to be not more
than sixty days and, in case of a meeting of shareholders, not less than ten
days prior to the date on which the particular action requiring such
determination of shareholders is to be taken. If the share transfer records are
not closed and if no record date is fixed for the determination of shareholders
entitled to notice of, or to vote at, a meeting of shareholders or entitled to
receive a distribution (other than a distribution involving a purchase or
redemption by the Corporation of any of its own shares) or a share dividend, the
date on which the notice of the meeting is mailed or the date on which the
resolution of the board of directors declaring such distribution or share
dividend is adopted, as the case may be, shall be the record date for such
determination of shareholders. When a determination of shareholders entitled to
vote at any meeting of shareholders has been made as provided in this Section
2.10, such determination shall apply to any adjournment thereof except where the
determination has been made through the closing of the share transfer records
and the stated period of closing has expired.
2.11 Officers Duties at Meetings. The president shall preside at, and the
---------------------------
secretary shall prepare minutes of, each meeting of shareholders, and in the
absence of either such officer, his duties shall be performed by some person or
persons elected by the vote of the holders of a majority of the outstanding
shares entitled to vote, present in person or represented by proxy.
2.12 Advance Notice of Shareholder Nominations and Proposals.
-------------------------------------------------------
(a) Annual Meetings.
---------------
(1) Nominations of persons for election to the board of directors of
the Corporation and the proposal of business to be considered by the
shareholders may be made at an annual meeting of shareholders (A) by or at the
direction of the board of directors or (B) by any shareholder of the Corporation
who was a shareholder of record at the time of giving of notice provided for in
this bylaw, who is entitled to vote at such meeting and who complies with the
notice procedure set forth in this bylaw.
(2) For nominations or other business to be properly brought before an
annual meeting by a shareholder pursuant to clause (B) of paragraph (a)(1) of
this bylaw, the shareholder must have given timely notice thereof in writing to
the secretary of the Corporation and, with respect to business other than a
director nomination, must otherwise be a proper matter for shareholder action.
To be timely, a shareholder's notice shall be delivered to the secretary at the
principal executive offices of the Corporation not later than the close of
business on the 120th day prior to the anniversary date of the Corporation's
proxy statement released to security holders in connection with the previous
year's annual meeting of security holders;
<PAGE>
provided, however, that in the event that the date of the annual meeting is more
than twenty days before such anniversary date, notice by the shareholder to be
timely must be so delivered not later than the close of business on the tenth
day following the day on which public disclosure of the date of such meeting is
first made by the Corporation. In no event shall the public disclosure of an
adjournment of an annual meeting commence a new time period for the giving of a
shareholder's notice as described above. Such shareholder's notice shall set
forth (A) as to each person whom the shareholder proposes to nominate for
election or re-election as a director all information relating to such person as
required to be disclosed in solicitations of proxies for election of directors
in an election contest, or as otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 14a-11 thereunder (including such person's written
consent to be named in the proxy statement as a nominee and to serve as director
if elected); (B) as to any other business that the shareholder proposes to bring
before the meeting, a brief description of the business desired to be brought
before the meeting, the reasons for conducting such business at the meeting and
any material interest in such business of such shareholder and the beneficial
owner, if any, on whose behalf the proposal is made; and (C) as to the
shareholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made (i) the name and address of such shareholder,
as they appear on the Corporation's books, and of such beneficial owner, (ii)
the class or series and number of shares of the Corporation which are owned
beneficially and of record by such shareholder and such beneficial owner, and
(iii) a description of any material interest of such shareholder or beneficial
owner in such proposal.
(b) Special Meetings. Only such business shall be conducted at a
----------------
special meeting of shareholders that shall have been brought before the meeting
pursuant to the Corporation's notice of meeting. Nominations of persons for
election to the board of directors may be made at a special meeting of
shareholders at which directors are to be elected pursuant to the Corporation's
notice of meeting (A) by or at the direction of the board of directors or (B)
provided that the board of directors has determined that directors shall be
elected at such meeting, by any shareholder of the Corporation who is a
shareholder of record at the time of giving of notice provided for in this
bylaw, who shall be entitled to vote at the meeting and who complies with the
notice procedures set forth in this bylaw. In the event the Corporation calls a
special meeting of shareholders for the purpose of electing one or more
directors to the board of directors, any such shareholder may nominate a person
or persons (as the case may be), for election to such position(s) as specified
in the Corporation's notice of meeting, if the shareholder's notice required by
paragraph (a)(2) of this bylaw shall be delivered to the secretary at the
principal executive offices of the Corporation not later than the close of
business on the tenth day following the day on which public disclosure is first
made of the date of the special meeting and of the nominee's proposed by the
board of directors to be elected at such meeting. In no event shall the public
disclosure of an adjournment of a special meeting commence a new time period for
the giving of a shareholder's notice as described above.
<PAGE>
(c) General.
-------
(1) Only such persons who are nominated in accordance with the
procedures set forth in this bylaw shall be eligible to serve as directors and
only such business shall be conducted at a meeting of shareholders as shall have
been brought before the meeting in accordance with the procedures set forth in
this bylaw. Except as otherwise provided by law, the articles of incorporation
or these bylaws, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this bylaw and, if any proposed nomination or business
is not in compliance with this bylaw, to declare that such defective proposal or
nomination shall be disregarded.
(2) For purpose of this bylaw, "public disclosure" shall mean
notice provided to the shareholders by the Corporation.
(3) Notwithstanding the foregoing provisions of this bylaw, a
shareholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this bylaw. Nothing in this bylaw shall be deemed to affect any rights
(A) of shareholders to request inclusion of proposal in the Corporation's proxy
statement pursuant to Rule 14A-8 under the Exchange Act or (B) of the holders of
any series of preferred stock to elect directors under specified circumstances.
ARTICLE THREE
Directors
3.01 Management. The powers of the Corporation shall be exercised by or
----------
under the authority of, and the business and affairs of the Corporation shall be
managed under the direction of, the board of directors.
3.02 Number; Election; Term; Qualification. The number of directors which
-------------------------------------
shall constitute the board of directors shall be not less than one. The number
of directors which shall constitute the entire board of directors shall be
determined by resolution of the board of directors at any meeting thereof or by
the shareholders at any meeting thereof, but shall never be less than one. The
directors shall be classified with respect to the time for which they severally
hold office into three classes, as nearly equal in number as possible. At each
annual meeting of the shareholders of the Corporation, the successors of the
class of directors whose term expires at the meeting shall be elected by
plurality vote of all shares cast at such meeting to hold office for a term
expiring at the annual meeting of shareholders held in the third year following
the year of their election. No director need be a shareholder, a resident of
the State of Texas, or a citizen of the United States.
3.03 Changes in Number. No decrease in the number of directors
-----------------
constituting the entire board of directors shall have the effect of shortening
the term of any incumbent director.
<PAGE>
Any directorship to be filled by reason of an increase in the number of
directors may be filled by (i) the shareholders at any annual or special meeting
of shareholders called for that purpose or (ii) the board of directors for a
term of office continuing only until the next election of one or more directors
by the shareholders; provided that the board of directors may not fill more than
two such directorships during the period between any two successive annual
meetings of shareholders. Notwithstanding the foregoing, whenever the holders
of any class or series of shares are entitled to elect one or more directors by
the provisions of the articles of incorporation, any newly created
directorship(s) of such class or series to be filled by reason of an increase in
the number of such directors may be filled by the affirmative vote of a majority
of the directors elected by such class or series then in office or by a sole
remaining director so elected or by the vote of the holders of the outstanding
shares of such class or series, and such directorship(s) shall not in any case
be filled by the vote of the remaining directors or by the holders of the
outstanding shares of the Corporation as a whole unless otherwise provided in
the articles of incorporation.
3.04 Removal. At any meeting of shareholders called expressly for that
-------
purpose, any director or the entire board of directors may be removed, with or
without cause, by a vote of the holders of a majority of the shares then
entitled to vote on the election of directors. Notwithstanding the foregoing,
whenever the holders of any class or series of shares are entitled to elect one
or more directors by the provisions of the articles of incorporation, only the
holders of shares of that class or series shall be entitled to vote for and
against the removal of any director elected by the holders of shares of that
class or series.
3.05 Vacancies. Any vacancy occurring in the board of directors may be
---------
filled by (i) the shareholders at any annual or special meeting of shareholders
called for that purpose or (ii) the affirmative vote of a majority of the
remaining directors though less than a quorum of the board of directors. A
director elected to fill a vacancy shall be elected to serve for the unexpired
term of his predecessor in office. Notwithstanding the foregoing, whenever the
holders of any class or series of shares are entitled to elect one or more
directors by the provisions of the articles of incorporation, any vacancies in
such directorship(s) may be filled by the affirmative vote of majority of the
directors elected by such class or series then in office or by a sole remaining
director so elected or by the vote of the holders of the outstanding shares of
such class or series, and such directorship(s) shall not in any case be filled
by the vote of the remaining directors or the holders of the outstanding shares
of the Corporation as a whole unless otherwise provided in the articles of
incorporation.
3.06 Place of Meetings. The board of directors may hold its meetings in
-----------------
such place or places within or without the State of Texas as the board of
directors may from time to time determine.
3.07 First Meeting. Each newly elected board of directors may hold its
-------------
first meeting for the purpose of organization and the transaction of business,
if a quorum is present, immediately after and at the same place as the annual
meeting of shareholders, and notice of such meeting shall not be necessary.
<PAGE>
3.08 Regular Meeting. Regular meetings of the board of directors may be
---------------
held without notice at such times and places as may be designated from time to
time by resolution of the board of directors and communicated to all directors.
3.09 Special Meetings; Notice. Special meetings of the board of directors
------------------------
shall be held whenever called by the president or by any director. The person
calling any special meeting shall cause notice of such special meeting,
including therein the time and place of such special meeting, to be given to
each director at least two days before such special meeting. Neither the
business to be transacted at, nor the purpose of, any special meeting of the
board of directors need be specified in the notice or waiver of notice of any
special meeting.
3.10 Quorum; Majority Vote. At all meetings of the board of directors, a
---------------------
majority of the number of directors fixed in the manner provided in these bylaws
shall constitute a quorum for the transaction of business. If a quorum is not
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time, without notice other than an announcement at the
meeting, until a quorum is present. The act of a majority of the directors
present at a meeting at which a quorum is in attendance shall be the act of the
board of directors, unless the act of a greater number is required by law, the
articles of incorporation, or these bylaws.
3.11 Procedure; Minutes. At meetings of the board of directors, business
------------------
shall be transacted in such order as the board of directors may determine from
time to time. The board of directors shall appoint at each meeting a person to
preside at the meeting and a person to act as secretary of the meeting. The
secretary of the meeting shall prepare minutes of the meeting which shall be
delivered to the secretary of the Corporation for placement in the minute books
of the Corporation.
3.12 Presumption of Assent. A director of the Corporation who is present
---------------------
at any meeting of the board of directors at which action on any matter is taken
shall be presumed to have assented to the action unless his dissent shall be
entered in the minutes of the meeting or unless he shall file his written
dissent to such action with the person acting as secretary of the meeting before
the adjournment thereof or shall forward any dissent by certified or registered
mail to the secretary of the Corporation immediately after the adjournment of
the meeting. Such right to dissent shall not apply to a director who voted in
favor of such action.
3.13 Compensation. Directors, in their capacity as directors, may receive,
------------
by resolution of the board of directors, a fixed sum and expenses of attendance,
if any, for attending meetings of the board of directors or a stated salary. No
director shall be precluded from serving the Corporation in any other capacity
or receiving compensation therefor.
3.14 Action Without Meeting. Any action which may be taken, or which is
----------------------
required by law, the articles of incorporation, or these bylaws to be taken, at
a meeting of the board of directors or any committee may be taken without a
meeting if a consent in writing, setting forth the action so taken, shall have
been signed by all of the members of the board of
<PAGE>
directors or committee, as the case may be, and such consent shall have the same
force and effect, as of the date stated therein, as a unanimous vote of such
members of the board of directors or committee, as the case may be, and may be
stated as such in any document or instrument filed with the Secretary of state
of Texas or in any certificate or other document delivered to any person. The
consent may be in one or more counterparts so long as each director or committee
member signs one of the counterparts. The signed consent shall be placed in the
minute book of the Corporation.
ARTICLE FOUR
Committees
4.01 Designation. The board of director may, by resolution adopted by a
-----------
majority of the entire board of directors, designate one or more committees.
4.02 Number; Qualification; Term. The board of directors, by resolution
---------------------------
adopted by a majority of the entire board of directors, shall designate one or
more of its members as members of any committee and may designate one or more of
its members as alternate members of any committee, who may, subject to any
limitations imposed by the board of directors, replace absent or disqualified
members at any meeting of that committee. The number of committee members may
be increased or decreased from time to time by resolution adopted by a majority
of the entire board of directors. Each committee member shall serve as such
until the earliest of (i) the expiration of his term as director, (ii) his
resignation as a committee member or as a director, or (iii) his removal, as a
committee member or as a director.
4.03 Authority. Each committee, to the extent expressly provided in the
---------
resolution establishing such committee, shall have and may exercise all of the
authority of the board of directors, including, without limitation, the
authority to authorize a distribution and to authorize the issuance of shares of
the Corporation. Notwithstanding the foregoing, however, no committee shall
have the authority of the board of directors in reference to:
(a) amending the articles of incorporation, except that a committee
may, to the extent provided in the resolution designating that committee,
exercise the authority of the board of directors vested in it in accordance with
Article 2.13 of the Texas Business Corporation Act;
(b) proposing a reduction of the stated capital of the Corporation in
the manner permitted by Article 4.12 of the Texas Business Corporation Act;
(c) approving a plan of merger or share exchange of the Corporation;
(d) recommending to the shareholders the sale, lease, or exchange of
all or substantially all of the property and assets of the Corporation otherwise
than in the usual and regular course of its business;
<PAGE>
(e) recommending to the shareholders a voluntary dissolution of the
Corporation or a revocation thereof;
(f) amending, altering, or repealing these bylaws or adopting new
bylaws of the Corporation;
(g) filling vacancies in the board of directors;
(h) filling vacancies in, or designating alternate members of, any
committee;
(i) filling any directorship to be filled by reason of an increase in
the number of directors;
(j) electing or removing officers of the Corporation or members or
alternate members of any committee;
(k) fixing the compensation of any member or alternate member of any
committee; or
(l) altering or repealing any resolution of the board of directors
that by its terms provides that it shall not be amendable or repealable.
4.04 Committee Changes. The board of directors shall have the power at any
-----------------
time to fill vacancies in, to change the membership of, and to discharge any
committee.
4.05 Regular Meetings. Regular meetings of any committee may be held
----------------
without notice at such time and place as may be designated from time to time by
the committee and communicated to all members thereof.
4.06 Special Meetings. Special meetings of any committee may be held
----------------
whenever called by any committee member. The committee member calling any
special meeting shall cause notice of such special meeting, including therein
the time and place of such special meeting, to be given to each committee member
at least two days before such special meeting. Neither the business to be
transacted at, nor the purpose of, any special meeting of any committee need be
specified in the notice or waiver of notice to any special meeting.
4.07 Quorum; Majority Vote. At meetings of any committee, a majority of
---------------------
the number of members designated by the board of directors shall constitute a
quorum for the transaction of business. If a quorum is not present at a meeting
of any committee, a majority of the members present may adjourn the meeting from
time to time, without notice other than an announcement at the meeting, until a
quorum is present. The act of a majority of the members present at any meeting
at which a quorum is in attendance shall be the act of a committee, unless the
act of a greater number is required by law, the articles of incorporation or
these bylaws.
<PAGE>
4.08 Minutes. Each committee shall cause minutes of its proceedings to be
-------
prepared and shall report the same to the board of directors upon the request of
the board of directors. The minutes of the proceedings of each committee shall
be delivered to the secretary of the Corporation for placement in the minute
books of the Corporation.
4.09 Compensation. Committee members may, by resolution of the board of
------------
directors, be allowed a fixed sum and expenses of attendance, if any, for
attending any committee meetings or a stated salary.
4.10 Responsibility. The designation of any committee and the delegation
--------------
of authority to it shall not operate to relieve the board of directors or any
director of any responsibility imposed upon it or such director by law.
ARTICLE FIVE
General Provisions Relating to the Meetings
5.01 Notice. Whenever by law, the articles of incorporation, or these
------
bylaws, notice is required to be given to any committee member, director, or
shareholder and no provision is made as to how such notice shall be given, it
shall be construed to mean that any such notice may be given (a) in person, (b)
in writing, by mail, postage prepaid, addressed to such committee member,
director, or shareholder at his address as it appears on the books of the
Corporation or, in the case of a shareholder, the share transfer records of the
Corporation, or (c) by any other method permitted by law. Any notice required
or permitted to be given by mail shall be deemed to be deliverable and given at
the time when the same is deposited in the United States mail, postage prepaid,
and addressed as aforesaid.
5.02 Waiver of Notice. Whenever by law, the articles of incorporation, or
----------------
these bylaws, any notice is required to be given to any committee member,
shareholder, or director of the Corporation, a waiver thereof in writing signed
by the person or persons entitled to such notice, whether before or after the
time notice should have been given, shall be equivalent to the giving of such
notice. Attendance of a committee member, shareholder, or director at a meeting
shall constitute a waiver of notice of such meeting, except where such person
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
5.03 Telephone and Similar Meetings. Shareholders, directors, or committee
------------------------------
members may participate in and hold a meeting by means of a conference telephone
or similar communications equipment by means of which persons participating in
the meeting can hear each other. Participation in such a meeting shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
<PAGE>
ARTICLE SIX
Officers and Other Agents
6.01 Number; Titles; Election; Term; Qualification. The officers of
---------------------------------------------
the Corporation shall be a president, one or more vice presidents (and, in the
case of each vice president, with such descriptive title, if any, as the board
of directors shall determine), a secretary, and a treasurer. The Corporation
may also have a chairman of the board, chief executive officer, one or more
assistant treasurers, one or more assistant secretaries, and such other officers
and such agents as the board of directors may from time to time elect or
appoint. The board of directors shall elect a president, vice president,
treasurer, and secretary at its first meeting at which a quorum shall be present
after the annual meeting of shareholders or whenever a vacancy exists. The
board of directors then, or from time to time, may also elect or appoint one or
more other officers or agents as it shall deem advisable. Each officer and
agent shall hold office for the term for which he is elected or appointed and
until his successor has been elected or appointed and qualified. Any person may
hold any number of offices. No officers or agent need be a shareholder, a
director, a resident of the State of Texas, or a citizen of the United States.
6.02 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 interest of the Corporation will be served thereby, but such removal
shall be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
6.03 Vacancies. Any vacancy occurring in any office of the
---------
Corporation may be filled by the board of directors.
6.04 Authority. Officers shall have such authority and perform such
---------
duties in the management of the Corporation as are provided in these bylaws or
as may be determined by resolution of the board of directors not inconsistent
with these bylaws.
6.05 Compensation. The compensation, if any, of officers and agents
------------
shall be fixed from time to time by the board of directors; provided, that the
board of directors may by resolution delegate to any one or more officers of the
Corporation the authority to fix such compensation.
6.06 Chairman of the Board. The chairman of the board shall have
---------------------
such powers and duties as may be prescribed by the board of directors.
6.07 Chief Executive Officer. The chief executive officer shall have
-----------------------
such powers and duties as may be prescribed by the board of directors. If a
chief executive officer is elected or appointed by the board of directors, the
chief executive officer will have the same responsibilities and powers
(including the power to enter into obligations in the name of the Corporation)
as the president, unless the board of directors prescribes otherwise.
<PAGE>
6.08 President. Unless and to the extent that such powers and duties
---------
are expressly delegated to a chairman of the board by the board of directors,
the president shall be the chief executive officer of the Corporation and,
subject to the supervision of the board of directors, shall have general
management and control of the business and property of the Corporation in the
ordinary course of its business with all such powers with respect to such
general management and control as may be reasonably incident to such
responsibilities, including, but not limited to, the power to employ, discharge,
or suspend employees and agents of the Corporation, to fix the compensation of
employees and agents, and to suspend, with or without cause, any officer of the
Corporation pending final action by the board of directors with respect to
continued suspension, removal, or reinstatement of such officer. The president
may, without limitation, agree upon and execute all division and transfer
orders, bonds, contracts, and other obligations in the name of the Corporation.
6.09 Vice Presidents.
---------------
(a) The Corporation may have one or more executive vice presidents,
each with such powers and duties as may be prescribed by the board of directors.
In the absence of the president, the executive vice president designated by the
board of directors (or in the absence of such designation, by seniority, as
determined by the length of time each has held the office of executive vice
president continuously) shall exercise the powers of the president.
(b) The Corporation may have one or more group vice presidents, each
with such powers and duties as may be prescribed by the board of directors or as
may be delegated from time to time by the president. The group vice presidents
shall not be officers of the Corporation and shall not have the power or
authority to bind the Corporation in its dealings with third parties.
6.10 Treasurer. The treasurer shall have custody of the
---------
Corporation's funds and securities, shall keep full and accurate accounts of
receipts and disbursements, and shall deposit all moneys and valuable effects in
the name and to the credit of the Corporation in such depository or depositories
as may be designated by the board of directors. The treasurer shall audit all
payrolls and vouchers of the Corporation, receive, audit, and consolidate all
operating and financial statements of the Corporation and its various
departments, shall supervise the accounting and auditing practices of the
Corporation, and shall have charge of matters relating to taxation.
Additionally, the treasurer shall have the power to endorse for deposit,
collection, or otherwise all checks, drafts, notes, bills of exchange, and other
commercial paper payable to the Corporation and to give proper receipts and
discharges for all payments to the Corporation. The treasurer shall perform
such other duties as may be prescribed by the board of directors or as may be
delegated from time to time by the president.
6.11 Assistant Treasurers. Each assistant treasurer shall have such
--------------------
powers and duties as may be prescribed by the board of directors or as may be
delegated from time to time by the president. The assistant treasurers (in the
order as designated by the board of directors or, in the absence of such
designation, as determined by the length of time each has held the office of
<PAGE>
assistant treasurer continuously) shall exercise the powers of the treasurer
during that officer's absence or inability to act. As between the Corporation
and third parties, any action taken by an assistant treasurer in the performance
of the duties of the treasurer shall be conclusive evidence of the absence or
inability to act of the treasurer at the time such action was taken.
6.12 Secretary. The secretary shall maintain minutes of all meetings
---------
of the board of directors, of any committee, and of the shareholders or consents
in lieu of such minutes in the Corporation's minute books, and shall cause
notice of such meetings to be given when requested by any person authorized to
call such meetings. The secretary may sign with the president, in the name of
the Corporation, all contracts of the Corporation and affix the seal of the
Corporation thereto. The secretary shall have charge of the certificate books,
share transfer records, stock ledgers, and such other stock books and papers as
the board of directors may direct, all of which shall at all reasonable times be
open to inspection by any director at the office of the Corporation during
business hours. The secretary shall perform such other duties as may be
prescribed by the board of directors or as may be delegated from time to time by
the president.
6.13 Assistant Secretaries. Each assistant secretary shall have such
---------------------
powers and duties as may be prescribed by the board of directors or as may be
delegated from time to time by the president. The assistant secretaries (in the
order designated by the board of directors or, in the absence of such
designation, as determined by the length of time each has held the office of
assistant secretary continuously) shall exercise the powers of the secretary
during that officer's absence or inability to act. As between the Corporation
and third parties, any action taken by an assistant secretary in the performance
of the duties of the secretary shall be conclusive evidence of the absence or
inability to act of the secretary at the time such action was taken.
ARTICLE SEVEN
Certificates and Shareholders
7.01 Certificated and Uncertificated Shares. The shares of the
--------------------------------------
Corporation may be either certificated shares or uncertificated shares. As used
herein, the term "certificated shares" means shares represented by instruments
in bearer or registered form, and the term "uncertificated shares" means shares
not represented by instruments and the transfers of which are registered upon
books maintained for that purpose by or on behalf of the Corporation.
7.02 Certificates for Certificated Shares. The certificates
------------------------------------
representing certificated shares of stock of the Corporation shall be in such
form as shall be approved by the board of directors in conformity with law. The
certificates shall be consecutively numbered, shall be entered as they are
issued in the books of the Corporation or in the records of the Corporation's
designated transfer agent, if any, and shall state upon the face thereof: (a)
that the Corporation is organized under the laws of the State of Texas; (b) the
name of the person to whom issued; (c) the number and class of shares and the
designation of the series, if any, which such certificate represents; (d) the
par value of each share represented by such certificate, or a
<PAGE>
statement that the shares are without par value; and (e) such other matters as
may be required by law. The certificates shall be signed by the president or
any vice president and also by the secretary, an assistant secretary, or any
other officer; however, the signatures of any of such officers may be
facsimiles. The certificates may be sealed with the seal of the Corporation or
a facsimile thereof.
7.03 Issuance. Shares with or without par value may be issued for
--------
such consideration and to such persons as the board of directors may from time
to time determine, except in the case of shares with par value the consideration
must be at least equal to the par value of such shares. Shares may not be
issued until the full amount of the consideration has been paid. After the
issuance of uncertificated shares, the Corporation or the transfer agent of the
Corporation shall send to the registered owner of such uncertificated shares a
written notice containing the information required to be stated on certificates
representing shares of stock as set forth in Section 7.02 above and such
additional information as may be required by (S)8.408 of the Texas Uniform
Commercial Code as currently in effect and as the same may be amended from time
to time hereafter.
7.04 Consideration for Shares. The consideration for the issuance of
------------------------
shares shall consist of any tangible or intangible benefit to the Corporation,
including cash, promissory notes, services performed, contracts for services to
be performed, or other securities of the Corporation. In the absence of fraud
in the transaction, the judgment of the board of directors as to the value of
consideration received shall be conclusive. When consideration, fixed as
provided by law, has been paid, the shares shall be deemed to have been issued
and shall be considered fully paid and nonassessable. The consideration
received for shares shall be allocated by the board of directors, in accordance
with law, between stated capital and surplus accounts.
7.05 Lost, Stolen, or Destroyed Certificates. The Corporation shall
---------------------------------------
issue a new certificate or certificates in place of any certificate representing
shares previously issued if the registered owner of the certificate:
(a) Claim. Makes proof by affidavit, in form and substance
-----
satisfactory to the board of directors or any proper officer, that a previously
issued certificate representing shares has been lost, destroyed, or stolen;
(b) Timely Request. Requests the issuance of a new certificate before
--------------
the Corporation has notice that the certificate has been acquired by a purchaser
for value in good faith and without notice of an adverse claim;
(c) Bond. If required by the board of directors or any proper
----
officer, in its or such officer's discretion, delivers to the Corporation a bond
or indemnity agreement in such form, with such surety or sureties, and with such
fixed or open penalty, as the board of directors or such officer may direct, in
its or cash officer's discretion, to indemnify the Corporation (and its transfer
agent and registrar, if any) against any claim that may be made on account of
the alleged loss, destruction, or theft of the certificate; and
<PAGE>
(d) Other Requirements. Satisfies any other reasonable requirements
------------------
imposed by the board of directors.
7.06 Transfer of Shares. Shares of stock of the Corporation shall be
------------------
transferable only on the books of the Corporation by the shareholders thereof in
person or by their duly authorized attorneys or legal representatives. With
respect to certificated shares, upon surrender to the Corporation or the
transfer agent of the Corporation for transfer of a certificate representing
shares duly endorsed and accompanied by any reasonable assurances that such
endorsements are genuine and effective as the Corporation may require and after
compliance with any applicable law relating to the collection of taxes, the
Corporation or its transfer agent shall, if it has no notice of an adverse claim
or if it has discharged any duty with respect to any adverse claim, issue one or
more new certificates to the person entitled thereto, cancel the old
certificate, and record the transaction upon its books. With respect to
uncertificated shares, upon delivery to the Corporation or the transfer agent of
the Corporation of an instruction originated by an appropriate person (as
prescribed by (S)8.308 of the Texas Uniform Commercial Code as currently in
effect and as the same may be amended from time to time hereafter) and
accompanied by any reasonable assurances that such instruction is genuine and
effective as the Corporation may require and after compliance with any
applicable law relating to the collection of taxes, the Corporation or its
transfer agent shall, if it has no notice of an adverse claim or has discharged
any duty with respect to any adverse claim, record the transaction upon its
books, and shall send to the new registered owner of such uncertificated shares,
and, if the shares have been transferred subject to a registered pledge, to the
registered pledgee, a written notice containing the information required to be
stated on certificates representing shares of stock set forth in Section 7.02
above and such additional information as may be required by (S)8.408 of the
Texas Uniform Commercial Code as currently in effect and as the same may be
amended from time to time hereafter.
7.07 Registered Shareholders. The Corporation shall be entitled to
-----------------------
treat the shareholder of record as the shareholder in fact of any shares and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such shares on the part of any other person, whether or not it shall
have actual or other notice thereof, except as otherwise provided by law.
7.08 Legends. The board of directors shall cause an appropriate
-------
legend to be placed on certificates representing shares of stock as may be
deemed necessary or desirable by the board of directors in order for the
Corporation to comply with applicable federal or state securities or other laws.
7.09 Regulations. The board of directors shall have the power and
-----------
authority to make all such rules and regulations as it may deem expedient
concerning the issue, transfer, registration, or replacement of certificates
representing shares of stock of the Corporation.
<PAGE>
ARTICLE EIGHT
Miscellaneous Provisions
8.01 Dividends. Subject to provisions of applicable statutes and the
---------
articles of incorporation, dividends may be declared by and at the discretion of
the board of directors at any meeting and may be paid in cash, in property, or
in shares of stock of the Corporation.
8.02 Books and Records. The Corporation shall keep books and records
-----------------
of account and shall keep minutes of the proceedings of its shareholders, the
board of directors, and each committee of the board of directors. The
Corporation shall keep at its registered office or principal place of business,
or at the office of its transfer agent or registrar, a record of the original
issuance of shares issued by the Corporation and a record of each transfer of
those shares that have been presented to the Corporation for registration of
transfer, giving the names and addresses of all past and current shareholders
and the number and class of the shares held by each of such shareholders.
8.03 Fiscal Year. The fiscal year of the Corporation shall be fixed
-----------
by the board of directors; provided, that if such fiscal year is not fixed by
the board of directors and the board of directors does not defer its
determination of the fiscal year, the fiscal year shall be the calendar year.
8.04 Seal. The seal, if any, of the Corporation shall be in such
----
form as may be approved from time to time by the board of directors. If the
board of directors approves a seal, the affixation of such seal shall not be
required to create a valid and binding obligation against the Corporation.
8.05 Attestation by the Secretary. With respect to any deed, deed of
----------------------------
trust, mortgage, or other instrument executed by the Corporation through its
duly authorized officer or officers, the attestation to such execution by the
secretary of the Corporation shall not be necessary to constitute such deed,
deed of trust, mortgage, or other instrument a valid and binding obligation
against the Corporation unless the resolutions, if any, of the board of
directors authorizing such execution expressly state that such attestation is
necessary.
8.06 Indemnification. Each person who is or was a director or
---------------
officer of the Corporation, or each such person who is or was serving at the
request of the board of directors or an officer of the Corporation as a
director, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another corporation, partnership, joint venture, sole
proprietorship, trust or other enterprise or employee benefit plan (including
the heirs, executors, administrators or estate of such person) shall be
indemnified by the Corporation to the fullest extent that a corporation is
required or permitted to grant indemnification to such person under the Texas
Business Corporation Act and the Texas Miscellaneous Corporation Act as the same
may exist or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the Corporation to provide
broader indemnification rights
<PAGE>
than said law permitted the Corporation to provide prior to such amendment) or
any other applicable laws as presently or hereafter in effect. Without limiting
the generality or the effect of the foregoing, the Corporation may enter into
one or more agreements with any person which provide for indemnification greater
or different than that provided in this article to the extent provided by
applicable laws. Any amendment or repeal of this article shall not adversely
affect any right or protection existing hereunder immediately prior to such
amendment or repeal.
8.07 Insurance. The Corporation may purchase and maintain insurance
---------
or other arrangement on behalf of any person who is or was a director, officer,
employee, or agent of the Corporation or who is or was serving at the request of
the Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise, against any liability asserted against him
and incurred by him in such a capacity or arising out of this status as such a
person, whether or not the Corporation would have the power to indemnify him
against that liability under these bylaws. If the insurance or other
arrangement is with a person or entity that is not regularly engaged in the
business of providing insurance coverage, the insurance or arrangement may
provide for payment of a liability with respect to which the Corporation would
not have the power to indemnify the person only if including coverage for the
additional liability has been approved by the shareholders of the Corporation.
In the absence of fraud, the judgment of the board as to the terms and
conditions of the insurance or other arrangement in the identity of the insured
or other person participating in an arrangement shall be conclusive and the
insurance or arrangement shall not voidable and shall not subject the directors
approving the insurance or arrangement or liability, on any ground, regardless
of whether directors participating in the approval are beneficiaries of the
insurance or arrangement.
8.08 Resignation. Any director, committee member, officer, or agent
-----------
may resign by so stating at any meeting of the board of directors or by giving
written notice to the board of directors, the president, or the secretary. Such
resignation shall take effect at the time specified in the statement made at the
board of directors' meeting or in the written notice, but in no event may the
effective time of such resignation be prior to the time such statement is made
or such notice is given. If no effective time is specified in the resignation,
the resignation shall be effective immediately. Unless a resignation specifies
otherwise, it shall be effective without being accepted.
8.09 Securities of Other Corporations. The president or any vice
--------------------------------
president of the Corporation shall have the power and authority to transfer,
endorse for transfer, vote, consent, or take any other action with respect to
any securities of another issuer which may be held or owned by the Corporation
and to make, execute, and deliver any waiver, proxy, or consent with respect to
any such securities.
8.10 Amendment of Bylaws. The power to amend or repeal these bylaws
-------------------
or to adopt new bylaws is vested in the board of directors, but is subject to
the right of the shareholders to amend or repeal these bylaws or to adopt new
bylaws.
<PAGE>
8.11 Invalid Provisions. If any part of these bylaws is held invalid
------------------
or inoperative for any reason, the remaining parts, so far as is possible and
reasonable, shall remain valid and operative.
8.12 Headings; Table of Contents. The headings and table of contents
---------------------------
used in these bylaws are for convenience only and do not constitute matter to be
construed in the interpretation of these bylaws.
<PAGE>
[FORM OF OPINION]
[SCHREEDER, WHEELER & FLINT, LLP LETTERHEAD]
December __, 1997
CPS Systems, Inc.
3400 Carlisle
Suite 500
Dallas TX 75204
RE: CPS Systems, Inc., a Texas corporation (the "Company") -Registration
Statement on Form SB-2 (File No. _________)
Ladies and Gentlemen:
In connection with the registration of _________ shares of the Company's
Common Stock, par value $0.01 per share (the "Shares"), under the Securities and
Exchange Commission (the "Commission") on or about December __, 1997 (the
"Registration Statement"), you have requested our opinion with respect to the
matters set forth below.
We have acted as special corporate counsel for the Company in connection
with the matters described herein. In our capacity as special Texas corporation
counsel to the Company, we have reviewed and are familiar with proceedings taken
and proposed to be taken by the Company in connection with the authorization,
issuance and sale of the Shares, and for purposes of this opinion have assumed
such proceedings will be timely completed in the manner presently proposed. In
addition, we have relied upon certification and advice from the officers of the
Company upon which we believe we are justified in relying and on various
certificates from, and the documents recorded with, the Secretary of State of
Texas, including the Restated Articles of Incorporation filed with the Secretary
of State of Texas on October __, 1997. We have also examined the Restated
Bylaws of the Company adopted as of October __, 1997 (the "Bylaws") and
Resolutions of the Board of Directors of the Company adopted on or before
October __, 1997 and in full force and effect on December __, 1997; and such
laws, records, documents, certificates, opinions and instruments as we deem
necessary to render this opinion.
We have assumed the genuineness of all signatures and the authenticity of
all documents submitted to us as originals and the conformity to the originals
of all documents submitted to us as certified, photostatic or conformed copies.
In addition, we have assumed that each person executing any instrument, document
or certificate referred to herein on behalf of any party is duly authorized to
do so.
Based on the foregoing, and subject to the assumptions and qualifications
set forth herein, it is our opinion that, as of the
<PAGE>
date of this letter, the Shares have been duly authorized by all necessary
corporation action on the part of the Company, and the Shares will, upon
issuance and delivery in accordance with the terms and conditions described in
the Registration Statement, be validly issued, fully paid and nonassessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement and further consent to the filing of this opinion as an exhibit to the
applications to securities commissions for the various states of the United
States for registration of the Shares. We also consent to the identification of
our firm as special corporate counsel to the Company in the section of the
Prospectus (which is part of the Registration Statement) entitled "Legal
Matters."
The opinions expressed herein are limited to the laws of the state of Texas
and we express no opinion concerning any laws other than the laws of the State
of Texas. Furthermore, the opinions presented in this letter are limited to the
matters specifically set forth herein and no other opinion shall be inferred
beyond the matters expressly stated.
The opinions expressed in this letter are solely for your use and may not
be relied upon by any other person without our prior written consent.
Very truly yours,
SCHREEDER, WHEELER & FLINT, LLP
By:____________________________
______________, Partner
<PAGE>
================================================================================
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 1
No. of Shares: 1,856 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
SECTION 1. DEFINITIONS......................................... 2
SECTION 2. EXERCISE OF WARRANT................................. 6
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.................... 7
3.1. Preemptive Rights................................... 7
3.2. Anti-Dilution Provisions............................ 7
SECTION 4. RESERVATIONS........................................ 7
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS................ 7
SECTION 6. DISSOLUTION OR LIQUIDATION.......................... 8
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS................... 8
SECTION 8. FRACTIONAL SHARES................................... 9
SECTION 9. FULLY PAID STOCK; TAXES............................. 9
SECTION 10. CLOSING OF TRANSFER BOOKS........................... 9
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS
AND SHARES; COMPLIANCE WITH LAWS.................... 9
11.1. In General.......................................... 10
11.2. Restrictive Legends................................. 10
11.3. Notice of Proposed Transfer; Registration
Not Required........................................ 10
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT)........... 11
12.1. Right to Put........................................ 11
12.2. Determined Value.................................... 12
12.3. Closing............................................. 13
12.4. Default by Company.................................. 13
12.5. Termination......................................... 13
SECTION 13. REGISTRATION RIGHTS................................. 13
13.1. Demand Registration Rights.......................... 13
13.2. Conditions to Demand Registration................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
13.3. Piggyback Registration....................................... 14
13.4. Expenses..................................................... 14
13.5. Indemnification.............................................. 14
13.6. Termination.................................................. 16
SECTION 14. TAG ALONG ARRANGEMENTS....................................... 16
14.1. Significant Transfer......................................... 16
14.2. Notices...................................................... 16
14.3. Termination.................................................. 16
SECTION 15. DRAG-ALONG OBLIGATION........................................ 16
15.1. Notice to Holder............................................. 16
15.2. Termination.................................................. 17
SECTION 16. BOARD OF DIRECTORS........................................... 17
SECTION 17. LOST, STOLEN WARRANTS, ETC................................... 17
SECTION 18. SEVERABILITY................................................. 18
SECTION 19. MISCELLANEOUS................................................ 18
19.1. Holder Not A Shareholder..................................... 18
19.2. Notices...................................................... 18
19.3. Successors and Assigns....................................... 18
19.4. Amendments................................................... 19
19.5. Headings..................................................... 19
19.6. Governing Law................................................ 19
</TABLE>
EXHIBIT A ANTI-DILUTION PROVISIONS
-ii-
<PAGE>
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 1
No. of Shares: 1,856 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
THIS IS TO CERTIFY that, for value received and subject to the
provisions hereinafter set forth,
HANIFEN IMHOFF MEZZANINE FUND, L.P.
or assigns
is entitled upon the due exercise hereof at any time during the Exercise Period
(as hereinafter defined) to purchase from CPS Systems, Inc., a Texas corporation
(the "Company"), 1,856 shares of Common Stock (as hereinafter defined and
subject to adjustment as provided herein) of the Company at the Exercise Price
(as hereinafter defined and subject to adjustment as provided herein) for each
share of Common Stock so purchased and to exercise the other rights, powers and
privileges hereinafter provided, all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
Attest: CPS SYSTEMS, INC.
(SIGNATURE ILLEGIBLE) By [SIGNATURE ILLEGIBLE]
- --------------------- -----------------------
Secretary Its President
{AFFIX CORPORATE SEAL]
[Additional provisions follow on the next
18 pages and are incorporated in this
Warrant as if set forth on this page.]
<PAGE>
SECTION 1. DEFINITIONS.
In addition to the terms defined elsewhere in this Warrant, the
following terms have the following respective meanings:
"Acquisition Corp." shall mean CPS Acquisition Corp., a Georgia
corporation formed to aid in the acquisition by the Shareholders of all
outstanding common stock of the Company.
"Applicable Percentage" shall be 15%.
"Borrowed Indebtedness" shall mean (a) all Senior Debt (as defined in
the Note Agreement), and (b) all indebtedness under the Note.
"Closing Date" shall have the meaning ascribed to such term in (S) 1.3
of the Note Agreement.
"Common Share Equivalent" shall mean, with respect to any security of
the Company and as of a given date, a number that is, (a) in the case of a share
of Common Stock, one, (b) in the case of all or a portion of any right, warrant
or other security that may be exercised for a share or shares of Common Stock
(other than this Warrant), the number of shares of Common Stock receivable upon
exercise of such security (or such portion of such security) and (c) in the case
of a security that is convertible or exchangeable into a share or shares of
Common Stock, the number of shares of Common Stock that would be received if
such conversion or exchange occurred on such date.
"Common Stock" shall mean, collectively, the (a) the Company's Common
Stock $.01 par value, (b) any other class of capital stock of the Company
hereafter authorized that is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company and (c) any other class or classes of Voting Stock.
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Company" shall mean CPS Systems, Inc., a Texas corporation, as it
shall exist as the survivor of the merger between it and Acquisition Corp. It
shall also refer to any
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successor to all or substantially all of the assets and business of PHF
Associates, Inc. Unless the context otherwise indicates, the term "Company"
shall also include all Subsidiaries.
"Determined Value" shall mean, as of the date of any determination
thereof, the value attributable to this Warrant in accordance with the
provisions of (S) 12.2. In ascertaining the Determined Value, no consideration
shall be given to the fact that the Underlying Shares, if the Warrant were
exercised, would constitute a minority interest in the Company's total capital
structure, and would not be readily marketable.
"EBITDA" shall mean, for any applicable period, the sum, without
duplication, for such period of:
(a) net income of the Company and its subsidiaries determined in
accordance with generally accepted accounting principles consistently applied;
plus
(b) the amount deducted, in determining net income referenced in
clause (a) above, of all income taxes (whether paid or deferred of the Company
and its subsidiaries;
plus
(c) the amount deducted, in determining net income referenced in
clause (a) above, of interest expense of the Company and its subsidiaries
determined in accordance with generally accepted accounting principles
consistently applied;
plus
(d) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with generally accepted accounting principles
consistently applied, as depreciation of assets of the company and its
subsidiaries;
plus
(e) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with GAAP, as amortization of assets of the
Company and its subsidiaries.
"Exercise Date" shall be mean the date on which this Warrant is
exercised.
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"Exercise Period" mean the period (a) commencing on the earliest of
(i) January 1, 2000, (ii) the date on which notice of a proposed Sale of the
Company is given to the Holder, or (iii) the effective date of an Initial Public
Offering and (b) termination on the Expiration Date.
"Exercise Price" shall be $1,856, adjustable as set forth in (S) 3.
"Expiration Date" with reference to this Warrant, shall mean the 10th
anniversary of the date of this Warrant (shown on the first page hereof).
"Fund" shall mean Hanifen Imhoff Mezzanine Fund, L.P., a Colorado
limited partnership.
"Holder" shall mean the registered holder of this Warrant, and if thce
context so indicates, the holder of Restricted Stock.
"Initial Public Offering" shall mean the first issuance of shares of
Common Stock by the Company pursuant to a public distribution in which the
Common Stock of the Company shall be listed and traded on a national or regional
exchange or in the NASDAQ over-the-counter market.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Note Agreement" shall mean the Note Agreement dated as of the date
hereof between the Company or Acquisition Corp., as the case may be, and the
Fund, as amended from time to time.
"Note" shall mean the "Note" as defined in the Note Agreement, and any
Note or Notes issued in exchange or substitution therefor.
"Principal Shareholders" shall mean Paul E. Kana, Sid H. Cordier and
Brian R. Wilson, and their respective assignees or successors in interest.
"Purchase Agreement" shall mean the Stock Purchase Agreement dated as
of November 11, 1994 among PHF Associates, INC, (to whose interest Acquisition
Corp. has succeeded) and the shareholders of CPS.
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"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with (S) 13, including, without
limitation, all registration, filing and NASD fees, all fees and expenses of
complying with state securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance, the fees and
disbursements of counsel and accountants retained by the Holder with respect to
Underlying Shares or Restricted Stock being registered, premiums and other costs
of policies of insurance against liabilities arising out of the public offering
of such securities and any fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, but excluding underwriting discounts
and commissions and transfer taxes, if any.
"Restricted Stock" shall mean the shares of Common Stock of the
Company issued upon the exercise of this Warrant and evidenced by a certificate
required to bear the legend specified in (S) 11.2.
"Sale of the Company" shall mean any change of control of the Company
(as the term "control" is defined in Rule 405 of the Commission under the
Securities Act), whether such change of control occurs through merger, sale of
assets or stock, exchange of securities, or otherwise.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Shareholders" shall mean the three Principal Shareholders and James
K. Hoofard, Jr. and G. Dean Booth.
"Significant Transfer" shall mean any sale, assignment, pledge or
other disposition of 25% or more of the outstanding Common Stock, other than the
pledges of stock contemplated by the Note Agreement.
"Subsidiary" shall mean any corporation of which more than 50% (by
number of votes) of the Voting Stock shall be beneficially owned, directly or
indirectly, by the Company.
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"Underlying Shares" shall mean the shares of Common Stock issuable
upon exercise of this Warrant.
"Voting Stock" shall mean Company securities of any class, the holders
of which are ordinarily, in the absence of contingencies, entitled to vote for
the election of the board of directors. For purposes of determining the number
of shares of Voting Stock outstanding, each share of Voting Stock shall be
deemed to constitute that number of shares equal to the number of votes that
such share is entitled to vote toward the election of any member of the board of
directors.
"Warrant" or "this Warrant" as used herein shall mean this Warrant and
any warrant hereafter issued in exchange or substitution for this Warrant.
SECTION 2. EXERCISE OF WARRANT.
Subject to the conditions hereinafter set forth, this Warrant may be
exercised in whole (but not in part), during the Exercise Period but in no event
subsequent to the end of the Exercise Period, by the surrender of this Warrant
(with the subscription form at the end hereof duly completed and executed) at
the principal office of the Company in Dallas, Texas, and upon payment of the
Exercise Price. At the option of the Holder, payment may be made by (a) funds
immediately available in Dallas, Texas and/or (b) the surrender and cancellation
of the Note accompanied by a written statement designating the unpaid principal
amount of the Note to be applied to the payment of the Exercise Price. If the
Note is tendered in payment of the Exercise Price and the unpaid principal
amount thereof exceeds such price, the Company shall (without charge to the
Holder) immediately issue and deliver to the Holder a new Note, in exchange for
the Note so tendered, at a principal amount equal to such excess and issued in
the name of the holder or its designated nominee or registered assignee.
In connection with any exercise hereunder, the Holder agrees to make
such representations and warranties as may be necessary to demonstrate
compliance with applicable securities laws, as may be reasonably requested by
the Company.
This Warrant and all rights and options hereunder shall expire at the
end of the Exercise Period, and shall be wholly null and void to the extent this
Warrant is not exercised before that time.
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The Company shall pay all reasonable expenses, taxes and other charges
payable in connection with the preparation, execution and delivery of stock
certificates under this (S) 2, regardless of the name or names in which such
stock certificates shall be registered.
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.
3.1. Preemptive Rights. The Holder shall have a preemptive or similar
right to acquire or subscribe for any unissued shares of Common Stock issued
after the date of this Warrant, or rights, warrants or options to purchase
Common Stock, or script or securities of any kind convertible into Common Stock
or carrying stock purchase warrants or privileges, except that such preemptive
right shall not apply to employee stock options granted by the Company in
aggregate amounts not exceeding 10% of the number of shares of Common Stock
outstanding on the Closing Date.
3.2. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as set forth in Exhibit A to this Warrant.
SECTION 4. RESERVATIONS.
The Company shall at all times reserve and keep available such number
of authorized shares of its Common Stock, solely for the purpose of issue upon
the exercise of the rights represented by this Warrant, as may at any time be
issuable (based upon the number of shares of Common Stock outstanding at any
such time) upon the exercise of this Warrant, and such shares shall at no time
have an aggregate par value that is in excess of the Exercise Price.
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS.
Upon any Sale of the Company, or any reorganization or
reclassification of the Common Stock or other equity securities of the Company,
then, as a condition of such Sale of the Company, reorganization or
reclassification, lawful and adequate provision shall be made so that the Holder
shall thereafter have the right to receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore purchasable hereunder, such shares of stock, securities
or assets as may (by virtue of such Sale of the Company, reorganization or
reclassification) be issued or payable with respect to or in exchange for a
number of outstanding shares of Common Stock
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immediately theretofore so purchasable hereunder had such Sale of the Company,
reorganization or reclassification not taken place; and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the Holder to the end that the provisions hereof shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon exercise of this Warrant. The Company shall not
effect any such Sale of the Company unless prior to or simultaneously with the
consummation thereof, the successor entity (if other than the Company) resulting
from such transaction shall assume by written instrument executed and mailed or
delivered to the Holder, the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to receive. Notice of any proposed Sale of the Company
shall be given by the Company to the Holder as promptly as possible after such
transaction appears likely.
SECTION 6. DISSOLUTION OR LIQUIDATION.
Upon any proposed distribution of the assets of the Company in
dissolution or liquidation (except under circumstances when (S) 5 shall be
applicable), the Company shall mail notice thereof to the Holder and shall make
no distribution to shareholders until the expiration of 60 days from the date of
mailing of such notice and, in any such case, the Holder of this Warrant may
exercise the purchase rights with respect to this Warrant within 60 days from
the date of mailing such notice and all rights herein granted not so exercised
within such 60-day period shall thereafter become null and void.
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS.
If the board of directors of the Company shall declare any dividend or
other distribution on its Common Stock except out of earned surplus or not
profits or by way of a stock dividend payable on its Common Stock, the Company
shall mail notice thereof to the Holder not less than 30 days prior to the
record date fixed for determining shareholders entitled to participate in such
dividend or other distribution and the Holder shall not participate in such
dividend or other distribution or be entitled to any rights on account or as a
result thereof unless and to the extent that this Warrant is exercised prior to
such record date. The provisions of this section shall not apply to
distributions made in connection with transactions covered by (S) 5.
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SECTION 8. FRACTIONAL SHARES.
Fractional shares shall be issued upon the exercise of this Warrant in
any case where the Holder would be entitled to receive a fractional share upon
such exercise.
SECTION 9. FULLY PAID STOCK; TAXES.
The Company covenants and agrees that the shares of stock represented
by each certificate for its Common Stock to be delivered on the exercise of this
Warrant will, at the time of such delivery, be validly issued and outstanding
and be fully paid and nonassessable. The Company further covenants and agrees
that it will pay when due and payable any and all federal and state issuance or
transfer taxes that may be payable in respect of this Warrant or any Common
Stock or certificates issued thereunder. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the transfer and delivery of stock certificates in the name other than that
of the Holder, and any such tax shall be paid by the Holder at the time of
presentation.
SECTION 10. CLOSING OF TRANSFER BOOKS.
The right to exercise this Warrant shall not be suspended during any
period that the stock transfer books of the Company for its Common Stock may be
closed. The Company shall not be required, however, to deliver stock
certificates upon such exercise while such books are duly closed for any
purpose, but the Company may postpone the delivery of such certificates until
the opening of such books. In such case, the certificates shall be delivered
promptly after the books are opened.
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS AND SHARES;
COMPLIANCE WITH LAWS.
Notwithstanding anything contained in this Warrant to the contrary,
the terms and provisions of this (S) 11 shall remain in full force and effect at
all times up to and including the end of the Exercise Period and, unless
otherwise specified herein, the term "Warrant" shall include the Underlying
Shares and the term "Restricted Stock" shall include such Underlying Shares as
if they had been issued.
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11.1. In General. This Warrant and the Restricted Stock shall not be
transferable except upon the conditions hereinafter specified, which conditions
are intended to insure compliance with the provisions of the Securities Act (or
any similar federal statute at the time in effect) and any applicable state
securities laws in respect of the transfer of this Warrant or any such
Restricted Stock.
11.2. Restrictive Legends. Each certificate for Restricted Stock
shall, unless otherwise permitted by the provisions of this (S) 11.2, bear on
the face thereof a legend reading substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND ANY STATE
SECURITIES LAWS THAT MAY BE APPLICABLE AND ARE
TRANSFERABLE ONLY UPON THE CONDITIONS SPECIFIED IN THE
WARRANT PURSUANT TO WHICH SUCH SHARES WERE ISSUED.
If a registration statement covering this Warrant or the Restricted
Stock shall become effective under the Securities Act and under any applicable
state securities laws or if the Company shall receive an opinion of counsel
reasonably satisfactory to the Company (which shall include counsel to the
Company and counsel to the original purchaser hereof) that, in the opinion of
such counsel, such legend is not, or is no longer, necessary or required
(including, without limitation, because of the availability of any exemption
afforded by Rule 144 of the Commission, the Company shall, or shall instruct its
transfer agents and registrars to, remove such legend from the certificates
evidencing the Restricted Stock or issue new certificates without such legend.
Upon the written request of the Holder of this Warrant or of the Restricted
Stock, the Company shall forthwith request independent counsel experienced in
such matters to render an opinion with respect to the matters covered herein,
and the Company shall bear all expenses in connection therewith.
11.3. Notice of Proposed Transfer; Registration Not Required. The
Holder of this Warrant or the Restricted Stock, by acceptance thereof, agrees
that it will give prior notice to the Company of its intention to transfer this
Warrant or
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the Restricted Stock (or any portion thereof), describing briefly the manner and
circumstances of the proposed transfer. Promptly after receiving such notice,
the Company shall present copies thereof to Company counsel. If, in the opinion
of such counsel, the proposed transfer may be effected without registration or
qualification under any federal or state law, the Company, as promptly as
practicable, shall notify such Holder of such opinion and of the terms and
conditions, if any, to be observed in connection with such transfer, whereupon
such Holder shall be entitled to transfer this Warrant or such Restricted Stock,
and to have a new Warrant or new stock certificate(s) issued in the name of the
transferee or its nominee. If such counsel is unable to render such an opinion
(in which case such counsel shall set forth in writing the basis for his legal
conclusions in this regard), the proposed transfer described in the notice given
pursuant to this (S) 11.3 may not be effected except to the extent permitted by
and upon such registration and/or qualification or, in lieu thereof, compliance
with the conditions of an exemptive regulation of the Commission and/or any
applicable state securities regulatory authority, as the case may be. Thereupon,
the Company shall notify such Holder who thereafter shall not be entitled to
effect such transfer until receipt of a contrary notice from the Company or
until such registration or qualification, filing or compliance has become
effective (and consistent with the terms thereof). All fees and expenses of
Company counsel in connection with the rendition of the opinion provided for in
this (S) 11.3 shall be paid by the Company.
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT).
12.1. Right to Put. On or after December 31, 1999, the Holder shall
have the right to require the Company to purchase this Warrant for cash (the
"Right to Put"), and the Company hereby agrees to make such purchase. The
purchase price (the "Purchase Price") shall be the value of the Underlying
Shares, which shall be the greater of (a) their Determined Value or (b) the
Applicable Percentage applied to the remainder of the product of five times the
Company's EBITDA minus its Borrowed Indebtedness plus its cash and cash
equivalents. In connection with the valuation in clause (b), EBITDA shall be
based upon the most recent 12 months, and Borrowed Indebtedness, cash and cash
equivalents as of the last business day of the month preceding the Determination
Date defined in (S) 12.2.
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Notwithstanding the foregoing paragraph, if the Company shall
determine to have an Initial Public Offering prior to December 31, 1999, the
Holder shall have the right to require the Company to purchase this Warrant for
cash, and the Company hereby agrees to make such purchase at the Purchase Price.
12.2. Determined Value. The Holder may exercise the Right to Put by
delivering notice thereof ("Notice of Sale") to the Company. Promptly thereafter
the Holder and the Company shall attempt to reach agreement on the Determined
Value. If they do so agree, they shall put their agreement in writing, and
closing shall be held in accordance with (S) 12.3. If the parties cannot agree,
they shall promptly appoint a mutually acceptable qualified independent
appraiser to provide the Determined Value. If parties shall be unable to agree
on such an appraiser within 10 days of the Notice Date, the Purchase Price
shall be determined by a panel of three independent appraisers, one of whom
shall be selected by the Company, another of whom shall be selected by the
Holder, and the third of whom shall be selected by such other two appraisers or,
if such appraisers shall be unable to agree upon a third appraiser within 10
days of the selection date of the second of such two appraisers, by the American
Arbitration Association; provided, that if either party shall not select its
appraiser within 10 days after the Notice Date, such amount or value shall be
determined solely by the appraiser selected by the other party. The appraiser or
appraisers appointed pursuant to the foregoing procedure shall be instructed to
determine such value within 30 days after the final appointment of any appraiser
pursuant hereto (but in no event may such determination be made more than 45
days following the Notice Date), and such determination shall be final and
binding upon the parties. If three appraisers shall be appointed, (a) if the
median of the determinations of the appraisers shall equal the mean of such
determinations, such mean shall constitute the determination of the appraisers,
otherwise (b) the determination of the appraiser that shall differ most from the
other two appraisers shall be excluded, the remaining two determinations shall
be averaged and such average shall constitute the determination of the
appraisers. Each party shall bear its respective fees and expenses with respect
to any appraisal procedures and one-half of the fees and expenses of the
appraisers participating in any appraisal procedure. The Company shall cause one
copy of the final determination of the appraiser(s) to be sent directly to the
Holder. Such determination shall set forth the date as of which the
determination was made, (the "Determination Date").
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12.3. Closing. Upon ascertainment of a Determined Value under (S)
12.2, the Holder shall select a settlement date by notice in writing to the
Company which shall be not more than 60 days after such agreement is reached
(the "Put Settlement Date"). On the Put Settlement Date, upon surrender of this
Warrant by the Holder at the principal place of business of the Company in
Dallas, Texas, or, at the option of the Holder, upon delivery of this Warrant to
an escrow agent reasonably acceptable to the Holder and the Company, the Company
shall transfer the Purchase Price to the Holder in immediately available funds
by the method specified in such Notice of Sale.
12.4. Default by the Company. If for any reason the Company shall
default on, or be otherwise unable to meet, its obligations under this (S) 12,
the Holder shall thereupon have the right to two demand registrations covering
any Underlying Shares or Restricted Stock held by the Holder during the balance
of the Exercise Period, as more fully provided in (S) 13 below. Such right shall
be in addition to all other rights and remedies available to the Holder upon a
breach by the Company of its obligations under this (S) 12.
12.5. Termination. The rights granted to the Holder in this (S) 12
shall terminate on the Expiration Date.
SECTION 13. REGISTRATION RIGHTS.
13.1. Demand Registration Rights. Upon the earlier of the time that
the Company (a) has or proposes to have an Initial Public Offering in which the
Holder does not exercise its piggyback rights under (S) 13.3 or (b) defaults in
the manner specified in (S) 12.4, the Holder shall thereupon be granted, and the
Company hereby does so grant, two demand registration rights covering the
Underlying Shares or Restricted Stock held by the Holder. Thereafter, upon the
request of the Holder requesting that the Company effect registration of all or
a part of such securities under applicable federal and state securities law, the
Company shall, subject to the conditions of (S) 13.2 below, promptly endeavor in
good faith to effect such registration.
The Company's actions shall include notification to or approval
of any governmental authority under any federal or state law, or listing with
any securities exchange or national securities market for the public trading of
securities, which may be required reasonably to permit the proposed sale of
securities that the Holder proposes to make promptly upon the effectiveness of
such registration, and the
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Company shall keep effective such registration for such period, not to exceed
nine months, as may be necessary to effect such sale and shall, if necessary,
amend the registration statement and supplement the prospectus during such
period.
13.2. Conditions to Demand Registration. The Company may delay any
registration required pursuant to (S) 13.1 for a period not exceeding 90 days
provided the Company shall in good faith determine that any such registration
would adversely affect an offering or contemplated offering of other securities
by the Company or would otherwise be materially detrimental to the Company or
its shareholders and, in any event, the Company shall not be required to
register or use its best efforts to effect any such registration on more than
two occasions.
13.3. Piggyback Registration. If at any time and from time to time
during the Exercise Period the Company proposes to register any of its Common
Stock under the Securities Act (other than pursuant to (S) 13.1) in connection
with an underwritten public offering of such Common Stock, it shall promptly
give written notice to the Holder of the Underlying Shares or Restricted Stock
of its intention to do so. Upon the written request of the Holder, given within
30 days after receipt of any such notice from the Company, the Company shall in
each instance use its best efforts to cause such securities to be registered
under the Securities Act and registered or qualified under any state securities
law, all to the extent necessary to permit the sale or other disposition thereof
in the manner stated in such request by the Holder; PROVIDED, HOWEVER, that the
obligation to give such notice and to use such best efforts shall not apply to
any proposal of the Company to register any of its securities under the
Securities Act (a) on Form S-8 (or any successor form), (b) in connection with
dividend reinvestment plans, or (c) for the purpose of offering such securities
to another business entity or the shareholders of such entity in connection with
the acquisition of assets or shares of capital stock of such entity or in
connection with a merger or consolidation with such entity. In connection with
any offering involving an underwriting of Restricted Stock the Company shall not
be required to include such shares unless the Holder agrees to the terms of the
underwriting and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. Nothing in
this (S) 13.3 shall be deemed to require the Company to proceed with any
registration of its securities after giving the notice herein provided.
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13.4. Expenses. The Company shall pay all Registration Expenses in
connection with all registrations (which, for purposes of this (S) 13.4 and (S)
13.5, shall include any qualifications, notifications and exemptions) under (S)
(S) 13.1 and 13.3.
13.5. Indemnification. In connection with any registration under (S)
13.1 or 13.3, the Company shall indemnify the Holder, and each underwriter
thereof including each person, if any, who controls such Holder within the
meaning of (S) 15 of the Securities Act, against all losses, claims, damages and
liabilities caused by any untrue, or alleged untrue, statement of a material
fact contained in any registration statement or prospectus or notification or
offering circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus
or caused by any omission, or alleged omission, to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omissions based
upon information furnished in writing to the Company by the Holder or, as the
case may be, any such underwriter expressly for use therein, and the Company and
each officer, director and controlling person of the Company shall be
indemnified by the Holder for all such losses, claims, damages and liabilities
caused by any untrue, or alleged untrue, statement or omission, or alleged
omission, based upon information furnished in writing to the Company by the
Holder for any such use.
Promptly upon receipt by a party indemnified under this (S) 13.5 of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party hereunder, the indemnified party shall notify the
indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may have to any indemnified party otherwise than under this
(S) 13.5. In case notice of commencement of any such action shall be given to
the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such
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counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless the indemnifying party either agrees to pay the same or
fails to assume the defense of such action with counsel satisfactory to the
indemnified party. No indemnifying party shall be liable for any settlement
entered into without its consent which consent shall not be unreasonably
withheld.
13.6. Termination. The rights granted to the Company under this (S)
13 shall terminate on the Expiration Date.
SECTION 14. TAG-ALONG ARRANGEMENTS.
14.1. Significant Transfer. The Holder shall have the right to have
this Warrant or Restricted Stock included in any Significant Transfer of Common
Stock by Principal Shareholders of the Company.
14.2. Notices. Promptly after it shall become aware of a proposed
Significant Transfer, the Company shall give notice thereof to the Holder,
specifying the terms of the transaction, including the date on which it is
expected to occur and stating the likelihood of this Warrant or Restricted Stock
being included in the transaction on the same terms. The Holder shall thereafter
have 20 days in which to respond as to whether or not it wishes or elects to be
included in the Significant Transfer on the terms thereof. If it elects to be
included, the Company shall use its best efforts to include the Holder's
securities upon the same terms as those applying to the selling Principal
Shareholders.
14.3. Termination. The provisions of this (S) 14 shall terminate on
the Expiration Date.
SECTION 15. DRAG-ALONG OBLIGATION.
15.1. Significant Transfer. Promptly upon its receiving notice or
otherwise learning of a proposed Significant Transfer by Principal Shareholders,
the Company shall deliver notice thereof to the Holder (such delivery date
referred to herein is the "Notice Date"), specifying the terms of the
transaction, including the date on which it is expected to occur (the "Transfer
Date"), the consideration per share to be paid by the prospective purchaser, and
a statement as to whether the Company or such Principal Shareholders desire the
inclusion of this Warrant or Restricted Stock in the transaction. If inclusion
is requested, the Holder shall thereupon have the obligation, and hereby agrees,
to include this Warrant or such Restricted Stock in such Significant
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Transfer, PROVIDED (a) the purchase price thereof shall be no less than the
"Purchase Price" specified and determined in (S) 12.1; (b) such purchase price
shall be paid in cash and/or in immediately available funds, and (c) the
Transfer Date shall occur within 60 days of the Notice Date.
15.2 Termination. The provisions of (S) 15.1 shall terminate on the
Expiration Date.
SECTION 16. BOARD OF DIRECTORS.
Until the date on which (a) the Fund shall no longer own this Warrant
or any of the Restricted Stock or (b) the Company shall become subject to the
periodic reporting requirements of the Securities Exchange Act of 1934, as
amended, the Fund shall have the right to receive all notices of and to attend
at Company's expense (by any of the Fund's authorized representatives) all
meetings of the Company's board of directors and any committees thereof. The
Fund shall be entitled to receive copies of all minutes of such meetings along
with copies of any items distributed to the members of the board of directors at
such meeting, whether or not the Fund's representative attends such meeting. In
addition, during such period the Fund shall have the right, exercisable at any
time while it holds this Warrant or the Restricted Stock, to name a
representative who shall maintain a seat on the Company's board of directors and
be entitled to all benefits generally available to members of such board.
After the Closing and during the period specified in the preceding
paragraph, the Company's board of directors shall consist of the Fund's nominee
(should one be named), another member mutually acceptable to the Fund and the
Shareholders, the three Principal Shareholders and James K. Hoofard, Jr. This
provision is subject to the condition that each of such persons is available and
willing to serve and, in the case of the Principal Shareholders and Hoofard,
remain Shareholders.
SECTION 17. LOST, STOLEN WARRANTS, ETC.
If this Warrant shall be mutilated, lost, stolen or destroyed, the
Company shall issue a new Warrant of like date, tenor and denomination and
deliver the same in exchange and substitution for and upon surrender and
cancellation of the mutilated Warrant, or in lieu of the Warrant lost, stolen or
-17-
<PAGE>
destroyed, upon receipt of evidence satisfactory to the Company of the loss,
theft or destruction of such Warrant, and upon receipt of indemnity satisfactory
to the Company.
SECTION 18. SEVERABILITY.
Should any part of this Warrant for any reason be declared invalid,
such decision shall not affect the validity of any remaining portion, which
shall remain in force and effect as if this Warrant had been executed with the
invalid portion thereof eliminated. It is hereby declared the intention of the
parties hereto that they would have executed and accepted the remaining portion
of this Warrant without including therein any such part, parts or portion which
may, for any reason, be hereafter declared invalid.
SECTION 19. MISCELLANEOUS.
19.1. Holder Not A Shareholder. Except as otherwise specifically
provided herein, prior to the exercise of this Warrant, the Holder shall not be
entitled to any of the rights of a shareholder of the Company, including the
right as a shareholder to (a) vote or consent or (b) receive dividends or any
other distributions made to shareholders.
19.2. Notices. Any notice, demand or delivery to be made pursuant to
the provisions of this Warrant shall be in writing and (a) shall be deemed to
have been given or made one day after the date sent (i) if by the Company, by
prepaid overnight delivery, addressed to the Holder at its last known address
appearing on the books of the Company maintained for such purpose or (ii) if by
the Holder, by prepaid overnight delivery, addressed to the Company at 3400
Carlisle, Suite 500, Dallas, TX 75240; and (b) if given by courier, confirmed
telegram, confirmed facsimile transmission or confirmed telex shall be deemed to
have been made or given when received. The Holder and the Company may each
designate a different address by notice to the other in the manner provided in
this (S) 19.2.
19.3. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder. The provisions of this Warrant
are intended to be for the benefit of the Holder of this Warrant or the
Restricted Stock and shall be enforceable by the Holder.
-18-
<PAGE>
19.4. Amendments. This Warrant may not be modified, supplemented,
varied or amended except by an instrument in writing signed by the Company and
the Holder.
19.5. Headings. The index and the descriptive headings of sections of
this Warrant are provided solely for convenience of reference and shall not, for
any purpose, be deemed a part of this Warrant.
19.6. GOVERNING LAW. THIS WARRANT AND ALL MATTERS CONCERNING THIS
WARRANT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF COLORADO FOR CONTRACTS
ENTERED INTO AND TO BE PERFORMED IN SUCH STATE WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.
* * * * * *
-19-
<PAGE>
ANTI-DILUTION PROVISIONS
1. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as follows:
(a) Common Stock Dividends, Subdivisions, Combinations. In case
the Company shall (i) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of Common Stock, (ii) subdivide, split or
reclassify the outstanding shares of its Common Stock into a larger number of
shares, or (iii) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, then in each such case the Underlying
Shares shall be adjusted to equal the number of such shares to which the holder
of this Warrant would have been entitled upon the occurrence of such event had
this Warrant been exercised immediately prior to the happening of such event or,
in the case of a stock dividend or other distribution, prior to the record date
for determination of such Shareholders entitled thereto. An adjustment made
pursuant to this paragraph 1 shall become effective immediately after such
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, split, combination or
reclassification.
(b) Reorganization or Reclassification. In case of any capital
reorganization or any reclassification of the Common Stock of the Company
(whether pursuant to a merger of consolidation or otherwise), this Warrant shall
thereafter be exercisable for the number of shares of stock or other securities
or property receivable upon such capital reorganization or reclassification of
Common Stock, as the case may be, by a holder of the number of shares of Common
Stock into which this Warrant was exercisable immediately prior to such capital
reorganization or reclassification of Common Stock; and, in any case,
appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(c) Distributions of Assets or Securities Other Than Common
Stock. In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any of its capital stock (other than
Common Stock), rights or warrants to purchase any of its securities,
EXHIBIT A
(to Warrant)
<PAGE>
cash, other assets or evidences of its indebtedness, then in each such case the
Underlying Shares shall be adjusted by multiplying the Underlying Shares
immediately prior to the date of such dividend or distribution by a fraction, of
which the numerator shall be the Determined Value per share of Common Stock at
the record date for determining shareholders entitled to such dividend or
distribution, and of which the denominator shall be such Determined Value per
share less the fair market value (as determined in good faith by the Board of
Directors of the Company) of the portion of the securities, cash, assets or
evidences of indebtedness so distributed applicable to one share of Common
Stock. An adjustment made pursuant to this subparagraph (c) shall become
effective immediately after such distribution date.
(d) No Impairment. The Company shall not, without the prior
consent of the Holder, by amendment of its Articles of Incorporation or through
any reorganization, transfer of the assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this paragraph 1 and in the taking
of all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against impairment.
(e) Readjustment. Upon the termination of any right of conversion
or exchange of any securities convertible into or exchangeable for Common Stock,
or upon the expiration of any rights or options to purchase Common Stock (other
than this Warrant) or any securities convertible into or exchangeable for Common
Stock, or upon any change in the number of shares of Common Stock issuable upon
exercise, conversion or exchange of any such securities, rights or options, the
Underlying Shares then in effect shall forthwith be readjusted to such
Underlying Shares as would have been in effect had the adjustments made upon the
issuance or sale of such securities, rights or options been made upon the basis
of the issuance of only the number of shares of Common Stock actually issued or
to be issued upon the exercise, conversion or exchange or such securities,
rights or options.
2. Notice of Certain Corporation Transactions. The Company shall
promptly mail to the Holder a notice of any proposed dividend, merger,
dissolution, liquidation or winding
A-3
<PAGE>
up of the Company, stating the proposed record date (if any) or effective date
for and such transaction and briefly describing the transaction.
3. No Adjustment or Readjustment in Certain Circumstances. The
Company shall not make any adjustment or readjustment of any of the Exercise
Price or the number of Underlying Shares in the case of (a) the exercise of this
Warrant, or (b) the issuance or sale by the Company of Common Stock or rights or
options pursuant to, or the adjustment of the exercise price, or the exercise or
termination, of rights or options issued pursuant to, any employee stock option
or similar plan of the Company, or (c) except as specifically provided in this
Exhibit A, by reason of the issuance of shares of Common Stock or any other
securities of the Company in exchange for cash, property or services or other
consideration.
4. Certificate of Adjustment. Upon the occurrence of each adjustment
or readjustment pursuant to this Exhibit A, the Company at its expanse shall as
promptly as practicable compute such adjustment or readjustment in accordance
with the provisions of this Exhibit A, and prepare and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is based.
5. Information to be Furnished Upon Request. Upon the request at any
time of the Holder, the Company shall as promptly as practicable furnish or
cause to be furnished, to the Holder, at its address set forth in such request,
a certificate setting forth the number of shares of Common Stock that at the
time would be received upon the exercise of the Warrant and the Exercise Price
thereof.
A-4
<PAGE>
TO PHF ASSOCIATES, INC.:
The undersigned registered holder of the within Warrant hereby
irrevocably exercises the Warrant, purchases thereunder ______________ shares of
the Common Stock of the Company, herewith makes payment of $_______________
therefor, and requests that the certificate(s) for such shares be issued in the
name of the undersigned Holder or its nominee and delivered to it at Holder's
address on the books of the Company.
HANIFEN IMHOFF MEZZANINE FUND, L.P.
By: Hanifen Imhoff Capital Partners
By: __________________________
Managing Partner
Dated: _______________________
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned registered Holder of the within
Warrant hereby sells, assigns and transfers unto ________________________ the
Warrant and all rights evidenced thereby and does irrevocably constitute and
appoint _______________________ attorney to transfer the Warrant on the books of
the Company.
HANIFEN IMHOFF MEZZANINE FUND, L.P.
By: Hanifen Imhoff Capital Partners
By: __________________________
Managing Partner
Dated: _______________________
<PAGE>
================================================================================
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 2
No. of Shares: 265 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
SECTION 1. DEFINITIONS......................................... 2
SECTION 2. EXERCISE OF WARRANT................................. 6
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.................... 7
3.1. Preemptive Rights................................... 7
3.2. Anti-Dilution Provisions............................ 7
SECTION 4. RESERVATIONS........................................ 7
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS................ 7
SECTION 6. DISSOLUTION OR LIQUIDATION.......................... 8
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS................... 8
SECTION 8. FRACTIONAL SHARES................................... 9
SECTION 9. FULLY PAID STOCK; TAXES............................. 9
SECTION 10. CLOSING OF TRANSFER BOOKS........................... 9
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS
AND SHARES; COMPLIANCE WITH LAWS.................... 9
11.1. In General.......................................... 10
11.2. Restrictive Legends................................. 10
11.3. Notice of Proposed Transfer; Registration
Not Required........................................ 10
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT)........... 11
12.1. Right to Put........................................ 11
12.2. Determined Value.................................... 12
12.3. Closing............................................. 13
12.4. Default by Company.................................. 13
12.5. Termination......................................... 13
SECTION 13. REGISTRATION RIGHTS................................. 13
13.1. Demand Registration Rights.......................... 13
13.2. Conditions to Demand Registration................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
13.3. Piggyback Registration....................................... 14
13.4. Expenses..................................................... 14
13.5. Indemnification.............................................. 14
13.6. Termination.................................................. 16
SECTION 14. TAG ALONG ARRANGEMENTS....................................... 16
14.1. Significant Transfer......................................... 16
14.2. Notices...................................................... 16
14.3. Termination.................................................. 16
SECTION 15. DRAG-ALONG OBLIGATION........................................ 16
15.1. Notice to Holder............................................. 16
15.2. Termination.................................................. 17
SECTION 16. BOARD OF DIRECTORS........................................... 17
SECTION 17. LOST, STOLEN WARRANTS, ETC................................... 17
SECTION 18. SEVERABILITY................................................. 18
SECTION 19. MISCELLANEOUS................................................ 18
19.1. Holder Not A Shareholder..................................... 18
19.2. Notices...................................................... 18
19.3. Successors and Assigns....................................... 18
19.4. Amendments................................................... 19
19.5. Headings..................................................... 19
19.6. Governing Law................................................ 19
</TABLE>
EXHIBIT A ANTI-DILUTION PROVISIONS
-ii-
<PAGE>
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 2
No. of Shares: 265 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
THIS IS TO CERTIFY that, for value received and subject to the
provisions hereinafter set forth,
JOHN K. PERCIVAL
or assigns
is entitled upon the due exercise hereof at any time during the Exercise Period
(as hereinafter defined) to purchase from CPS Systems, Inc., a Texas corporation
(the "Company"), 265 shares of Common Stock (as hereinafter defined and
subject to adjustment as provided herein) of the Company at the Exercise Price
(as hereinafter defined and subject to adjustment as provided herein) for each
share of Common Stock so purchased and to exercise the other rights, powers and
privileges hereinafter provided, all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
Attest: CPS SYSTEMS, INC.
(SIGNATURE ILLEGIBLE) By [SIGNATURE ILLEGIBLE]
- --------------------- -----------------------
Secretary Its President
{AFFIX CORPORATE SEAL]
[Additional provisions follow on the next
18 pages and are incorporated in this
Warrant as if set forth on this page.]
<PAGE>
SECTION 1. DEFINITIONS.
In addition to the terms defined elsewhere in this Warrant, the
following terms have the following respective meanings:
"Acquisition Corp." shall mean CPS Acquisition Corp., a Georgia
corporation formed to aid in the acquisition by the Shareholders of all
outstanding common stock of the Company.
"Applicable Percentage" shall be 2.14%.
"Borrowed Indebtedness" shall mean (a) all Senior Debt (as defined in
the Note Agreement), and (b) all indebtedness under the Note.
"Closing Date" shall have the meaning ascribed to such term in (S) 1.3
of the Note Agreement.
"Common Share Equivalent" shall mean, with respect to any security of
the Company and as of a given date, a number that is, (a) in the case of a share
of Common Stock, one, (b) in the case of all or a portion of any right, warrant
or other security that may be exercised for a share or shares of Common Stock
(other than this Warrant), the number of shares of Common Stock receivable upon
exercise of such security (or such portion of such security) and (c) in the case
of a security that is convertible or exchangeable into a share or shares of
Common Stock, the number of shares of Common Stock that would be received if
such conversion or exchange occurred on such date.
"Common Stock" shall mean, collectively, the (a) the Company's Common
Stock $.01 par value, (b) any other class of capital stock of the Company
hereafter authorized that is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company and (c) any other class or classes of Voting Stock.
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Company" shall mean CPS Systems, Inc., a Texas corporation, as it
shall exist as the survivor of the merger between it and Acquisition Corp. It
shall also refer to any
-2-
<PAGE>
successor to all or substantially all of the assets and business of PHF
Associates, Inc. Unless the context otherwise indicates, the term "Company"
shall also include all Subsidiaries.
"Determined Value" shall mean, as of the date of any determination
thereof, the value attributable to this Warrant in accordance with the
provisions of (S) 12.2. In ascertaining the Determined Value, no consideration
shall be given to the fact that the Underlying Shares, if the Warrant were
exercised, would constitute a minority interest in the Company's total capital
structure, and would not be readily marketable.
"EBITDA" shall mean, for any applicable period, the sum, without
duplication, for such period of:
(a) net income of the Company and its subsidiaries determined in
accordance with generally accepted accounting principles consistently applied;
plus
(b) the amount deducted, in determining net income referenced in
clause (a) above, of all income taxes (whether paid or deferred of the Company
and its subsidiaries;
plus
(c) the amount deducted, in determining net income referenced in
clause (a) above, of interest expense of the Company and its subsidiaries
determined in accordance with generally accepted accounting principles
consistently applied;
plus
(d) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with generally accepted accounting principles
consistently applied, as depreciation of assets of the company and its
subsidiaries;
plus
(e) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with GAAP, as amortization of assets of the
Company and its subsidiaries.
"Exercise Date" shall be mean the date on which this Warrant is
exercised.
-3-
<PAGE>
"Exercise Period" mean the period (a) commencing on the earliest of
(i) January 1, 2000, (ii) the date on which notice of a proposed Sale of the
Company is given to the Holder, or (iii) the effective date of an Initial Public
Offering and (b) termination on the Expiration Date.
"Exercise Price" shall be $265, adjustable as set forth in (S) 3.
"Expiration Date" with reference to this Warrant, shall mean the 10th
anniversary of the date of this Warrant (shown on the first page hereof).
"Holder" shall mean the registered holder of this Warrant, and if thce
context so indicates, the holder of Restricted Stock.
"Initial Public Offering" shall mean the first issuance of shares of
Common Stock by the Company pursuant to a public distribution in which the
Common Stock of the Company shall be listed and traded on a national or regional
exchange or in the NASDAQ over-the-counter market.
"John K. Percival" shall mean John K. Percival.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Note Agreement" shall mean the Note Agreement dated as of the date
hereof between the Company or Acquisition Corp., as the case may be, and the
Hanifen Imhoff Mezzanine Fund, L.P., a Colorado limited partnership.
"Note" shall mean the "Note" as defined in the Note Agreement, and any
Note or Notes issued in exchange or substitution therefor.
"Principal Shareholders" shall mean Paul E. Kana, Sid H. Cordier and
Brian R. Wilson, and their respective assignees or successors in interest.
"Purchase Agreement" shall mean the Stock Purchase Agreement dated as
of November 11, 1994 among PHF Associates, Inc, (to whose interest Acquisition
Corp. has succeeded) and the shareholders of CPS.
-4-
<PAGE>
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with (S) 13, including, without
limitation, all registration, filing and NASD fees, all fees and expenses of
complying with state securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance, the fees and
disbursements of counsel and accountants retained by the Holder with respect to
Underlying Shares or Restricted Stock being registered, premiums and other costs
of policies of insurance against liabilities arising out of the public offering
of such securities and any fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, but excluding underwriting discounts
and commissions and transfer taxes, if any.
"Restricted Stock" shall mean the shares of Common Stock of the
Company issued upon the exercise of this Warrant and evidenced by a certificate
required to bear the legend specified in (S) 11.2.
"Sale of the Company" shall mean any change of control of the Company
(as the term "control" is defined in Rule 405 of the Commission under the
Securities Act), whether such change of control occurs through merger, sale of
assets or stock, exchange of securities, or otherwise.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Shareholders" shall mean the three Principal Shareholders and James
K. Hoofard, Jr. and G. Dean Booth.
"Significant Transfer" shall mean any sale, assignment, pledge or
other disposition of 25% or more of the outstanding Common Stock, other than the
pledges of stock contemplated by the Note Agreement.
"Subsidiary" shall mean any corporation of which more than 50% (by
number of votes) of the Voting Stock shall be beneficially owned, directly or
indirectly, by the Company.
-5-
<PAGE>
"Underlying Shares" shall mean the shares of Common Stock issuable
upon exercise of this Warrant.
"Voting Stock" shall mean Company securities of any class, the holders
of which are ordinarily, in the absence of contingencies, entitled to vote for
the election of the board of directors. For purposes of determining the number
of shares of Voting Stock outstanding, each share of Voting Stock shall be
deemed to constitute that number of shares equal to the number of votes that
such share is entitled to vote toward the election of any member of the board of
directors.
"Warrant" or "this Warrant" as used herein shall mean this Warrant and
any warrant hereafter issued in exchange or substitution for this Warrant.
SECTION 2. EXERCISE OF WARRANT.
Subject to the conditions hereinafter set forth, this Warrant may be
exercised in whole (but not in part), during the Exercise Period but in no event
subsequent to the end of the Exercise Period, by the surrender of this Warrant
(with the subscription form at the end hereof duly completed and executed) at
the principal office of the Company in Dallas, Texas, and upon payment of the
Exercise Price. At the option of the Holder, payment may be made by (a) funds
immediately available in Dallas, Texas and/or (b) the surrender and cancellation
of the Note accompanied by a written statement designating the unpaid principal
amount of the Note to be applied to the payment of the Exercise Price. If the
Note is tendered in payment of the Exercise Price and the unpaid principal
amount thereof exceeds such price, the Company shall (without charge to the
Holder) immediately issue and deliver to the Holder a new Note, in exchange for
the Note so tendered, at a principal amount equal to such excess and issued in
the name of the holder or its designated nominee or registered assignee.
In connection with any exercise hereunder, the Holder agrees to make
such representations and warranties as may be necessary to demonstrate
compliance with applicable securities laws, as may be reasonably requested by
the Company.
This Warrant and all rights and options hereunder shall expire at the
end of the Exercise Period, and shall be wholly null and void to the extent this
Warrant is not exercised before that time.
-6-
<PAGE>
The Company shall pay all reasonable expenses, taxes and other charges
payable in connection with the preparation, execution and delivery of stock
certificates under this (S) 2, regardless of the name or names in which such
stock certificates shall be registered.
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.
3.1. Preemptive Rights. The Holder shall have a preemptive or similar
right to acquire or subscribe for any unissued shares of Common Stock issued
after the date of this Warrant, or rights, warrants or options to purchase
Common Stock, or script or securities of any kind convertible into Common Stock
or carrying stock purchase warrants or privileges, except that such preemptive
right shall not apply to employee stock options granted by the Company in
aggregate amounts not exceeding 10% of the number of shares of Common Stock
outstanding on the Closing Date.
3.2. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as set forth in Exhibit A to this Warrant.
SECTION 4. RESERVATIONS.
The Company shall at all times reserve and keep available such number
of authorized shares of its Common Stock, solely for the purpose of issue upon
the exercise of the rights represented by this Warrant, as may at any time be
issuable (based upon the number of shares of Common Stock outstanding at any
such time) upon the exercise of this Warrant, and such shares shall at no time
have an aggregate par value that is in excess of the Exercise Price.
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS.
Upon any Sale of the Company, or any reorganization or
reclassification of the Common Stock or other equity securities of the Company,
then, as a condition of such Sale of the Company, reorganization or
reclassification, lawful and adequate provision shall be made so that the Holder
shall thereafter have the right to receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore purchasable hereunder, such shares of stock, securities
or assets as may (by virtue of such Sale of the Company, reorganization or
reclassification) be issued or payable with respect to or in exchange for a
number of outstanding shares of Common Stock
-7-
<PAGE>
immediately theretofore so purchasable hereunder had such Sale of the Company,
reorganization or reclassification not taken place; and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the Holder to the end that the provisions hereof shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon exercise of this Warrant. The Company shall not
effect any such Sale of the Company unless prior to or simultaneously with the
consummation thereof, the successor entity (if other than the Company) resulting
from such transaction shall assume by written instrument executed and mailed or
delivered to the Holder, the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to receive. Notice of any proposed Sale of the Company
shall be given by the Company to the Holder as promptly as possible after such
transaction appears likely.
SECTION 6. DISSOLUTION OR LIQUIDATION.
Upon any proposed distribution of the assets of the Company in
dissolution or liquidation (except under circumstances when (S) 5 shall be
applicable), the Company shall mail notice thereof to the Holder and shall make
no distribution to shareholders until the expiration of 60 days from the date of
mailing of such notice and, in any such case, the Holder of this Warrant may
exercise the purchase rights with respect to this Warrant within 60 days from
the date of mailing such notice and all rights herein granted not so exercised
within such 60-day period shall thereafter become null and void.
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS.
If the board of directors of the Company shall declare any dividend or
other distribution on its Common Stock except out of earned surplus or not
profits or by way of a stock dividend payable on its Common Stock, the Company
shall mail notice thereof to the Holder not less than 30 days prior to the
record date fixed for determining shareholders entitled to participate in such
dividend or other distribution and the Holder shall not participate in such
dividend or other distribution or be entitled to any rights on account or as a
result thereof unless and to the extent that this Warrant is exercised prior to
such record date. The provisions of this section shall not apply to
distributions made in connection with transactions covered by (S) 5.
-8-
<PAGE>
SECTION 8. FRACTIONAL SHARES.
Fractional shares shall be issued upon the exercise of this Warrant in
any case where the Holder would be entitled to receive a fractional share upon
such exercise.
SECTION 9. FULLY PAID STOCK; TAXES.
The Company covenants and agrees that the shares of stock represented
by each certificate for its Common Stock to be delivered on the exercise of this
Warrant will, at the time of such delivery, be validly issued and outstanding
and be fully paid and nonassessable. The Company further covenants and agrees
that it will pay when due and payable any and all federal and state issuance or
transfer taxes that may be payable in respect of this Warrant or any Common
Stock or certificates issued thereunder. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the transfer and delivery of stock certificates in the name other than that
of the Holder, and any such tax shall be paid by the Holder at the time of
presentation.
SECTION 10. CLOSING OF TRANSFER BOOKS.
The right to exercise this Warrant shall not be suspended during any
period that the stock transfer books of the Company for its Common Stock may be
closed. The Company shall not be required, however, to deliver stock
certificates upon such exercise while such books are duly closed for any
purpose, but the Company may postpone the delivery of such certificates until
the opening of such books. In such case, the certificates shall be delivered
promptly after the books are opened.
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS AND SHARES;
COMPLIANCE WITH LAWS.
Notwithstanding anything contained in this Warrant to the contrary,
the terms and provisions of this (S) 11 shall remain in full force and effect at
all times up to and including the end of the Exercise Period and, unless
otherwise specified herein, the term "Warrant" shall include the Underlying
Shares and the term "Restricted Stock" shall include such Underlying Shares as
if they had been issued.
-9-
<PAGE>
11.1. In General. This Warrant and the Restricted Stock shall not be
transferable except upon the conditions hereinafter specified, which conditions
are intended to insure compliance with the provisions of the Securities Act (or
any similar federal statute at the time in effect) and any applicable state
securities laws in respect of the transfer of this Warrant or any such
Restricted Stock.
11.2. Restrictive Legends. Each certificate for Restricted Stock
shall, unless otherwise permitted by the provisions of this (S) 11.2, bear on
the face thereof a legend reading substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND ANY STATE
SECURITIES LAWS THAT MAY BE APPLICABLE AND ARE
TRANSFERABLE ONLY UPON THE CONDITIONS SPECIFIED IN THE
WARRANT PURSUANT TO WHICH SUCH SHARES WERE ISSUED.
If a registration statement covering this Warrant or the Restricted
Stock shall become effective under the Securities Act and under any applicable
state securities laws or if the Company shall receive an opinion of counsel
reasonably satisfactory to the Company (which shall include counsel to the
Company and counsel to the original purchaser hereof) that, in the opinion of
such counsel, such legend is not, or is no longer, necessary or required
(including, without limitation, because of the availability of any exemption
afforded by Rule 144 of the Commission, the Company shall, or shall instruct its
transfer agents and registrars to, remove such legend from the certificates
evidencing the Restricted Stock or issue new certificates without such legend.
Upon the written request of the Holder of this Warrant or of the Restricted
Stock, the Company shall forthwith request independent counsel experienced in
such matters to render an opinion with respect to the matters covered herein,
and the Company shall bear all expenses in connection therewith.
11.3. Notice of Proposed Transfer; Registration Not Required. The
Holder of this Warrant or the Restricted Stock, by acceptance thereof, agrees
that it will give prior notice to the Company of its intention to transfer this
Warrant or
-10-
<PAGE>
the Restricted Stock (or any portion thereof), describing briefly the manner and
circumstances of the proposed transfer. Promptly after receiving such notice,
the Company shall present copies thereof to Company counsel. If, in the opinion
of such counsel, the proposed transfer may be effected without registration or
qualification under any federal or state law, the Company, as promptly as
practicable, shall notify such Holder of such opinion and of the terms and
conditions, if any, to be observed in connection with such transfer, whereupon
such Holder shall be entitled to transfer this Warrant or such Restricted Stock,
and to have a new Warrant or new stock certificate(s) issued in the name of the
transferee or its nominee. If such counsel is unable to render such an opinion
(in which case such counsel shall set forth in writing the basis for his legal
conclusions in this regard), the proposed transfer described in the notice given
pursuant to this (S) 11.3 may not be effected except to the extent permitted by
and upon such registration and/or qualification or, in lieu thereof, compliance
with the conditions of an exemptive regulation of the Commission and/or any
applicable state securities regulatory authority, as the case may be. Thereupon,
the Company shall notify such Holder who thereafter shall not be entitled to
effect such transfer until receipt of a contrary notice from the Company or
until such registration or qualification, filing or compliance has become
effective (and consistent with the terms thereof). All fees and expenses of
Company counsel in connection with the rendition of the opinion provided for in
this (S) 11.3 shall be paid by the Company.
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT).
12.1. Right to Put. On or after December 31, 1999, the Holder shall
have the right to require the Company to purchase this Warrant for cash (the
"Right to Put"), and the Company hereby agrees to make such purchase. The
purchase price (the "Purchase Price") shall be the value of the Underlying
Shares, which shall be the greater of (a) their Determined Value or (b) the
Applicable Percentage applied to the remainder of the product of five times the
Company's EBITDA minus its Borrowed Indebtedness plus its cash and cash
equivalents. In connection with the valuation in clause (b), EBITDA shall be
based upon the most recent 12 months, and Borrowed Indebtedness, cash and cash
equivalents as of the last business day of the month preceding the Determination
Date defined in (S) 12.2.
-11-
<PAGE>
Notwithstanding the foregoing paragraph, if the Company shall
determine to have an Initial Public Offering prior to December 31, 1999, the
Holder shall have the right to require the Company to purchase this Warrant for
cash, and the Company hereby agrees to make such purchase at the Purchase Price.
12.2. Determined Value. The Holder may exercise the Right to Put by
delivering notice thereof ("Notice of Sale") to the Company. Promptly thereafter
the Holder and the Company shall attempt to reach agreement on the Determined
Value. If they do so agree, they shall put their agreement in writing, and
closing shall be held in accordance with (S) 12.3. If the parties cannot agree,
they shall promptly appoint a mutually acceptable qualified independent
appraiser to provide the Determined Value. If parties shall be unable to agree
on such an appraiser within 10 days of the Notice Date, the Purchase Price
shall be determined by a panel of three independent appraisers, one of whom
shall be selected by the Company, another of whom shall be selected by the
Holder, and the third of whom shall be selected by such other two appraisers or,
if such appraisers shall be unable to agree upon a third appraiser within 10
days of the selection date of the second of such two appraisers, by the American
Arbitration Association; provided, that if either party shall not select its
appraiser within 10 days after the Notice Date, such amount or value shall be
determined solely by the appraiser selected by the other party. The appraiser or
appraisers appointed pursuant to the foregoing procedure shall be instructed to
determine such value within 30 days after the final appointment of any appraiser
pursuant hereto (but in no event may such determination be made more than 45
days following the Notice Date), and such determination shall be final and
binding upon the parties. If three appraisers shall be appointed, (a) if the
median of the determinations of the appraisers shall equal the mean of such
determinations, such mean shall constitute the determination of the appraisers,
otherwise (b) the determination of the appraiser that shall differ most from the
other two appraisers shall be excluded, the remaining two determinations shall
be averaged and such average shall constitute the determination of the
appraisers. Each party shall bear its respective fees and expenses with respect
to any appraisal procedures and one-half of the fees and expenses of the
appraisers participating in any appraisal procedure. The Company shall cause one
copy of the final determination of the appraiser(s) to be sent directly to the
Holder. Such determination shall set forth the date as of which the
determination was made, (the "Determination Date").
-12-
<PAGE>
12.3. Closing. Upon ascertainment of a Determined Value under (S)
12.2, the Holder shall select a settlement date by notice in writing to the
Company which shall be not more than 60 days after such agreement is reached
(the "Put Settlement Date"). On the Put Settlement Date, upon surrender of this
Warrant by the Holder at the principal place of business of the Company in
Dallas, Texas, or, at the option of the Holder, upon delivery of this Warrant to
an escrow agent reasonably acceptable to the Holder and the Company, the Company
shall transfer the Purchase Price to the Holder in immediately available funds
by the method specified in such Notice of Sale.
12.4. Default by the Company. If for any reason the Company shall
default on, or be otherwise unable to meet, its obligations under this (S) 12,
the Holder shall thereupon have the right to two demand registrations covering
any Underlying Shares or Restricted Stock held by the Holder during the balance
of the Exercise Period, as more fully provided in (S) 13 below. Such right shall
be in addition to all other rights and remedies available to the Holder upon a
breach by the Company of its obligations under this (S) 12.
12.5. Termination. The rights granted to the Holder in this (S) 12
shall terminate on the Expiration Date.
SECTION 13. REGISTRATION RIGHTS.
13.1. Demand Registration Rights. Upon the earlier of the time that
the Company (a) has or proposes to have an Initial Public Offering in which the
Holder does not exercise its piggyback rights under (S) 13.3 or (b) defaults in
the manner specified in (S) 12.4, the Holder shall thereupon be granted, and the
Company hereby does so grant, two demand registration rights covering the
Underlying Shares or Restricted Stock held by the Holder. Thereafter, upon the
request of the Holder requesting that the Company effect registration of all or
a part of such securities under applicable federal and state securities law, the
Company shall, subject to the conditions of (S) 13.2 below, promptly endeavor in
good faith to effect such registration.
The Company's actions shall include notification to or approval
of any governmental authority under any federal or state law, or listing with
any securities exchange or national securities market for the public trading of
securities, which may be required reasonably to permit the proposed sale of
securities that the Holder proposes to make promptly upon the effectiveness of
such registration, and the
-13-
<PAGE>
Company shall keep effective such registration for such period, not to exceed
nine months, as may be necessary to effect such sale and shall, if necessary,
amend the registration statement and supplement the prospectus during such
period.
13.2. Conditions to Demand Registration. The Company may delay any
registration required pursuant to (S) 13.1 for a period not exceeding 90 days
provided the Company shall in good faith determine that any such registration
would adversely affect an offering or contemplated offering of other securities
by the Company or would otherwise be materially detrimental to the Company or
its shareholders and, in any event, the Company shall not be required to
register or use its best efforts to effect any such registration on more than
two occasions.
13.3. Piggyback Registration. If at any time and from time to time
during the Exercise Period the Company proposes to register any of its Common
Stock under the Securities Act (other than pursuant to (S) 13.1) in connection
with an underwritten public offering of such Common Stock, it shall promptly
give written notice to the Holder of the Underlying Shares or Restricted Stock
of its intention to do so. Upon the written request of the Holder, given within
30 days after receipt of any such notice from the Company, the Company shall in
each instance use its best efforts to cause such securities to be registered
under the Securities Act and registered or qualified under any state securities
law, all to the extent necessary to permit the sale or other disposition thereof
in the manner stated in such request by the Holder; PROVIDED, HOWEVER, that the
obligation to give such notice and to use such best efforts shall not apply to
any proposal of the Company to register any of its securities under the
Securities Act (a) on Form S-8 (or any successor form), (b) in connection with
dividend reinvestment plans, or (c) for the purpose of offering such securities
to another business entity or the shareholders of such entity in connection with
the acquisition of assets or shares of capital stock of such entity or in
connection with a merger or consolidation with such entity. In connection with
any offering involving an underwriting of Restricted Stock the Company shall not
be required to include such shares unless the Holder agrees to the terms of the
underwriting and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. Nothing in
this (S) 13.3 shall be deemed to require the Company to proceed with any
registration of its securities after giving the notice herein provided.
-14-
<PAGE>
13.4. Expenses. The Company shall pay all Registration Expenses in
connection with all registrations (which, for purposes of this (S) 13.4 and (S)
13.5, shall include any qualifications, notifications and exemptions) under (S)
(S) 13.1 and 13.3.
13.5. Indemnification. In connection with any registration under (S)
13.1 or 13.3, the Company shall indemnify the Holder, and each underwriter
thereof including each person, if any, who controls such Holder within the
meaning of (S) 15 of the Securities Act, against all losses, claims, damages and
liabilities caused by any untrue, or alleged untrue, statement of a material
fact contained in any registration statement or prospectus or notification or
offering circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus
or caused by any omission, or alleged omission, to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omissions based
upon information furnished in writing to the Company by the Holder or, as the
case may be, any such underwriter expressly for use therein, and the Company and
each officer, director and controlling person of the Company shall be
indemnified by the Holder for all such losses, claims, damages and liabilities
caused by any untrue, or alleged untrue, statement or omission, or alleged
omission, based upon information furnished in writing to the Company by the
Holder for any such use.
Promptly upon receipt by a party indemnified under this (S) 13.5 of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party hereunder, the indemnified party shall notify the
indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may have to any indemnified party otherwise than under this
(S) 13.5. In case notice of commencement of any such action shall be given to
the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such
-15-
<PAGE>
counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless the indemnifying party either agrees to pay the same or
fails to assume the defense of such action with counsel satisfactory to the
indemnified party. No indemnifying party shall be liable for any settlement
entered into without its consent which consent shall not be unreasonably
withheld.
13.6. Termination. The rights granted to the Company under this (S)
13 shall terminate on the Expiration Date.
SECTION 14. TAG-ALONG ARRANGEMENTS.
14.1. Significant Transfer. The Holder shall have the right to have
this Warrant or Restricted Stock included in any Significant Transfer of Common
Stock by Principal Shareholders of the Company.
14.2. Notices. Promptly after it shall become aware of a proposed
Significant Transfer, the Company shall give notice thereof to the Holder,
specifying the terms of the transaction, including the date on which it is
expected to occur and stating the likelihood of this Warrant or Restricted Stock
being included in the transaction on the same terms. The Holder shall thereafter
have 20 days in which to respond as to whether or not it wishes or elects to be
included in the Significant Transfer on the terms thereof. If it elects to be
included, the Company shall use its best efforts to include the Holder's
securities upon the same terms as those applying to the selling Principal
Shareholders.
14.3. Termination. The provisions of this (S) 14 shall terminate on
the Expiration Date.
SECTION 15. DRAG-ALONG OBLIGATION.
15.1. Significant Transfer. Promptly upon its receiving notice or
otherwise learning of a proposed Significant Transfer by Principal Shareholders,
the Company shall deliver notice thereof to the Holder (such delivery date
referred to herein is the "Notice Date"), specifying the terms of the
transaction, including the date on which it is expected to occur (the "Transfer
Date"), the consideration per share to be paid by the prospective purchaser, and
a statement as to whether the Company or such Principal Shareholders desire the
inclusion of this Warrant or Restricted Stock in the transaction. If inclusion
is requested, the Holder shall thereupon have the obligation, and hereby agrees,
to include this Warrant or such Restricted Stock in such Significant
-16-
<PAGE>
Transfer, PROVIDED (a) the purchase price thereof shall be no less than the
"Purchase Price" specified and determined in (S) 12.1; (b) such purchase price
shall be paid in cash and/or in immediately available funds, and (c) the
Transfer Date shall occur within 60 days of the Notice Date.
15.2 Termination. The provisions of (S) 15.1 shall terminate on the
Expiration Date.
SECTION 16. [INTENTIONALLY DELETED.]
SECTION 17. LOST, STOLEN WARRANTS, ETC.
If this Warrant shall be mutilated, lost, stolen or destroyed, the
Company shall issue a new Warrant of like date, tenor and denomination and
deliver the same in exchange and substitution for and upon surrender and
cancellation of the mutilated Warrant, or in lieu of the Warrant lost, stolen or
-17-
<PAGE>
destroyed, upon receipt of evidence satisfactory to the Company of the loss,
theft or destruction of such Warrant, and upon receipt of indemnity satisfactory
to the Company.
SECTION 18. SEVERABILITY.
Should any part of this Warrant for any reason be declared invalid,
such decision shall not affect the validity of any remaining portion, which
shall remain in force and effect as if this Warrant had been executed with the
invalid portion thereof eliminated. It is hereby declared the intention of the
parties hereto that they would have executed and accepted the remaining portion
of this Warrant without including therein any such part, parts or portion which
may, for any reason, be hereafter declared invalid.
SECTION 19. MISCELLANEOUS.
19.1. Holder Not A Shareholder. Except as otherwise specifically
provided herein, prior to the exercise of this Warrant, the Holder shall not be
entitled to any of the rights of a shareholder of the Company, including the
right as a shareholder to (a) vote or consent or (b) receive dividends or any
other distributions made to shareholders.
19.2. Notices. Any notice, demand or delivery to be made pursuant to
the provisions of this Warrant shall be in writing and (a) shall be deemed to
have been given or made one day after the date sent (i) if by the Company, by
prepaid overnight delivery, addressed to the Holder at its last known address
appearing on the books of the Company maintained for such purpose or (ii) if by
the Holder, by prepaid overnight delivery, addressed to the Company at 3400
Carlisle, Suite 500, Dallas, TX 75240; and (b) if given by courier, confirmed
telegram, confirmed facsimile transmission or confirmed telex shall be deemed to
have been made or given when received. The Holder and the Company may each
designate a different address by notice to the other in the manner provided in
this (S) 19.2.
19.3. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder. The provisions of this Warrant
are intended to be for the benefit of the Holder of this Warrant or the
Restricted Stock and shall be enforceable by the Holder.
-18-
<PAGE>
19.4. Amendments. This Warrant may not be modified, supplemented,
varied or amended except by an instrument in writing signed by the Company and
the Holder.
19.5. Headings. The index and the descriptive headings of sections of
this Warrant are provided solely for convenience of reference and shall not, for
any purpose, be deemed a part of this Warrant.
19.6. GOVERNING LAW. THIS WARRANT AND ALL MATTERS CONCERNING THIS
WARRANT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF COLORADO FOR CONTRACTS
ENTERED INTO AND TO BE PERFORMED IN SUCH STATE WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.
* * * * * *
-19-
<PAGE>
ANTI-DILUTION PROVISIONS
1. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as follows:
(a) Common Stock Dividends, Subdivisions, Combinations. In case
the Company shall (i) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of Common Stock, (ii) subdivide, split or
reclassify the outstanding shares of its Common Stock into a larger number of
shares, or (iii) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, then in each such case the Underlying
Shares shall be adjusted to equal the number of such shares to which the holder
of this Warrant would have been entitled upon the occurrence of such event had
this Warrant been exercised immediately prior to the happening of such event or,
in the case of a stock dividend or other distribution, prior to the record date
for determination of such Shareholders entitled thereto. An adjustment made
pursuant to this paragraph 1 shall become effective immediately after such
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, split, combination or
reclassification.
(b) Reorganization or Reclassification. In case of any capital
reorganization or any reclassification of the Common Stock of the Company
(whether pursuant to a merger of consolidation or otherwise), this Warrant shall
thereafter be exercisable for the number of shares of stock or other securities
or property receivable upon such capital reorganization or reclassification of
Common Stock, as the case may be, by a holder of the number of shares of Common
Stock into which this Warrant was exercisable immediately prior to such capital
reorganization or reclassification of Common Stock; and, in any case,
appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(c) Distributions of Assets or Securities Other Than Common
Stock. In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any of its capital stock (other than
Common Stock), rights or warrants to purchase any of its securities,
EXHIBIT A
(to Warrant)
<PAGE>
cash, other assets or evidences of its indebtedness, then in each such case the
Underlying Shares shall be adjusted by multiplying the Underlying Shares
immediately prior to the date of such dividend or distribution by a fraction, of
which the numerator shall be the Determined Value per share of Common Stock at
the record date for determining shareholders entitled to such dividend or
distribution, and of which the denominator shall be such Determined Value per
share less the fair market value (as determined in good faith by the Board of
Directors of the Company) of the portion of the securities, cash, assets or
evidences of indebtedness so distributed applicable to one share of Common
Stock. An adjustment made pursuant to this subparagraph (c) shall become
effective immediately after such distribution date.
(d) No Impairment. The Company shall not, without the prior
consent of the Holder, by amendment of its Articles of Incorporation or through
any reorganization, transfer of the assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this paragraph 1 and in the taking
of all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against impairment.
(e) Readjustment. Upon the termination of any right of conversion
or exchange of any securities convertible into or exchangeable for Common Stock,
or upon the expiration of any rights or options to purchase Common Stock (other
than this Warrant) or any securities convertible into or exchangeable for Common
Stock, or upon any change in the number of shares of Common Stock issuable upon
exercise, conversion or exchange of any such securities, rights or options, the
Underlying Shares then in effect shall forthwith be readjusted to such
Underlying Shares as would have been in effect had the adjustments made upon the
issuance or sale of such securities, rights or options been made upon the basis
of the issuance of only the number of shares of Common Stock actually issued or
to be issued upon the exercise, conversion or exchange or such securities,
rights or options.
2. Notice of Certain Corporation Transactions. The Company shall
promptly mail to the Holder a notice of any proposed dividend, merger,
dissolution, liquidation or winding
A-3
<PAGE>
up of the Company, stating the proposed record date (if any) or effective date
for and such transaction and briefly describing the transaction.
3. No Adjustment or Readjustment in Certain Circumstances. The
Company shall not make any adjustment or readjustment of any of the Exercise
Price or the number of Underlying Shares in the case of (a) the exercise of this
Warrant, or (b) the issuance or sale by the Company of Common Stock or rights or
options pursuant to, or the adjustment of the exercise price, or the exercise or
termination, of rights or options issued pursuant to, any employee stock option
or similar plan of the Company, or (c) except as specifically provided in this
Exhibit A, by reason of the issuance of shares of Common Stock or any other
securities of the Company in exchange for cash, property or services or other
consideration.
4. Certificate of Adjustment. Upon the occurrence of each adjustment
or readjustment pursuant to this Exhibit A, the Company at its expanse shall as
promptly as practicable compute such adjustment or readjustment in accordance
with the provisions of this Exhibit A, and prepare and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is based.
5. Information to be Furnished Upon Request. Upon the request at any
time of the Holder, the Company shall as promptly as practicable furnish or
cause to be furnished, to the Holder, at its address set forth in such request,
a certificate setting forth the number of shares of Common Stock that at the
time would be received upon the exercise of the Warrant and the Exercise Price
thereof.
A-4
<PAGE>
TO CPS SYSTEMS, INC.:
The undersigned registered holder of the within Warrant hereby
irrevocably exercises the Warrant, purchases thereunder ______________ shares of
the Common Stock of the Company, herewith makes payment of $_______________
therefor, and requests that the certificate(s) for such shares be issued in the
name of the undersigned Holder or its nominee and delivered to it at Holder's
address on the books of the Company.
By: /s/ JOHN K. PERCIVAL
------------------------------
John K. Percival
Dated:
---------------------------
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned registered Holder of the within
Warrant hereby sells, assigns and transfers unto ________________________ the
Warrant and all rights evidenced thereby and does irrevocably constitute and
appoint _______________________ attorney to transfer the Warrant on the books of
the Company.
By: /s/ JOHN K. PERCIVAL
------------------------------
John K. Percival
Dated:
---------------------------
<PAGE>
================================================================================
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 3
No. of Shares: 177 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
SECTION 1. DEFINITIONS......................................... 2
SECTION 2. EXERCISE OF WARRANT................................. 6
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.................... 7
3.1. Preemptive Rights................................... 7
3.2. Anti-Dilution Provisions............................ 7
SECTION 4. RESERVATIONS........................................ 7
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS................ 7
SECTION 6. DISSOLUTION OR LIQUIDATION.......................... 8
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS................... 8
SECTION 8. FRACTIONAL SHARES................................... 9
SECTION 9. FULLY PAID STOCK; TAXES............................. 9
SECTION 10. CLOSING OF TRANSFER BOOKS........................... 9
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS
AND SHARES; COMPLIANCE WITH LAWS.................... 9
11.1. In General.......................................... 10
11.2. Restrictive Legends................................. 10
11.3. Notice of Proposed Transfer; Registration
Not Required........................................ 10
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT)........... 11
12.1. Right to Put........................................ 11
12.2. Determined Value.................................... 12
12.3. Closing............................................. 13
12.4. Default by Company.................................. 13
12.5. Termination......................................... 13
SECTION 13. REGISTRATION RIGHTS................................. 13
13.1. Demand Registration Rights.......................... 13
13.2. Conditions to Demand Registration................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
13.3. Piggyback Registration....................................... 14
13.4. Expenses..................................................... 14
13.5. Indemnification.............................................. 14
13.6. Termination.................................................. 16
SECTION 14. TAG ALONG ARRANGEMENTS....................................... 16
14.1. Significant Transfer......................................... 16
14.2. Notices...................................................... 16
14.3. Termination.................................................. 16
SECTION 15. DRAG-ALONG OBLIGATION........................................ 16
15.1. Notice to Holder............................................. 16
15.2. Termination.................................................. 17
SECTION 16. BOARD OF DIRECTORS........................................... 17
SECTION 17. LOST, STOLEN WARRANTS, ETC................................... 17
SECTION 18. SEVERABILITY................................................. 18
SECTION 19. MISCELLANEOUS................................................ 18
19.1. Holder Not A Shareholder..................................... 18
19.2. Notices...................................................... 18
19.3. Successors and Assigns....................................... 18
19.4. Amendments................................................... 19
19.5. Headings..................................................... 19
19.6. Governing Law................................................ 19
</TABLE>
EXHIBIT A ANTI-DILUTION PROVISIONS
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<PAGE>
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 3
No. of Shares: 177 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
THIS IS TO CERTIFY that, for value received and subject to the
provisions hereinafter set forth,
SAMUEL E. HUDGINS
or assigns
is entitled upon the due exercise hereof at any time during the Exercise Period
(as hereinafter defined) to purchase from CPS Systems, Inc., a Texas corporation
(the "Company"), 177 shares of Common Stock (as hereinafter defined and
subject to adjustment as provided herein) of the Company at the Exercise Price
(as hereinafter defined and subject to adjustment as provided herein) for each
share of Common Stock so purchased and to exercise the other rights, powers and
privileges hereinafter provided, all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
Attest: CPS SYSTEMS, INC.
(SIGNATURE ILLEGIBLE) By [SIGNATURE ILLEGIBLE]
- --------------------- -----------------------
Secretary Its President
{AFFIX CORPORATE SEAL]
[Additional provisions follow on the next
18 pages and are incorporated in this
Warrant as if set forth on this page.]
<PAGE>
SECTION 1. DEFINITIONS.
In addition to the terms defined elsewhere in this Warrant, the
following terms have the following respective meanings:
"Acquisition Corp." shall mean CPS Acquisition Corp., a Georgia
corporation formed to aid in the acquisition by the Shareholders of all
outstanding common stock of the Company.
"Applicable Percentage" shall be 1.43%.
"Borrowed Indebtedness" shall mean (a) all Senior Debt (as defined in
the Note Agreement), and (b) all indebtedness under the Note.
"Closing Date" shall have the meaning ascribed to such term in (S) 1.3
of the Note Agreement.
"Common Share Equivalent" shall mean, with respect to any security of
the Company and as of a given date, a number that is, (a) in the case of a share
of Common Stock, one, (b) in the case of all or a portion of any right, warrant
or other security that may be exercised for a share or shares of Common Stock
(other than this Warrant), the number of shares of Common Stock receivable upon
exercise of such security (or such portion of such security) and (c) in the case
of a security that is convertible or exchangeable into a share or shares of
Common Stock, the number of shares of Common Stock that would be received if
such conversion or exchange occurred on such date.
"Common Stock" shall mean, collectively, the (a) the Company's Common
Stock $.01 par value, (b) any other class of capital stock of the Company
hereafter authorized that is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company and (c) any other class or classes of Voting Stock.
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Company" shall mean CPS Systems, Inc., a Texas corporation, as it
shall exist as the survivor of the merger between it and Acquisition Corp. It
shall also refer to any
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successor to all or substantially all of the assets and business of PHF
Associates, Inc. Unless the context otherwise indicates, the term "Company"
shall also include all Subsidiaries.
"Determined Value" shall mean, as of the date of any determination
thereof, the value attributable to this Warrant in accordance with the
provisions of (S) 12.2. In ascertaining the Determined Value, no consideration
shall be given to the fact that the Underlying Shares, if the Warrant were
exercised, would constitute a minority interest in the Company's total capital
structure, and would not be readily marketable.
"EBITDA" shall mean, for any applicable period, the sum, without
duplication, for such period of:
(a) net income of the Company and its subsidiaries determined in
accordance with generally accepted accounting principles consistently applied;
plus
(b) the amount deducted, in determining net income referenced in
clause (a) above, of all income taxes (whether paid or deferred of the Company
and its subsidiaries;
plus
(c) the amount deducted, in determining net income referenced in
clause (a) above, of interest expense of the Company and its subsidiaries
determined in accordance with generally accepted accounting principles
consistently applied;
plus
(d) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with generally accepted accounting principles
consistently applied, as depreciation of assets of the company and its
subsidiaries;
plus
(e) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with GAAP, as amortization of assets of the
Company and its subsidiaries.
"Exercise Date" shall be mean the date on which this Warrant is
exercised.
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<PAGE>
"Exercise Period" mean the period (a) commencing on the earliest of
(i) January 1, 2000, (ii) the date on which notice of a proposed Sale of the
Company is given to the Holder, or (iii) the effective date of an Initial Public
Offering and (b) termination on the Expiration Date.
"Exercise Price" shall be $177, adjustable as set forth in (S) 3.
"Expiration Date" with reference to this Warrant, shall mean the 10th
anniversary of the date of this Warrant (shown on the first page hereof).
"Holder" shall mean the registered holder of this Warrant, and if thce
context so indicates, the holder of Restricted Stock.
"Initial Public Offering" shall mean the first issuance of shares of
Common Stock by the Company pursuant to a public distribution in which the
Common Stock of the Company shall be listed and traded on a national or regional
exchange or in the NASDAQ over-the-counter market.
"Samuel E. Hudgins" shall mean Samuel E. Hudgins.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Note Agreement" shall mean the Note Agreement dated as of the date
hereof between the Company or Acquisition Corp., as the case may be, and the
Hanifen Imhoff Mezzanine Fund, L.P., a Colorado limited partnership.
"Note" shall mean the "Note" as defined in the Note Agreement, and any
Note or Notes issued in exchange or substitution therefor.
"Principal Shareholders" shall mean Paul E. Kana, Sid H. Cordier and
Brian R. Wilson, and their respective assignees or successors in interest.
"Purchase Agreement" shall mean the Stock Purchase Agreement dated as
of November 11, 1994 among PHF Associates, Inc, (to whose interest Acquisition
Corp. has succeeded) and the shareholders of CPS.
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<PAGE>
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with (S) 13, including, without
limitation, all registration, filing and NASD fees, all fees and expenses of
complying with state securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance, the fees and
disbursements of counsel and accountants retained by the Holder with respect to
Underlying Shares or Restricted Stock being registered, premiums and other costs
of policies of insurance against liabilities arising out of the public offering
of such securities and any fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, but excluding underwriting discounts
and commissions and transfer taxes, if any.
"Restricted Stock" shall mean the shares of Common Stock of the
Company issued upon the exercise of this Warrant and evidenced by a certificate
required to bear the legend specified in (S) 11.2.
"Sale of the Company" shall mean any change of control of the Company
(as the term "control" is defined in Rule 405 of the Commission under the
Securities Act), whether such change of control occurs through merger, sale of
assets or stock, exchange of securities, or otherwise.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Shareholders" shall mean the three Principal Shareholders and James
K. Hoofard, Jr. and G. Dean Booth.
"Significant Transfer" shall mean any sale, assignment, pledge or
other disposition of 25% or more of the outstanding Common Stock, other than the
pledges of stock contemplated by the Note Agreement.
"Subsidiary" shall mean any corporation of which more than 50% (by
number of votes) of the Voting Stock shall be beneficially owned, directly or
indirectly, by the Company.
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<PAGE>
"Underlying Shares" shall mean the shares of Common Stock issuable
upon exercise of this Warrant.
"Voting Stock" shall mean Company securities of any class, the holders
of which are ordinarily, in the absence of contingencies, entitled to vote for
the election of the board of directors. For purposes of determining the number
of shares of Voting Stock outstanding, each share of Voting Stock shall be
deemed to constitute that number of shares equal to the number of votes that
such share is entitled to vote toward the election of any member of the board of
directors.
"Warrant" or "this Warrant" as used herein shall mean this Warrant and
any warrant hereafter issued in exchange or substitution for this Warrant.
SECTION 2. EXERCISE OF WARRANT.
Subject to the conditions hereinafter set forth, this Warrant may be
exercised in whole (but not in part), during the Exercise Period but in no event
subsequent to the end of the Exercise Period, by the surrender of this Warrant
(with the subscription form at the end hereof duly completed and executed) at
the principal office of the Company in Dallas, Texas, and upon payment of the
Exercise Price. At the option of the Holder, payment may be made by (a) funds
immediately available in Dallas, Texas and/or (b) the surrender and cancellation
of the Note accompanied by a written statement designating the unpaid principal
amount of the Note to be applied to the payment of the Exercise Price. If the
Note is tendered in payment of the Exercise Price and the unpaid principal
amount thereof exceeds such price, the Company shall (without charge to the
Holder) immediately issue and deliver to the Holder a new Note, in exchange for
the Note so tendered, at a principal amount equal to such excess and issued in
the name of the holder or its designated nominee or registered assignee.
In connection with any exercise hereunder, the Holder agrees to make
such representations and warranties as may be necessary to demonstrate
compliance with applicable securities laws, as may be reasonably requested by
the Company.
This Warrant and all rights and options hereunder shall expire at the
end of the Exercise Period, and shall be wholly null and void to the extent this
Warrant is not exercised before that time.
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<PAGE>
The Company shall pay all reasonable expenses, taxes and other charges
payable in connection with the preparation, execution and delivery of stock
certificates under this (S) 2, regardless of the name or names in which such
stock certificates shall be registered.
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.
3.1. Preemptive Rights. The Holder shall have a preemptive or similar
right to acquire or subscribe for any unissued shares of Common Stock issued
after the date of this Warrant, or rights, warrants or options to purchase
Common Stock, or script or securities of any kind convertible into Common Stock
or carrying stock purchase warrants or privileges, except that such preemptive
right shall not apply to employee stock options granted by the Company in
aggregate amounts not exceeding 10% of the number of shares of Common Stock
outstanding on the Closing Date.
3.2. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as set forth in Exhibit A to this Warrant.
SECTION 4. RESERVATIONS.
The Company shall at all times reserve and keep available such number
of authorized shares of its Common Stock, solely for the purpose of issue upon
the exercise of the rights represented by this Warrant, as may at any time be
issuable (based upon the number of shares of Common Stock outstanding at any
such time) upon the exercise of this Warrant, and such shares shall at no time
have an aggregate par value that is in excess of the Exercise Price.
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS.
Upon any Sale of the Company, or any reorganization or
reclassification of the Common Stock or other equity securities of the Company,
then, as a condition of such Sale of the Company, reorganization or
reclassification, lawful and adequate provision shall be made so that the Holder
shall thereafter have the right to receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore purchasable hereunder, such shares of stock, securities
or assets as may (by virtue of such Sale of the Company, reorganization or
reclassification) be issued or payable with respect to or in exchange for a
number of outstanding shares of Common Stock
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<PAGE>
immediately theretofore so purchasable hereunder had such Sale of the Company,
reorganization or reclassification not taken place; and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the Holder to the end that the provisions hereof shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon exercise of this Warrant. The Company shall not
effect any such Sale of the Company unless prior to or simultaneously with the
consummation thereof, the successor entity (if other than the Company) resulting
from such transaction shall assume by written instrument executed and mailed or
delivered to the Holder, the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to receive. Notice of any proposed Sale of the Company
shall be given by the Company to the Holder as promptly as possible after such
transaction appears likely.
SECTION 6. DISSOLUTION OR LIQUIDATION.
Upon any proposed distribution of the assets of the Company in
dissolution or liquidation (except under circumstances when (S) 5 shall be
applicable), the Company shall mail notice thereof to the Holder and shall make
no distribution to shareholders until the expiration of 60 days from the date of
mailing of such notice and, in any such case, the Holder of this Warrant may
exercise the purchase rights with respect to this Warrant within 60 days from
the date of mailing such notice and all rights herein granted not so exercised
within such 60-day period shall thereafter become null and void.
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS.
If the board of directors of the Company shall declare any dividend or
other distribution on its Common Stock except out of earned surplus or not
profits or by way of a stock dividend payable on its Common Stock, the Company
shall mail notice thereof to the Holder not less than 30 days prior to the
record date fixed for determining shareholders entitled to participate in such
dividend or other distribution and the Holder shall not participate in such
dividend or other distribution or be entitled to any rights on account or as a
result thereof unless and to the extent that this Warrant is exercised prior to
such record date. The provisions of this section shall not apply to
distributions made in connection with transactions covered by (S) 5.
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<PAGE>
SECTION 8. FRACTIONAL SHARES.
Fractional shares shall be issued upon the exercise of this Warrant in
any case where the Holder would be entitled to receive a fractional share upon
such exercise.
SECTION 9. FULLY PAID STOCK; TAXES.
The Company covenants and agrees that the shares of stock represented
by each certificate for its Common Stock to be delivered on the exercise of this
Warrant will, at the time of such delivery, be validly issued and outstanding
and be fully paid and nonassessable. The Company further covenants and agrees
that it will pay when due and payable any and all federal and state issuance or
transfer taxes that may be payable in respect of this Warrant or any Common
Stock or certificates issued thereunder. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the transfer and delivery of stock certificates in the name other than that
of the Holder, and any such tax shall be paid by the Holder at the time of
presentation.
SECTION 10. CLOSING OF TRANSFER BOOKS.
The right to exercise this Warrant shall not be suspended during any
period that the stock transfer books of the Company for its Common Stock may be
closed. The Company shall not be required, however, to deliver stock
certificates upon such exercise while such books are duly closed for any
purpose, but the Company may postpone the delivery of such certificates until
the opening of such books. In such case, the certificates shall be delivered
promptly after the books are opened.
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS AND SHARES;
COMPLIANCE WITH LAWS.
Notwithstanding anything contained in this Warrant to the contrary,
the terms and provisions of this (S) 11 shall remain in full force and effect at
all times up to and including the end of the Exercise Period and, unless
otherwise specified herein, the term "Warrant" shall include the Underlying
Shares and the term "Restricted Stock" shall include such Underlying Shares as
if they had been issued.
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<PAGE>
11.1. In General. This Warrant and the Restricted Stock shall not be
transferable except upon the conditions hereinafter specified, which conditions
are intended to insure compliance with the provisions of the Securities Act (or
any similar federal statute at the time in effect) and any applicable state
securities laws in respect of the transfer of this Warrant or any such
Restricted Stock.
11.2. Restrictive Legends. Each certificate for Restricted Stock
shall, unless otherwise permitted by the provisions of this (S) 11.2, bear on
the face thereof a legend reading substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND ANY STATE
SECURITIES LAWS THAT MAY BE APPLICABLE AND ARE
TRANSFERABLE ONLY UPON THE CONDITIONS SPECIFIED IN THE
WARRANT PURSUANT TO WHICH SUCH SHARES WERE ISSUED.
If a registration statement covering this Warrant or the Restricted
Stock shall become effective under the Securities Act and under any applicable
state securities laws or if the Company shall receive an opinion of counsel
reasonably satisfactory to the Company (which shall include counsel to the
Company and counsel to the original purchaser hereof) that, in the opinion of
such counsel, such legend is not, or is no longer, necessary or required
(including, without limitation, because of the availability of any exemption
afforded by Rule 144 of the Commission, the Company shall, or shall instruct its
transfer agents and registrars to, remove such legend from the certificates
evidencing the Restricted Stock or issue new certificates without such legend.
Upon the written request of the Holder of this Warrant or of the Restricted
Stock, the Company shall forthwith request independent counsel experienced in
such matters to render an opinion with respect to the matters covered herein,
and the Company shall bear all expenses in connection therewith.
11.3. Notice of Proposed Transfer; Registration Not Required. The
Holder of this Warrant or the Restricted Stock, by acceptance thereof, agrees
that it will give prior notice to the Company of its intention to transfer this
Warrant or
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<PAGE>
the Restricted Stock (or any portion thereof), describing briefly the manner and
circumstances of the proposed transfer. Promptly after receiving such notice,
the Company shall present copies thereof to Company counsel. If, in the opinion
of such counsel, the proposed transfer may be effected without registration or
qualification under any federal or state law, the Company, as promptly as
practicable, shall notify such Holder of such opinion and of the terms and
conditions, if any, to be observed in connection with such transfer, whereupon
such Holder shall be entitled to transfer this Warrant or such Restricted Stock,
and to have a new Warrant or new stock certificate(s) issued in the name of the
transferee or its nominee. If such counsel is unable to render such an opinion
(in which case such counsel shall set forth in writing the basis for his legal
conclusions in this regard), the proposed transfer described in the notice given
pursuant to this (S) 11.3 may not be effected except to the extent permitted by
and upon such registration and/or qualification or, in lieu thereof, compliance
with the conditions of an exemptive regulation of the Commission and/or any
applicable state securities regulatory authority, as the case may be. Thereupon,
the Company shall notify such Holder who thereafter shall not be entitled to
effect such transfer until receipt of a contrary notice from the Company or
until such registration or qualification, filing or compliance has become
effective (and consistent with the terms thereof). All fees and expenses of
Company counsel in connection with the rendition of the opinion provided for in
this (S) 11.3 shall be paid by the Company.
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT).
12.1. Right to Put. On or after December 31, 1999, the Holder shall
have the right to require the Company to purchase this Warrant for cash (the
"Right to Put"), and the Company hereby agrees to make such purchase. The
purchase price (the "Purchase Price") shall be the value of the Underlying
Shares, which shall be the greater of (a) their Determined Value or (b) the
Applicable Percentage applied to the remainder of the product of five times the
Company's EBITDA minus its Borrowed Indebtedness plus its cash and cash
equivalents. In connection with the valuation in clause (b), EBITDA shall be
based upon the most recent 12 months, and Borrowed Indebtedness, cash and cash
equivalents as of the last business day of the month preceding the Determination
Date defined in (S) 12.2.
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Notwithstanding the foregoing paragraph, if the Company shall
determine to have an Initial Public Offering prior to December 31, 1999, the
Holder shall have the right to require the Company to purchase this Warrant for
cash, and the Company hereby agrees to make such purchase at the Purchase Price.
12.2. Determined Value. The Holder may exercise the Right to Put by
delivering notice thereof ("Notice of Sale") to the Company. Promptly thereafter
the Holder and the Company shall attempt to reach agreement on the Determined
Value. If they do so agree, they shall put their agreement in writing, and
closing shall be held in accordance with (S) 12.3. If the parties cannot agree,
they shall promptly appoint a mutually acceptable qualified independent
appraiser to provide the Determined Value. If parties shall be unable to agree
on such an appraiser within 10 days of the Notice Date, the Purchase Price
shall be determined by a panel of three independent appraisers, one of whom
shall be selected by the Company, another of whom shall be selected by the
Holder, and the third of whom shall be selected by such other two appraisers or,
if such appraisers shall be unable to agree upon a third appraiser within 10
days of the selection date of the second of such two appraisers, by the American
Arbitration Association; provided, that if either party shall not select its
appraiser within 10 days after the Notice Date, such amount or value shall be
determined solely by the appraiser selected by the other party. The appraiser or
appraisers appointed pursuant to the foregoing procedure shall be instructed to
determine such value within 30 days after the final appointment of any appraiser
pursuant hereto (but in no event may such determination be made more than 45
days following the Notice Date), and such determination shall be final and
binding upon the parties. If three appraisers shall be appointed, (a) if the
median of the determinations of the appraisers shall equal the mean of such
determinations, such mean shall constitute the determination of the appraisers,
otherwise (b) the determination of the appraiser that shall differ most from the
other two appraisers shall be excluded, the remaining two determinations shall
be averaged and such average shall constitute the determination of the
appraisers. Each party shall bear its respective fees and expenses with respect
to any appraisal procedures and one-half of the fees and expenses of the
appraisers participating in any appraisal procedure. The Company shall cause one
copy of the final determination of the appraiser(s) to be sent directly to the
Holder. Such determination shall set forth the date as of which the
determination was made, (the "Determination Date").
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12.3. Closing. Upon ascertainment of a Determined Value under (S)
12.2, the Holder shall select a settlement date by notice in writing to the
Company which shall be not more than 60 days after such agreement is reached
(the "Put Settlement Date"). On the Put Settlement Date, upon surrender of this
Warrant by the Holder at the principal place of business of the Company in
Dallas, Texas, or, at the option of the Holder, upon delivery of this Warrant to
an escrow agent reasonably acceptable to the Holder and the Company, the Company
shall transfer the Purchase Price to the Holder in immediately available funds
by the method specified in such Notice of Sale.
12.4. Default by the Company. If for any reason the Company shall
default on, or be otherwise unable to meet, its obligations under this (S) 12,
the Holder shall thereupon have the right to two demand registrations covering
any Underlying Shares or Restricted Stock held by the Holder during the balance
of the Exercise Period, as more fully provided in (S) 13 below. Such right shall
be in addition to all other rights and remedies available to the Holder upon a
breach by the Company of its obligations under this (S) 12.
12.5. Termination. The rights granted to the Holder in this (S) 12
shall terminate on the Expiration Date.
SECTION 13. REGISTRATION RIGHTS.
13.1. Demand Registration Rights. Upon the earlier of the time that
the Company (a) has or proposes to have an Initial Public Offering in which the
Holder does not exercise its piggyback rights under (S) 13.3 or (b) defaults in
the manner specified in (S) 12.4, the Holder shall thereupon be granted, and the
Company hereby does so grant, two demand registration rights covering the
Underlying Shares or Restricted Stock held by the Holder. Thereafter, upon the
request of the Holder requesting that the Company effect registration of all or
a part of such securities under applicable federal and state securities law, the
Company shall, subject to the conditions of (S) 13.2 below, promptly endeavor in
good faith to effect such registration.
The Company's actions shall include notification to or approval
of any governmental authority under any federal or state law, or listing with
any securities exchange or national securities market for the public trading of
securities, which may be required reasonably to permit the proposed sale of
securities that the Holder proposes to make promptly upon the effectiveness of
such registration, and the
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Company shall keep effective such registration for such period, not to exceed
nine months, as may be necessary to effect such sale and shall, if necessary,
amend the registration statement and supplement the prospectus during such
period.
13.2. Conditions to Demand Registration. The Company may delay any
registration required pursuant to (S) 13.1 for a period not exceeding 90 days
provided the Company shall in good faith determine that any such registration
would adversely affect an offering or contemplated offering of other securities
by the Company or would otherwise be materially detrimental to the Company or
its shareholders and, in any event, the Company shall not be required to
register or use its best efforts to effect any such registration on more than
two occasions.
13.3. Piggyback Registration. If at any time and from time to time
during the Exercise Period the Company proposes to register any of its Common
Stock under the Securities Act (other than pursuant to (S) 13.1) in connection
with an underwritten public offering of such Common Stock, it shall promptly
give written notice to the Holder of the Underlying Shares or Restricted Stock
of its intention to do so. Upon the written request of the Holder, given within
30 days after receipt of any such notice from the Company, the Company shall in
each instance use its best efforts to cause such securities to be registered
under the Securities Act and registered or qualified under any state securities
law, all to the extent necessary to permit the sale or other disposition thereof
in the manner stated in such request by the Holder; PROVIDED, HOWEVER, that the
obligation to give such notice and to use such best efforts shall not apply to
any proposal of the Company to register any of its securities under the
Securities Act (a) on Form S-8 (or any successor form), (b) in connection with
dividend reinvestment plans, or (c) for the purpose of offering such securities
to another business entity or the shareholders of such entity in connection with
the acquisition of assets or shares of capital stock of such entity or in
connection with a merger or consolidation with such entity. In connection with
any offering involving an underwriting of Restricted Stock the Company shall not
be required to include such shares unless the Holder agrees to the terms of the
underwriting and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. Nothing in
this (S) 13.3 shall be deemed to require the Company to proceed with any
registration of its securities after giving the notice herein provided.
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13.4. Expenses. The Company shall pay all Registration Expenses in
connection with all registrations (which, for purposes of this (S) 13.4 and (S)
13.5, shall include any qualifications, notifications and exemptions) under (S)
(S) 13.1 and 13.3.
13.5. Indemnification. In connection with any registration under (S)
13.1 or 13.3, the Company shall indemnify the Holder, and each underwriter
thereof including each person, if any, who controls such Holder within the
meaning of (S) 15 of the Securities Act, against all losses, claims, damages and
liabilities caused by any untrue, or alleged untrue, statement of a material
fact contained in any registration statement or prospectus or notification or
offering circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus
or caused by any omission, or alleged omission, to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omissions based
upon information furnished in writing to the Company by the Holder or, as the
case may be, any such underwriter expressly for use therein, and the Company and
each officer, director and controlling person of the Company shall be
indemnified by the Holder for all such losses, claims, damages and liabilities
caused by any untrue, or alleged untrue, statement or omission, or alleged
omission, based upon information furnished in writing to the Company by the
Holder for any such use.
Promptly upon receipt by a party indemnified under this (S) 13.5 of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party hereunder, the indemnified party shall notify the
indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may have to any indemnified party otherwise than under this
(S) 13.5. In case notice of commencement of any such action shall be given to
the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such
-15-
<PAGE>
counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless the indemnifying party either agrees to pay the same or
fails to assume the defense of such action with counsel satisfactory to the
indemnified party. No indemnifying party shall be liable for any settlement
entered into without its consent which consent shall not be unreasonably
withheld.
13.6. Termination. The rights granted to the Company under this (S)
13 shall terminate on the Expiration Date.
SECTION 14. TAG-ALONG ARRANGEMENTS.
14.1. Significant Transfer. The Holder shall have the right to have
this Warrant or Restricted Stock included in any Significant Transfer of Common
Stock by Principal Shareholders of the Company.
14.2. Notices. Promptly after it shall become aware of a proposed
Significant Transfer, the Company shall give notice thereof to the Holder,
specifying the terms of the transaction, including the date on which it is
expected to occur and stating the likelihood of this Warrant or Restricted Stock
being included in the transaction on the same terms. The Holder shall thereafter
have 20 days in which to respond as to whether or not it wishes or elects to be
included in the Significant Transfer on the terms thereof. If it elects to be
included, the Company shall use its best efforts to include the Holder's
securities upon the same terms as those applying to the selling Principal
Shareholders.
14.3. Termination. The provisions of this (S) 14 shall terminate on
the Expiration Date.
SECTION 15. DRAG-ALONG OBLIGATION.
15.1. Significant Transfer. Promptly upon its receiving notice or
otherwise learning of a proposed Significant Transfer by Principal Shareholders,
the Company shall deliver notice thereof to the Holder (such delivery date
referred to herein is the "Notice Date"), specifying the terms of the
transaction, including the date on which it is expected to occur (the "Transfer
Date"), the consideration per share to be paid by the prospective purchaser, and
a statement as to whether the Company or such Principal Shareholders desire the
inclusion of this Warrant or Restricted Stock in the transaction. If inclusion
is requested, the Holder shall thereupon have the obligation, and hereby agrees,
to include this Warrant or such Restricted Stock in such Significant
-16-
<PAGE>
Transfer, PROVIDED (a) the purchase price thereof shall be no less than the
"Purchase Price" specified and determined in (S) 12.1; (b) such purchase price
shall be paid in cash and/or in immediately available funds, and (c) the
Transfer Date shall occur within 60 days of the Notice Date.
15.2 Termination. The provisions of (S) 15.1 shall terminate on the
Expiration Date.
SECTION 16. [INTENTIONALLY DELETED.]
SECTION 17. LOST, STOLEN WARRANTS, ETC.
If this Warrant shall be mutilated, lost, stolen or destroyed, the
Company shall issue a new Warrant of like date, tenor and denomination and
deliver the same in exchange and substitution for and upon surrender and
cancellation of the mutilated Warrant, or in lieu of the Warrant lost, stolen or
-17-
<PAGE>
destroyed, upon receipt of evidence satisfactory to the Company of the loss,
theft or destruction of such Warrant, and upon receipt of indemnity satisfactory
to the Company.
SECTION 18. SEVERABILITY.
Should any part of this Warrant for any reason be declared invalid,
such decision shall not affect the validity of any remaining portion, which
shall remain in force and effect as if this Warrant had been executed with the
invalid portion thereof eliminated. It is hereby declared the intention of the
parties hereto that they would have executed and accepted the remaining portion
of this Warrant without including therein any such part, parts or portion which
may, for any reason, be hereafter declared invalid.
SECTION 19. MISCELLANEOUS.
19.1. Holder Not A Shareholder. Except as otherwise specifically
provided herein, prior to the exercise of this Warrant, the Holder shall not be
entitled to any of the rights of a shareholder of the Company, including the
right as a shareholder to (a) vote or consent or (b) receive dividends or any
other distributions made to shareholders.
19.2. Notices. Any notice, demand or delivery to be made pursuant to
the provisions of this Warrant shall be in writing and (a) shall be deemed to
have been given or made one day after the date sent (i) if by the Company, by
prepaid overnight delivery, addressed to the Holder at its last known address
appearing on the books of the Company maintained for such purpose or (ii) if by
the Holder, by prepaid overnight delivery, addressed to the Company at 3400
Carlisle, Suite 500, Dallas, TX 75240; and (b) if given by courier, confirmed
telegram, confirmed facsimile transmission or confirmed telex shall be deemed to
have been made or given when received. The Holder and the Company may each
designate a different address by notice to the other in the manner provided in
this (S) 19.2.
19.3. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder. The provisions of this Warrant
are intended to be for the benefit of the Holder of this Warrant or the
Restricted Stock and shall be enforceable by the Holder.
-18-
<PAGE>
19.4. Amendments. This Warrant may not be modified, supplemented,
varied or amended except by an instrument in writing signed by the Company and
the Holder.
19.5. Headings. The index and the descriptive headings of sections of
this Warrant are provided solely for convenience of reference and shall not, for
any purpose, be deemed a part of this Warrant.
19.6. GOVERNING LAW. THIS WARRANT AND ALL MATTERS CONCERNING THIS
WARRANT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF COLORADO FOR CONTRACTS
ENTERED INTO AND TO BE PERFORMED IN SUCH STATE WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.
* * * * * *
-19-
<PAGE>
ANTI-DILUTION PROVISIONS
1. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as follows:
(a) Common Stock Dividends, Subdivisions, Combinations. In case
the Company shall (i) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of Common Stock, (ii) subdivide, split or
reclassify the outstanding shares of its Common Stock into a larger number of
shares, or (iii) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, then in each such case the Underlying
Shares shall be adjusted to equal the number of such shares to which the holder
of this Warrant would have been entitled upon the occurrence of such event had
this Warrant been exercised immediately prior to the happening of such event or,
in the case of a stock dividend or other distribution, prior to the record date
for determination of such Shareholders entitled thereto. An adjustment made
pursuant to this paragraph 1 shall become effective immediately after such
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, split, combination or
reclassification.
(b) Reorganization or Reclassification. In case of any capital
reorganization or any reclassification of the Common Stock of the Company
(whether pursuant to a merger of consolidation or otherwise), this Warrant shall
thereafter be exercisable for the number of shares of stock or other securities
or property receivable upon such capital reorganization or reclassification of
Common Stock, as the case may be, by a holder of the number of shares of Common
Stock into which this Warrant was exercisable immediately prior to such capital
reorganization or reclassification of Common Stock; and, in any case,
appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(c) Distributions of Assets or Securities Other Than Common
Stock. In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any of its capital stock (other than
Common Stock), rights or warrants to purchase any of its securities,
EXHIBIT A
(to Warrant)
<PAGE>
cash, other assets or evidences of its indebtedness, then in each such case the
Underlying Shares shall be adjusted by multiplying the Underlying Shares
immediately prior to the date of such dividend or distribution by a fraction, of
which the numerator shall be the Determined Value per share of Common Stock at
the record date for determining shareholders entitled to such dividend or
distribution, and of which the denominator shall be such Determined Value per
share less the fair market value (as determined in good faith by the Board of
Directors of the Company) of the portion of the securities, cash, assets or
evidences of indebtedness so distributed applicable to one share of Common
Stock. An adjustment made pursuant to this subparagraph (c) shall become
effective immediately after such distribution date.
(d) No Impairment. The Company shall not, without the prior
consent of the Holder, by amendment of its Articles of Incorporation or through
any reorganization, transfer of the assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this paragraph 1 and in the taking
of all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against impairment.
(e) Readjustment. Upon the termination of any right of conversion
or exchange of any securities convertible into or exchangeable for Common Stock,
or upon the expiration of any rights or options to purchase Common Stock (other
than this Warrant) or any securities convertible into or exchangeable for Common
Stock, or upon any change in the number of shares of Common Stock issuable upon
exercise, conversion or exchange of any such securities, rights or options, the
Underlying Shares then in effect shall forthwith be readjusted to such
Underlying Shares as would have been in effect had the adjustments made upon the
issuance or sale of such securities, rights or options been made upon the basis
of the issuance of only the number of shares of Common Stock actually issued or
to be issued upon the exercise, conversion or exchange or such securities,
rights or options.
2. Notice of Certain Corporation Transactions. The Company shall
promptly mail to the Holder a notice of any proposed dividend, merger,
dissolution, liquidation or winding
A-3
<PAGE>
up of the Company, stating the proposed record date (if any) or effective date
for and such transaction and briefly describing the transaction.
3. No Adjustment or Readjustment in Certain Circumstances. The
Company shall not make any adjustment or readjustment of any of the Exercise
Price or the number of Underlying Shares in the case of (a) the exercise of this
Warrant, or (b) the issuance or sale by the Company of Common Stock or rights or
options pursuant to, or the adjustment of the exercise price, or the exercise or
termination, of rights or options issued pursuant to, any employee stock option
or similar plan of the Company, or (c) except as specifically provided in this
Exhibit A, by reason of the issuance of shares of Common Stock or any other
securities of the Company in exchange for cash, property or services or other
consideration.
4. Certificate of Adjustment. Upon the occurrence of each adjustment
or readjustment pursuant to this Exhibit A, the Company at its expanse shall as
promptly as practicable compute such adjustment or readjustment in accordance
with the provisions of this Exhibit A, and prepare and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is based.
5. Information to be Furnished Upon Request. Upon the request at any
time of the Holder, the Company shall as promptly as practicable furnish or
cause to be furnished, to the Holder, at its address set forth in such request,
a certificate setting forth the number of shares of Common Stock that at the
time would be received upon the exercise of the Warrant and the Exercise Price
thereof.
A-4
<PAGE>
TO CPS SYSTEMS, INC.:
The undersigned registered holder of the within Warrant hereby
irrevocably exercises the Warrant, purchases thereunder ______________ shares of
the Common Stock of the Company, herewith makes payment of $_______________
therefor, and requests that the certificate(s) for such shares be issued in the
name of the undersigned Holder or its nominee and delivered to it at Holder's
address on the books of the Company.
By: /s/ SAMUEL E. HUDGINS
-------------------------------
Samuel E. Hudgins
Dated:
----------------------------
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned registered Holder of the within
Warrant hereby sells, assigns and transfers unto ________________________ the
Warrant and all rights evidenced thereby and does irrevocably constitute and
appoint _______________________ attorney to transfer the Warrant on the books of
the Company.
By: /s/ SAMUEL E. HUDGINS
-------------------------------
Samuel E. Hudgins
Dated:
----------------------------
<PAGE>
================================================================================
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 4
No. of Shares: 78 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
SECTION 1. DEFINITIONS......................................... 2
SECTION 2. EXERCISE OF WARRANT................................. 6
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.................... 7
3.1. Preemptive Rights................................... 7
3.2. Anti-Dilution Provisions............................ 7
SECTION 4. RESERVATIONS........................................ 7
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS................ 7
SECTION 6. DISSOLUTION OR LIQUIDATION.......................... 8
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS................... 8
SECTION 8. FRACTIONAL SHARES................................... 9
SECTION 9. FULLY PAID STOCK; TAXES............................. 9
SECTION 10. CLOSING OF TRANSFER BOOKS........................... 9
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS
AND SHARES; COMPLIANCE WITH LAWS.................... 9
11.1. In General.......................................... 10
11.2. Restrictive Legends................................. 10
11.3. Notice of Proposed Transfer; Registration
Not Required........................................ 10
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT)........... 11
12.1. Right to Put........................................ 11
12.2. Determined Value.................................... 12
12.3. Closing............................................. 13
12.4. Default by Company.................................. 13
12.5. Termination......................................... 13
SECTION 13. REGISTRATION RIGHTS................................. 13
13.1. Demand Registration Rights.......................... 13
13.2. Conditions to Demand Registration................... 14
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
13.3. Piggyback Registration....................................... 14
13.4. Expenses..................................................... 14
13.5. Indemnification.............................................. 14
13.6. Termination.................................................. 16
SECTION 14. TAG ALONG ARRANGEMENTS....................................... 16
14.1. Significant Transfer......................................... 16
14.2. Notices...................................................... 16
14.3. Termination.................................................. 16
SECTION 15. DRAG-ALONG OBLIGATION........................................ 16
15.1. Notice to Holder............................................. 16
15.2. Termination.................................................. 17
SECTION 16. BOARD OF DIRECTORS........................................... 17
SECTION 17. LOST, STOLEN WARRANTS, ETC................................... 17
SECTION 18. SEVERABILITY................................................. 18
SECTION 19. MISCELLANEOUS................................................ 18
19.1. Holder Not A Shareholder..................................... 18
19.2. Notices...................................................... 18
19.3. Successors and Assigns....................................... 18
19.4. Amendments................................................... 19
19.5. Headings..................................................... 19
19.6. Governing Law................................................ 19
</TABLE>
EXHIBIT A ANTI-DILUTION PROVISIONS
-ii-
<PAGE>
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 4
No. of Shares: 78 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
THIS IS TO CERTIFY that, for value received and subject to the
provisions hereinafter set forth,
ROBERT J. NEWCORN
or assigns
is entitled upon the due exercise hereof at any time during the Exercise Period
(as hereinafter defined) to purchase from CPS Systems, Inc., a Texas corporation
(the "Company"), 1,856 shares of Common Stock (as hereinafter defined and
subject to adjustment as provided herein) of the Company at the Exercise Price
(as hereinafter defined and subject to adjustment as provided herein) for each
share of Common Stock so purchased and to exercise the other rights, powers and
privileges hereinafter provided, all on the terms and conditions and
pursuant to the provisions hereinafter set forth.
Attest: CPS SYSTEMS, INC.
By /s/ Paul E. Kana
- --------------------- -----------------------
Secretary Its President
{AFFIX CORPORATE SEAL]
[Additional provisions follow on the next
16 pages and are incorporated in this
Warrant as if set forth on this page.]
<PAGE>
SECTION 1. DEFINITIONS.
In addition to the terms defined elsewhere in this Warrant, the
following terms have the following respective meanings:
"Acquisition Corp." shall mean CPS Acquisition Corp., a Georgia
corporation formed to aid in the acquisition by the Shareholders of all
outstanding common stock of the Company.
"Applicable Percentage" shall be .63%.
"Borrowed Indebtedness" shall mean (a) all Senior Debt (as defined in
the Note Agreement), and (b) all indebtedness under the Note.
"Closing Date" shall have the meaning ascribed to such term in (S) 1.3
of the Note Agreement.
"Common Share Equivalent" shall mean, with respect to any security of
the Company and as of a given date, a number that is, (a) in the case of a share
of Common Stock, one, (b) in the case of all or a portion of any right, warrant
or other security that may be exercised for a share or shares of Common Stock
(other than this Warrant), the number of shares of Common Stock receivable upon
exercise of such security (or such portion of such security) and (c) in the case
of a security that is convertible or exchangeable into a share or shares of
Common Stock, the number of shares of Common Stock that would be received if
such conversion or exchange occurred on such date.
"Common Stock" shall mean, collectively, the (a) the Company's Common
Stock $.01 par value, (b) any other class of capital stock of the Company
hereafter authorized that is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Company and (c) any other class or classes of Voting Stock.
"Commission" shall mean the Securities and Exchange Commission, or any
other federal agency at the time administering the Securities Act.
"Company" shall mean CPS Systems, Inc., a Texas corporation, as it
shall exist as the survivor of the merger between it and Acquisition Corp. It
shall also refer to any
-2-
<PAGE>
successor to all or substantially all of the assets and business of PHF
Associates, Inc. Unless the context otherwise indicates, the term "Company"
shall also include all Subsidiaries.
"Determined Value" shall mean, as of the date of any determination
thereof, the value attributable to this Warrant in accordance with the
provisions of (S) 12.2. In ascertaining the Determined Value, no consideration
shall be given to the fact that the Underlying Shares, if the Warrant were
exercised, would constitute a minority interest in the Company's total capital
structure, and would not be readily marketable.
"EBITDA" shall mean, for any applicable period, the sum, without
duplication, for such period of:
(a) net income of the Company and its subsidiaries determined in
accordance with generally accepted accounting principles consistently applied;
plus
(b) the amount deducted, in determining net income referenced in
clause (a) above, of all income taxes (whether paid or deferred of the Company
and its subsidiaries;
plus
(c) the amount deducted, in determining net income referenced in
clause (a) above, of interest expense of the Company and its subsidiaries
determined in accordance with generally accepted accounting principles
consistently applied;
plus
(d) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with generally accepted accounting principles
consistently applied, as depreciation of assets of the company and its
subsidiaries;
plus
(e) the amount deducted, in determining net income referenced in
clause (a) above, in accordance with GAAP, as amortization of assets of the
Company and its subsidiaries.
"Exercise Date" shall be mean the date on which this Warrant is
exercised.
-3-
<PAGE>
"Exercise Period" mean the period (a) commencing on the earliest of
(i) January 1, 2000, (ii) the date on which notice of a proposed Sale of the
Company is given to the Holder, or (iii) the effective date of an Initial Public
Offering and (b) termination on the Expiration Date.
"Exercise Price" shall be $1,856, adjustable as set forth in (S) 3.
"Expiration Date" with reference to this Warrant, shall mean the 10th
anniversary of the date of this Warrant (shown on the first page hereof).
"Holder" shall mean the registered holder of this Warrant, and if thce
context so indicates, the holder of Restricted Stock.
"Initial Public Offering" shall mean the first issuance of shares of
Common Stock by the Company pursuant to a public distribution in which the
Common Stock of the Company shall be listed and traded on a national or regional
exchange or in the NASDAQ over-the-counter market.
"Robert J. Newcorn" shall mean Robert J. Newcorn.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Note Agreement" shall mean the Note Agreement dated as of the date
hereof between the Company or Acquisition Corp., as the case may be, and the
Fund, as amended from time to time.
"Note" shall mean the "Note" as defined in the Note Agreement, and any
Note or Notes issued in exchange or substitution therefor.
"Principal Shareholders" shall mean Paul E. Kana, Sid H. Cordier and
Brian R. Wilson, and their respective assignees or successors in interest.
"Purchase Agreement" shall mean the Stock Purchase Agreement dated as
of November 11, 1994 among PHF Associates, Inc, (to whose interest Acquisition
Corp. has succeeded) and the shareholders of CPS.
-4-
<PAGE>
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with (S) 13, including, without
limitation, all registration, filing and NASD fees, all fees and expenses of
complying with state securities or blue sky laws, all word processing,
duplicating and printing expenses, messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of any special audits or "cold comfort"
letters required by or incident to such performance and compliance, the fees and
disbursements of counsel and accountants retained by the Holder with respect to
Underlying Shares or Restricted Stock being registered, premiums and other costs
of policies of insurance against liabilities arising out of the public offering
of such securities and any fees and disbursements of underwriters customarily
paid by issuers or sellers of securities, but excluding underwriting discounts
and commissions and transfer taxes, if any.
"Restricted Stock" shall mean the shares of Common Stock of the
Company issued upon the exercise of this Warrant and evidenced by a certificate
required to bear the legend specified in (S) 11.2.
"Sale of the Company" shall mean any change of control of the Company
(as the term "control" is defined in Rule 405 of the Commission under the
Securities Act), whether such change of control occurs through merger, sale of
assets or stock, exchange of securities, or otherwise.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Shareholders" shall mean the three Principal Shareholders and James
K. Hoofard, Jr. and G. Dean Booth.
"Significant Transfer" shall mean any sale, assignment, pledge or
other disposition of 25% or more of the outstanding Common Stock, other than the
pledges of stock contemplated by the Note Agreement.
"Subsidiary" shall mean any corporation of which more than 50% (by
number of votes) of the Voting Stock shall be beneficially owned, directly or
indirectly, by the Company.
-5-
<PAGE>
"Underlying Shares" shall mean the shares of Common Stock issuable
upon exercise of this Warrant.
"Voting Stock" shall mean Company securities of any class, the holders
of which are ordinarily, in the absence of contingencies, entitled to vote for
the election of the board of directors. For purposes of determining the number
of shares of Voting Stock outstanding, each share of Voting Stock shall be
deemed to constitute that number of shares equal to the number of votes that
such share is entitled to vote toward the election of any member of the board of
directors.
"Warrant" or "this Warrant" as used herein shall mean this Warrant and
any warrant hereafter issued in exchange or substitution for this Warrant.
SECTION 2. EXERCISE OF WARRANT.
Subject to the conditions hereinafter set forth, this Warrant may be
exercised in whole (but not in part), during the Exercise Period but in no event
subsequent to the end of the Exercise Period, by the surrender of this Warrant
(with the subscription form at the end hereof duly completed and executed) at
the principal office of the Company in Dallas, Texas, and upon payment of the
Exercise Price. At the option of the Holder, payment may be made by (a) funds
immediately available in Dallas, Texas and/or (b) the surrender and cancellation
of the Note accompanied by a written statement designating the unpaid principal
amount of the Note to be applied to the payment of the Exercise Price. If the
Note is tendered in payment of the Exercise Price and the unpaid principal
amount thereof exceeds such price, the Company shall (without charge to the
Holder) immediately issue and deliver to the Holder a new Note, in exchange for
the Note so tendered, at a principal amount equal to such excess and issued in
the name of the holder or its designated nominee or registered assignee.
In connection with any exercise hereunder, the Holder agrees to make
such representations and warranties as may be necessary to demonstrate
compliance with applicable securities laws, as may be reasonably requested by
the Company.
This Warrant and all rights and options hereunder shall expire at the
end of the Exercise Period, and shall be wholly null and void to the extent this
Warrant is not exercised before that time.
-6-
<PAGE>
The Company shall pay all reasonable expenses, taxes and other charges
payable in connection with the preparation, execution and delivery of stock
certificates under this (S) 2, regardless of the name or names in which such
stock certificates shall be registered.
SECTION 3. PREEMPTIVE RIGHTS; ANTI-DILUTION.
3.1. Preemptive Rights. The Holder shall have a preemptive or similar
right to acquire or subscribe for any unissued shares of Common Stock issued
after the date of this Warrant, or rights, warrants or options to purchase
Common Stock, or script or securities of any kind convertible into Common Stock
or carrying stock purchase warrants or privileges, except that such preemptive
right shall not apply to employee stock options granted by the Company in
aggregate amounts not exceeding 10% of the number of shares of Common Stock
outstanding on the Closing Date.
3.2. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as set forth in Exhibit A to this Warrant.
SECTION 4. RESERVATIONS.
The Company shall at all times reserve and keep available such number
of authorized shares of its Common Stock, solely for the purpose of issue upon
the exercise of the rights represented by this Warrant, as may at any time be
issuable (based upon the number of shares of Common Stock outstanding at any
such time) upon the exercise of this Warrant, and such shares shall at no time
have an aggregate par value that is in excess of the Exercise Price.
SECTION 5. SALE OF THE COMPANY; REORGANIZATIONS.
Upon any Sale of the Company, or any reorganization or
reclassification of the Common Stock or other equity securities of the Company,
then, as a condition of such Sale of the Company, reorganization or
reclassification, lawful and adequate provision shall be made so that the Holder
shall thereafter have the right to receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore purchasable hereunder, such shares of stock, securities
or assets as may (by virtue of such Sale of the Company, reorganization or
reclassification) be issued or payable with respect to or in exchange for a
number of outstanding shares of Common Stock
-7-
<PAGE>
immediately theretofore so purchasable hereunder had such Sale of the Company,
reorganization or reclassification not taken place; and in any such case
appropriate provisions shall be made with respect to the rights and interests of
the Holder to the end that the provisions hereof shall thereafter be applicable,
as nearly as may be, in relation to any shares of stock, securities or assets
thereafter deliverable upon exercise of this Warrant. The Company shall not
effect any such Sale of the Company unless prior to or simultaneously with the
consummation thereof, the successor entity (if other than the Company) resulting
from such transaction shall assume by written instrument executed and mailed or
delivered to the Holder, the obligation to deliver to the Holder such shares of
stock, securities or assets as, in accordance with the foregoing provisions, the
Holder may be entitled to receive. Notice of any proposed Sale of the Company
shall be given by the Company to the Holder as promptly as possible after such
transaction appears likely.
SECTION 6. DISSOLUTION OR LIQUIDATION.
Upon any proposed distribution of the assets of the Company in
dissolution or liquidation (except under circumstances when (S) 5 shall be
applicable), the Company shall mail notice thereof to the Holder and shall make
no distribution to shareholders until the expiration of 60 days from the date of
mailing of such notice and, in any such case, the Holder of this Warrant may
exercise the purchase rights with respect to this Warrant within 60 days from
the date of mailing such notice and all rights herein granted not so exercised
within such 60-day period shall thereafter become null and void.
SECTION 7. NOTICE OF EXTRAORDINARY DIVIDENDS.
If the board of directors of the Company shall declare any dividend or
other distribution on its Common Stock except out of earned surplus or not
profits or by way of a stock dividend payable on its Common Stock, the Company
shall mail notice thereof to the Holder not less than 30 days prior to the
record date fixed for determining shareholders entitled to participate in such
dividend or other distribution and the Holder shall not participate in such
dividend or other distribution or be entitled to any rights on account or as a
result thereof unless and to the extent that this Warrant is exercised prior to
such record date. The provisions of this section shall not apply to
distributions made in connection with transactions covered by (S) 5.
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<PAGE>
SECTION 8. FRACTIONAL SHARES.
Fractional shares shall be issued upon the exercise of this Warrant in
any case where the Holder would be entitled to receive a fractional share upon
such exercise.
SECTION 9. FULLY PAID STOCK; TAXES.
The Company covenants and agrees that the shares of stock represented
by each certificate for its Common Stock to be delivered on the exercise of this
Warrant will, at the time of such delivery, be validly issued and outstanding
and be fully paid and nonassessable. The Company further covenants and agrees
that it will pay when due and payable any and all federal and state issuance or
transfer taxes that may be payable in respect of this Warrant or any Common
Stock or certificates issued thereunder. The Company shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the transfer and delivery of stock certificates in the name other than that
of the Holder, and any such tax shall be paid by the Holder at the time of
presentation.
SECTION 10. CLOSING OF TRANSFER BOOKS.
The right to exercise this Warrant shall not be suspended during any
period that the stock transfer books of the Company for its Common Stock may be
closed. The Company shall not be required, however, to deliver stock
certificates upon such exercise while such books are duly closed for any
purpose, but the Company may postpone the delivery of such certificates until
the opening of such books. In such case, the certificates shall be delivered
promptly after the books are opened.
SECTION 11. RESTRICTIONS ON TRANSFERABILITY OF WARRANTS AND SHARES;
COMPLIANCE WITH LAWS.
Notwithstanding anything contained in this Warrant to the contrary,
the terms and provisions of this (S) 11 shall remain in full force and effect at
all times up to and including the end of the Exercise Period and, unless
otherwise specified herein, the term "Warrant" shall include the Underlying
Shares and the term "Restricted Stock" shall include such Underlying Shares as
if they had been issued.
-9-
<PAGE>
11.1. In General. This Warrant and the Restricted Stock shall not be
transferable except upon the conditions hereinafter specified, which conditions
are intended to insure compliance with the provisions of the Securities Act (or
any similar federal statute at the time in effect) and any applicable state
securities laws in respect of the transfer of this Warrant or any such
Restricted Stock.
11.2. Restrictive Legends. Each certificate for Restricted Stock
shall, unless otherwise permitted by the provisions of this (S) 11.2, bear on
the face thereof a legend reading substantially as follows:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION
OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND ANY STATE
SECURITIES LAWS THAT MAY BE APPLICABLE AND ARE
TRANSFERABLE ONLY UPON THE CONDITIONS SPECIFIED IN THE
WARRANT PURSUANT TO WHICH SUCH SHARES WERE ISSUED.
If a registration statement covering this Warrant or the Restricted
Stock shall become effective under the Securities Act and under any applicable
state securities laws or if the Company shall receive an opinion of counsel
reasonably satisfactory to the Company (which shall include counsel to the
Company and counsel to the original purchaser hereof) that, in the opinion of
such counsel, such legend is not, or is no longer, necessary or required
(including, without limitation, because of the availability of any exemption
afforded by Rule 144 of the Commission, the Company shall, or shall instruct its
transfer agents and registrars to, remove such legend from the certificates
evidencing the Restricted Stock or issue new certificates without such legend.
Upon the written request of the Holder of this Warrant or of the Restricted
Stock, the Company shall forthwith request independent counsel experienced in
such matters to render an opinion with respect to the matters covered herein,
and the Company shall bear all expenses in connection therewith.
11.3. Notice of Proposed Transfer; Registration Not Required. The
Holder of this Warrant or the Restricted Stock, by acceptance thereof, agrees
that it will give prior notice to the Company of its intention to transfer this
Warrant or
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<PAGE>
the Restricted Stock (or any portion thereof), describing briefly the manner and
circumstances of the proposed transfer. Promptly after receiving such notice,
the Company shall present copies thereof to Company counsel. If, in the opinion
of such counsel, the proposed transfer may be effected without registration or
qualification under any federal or state law, the Company, as promptly as
practicable, shall notify such Holder of such opinion and of the terms and
conditions, if any, to be observed in connection with such transfer, whereupon
such Holder shall be entitled to transfer this Warrant or such Restricted Stock,
and to have a new Warrant or new stock certificate(s) issued in the name of the
transferee or its nominee. If such counsel is unable to render such an opinion
(in which case such counsel shall set forth in writing the basis for his legal
conclusions in this regard), the proposed transfer described in the notice given
pursuant to this (S) 11.3 may not be effected except to the extent permitted by
and upon such registration and/or qualification or, in lieu thereof, compliance
with the conditions of an exemptive regulation of the Commission and/or any
applicable state securities regulatory authority, as the case may be. Thereupon,
the Company shall notify such Holder who thereafter shall not be entitled to
effect such transfer until receipt of a contrary notice from the Company or
until such registration or qualification, filing or compliance has become
effective (and consistent with the terms thereof). All fees and expenses of
Company counsel in connection with the rendition of the opinion provided for in
this (S) 11.3 shall be paid by the Company.
SECTION 12. SALE OF WARRANT TO COMPANY (RIGHT TO PUT).
12.1. Right to Put. On or after December 31, 1999, the Holder shall
have the right to require the Company to purchase this Warrant for cash (the
"Right to Put"), and the Company hereby agrees to make such purchase. The
purchase price (the "Purchase Price") shall be the value of the Underlying
Shares, which shall be the greater of (a) their Determined Value or (b) the
Applicable Percentage applied to the remainder of the product of five times the
Company's EBITDA minus its Borrowed Indebtedness plus its cash and cash
equivalents. In connection with the valuation in clause (b), EBITDA shall be
based upon the most recent 12 months, and Borrowed Indebtedness, cash and cash
equivalents as of the last business day of the month preceding the Determination
Date defined in (S) 12.2.
-11-
<PAGE>
Notwithstanding the foregoing paragraph, if the Company shall
determine to have an Initial Public Offering prior to December 31, 1999, the
Holder shall have the right to require the Company to purchase this Warrant for
cash, and the Company hereby agrees to make such purchase at the Purchase Price.
12.2. Determined Value. The Holder may exercise the Right to Put by
delivering notice thereof ("Notice of Sale") to the Company. Promptly thereafter
the Holder and the Company shall attempt to reach agreement on the Determined
Value. If they do so agree, they shall put their agreement in writing, and
closing shall be held in accordance with (S) 12.3. If the parties cannot agree,
they shall promptly appoint a mutually acceptable qualified independent
appraiser to provide the Determined Value. If parties shall be unable to agree
on such an appraiser within 10 days of the Notice Date, the Purchase Price
shall be determined by a panel of three independent appraisers, one of whom
shall be selected by the Company, another of whom shall be selected by the
Holder, and the third of whom shall be selected by such other two appraisers or,
if such appraisers shall be unable to agree upon a third appraiser within 10
days of the selection date of the second of such two appraisers, by the American
Arbitration Association; provided, that if either party shall not select its
appraiser within 10 days after the Notice Date, such amount or value shall be
determined solely by the appraiser selected by the other party. The appraiser or
appraisers appointed pursuant to the foregoing procedure shall be instructed to
determine such value within 30 days after the final appointment of any appraiser
pursuant hereto (but in no event may such determination be made more than 45
days following the Notice Date), and such determination shall be final and
binding upon the parties. If three appraisers shall be appointed, (a) if the
median of the determinations of the appraisers shall equal the mean of such
determinations, such mean shall constitute the determination of the appraisers,
otherwise (b) the determination of the appraiser that shall differ most from the
other two appraisers shall be excluded, the remaining two determinations shall
be averaged and such average shall constitute the determination of the
appraisers. Each party shall bear its respective fees and expenses with respect
to any appraisal procedures and one-half of the fees and expenses of the
appraisers participating in any appraisal procedure. The Company shall cause one
copy of the final determination of the appraiser(s) to be sent directly to the
Holder. Such determination shall set forth the date as of which the
determination was made, (the "Determination Date").
-12-
<PAGE>
12.3. Closing. Upon ascertainment of a Determined Value under (S)
12.2, the Holder shall select a settlement date by notice in writing to the
Company which shall be not more than 60 days after such agreement is reached
(the "Put Settlement Date"). On the Put Settlement Date, upon surrender of this
Warrant by the Holder at the principal place of business of the Company in
Dallas, Texas, or, at the option of the Holder, upon delivery of this Warrant to
an escrow agent reasonably acceptable to the Holder and the Company, the Company
shall transfer the Purchase Price to the Holder in immediately available funds
by the method specified in such Notice of Sale.
12.4. Default by the Company. If for any reason the Company shall
default on, or be otherwise unable to meet, its obligations under this (S) 12,
the Holder shall thereupon have the right to two demand registrations covering
any Underlying Shares or Restricted Stock held by the Holder during the balance
of the Exercise Period, as more fully provided in (S) 13 below. Such right shall
be in addition to all other rights and remedies available to the Holder upon a
breach by the Company of its obligations under this (S) 12.
12.5. Termination. The rights granted to the Holder in this (S) 12
shall terminate on the Expiration Date.
SECTION 13. REGISTRATION RIGHTS.
13.1. Demand Registration Rights. Upon the earlier of the time that
the Company (a) has or proposes to have an Initial Public Offering in which the
Holder does not exercise its piggyback rights under (S) 13.3 or (b) defaults in
the manner specified in (S) 12.4, the Holder shall thereupon be granted, and the
Company hereby does so grant, two demand registration rights covering the
Underlying Shares or Restricted Stock held by the Holder. Thereafter, upon the
request of the Holder requesting that the Company effect registration of all or
a part of such securities under applicable federal and state securities law, the
Company shall, subject to the conditions of (S) 13.2 below, promptly endeavor in
good faith to effect such registration.
The Company's actions shall include notification to or approval
of any governmental authority under any federal or state law, or listing with
any securities exchange or national securities market for the public trading of
securities, which may be required reasonably to permit the proposed sale of
securities that the Holder proposes to make promptly upon the effectiveness of
such registration, and the
-13-
<PAGE>
Company shall keep effective such registration for such period, not to exceed
nine months, as may be necessary to effect such sale and shall, if necessary,
amend the registration statement and supplement the prospectus during such
period.
13.2. Conditions to Demand Registration. The Company may delay any
registration required pursuant to (S) 13.1 for a period not exceeding 90 days
provided the Company shall in good faith determine that any such registration
would adversely affect an offering or contemplated offering of other securities
by the Company or would otherwise be materially detrimental to the Company or
its shareholders and, in any event, the Company shall not be required to
register or use its best efforts to effect any such registration on more than
two occasions.
13.3. Piggyback Registration. If at any time and from time to time
during the Exercise Period the Company proposes to register any of its Common
Stock under the Securities Act (other than pursuant to (S) 13.1) in connection
with an underwritten public offering of such Common Stock, it shall promptly
give written notice to the Holder of the Underlying Shares or Restricted Stock
of its intention to do so. Upon the written request of the Holder, given within
30 days after receipt of any such notice from the Company, the Company shall in
each instance use its best efforts to cause such securities to be registered
under the Securities Act and registered or qualified under any state securities
law, all to the extent necessary to permit the sale or other disposition thereof
in the manner stated in such request by the Holder; PROVIDED, HOWEVER, that the
obligation to give such notice and to use such best efforts shall not apply to
any proposal of the Company to register any of its securities under the
Securities Act (a) on Form S-8 (or any successor form), (b) in connection with
dividend reinvestment plans, or (c) for the purpose of offering such securities
to another business entity or the shareholders of such entity in connection with
the acquisition of assets or shares of capital stock of such entity or in
connection with a merger or consolidation with such entity. In connection with
any offering involving an underwriting of Restricted Stock the Company shall not
be required to include such shares unless the Holder agrees to the terms of the
underwriting and then only in such quantity as will not, in the opinion of the
underwriters, jeopardize the success of the offering by the Company. Nothing in
this (S) 13.3 shall be deemed to require the Company to proceed with any
registration of its securities after giving the notice herein provided.
-14-
<PAGE>
13.4. Expenses. The Company shall pay all Registration Expenses in
connection with all registrations (which, for purposes of this (S) 13.4 and (S)
13.5, shall include any qualifications, notifications and exemptions) under (S)
(S) 13.1 and 13.3.
13.5. Indemnification. In connection with any registration under (S)
13.1 or 13.3, the Company shall indemnify the Holder, and each underwriter
thereof including each person, if any, who controls such Holder within the
meaning of (S) 15 of the Securities Act, against all losses, claims, damages and
liabilities caused by any untrue, or alleged untrue, statement of a material
fact contained in any registration statement or prospectus or notification or
offering circular (and as amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) or any preliminary prospectus
or caused by any omission, or alleged omission, to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omissions based
upon information furnished in writing to the Company by the Holder or, as the
case may be, any such underwriter expressly for use therein, and the Company and
each officer, director and controlling person of the Company shall be
indemnified by the Holder for all such losses, claims, damages and liabilities
caused by any untrue, or alleged untrue, statement or omission, or alleged
omission, based upon information furnished in writing to the Company by the
Holder for any such use.
Promptly upon receipt by a party indemnified under this (S) 13.5 of
notice of the commencement of any action against such indemnified party in
respect of which indemnity or reimbursement may be sought against any
indemnifying party hereunder, the indemnified party shall notify the
indemnifying party in writing of the commencement of such action, but the
failure so to notify the indemnifying party shall not relieve it of any
liability which it may have to any indemnified party otherwise than under this
(S) 13.5. In case notice of commencement of any such action shall be given to
the indemnifying party as above provided, the indemnifying party shall be
entitled to participate in and, to the extent it may wish, jointly with any
other indemnifying party similarly notified, to assume the defense of such
action at its own expense, with counsel chosen by it and satisfactory to such
indemnified party. The indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such
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<PAGE>
counsel (other than reasonable costs of investigation) shall be paid by the
indemnified party unless the indemnifying party either agrees to pay the same or
fails to assume the defense of such action with counsel satisfactory to the
indemnified party. No indemnifying party shall be liable for any settlement
entered into without its consent which consent shall not be unreasonably
withheld.
13.6. Termination. The rights granted to the Company under this (S)
13 shall terminate on the Expiration Date.
SECTION 14. TAG-ALONG ARRANGEMENTS.
14.1. Significant Transfer. The Holder shall have the right to have
this Warrant or Restricted Stock included in any Significant Transfer of Common
Stock by Principal Shareholders of the Company.
14.2. Notices. Promptly after it shall become aware of a proposed
Significant Transfer, the Company shall give notice thereof to the Holder,
specifying the terms of the transaction, including the date on which it is
expected to occur and stating the likelihood of this Warrant or Restricted Stock
being included in the transaction on the same terms. The Holder shall thereafter
have 20 days in which to respond as to whether or not it wishes or elects to be
included in the Significant Transfer on the terms thereof. If it elects to be
included, the Company shall use its best efforts to include the Holder's
securities upon the same terms as those applying to the selling Principal
Shareholders.
14.3. Termination. The provisions of this (S) 14 shall terminate on
the Expiration Date.
SECTION 15. DRAG-ALONG OBLIGATION.
15.1. Significant Transfer. Promptly upon its receiving notice or
otherwise learning of a proposed Significant Transfer by Principal Shareholders,
the Company shall deliver notice thereof to the Holder (such delivery date
referred to herein is the "Notice Date"), specifying the terms of the
transaction, including the date on which it is expected to occur (the "Transfer
Date"), the consideration per share to be paid by the prospective purchaser, and
a statement as to whether the Company or such Principal Shareholders desire the
inclusion of this Warrant or Restricted Stock in the transaction. If inclusion
is requested, the Holder shall thereupon have the obligation, and hereby agrees,
to include this Warrant or such Restricted Stock in such Significant
-16-
<PAGE>
Transfer, PROVIDED (a) the purchase price thereof shall be no less than the
"Purchase Price" specified and determined in (S) 12.1; (b) such purchase price
shall be paid in cash and/or in immediately available funds, and (c) the
Transfer Date shall occur within 60 days of the Notice Date.
15.2 Termination. The provisions of (S) 15.1 shall terminate on the
Expiration Date.
SECTION 16. [INTENTIONALLY DELETED]
SECTION 17. LOST, STOLEN WARRANTS, ETC.
If this Warrant shall be mutilated, lost, stolen or destroyed, the
Company shall issue a new Warrant of like date, tenor and denomination and
deliver the same in exchange and substitution for and upon surrender and
cancellation of the mutilated Warrant, or in lieu of the Warrant lost, stolen or
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<PAGE>
destroyed, upon receipt of evidence satisfactory to the Company of the loss,
theft or destruction of such Warrant, and upon receipt of indemnity satisfactory
to the Company.
SECTION 18. SEVERABILITY.
Should any part of this Warrant for any reason be declared invalid,
such decision shall not affect the validity of any remaining portion, which
shall remain in force and effect as if this Warrant had been executed with the
invalid portion thereof eliminated. It is hereby declared the intention of the
parties hereto that they would have executed and accepted the remaining portion
of this Warrant without including therein any such part, parts or portion which
may, for any reason, be hereafter declared invalid.
SECTION 19. MISCELLANEOUS.
19.1. Holder Not A Shareholder. Except as otherwise specifically
provided herein, prior to the exercise of this Warrant, the Holder shall not be
entitled to any of the rights of a shareholder of the Company, including the
right as a shareholder to (a) vote or consent or (b) receive dividends or any
other distributions made to shareholders.
19.2. Notices. Any notice, demand or delivery to be made pursuant to
the provisions of this Warrant shall be in writing and (a) shall be deemed to
have been given or made one day after the date sent (i) if by the Company, by
prepaid overnight delivery, addressed to the Holder at its last known address
appearing on the books of the Company maintained for such purpose or (ii) if by
the Holder, by prepaid overnight delivery, addressed to the Company at 3400
Carlisle, Suite 500, Dallas, TX 75240; and (b) if given by courier, confirmed
telegram, confirmed facsimile transmission or confirmed telex shall be deemed to
have been made or given when received. The Holder and the Company may each
designate a different address by notice to the other in the manner provided in
this (S) 19.2.
19.3. Successors and Assigns. This Warrant and the rights evidenced
hereby shall inure to the benefit of and be binding upon the successors and
permitted assigns of the Company and the Holder. The provisions of this Warrant
are intended to be for the benefit of the Holder of this Warrant or the
Restricted Stock and shall be enforceable by the Holder.
-18-
<PAGE>
19.4. Amendments. This Warrant may not be modified, supplemented,
varied or amended except by an instrument in writing signed by the Company and
the Holder.
19.5. Headings. The index and the descriptive headings of sections of
this Warrant are provided solely for convenience of reference and shall not, for
any purpose, be deemed a part of this Warrant.
19.6. GOVERNING LAW. THIS WARRANT AND ALL MATTERS CONCERNING THIS
WARRANT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF COLORADO FOR CONTRACTS
ENTERED INTO AND TO BE PERFORMED IN SUCH STATE WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS.
* * * * * *
-19-
<PAGE>
ANTI-DILUTION PROVISIONS
1. Anti-Dilution Provisions. The Underlying Shares shall be subject
to change or adjustment as follows:
(a) Common Stock Dividends, Subdivisions, Combinations. In case
the Company shall (i) pay or make a dividend or other distribution to all
holders of its Common Stock in shares of Common Stock, (ii) subdivide, split or
reclassify the outstanding shares of its Common Stock into a larger number of
shares, or (iii) combine or reclassify the outstanding shares of its Common
Stock into a smaller number of shares, then in each such case the Underlying
Shares shall be adjusted to equal the number of such shares to which the holder
of this Warrant would have been entitled upon the occurrence of such event had
this Warrant been exercised immediately prior to the happening of such event or,
in the case of a stock dividend or other distribution, prior to the record date
for determination of such Shareholders entitled thereto. An adjustment made
pursuant to this paragraph 1 shall become effective immediately after such
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, split, combination or
reclassification.
(b) Reorganization or Reclassification. In case of any capital
reorganization or any reclassification of the Common Stock of the Company
(whether pursuant to a merger of consolidation or otherwise), this Warrant shall
thereafter be exercisable for the number of shares of stock or other securities
or property receivable upon such capital reorganization or reclassification of
Common Stock, as the case may be, by a holder of the number of shares of Common
Stock into which this Warrant was exercisable immediately prior to such capital
reorganization or reclassification of Common Stock; and, in any case,
appropriate adjustment shall be made in the application of the provisions herein
set forth with respect to the rights and interests thereafter of the Holder of
this Warrant to the end that the provisions set forth herein shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other securities or property thereafter deliverable upon the exercise of this
Warrant.
(c) Distributions of Assets or Securities Other Than Common
Stock. In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock shares of any of its capital stock (other than
Common Stock), rights or warrants to purchase any of its securities,
EXHIBIT A
(to Warrant)
<PAGE>
cash, other assets or evidences of its indebtedness, then in each such case the
Underlying Shares shall be adjusted by multiplying the Underlying Shares
immediately prior to the date of such dividend or distribution by a fraction, of
which the numerator shall be the Determined Value per share of Common Stock at
the record date for determining shareholders entitled to such dividend or
distribution, and of which the denominator shall be such Determined Value per
share less the fair market value (as determined in good faith by the Board of
Directors of the Company) of the portion of the securities, cash, assets or
evidences of indebtedness so distributed applicable to one share of Common
Stock. An adjustment made pursuant to this subparagraph (c) shall become
effective immediately after such distribution date.
(d) No Impairment. The Company shall not, without the prior
consent of the Holder, by amendment of its Articles of Incorporation or through
any reorganization, transfer of the assets, consolidation, merger, dissolution,
issue or sale of securities or any other voluntary action, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Company, but will at all times in good faith assist
in the carrying out of all the provisions of this paragraph 1 and in the taking
of all such action as may be necessary or appropriate in order to protect the
conversion rights of the Holder against impairment.
(e) Readjustment. Upon the termination of any right of conversion
or exchange of any securities convertible into or exchangeable for Common Stock,
or upon the expiration of any rights or options to purchase Common Stock (other
than this Warrant) or any securities convertible into or exchangeable for Common
Stock, or upon any change in the number of shares of Common Stock issuable upon
exercise, conversion or exchange of any such securities, rights or options, the
Underlying Shares then in effect shall forthwith be readjusted to such
Underlying Shares as would have been in effect had the adjustments made upon the
issuance or sale of such securities, rights or options been made upon the basis
of the issuance of only the number of shares of Common Stock actually issued or
to be issued upon the exercise, conversion or exchange or such securities,
rights or options.
2. Notice of Certain Corporation Transactions. The Company shall
promptly mail to the Holder a notice of any proposed dividend, merger,
dissolution, liquidation or winding
A-3
<PAGE>
up of the Company, stating the proposed record date (if any) or effective date
for and such transaction and briefly describing the transaction.
3. No Adjustment or Readjustment in Certain Circumstances. The
Company shall not make any adjustment or readjustment of any of the Exercise
Price or the number of Underlying Shares in the case of (a) the exercise of this
Warrant, or (b) the issuance or sale by the Company of Common Stock or rights or
options pursuant to, or the adjustment of the exercise price, or the exercise or
termination, of rights or options issued pursuant to, any employee stock option
or similar plan of the Company, or (c) except as specifically provided in this
Exhibit A, by reason of the issuance of shares of Common Stock or any other
securities of the Company in exchange for cash, property or services or other
consideration.
4. Certificate of Adjustment. Upon the occurrence of each adjustment
or readjustment pursuant to this Exhibit A, the Company at its expanse shall as
promptly as practicable compute such adjustment or readjustment in accordance
with the provisions of this Exhibit A, and prepare and furnish to the Holder a
certificate setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is based.
5. Information to be Furnished Upon Request. Upon the request at any
time of the Holder, the Company shall as promptly as practicable furnish or
cause to be furnished, to the Holder, at its address set forth in such request,
a certificate setting forth the number of shares of Common Stock that at the
time would be received upon the exercise of the Warrant and the Exercise Price
thereof.
A-4
<PAGE>
TO PHF ASSOCIATES, INC.:
The undersigned registered holder of the within Warrant hereby
irrevocably exercises the Warrant, purchases thereunder ______________ shares of
the Common Stock of the Company, herewith makes payment of $_______________
therefor, and requests that the certificate(s) for such shares be issued in the
name of the undersigned Holder or its nominee and delivered to it at Holder's
address on the books of the Company.
By: /s/ ROBERT J. NEWCORN
-------------------------------
Robert J. Newcorn
Dated:
----------------------------
ASSIGNMENT
FOR VALUE RECEIVED, the undersigned registered Holder of the within
Warrant hereby sells, assigns and transfers unto ________________________ the
Warrant and all rights evidenced thereby and does irrevocably constitute and
appoint _______________________ attorney to transfer the Warrant on the books of
the Company.
HANIFEN IMHOFF MEZZANINE FUND, L.P.
By: /s/ ROBERT J. NEWCORN
-------------------------------
Robert J. Newcorn
Dated:
----------------------------
<PAGE>
Summary Plan Description
for
CPS SYSYTEMS, INC. 401K RETIREMENT PLAN
<PAGE>
<TABLE>
<CAPTION>
Tables of Contents
PAGE
----
<S> <C>
Introduction......................................................... 1
1. Who Is Eligible for the Plan?........................................ 2
2. How Do I Become a Member of the Plan?................................ 2
3. How Do I Earn Service for Purposes of the Plan?...................... 2
4. May I Make Pre-Tax 401(k) Contributions to the Plan?................. 2
5. Does the Company Make Any Contributions to the Plan?................. 3
6. May I Make After-Tax Voluntary Contributions to the Plan?............ 4
7. Will the Plan Accept Rollover Contributions?......................... 4
8. What Happens to My Contributions?.................................... 4
9. How Do I Know How Much Is In My Accounts?............................ 5
10. What Are My Benefits at Retirement?.................................. 5
11. What Happens if I Become Disabled?................................... 5
12. What Happens to My Accounts if I Die?................................ 5
13. How Do I Name My Beneficiary?........................................ 6
14. What If I Leave the Company Before I Retire?......................... 6
15. What About Breaks in Service?........................................ 7
16. How Will Benefits Under the Plan Be Paid?............................ 7
17. May I Make Withdrawals While I am Working?........................... 9
18. Are Loans Available Under the Plan?.................................. 10
19. What Happens If the Plan Becomes Top Heavy?.......................... 11
20. What Else Do I Need to Know About the Plan?.......................... 12
21. What Is the Procedure for Review of Claims Which Are Denied?......... 12
22. What Happens If The Plan Terminates?................................. 13
23. What Are My Rights Under ERISA?...................................... 13
General Information.................................................. 15
</TABLE>
i
<PAGE>
Introduction
- ------------
CPS SYSTEMS, INC. 401K RETIREMENT PLAN is designed to allow you and other
eligible employees to share in the profits of the Company. The Plan is also
intended to give you the opportunity to accumulate savings by means of salary
deferral and to provide you with retirement and other benefits. The Plan first
took effect on July 1, 1989 and has been revised from time to time. The revised
Plan is described on the following pages.
This Summary Plan Description gives you a general outline of the major features
of the Plan. It also explains your rights and obligations as a member of the
Plan. If there is any conflict between the wording of this description and the
Plan document, the terms and conditions of the Plan document will apply. A copy
of the Plan document is available for your inspection at the Company during
normal business hours. You may obtain a copy upon request.
Please read this description carefully so you will understand how the Plan works
for you. If you have any questions, you should contact the Plan Administrator.
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<PAGE>
1. Who Is Eligible for the Plan?
Any employee who is employed by CPS SYSTEMS, INC. is eligible to participate in
the Plan.
2. How Do I Become a Member of the Plan?
If you are currently a member of the Plan, you will continue to be a member of
the revised Plan. Otherwise, you will become a member of the Plan on the
January 1st or July 1st on or after the date you have reached age 20-1/2 and
have completed at least 6 Months of Service (see Question 3).
When you become eligible to participate in the Plan, you will be asked to name
your beneficiary by completing a Beneficiary Designation Form. (See Question 13
for more information on choosing your beneficiary.)
3. How Do I Earn Service for Purpose of the Plan?
Eligibility
- -----------
For purposes of joining the Plan (see Question 2), you earn 6 Months of Service
when you complete an average of 83-1/3 Hours of Service per month during the
6-month period which begins on the date you are first employed or reemployed, or
during any following 6-month period. (Each new period begins on the day after
the end of the prior period).
Vesting
- -------
For purposes of determining your vested percentage under the Plan (see Question
14), you earn a Year of Service when you complete at least 1,000 Hours of
Service during any Plan Year.
Hour of Service
- ---------------
Hours of Service are used by the Plan to determine whether you have earned
credit for periods of service. An Hour of Service is any hour for which you are
paid directly or in directly by the Company, including paid holidays, vacations,
sick leave, disability, layoff, jury duty, military leave and any other paid
leaves of absence. However, you will receive credit for more than 501 Hours of
Service for any one period of paid absence.
4. May I Make Pre-Tax 401(k) Contributions to the Plan?
When you become a member of the Plan, you may sign a payroll agreement with the
Company to have part of your Compensation deferred into the Plan on a pre-tax
basis. You may choose to defer up to 15% of your Compensation for each Plan
Year. However, the total amount of your deferral may not exceed the annual IRS
limit. The IRS limit is $9,240 for the 1995 calendar year, but this amount may
change from year to year depending upon cost of living increases. Your
Compensation will continue to be deferred by this amount until you decide to
change the amount or to stop making contributions altogether.
Page 2
<PAGE>
Your Compensation for purposes of the pre-tax 401(k) contribution means the
total earnings paid to you by the Company before any deferrals.
You may increase or decrease your pre-tax 401(k) contribution by completing a
new payroll agreement and filing it with the Plan Administrator at least 30 days
before the effective date of the change. You may make such a change at least
once a year and at such other times as allowed by the Plan Administrator.
You may stop making pre-tax 401(k) contributions altogether by notifying the
Plan Administrator in writing at least 30 days before the date you want your
contributions to stop. If you stop making pre-tax 401(k) contributions, you may
begin again on any following January 1st or July 1st and on such other dates as
allowed by the Plan Administrator. You must file a new payroll agreement with
the Plan Administrator at least 30 days before the date you wish to resume
making contributions.
Your pre-tax 401(k) contribution will not be subject to federal income taxes
until it is distributed from the Plan. In addition, depending on your state or
local tax laws, your pre-tax 401(k) contribution may be excluded from state and
local taxes until it is distributed. However, your pre-tax 401(k) contribution
will always be subject to Social Security taxes.
Because of legal requirements, pre-tax 401(k) contributions can only be made by
salary reduction. Cash payments are not permitted.
5. Does the Company Make Any Contributions to the Plan?
Matching Contributions
Each Plan Year the Board of Directors will review the Company's financial status
and vote on whether to make a matching contribution.
You will receive a share of any matching contribution if you elect to make
pre-tax 401(k) contributions.
If a matching contribution is to be made for the Plan Year, the amount will be
equal to a percentage of your pre-tax 401(k) contributions for that Plan Year,
as voted by the Board of Directors.
Any matching contribution made by the Company will be credited to your matching
contribution account.
Profit Sharing Contributions
The Company may also make a profit sharing contribution to the Plan. Each Plan
Year, the Board of Directors will review the Company's financial status and vote
on the amount of the profit sharing contribution for that Plan Year. In years of
no profit or low profit, the Company may not make a profit sharing contribution.
Each Plan Year you will receive a share of any profit sharing contribution if
you complete at least 501 Hours of Service during that Plan Year or you are
employed by the Company on the last day of the Plan Year.
Your share of the profit sharing contribution will be in the same proportion
that your Compensation bears to the total Compensation paid to all members
eligible to
Page 3
<PAGE>
share in the allocation.
For example, if the total profit sharing contribution for a particular year is
$20,000 and your Compensation during the year is 2% of the total Compensation
for all eligible members, then your share would be $400, figured as follows:
2% X $20,000 = $400
Your Compensation for purposes of the profit sharing contribution for any Plan
Year means the total earnings paid to you by the Company during the Plan Year.
Any pre-tax 401 (k) contributions made during such period are included.
Any profit sharing contributions made by the Company will be credited to your
profit sharing contribution account.
6. May I Make After-Tax Voluntary Contributions to the Plan?
You are not permitted to make any contributions to the Plan other than pre-tax
401 (k) contributions.
7. Will the Plan Accept Rollover Contributions?
You may contribute to the Plan distributions that you are entitled to receive
(or have received) from other qualified plans. Such a contribution is called a
"rollover contribution". There are three ways that you can make a rollover
contribution to the Plan:
. You may ask the other plan to make a direct transfer of your distribution
into this Plan. See the administrator of the other plan for more
information on this procedure.
. You may receive the distribution from the other plan and then rollover the
distribution into this Plan within 60 days of receipt. Note: your
distribution may be subject to a 20% withholding by the IRS when you
receive payment of the distribution. For more information on the
withholding, see your tax advisor or the administrator of the other plan.
. If you have received payment of the Distribution and rolled it into an IRA,
you may roll the IRA into this Plan. You should contact the financial
institution that holds your IRA for more information on this procedure.
If you wish to make a rollover contribution, you must file a written request
with the Plan Administrator so that a determination may be made as to whether
the distribution from the other plan (or the IRA) meets the legal requirements
necessary to place your money under this Plan. You will always be 100% vested
in the value of your rollover contribution account.
8. What Happens to My Contributions?
All of the contributions go into a Trust Fund that is managed by the Trustee of
the Plan. The Trustee holds and invests all contributions and any money earned
by the investments.
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<PAGE>
You decide on how the contributions will be invested under the Plan. The Plan
Administrator will provide you with information on what investments are
available under the Trust Fund. (See the General Information Section for the
organization that maintains your investments.)
9. How Do I Know How Much Is in My Accounts?
At least once each year you will receive a statement showing the status of your
accounts. This statement will tell you:
. Your pre-tax 401 (k) contributions made during such period.
. Your share of matching Company contributions made during such period.
. Your share of profit sharing Company contributions for such period.
. The value of any rollover contributions you made to the plan.
. Your share of investment results - earnings and losses.
. The current balance in all your accounts.
10. What Are My Benefits at Retirement?
You may retire on your Normal Retirement Date and receive the full balance of
your accounts under the Plan. Your benefit will be paid to you according to the
methods described in Question 16.
Your Normal Retirement Date is the later of your 65th birthday or the 5th
anniversary of the 1st day of the Plan Year in which you joined the Plan.
If you work beyond your Normal Retirement Date, your payments from the Plan will
not start until you actually retire. However, if you work beyond age 70-1/2,
your payments from the Plan will begin at that time. (See the Plan Administrator
for more information.)
11. What Happens if I Become Disabled?
If you become totally and permanently disabled before you reach your Normal
Retirement Date, you will receive the full balance of your accounts under the
Plan. Your benefit will be paid to you according to the methods described in
Question 16.
Total and permanent disability means you are unable to do your job with the
Company because of a mental or physical disability which can be expected to
result in death or last for a continuous period of at least 12 months. The Plan
Administrator will decide if you are disabled based on qualified medical
evidence.
12. What Happens to My Accounts if I Die?
If you die while you are working for the Company, the full balance of your
accounts under the Plan will be paid to your beneficiary. (See Question 13 for
more information on choosing your beneficiary.)
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<PAGE>
If you die after you have left the Company, the vested balance (see Question 14)
of your accounts, if any, will be paid to your beneficiary.
If you die before payments from the Plan have begun, and the vested balance of
your accounts is not greater than $3,500, the death benefit will be paid to your
beneficiary in a single lump sum. If the vested balance is greater than $3,500,
the death benefit will be paid as a life annuity, unless he/she elects a lump
sum payment or installment payments.
If you die after your payments from the Plan have begun, your beneficiary will
receive whatever death benefit is payable under the method of payment or form of
annuity that was in effect on the date of your death.
13. How Do I Name My Beneficiary?
When you become eligible to join the Plan, you will be asked to name your
beneficiary by completing a Beneficiary Designation Form. You may name anyone
you wish as your beneficiary. However, if you are married, your spouse is
automatically entitled to receive a death benefit equal to 100% of your account
balance, unless he/she consents to the naming of another beneficiary.
You may change your beneficiary designation at any time by filing a new form
with the Plan Administrator. However, if you are married, any change must be
consented to by your spouse.
Your spouse's consent to any non-spouse beneficiary designation must be in
writing and witnessed by a notary or Plan representative.
If you do not name a beneficiary, or if your named beneficiary dies before you
or before a complete distribution is made, death benefits will be paid to the
following person or persons in this order: (a) your spouse, (b) your natural
and adopted children, and children of deceased children by right of
representation, (c) your parents, (d) your brothers and sisters, and nephews and
nieces who are children of deceased brothers and sisters by right of
representation, and (e) your estate.
14. What If I Leave the Company Before I Retire?
If you stop working for the Company before your Normal Retirement Date for a
reason other than death or disability, you will be vested in your pre-tax 401
(k) contribution account. You will also be vested in your matching contribution
account and your profit sharing contribution account based on the following
vesting schedule:
<TABLE>
<CAPTION>
Years of Service Vesting Percentage
---------------- ------------------
<S> <C>
3 20%
4 40%
5 60%
6 80%
7 100%
</TABLE>
If you stop working for the Company and you receive distribution of your vested
benefit, the non-vested part of your matching contribution account and your
profit sharing contribution account will be forfeited as of the date of your
distribution. If you defer distribution of your vested benefit, the non-vested
part will not be
Page 6
<PAGE>
forfeited until you have 5 or more 1-year breaks in service. (See Question 15
for information on breaks in service.)
If you are reemployed before you have 5 or more 1-year breaks in service you
may, within 5 years of your reemployment date, repay the amount of your
distribution attributable to Company contributions and have your matching
contribution account and your profit sharing contribution account restored to
the extent it was forfeited as a result of the distribution.
Any forfeitures will be used to offset future Company contributions.
In determining your vested percentage, all Years of Service with the Company
will be counted. (See Question 3 for information on Years of Service.)
Your benefit will be paid to you according to the methods described in Question
16.
15. What About Breaks in Service?
A 1-year break in service occurs if you do not complete more than 500 hours in
any Plan Year. However, if you are on a leave of absence approved by the
Company, you will not have a break in service during your absence, provided you
return to work after the end of your leave of absence.
As stated in Question 14, if you are reemployed before you have 5 or more 1-year
breaks in service you may, within 5 years of your reemployment date, repay the
amount of your distribution and have your matching contribution account and your
profit sharing contribution account restored to the extent it was forfeited as a
result of the distribution.
For purposes of preventing a break in service, if you are absent from work for
maternity of paternity reasons, you will be credited with the number of Hours of
Service that you would normally have worked during that period, or, where actual
hours cannot be determined, 8 Hours of Service for each day of your absence.
However, in no event will you be credited with more than 501 hours. An absence
from work maternity or paternity reasons means you are absent from work because:
. you are pregnant, or
. you gave birth to a child, or
. you adopted a child, or
. you are caring for your child immediately following birth or adoption.
Credit will be given for the Plan Year in which the absence begins or, if not
needed to prevent a break in service in that year, in the following Plan Year.
The Plan Administrator may require you to furnish proof that your absence
qualifies as a maternity or paternity absence.
16. How Will Benefits Under the Plan Be Paid?
When you retire or stop working for the Company for any reason, including total
and permanent disability, your benefit under the Plan will be paid in the
following manner:
. If the amount of your benefit is not greater than $3,500, your benefit will
Page 7
<PAGE>
automatically be paid to you in a lump sum.
. If the amount of your benefit is greater than $3,500, you may elect to
receive your benefits in the form of a lump sum or as an annuity or in
installment payments. However, if you do not elect a method of payment
within a reasonable time after you terminate your employment, your benefits
will be paid to you in a lump sum. Furthermore, if you have elected to
receive your account balance in the form of an annuity, the following rules
will apply:
. If you are not married, the annuity will automatically be paid in the
form of a single life annuity. Under this form, you will receive a
monthly benefit payment for as long as you live. Upon your death, no
further benefit payments will be made. You may waive the single life
annuity and elect another form of annuity or a lump sum payment.
. If you are married , the annuity will automatically be paid in the form
of a spouse joint and survivor annuity. Under this form, you will
receive a monthly benefit payment for as long as you live. If you die
before your spouse, he/she will receive a monthly payment for as long as
he/she lives in an amount equal to 1/2 of the monthly payment you were
receiving. You may waive the spouse joint and survivor annuity form and
elect another form of annuity or lump sum payment as long as you have
the consent of your spouse.
. If you are married, any withdrawal that you make from the Plan after you
elect the annuity will require spousal consent. Any loan you take from
the Plan after you elect the annuity will require spousal consent if the
portion of your account used as security for the loan exceeds $3,500.
. If you are married and die after you elect the annuity but before the
date benefits are scheduled to begin, the automatic spouse's death
benefit (see Question 13) will only be 50% of your account balance and
the remaining 50% of your account balance will be paid to your named
beneficiary. You may waive the 50% automatic spouse's death benefit and
elect another beneficiary for this portion of your account balance as
long as you have the consent of your spouse.
Your spouse's consent to waive any right to the spouse joint and survivor
annuity or the 50% spouse's death benefit form or to any withdrawal or to any
loan must be in writing and witnessed by a notary or plan representative.
If the amount of your vested benefit is less than $3,500, your benefit will be
paid to you as soon as administratively possible after you terminate or retire.
However, if the amount of your vested benefit is greater than $3,500, no benefit
will be paid to you until your Normal Retirement Date unless you consent in
writing to an earlier payment date.
Important Notes:
- ----------------
. Your distribution may be subject to a 20% withholding for federal income
tax purposes unless you elect to have the distribution transferred directly
to another employer plan that accepts rollovers or an Individual Retirement
Account (IRA).
. If you stop working for the Company before you reach age 55, the IRS may
assess a penalty tax on the amount of your distribution.
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<PAGE>
For more information on direct transfers, withholding or the penalty tax, see
your tax advisor or your employee benefits administrator.
Furthermore, if the amount of your benefit is greater than $3,500, you may elect
to defer payment beyond your Normal Retirement Date. If you do elect to defer
payment of your benefit, the deferral cannot be later than the April 1
following the calendar year in which you reach age 70-1/2, regardless of whether
you are still working for the Company. However, if you reached age 70-1/2 before
January 1, 1989, special rules may apply to you. (See the Plan Administrator for
more information on these special rules.)
17. May I Make Withdrawals While I Am Working?
Your Rollover Contribution Account
- ----------------------------------
You may withdraw all or a part of your rollover contribution account. There are
no special rules which apply to withdrawals from this account.
Hardship Withdrawals From Your Matching Contribution Account and Your Profit
- ----------------------------------------------------------------------------
Sharing Contribution Account
- ----------------------------
You may make a hardship withdrawal from the vested portion of your matching
contribution account and your profit sharing contribution account if your
withdrawal is for one of the following reasons:
. to build, purchase or improve a house occupied or to be occupied by you,
. to pay for all or part of the cost of your education or the education of
one of your dependents,
. to pay for all or part of any unusual medical expense for you or any of
your dependents,
. to meet any severe financial hardship.
Hardship Withdrawals From Your Pre-Tax 401 (k) Contribution Account
- -------------------------------------------------------------------
You may also make a hardship withdrawal from your pre-tax 401(k) contribution
account (but excluding any earnings) if your withdrawal is for any one of the
following reasons:
. to purchase your principal residence (excluding mortgage payments),
. to pay any medical expense for you and any of your dependents,
. to pay to tuition for the next semester or quarter of post-secondary
education for you or any of your dependents, or
. to pay for the cost of preventing your aviation from, or foreclosure on the
mortgage of, your principal residence.
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<PAGE>
In addition to satisfying one of the above hardship reasons, you must also
satisfy both of the following requirements:
. the amount of your withdrawal must not exceed the amount of your financial
need, and
. you must have obtained all distributions, unrelated to hardship, and any
nontaxable loans currently available under this Plan or any other qualified
plan of the Company.
Important Note: If you receive a hardship withdrawal from your pre-tax 401(k)
contribution account, your pre-tax 401(k) contributions under the Plan will be
suspended for a period of 12 months. Also, the annual IRS limit ($9,240 for
1995) on your pre-tax 401(k) contributions for the calendar year following the
year in which you received the hardship withdrawal will be reduced. The limit
will be reduced by the amount of pre-tax 401(k) contributions that you made
under the Plan during the calendar year in which you received the hardship
withdrawal.
Age 59-1/2 Withdrawals
- ----------------------
Upon reaching age 59-1/2, you may withdraw all or part of the vested portion of
any account without restriction.
Normal Retirement Age Withdrawals
- ---------------------------------
Upon reaching your Normal Retirement Age, you may also withdraw all or part of
any account without restriction.
Procedure for Making Withdrawals
- --------------------------------
If you wish to make a withdrawal, you should ask the Plan Administrator for a
withdrawal form to complete. You should return the completed form to the Plan
Administrator at least 30 days before the withdrawal date.
Important Notes:
- ---------------
. Your withdrawal may be subject to a 20% withholding for federal income tax
purposes unless you elect to have the withdrawal transferred directly to an
Individual Retirement Account (IRA).
. If you make a withdrawal from your accounts before you reach age 59-1/2, the
IRS may assess a penalty tax in addition to the income tax you would
ordinarily pay on the withdrawal.
For more information on direct transfers, withholding or the penalty tax, see
your tax advisor or your employee benefits administrator.
18. Are Loans Available Under the Plan?
You may apply for a loan from the Plan by filing a written application with the
Plan Administrator.
The interest you will pay on your loan will be a reasonable rate as determined
by the Trustee. Your loan will be secured by your vested account balance.
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<PAGE>
The repayment schedule of your loan will be as agreed upon by you and the
Trustee. However, it cannot longer be than 5 years, unless the purpose of the
loan is to purchase a dwelling which within a reasonable time is to be used as
your principal residence. Also, the loan must be amortized in level payments
made not less frequently than quarterly over the term of the loan.
Any loans made to you cannot exceed the lesser of (1) $50,000 or (2) 1/2 of the
vested portion of your account balance.
The amount of your loan must be for at least $1,000. If you already have
received a loan from the Plan and wish to receive another loan, there are
additional limits that may apply to your new loan. For information on these
limits, please see the Plan Administrator.
If you should die or leave the Company with an outstanding loan balance, it will
be deducted from your account before any benefits are paid to you or your
beneficiary.
For more information on the loan program, please refer to the Loan Procedures
Form which is available from the Plan Administrator.
19. What Happens if the Plan Becomes Top Heavy?
An additional benefit may be provided if the Plan is determined to be
"top-heavy." A "top-heavy" plan is one where more than 60% of the contributions
or benefits are paid to "Key Employees." "Key Employees" are generally owners,
officers, shareholders or highly paid employees. Each year the Plan
Administrator will determine whether the Plan is "top-heavy" for that year.
If the Plan becomes "top heavy" in any year, the Plan Administrator will notify
you, and the following special rules will apply that year:
. The Company may be required to contribute a minimum amount to your account
under the Plan equal to 3% of your earnings for that year. However, if the
highest amount contributed for a "Key Employee" is less than 3% of
earnings, the minimum contribution will not be greater than that amount.
. Your vested interest in your profit sharing contribution account and
matching contribution account will be determined according to the following
vesting schedule, instead of the vesting schedule in Question 14.
Years of Services Vesting Percentage
----------------- ------------------
1 0%
2 20%
3 40%
4 60%
5 80%
6 100%
The above vesting schedule will continue to apply in subsequent Plan Years even
if the Plan is no longer "top-heavy."
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<PAGE>
20. What Else Do I Need to Know About the Plan?
. You do not have to become a member of the Plan to stay employed. The Plan
does not give you any rights to continued employment or to any benefits
except those you earn under the terms of the Plan.
. For the protection of your interests and those of your dependents, your
benefit under the Plan cannot be taken, transferred or assigned. However, if
a court order under a state domestic relations law is determined to be a
"qualified domestic relations order", some or all of your benefit under the
Plan may be paid to someone other than you, your present spouse or your
named beneficiary. See the Plan Administrator if you have any questions
relating to domestic relations orders.
. The IRS places certain limits on the maximum contributions you and the
Company can make on your behalf. It is not expected that these limits will
be exceeded under the Plan. If any of these limits are exceeded, you will be
notified.
. If you are a "Highly Compensated Employee", the IRS places additional limits
on the amount of your pre-tax 401(k) and/or matching contributions. If these
limits are exceeded, your contributions will be reduced and any excess
contributions (plus earnings) will be paid to you. However, if you are not
vested, any excess matching contributions will be forfeited and applied to
reduce future Company contributions. You will be notified if it becomes
necessary to reduce any of your contributions.
. Because the Plan bases benefits solely on the amount of funds in your
accounts, it is not insured by the Pension Benefit Guaranty Corporation
(PBGC).
. Prior to 1994, the law required that the Plan, in determining your benefits,
only recognize compensation up to $200,000, as indexed annually to reflect
cost of living increases. Effective January 1, 1994, the limit has been
decreased to $150,000, as indexed periodically to reflect cost of living
increases. This limit will be adjusted each year for cost of living
increases. The limit will be applied to certain highly compensated employees
and their family members who participate in the Plan as if they were a
single participant of the Plan. Your Plan Administrator can provide you with
more information about this rule.
21. What Is the Procedure for Review of Claims Which Are Denied?
You will automatically receive your benefit from the Plan when you terminate or
retire. You will be asked to complete a form for such items as address, form of
payment desired, etc. If you feel that you are not getting the benefit to which
you are entitled, you may file a written claim with the Plan Administrator.
The Plan Administrator rules on every claim that is filed. Within 60 days of
the Plan Administrator receives your claim, it will be approved or denied. If
there are special circumstances, you may receive notice that the decision on
your claim will take longer than 60 days. (The Plan Administrator then has an
additional 60 days to make a decision.)
If your claim is denied, the notice of the claim denial will include:
. The specific reason for the denial.
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<PAGE>
. Specific reference to the Plan provisions on which the denial is
based.
. A description of any additional material or information you should
present to the Plan Administrator in order to have your claim
reviewed, and an explanation of the reason you must submit this
information.
. An explanation of the procedure you must follow if you want to appeal
the denial of your claim.
If you do not receive such a written notice within 60 days (or in special
circumstances - 180 days), you may assume that your claim has been denied and
proceed with the review procedures for denied claims as described below.
If your claim for benefits under the Plan is denied, you may make a written
request for a review of your claim within 60 days after you receive notice of
the denial. This request must be sent to the Plan Administrator,
You may also review the Plan documents and submit issues and comments in
writing. You have the right to be represented by an attorney or any other
representative of your choice. You may also request that the review be in the
nature of a hearing.
The Plan Administrator must inform you of the decision not later than 60 days
after receiving your request for a review. This 60-day period may be extended
for an additional 60 days if there are special circumstances, such as the need
for a hearing. The decision on the review will be in writing and include reasons
for the decision, as well as specific references to the Plan provisions on which
the denial is based.
22. What Happens if the Plan Terminates?
The Company intends to maintain the Plan indefinitely. However, it is always
possible that something could happen that would make it necessary for the
Company to terminate the Plan. If this happens, you and all other members will
automatically become fully entitled to the total balance in your accounts under
the Plan.
23. What Are My Rights Under ERISA?
You are entitled to certain rights and protections under the Employee Retirement
Income Security Act of 1974 (ERISA). ERISA provides that all Plan members shall
be entitled to:
. Examine without charge at the Company all Plan documents and copies of
all documents filed by the Plan Administrator with the U.S.
Department of Labor, such as annual reports and Plan descriptions.
. Obtain copies of all Plan documents and other Plan information upon
written request to the Plan Administrator. The Plan Administrator may
make a reasonable charge for the copies.
. Receive a summary of the Plan's annual financial report. The Plan
Administrator is required by law to furnish each member with a copy of
this summary annual report.
. Obtain a statement of the total balances in your accounts and what
your benefit
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<PAGE>
would be if you stopped working under the Plan now. If you do not have a
right to a benefit, the statement will tell you how many more years you
have to work to have a right to a benefit. This statement must be requested
in writing and is not required to be given more than once a year. The Plan
Administrator must provide the statement free of Charge.
In addition to creating rights for Plan members, ERISA imposes duties upon the
people who are responsible for the operation of the employee benefit Plan. The
people who operate your Plan, called "fiduciaries" of the Plan, have a duty to
do so prudently and in the interest of you and other Plan members and
beneficiaries.
No one, including your employer, may fire you or discriminate against you in
any way to prevent you from obtaining a benefit or exercising your rights under
ERISA.
If your claim for a benefit is denied in whole or in part, you must receive a
written explanation of the reason for the denial. You have the right to have the
Plan Administrator review and reconsider your claim.
Under ERISA, there are steps you can take to enforce the above rights. For
instance, if you request materials from the Plan Administrator and do not
receive them within 30 days, you may file suit in a federal court. In such a
case, the court may require the Plan Administrator to provide the materials and
pay you up to $100 a day until you receive the materials, unless the materials
were not sent because of reasons beyond the control of the Plan Administrator.
If you have a claim for benefits which is denied or ignored, in whole or in
part, you may file suit in a state or federal court. If it should happen that
the Plan fiduciaries misuse the Plan's money, or if you are discriminated
against for asserting your rights, you may seek assistance form the U.S.
Department of Labor, or you may file suit in a federal court. The court will
decide who should pay court costs and legal fees. If you are successful, the
court may order the person you have sued to pay these costs and fees. If you
lose, the court may order you to pay these costs and fees; for example, if it
finds your claim is frivolous.
If you have any questions about your Plan, you should contact the Plan
Administrator. If you have any questions about this statement or about your
rights under ERISA, you should contact the nearest Area Office of the U.S.
Labor-Management Services Administration, Department of Labor.
Page 14
<PAGE>
General Information
Name of Plan:
- -------------
CPS SYSTEMS, INC. 401K RETIREMENT PLAN
Name and Address of Company:
- ----------------------------
CPS SYSTEMS, INC.
3400 CARLISLE, SUITE 500
DALLAS, TX 75204
Names Address and Telephone Number of Plan Administrator:
- ---------------------------------------------------------
CPS SYSTEMS, INC.
3400 CARLYLE, SUITE 500
DALLAS, TX 75204
Agent for Service of Legal Process:
- -----------------------------------
Plan Administrator
Service of legal process may also be made upon a Plan Trustee.
Name and Address of Trustee(s):
- ------------------------------
PAUL E. KANA & JAMES k. HOOFARD, JR.
3400 CARLISLE, SUITE 500
DALLAS, TX 75204
Plan Number:
- ------------
001
Type of Plan:
- -------------
Defined Contribution - Profit Sharing 401(k)
Type of Plan Administration:
- ----------------------------
The Plan is self-administered by the Company.
Employer Identification Number:
- -------------------------------
75-1607857
Plan Year:
- ----------
January 1 to December 31
Ending Date of Employer's Fiscal Year:
- --------------------------------------
December 31
Organization Maintaining Investments:
- -------------------------------------
The New England
Although this booklet serves as a brief summary of the Plan, the final
interpretation of the Plan and benefits provided are governed by the legal Plan
documents.
Page 15
<PAGE>
THE 1997 EQUITY PARTICIPATION PLAN
OF
CPS SYSTEMS, INC.
CPS Systems, Inc., a Texas corporation, has adopted The 1997 Equity
Participation Plan of CPS Systems, Inc. (the "Plan"), effective __________,
1997, for the benefit of its eligible employees, consultants and directors. The
Plan consists of two plans, one for the benefit of key Employees (as such term
is defined below), Independent Directors (as such term is defined below) and
consultants and another solely for the benefit of Independent Directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
ARTICLE I
DEFINITIONS
I.1 General. Wherever the following terms are used in this Plan
-------
they shall have the meaning specified below, unless the context clearly
indicates otherwise.
I.2 Award Limit. "Award Limit" shall mean
----------- ---------------------
( )shares of Common Stock.
-----------
I.3 Board. "Board" shall mean the Board of Directors of the
-----
Company.
I.4 Change in Control. "Change in Control" shall mean a change in
-----------------
ownership or control of the Company effected through either of the following
transactions:
(a) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's stockholders which
the Board does not recommend such stockholders to accept; or
<PAGE>
(b) there is a change in the composition of the Board over a period of
twenty-four (24) consecutive months (or less) such that a majority of the
Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be
comprised of individuals who either (i) have been Board members
continuously since the beginning of such period or (ii) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
I.5 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
I.6 Committee. "Committee" shall mean the Compensation Committee
---------
of the Board, or another committee, or a subcommittee of the Board, appointed as
provided in Section 9.1.
I.7 Common Stock. "Common Stock" shall mean the common stock of
------------
the Company, par value $.01 per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any preferred
stock and any warrants, options or other rights to purchase Common Stock. Debt
securities of the Company convertible into Common Stock shall be deemed equity
securities of the Company.
I.8 Company. "Company" shall mean CPS Systems, Inc., a Texas
-------
corporation.
I.9 Corporate Transaction. "Corporate Transaction" shall mean any
---------------------
of the following stockholder-approved transactions to which the Company is a
party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
I.10 Deferred Stock. "Deferred Stock" shall mean Common
--------------
Stock awarded under Article VII of this Plan.
I.11 Director. "Director" shall mean a member of the Board.
--------
<PAGE>
I.12 Dividend Equivalent. "Dividend Equivalent" shall mean a
-------------------
right to receive the equivalent value (in cash or Common Stock) of dividends
paid on Common Stock, awarded under Article VII of this Plan.
I.13 Employee. "Employee" shall mean any officer or other
--------
employee (as defined in accordance with Section 3401(c) of the Code) of the
Company, or of any corporation which is a Subsidiary.
I.14 Exchange Act. "Exchange Act" shall mean the Securities
------------
Exchange Act of 1934, as amended.
I.15 Fair Market Value. "Fair Market Value" of a share of Common
-----------------
Stock as of a given date shall be (i) the closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if shares were
not traded on the trading day previous to such date, then on the next preceding
date on which a trade occurred, or (ii) if Common Stock is not traded on an
exchange but is quoted on NASDAQ or a successor quotation system, the mean
between the closing representative bid and asked prices for the Common Stock on
the trading day previous to such date as reported by NASDAQ or such successor
quotation system; or (iii) if Common Stock is not publicly traded on an exchange
and not quoted on NASDAQ or a successor quotation system, the Fair Market Value
of a share of Common Stock as established by the Committee (or the Board, in the
case of grants to Independent Directors) acting in good faith.
I.16 Grantee. "Grantee" shall mean an Employee, Independent
-------
Director or consultant granted a Performance Award, Dividend Equivalent, Stock
Payment or Stock Appreciation Right, or an award of Deferred Stock, under this
Plan.
I.17 Incentive Stock Option. "Incentive Stock Option" shall mean
----------------------
an option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
I.18 Independent Director. "Independent Director" shall mean a
--------------------
member of the Board who is not an Employee of the Company.
I.19 Non-Qualified Stock Option. "Non-Qualified Stock Option"
--------------------------
shall mean an Option which is not designated as an Incentive Stock Option by the
Committee.
I.20 Option. "Option" shall mean a stock option granted under
------
Article III of this Plan. An Option granted under this Plan shall, as determined
by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock
Option; provided, however, that Options granted to Independent Directors and
consultants shall be Non-Qualified Stock Options.
I.21 Optionee. "Optionee" shall mean an Employee, consultant or
--------
Independent Director granted an Option under this Plan.
I.22 Performance Award. "Performance Award" shall mean a cash
-----------------
bonus, stock bonus or other performance or incentive award that is paid in cash,
Common Stock or a combination of both, awarded under Article VII of this Plan.
<PAGE>
I.23 Plan. "Plan" shall mean The 1997 Equity Participation Plan of
----
CPS Systems, Inc.
I.24 QDRO. "QDRO" shall mean a qualified domestic relations order
----
as defined by the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder.
I.25 Restricted Stock. "Restricted Stock" shall mean Common Stock
----------------
awarded under Article VI of this Plan.
I.26 Restricted Stockholder. "Restricted Stockholder" shall mean
----------------------
an Employee, Independent Director or consultant granted an award of Restricted
Stock under Article VI of this Plan.
I.27 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
----------
under the Exchange Act, as such Rule may be amended from time to time.
I.28 Stock Appreciation Right. "Stock Appreciation Right" shall
------------------------
mean a stock appreciation right granted under Article VIII of this Plan.
I.29 Stock Payment. "Stock Payment" shall mean (i) a payment in
-------------
the form of shares of Common Stock, or (ii) an option or other right to purchase
shares of Common Stock, as part of a deferred compensation arrangement, made in
lieu of all or any portion of the compensation, including without limitation,
salary, bonuses and commissions, that would otherwise become payable to a key
Employee, Independent Director or consultant in cash, awarded under Article VII
of this Plan.
I.30 Subsidiary. "Subsidiary" shall mean (i) any corporation in
----------
an unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain and (ii) any
partnership or limited liability company in which the Company (A) directly or
indirectly holds a managing partner or managing member interest or (B) is
entitled to 50 percent or more of the profits or assets upon dissolution.
I.31 Termination of Consultancy. "Termination of Consultancy"
--------------------------
shall mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
<PAGE>
I.32 Termination of Directorship. "Termination of Directorship"
---------------------------
shall mean the time when an Optionee who is an Independent Director ceases to be
a Director for any reason, including, but not by way of limitation, a
termination by resignation, failure to be elected, death or retirement. The
Board, in its sole and absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Directorship with respect to
Independent Directors.
I.33 Termination of Employment. "Termination of Employment"
-------------------------
shall mean the time when the employee-employer relationship between an Optionee,
Grantee or Restricted Stockholder and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company or any Subsidiary, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the employee-
employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former employee.
The Committee, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Employment, including, but not
by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; provided,
--------
however, that, with respect to Incentive Stock Options, a leave of absence,
- -------
change in status from an employee to an independent contractor or other change
in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
II.1 Shares Subject to Plan.
----------------------
(a) The shares of stock subject to Options, awards of Restricted
Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially shares of
the Company's Common Stock, par value $.01 per share. The aggregate number of
such shares which may be issued upon exercise of such options or rights or upon
any such awards under the Plan shall not exceed
------------------------------
( ) shares of Common Stock. The shares of Common Stock issuable upon
----------
exercise of such options or rights or upon any such awards may be either
previously authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to options or
Stock Appreciation Rights granted under the Plan to any individual in any fiscal
<PAGE>
year shall not exceed the Award Limit. To the extent required by Section 162(m)
of the Code, shares subject to Options which are canceled continue to be counted
against the Award Limit and if, after grant of an Option, the price of shares
subject to such Option is reduced, the transaction is treated as a cancellation
of the Option and a grant of a new Option and both the Option deemed to be
canceled and the Option deemed to be granted are counted against the Award
Limit. Furthermore, to the extent required by Section 162(m) of the Code, if,
after grant of a Stock Appreciation Right, the base amount on which stock
appreciation is calculated is reduced to reflect a reduction in the Fair Market
Value of the Company's Common Stock, the transaction is treated as a
cancellation of the Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted are counted against the
Award Limit.
II.2 Add-back of Options and Other Rights. If any Option, or
------------------------------------
other right to acquire shares of Common Stock under any other award under this
Plan, expires or is canceled without having been fully exercised, or is
exercised in whole or in part for cash as permitted by this Plan, the number of
shares subject to such Option or other right but as to which such Option or
other right was not exercised prior to its expiration, cancellation or exercise
may again be optioned, granted or awarded hereunder, subject to the limitations
of Section 2.1. Furthermore, any shares subject to Options or other awards
which are adjusted pursuant to Section 10.3 and become exercisable with respect
to shares of stock of another corporation shall be considered cancelled and may
again be optioned, granted or awarded hereunder, subject to the limitations of
Section 2.1. Shares of Common Stock which are delivered by the Optionee or
Grantee or withheld by the Company upon the exercise of any Option or other
award under this Plan, in payment of the exercise price thereof, may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. If any share of Restricted Stock is forfeited by the Grantee or
repurchased by the Company pursuant to Section 6.6 hereof, such share may again
be optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Notwithstanding the provisions of this Section 2.2, no shares of Common
Stock may again be optioned, granted or awarded if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.
ARTICLE III
GRANTING OF OPTIONS
III.1 Eligibility. Any Employee, Independent Director or
-----------
consultant selected by the Committee pursuant to Section 3.4(a)(i) shall be
eligible to be granted an Option. In addition, each Independent Director of the
Company shall be eligible to be granted Options at the times and in the manner
set forth in Section 3.4(d).
III.2 Disqualification for Stock Ownership. No person may be
------------------------------------
granted an Incentive Stock Option under this Plan if such person, at the time
the Incentive Stock Option is granted, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any then existing Subsidiary or parent corporation (within the
meaning of Section 422 of the Code) unless such Incentive Stock Option conforms
to the applicable provisions of Section 422 of the Code.
III.3 Qualification of Incentive Stock Options. No Incentive Stock
----------------------------------------
<PAGE>
Option shall be granted unless such Option, when granted, qualifies as an
"incentive stock option" under Section 422 of the Code. No Incentive Stock
Option shall be granted to any person who is not an Employee.
III.4 Granting of Options
-------------------
(a) The Committee shall from time to time, in its absolute discretion,
and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from
among the key Employees, Independent Directors or consultants (including
Employees, Independent Directors or consultants who have previously
received Options or other awards under this Plan) such of them as in its
opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected key Employees,
Independent Directors or consultants;
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Stock Options and whether such Options are to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and conditions
-------- -------
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) Upon the selection of a key Employee, Independent Director or
consultant to be granted an Option, the Committee shall instruct the Secretary
of the Company to issue the Option and may impose such conditions on the grant
of the Option as it deems appropriate. Without limiting the generality of the
preceding sentence, the Committee may, in its discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option to an
Employee, Independent Director or consultant that the Employee, Independent
Director or consultant surrender for cancellation some or all of the unexercised
Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments or other rights
which have been previously granted to him under this Plan or otherwise. An
Option, the grant of which is conditioned upon such surrender, may have an
option price lower (or higher) than the exercise price of such surrendered
Option or other award, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be modified
by the Committee to disqualify such option from treatment as an "incentive stock
option" under Section 422 of the Code.
<PAGE>
(d) During the term of the Plan, each person who is an Independent
Director as of the date of the consummation of the initial public offering of
Common Stock automatically shall be granted (i) an Option to purchase
( ) shares of Common Stock (subject to adjustment as
- --------------- --------
provided in Section 10.3) on the date of such initial public offering and (ii)
an Option to purchase ( ) shares of Common Stock
----------------- ----------
(subject to adjustment as provided in Section 10.3) on the third anniversary of
such grant; provided that such Independent Director serves as a member of the
--------
Board on such third anniversary. During the term of the Plan, a person who is
initially elected to the Board after the consummation of the initial public
offering of Common Stock and who is an Independent Director at the time of such
initial election automatically shall be granted (i) an Option to purchase
( ) shares of Common Stock (subject to adjustment as
- ---------------- ----------
provided in Section 10.3) on the date of such initial election and (ii) an
Option to purchase ( ) shares of Common Stock (subject
----------------- ----------
to adjustment as provided in Section 10.3) on the third anniversary of such
grant; provided that such Independent Director serves as a member of the Board
--------
on such third anniversary. Members of the Board who are employees of the
Company and who subsequently retire from the Company but remain on the Board, to
the extent that they are eligible, will receive Options as described in clause
(i) of the preceding sentence upon retirement from the Company and shall be
eligible to receive additional Options as described in and pursuant to the terms
of clause (ii) of the preceding sentence. All the foregoing Option grants
authorized by this Section 3.4(d) are subject to stockholder approval of the
Plan.
ARTICLE IV
TERMS OF OPTIONS
IV.1 Option Agreement. Each Option shall be evidenced by a written
----------------
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of grants to Independent
Directors) shall determine, consistent with this Plan. Stock Option Agreements
evidencing Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
IV.2 Option Price. The price per share of the shares subject to
------------
each Option shall be set by the Committee; provided, however, that such price
-------- -------
shall be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Incentive Stock
Options and Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, such price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the date the Option
is granted; (ii) in the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code) such price shall not be less than 110% of the Fair Market Value of a
<PAGE>
share of Common Stock on the date the Option is granted; and (iii) in the case
of grants to Independent Directors, such price shall equal 100% of the Fair
Market Value of a share of Common Stock pursuant to Section 3.4(d) on the date
the Option is granted; provided, however, that the price of each share subject
-------- -------
to each Option granted to Independent Directors on the date of the initial
public offering of Common Stock shall equal the initial public offering price
per share of Common Stock.
IV.3 Option Term. The term of an Option shall be set by the
-----------
Committee in its discretion; provided, however, that, (i) in the case of grants
-------- -------
to Independent Directors pursuant to Section 3.4(d), the term shall be ten (10)
years from the date the Option is granted, without variation or acceleration
hereunder, but subject to Section 5.6, and (ii) in the case of Incentive Stock
Options, the term shall not be more than ten (10) years from the date the
Incentive Stock Option is granted, or five (5) years from such date if the
Incentive Stock Option is granted to an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary or parent
corporation thereof (within the meaning of Section 422 of the Code). Except as
limited by requirements of Section 422 of the Code and regulations and rulings
thereunder applicable to Incentive Stock Options, the Committee may extend the
term of any outstanding Option in connection with any Termination of Employment
or Termination of Consultancy of the Optionee, or amend any other term or
condition of such Option relating to such a termination.
IV.4 Option Vesting
--------------
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee and the Committee
may determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; provided, however, that Options granted to
-------- -------
Independent Directors pursuant to Section 3.4(d) shall become exercisable in
cumulative annual installments of 33 1/3% on each of the first, second and third
anniversaries of the date of Option grant, without variation or acceleration
hereunder except as provided in Section 10.3(b). At any time after grant of an
Option, the Committee may, in its sole and absolute discretion and subject to
whatever terms and conditions it selects, accelerate the period during which an
Option (except an Option granted to an Independent Director pursuant to Section
3.4(d)) vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees,
Independent Directors or consultants either in the Stock Option Agreement or by
action of the Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c),
<PAGE>
the Fair Market Value of stock shall be determined as of the time the Option
with respect to such stock is granted.
IV.5 Consideration. In consideration of the granting of an Option,
-------------
the Optionee shall agree, in the written Stock Option Agreement, to remain in
the employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year
after the Option is granted or, in the case of an Independent Director, to the
end of such Independent Director's current Board term (or such shorter period as
may be fixed in the Stock Option Agreement or by action of the Committee or the
Board following grant of the Option). Nothing in this Plan or in any Stock
Option Agreement hereunder shall confer upon any Optionee any right to continue
in the employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Optionee at any time for any reason whatsoever, with or without
good cause.
ARTICLE V
EXERCISE OF OPTIONS
V.1 Partial Exercise. An exercisable Option may be exercised in
----------------
whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
V.2 Manner of Exercise. All or a portion of an exercisable Option
------------------
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board, in the case of Options granted to Independent
Directors pursuant to Section 3.4(d)) stating that the Option, or a portion
thereof, is exercised. The notice shall be signed by the Optionee or other
person then entitled to exercise the Option or such portion;
(b) Such representations and documents as the Committee (or the Board,
in the case of Options granted to Independent Directors pursuant to Section
3.4(d)), in its absolute discretion, deems necessary or advisable to effect
compliance with all applicable provisions of the Securities Act of 1933, as
amended, and any other federal or state securities laws or regulations. The
Committee or Board may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance including,
without limitation, placing legends on share certificates and issuing stop-
transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However,
the
<PAGE>
Committee (or the Board, in the case of Options granted to Independent
Directors pursuant to Section 3.4(d)), may in its discretion (i) allow a delay
in payment up to thirty (30) days from the date the Option, or portion thereof,
is exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of Common Stock owned by the Optionee, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the delivery of property of any kind which
constitutes good and valuable consideration; (iv) allow payment, in whole or in
part, through the delivery of a full recourse promissory note bearing interest
(at no less than such rate as shall then preclude the imputation of interest
under the Code) and payable upon such terms as may be prescribed by the
Committee or the Board, or (v) allow payment through any combination of the
consideration provided in the foregoing subparagraphs (ii), (iii) and (iv). In
the case of a promissory note, the Committee (or the Board, in the case of
Options granted to Independent Directors pursuant to Section 3.4(d)) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.
V.3 Conditions to Issuance of Stock Certificates. The
--------------------------------------------
Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory body
which the Committee or Board shall, in its absolute discretion, deem necessary
or advisable;
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee (or Board, in the case of
Options granted to Independent Directors pursuant to Section 3.4(d)) shall, in
its absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the exercise
of the Option as the Committee (or Board, in the case of Options granted to
Independent Directors pursuant to Section 3.4(d)) may establish from time to
time for reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
V.4 Rights as Stockholders. The holders of Options shall not be,
----------------------
nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders.
V.5 Ownership and Transfer Restrictions. The Committee (or Board,
-----------------------------------
<PAGE>
in the case of Options granted to Independent Directors pursuant to Section
3.4(d)), in its absolute discretion, may impose such restrictions on the
ownership and transferability of the shares purchasable upon the exercise of an
Option as it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Agreement and may be referred to on the certificates
evidencing such shares. The Committee may require the Employee to give the
Company prompt notice of any disposition of shares of Common Stock acquired by
exercise of an Incentive Stock Option within (i) two years from the date of
granting such Option to such Employee or (ii) one year after the transfer of
such shares to such Employee. The Committee may direct that the certificates
evidencing shares acquired by exercise of an Option refer to such requirement to
give prompt notice of disposition.
V.6 Limitations on Exercise of Options Granted to Independent
---------------------------------------------------------
Directors Pursuant to Section 3.4(d). No Option granted to an Independent
- ------------------------------------
Director pursuant to Section 3.4(d) may be exercised to any extent by anyone
after the first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the Optionee's
Termination of Directorship for any reason other than such Optionee's death or
his permanent and total disability, unless the Optionee dies within said three-
month period; or
(d) The expiration of ten years from the date the Option was granted.
ARTICLE VI
AWARD OF RESTRICTED STOCK
VI.1 Award of Restricted Stock
-------------------------
(a) The Committee may from time to time, in its absolute discretion:
(i) Select from among the key Employees, Independent Directors or
consultants (including Employees, Independent Directors or consultants who
have previously received other awards under this Plan) such of them as in
its opinion should be awarded Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this Plan.
(b) The Committee shall establish the purchase price, if any, and form
of payment for Restricted Stock; provided, however, that such purchase price
-------- -------
shall be no less than the par value of the Common Stock to be purchased, unless
otherwise permitted by applicable state law. In all cases, legal consideration
shall be required for each issuance of Restricted Stock.
<PAGE>
(c) Upon the selection of a key Employee, Independent Director or
consultant to be awarded Restricted Stock, the Committee shall instruct the
Secretary of the Company to issue such Restricted Stock and may impose such
conditions on the issuance of such Restricted Stock as it deems appropriate.
VI.2 Restricted Stock Agreement. Restricted Stock shall be issued
--------------------------
only pursuant to a written Restricted Stock Agreement, which shall be executed
by the selected key Employee, Independent Director or consultant and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
VI.3 Consideration. As consideration for the issuance of
-------------
Restricted Stock, in addition to payment of any purchase price, the Restricted
Stockholder shall agree, in the written Restricted Stock Agreement, to remain in
the employ of (or to consult for or serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year
after the Restricted Stock is issued or, in the case of an Independent Director,
to the end of such Independent Director's current Board term (or such shorter
period as may be fixed in the Restricted Stock Agreement or by action of the
Committee or the Board following grant of the Restricted Stock). Nothing in
this Plan or in any Restricted Stock Agreement hereunder shall confer on any
Restricted Stockholder any right to continue in the employ of, or as a
consultant for, the Company or any Subsidiary, or as a director of the Company,
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Restricted
Stockholder at any time for any reason whatsoever, with or without good cause.
VI.4 Rights as Stockholders. Upon delivery of the shares of
----------------------
Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted
Stockholder shall have, unless otherwise provided by the Committee, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Restricted Stock Agreement, including the right to receive all dividends
and other distributions paid or made with respect to the shares; provided,
--------
however, that in the discretion of the Committee, any extraordinary
- -------
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5.
VI.5 Restriction. All shares of Restricted Stock issued under this
-----------
Plan (including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; provided, however,
-------- -------
that by action taken after the Restricted Stock is issued, the Committee may, on
such terms and conditions as it may determine to be appropriate, remove any or
all of the restrictions imposed by the terms of the Restricted Stock Agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire. Unless provided otherwise by the Committee, if no
consideration was paid by the Restricted Stockholder upon issuance, a Restricted
Stockholder's rights in unvested Restricted Stock shall lapse upon Termination
of Employment or, if applicable, upon Termination of Consultancy or Termination
of Directorship with the Company.
<PAGE>
VI.6 Repurchase of Restricted Stock. The Committee shall provide
------------------------------
in the terms of each individual Restricted Stock Agreement that the Company
shall have the right to repurchase from the Restricted Stockholder the
Restricted Stock then subject to restrictions under the Restricted Stock
Agreement immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy or Termination of Directorship between the Restricted
Stockholder and the Company, at a cash price per share equal to the price paid
by the Restricted Stockholder for such Restricted Stock; provided, however, that
-------- -------
provision may be made that no such right of repurchase shall exist in the event
of a Termination of Employment or Termination of Consultancy without cause, or
following a change in control of the Company or because of the Restricted
Stockholder's retirement, death or disability, or otherwise.
VI.7 Escrow. The Secretary of the Company or such other escrow
------
holder as the Committee may appoint shall retain physical custody of each
certificate representing Restricted Stock until all of the restrictions imposed
under the Restricted Stock Agreement with respect to the shares evidenced by
such certificate expire or shall have been removed.
VI.8 Legend. In order to enforce the restrictions imposed upon
------
shares of Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates representing all shares of Restricted Stock
that are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
VII.1 Performance Awards. Any key Employee, Independent Director or
------------------
consultant selected by the Committee may be granted one or more Performance
Awards. The value of such Performance Awards may be linked to the market value,
book value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined appropriate by the Committee, in each
case on a specified date or dates or over any period or periods determined by
the Committee, or may be based upon the appreciation in the market value, book
value, net profits or other measure of the value of a specified number of shares
of Common Stock over a fixed period or periods determined by the Committee. In
making such determinations, the Committee shall consider (among such other
factors as it deems relevant in light of the specific type of award) the
contributions, responsibilities and other compensation of the particular key
Employee, Independent Director or consultant.
VII.2 Dividend Equivalents. Any key Employee, Independent Director
--------------------
or consultant selected by the Committee may be granted Dividend Equivalents
based on the dividends declared on Common Stock, to be credited as of dividend
payment dates, during the period between the date an Option, Stock Appreciation
Right, Deferred Stock or Performance Award is granted, and the date such Option,
Stock Appreciation Right, Deferred Stock or Performance Award is exercised,
vests or expires, as determined by the Committee. Such Dividend Equivalents
shall be converted to cash or additional shares of Common Stock by such formula
and at such time and subject to such limitations as may be determined by the
Committee. With respect to Dividend
<PAGE>
Equivalents granted with respect to Options intended to be qualified
performance-based compensation for purposes of Section 162(m), such Dividend
Equivalents shall be payable regardless of whether such Option is exercised.
VII.3 Stock Payments. Any key Employee, Independent Director or
--------------
consultant selected by the Committee may receive Stock Payments in the manner
determined from time to time by the Committee. The number of shares shall be
determined by the Committee and may be based upon the Fair Market Value, book
value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined appropriate by the Committee,
determined on the date such Stock Payment is made or on any date thereafter.
VII.4 Deferred Stock. Any key Employee, Independent Director
--------------
or consultant selected by the Committee may be granted an award of Deferred
Stock in the manner determined from time to time by the Committee. The number
of shares of Deferred Stock shall be determined by the Committee and may be
linked to the market value, book value, net profits or other measure of the
value of Common Stock or other specific performance criteria determined to be
appropriate by the Committee, in each case on a specified date or dates or over
any period or periods determined by the Committee. Common Stock underlying a
Deferred Stock award will not be issued until the Deferred Stock award has
vested, pursuant to a vesting schedule or performance criteria set by the
Committee. Unless otherwise provided by the Committee, a Grantee of Deferred
Stock shall have no rights as a Company stockholder with respect to such
Deferred Stock until such time as the award has vested and the Common Stock
underlying the award has been issued.
VII.5 Performance Award Agreement, Dividend Equivalent Agreement,
-----------------------------------------------------------
Deferred Stock Agreement, Stock Payment Agreement. Each Performance
- -------------------------------------------------
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall
be evidenced by a written agreement, which shall be executed by the Grantee and
an authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
VII.6 Term. The term of a Performance Award, Dividend Equivalent,
----
award of Deferred Stock and/or Stock Payment shall be set by the Committee in
its discretion.
VII.7 Exercise Upon Termination of Employment. A Performance Award,
---------------------------------------
Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable
or payable only while the Grantee is an Employee, Independent Director or
consultant; provided that the Committee may determine that the Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be
exercised or paid subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
VII.8 Payment on Exercise. Payment of the amount determined under
-------------------
Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of
both, as determined by the Committee. To the extent any payment under this
Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.
<PAGE>
VII.9 Consideration. In consideration of the granting of a
-------------
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment, the Grantee shall agree, in a written agreement, to remain in the
employ of, or to consult for, the Company or any Subsidiary for a period of at
least one year after such Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment is granted (or such shorter period as may be
fixed in such agreement or by action of the Committee following such grant).
Nothing in this Plan or in any agreement hereunder shall confer on any Grantee
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
VIII.1 Grant of Stock Appreciation Rights. A Stock Appreciation
----------------------------------
Right may be granted to any key Employee, Independent Director or consultant
selected by the Committee. A Stock Appreciation Right may be granted (i) in
connection and simultaneously with the grant of an Option, (ii) with respect to
a previously granted Option, or (iii) independent of an Option. A Stock
Appreciation Right shall be subject to such terms and conditions not
inconsistent with this Plan as the Committee shall impose and shall be evidenced
by a written Stock Appreciation Right Agreement, which shall be executed by the
Grantee and an authorized officer of the Company. The Committee, in its
discretion, may determine whether a Stock Appreciation Right is to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights
intended to so qualify shall contain such terms and conditions as may be
necessary to meet the applicable provisions of section 162(m) of the Code.
Without limiting the generality of the foregoing, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a condition of
the grant of a Stock Appreciation Right to an Employee, Independent Director or
consultant that the Employee, Independent Director or consultant surrender for
cancellation some or all of the unexercised Options, awards of Restricted Stock
or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments, or other rights which have been previously
granted to him under this Plan or otherwise. A Stock Appreciation Right, the
grant of which is conditioned upon such surrender, may have an exercise price
lower (or higher) than the exercise price of the surrendered Option or other
award, may cover the same (or a lesser or greater) number of shares as such
surrendered Option or other award, may contain such other terms as the Committee
deems appropriate, and shall be exercisable in accordance with its terms,
without regard to the number of shares, price, exercise period or any other term
or condition of such surrendered Option or other award.
VIII.2 Coupled Stock Appreciation Rights
---------------------------------
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the
<PAGE>
number of shares subject to the simultaneously or previously granted Option to
which it is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
VIII.3 Independent Stock Appreciation Rights
-------------------------------------
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine. The exercise price per share of Common Stock subject to each ISAR
shall be set by the Committee. An ISAR is exercisable only while the Grantee is
an Employee, Independent Director or consultant; provided that the Committee may
determine that the ISAR may be exercised subsequent to Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company, or because of the Grantee's retirement, death or disability, or
otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Committee may impose.
VIII.4 Payment and Limitations on Exercise
-----------------------------------
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock Appreciation Right is exercised) or a combination of both, as
determined by the Committee. To the extent such payment is effected in Common
Stock it shall be made subject to satisfaction of all provisions of Section 5.3
hereinabove pertaining to Options.
(b) Grantees of Stock Appreciation Rights may, in the discretion of
the Board or Committee, be required to comply with any timing or other
restrictions including a window-period requirement deemed advisable or prudent
by the Board or Committee or otherwise with respect to the settlement or
exercise of a Stock Appreciation Right.
VIII.5 Consideration. In consideration of the granting of a Stock
-------------
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right
<PAGE>
Agreement, to remain in the employ of (or to consult for or serve as an
Independent Director of, as applicable) the Company or any Subsidiary for a
period of at least one year after the Stock Appreciation Right is granted or, in
the case of an Independent Director, to the end of such Independent Director's
current Board term (or such shorter period as may be fixed in the Stock
Appreciation Right Agreement or by action of the Committee or the Board
following grant of the Restricted Stock). Nothing in this Plan or in any Stock
Appreciation Right Agreement hereunder shall confer on any Grantee any right to
continue in the employ of, or as a consultant for, the Company or any Subsidiary
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
ARTICLE IX
ADMINISTRATION
IX.1 Compensation Committee. Prior to the closing of the Company's
----------------------
initial public offering of equity securities (the "Offering"), the Compensation
Committee shall consist of the entire Board. Following the closing of the
Offering, the Compensation Committee (or another committee or a subcommittee of
the Board assuming the functions of the Committee under this Plan) shall consist
solely of two or more Independent Directors appointed by and holding office at
the pleasure of the Board, each of whom is (i) a "non-employee director" (as
defined by Rule 16b-3), (ii) to the extent required by the applicable provisions
of Rule 16b-3, a "disinterested person" (as defined by Rule 16b-3) and (iii) an
"outside director" for purposes of Section 162(m) of the Code. Appointment of
Committee members shall be effective upon acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board.
Vacancies in the Committee may be filled by the Board.
IX.2 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options, awards of Restricted Stock or Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to grants to
Independent Directors. Any such grant or award under this Plan need not be the
same with respect to each Optionee, Grantee or Restricted Stockholder. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
IX.3 Majority Rule; Unanimous Written Consent. The Committee shall
----------------------------------------
act by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
<PAGE>
IX.4 Compensation; Professional Assistance; Good Faith Actions.
---------------------------------------------------------
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan, Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, and all members of the Committee and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
ARTICLE X
MISCELLANEOUS PROVISIONS
X.1 Not Transferable. Options, Restricted Stock awards, Deferred
----------------
Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such rights or awards
have been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award, Deferred Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee,
Grantee or Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee or Grantee, only he may exercise
an Option or other right or award (or any portion thereof) granted to him under
the Plan, unless it has been disposed of pursuant to a QDRO. After the death of
the Optionee or Grantee, any exercisable portion of an Option or other right or
award may, prior to the time when such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement or other agreement, be exercised
by his personal representative or by any person empowered to do so under the
deceased Optionee's or Grantee's will or under the then applicable laws of
descent and distribution.
X.2 Amendment, Suspension or Termination of this Plan. Except as
-------------------------------------------------
otherwise provided in this Section 9.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
<PAGE>
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Committee may be taken that would otherwise require
stockholder approval as a matter of applicable law, regulation or rule. No
amendment, suspension or termination of this Plan shall, without the consent of
the holder of Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, alter or impair any rights or obligations under any Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted
or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or
awarded during any period of suspension or after termination of this Plan, and
in no event may any Incentive Stock Option be granted under this Plan after the
first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 10.4.
X.3 Changes in Common Stock or Assets of the Company , Acquisition
------------------------------------------------ -------------
or Liquidation of the Company and Other Corporate Events.
- --------------------------------------------------------
(a) Subject to Section 10.3(d), in the event that the Committee (or
the Board, in the case of grants to Independent Directors) determines that any
dividend or other distribution (whether in the form of cash, Common Stock, other
securities, or other property), recapitalization, reclassification, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, liquidation, dissolution, or sale, transfer, exchange
or other disposition of all or substantially all of the assets of the Company
(including, but not limited to a Corporate Transaction), or exchange of Common
Stock or other securities of the Company, issuance of warrants or other rights
to purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of grants to Independent Directors, the Board's sole discretion), affects
the Common Stock such that an adjustment is determined by the Committee to be
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, Restricted Stock award, Performance Award, Stock Appreciation
Right, Dividend Equivalent, Deferred Stock award or Stock Payment, then the
Committee (or the Board, in the case of grants to Independent Directors) shall,
in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be
granted under the Plan, or which may be granted as Restricted Stock or
Deferred Stock (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares which
may be issued and adjustments of the Award Limit),
<PAGE>
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in
the number and kind of shares of outstanding Restricted Stock or Deferred
Stock, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment.
(b) Subject to Sections 10.3(b)(vii) and 10.3(d), in the event of any
Corporate Transaction or other transaction or event described in Section 10.3(a)
or any unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of grants to Independent
Directors) in its discretion is hereby authorized to take any one or more of the
following actions whenever the Committee (or the Board, in the case of grants to
Independent Directors) determines that such action is appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan or with respect to any option, right or
other award under this Plan, to facilitate such transactions or events or to
give effect to such changes in laws, regulations or principles:
(i) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of grants to Independent Directors) may provide, either by the terms
of the agreement or by action taken prior to the occurrence of such
transaction or event and either automatically or upon the optionee's
request, for either the purchase of any such Option, Performance Award,
Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any
Restricted Stock or Deferred Stock for an amount of cash equal to the
amount that could have been attained upon the exercise of such option,
right or award or realization of the optionee's rights had such option,
right or award been currently exercisable or payable or fully vested or the
replacement of such option, right or award with other rights or property
selected by the Committee (or the Board, in the case of grants to
Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the Committee (or the
Board, in the case of grants to Independent Directors) may provide, either
by the terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction or
event that it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of grants to Independent Directors) may provide, either by the terms
of such Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by
action taken prior to the occurrence of such transaction or event, that for
a specified period of time prior to such transaction or event, such option,
<PAGE>
right or award shall be exercisable as to all shares covered thereby,
notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the
provisions of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock;
(iv) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of grant to Independent Directors) may provide, either by the terms of
such Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by
action taken prior to the occurrence of such transaction or event, that
upon such event, such option, right or award be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or shall be
substituted for by similar options, rights or awards covering the stock of
the successor or survivor corporation, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kind of shares and
prices; and
(v) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of grants to Independent Directors) may make adjustments in the number
and type of shares of Common Stock (or other securities or property)
subject to outstanding Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents, or Stock Payments, and in the number and kind
of outstanding Restricted Stock or Deferred Stock and/or in the terms and
conditions of (including the grant or exercise price), and the criteria
included in, outstanding options, rights and awards and options, rights and
awards which may be granted in the future.
(vi) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee may provide either by the
terms of a Restricted Stock award or Deferred Stock award or by action
taken prior to the occurrence of such event that, for a specified period of
time prior to such event, the restrictions imposed under a Restricted Stock
Agreement or a Deferred Stock Agreement upon some or all shares of
Restricted Stock or Deferred Stock may be terminated, and, in the case of
Restricted Stock, some or all shares of such Restricted Stock may cease to
be subject to repurchase under Section 6.6 or forfeiture under Section 6.5
after such event.
(vii) None of the foregoing discretionary terms of this Section
10.3(b) shall be permitted with respect to Options granted under Section
3.4(d) to Independent Directors to the extent that such discretion would be
inconsistent with the applicable exemptive conditions of Rule 16b-3. In
the event of a Change in Control or a Corporate Transaction, to the extent
that the Board does not have the ability under Rule 16b-3 to take or to
refrain from taking the discretionary actions set forth in Section
10.3(b)(iii) above, each Option granted to an Independent Director shall be
exercisable as to all shares covered thereby upon such Change in Control or
during the five days immediately preceding the consummation of such
Corporate Transaction and subject to such consummation, notwithstanding
anything to the contrary in Section 4.4 or the vesting schedule of such
Options. In the event of a Corporate Transaction, to the extent that the
Board does not have the ability under Rule 16b-3 to take or to refrain from
taking the discretionary actions set forth in Section 10.3(b)(ii) above, no
<PAGE>
Option granted to an Independent Director may be exercised following such
Corporate Transaction unless such Option is, in connection with such
Corporate Transaction, either assumed by the successor or survivor
corporation (or parent or subsidiary thereof) or replaced with a comparable
right with respect to shares of the capital stock of the successor or
survivor corporation (or parent or subsidiary thereof).
(c) Subject to Section 10.3(d) and 10.8, the Committee (or the Board,
in the case of grants to Independent Directors) may, in its discretion, include
such further provisions and limitations in any Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or Restricted Stock
or Deferred Stock agreement or certificate, as it may deem equitable and in the
best interests of the Company.
(d) With respect to Incentive Stock Options and Options and Stock
Appreciation Rights intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 10.3 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the
Committee (or the Board, in the case of grants to Independent Directors)
determines that the option or other award is not to comply with such exemptive
conditions. The number of shares of Common Stock subject to any option, right
or award shall always be rounded to the next whole number.
(e) In the event of any Corporate Transaction, each outstanding
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, Stock
Payment, Restricted Stock, or Deferred Stock award shall, immediately prior to
the effective date of the Corporate Transaction, automatically become fully
exercisable for all of the shares of Common Stock at the time subject to such
rights or fully vested, applicable, and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding right
shall not so accelerate if and to the extent: (i) such right is, in connection
with the Corporate Transaction, either to be assumed by the successor or
survivor corporation (or parent thereof) or to be replaced with a comparable
right with respect to shares of the capital stock of the successor or survivor
corporation (or parent thereof) or (ii) the acceleration of exercisability of
such right is subject to other limitations imposed by the Plan Administrator at
the time of grant. The determination of comparability of rights under clause
(i) above shall be made by the Plan Administrator, and its determination shall
be final, binding and conclusive.
X.4 Approval of Plan by Stockholders. This Plan will be submitted
--------------------------------
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan. Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted
and Restricted Stock or Deferred Stock may be awarded prior to such stockholder
approval, provided that such Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such
Restricted Stock or Deferred Stock shall not vest prior to the time when this
Plan is approved by the stockholders, and provided further that if such approval
<PAGE>
has not been obtained at the end of said twelve-month period, all Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments previously granted and all Restricted Stock or Deferred Stock
previously awarded under this Plan shall thereupon be canceled and become null
and void.
X.5 Tax Withholding. The Company shall be entitled to require
---------------
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder of any sums required by federal, state or
local tax law to be withheld with respect to the issuance, vesting or exercise
of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the
Board, in the case of grants to Independent Directors) may in its discretion and
in satisfaction of the foregoing requirement allow such Optionee, Grantee or
Restricted Stockholder to elect to have the Company withhold shares of Common
Stock otherwise issuable under such Option or other award (or allow the return
of shares of Common Stock) having a Fair Market Value equal to the sums required
to be withheld.
X.6 Loans. The Committee may, in its discretion, extend one or
-----
more loans to key Employees in connection with the exercise or receipt of an
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted under this Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.
X.7 Forfeiture Provisions. Pursuant to its general authority to
---------------------
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of grants to Independent Directors) shall
have the right (to the extent consistent with the applicable exemptive
conditions of Rule 16b-3) to provide, in the terms of Options or other awards
made under the Plan, or to require the recipient to agree by separate written
instrument, that (i) any proceeds, gains or other economic benefit actually or
constructively received by the recipient upon any receipt or exercise of the
award, or upon the receipt or resale of any Common Stock underlying such award,
must be paid to the Company, and (ii) the award shall terminate and any
unexercised portion of such award (whether or not vested) shall be forfeited, if
(a) a Termination of Employment, Termination of Consultancy or Termination of
Directorship occurs prior to a specified date, or within a specified time period
following receipt or exercise of the award, or (b) the recipient at any time, or
during a specified time period, engages in any activity in competition with the
Company, or which is inimical, contrary or harmful to the interests of the
Company, as further defined by the Committee (or the Board, as applicable).
X.8 Limitations Applicable to Section 16 Persons and Performance-
-------------------------------------------- ----------------
Based Compensation. Notwithstanding any other provision of this Plan, this
- ------------------
Plan, and any Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock
awarded, to any individual who is then subject to Section 16 of the Exchange
Act, shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule. To the extent permitted by applicable law, the Plan,
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents,
Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder
<PAGE>
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore, notwithstanding any other provision of this Plan,
any Option or Stock Appreciation Right intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall be subject
to any additional limitations set forth in Section 162(m) of the Code (including
any amendment to Section 162(m) of the Code) or any regulations or rulings
issued thereunder that are requirements for qualification as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, and this Plan
shall be deemed amended to the extent necessary to conform to such requirements.
X.9 Effect of Plan Upon Options and Compensation Plans. The
--------------------------------------------------
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Independent Directors or consultants
of the Company or any Subsidiary or (ii) to grant or assume options or other
rights otherwise than under this Plan in connection with any proper corporate
purpose including but not by way of limitation, the grant or assumption of
options in connection with the acquisition by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any corporation,
partnership, firm or association.
X.10 Compliance with Laws . This Plan, the granting and vesting of
--------------------
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this
Plan and the issuance and delivery of shares of Common Stock and the payment of
money under this Plan or under Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or
Deferred Stock awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan,
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations.
X.11 Titles. Titles are provided herein for convenience only and
------
are not to serve as a basis for interpretation or construction of this Plan.
X.12 Governing Law. This Plan and any agreements hereunder shall
-------------
be administered, interpreted and enforced under the internal laws of the State
of Maryland without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of CPS Systems, Inc. on ________________, 1997.
<PAGE>
Executed on this _______ day of October, 1997.
--------------------------
--------------------------
Director and Secretary
* * * * * * *
I hereby certify that the foregoing Plan was approved by the stockholders
of CPS Systems, Inc. on ___________, 1997.
Executed at __________, __________ on this _________ day of October, 1997.
--------------------------
Director and Secretary
<PAGE>
DRAFT 10/16/97
CPS SYSTEMS, INC.
EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE. This CPS Systems, Inc. Employee Stock Purchase Plan (the
-------
"PLAN") is intended to encourage and assist employees of CPS Systems, Inc. (the
"CORPORATION") and the employees of any present of future subsidiaries of the
Corporation in acquiring a stock ownership interest in the Corporation. The
Plan is intended to be an Employee Stock Purchase Plan under Section 423 of the
Internal Revenue Code of 1986, as amended (the "CODE").
2. STOCK SUBJECT TO THE PLAN. Subject to adjustment pursuant to Section
-------------------------
12 of the Plan, the maximum aggregate number of shares of Common Stock which may
be sold under the Plan (the "SHARES") is _______ shares in each calendar year
(________ shares in each Quarterly Period) plus in each period all unissued
shares from prior periods, whether offered or not, not to exceed ________
shares, in the aggregate. If the total number of shares for which options are
exercised in any period exceeds the maximum number of shares for the period, the
Corporation shall make a pro rata allocation of the shares available for
delivery and distribution in an nearly a uniform manner as shall be practicable
and as it shall determine to be equitable, and the balance of payroll deductions
credited to the account of each participant under the Plan shall be returned to
him as promptly as possible. The shares may be authorized but unissued, or
reacquired, shares of Common Stock of the Corporation. The Corporation during
the term of the Plan shall at all times reserve and keep available such number
of Shares as shall be sufficient to satisfy the requirements of the Plan.
3. DEFINITIONS.
-----------
3.1 QUARTERLY PERIOD. "QUARTERLY PERIOD" shall mean the three-month
----------------
period ending on the last day of each of the Corporation's fiscal quarters, with
the first quarterly period to commence on the effective date of the
Corporation's initial public offering.
3.2 BASE PAY. "BASE PAY" shall mean regular straight-time earnings
--------
excluding payments for overtime, shift premium, bonuses and other special
payments, commissions and other marketing incentive payments.
3.3 EMPLOYEE. "EMPLOYEE" means any person who is customarily employed on
--------
a full-time or part-time basis by the Corporation and is regularly scheduled to
work more than 20 hours per week.
3.4 SUBSIDIARY CORPORATION. "SUBSIDIARY CORPORATION" shall mean any
----------------------
present or future corporation which (i) would be a "subsidiary corporation" of
CPS Systems, Inc., as that term is defined in (S)424 of the Code and (ii) is
designated as a participant in the Plan.
4. ELIGIBILITY AND PARTICIPATION.
-----------------------------
4.1 INITIAL ELIGIBILITY. Any Employee who shall have completed ninety
-------------------
(90) days' employment and shall be employed by the Corporation on the date his
participation in the Plan is to become effective shall be eligible to
participate in offerings under the Plan which commence on or after such ninety
day period has concluded.
<PAGE>
4.2 LEAVE OF ABSENCE. For purposes of participation in the Plan, a person
----------------
on leave of absence shall be deemed to be an Employee for the first 90 days of
such leave of absence and such Employee's employment shall be deemed to have
terminated at the close of business on the 90th day of such leave of absence
unless such employee shall have returned to regular full-time or part-time
employment (as the case may be) prior to the close of business on such 90th day.
Termination by the Corporation of any Employee's leave of absence, other than
termination of such leave of absence on return to full time or part time
employment, shall terminate as Employee's employment for all purposes of the
Plan and shall terminate such employee's participation in the Plan and right to
exercise any option.
4.3 RESTRICTIONS ON PARTICIPATION. Notwithstanding any provisions of the
-----------------------------
Plan to the contrary, no Employee shall be granted an option to participate in
the Plan:
(a) if, immediately after the grant, the Employee would own stock, and/or
hold outstanding options to purchase stock, possessing 5% or more of the total
combined voting power or value of all classes of stock of the Corporation (for
purposes of this paragraph, the rules of (S)424(d) of the Code shall apply in
determining stock ownership of any employee); or
(b) which permits his rights to purchase stock under all employee stock
purchase plans of the Corporation to accrue at a rate which exceeds $25,000 in
fair market value of the stock (determined at the Date of Grant for each
calendar year in which such option is outstanding).
4.4 JOINING THE PLAN. Any eligible Employee's participation in the Plan
----------------
shall be effective as of the first day of the quarterly period following the day
on which the employee completes, signs and returns to the Corporation, or one of
its present or future subsidiaries, a Stock Purchase Plan Application and
Payroll Deduction Authority form indicating his or her acceptance and agreement
to the Plan. Membership of any employee in the Plan is entirely voluntary.
Except as provided herein, all employees who elect to participate in the Plan
shall have the same rights and privileges.
Any Employee receiving shares shall have no rights with respect to
continuation of employment, nor with respect to continuation of any particular
Corporation business, policy or product.
5. MEMBER'S CONTRIBUTIONS. Each member shall elect to make contributions
----------------------
by payroll deduction of two percent (2%), five percent (5%) or ten percent (10%)
of his or her Base Pay.
Subject to the maximum described above, a member may elect in writing to
increase or decrease his or her rate of contribution; such change will become
effective the first day of the quarterly period following receipt by the
Corporation of such written election.
The amount of each member's contribution shall be held by the Corporation
in a special account and such contribution, free of any obligation of the
Corporation to pay interest thereon, shall be credited to such member's
individual account as of the last trading day of the month during which the
compensation from which the contribution was deducted was earned.
No member shall be permitted to make contributions for any period during
which he or she is not receiving pay from the Corporation or one of its present
or future subsidiaries.
6. ISSUANCE OF SHARES. On the last trading day of each Quarterly Period
------------------
so long as the Plan shall remain in effect, and provided the member has not
before that date advised the Corporation that he
2
<PAGE>
or she does not wish shares purchased for his or her account on that date, the
Corporation shall apply the funds in the member's account as of that date to the
purchase of authorized but unissued shares of its Common Stock in units of one
share or multiples thereof.
The cost to each member for the shares so purchased shall be ninety percent
(90%) of the lower of the fair market value of the Common Stock on the first
trading day of the Quarterly Period (the "DATE OF GRANT") or the fair market
value of the Common Stock on the last trading day of the quarterly period (the
"DATE OF EXERCISE"), determined as follows:
(1) The fair market value of the shares on the Date of Grant shall be the
mean between the average bid and ask prices of the stock in the over-
the-counter market as quoted on the National Association of Security
Dealers Automatic Quotation System (NASDAQ), or if its stock is a
National Market System security the last reported sales price of the
stock, or if the stock is traded on one or more securities exchanges
the average of the closing prices on all such exchanges on the Date of
Grant; and
(2) The fair market value of the shares on the Date of Exercise shall be
the mean between the average bid and ask prices of the stock in the
over-the-counter market as quoted on the National Association of
Securities Dealers Automatic Quotation System (NASDAQ) or if the stock
is National Market System security the last reported sales price of
the stock, or if the stock is traded on one or more securities
exchanges the average of the closing prices on all such exchanges on
the Date of Exercise.
Any moneys remaining in such member's account equaling less than the sum
required to purchase one share, or moneys remaining in such member's account by
reason of application of the provisions of the next paragraph hereof shall,
unless otherwise requested by the member, be held in the member's account for
use during the next Quarterly Period. Any moneys remaining in such member's
account by reason of his or her prior election not to purchase shares in a given
quarterly period shall be disbursed to the employee within 30 days of the end of
such Quarterly Period. The Corporation shall as expeditiously as possible after
the last day of each Quarterly Period issue to the member entitled thereto the
certificate evidencing the shares issuable to him or her as provided herein.
Notwithstanding anything above to the contrary, (a) if the number of shares
members desire to purchase at the end of any quarterly period exceeds the number
of shares then available under the Plan, the shares available shall be allocated
among such members in proportion to their contributions during the quarterly
period (but no fractional shares shall be issued); and (b) no funds in an
employee's account shall be applied to the purchase of shares are covered by an
effective registration statement under the Securities Act of 1933, as amended,
or by an exemption therefrom.
7. TERMINATION OF MEMBERSHIP. A member's membership in the Plan will be
-------------------------
terminated when the member (a) voluntarily elects to withdraw his or her entire
account, (b) resigns or is discharged from the Corporation or one of its present
or future subsidiaries, (c) dies, or (d) does not receive pay from the
Corporation or one of its present or future subsidiaries for twelve (12)
consecutive months, unless this period is due to illness, injury or for other
reasons approved by the Plan Administrator. Upon termination of membership, the
terminated member shall not be entitled to rejoin the Plan until the first day
of the quarterly period immediately following the quarterly period in which the
termination occurs, provided that a terminated member who is an executive
officer of the Corporation shall not be entitled to rejoin the Plan until the
first day of the first quarterly period that commences after the expiration of
3
<PAGE>
six months from the date of termination of membership. Upon termination of
membership, the member shall be entitled to the amount of his or her individual
account within fifteen (15) days after termination.
8. BENEFICIARY. Each member may file a written designation of a
-----------
beneficiary who is to receive any shares of Common Stock credited to such
member's account under the Plan in the event of the death of such member prior
to delivery to such member of the certificates for such shares. Such
designation may be changed by the member at any time by written notice received
by the Corporation.
Upon the death of a member his or her account shall be paid or distributed
to the beneficiary or beneficiaries designated by such member, or in the absence
of such designation, to the executor or administrator of his or her estate, and
in either event the Corporation shall not be under any further liability to
anyone. If more than one beneficiary is designated, then each beneficiary shall
receive an equal portion of the account unless the member indicates to the
contrary in his or her designation, provided that the Corporation may in its
sole discretion make distributions in such form as will avoid the creation of
fractional shares.
9. ADMINISTRATION OF THE PLAN. The Plan shall be administered by such
--------------------------
officers or other employees of the Corporation (the "PLAN ADMINISTRATOR") as the
Board of Directors of the Corporation may from time to time select, and the
persons so selected shall be responsible for the administration of the Plan.
All costs and expenses incurred in administering the Plan shall be paid by the
Corporation. Any taxes applicable to the member's account shall be charged or
credited to the member's account by the Corporation.
10. MODIFICATION AND TERMINATION. The Corporation expects to continue the
----------------------------
Plan until such time as the shares reserved for issuance under the Plan have
been sold. The Corporation reserves, however, the right to amend, alter or
terminate the Plan in its discretion, and intends to terminate the Plan in the
event shareholder approval of the Plan is not obtained. Upon termination, each
member shall be entitled to the amount of his or her individual account within
thirty (30) days after termination.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. Appropriate and
------------------------------------------
proportionate adjustments shall be made in the number and class of shares of
stock subject to this Plan, and to the rights granted hereunder and the prices
applicable to such rights, in the event of a stock dividend, stock split,
reverse stock split, recapitalization, reorganization, merger, consolidation,
acquisition, separation or like change in the capital structure of the
Corporation.
12. TRANSFERABILITY OF RIGHTS. No rights of any employee under this Plan
-------------------------
shall be transferable by him or her, by operation of law or otherwise, except to
the extent that a member is permitted to designate a beneficiary or
beneficiaries as hereinabove provided, and except to the extent permitted by
will or the laws of descent and distribution if no such beneficiary be
designated.
13. PARTICIPATION IN OTHER PLANS. Nothing herein contained shall affect
----------------------------
an employee's right to participate in and receive benefits under and in
accordance with the then current provisions of any pension, insurance or other
employee welfare plan or program of the Corporation.
14. APPLICABLE LAW. The interpretation, performance and enforcement of
--------------
this Plan shall be governed by the laws of the State of Maryland.
4
<PAGE>
15. EFFECTIVE DATE OF PLAN; SHAREHOLDER APPROVAL. The Plan shall become
--------------------------------------------
effective on the effective date of the Corporation's initial public offering and
shall be submitted to the shareholders of the Corporation for their approval.
The Corporation's obligation to offer, sell or deliver shares under the Plan is
subject to any governmental approval required in connection with the authorized
issuance or sale of such shares and is further subject to the determination by
the Corporation that it has complied with all applicable securities laws.
16. LEGEND CONDITIONS. The shares of Common Stock to be issued pursuant
-----------------
to the provisions of this Plan shall have endorsed upon their face the
following:
(1) Any reasonable legend condition imposed by the Plan Administrator, if
required;
(2) Unless the shares to be issued under this Plan have been registered
under the Securities Act of 1933, the following:
The share represented by this certificate have not been registered
under the Securities Act of 1933. The shares have been acquired for
investment and may not be pledged or hypothecated, and may not be sold
or transferred in the absence of an effective Registration Statement
for the shares under the Securities Act of 1933 or an opinion of
counsel to the Company that registration is not required under said
Act.
<PAGE>
DRAFT 10/16/97
THE 1997 EQUITY PARTICIPATION PLAN
OF
CPS SYSTEMS, INC.
CPS Systems, Inc., a Texas corporation, has adopted The 1997 Equity
Participation Plan of CPS Systems, Inc. (the "Plan"), effective __________,
1997, for the benefit of its eligible employees, consultants and directors. The
Plan consists of two plans, one for the benefit of key Employees (as such term
is defined below), Independent Directors (as such term is defined below) and
consultants and another solely for the benefit of Independent Directors.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, key Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
ARTICLE I
DEFINITIONS
1.1 General. Wherever the following terms are used in this Plan
-------
they shall have the meaning specified below, unless the context clearly
indicates otherwise.
1.2 Award Limit. "Award Limit" shall mean _______________________
-----------
(____________) shares of Common Stock.
1.3 Board. "Board" shall mean the Board of Directors of the
-----
Company.
1.4 Change in Control. "Change in Control" shall mean a change in
-----------------
ownership or control of the Company effected through either of the following
transactions:
(a) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's stockholders which
the Board does not recommend such stockholders to accept; or
(b) there is a change in the composition of the Board over a period
of twenty-four (24) consecutive months (or less) such that a majority of
the Board members (rounded up to the nearest whole number) ceases, by
reason of one or more proxy contests for the election of Board members, to
be comprised of individuals who either (i) have been Board members
continuously since the beginning of such period or (ii) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
<PAGE>
1.5 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
1.6 Committee. "Committee" shall mean the Compensation Committee of
---------
the Board, or another committee, or a subcommittee of the Board, appointed as
provided in Section 9.1.
1.7 Common Stock. "Common Stock" shall mean the common stock of the
------------
Company, par value $.01 per share, and any equity security of the Company issued
or authorized to be issued in the future, but excluding any preferred stock and
any warrants, options or other rights to purchase Common Stock. Debt securities
of the Company convertible into Common Stock shall be deemed equity securities
of the Company.
1.8 Company. "Company" shall mean CPS Systems, Inc., a Texas
-------
corporation.
1.9 Corporate Transaction. "Corporate Transaction" shall mean any of
---------------------
the following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
1.10 Deferred Stock. "Deferred Stock" shall mean Common Stock
--------------
awarded under Article VII of this Plan.
1.11 Director. "Director" shall mean a member of the Board.
--------
1.12 Dividend Equivalent. "Dividend Equivalent" shall mean a right
-------------------
to receive the equivalent value (in cash or Common Stock) of dividends paid on
Common Stock, awarded under Article VII of this Plan.
1.13 Employee. "Employee" shall mean any officer or other employee
--------
(as defined in accordance with Section 3401(c) of the Code) of the Company, or
of any corporation which is a Subsidiary.
1.14 Exchange Act. "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended.
1.15 Fair Market Value. "Fair Market Value" of a share of Common
-----------------
Stock as of a given date shall be (i) the closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any composite index which includes such
principal exchange), on the trading day previous to such date, or if shares were
not traded on the trading day previous to such date, then on the next preceding
date on which a trade occurred, or
2
<PAGE>
(ii) if Common Stock is not traded on an exchange but is quoted on NASDAQ or a
successor quotation system, the mean between the closing representative bid and
asked prices for the Common Stock on the trading day previous to such date as
reported by NASDAQ or such successor quotation system; or (iii) if Common Stock
is not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Committee (or the Board, in the case of grants to Independent
Directors) acting in good faith.
1.16 Grantee. "Grantee" shall mean an Employee, Independent Director
-------
or consultant granted a Performance Award, Dividend Equivalent, Stock Payment or
Stock Appreciation Right, or an award of Deferred Stock, under this Plan.
1.17 Incentive Stock Option. "Incentive Stock Option" shall mean an
----------------------
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.18 Independent Director. "Independent Director" shall mean a
--------------------
member of the Board who is not an Employee of the Company.
1.19 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall
--------------------------
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.20 Option. "Option" shall mean a stock option granted under
------
Article III of this Plan. An Option granted under this Plan shall, as
determined by the Committee, be either a Non-Qualified Stock Option or an
Incentive Stock Option; provided, however, that Options granted to Independent
-------- -------
Directors and consultants shall be Non-Qualified Stock Options.
1.21 Optionee. "Optionee" shall mean an Employee, consultant or
--------
Independent Director granted an Option under this Plan.
1.22 Performance Award. "Performance Award" shall mean a cash bonus,
-----------------
stock bonus or other performance or incentive award that is paid in cash, Common
Stock or a combination of both, awarded under Article VII of this Plan.
1.23 Plan. "Plan" shall mean The 1997 Equity Participation Plan of
----
CPS Systems, Inc.
1.24 QDRO. "QDRO" shall mean a qualified domestic relations order as
----
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
1.25 Restricted Stock. "Restricted Stock" shall mean Common Stock
----------------
awarded under Article VI of this Plan.
1.26 Restricted Stockholder. "Restricted Stockholder" shall mean an
----------------------
Employee, Independent Director or consultant granted an award of Restricted
Stock under Article VI of this Plan.
1.27 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
----------
under the Exchange Act, as such Rule may be amended from time to time.
1.28 Stock Appreciation Right. "Stock Appreciation Right" shall mean
------------------------
a stock appreciation right granted under Article VIII of this Plan.
3
<PAGE>
1.29 Stock Payment. "Stock Payment" shall mean (i) a payment in the
-------------
form of shares of Common Stock, or (ii) an option or other right to purchase
shares of Common Stock, as part of a deferred compensation arrangement, made in
lieu of all or any portion of the compensation, including without limitation,
salary, bonuses and commissions, that would otherwise become payable to a key
Employee, Independent Director or consultant in cash, awarded under Article VII
of this Plan.
1.30 Subsidiary. "Subsidiary" shall mean (i) any corporation in an
----------
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation in the unbroken chain then owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain and (ii) any
partnership or limited liability company in which the Company (A) directly or
indirectly holds a managing partner or managing member interest or (B) is
entitled to 50 percent or more of the profits or assets upon dissolution.
1.31 Termination of Consultancy. "Termination of Consultancy" shall
--------------------------
mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Committee, in its absolute discretion, shall determine the
effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
1.32 Termination of Directorship. "Termination of Directorship"
---------------------------
shall mean the time when an Optionee who is an Independent Director ceases to be
a Director for any reason, including, but not by way of limitation, a
termination by resignation, failure to be elected, death or retirement. The
Board, in its sole and absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Directorship with respect to
Independent Directors.
1.33 Termination of Employment. "Termination of Employment" shall
-------------------------
mean the time when the employee-employer relationship between an Optionee,
Grantee or Restricted Stockholder and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company or any Subsidiary, (ii) at the discretion of the
Committee, terminations which result in a temporary severance of the employee-
employer relationship, and (iii) at the discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former employee.
The Committee, in its absolute discretion, shall determine the effect of all
matters and questions relating to Termination of Employment, including, but not
by way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; provided,
--------
however, that, with respect to Incentive Stock Options, a leave of absence,
- -------
change in status from an employee to an independent contractor or other change
in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of this Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
4
<PAGE>
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan .
-----------------------
(a) The shares of stock subject to Options, awards of Restricted
Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock, initially shares of
the Company's Common Stock, par value $.01 per share. The aggregate number of
such shares which may be issued upon exercise of such options or rights or upon
any such awards under the Plan shall not exceed ________________________________
(__________) shares of Common Stock. The shares of Common Stock issuable upon
exercise of such options or rights or upon any such awards may be either
previously authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to options or
Stock Appreciation Rights granted under the Plan to any individual in any fiscal
year shall not exceed the Award Limit. To the extent required by Section 162(m)
of the Code, shares subject to Options which are canceled continue to be counted
against the Award Limit and if, after grant of an Option, the price of shares
subject to such Option is reduced, the transaction is treated as a cancellation
of the Option and a grant of a new Option and both the Option deemed to be
canceled and the Option deemed to be granted are counted against the Award
Limit. Furthermore, to the extent required by Section 162(m) of the Code, if,
after grant of a Stock Appreciation Right, the base amount on which stock
appreciation is calculated is reduced to reflect a reduction in the Fair Market
Value of the Company's Common Stock, the transaction is treated as a
cancellation of the Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted are counted against the
Award Limit.
2.2 Add-back of Options and Other Rights. If any Option, or other
-------------------------------------
right to acquire shares of Common Stock under any other award under this Plan,
expires or is canceled without having been fully exercised, or is exercised in
whole or in part for cash as permitted by this Plan, the number of shares
subject to such Option or other right but as to which such Option or other right
was not exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Options or other awards which are
adjusted pursuant to Section 10.3 and become exercisable with respect to shares
of stock of another corporation shall be considered cancelled and may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Shares of Common Stock which are delivered by the Optionee or Grantee or
withheld by the Company upon the exercise of any Option or other award under
this Plan, in payment of the exercise price thereof, may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1. If any
share of Restricted Stock is forfeited by the Grantee or repurchased by the
Company pursuant to Section 6.6 hereof, such share may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
Notwithstanding the provisions of this Section 2.2, no shares of Common Stock
may again be optioned, granted or awarded if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.
5
<PAGE>
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Any Employee, Independent Director or consultant
-----------
selected by the Committee pursuant to Section 3.4(a)(i) shall be eligible to be
granted an Option. In addition, each Independent Director of the Company shall
be eligible to be granted Options at the times and in the manner set forth in
Section 3.4(d).
3.2 Disqualification for Stock Ownership. No person may be granted
------------------------------------
an Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any then existing Subsidiary or parent corporation (within the meaning of
Section 422 of the Code) unless such Incentive Stock Option conforms to the
applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock
----------------------------------------
Option shall be granted unless such Option, when granted, qualifies as an
"incentive stock option" under Section 422 of the Code. No Incentive Stock
Option shall be granted to any person who is not an Employee.
3.4 Granting of Options
-------------------
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select
from among the key Employees, Independent Directors or consultants
(including Employees, Independent Directors or consultants who have
previously received Options or other awards under this Plan) such of them
as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of shares
to be subject to such Options granted to the selected key Employees,
Independent Directors or consultants;
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Stock Options and whether such Options are to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and conditions
-------- -------
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) Upon the selection of a key Employee, Independent Director or
consultant to be granted an Option, the Committee shall instruct the Secretary
of the Company to issue the Option and may impose such conditions on the grant
of the Option as it deems appropriate. Without limiting the generality of the
preceding sentence, the Committee may, in its discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option to an
Employee, Independent Director or consultant that the Employee, Independent
Director or consultant surrender for cancellation some or all of the unexercised
Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
6
<PAGE>
Appreciation Rights, Dividend Equivalents or Stock Payments or other rights
which have been previously granted to him under this Plan or otherwise. An
Option, the grant of which is conditioned upon such surrender, may have an
option price lower (or higher) than the exercise price of such surrendered
Option or other award, may cover the same (or a lesser or greater) number of
shares as such surrendered Option or other award, may contain such other terms
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) During the term of the Plan, each person who is an Independent
Director as of the date of the consummation of the initial public offering of
Common Stock automatically shall be granted (i) an Option to purchase
______________ (________) shares of Common Stock (subject to adjustment as
provided in Section 10.3) on the date of such initial public offering and (ii)
an Option to purchase _______________ (__________) shares of Common Stock
(subject to adjustment as provided in Section 10.3) on the third anniversary of
such grant; provided that such Independent Director serves as a member of the
--------
Board on such third anniversary. During the term of the Plan, a person who is
initially elected to the Board after the consummation of the initial public
offering of Common Stock and who is an Independent Director at the time of such
initial election automatically shall be granted (i) an Option to purchase
_______________ (__________) shares of Common Stock (subject to adjustment as
provided in Section 10.3) on the date of such initial election and (ii) an
Option to purchase _______________ (__________) shares of Common Stock (subject
to adjustment as provided in Section 10.3) on the third anniversary of such
grant; provided that such Independent Director serves as a member of the Board
--------
on such third anniversary. Members of the Board who are employees of the
Company and who subsequently retire from the Company but remain on the Board, to
the extent that they are eligible, will receive Options as described in clause
(i) of the preceding sentence upon retirement from the Company and shall be
eligible to receive additional Options as described in and pursuant to the terms
of clause (ii) of the preceding sentence. All the foregoing Option grants
authorized by this Section 3.4(d) are subject to stockholder approval of the
Plan.
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written
----------------
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of grants to Independent
Directors) shall determine, consistent with this Plan. Stock Option Agreements
evidencing Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Stock Option Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each
------------
Option shall be set by the Committee; provided, however, that such price shall
-------- -------
be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Incentive Stock
Options and Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, such price shall not be less than
100% of the Fair Market Value of a share
7
<PAGE>
of Common Stock on the date the Option is granted; (ii) in the case of Incentive
Stock Options granted to an individual then owning (within the meaning of
Section 424(d) of the Code) more than 10% of the total combined voting power of
all classes of stock of the Company or any Subsidiary or parent corporation
thereof (within the meaning of Section 422 of the Code) such price shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the date
the Option is granted; and (iii) in the case of grants to Independent Directors,
such price shall equal 100% of the Fair Market Value of a share of Common Stock
pursuant to Section 3.4(d) on the date the Option is granted; provided, however,
-------- -------
that the price of each share subject to each Option granted to Independent
Directors on the date of the initial public offering of Common Stock shall equal
the initial public offering price per share of Common Stock.
4.3 Option Term. The term of an Option shall be set by the
-----------
Committee in its discretion; provided, however, that, (i) in the case of grants
-------- -------
to Independent Directors pursuant to Section 3.4(d), the term shall be ten (10)
years from the date the Option is granted, without variation or acceleration
hereunder, but subject to Section 5.6, and (ii) in the case of Incentive Stock
Options, the term shall not be more than ten (10) years from the date the
Incentive Stock Option is granted, or five (5) years from such date if the
Incentive Stock Option is granted to an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Subsidiary or parent
corporation thereof (within the meaning of Section 422 of the Code). Except as
limited by requirements of Section 422 of the Code and regulations and rulings
thereunder applicable to Incentive Stock Options, the Committee may extend the
term of any outstanding Option in connection with any Termination of Employment
or Termination of Consultancy of the Optionee, or amend any other term or
condition of such Option relating to such a termination.
4.4 Option Vesting
--------------
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee and the Committee
may determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; provided, however, that Options granted to
-------- -------
Independent Directors pursuant to Section 3.4(d) shall become exercisable in
cumulative annual installments of 33 1/3% on each of the first, second and third
anniversaries of the date of Option grant, without variation or acceleration
hereunder except as provided in Section 10.3(b). At any time after grant of an
Option, the Committee may, in its sole and absolute discretion and subject to
whatever terms and conditions it selects, accelerate the period during which an
Option (except an Option granted to an Independent Director pursuant to Section
3.4(d)) vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees,
Independent Directors or consultants either in the Stock Option Agreement or by
action of the Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c), the Fair Market Value
of stock shall be determined as of the time the Option with respect to such
stock is granted.
8
<PAGE>
4.5 Consideration. In consideration of the granting of an Option,
-------------
the Optionee shall agree, in the written Stock Option Agreement, to remain in
the employ of (or to consult for or to serve as an Independent Director of, as
applicable) the Company or any Subsidiary for a period of at least one year
after the Option is granted or, in the case of an Independent Director, to the
end of such Independent Director's current Board term (or such shorter period as
may be fixed in the Stock Option Agreement or by action of the Committee or the
Board following grant of the Option). Nothing in this Plan or in any Stock
Option Agreement hereunder shall confer upon any Optionee any right to continue
in the employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Optionee at any time for any reason whatsoever, with or without
good cause.
ARTICLE V
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised in
----------------
whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option
------------------
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board, in the case of Options granted to Independent
Directors pursuant to Section 3.4(d)) stating that the Option, or a portion
thereof, is exercised. The notice shall be signed by the Optionee or other
person then entitled to exercise the Option or such portion;
(b) Such representations and documents as the Committee (or the
Board, in the case of Options granted to Independent Directors pursuant to
Section 3.4(d)), in its absolute discretion, deems necessary or advisable to
effect compliance with all applicable provisions of the Securities Act of 1933,
as amended, and any other federal or state securities laws or regulations. The
Committee or Board may, in its absolute discretion, also take whatever
additional actions it deems appropriate to effect such compliance including,
without limitation, placing legends on share certificates and issuing stop-
transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However,
the Committee (or the Board, in the case of Options granted to Independent
Directors pursuant to Section 3.4(d)), may in its discretion (i) allow a delay
in payment up to thirty (30) days from the date the Option, or portion thereof,
is exercised; (ii) allow payment, in whole or in part, through the delivery of
shares of Common Stock owned by the Optionee, duly endorsed for transfer to the
Company with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the delivery of property of any kind which
constitutes good and valuable consideration; (iv) allow payment, in whole or in
part, through the delivery of a full recourse promissory note bearing interest
(at no less than such rate as shall then preclude the imputation of interest
under the
9
<PAGE>
Code) and payable upon such terms as may be prescribed by the Committee or the
Board, or (v) allow payment through any combination of the consideration
provided in the foregoing subparagraphs (ii), (iii) and (iv). In the case of a
promissory note, the Committee (or the Board, in the case of Options granted to
Independent Directors pursuant to Section 3.4(d)) may also prescribe the form of
such note and the security to be given for such note. The Option may not be
exercised, however, by delivery of a promissory note or by a loan from the
Company when or where such loan or other extension of credit is prohibited by
law.
5.3 Conditions to Issuance of Stock Certificates. The Company
--------------------------------------------
shall not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory body
which the Committee or Board shall, in its absolute discretion, deem necessary
or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee (or Board, in the case of
Options granted to Independent Directors pursuant to Section 3.4(d)) shall, in
its absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors pursuant to Section 3.4(d)) may establish from
time to time for reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4 Rights as Stockholders. The holders of Options shall not be,
----------------------
nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders.
5.5 Ownership and Transfer Restrictions. The Committee (or Board,
-----------------------------------
in the case of Options granted to Independent Directors pursuant to Section
3.4(d)), in its absolute discretion, may impose such restrictions on the
ownership and transferability of the shares purchasable upon the exercise of an
Option as it deems appropriate. Any such restriction shall be set forth in the
respective Stock Option Agreement and may be referred to on the certificates
evidencing such shares. The Committee may require the Employee to give the
Company prompt notice of any disposition of shares of Common Stock acquired by
exercise of an Incentive Stock Option within (i) two years from the date of
granting such Option to such Employee or (ii) one year after the transfer of
such shares to such Employee. The Committee may direct that the certificates
evidencing shares acquired by exercise of an Option refer to such requirement to
give prompt notice of disposition.
10
<PAGE>
5.6 Limitations on Exercise of Options Granted to Independent Directors
-------------------------------------------------------------------
Pursuant to Section 3.4(d). No Option granted to an Independent Director
- --------------------------
pursuant to Section 3.4(d) may be exercised to any extent by anyone after the
first to occur of the following events:
(a) The expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and total
disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such Optionee's
death or his permanent and total disability, unless the Optionee dies within
said three-month period; or
(d) The expiration of ten years from the date the Option was granted.
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 Award of Restricted Stock
--------------------------
(a) The Committee may from time to time, in its absolute discretion:
(i) Select from among the key Employees, Independent Directors
or consultants (including Employees, Independent Directors or consultants who
have previously received other awards under this Plan) such of them as in its
opinion should be awarded Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this Plan.
(b) The Committee shall establish the purchase price, if any, and
form of payment for Restricted Stock; provided, however, that such purchase
-------- -------
price shall be no less than the par value of the Common Stock to be purchased,
unless otherwise permitted by applicable state law. In all cases, legal
consideration shall be required for each issuance of Restricted Stock.
(c) Upon the selection of a key Employee, Independent Director or
consultant to be awarded Restricted Stock, the Committee shall instruct the
Secretary of the Company to issue such Restricted Stock and may impose such
conditions on the issuance of such Restricted Stock as it deems appropriate.
6.2 Restricted Stock Agreement. Restricted Stock shall be issued
--------------------------
only pursuant to a written Restricted Stock Agreement, which shall be executed
by the selected key Employee, Independent Director or consultant and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
6.3 Consideration. As consideration for the issuance of Restricted
-------------
Stock, in addition to payment of any purchase price, the Restricted Stockholder
shall agree, in the written Restricted Stock Agreement, to remain in the employ
of (or to consult for or serve as an Independent Director of, as applicable) the
Company or any Subsidiary for a period of at least one year after the Restricted
Stock is
11
<PAGE>
issued or, in the case of an Independent Director, to the end of such
Independent Director's current Board term (or such shorter period as may be
fixed in the Restricted Stock Agreement or by action of the Committee or the
Board following grant of the Restricted Stock). Nothing in this Plan or in any
Restricted Stock Agreement hereunder shall confer on any Restricted Stockholder
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary, or as a director of the Company, or shall interfere with or
restrict in any way the rights of the Company and any Subsidiary, which are
hereby expressly reserved, to discharge any Restricted Stockholder at any time
for any reason whatsoever, with or without good cause.
6.4 Rights as Stockholders. Upon delivery of the shares of
----------------------
Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted
Stockholder shall have, unless otherwise provided by the Committee, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Restricted Stock Agreement, including the right to receive all dividends
and other distributions paid or made with respect to the shares; provided,
--------
however, that in the discretion of the Committee, any extraordinary
- -------
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5.
6.5 Restriction. All shares of Restricted Stock issued under this
-----------
Plan (including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; provided, however,
-------- -------
that by action taken after the Restricted Stock is issued, the Committee may, on
such terms and conditions as it may determine to be appropriate, remove any or
all of the restrictions imposed by the terms of the Restricted Stock Agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire. Unless provided otherwise by the Committee, if no
consideration was paid by the Restricted Stockholder upon issuance, a Restricted
Stockholder's rights in unvested Restricted Stock shall lapse upon Termination
of Employment or, if applicable, upon Termination of Consultancy or Termination
of Directorship with the Company.
6.6 Repurchase of Restricted Stock. The Committee shall provide in
------------------------------
the terms of each individual Restricted Stock Agreement that the Company shall
have the right to repurchase from the Restricted Stockholder the Restricted
Stock then subject to restrictions under the Restricted Stock Agreement
immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy or Termination of Directorship between the Restricted
Stockholder and the Company, at a cash price per share equal to the price paid
by the Restricted Stockholder for such Restricted Stock; provided, however, that
-------- -------
provision may be made that no such right of repurchase shall exist in the event
of a Termination of Employment or Termination of Consultancy without cause, or
following a change in control of the Company or because of the Restricted
Stockholder's retirement, death or disability, or otherwise.
6.7 Escrow. The Secretary of the Company or such other escrow
------
holder as the Committee may appoint shall retain physical custody of each
certificate representing Restricted Stock until all of the restrictions imposed
under the Restricted Stock Agreement with respect to the shares evidenced by
such certificate expire or shall have been removed.
6.8 Legend. In order to enforce the restrictions imposed upon
------
shares of Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates representing all shares of Restricted Stock
that are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.
12
<PAGE>
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1 Performance Awards. Any key Employee, Independent Director or
------------------
consultant selected by the Committee may be granted one or more Performance
Awards. The value of such Performance Awards may be linked to the market value,
book value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined appropriate by the Committee, in each
case on a specified date or dates or over any period or periods determined by
the Committee, or may be based upon the appreciation in the market value, book
value, net profits or other measure of the value of a specified number of shares
of Common Stock over a fixed period or periods determined by the Committee. In
making such determinations, the Committee shall consider (among such other
factors as it deems relevant in light of the specific type of award) the
contributions, responsibilities and other compensation of the particular key
Employee, Independent Director or consultant.
7.2 Dividend Equivalents. Any key Employee, Independent Director
--------------------
or consultant selected by the Committee may be granted Dividend Equivalents
based on the dividends declared on Common Stock, to be credited as of dividend
payment dates, during the period between the date an Option, Stock Appreciation
Right, Deferred Stock or Performance Award is granted, and the date such Option,
Stock Appreciation Right, Deferred Stock or Performance Award is exercised,
vests or expires, as determined by the Committee. Such Dividend Equivalents
shall be converted to cash or additional shares of Common Stock by such formula
and at such time and subject to such limitations as may be determined by the
Committee. With respect to Dividend Equivalents granted with respect to Options
intended to be qualified performance-based compensation for purposes of Section
162(m), such Dividend Equivalents shall be payable regardless of whether such
Option is exercised.
7.3 Stock Payments. Any key Employee, Independent Director or
--------------
consultant selected by the Committee may receive Stock Payments in the manner
determined from time to time by the Committee. The number of shares shall be
determined by the Committee and may be based upon the Fair Market Value, book
value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined appropriate by the Committee,
determined on the date such Stock Payment is made or on any date thereafter.
7.4 Deferred Stock. Any key Employee, Independent Director or
--------------
consultant selected by the Committee may be granted an award of Deferred Stock
in the manner determined from time to time by the Committee. The number of
shares of Deferred Stock shall be determined by the Committee and may be linked
to the market value, book value, net profits or other measure of the value of
Common Stock or other specific performance criteria determined to be appropriate
by the Committee, in each case on a specified date or dates or over any period
or periods determined by the Committee. Common Stock underlying a Deferred
Stock award will not be issued until the Deferred Stock award has vested,
pursuant to a vesting schedule or performance criteria set by the Committee.
Unless otherwise provided by the Committee, a Grantee of Deferred Stock shall
have no rights as a Company stockholder with respect to such Deferred Stock
until such time as the award has vested and the Common Stock underlying the
award has been issued.
7.5 Performance Award Agreement, Dividend Equivalent Agreement,
-----------------------------------------------------------
Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award,
- -------------------------------------------------
Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be
evidenced by a written agreement, which shall be executed by the Grantee and an
authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
13
<PAGE>
7.6 Term. The term of a Performance Award, Dividend Equivalent,
----
award of Deferred Stock and/or Stock Payment shall be set by the Committee in
its discretion.
7.7 Exercise Upon Termination of Employment. A Performance Award,
---------------------------------------
Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable
or payable only while the Grantee is an Employee, Independent Director or
consultant; provided that the Committee may determine that the Performance
Award, Dividend Equivalent, award of Deferred Stock and/or Stock Payment may be
exercised or paid subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
7.8 Payment on Exercise. Payment of the amount determined under
-------------------
Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of
both, as determined by the Committee. To the extent any payment under this
Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.
7.9 Consideration. In consideration of the granting of a
-------------
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment, the Grantee shall agree, in a written agreement, to remain in the
employ of, or to consult for, the Company or any Subsidiary for a period of at
least one year after such Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment is granted (or such shorter period as may be
fixed in such agreement or by action of the Committee following such grant).
Nothing in this Plan or in any agreement hereunder shall confer on any Grantee
any right to continue in the employ of, or as a consultant for, the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right
----------------------------------
may be granted to any key Employee, Independent Director or consultant selected
by the Committee. A Stock Appreciation Right may be granted (i) in connection
and simultaneously with the grant of an Option, (ii) with respect to a
previously granted Option, or (iii) independent of an Option. A Stock
Appreciation Right shall be subject to such terms and conditions not
inconsistent with this Plan as the Committee shall impose and shall be evidenced
by a written Stock Appreciation Right Agreement, which shall be executed by the
Grantee and an authorized officer of the Company. The Committee, in its
discretion, may determine whether a Stock Appreciation Right is to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
and Stock Appreciation Right Agreements evidencing Stock Appreciation Rights
intended to so qualify shall contain such terms and conditions as may be
necessary to meet the applicable provisions of section 162(m) of the Code.
Without limiting the generality of the foregoing, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a condition of
the grant of a Stock Appreciation Right to an Employee, Independent Director or
consultant that the Employee, Independent Director or consultant surrender for
cancellation some or all of the unexercised Options, awards of Restricted Stock
or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments, or other rights which have been previously
granted to him under this Plan or otherwise. A Stock Appreciation Right, the
grant of which is conditioned upon such surrender, may have an exercise price
lower (or higher) than the exercise price of the surrendered Option or other
award, may cover the same (or a lesser or greater) number of shares as such
surrendered Option or other award, may contain such other terms
14
<PAGE>
as the Committee deems appropriate, and shall be exercisable in accordance with
its terms, without regard to the number of shares, price, exercise period or any
other term or condition of such surrendered Option or other award.
8.2 Coupled Stock Appreciation Rights
---------------------------------
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to
a particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the
number of shares subject to the simultaneously or previously granted Option to
which it is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
8.3 Independent Stock Appreciation Rights
-------------------------------------
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine. The exercise price per share of Common Stock subject to each ISAR
shall be set by the Committee. An ISAR is exercisable only while the Grantee is
an Employee, Independent Director or consultant; provided that the Committee may
determine that the ISAR may be exercised subsequent to Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company, or because of the Grantee's retirement, death or disability, or
otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Committee may impose.
8.4 Payment and Limitations on Exercise
-----------------------------------
(a) Payment of the amount determined under Section 8.2(c) and
8.3(b) above shall be in cash, in Common Stock (based on its Fair Market Value
as of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Committee. To the extent such payment is effected in
Common Stock it shall be made subject to satisfaction of all provisions of
Section 5.3 hereinabove pertaining to Options.
(b) Grantees of Stock Appreciation Rights may, in the discretion of
the Board or Committee, be required to comply with any timing or other
restrictions including a window-period
15
<PAGE>
requirement deemed advisable or prudent by the Board or Committee or otherwise
with respect to the settlement or exercise of a Stock Appreciation Right.
8.5 Consideration. In consideration of the granting of a Stock
-------------
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of (or to consult for or serve as an
Independent Director of, as applicable) the Company or any Subsidiary for a
period of at least one year after the Stock Appreciation Right is granted or, in
the case of an Independent Director, to the end of such Independent Director's
current Board term (or such shorter period as may be fixed in the Stock
Appreciation Right Agreement or by action of the Committee or the Board
following grant of the Restricted Stock). Nothing in this Plan or in any Stock
Appreciation Right Agreement hereunder shall confer on any Grantee any right to
continue in the employ of, or as a consultant for, the Company or any Subsidiary
or shall interfere with or restrict in any way the rights of the Company and any
Subsidiary, which are hereby expressly reserved, to discharge any Grantee at any
time for any reason whatsoever, with or without good cause.
ARTICLE IX
ADMINISTRATION
9.1 Compensation Committee. Prior to the closing of the Company's
----------------------
initial public offering of equity securities (the "Offering"), the Compensation
Committee shall consist of the entire Board. Following the closing of the
Offering, the Compensation Committee (or another committee or a subcommittee of
the Board assuming the functions of the Committee under this Plan) shall consist
solely of two or more Independent Directors appointed by and holding office at
the pleasure of the Board, each of whom is (i) a "non-employee director" (as
defined by Rule 16b-3), (ii) to the extent required by the applicable provisions
of Rule 16b-3, a "disinterested person" (as defined by Rule 16b-3) and (iii) an
"outside director" for purposes of Section 162(m) of the Code. Appointment of
Committee members shall be effective upon acceptance of appointment. Committee
members may resign at any time by delivering written notice to the Board.
Vacancies in the Committee may be filled by the Board.
9.2 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options, awards of Restricted Stock or Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to grants to
Independent Directors. Any such grant or award under this Plan need not be the
same with respect to each Optionee, Grantee or Restricted Stockholder. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
9.3 Majority Rule ; Unanimous Written Consent. The Committee shall
-----------------------------------------
act by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
9.4 Compensation; Professional Assistance; Good Faith Actions.
---------------------------------------------------------
Members of the Committee shall receive such compensation for their services as
members as may be determined by the
16
<PAGE>
Board. All expenses and liabilities which members of the Committee incur in
connection with the administration of this Plan shall be borne by the Company.
The Committee may, with the approval of the Board, employ attorneys,
consultants, accountants, appraisers, brokers, or other persons. The Committee,
the Company and the Company's officers and Directors shall be entitled to rely
upon the advice, opinions or valuations of any such persons. All actions taken
and all interpretations and determinations made by the Committee or the Board in
good faith shall be final and binding upon all Optionees, Grantees, Restricted
Stockholders, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to this Plan, Options, awards of
Restricted Stock or Deferred Stock, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments, and all members of the Committee
and the Board shall be fully protected by the Company in respect of any such
action, determination or interpretation.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Not Transferable. Options, Restricted Stock awards, Deferred
----------------
Stock awards, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments under this Plan may not be sold, pledged,
assigned, or transferred in any manner other than by will or the laws of descent
and distribution or pursuant to a QDRO, unless and until such rights or awards
have been exercised, or the shares underlying such rights or awards have been
issued, and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award, Deferred Stock award, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment or interest or right
therein shall be liable for the debts, contracts or engagements of the Optionee,
Grantee or Restricted Stockholder or his successors in interest or shall be
subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee or Grantee, only he may exercise
an Option or other right or award (or any portion thereof) granted to him under
the Plan, unless it has been disposed of pursuant to a QDRO. After the death of
the Optionee or Grantee, any exercisable portion of an Option or other right or
award may, prior to the time when such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement or other agreement, be exercised
by his personal representative or by any person empowered to do so under the
deceased Optionee's or Grantee's will or under the then applicable laws of
descent and distribution.
10.2 Amendment, Suspension or Termination of this Plan. Except as
-------------------------------------------------
otherwise provided in this Section 9.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Committee may be taken that would otherwise require
stockholder approval as a matter of applicable law, regulation or rule. No
amendment, suspension or termination of this Plan shall, without the consent of
the holder of Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, alter or impair any rights or obligations under any Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted
or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred Stock, Performance Awards, Stock
Appreciation Rights,
17
<PAGE>
Dividend Equivalents or Stock Payments may be granted or awarded during any
period of suspension or after termination of this Plan, and in no event may any
Incentive Stock Option be granted under this Plan after the first to occur of
the following events:
(a) The expiration of ten years from the date the Plan is adopted
by the Board; or
(b) The expiration of ten years from the date the Plan is approved
by the Company's stockholders under Section 10.4.
10.3 Changes in Common Stock or Assets of the Company , Acquisition
--------------------------------------------------------------
or Liquidation of the Company and Other Corporate Events.
- --------------------------------------------------------
(a) Subject to Section 10.3(d), in the event that the Committee (or
the Board, in the case of grants to Independent Directors) determines that any
dividend or other distribution (whether in the form of cash, Common Stock, other
securities, or other property), recapitalization, reclassification, stock split,
reverse stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, liquidation, dissolution, or sale, transfer, exchange
or other disposition of all or substantially all of the assets of the Company
(including, but not limited to a Corporate Transaction), or exchange of Common
Stock or other securities of the Company, issuance of warrants or other rights
to purchase Common Stock or other securities of the Company, or other similar
corporate transaction or event, in the Committee's sole discretion (or in the
case of grants to Independent Directors, the Board's sole discretion), affects
the Common Stock such that an adjustment is determined by the Committee to be
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to an Option, Restricted Stock award, Performance Award, Stock Appreciation
Right, Dividend Equivalent, Deferred Stock award or Stock Payment, then the
Committee (or the Board, in the case of grants to Independent Directors) shall,
in such manner as it may deem equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be
granted under the Plan, or which may be granted as Restricted Stock or
Deferred Stock (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares which
may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents, or Stock Payments, and in
the number and kind of shares of outstanding Restricted Stock or Deferred
Stock, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment.
(b) Subject to Sections 10.3(b)(vii) and 10.3(d), in the event of
any Corporate Transaction or other transaction or event described in Section
10.3(a) or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Committee (or the Board, in
18
<PAGE>
the case of grants to Independent Directors) in its discretion is hereby
authorized to take any one or more of the following actions whenever the
Committee (or the Board, in the case of grants to Independent Directors)
determines that such action is appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan or with respect to any option, right or other award under this
Plan, to facilitate such transactions or events or to give effect to such
changes in laws, regulations or principles:
(i) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of grants to Independent Directors) may provide, either by the terms
of the agreement or by action taken prior to the occurrence of such
transaction or event and either automatically or upon the optionee's
request, for either the purchase of any such Option, Performance Award,
Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or any
Restricted Stock or Deferred Stock for an amount of cash equal to the
amount that could have been attained upon the exercise of such option,
right or award or realization of the optionee's rights had such option,
right or award been currently exercisable or payable or fully vested or the
replacement of such option, right or award with other rights or property
selected by the Committee (or the Board, in the case of grants to
Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the Committee (or
the Board, in the case of grants to Independent Directors) may provide,
either by the terms of such Option, Performance Award, Stock Appreciation
Right, Dividend Equivalent, or Stock Payment, or Restricted Stock or
Deferred Stock or by action taken prior to the occurrence of such
transaction or event that it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of grants to Independent Directors) may provide, either by the terms
of such Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by
action taken prior to the occurrence of such transaction or event, that for
a specified period of time prior to such transaction or event, such option,
right or award shall be exercisable as to all shares covered thereby,
notwithstanding anything to the contrary in (i) Section 4.4 or (ii) the
provisions of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, or Restricted Stock or Deferred
Stock;
(iv) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of grant to Independent Directors) may provide, either by the terms of
such Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent, or Stock Payment, or Restricted Stock or Deferred Stock or by
action taken prior to the occurrence of such transaction or event, that
upon such event, such option, right or award be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or shall be
substituted for by similar options, rights or awards covering the stock of
the successor or survivor corporation, or a parent or subsidiary thereof,
with appropriate adjustments as to the number and kind of shares and
prices; and
(v) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee (or the Board, in the
case of grants to Independent Directors) may make adjustments in the number
and type of shares of Common Stock (or other securities or property)
subject to outstanding Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents, or Stock Payments, and in the number and kind
of outstanding Restricted Stock or Deferred Stock and/or in the terms and
conditions of (including the grant or exercise price), and the criteria
included in, outstanding options, rights and awards and options, rights and
awards which may be granted in the future.
19
<PAGE>
(vi) In its sole and absolute discretion, and on such terms
and conditions as it deems appropriate, the Committee may provide either by
the terms of a Restricted Stock award or Deferred Stock award or by action
taken prior to the occurrence of such event that, for a specified period of
time prior to such event, the restrictions imposed under a Restricted Stock
Agreement or a Deferred Stock Agreement upon some or all shares of
Restricted Stock or Deferred Stock may be terminated, and, in the case of
Restricted Stock, some or all shares of such Restricted Stock may cease to
be subject to repurchase under Section 6.6 or forfeiture under Section 6.5
after such event.
(vii) None of the foregoing discretionary terms of this
Section 10.3(b) shall be permitted with respect to Options granted under
Section 3.4(d) to Independent Directors to the extent that such discretion
would be inconsistent with the applicable exemptive conditions of Rule 16b-
3. In the event of a Change in Control or a Corporate Transaction, to the
extent that the Board does not have the ability under Rule 16b-3 to take or
to refrain from taking the discretionary actions set forth in Section
10.3(b)(iii) above, each Option granted to an Independent Director shall be
exercisable as to all shares covered thereby upon such Change in Control or
during the five days immediately preceding the consummation of such
Corporate Transaction and subject to such consummation, notwithstanding
anything to the contrary in Section 4.4 or the vesting schedule of such
Options. In the event of a Corporate Transaction, to the extent that the
Board does not have the ability under Rule 16b-3 to take or to refrain from
taking the discretionary actions set forth in Section 10.3(b)(ii) above, no
Option granted to an Independent Director may be exercised following such
Corporate Transaction unless such Option is, in connection with such
Corporate Transaction, either assumed by the successor or survivor
corporation (or parent or subsidiary thereof) or replaced with a comparable
right with respect to shares of the capital stock of the successor or
survivor corporation (or parent or subsidiary thereof).
(c) Subject to Section 10.3(d) and 10.8, the Committee (or the
Board, in the case of grants to Independent Directors) may, in its discretion,
include such further provisions and limitations in any Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock agreement or certificate, as it may deem
equitable and in the best interests of the Company.
(d) With respect to Incentive Stock Options and Options and Stock
Appreciation Rights intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 10.3 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the
Committee (or the Board, in the case of grants to Independent Directors)
determines that the option or other award is not to comply with such exemptive
conditions. The number of shares of Common Stock subject to any option, right
or award shall always be rounded to the next whole number.
(e) In the event of any Corporate Transaction, each outstanding
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent, Stock
Payment, Restricted Stock, or Deferred Stock award shall, immediately prior to
the effective date of the Corporate Transaction, automatically become fully
exercisable for all of the shares of Common Stock at the time subject to such
rights or fully vested, applicable, and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. However, an outstanding right
shall not so accelerate if and to the extent: (i)
20
<PAGE>
such right is, in connection with the Corporate Transaction, either to be
assumed by the successor or survivor corporation (or parent thereof) or to be
replaced with a comparable right with respect to shares of the capital stock of
the successor or survivor corporation (or parent thereof) or (ii) the
acceleration of exercisability of such right is subject to other limitations
imposed by the Plan Administrator at the time of grant. The determination of
comparability of rights under clause (i) above shall be made by the Plan
Administrator, and its determination shall be final, binding and conclusive.
10.4 Approval of Plan by Stockholders. This Plan will be submitted
--------------------------------
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan. Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted
and Restricted Stock or Deferred Stock may be awarded prior to such stockholder
approval, provided that such Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such
Restricted Stock or Deferred Stock shall not vest prior to the time when this
Plan is approved by the stockholders, and provided further that if such approval
has not been obtained at the end of said twelve-month period, all Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments previously granted and all Restricted Stock or Deferred Stock
previously awarded under this Plan shall thereupon be canceled and become null
and void.
10.5 Tax Withholding. The Company shall be entitled to require
---------------
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder of any sums required by federal, state or
local tax law to be withheld with respect to the issuance, vesting or exercise
of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the
Board, in the case of grants to Independent Directors) may in its discretion and
in satisfaction of the foregoing requirement allow such Optionee, Grantee or
Restricted Stockholder to elect to have the Company withhold shares of Common
Stock otherwise issuable under such Option or other award (or allow the return
of shares of Common Stock) having a Fair Market Value equal to the sums required
to be withheld.
10.6 Loans. The Committee may, in its discretion, extend one or more
-----
loans to key Employees in connection with the exercise or receipt of an Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or Stock
Payment granted under this Plan, or the issuance of Restricted Stock or Deferred
Stock awarded under this Plan. The terms and conditions of any such loan shall
be set by the Committee.
10.7 Forfeiture Provisions. Pursuant to its general authority to
---------------------
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of grants to Independent Directors) shall
have the right (to the extent consistent with the applicable exemptive
conditions of Rule 16b-3) to provide, in the terms of Options or other awards
made under the Plan, or to require the recipient to agree by separate written
instrument, that (i) any proceeds, gains or other economic benefit actually or
constructively received by the recipient upon any receipt or exercise of the
award, or upon the receipt or resale of any Common Stock underlying such award,
must be paid to the Company, and (ii) the award shall terminate and any
unexercised portion of such award (whether or not vested) shall be forfeited, if
(a) a Termination of Employment, Termination of Consultancy or Termination of
Directorship occurs prior to a specified date, or within a specified time period
following receipt or exercise of the award, or (b) the recipient at any time, or
during a specified time period, engages in any activity in competition with the
Company, or which is inimical, contrary or harmful to the interests of the
Company, as further defined by the Committee (or the Board, as applicable).
10.8 Limitations Applicable to Section 16 Persons and Performance-
-------------------------------------------------------------
Based Compensation. Notwithstanding any other provision of this Plan, this
- ------------------
Plan, and any Option, Performance
21
<PAGE>
Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment granted,
or Restricted Stock or Deferred Stock awarded, to any individual who is then
subject to Section 16 of the Exchange Act, shall be subject to any additional
limitations set forth in any applicable exemptive rule under Section 16 of the
Exchange Act (including any amendment to Rule 16b-3 of the Exchange Act) that
are requirements for the application of such exemptive rule. To the extent
permitted by applicable law, the Plan, Options, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents, Stock Payments, Restricted Stock and
Deferred Stock granted or awarded hereunder shall be deemed amended to the
extent necessary to conform to such applicable exemptive rule. Furthermore,
notwithstanding any other provision of this Plan, any Option or Stock
Appreciation Right intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall be subject to any additional
limitations set forth in Section 162(m) of the Code (including any amendment to
Section 162(m) of the Code) or any regulations or rulings issued thereunder that
are requirements for qualification as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed
amended to the extent necessary to conform to such requirements.
10.9 Effect of Plan Upon Options and Compensation Plans. The
--------------------------------------------------
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Independent Directors or consultants
of the Company or any Subsidiary or (ii) to grant or assume options or other
rights otherwise than under this Plan in connection with any proper corporate
purpose including but not by way of limitation, the grant or assumption of
options in connection with the acquisition by purchase, lease, merger,
consolidation or otherwise, of the business, stock or assets of any corporation,
partnership, firm or association.
10.10 Compliance with Laws. This Plan, the granting and vesting of
--------------------
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this
Plan and the issuance and delivery of shares of Common Stock and the payment of
money under this Plan or under Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or
Deferred Stock awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan,
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations.
10.11 Titles. Titles are provided herein for convenience only and are
------
not to serve as a basis for interpretation or construction of this Plan.
22
<PAGE>
10.12 Governing Law. This Plan and any agreements hereunder shall be
-------------
administered, interpreted and enforced under the internal laws of the State of
Maryland without regard to conflicts of laws thereof.
* * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of CPS Systems, Inc. on ________________, 1997.
Executed on this _______ day of October, 1997.
____________________________________
_________________________
Director and Secretary
* * * * * * *
I hereby certify that the foregoing Plan was approved by the stockholders
of CPS Systems, Inc. on ___________, 1997.
Executed at __________, __________ on this _________ day of October, 1997.
____________________________________
______________________
Director and Secretary
23
<PAGE>
===============================================================================
STANDARD OFFICE BUILDING
LEASE AGREEMENT
STATE OF TEXAS
--------------
COUNTY OF DALLAS
-------------
THIS AGREEMENT, entered into this 13th day of February , 1990. between
------ ---------- --
1. LANDLORD
AETNA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
herein designated as Landlord, and
2. TENANT
CPS BUSINESS SYSTEMS, INC.
- --------------------------------------------------------------------------------
herein designated as Tenant.
3. LEASED PREMISES
Landlord, in consideration of covenants and agreements to be performed by
Tenant and upon terms and conditions hereinafter stated, does hereby lease to
Tenant suite number(s) 500 on floor(s) fifth floor (5th) of the building known
----- --------------------
as 3400 Carlisle , located at 3400 Carlisle (hereinafter called the "Leased
---------------- ---------------
Premises") on a tract of land situated in the City of DALLAS ,
---------------
State of Texas , as described in Exhibit "A" attached hereto. The number of
------- -----
square feet contained in the Leased Premises is approximately 11,640 square
--------
feet.
4. TERM
For term of SEE ADDENDUM "A" , beginning on _________________________ and
-------------------
ending on ____________________________, to be continuously used and occupied
during term of this Lease by the Tenant for no other purpose than:
5. USE
General office for the conduct of selling, installing, and maintaining
- --------------------------------------------------------------------------------
proprietary software.
- --------------------------------------------------------------------------------
This Lease is conditioned upon faithful performance by Tenant of the
following agreements, covenants, rules and regulations, herein set out and
agreed to by Tenant.
6. BASE RENTAL
In consideration of this Lease, Tenant promises to pay Landlord, in Dallas,
Texas, the sum of SEE ADDENDUM "A" DOLLARS
---------------------------------------------------
7. ADJUSTMENT OF RENTAL
SEE ADDENDUM "B"
8. LATE CHARGE
Tenant agrees to pay Landlord an additional amount of 3% of any sum owing
by Tenant under this Lease if such sum is not in Landlord's office or postmarked
by midnight of the 10th day following the date on which such sum became due for
the extra expenses involved in handling delinquent payments. A $10.00 charge
will be assessed by Landlord for every returned check.
===============================================================================
<PAGE>
================================================================================
Page 2
9. SERVICE BY LANDLORD
Landlord agrees to furnish Tenant, while occupying premises, water - hot,
cold and refrigerated - at those points of supply provided for general use of
tenants; electric current for ordinary office use; heated and refrigerated air
conditioning in season, at such times as Landlord normally furnishes these
services to all tenants of building, and at such temperatures and in such
amounts as are considered by Landlord to be standard, such service on Saturdays,
Sundays and holidays to be optional on part of Landlord; elevator and janitor
service and electric lighting service for all public areas and special service
areas of building in the manner and to the extent deemed by Landlord to be
standard; but failure to furnish or any interruption of these services, from any
cause whatsoever, shall not make Landlord liable for damage or loss to person,
property or Tenant's business; shall not be considered an eviction of Tenant;
shall not entitle Tenant to any refund or reduction of rent, and shall not
relieve Tenant from compliance with any term or provision of this Lease.
Landlord shall use reasonable diligence to repair promptly any malfunction of
the building improvements or facilities but Tenant shall have no claim for
rebate or abatement of rent for damages resulting from such repair or from any
interruptions in service occasioned by such repair, unless resulting from
negligence of Landlord, its employees, agents, assignees or licensees.
10. PAYMENTS AND PERFORMANCE
Tenant agrees to pay all rents and all other sums required to be paid to
Landlord at the times and in the manner provided in this Lease. The obligation
of Tenant to pay rent is an independent covenant and under no circumstances
shall Tenant be released from its obligation to pay rent.
11. REPAIRS AND RE-ENTRY
Tenant will maintain the interior of the Leased Premises in sound
condition, at Tenant's own expense, and shall repair, using only contractors
approved by Landlord, any damage done to the building or any part of the
building by Tenant or Tenant's agents, employees and invitees. If Tenant fails
to make such repairs promptly, within 15 days of occurrence, Landlord shall have
the option to make such repairs itself and Tenant shall reimburse Landlord for
the cost of the repairs on demand. Tenant shall not commit nor allow any waste
or damage to be committed on any part of the interior of the Leased Premises,
and at the time of termination of this Lease, shall deliver the Leased Premises
to Landlord in as good condition as existed on date of Tenant's possession,
ordinary wear and tear damage to casualty and condemnation excepted, and
Landlord shall have the right to re-enter and resume possession.
12. ASSIGNMENT - SUBLETTING
Tenant shall not assign or mortgage this Lease or any right under or
interest in it; allow same to be assigned by operation of law or otherwise;
sublet the Leased Premises of any part thereof, or allow any other person to
occupy or use the Leased Premises or any part thereof in place of Tenant without
the prior written consent of Landlord. Any such assignment mortgage or
subletting without Landlord's consent, such consent not to be unreasonably
withheld, conditioned or delayed, shall be void and shall, at Landlord's option,
constitute a breach of this Lease. Nothwithstanding approval by Landlord of any
subletting or assignment by Tenant, Tenant, any guarantor of Tenant's
obligations under this Lease and cash assignee and subtenant shall remain fully
responsible and liable for payment of the rent required under this Lease and for
compliance with all of Tenant's other obligations. Consent of Landlord to any
assignment, mortgage or subletting shall constitute approval only as to that
specific assignment, mortgage or subletting, and none other.
13. ALTERATIONS AND ADDITIONS BY TENANT
Tenant shall make no alterations, additions or improvements to the Leased
Premises, including the installation of trade fixtures, without the prior
written consent of Landlord, Landlord may impose, as a condition of its consent,
requirements as to the manner in which, the times at which, and the contractor
by whom such work shall be done, except as otherwise provided herein. All ????
permanent alterations, additions or improvements, including trade fixtures,
shall be made by Tenant at its sole cost and expense, shall be part of the
building, shall become the property of Landlord at the time they are placed on
the Leased Premises, and shall be surrendered with the Leased Premises upon
termination of this Lease. Landlord may, however, by written notice to Tenant
given at least 30 days prior to the end of the term, require Tenant to remove
all partitions, counters, railing and the like installed by Tenant and to repair
any damage to the premises caused by such removal. Tenant agrees to indemnify
and hold Landlord harmless from and against any and all claims for mechanics,
materialmen or other liens in connection with any alterations, additions or
improvements, including trade fixtures. In addition, Tenant shall, if required
by Landlord, furnish such waiver or waivers or lien in form and with surety
satisfactory to Landlord before commencing any work on such alterations,
additions or improvements, including trade fixtures. Landlord reserves the right
to enter the Leased Premises for the purpose of posting any notices of
nonresponsibility as may be permitted by law or desired by Landlord.
14. LEGAL USE - VIOLATIONS OF INSURANCE COVERAGE - NUISANCE
Tenant will not use the Leased Premises nor allow the Leased Premises to be
used or any purpose other than that stated in this Lease or for any purpose
which is unlawful; disreputable; or extra-hazardous on account of fire,
explosion or other casualty; nor permit any act which would void the fire and
casualty insurance on the building or its contents. If insurance rates on the
building or its contents are increased due to action, conduct or business of
Tenant, Tenant will pay such amount of insurance rate increase to Landlord on
demand. Tenant will not create a nuisance, interfere with, annoy or disturb
other tenants or Landlord, nor allow Tenant's agents, employees or invitees to
do so.
15. LAWS AND REGULATIONS
Tenant will maintain the Leased Premises in a clean and healthful condition
and will comply with all laws, ordinances, orders, rules and regulations of any
governmental authority having jurisdiction over the use, conditions or occupancy
of the Leased Premises.
16. INDEMNITY AND LIABILITY
Except for any tenant finish items identified during Tenant's walk-through
inspection prior to Tenant occupancy, by moving into the Leased Premises, Tenant
acknowledges that the premises are received by it in a good state of repair,
accepts the premises as suitable for the purposes for which same are leased,
waives any and all delects of the premises and assumes all risks of damage to
persons, property or Tenant's business. Landlord shall not be liable for any
injury to person, damage to property or to Tenant's business arising from any
acts or omissions of Landlord or from any cause whatsoever except Landlord's
gross negligence or willful wrong. Tenant will indemnify and hold Landlord
harmless from all suits, actions, damages, liability and expense in connection
with loss of life, bodily or personal injury or property damage arising from any
occurrence upon the Leased Premises, from use or occupancy by Tenant of the
Leased Premises, and from any acts or omissions of Tenant, its agents,
contractors, employees or invitees. In addition, if Landlord should, without
fault on its part, be made a party to any action by or against Tenant, Tenant
shall pay all costs, expenses and reasonable attorney's fees of Landlord.
17. RULES OF BUILDING
Tenant, Tenant's agents, employees and invitees will comply fully with all
building rules and regulations which are attached to this Lease and made a part
of it by this reference Landlord may amend or change the rules and regulations
as it may deem advisable so long as such amendments or changes do not conflict
with the term of the lease and are uniformly applied to all tenants, to provide
for the safety, protection, care and cleanliness of the building, and Landlord
shall give Tenant a written copy of all such rules and amendments.
18. ENTRY FOR REPAIRS AND INSPECTION
Landlord and its agents and representatives may enter the Leased Premises
at any reasonable hour or at any time during emergencies to inspect ???? and
make repairs, alterations or additions as Landlord deems necessary. Tenant will
not be entitled to reduction or abatement of rent due to landlord's ???? for
such purposes.
================================================================================
<PAGE>
================================================================================
Page 3
19. CONDEMNATION
If the Leased Premises shall be taken or condemned in whole or in part for
public purposes, or transferred by agreement in connection with or under threat
of condemnation, this Lease shall, at Landlord's option, terminate at the time
the title is transferred. Tenant shall not be entitled to any portion of the
condemnation award or of any compensation paid for any transfer by agreement,
but Tenant may file a claim for any taking of fixtures and improvements owned by
it and for moving costs.
Tenant recognizes Landlord's statutory lien but Landlord agrees to be
subordinate to Tenant's bank.
21. ABANDONED PROPERTY
All of Tenant's furniture, movable trade fixtures and personal property not
removed from the Leased Premises within 5 days of Landlord's written request at
the termination of this Lease, whether such termination occurs by lapse of time
or otherwise, shall be conclusively presumed abandoned by Tenant, and Landlord
may declare such property to be the property of Landlord or may dispose of the
property by any method it deems advisable. Landlord's rights under this
paragraph shall be cumulative of its rights under Section 20 above.
22. HOLDING OVER
It is agreed and understood that any holding over by the Tenant of the
Leased Premises at the termination of this Lease whether such termination occurs
by lapse of time or otherwise, shall be construed as a tenancy at will at a
daily rental equal to 1/30th of an amount equal to 150%, the monthly rental
payable during the last month prior to termination of this Lease and shall be
Landlord's sole liquidated damages. Such tennacy shall be subject to all other
terms and provisions of this Lease except any right of renewal.
23. CASUALTY
In the event the Leased Premises are damaged by fire or other casualty
covered by Landlord's insurance, Landlord shall repair the damage at his expense
within a reasonable time. If the damage cannot be repaired within 180 days (as
estimated by an architect chosen by Landlord), this Lease may be terminated by
either Landlord or Tenant by written notice within 30 days after receipt of the
architect's ??????? certification and shall then terminate as of effective as of
the note of the casualty. Tenant shall pay all rent due under this Lease,
prorated to the date of such termination, and all other sums owing at that time
and shall immediately surrender possession of the Leased Premises to Landlord.
However if the damage can be repaired with 180 days or if it cannot be
repaired within such time but neither party exercises its option to terminate
this Lease, Landlord shall, within 30 days of such damage, begin to repair the
Leased Premises and Landlord's finish and shall proceed with reasonable
diligence to restore the Leased Premises and Landlord's finish to the same
condition as existed immediately prior to the occurrence of such casualty. The
rent shall be abated during the time the premises are unfit for occupancy.
Landlord shall not be required to rebuild, repair or replace any of the
furniture, equipments, fixtures or other improvements which may have been placed
on the Leased Premises by Tenant, in the event any mortgagee under a deed of
trust, security agreement or mortgage on the building should require that the
insurance proceeds be used to retire the mortgage debt, Landlord shall have no
obligation to rebuild and this Lease shall terminate upon written notice to
Tenant. In the event the building is so badly damaged by fire or other casualty,
even though the Leased Premises may not be affected, that Landlord decides,
within 90 days after the destruction, not to rebuild or repair the building
(such decision being vested exclusively in the discretion of Landlord), then in
such event Landlord shall so notify Tenant in writing and this Lease shall
terminate as of the time such notice is given, and the Tenant shall pay rent
hereunder apportioned to the time such notice is given and shall pay all other
obligations of Tenant owing on the date of termination, and Tenant shall
immediately surrender the Leased Premises to Landlord. Notwithstanding the
foregoing provisions of this Section 23, Tenant agrees that if the Leased
Premises or any other part of the building is damaged by fire or other casualty
caused by the fault or negligence of Tenant or Tenant's agents, employees or
invitees, Tenant shall have no option to terminate this Lease, even if the
damage cannot be repaired within 180 days, and the rent shall not be abated or
reduced before or during the repair period.
24. FORCE-MAJEURE
In the event Landlord or Tenant shall be delayed, hindered or prevented
from the performance of any act required under this Lease by reasons of acts of
God; acts of common enemies; fire, storm, flood, explosion or other casualty;
strikes; lockouts; labor disputes; labor troubles; inability to produce
materials; failure of power; restrictive governmental laws or regulations; riots
insurrection; war; settlement of losses with insurance carriers; injunction;
order of any court or governmental authority; or other cause not within the
reasonable control of Landlord, then the performance of such act shall be
excused for the period of the delay and the period for the performance of any
such act shall be extended for a period equivalent to the period of such delay.
25. INSURANCE
A. Subrogation: Landlord and Tenant hereby waive and release any and all
rights, claims, demands and causes of action each may have against the other on
account of any loss or damage occasioned to Landlord or to Tenant as the case
may be, their respective businesses, properties, real and personal, the Leased
Premises or its contents, arising from any risk or peril covered by any
insurance policy carried by either party. Inasmuch as the above mutual waivers
will preclude the assignment of any aforesaid claim by way of subrogation (or
otherwise) in an insurance company (or any other person), each party hereto
hereby agrees immediately to give to its respective insurance companies written
notice of the terms of said mutual waivers, and to have said insurance policies
properly endorsed if necessary, to prevent the invalidation of said insurance
coverages by reason of said waivers. This provision shall be cumulative of
Section 16.
B. Liability Insurance: Tenant shall procure and maintain throughout the
term of this Lease a policy or policies of insurance, at its sole cost and
expense, insuring Tenant and Landlord against any and all liability for property
damage or injury to or death of person or persons occasioned by or arising out
of or in connection with the use or occupancy of the Leased Premises, the limits
of such policy or policies to be in no amount not less than $300,000 with
respect to injuries to or death of any one person, in an amount not less than
$300,000 with respect to any one accident or disaster, and in an amount not less
than $100,000 with respect to property damaged or destroyed. Tenant shall
furnish evidence satisfactory to Landlord of the maintenance of such insurance
and shall obtain a written obligation on the part of each insurance company to
notify Landlord at least 10 days prior to cancellation of such insurance.
26. TRANSFER OF LANDLORD'S RIGHTS
Landlord shall have the right to transfer and assign in whole or in part,
all and every feature of its rights and obligations under this Lease and in the
building and property referred to in this Lease. In such event Landlord shall be
released from any further obligation under this Lease and Tenant agrees to look
solely to Landlord's successor for the performance of such obligations. Landlord
agrees to transfer the Security Deposit to any successor Landlords.
27. BANKRUPTCY
Bankruptcy. Insolvency or inability to pay its debts as such become due of
Tenant or any guarantor of this Lease; filing by or against Tenant or any
guarantor in any court pursuant to any statute either of the United States or of
any State of a petition in bankruptcy or insolvency or for reorganization;
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Page 4
arrangement or for the appointment of a receiver or trustee of all or a portion
of Tenant's or any such guarantor's property; or the making by Tenant or any,
such guarantor of an assignment for the benefit of creditors, shall constitute a
default by Tenant under this Lease and this Lease shall terminate, Tenant shall
then Immediately surrender the Leased Premises to Landlord. If Tenant fails to
do so, Landlord may expel or remove Tenant and its property and retake
possession of the Leased Premises without liability for any prosecution or any
claim for damages by reason of such re-entry. Tenant further agrees to indemnify
Landlord for all loss and damage suffered by Landlord by reason of such
termination, including loss of rental for the remainder of the lease term.
28. DEFAULT
The following shall also constitute events of default by Tenant under this
Lease:
(a) Tenant's failure to pay rent and other sums payable by Tenant under
this Lease within five (5) days of the due date.
(b) Tenant's failure to comply with other provisions of this Lease, within
thirty (30) days of written notice of such failure to comply.
(c) Tenant's desertion or abandonment of a substantial part of the Leased
Premises.
29. REMEDIES
A. Upon the occurrence of any of the events of default listed in Section
28 above, Landlord shall have the option to take any one or more of the
following actions without notice or demand in addition to and not in limitation
of any other remedy permitted by law or by this Lease:
(1) Terminate this Lease, at which time Tenant shall immediately surrender
the Leased Premises to Landlord. If Tenant fails to do so, Landlord
may expel or remove Tenant and its property and retake possession of
the Leased Premises without liability for any prosecution or any claim
for damages by reason of such re-entry. Tenant further agrees to
indemnify Landlord for all loss and damage suffered by Landlord by
reason of such termination, including loss or rental for the remainder
of the lease term.
(2) Enter upon and take possession of the Leased Premises as Tenant's
agent without terminating this Lease and without liability to
prosecution of any claim for damages by reason of such re-entry, and
relet the Leased Premises as Tenant's agent and receive rent therefor.
Tenant agrees to pay Landlord on demand for any costs incurred by
Landlord through such reletting, including costs of renovating or
repairing the Leased Premises for a new tenant and for any deficiency
that may arise between amount of rent due for the remainder of
Tenant's lease and that received by Landlord from reletting the Leased
Premises. It is expressly understood and agreed, however, that
Landlord shall have to use its best efforts to relet the Leased
Premises, and however Landlord's failure to do so shall not release or
affect Tenant's liability for rent or damages.
(3) Landlord may do whatever Tenant is obligated to do under the terms of
this Lease and in order to accomplish this purpose Landlord may enter
the Leased Premises without liability to prosecution or any claim for
damages therefor. Tenant shall reimburse Landlord for any expenses
Landlord may incur in effecting compliance with this Lease on Tenant's
behalf. Tenant further agrees that Landlord shall not be liable for
any damages which may result to Tenant from such action by Landlord,
whether caused by Landlord's negligence or otherwise.
B. Upon the occurrence of the default event stated in Section 28(a)
above, Landlord shall have the option, in addition to and not in limitation of
any other remedy permitted by law or by this Lease, of declaring the entire
amount of rent for the remainder of the lease term due and payable immediately;
without terminating this Lease, as liquidated and agreed damages for the
payment of costs and expenses that Landlord will incur in regaining possession,
restoring or reletting the Leased Premises. It is understood and agreed that the
actual determination of Landlord's costs and expenses is not leasible and that
the amount of rent for the remainder of the lease term represents a reasonable
estimate of such cost.
30. NO WAIVER
No action by Landlord or its agents shall constitute an acceptance of an
attempted surrender of the Leased Premises and no agreement to accept such a
surrender of the Leased Premises shall be valid unless in writing. Re-entry of
the Leased Premises by Landlord shall not constitute an election by Landlord to
terminate this Lease unless Landlord so notifies Tenant in writing. Acceptance
of rent by Landlord following the occurrence of an event of default shall not
waive such default, nor shall the receipt by Landlord of rent from any assignee,
subtenant or occupant of said premises other than Tenant be deemed a waiver of
Section 12 of this Lease. Landlord's waiver of any default or breach of the
terms of this Lease (including any violation or failure to enforce the Building
Rules attached hereto) or failure by Landlord to enforce one or more of the
remedies provided herein upon such default or breach shall not constitute a
waiver of any other default or breach of this Lease. No provision of this Lease
shall be deemed waived by Landlord unless evidenced in writing. Landlord's
rights and remedies under this Lease shall be cumulative of every other right or
remedy Landlord may have otherwise at law or in equity, and Landlord's exercise
of one or more of the rights of remedies shall not bar or in any way impair
Landlord's exercise of other rights and remedies.
31. SUBORDINATION
This Lease and all rights of the Tenant hereunder are subject and
subordinate to any deeds of trust, mortgages or other instruments of security
which do now or may hereafter cover the building and the land or any interest of
Landlord therein, and to any and all advances made on the security thereof, and
to any and all increases, renewals, modifications, consolidations, replacements
and extensions of any of such deeds of trust, mortgages or instruments of
security. This provision is hereby declared by Landlord and Tenant to be self-
operative and no further instrument shall be required to effect such
subordination of this Lease. Tenant shall, however, from time to time, upon
demand, execute, acknowledge and deliver to Landlord any and all instruments and
certificates that in the judgment of Landlord may be necessary or proper to
confirm or evidence such subordination, and Tenant hereby irrevocably appoints
Landlord as Tenant's agent and attorney-in-fact for the purpose of executing,
acknowledging and delivering any such instruments and certificates. This Lease
and all rights of Tenant hereunder are further subject and subordinate to all
ground or primary leases in existence at the date hereof and to any and all
supplements, modifications and extensions thereof heretofore or hereafter made.
However, notwithstanding the foregoing provisions of this Section 31, Tenant
agrees that any such mortgagee shall have the right at any time to subordinate
any such deeds of Trust, mortgages or other instruments of security to this
Lease on such terms and subject to such conditions as such mortgagee may deem
appropriate in its discretion. Tenant further agrees, upon demand by Landlord's
mortgagee at any time, before or after the institution of any proceedings for
the foreclosure of any such deeds of trust, mortgages or other instruments of
security, or sale of the building pursuant to any such deeds of trust, mortgages
or other instrument of security, to attorn to such purchaser upon any such sale
and to recognize such purchaser as Landlord under this Lease. This agreement of
Tenant to attorn upon demand of Landlord's mortgagee shall survive any such
foreclosure sale or trustee's sale. Tenant shall upon demand at any time or
times, or after any such foreclosure sale or trustee's sale, execute,
acknowledge and deliver to Landlord's mortgagee any and all instruments and
certificates that in the judgment of Landlord's mortgagee may be necessary or
proper to confirm or evidence such attornment, and Tenant hereby irrevocably
appoints Landlord's mortgagee as Tenant's agent and attorney-in-fact for the
purpose of executing, acknowledging and delivering any such instruments and
certificates.
32. ESTOPPEL CERTIFICATES
Tenant agrees to furnish from time to time when requested by Landlord or
the holder of any deed of trust or mortgage covering the land and building or
any interest of Landlord therein, a certificate signed by Tenant to the effect
that this Lease is then presently in full force and effect and unmodified: that
the term of this Lease has commenced and the full rental is then accruing
hereunder: that Tenant has accepted possession of the Leased Premises and that
any improvements required (if any) by the terms of this Lease to be made by
Landlord have been completed to the satisfaction of Tenant: that no rent under
this Lease has been paid more than 30 days in advance of its due date; that the
address for notices ? be sent to Tenant is as set forth in this Lease; that
Tenant, as of the date of such certificate, has no charge, lien or claim of
offset under this Lease or otherwise against rents or other charges due or to
become due hereunder; and that to the knowledge of Tenant, Landlord is not then
in default under this Lease. The certificate shall also contain an agreement by
Tenant with such holder that from and after the date of such certificate. Tenant
will not pay any rent under this Lease more than 30 days in advance of its due
date, will not surrender or consent to the modification of any of the terms of
this Lease nor to the termination of this Lease by Landlord, and will not seek
to terminate this Lease by reason of any act or omission of Landlord until
Tenant shall have given written notice of such act or omission to
================================================================================
<PAGE>
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Page 5
the holder of such deed of trust or mortgage (at such holder's last address
furnished to Tenant) and until a reasonable period of time shall have elapsed
following the giving of such notice, during which period such holder shall have
the right, but shall not be obligated, to remedy such act or omission: provided,
however, that (i) the agreement of Tenant described in this sentence will be of
no effect under such certificate unless Tenant is furnished by such holder with
a copy of any assignment to such holder of Landlord's interest in this Lease
within 120 days after the date of such certificate, and (ii) the agreement of
Tenant with such holder that is embodied in such certificate shall terminate
upon the subsequent termination of any such assignment.
33. JOINT AND SEVERAL LIABILITY
The obligations imposed upon Tenant (if more than one) under this Lease
shall be joint and several. Landlord may proceed against guarantor without first
proceeding against Tenant, and no guarantor shall be released from its guaranty
for any reason, including, but not limited to, any amendment of this Lease, any
waiver of Landlord's rights, failure of Landlord to give Tenant or any guarantor
any notices, or release of any party liable for payment and performance of
Tenant's obligations under this Lease.
34. ATTORNEY'S FEES
If Landlord or Tenant brings any action under this Lease or consults or
places this Lease or any amount payable under it with an attorney for the
enforcement of any of Landlord's rights under this Lease, the prevailing party
agrees to pay reasonable attorney's fees and other costs and expenses incurred.
35. QUIET POSSESSION
Landlord hereby covenants that Tenant, upon payment of rent as provided
under this Lease and performing all other agreements contained in this Lease,
shall and may peacefully have, hold and enjoy the Leased Premises.
36. BUILDING NAME
Tenant may use the present name of the building in the name of its business
and in its business address, provided, however, that Landlord reserves the right
to change the name of the building at any time without prior notice to Tenant.
Tenant agrees to immediately cease use of the building name in connection with
its business upon termination of this Lease, by lapse of time or otherwise.
37. PARKING
SEE PARKING RENTAL AGREEMENT, ADDENDUM C
38. NOTICES
Any notice required or permitted to be given by one party to the other
under this Lease shall be in writing and shall be effective when deposited
pursuant hereto with the United States Mail, Certified or Registered Mail,
Return Receipt Requested, postage prepaid, addressed as follows:
If to LANDLORD: Aetna Life If to TENANT: CPS Business
Insurance Company Systems, Inc.
14785 Preston Road, 3400 Carlisle,
Suite 275 Suite 500
Dallas, Texas 75240 Dallas, Texas 75204
Either party may change its address as designated above by written notice
to the other party.
39. FINANCIAL STATEMENTS
Tenant shall furnish Landlord from time to time when requested by Landlord
the most recent statement of financial condition in Tenant's possession, of
Tenant prepared by an independent certified public accountant and in form
reasonably satisfactory to Landlord.
40. LEASEHOLD IMPROVEMENTS
In the event the Leased Premises are not ready for occupancy for reasons
other than any delay in the installation of Tenant's leasehold improvements due
to any changes or additions ordered by Tenant, then the rent hereinabove
provided shall abate and not commence until the date the leasehold improvements
to the Leased Premises are substantially complete; but such abatement of rent
shall constitute full settlement of all claims that Tenant might otherwise have
against Landlord by reason of the Leased Premises not being ready for occupancy
by Tenant on the lease commencement date. If the Leased Premises are not ready
for occupancy by Tenant on the lease commencement date, the term of this Lease
shall be extended by the period of time which elapses between the lease
commencement date and the date the Leased Premises are ready for occupancy by
Tenant, and the parties agree to execute an agreement between them confirming
any such extension of the lease term.
41. ENTIRE AGREEMENT
Tenant agrees that as a material consideration for execution of this Lease
there are no oral representations, understanding, stipulations or promises
pertaining to this agreement that are not incorporated in this Lease, and it is
also agreed that this Lease shall not be altered, waived, amended or extended
except by written agreement signed by both parties, unless expressly provided
otherwise in this Lease.
42. SEVERABILITY
If any provision of this Lease is illegal, invalid or unenforceable under
present or future laws during the term of this Lease, it is the intention of
both parties that the remainder of this Lease shall not be affected, and that a
clause be added to this Lease as similar to such invalid or unenforceable clause
as possible and be legal, valid and enforceable.
43. CAPTIONS
The captions of each paragraph of this Lease are added as a matter of
convenience only and shall not be considered in the construction or
interpretation of any part of this Lease.
44. BINDING EFFECT
The provisions of this Lease shall be binding upon and inure to the
benefit of Landlord and Tenant, respectively, and to their heirs, personal,
representatives, successors and assigns, subject to the provisions of Section 26
above.
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<PAGE>
45.SPECIAL CONDITIONS
Exhibit "A" Legal Description
Exhibit "B" Floorplan
Exhibit "C" Leasehold Improvements
Addendum "A" Special Provisions
Addendum "B" Adjustment to Rental
Addendum "C" Parking Rental Agreement
IN WITNESS WHEREOF, this Lease is entered into by the parties hereto on the
date and year first set forth above.
TENTANT
CPS BUSINESS SYSTEMS INC.
- --------------------------------------------------------------------------------
By:/s/ Clayton B. Callaway
------------------------------
Clayton B. Callaway
Title: President & Chief Executive Officer
--------------------------
LANDLORD:
AETNA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
By:/s/ Joseph E. Gaukler
------------------------------
Joseph E. Gaukler
Title: Assistant Vice President
---------------------------
CORPORATE ACKNOWLEDGEMENT
STATE OF ________________________
COUNTY OF _______________________
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this day personally appeared _________________________________________
______________________, whose name is subscribed to the foregoing instrument,
and acknowledged to me that the same was the act of the said ___________________
_____________, a corporation, and that he/she executed the same as the act of
such corporation for the purposes and consideration therein expressed, and in
the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL, OF OFFICE this ________ day of _____________
_________________, 19___.
(SEAL) ______________________________________________________
Notary Public in and for County.
INDIVIDUAL, ACKNOWLEDGMENT
STATE OF _______________________
COUNTY OF ______________________
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this day personally appeared ________________________________________
___________________, known to me to be the person whose name is subscribed to
the foregoing instrument, and acknowledged to me that he/she executed the same
for the purposes and consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE this _________ day of _____________
______________, 19___.
(SEAL) _______________________________________________________
Notary Public in and for County.
<PAGE>
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BUILDING RULES AND AGREED REGULATIONS
1. Tenant agrees to make deposit, in amount fixed by Landlord from time
to time, for each key issued by Landlord to Tenant for its offices, and upon
termination of lease contract, to return all keys to Landlord. Landlord will
refund amount deposited on each key returned.
2. Tenant will refer all contractors, contractor's representatives and
Installation technicians, rendering any service to Tenant to Landlord for
Landlord's supervision, approval, and control before performance of any
contractual service. This provision shall apply to all work performed in
building including installations of telephones, telegraph equipment, electrical
devices and attachments, and installations of any nature affecting floors,
walls, woodwork, trim, windows, ceilings, equipment or any other physical
portion of building.
3. Movement in or out of building of furniture or office equipment, or
dispatch or receipt by Tenant of any merchandise or materials which requires use
of elevators of stairways, or movement through building entrances or lobby shall
be restricted to hours designated by Landlord. All such movement shall be under
supervision of Landlord and in the manner agreed between Tenant and Landlord by
prearrangement before performance. Such prearrangement initiated by Tenant will
include determination by Landlord and subject to its decision and control,
time, method, and routing of movement, limitations imposed by safety or other
concerns which may prohibit any article, equipment or any other item from being
brought into building. Tenant is to assume all risk as to damage to articles
moved and injury to persons or public engaged or not engaged in such movement,
including equipment, property, and personnel of Landlord if damaged or injured
as a result of acts in connection with carrying out this service for Tenant from
time of entering property to completion of work; and Landlord shall not be
liable for acts of any person engaged in, or any damage or loss to any of said
property or persons resulting from any act in connection with such service
performed for Tenant.
4. No signs will be allowed in any form on exterior of building or
windows inside or out, and no signs except in uniform location and uniform style
fixed by Landlord will be permitted in the public corridors or on corridors
doors or entrances to Tenant's space. All signs will be contracted for by
Landlord for Tenant at the rate fixed by Landlord from time to time, and Tenant
will be billed and pay for such service accordingly.
5. No portion of Tenant's area or any other part of building shall at any
time be used or occupied as sleeping or lodging quarters.
6. Tenant shall not place, install or operate on leased premises or in
any part of building, any engine, stove, or machinery, or conduct mechanical
operations or cook thereon or therein, or place or use in or about premises any
explosives, gasoline, kerosene, oil, acids, caustics or any other inflammable,
explosive, or hazardous material without written consent of Landlord, except for
the equipment used in Tenant's daily conduct of business in selling, installing
& maintaining proprietary software.
7. Landlord will not be responsible for lost or stolen personal property,
equipment, money, or jewelry from Tenant's area of public rooms regardless of
whether such loss occurs when area is locked against entry or not.
8. No birds or animals shall be brought into or kept in or about
building.
9. Employees of Landlord shall not receive or carry messages for or to
any Tenant or other person, nor contract with or render free or paid services
to any Tenant or Tenant's agents, employees, or invitees.
10. Landlord will not permit entrance to Tenant's offices by use of pass
keys controlled by Landlord, to any person at any time without written
permission by Tenant except employees, contractors, or service personnel
directly supervised by Landlord.
11. None of the entries, passages, doors, elevators, elevator doors,
hallways or stairways shall be blocked or obstructed, or any rubbish, litter,
trash, or material of any nature placed, emptied or thrown into these areas, or
such areas be used at any time except for access or egrees by Tenant, Tenant's
agents, employees, or invitees.
12. The Landlord desires to maintain the highest standards of
environmental comfort and convenience for the tenantry. It will be appreciated
if any undesirable conditions or lack of courtesy or attention are reported
directly to the management.
13. Tenant shall have access to the building twenty-four (24) hours per
day, seven (7) days a week.
After-hours HVAC will be assessed at $15.00 per hour.
SECURITY DEPOSIT
Amount: $ 11,290.80
---------------
The security deposit shall be payable on the date of Tenant's execution of
this Lease and shall be held by Landlord without liability for interest and as
security for the performance by Tenant of Tenant's obligations under this Lease.
It is expressly understood that the security deposit shall not be considered an
advance payment of rental or a measure of Landlord's damages in case of default
by Tenant or upon termination of this Lease. Landlord may comm??? the security
deposit with Landlord's other funds, Landlord may, from time to time, without
prejudice to any other remedy, use the security deposit to the extent necessary
to make good any arrearages of rent or to satisfy any other obligation of Tenant
hereunder. Following any such application of the security deposit, Tenant shall
pay to Landlord on demand the amount so applied in order to restore the security
deposit to its original amount. If Tenant is not in default at the termination
of this Lease, the balance of the security deposit remaining after any such
application shall be returned by Landlord to Tenant. If Landlord transfers its
interest in the Leased Premises during the term of this Lease, Landlord may
assign the security deposit to the transferee and thereafter shall have no
further liability for the return of such security deposit.
<PAGE>
EXHIBIT "A"
Legal Description
-----------------
Being LOT 1B, BLOCK 2/973 of a Second Replat of the POWER INVESTMENT COMPANY'S
SUBDIVISION, an Addition to the City of Dallas, Dallas County, Texas, according
to the Map recorded in Volume 84139, Page 1590, Map Records, Dallas County,
Texas.
<PAGE>
EXHIBIT "B"
[FLOOR PLAN APPEARS HERE]
<PAGE>
EXHIBIT "C"
Leasehold Improvements
----------------------
Attached hereto and made a part hereof the Lease Agreement dated day of
February, 1989, between AETNA LIFE INSURANCE COMPANY, (the "Landlord") and CPS
BUSINESS SYSTEMS, INC. (the "Tenant").
Landlord agrees to provide improvements in an amount not to exceed One
Hundred Eight Thousand and No/100 Dollars ($108,000.00) to Tenant's space in
accordance with the plans and specifications to be provided by Landlord and
approved by Tenant.
Tenant agrees to cooperate with Landlord in the preparation of construction
documents for the leasehold improvements to be made to the Leased Premises and
Tenant agrees to deliver to Landlord initialled construction documents.
In the event the cost of the Tenant's Leasehold improvements exceed the
allowance stated above, Tenant shall reimburse Landlord for the excess of this
allowance upon the substantial completion of the Leased Premise. This cost,
together with the cost of any change orders or extras during the course of
construction, shall be paid upon substantial completion of such construction.
<PAGE>
ADDENDUM A
SPECIAL PROVISIONS
Attached hereto and made a part of the Lease Agreement dated the 13th of
February, 1990, by and between AETNA LIFE INSURANCE COMPANY (the "Landlord") and
CPS BUSINESS SYSTEMS, INC. (the "Tenant").
1. Commencement Date:
------------------
Tenant shall take occupancy of 4,120 rentable square feet as reflected on
the floorplan attached hereto, on April 1, 1990. The Commencement Date for
the balance of Tenant's premises, 7,520 rentable square feet, shall be the
later of (a) May 1, 1990, or (b) the date of substantial completion of the
Premises.
In the event the construction is completed on the 7,520 rentable square
feet prior to the Commencement Date of May 1, 1990, Tenant shall be
permitted to take early occupancy of the Premises without payment of rental
for a period not to exceed ten (10) calendar days.
2. Term:
----
Paragraph 4. Term, of the Lease Agreement.
The lease term for the 4,120 rentable square feet shall be sixty-one (61)
months beginning on April 1, 1990 and terminating on April 30, 1995.
The lease term for the 7,520 rentable square feet shall be sixty (60)
months beginning on May 1, 1990 and terminating on April 30, 1995.
3. Base Rental:
-----------
Paragraph 6. Base Rental, of the Lease Agreement
In consideration of this Lease and without offset, Tenant promises to pay
Landlord at office of Landlord in Dallas, Texas, the sum of 636,281.20, in
lawful money of the United States of America, payable in monthly amounts
of:
April 1, 1990-July 31, 1990 $ 0.00/month
August 1, 1990-August 31, 1990 $3,996.40/month ($11.64/RSF)
September 1, 1990-April 30, 1995 $11,290.80/month ($11.64/RSF)
Rental shall be payable in advance, without demand, on the first day of
each and every calendar month during the term of the Lease. The Security
Deposit in the amount of $11,290.80 shall be due upon execution of the
Lease and the first (1st) monthly installment shall be due on the
Commencement Date of the Lease. The base rental stated herein shall be
subject, however, to adjustment as provided in Addendum B of this Lease.
Should the term of the Lease begin on a day other than the first day of a
calendar month or terminate on a day other than the last day of a calendar
month, the rent for such partial month shall be proportionately reduced.
All rent and sums provided to be paid under the Lease shall be paid to
Landlord at the address in Section 38 of this Lease.
<PAGE>
4. Moving Allowance:
-----------------
Landlord will provide Tenant with a moving allowance of $11,640.00 within
thirty (30) days of Tenant's acceptance and occupancy of the Premises.
6. First Right of Opportunity::
---------------------------
If Tenant is not in default of any of the terms, conditions, or covenants
of the Lease and Landlord is engaged in negotiation with a third party to
enter into a lease for all of or any portion of that area marked as "First
Opportunity Area", in Exhibit "B", attached hereto, Landlord shall notify
Tenant of such interest. Within ten (10) working days after Landlord gives
Tenant notice, Tenant shall: (1) notify Landlord in writing of its desire
to lease that space which said third party is interested in leasing: or,
(2) notify Landlord in writing of its intention not to take said space.
Failure to timely notify Landlord of its desire to lease said space or
failure to enter into a written lease agreement or amendment with Landlord
within thirty (30) days of notification of third party interest for said
space, shall be deemed a rejection of such space by Tenant and this Right
of First Opportunity shall terminate immediately.
A. The rental rate for the First Right of Opportunity space, if exercised
during the first twelve (12) months of the lease term, shall be at the
same rate and terms as the primary lease. If Tenant's exercise of the
First Right of Opportunity occurs after the twelfth (12th) month of
the lease term, the rental rate shall be the then current fair market
rate for properties of equivalent size, utility and location, with the
length of the lease term and credit standing of the Tenant to be taken
in account.
6. Renewal Option:
---------------
If at the end of the primary term of this Lease, Tenant is not in default
of any of the terms, conditions, or covenants of the Lease, Tenant, but not
an assignee or subtenant of Tenant, is hereby granted one (1) option to
renew this Lease for an additional term of five (5) years upon the same
terms and conditions contained in this Lease with the following exceptions:
A. Rental for the renewal term shall be the then current fair market rate
for properties of equivalent size, utility and location, with the
length of the lease term and credit standing of the Tenant to be taken
in account. If Tenant desires to renew this Lease, Tenant will notify
Landlord of its intention to renew no later than one hundred twenty
(120) days prior to the expiration date of this Lease. Landlord will
provide Tenant with a proposal to renew within fifteen (15) days
following notification.
<PAGE>
7. Subordination, Non-Disturbance and Attornment
---------------------------------------------
Tenant agrees that this Lease and all rights of Tenant hereunder shall
be subordinate at all times to the lien of any mortgages, deeds of
trust or other instruments of security which may hereafter affect the
Leased Premises, Building or tract of land described on Exhibit "A"
attached hereto. Landlord shall use its reasonable efforts to obtain
from the holder or any mortgage or other security instrument to which
this Lease is to be subordinated or to whom Tenant is to attorn, a
written agreement (hereinafter referred to as a "Non-Disturbance
Agreement") to be delivered to Tenant, that (i) so long as Tenant is
in compliance with the provisions of this Lease, Tenant's use and
occupancy of the Leased Premises and its rights under this Lease shall
not be disturbed or affected prior to the expiration or termination of
this Lease or by any foreclosure or other action (or by the delivery
or acceptance of a deed or other conveyance or transfer in lieu
thereof) which may be instituted or undertaken in order to enforce any
right or remedy available to the holder of such instrument or any
other document evidencing or given as security for the transaction
secured thereby, (ii) Tenant shall not be named as a party defendant
in any foreclosure, summary; or any other action commenced by any such
secured party, and (iii) any party succeeding to the interest of
Landlord as a result of any such enforcement action or otherwise shall
be bound to Tenant, and Tenant shall be bound to it, under all the
terms, covenants and conditions of this lease with the same force and
effect as if such party were the original Landlord under this Lease.
Landlord covenants and agrees that it will obtain and deliver to
Tenant a Non-Disturbance Agreement in accordance with the foregoing
provisions from the then holder(s) of any mortage or other security
interest affecting the Lease Premises, Building or the tract of land
described on Exhibit "A", if any, on or before the date of the Leased
Premises are substantially complete.
8. Signage:
--------
Tenant shall have the opportunity to be included on a three-part monument
sign to be erected on the property. Landlord will construct the sign base,
at Landlord's cost. Tenant shall bear the cost, not to exceed $500.00, of
all materials and installation charges incurred in the placement of
tenant's name on the sign base.
<PAGE>
ADDENDUM "B"
This Addendum "B" is attached hereto and made a part thereof that certain Lease
Agreement, dated the 13th day of February 1990, by and between AETNA LIFE
INSURANCE COMPANY (the "Landlord"), and CPS BUSINESS SYSTEMS, INC. (the
"Tenant"), for office space located at 3400 Carlisle, Dallas, Texas.
1. ADJUSTMENT TO BASE RENTAL
-------------------------
A. For purposes of ascertain the adjustment to Base
Rental, the following terms shall have the following meanings:
(i) "Base Amount" shall mean the greater of $5.50 per square foot
of rentable area in the building or, the annualized actual costs per
square foot of rentable area in the building for the calendar year
1989.
(ii) "Basic Costs" shall mean all building and Complex operating
expenses;
(iii) "Complex" shall mean the building and any other land or
improvements, including related parking facilities, now or hereafter
operated, in whole or in part, in common with the building.
(iv) "Estimated Basic Costs" shall mean a good faith projection of
Basic Costs for the forthcoming calendar year;
(v) "Estimated Basic Costs" shall mean the ratio determined by
dividing rentable area in the premises by rentable area in the
building. As of the time of execution of this Lease, Tenant's share is
15.32466% subject to the results of Landlord's action to remeasure the
building and Tenant's premises, the proration represented herein may
be altered to reflect the correct proration established by the
remeasurement thereof.
(vi) "Operating Expenses" shall mean all reasonable expenses, costs,
and disbursements (but not replacement of capital Investment items nor
specific costs especially billed to and paid by specific Tenants) of
every kind and nature which Landlord shall pay or become obligated to
pay because of or in connection with the ownership and operation of
the building including, but not limited to, the following:
(a) Wages salaries, and fees of all personnel engaged solely in
the operation, maintenace, or security of the building and
personnel who may provide traffic control relating solely to
ingress and egress from the parking areas for the building to
adjacent streets. All taxes, insurance; and benefits relating to
employees providing these services shall also be included;
(b) All supplies and materials used solely in the operation and
maintenance of the building
(c) Costs of all utilities for the building including but not
limited to the cost of water and power, heating, lighting, air
conditioning, and ventilation;
<PAGE>
(d) Costs of all maintenance, janitorial, and service
agreements for the building and the equipment therein,
including but not limited to, alarm service, window cleaning
and elevator maintenance.
(e) Cost of all insurance relating to the building
including but not limited to the cost of casualty and
liability insurance and Landlord personal property used in
connection therewith;
(f) All taxes, assessments, and other governmental charges,
whether federal, state, county, or municipal, and whether
they be by taxing districts or authorities presently taxing
the premises or by other, subsequently created or otherwise,
and any other taxes and assessments attributable to the
building or its operation. Tenant will be responsible for
its operation. Tenant will be responsible for taxes on its
personal property; provided, however, special assessments
shall be amortized over the useful life of the improvements
built in connection with the special assessment.
(g) Cost of labor and materials in performing repairs and
general maintenance in connection with the building,
including without limitation, Landlord's share of all
maintenance for the access road to the building and
Landlord's share of maintenance of the underground storm
drainage system, but excluding repairs and general
maintenance paid by proceeds of insurance or by Tenant or
other third parties, and alterations attributable solely to
Tenants of the building other than Tenant;
(h) Amortization of the cost of installation of capital
investment items which are primarily for the purpose of
reducing operating costs of the building (e.g. energy saving
devices) or which may be required by governmental authority.
All such costs shall be amortized over the reasonable life
of the capital investment items by and additional charge to
be added to rent and paid by Tenant as additional rent, with
the reasonable life and amortization schedule being
determined by Landlord in accordance with generally accepted
accounting principals, but in no event to extend beyond the
reasonable life of the building;
(i) Landlord accounting, auditing, legal, and management
fee applicable to the building such operating expenses shall
be computed on a cash basis. All operating expenses shall be
determined in accordance with accepted accounting principals
which shall be consistently applied.
<PAGE>
2. BILLING ADJUSTMENT TO BASE RENT.
-------------------------------
A. For each calender year during the term of this Lease, Base Rental shall
be adjusted upward by the amount of Tenant's Share of the increase, if any,
of Basic Costs over the Base Amount. Prior to January 1, 1990, and January
1 or each calendar year during the term of this Lease, or as soon as
practicable thereafter, Landlord shall provide Tenant with Estimated Basic
Costs for the calendar year ahead and Tenant's Share of the increase of
Estimated Basic Costs over the Base Amount; thereafter, Tenant's share of
the increase of Estimated Basic Costs over the Base Amount shall be paid in
twelve (12) equal monthly installments together with the monthly
installment of rental due hereunder. (Example: Actual costs equal
$5.85/RSF, less $5.50 Base Amount=$.35/RSF times 11,640/RSF=$4,074.00/year;
$339.50/month.)
B. By June 1, 1990 and by January 1, or each calendar year thereafter
during the term of the Lease, or as soon thereafter as practicable,
Landlord shall furnish to Tenant a statement of Basic Costs for the
previous calendar year. A lump sum payment (which payment shall be deemed a
payment of rent hereunder for all purposes) will be made from Tenant to
Landlord, or, as the case may be, from Landlord to Tenant within thirty
(30) days after the delivery of such statement equal to the difference
between Tenant's Share of the increase of Estimated Basic Costs over the
Base Amount for the previous calendar year. The effect of this
reconciliation payment is that Tenant will pay during the term of this
Lease its share of Basic Costs increases over the greater of $5.50 per
square foot of rentable area in the building or the annualized actual costs
per square foot of rentable area in the building for the calendar year 1989
set forth in 1. A.(i) above.
C. Tenant at its expense shall have the right at all reasonable times,
following prior written notice to Landlord, to audit Landlord's books and
records relating to this Lease for any year or years for which Base rental
is adjusted pursuant to Addendum "B" hereof.
D. If this Lease shall terminate on a day other than the last day of a
calendar year, that amount of any adjustment between Estimated Basic Costs
and Actual Basic Costs with respect of the calendar year in which such
costs be prorated on the basis which the number of days from the
commencement of such calendar year to and including such termination bears
to 365 days; and any amount payable by Landlord to Tenant to Landlord with
respect to such adjustment shall be payable within thirty (30) days after
delivery by Landlord to Tenant of the statement of Actual Basic Costs with
respect to such calendar years.
E. Notwithstanding, anything to the contrary contained in the Lease
Agreement of this Addendum "B", any excess for taxes and insurance
(uncontrollable expenses), above that portion of Tenant's Base Amount
allocated for taxes and insurance, as set forth above, shall not exceed ten
percent (10%) per annum, compounded annually and all other excess expenses,
excluding taxes and insurance (controllable expenses) included in Tenant's
Base Amount, as set forth above, shall not exceed six percent (6%) per
annum, compounded annually. For example, if the initial cost for taxes and
insurance is $1.00/RSF, then the first year the taxes and insurance excess
would not exceed $.10/RSF; the second year the excess would not exceed
$.21/RSF; the third year $.33/RSF, and so on.
<PAGE>
7. Termination. In the event this Agreement is terminated for any reason,
-----------
Tenant agrees to remove said automobile from the Garage promptly upon demand,
otherwise Tenant authorizes Landlord to remove said automobile without
assumption of any liability whatsoever.
8. Rules: Tenant, Tenant's agents, employees invitees or assigns will fully
-----
comply with all rules and regulations promulgated by Landlord or the government
of the use of the Garage.
9. Default: The following shall constitute events of default by Tenant
-------
hereunder:
c. Any default by Tenant under the Lease.
10. Remedies: Upon the occurrence of any event of default as listed in Section
--------
9 above, Landlord shall have all remedies provided for Landlord under the Lease.
11. Notice: Any notice required or permitted hereby shall be given in
------
accordance with notice provisions of the Lease.
12. Binding Effect: The terms and provisions of this Agreement shall inure to
--------------
the benefit of and be binding upon the respective heirs, representatives,
successors and assigns of Landlord and Tenant for the Term of the Lease.
13. Severability: If any clause or provision of this Agreement is illegal,
------------
invalid or unenforceable under any present or future laws effective during the
term hereof, then it is the intention of the parties hereto that the remainder
of this Agreement shall not be affected thereby and shall remain in full force
and effect.
<PAGE>
ADDENDUM C
PARKING RENTAL AGREEMENT
THIS PARKING RENTAL AGREEMENT (the "Parking Agreement") is made and entered into
as of this 13th day of February 1990, by and between AETNA LIFE INSURANCE
COMPANY (the "Landlord") and CPS Business Systems, Inc. (the "Tenant").
WHEREAS, Landlord and Tenant are parties to one Standard Office Building
Lease Agreement (the "Lease") dated the day of February, 1990, whereby
Landlord has leased to Tenant, Suite 500 in 3400 Carlisle (the "Building")
located at 3400 Carlisle, Dallas, Texas, 75204, consisting of approximately
11,640 rentable square feet; and
WHEREAS, the parties hereto wish to provide for parking for Tenant.
NOW, THEREFORE, for and in consideration of the mutual covenants herein
contained and other good and valuable consideration, the parties hereto agree as
follows;
1. Lease of Space: Tenant agrees to lease thirty-eight (38) unreserved P-2
--------------
(second) level parking spaces from Landlord. Seven (7) of said parking
spaces will be reserved. Two (2) of tenant's reserved parking spaces to be
located adjacent to the elevator lobby.
2. Rent: In consideration of this agreement, Tenant promises to pay
----
Landlord at the office of Landlord, in Dallas, Texas, the sum of No/100
Dollars ($0.00),
3. Term: This Parking Agreement shall take effect March 1, 1990 and shall
----
continue until it expires on April 30, 1995. However, notwithstanding the
foregoing, this Agreement shall sooner terminate upon prior termination of
the Lease. Should the Lease be extended for any reason, this Agreement
shall be extended and continue until the termination of said Lease.
4. Assignment; Subletting: Upon an approved assignment of the Lease or
----------------------
subletting of the Tenant's space in the Building, the Tenant's parking
spaces covered herein will be sublet to Tenant's sublessee or assignee to
Tenant's assignee.
5. Theft: LANDLORD SHALL NOT BE RESPONSIBLE EXCEPT FOR LANDLORD'S GROSS
-----
NEGLIGENCE FOR ANY LOSS, THEFT OR DAMAGE TO ANY ARTICLES LEFT IN ANY
AUTOMOBILE OR OF TENANT, ITS EMPLOYEES, AGENTS, INVITEES, OR ASSIGNS, NOR
SHALL LANDLORD BE RESPONSIBLE FOR ANY LOSS OR DAMAGE TO THE SAID AUTOMOBILE
OR ANY PART THEREOF, WHILE IN, OR BEING DRIVEN TO OR FROM THE GARAGE,
HOWSOEVER CAUSED. NO PERSON IS AUTHORIZED TO ACCEPT POSSESSION, CARE OR
CUSTODY OF ANY ARTICLES IN SAID AUTOMOBILE OR TO AGREE TO ANY CHANGE OF
CONDITIONS HEREIN CONTAINED.
6. Use: Tenant agrees that all automobiles in the Garage driven by Tenant
---
or tenant's invitees shall be driven and handled at the risk of the owner
thereof, and any person driving said automobile shall be, and hereby agrees
to be the servant and employee of the Tenant.
<PAGE>
F. Notwithstanding, anything to contrary contained in the Lease Agreement or
this Addendum "B", there shall be excluded from the Operating Expenses any costs
incurred for promotional fees or any other costs related to leasing space such
as, but not limited to, brokerage fees and legal fees incurred in enforcing the
obligations of other tenants.
The Rentable Square Footage of the building known as 3400 Carlisle is
75,956 rentable square feet, subject to remeasurement of the building.
<PAGE>
AMENDMENT NO. 1
This Amendment No. 1 (this "AMENDMENT") is entered into as of January 31,
---------
1995 between DALLAS METRO REAL ESTATE FUND I ("LANDLORD") successor in interest
--------
to AETNA LIFE INSURANCE COMPANY. ("PREVIOUS LANDLORD") and CPS SYSTEMS, INC., a
-----------------
Texas corporation ("TENANT"), formally know as CPS Business Systems, Inc. for
------
the purpose of amending the lease agreement between Previous Landlord and Tenant
dated February 13, 1990 (the "LEASE"). Unless specified otherwise, all
-----
capitalized terms used herein shall have the meanings assigned to them in the
Lease.
RECITALS
Tenant is currently occupying Suite 500 in the Building, which contains
approximately 11,640 rentable square feet (the "EXISTING PREMISES"), pursuant to
-----------------
the terms of the Lease. Tenant desires to extend the Term of the Lease and to
lease the space depicted on Exhibit A containing approximately 2,605 rentable
---------
square feet (the "EXPANSION AREA") on the terms and conditions of the Lease, as
--------------
amended hereby. Landlord has agreed to such extension and expansion on the terms
and conditions contained herein.
AGREEMENTS:
For valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Landlord and Tenant agree as follows:
1. TERM. The Term for the Existing Premises is hereby extended an
----
additional five (5) years and such extented term shall begin on May 1, 1995,
(the "EFFECTIVE DATE") and shall expire at 5:00 p.m., Dallas, Texas time, April
--------------
30, 2000.
2. EXPANSION AREA; TENANT'S PROPORTIONATE SHARE; ACCEPTANCE. Landlord
--------------------------------------------------------
hereby leases to Tenant, and Tenant hereby leases from Landlord, the Expansion
Area on the terms and conditions of the Lease, as modified hereby; accordingly,
from and after the Expansion Area Effective Date (defined below), the terms
"Leased Premises" shall refer collectively to the Existing Premises and the
Expansion Area, and Tenant's Proportionate Share shall be increased to 18.75%.
Tenant accepts the Expansion Area in its "AS-IS" condition and Landlord shall
not be required to perform any demolition work or tenant-finish work therein or
to provide any allowances therefor, except as specifically set forth herein.
Landlord shall grant Tenant the right to use the Expansion Area in its "AS-IS"
condition free of charge until the Expansion Area Effective Date (defined
below).
3. EXPANSION AREA TERM. The Term for the Expansion Area shall begin on
-------------------
the earlier of (a) January 1, 1996 or (b) the date on which the Tenant begins
conducting their business in the expansion area (the "EXPANSION AREA EFFECTIVE
------------------------
DATE") and shall expire coterminously with the Lease at 5:00 p.m., Dallas,
- ----
Texas, time on April 30, 2000.
<PAGE>
4. BASIC RENTAL - LEASED PREMISES. Basic Rental for the Leased Premises
------------------------------
shall be the following amounts for the following periods of time:
ANNUAL BASIC RENTAL RATE PER MONTHLY INSTALLMENTS OF
TIME RENTABLE SQUARE FOOT FOR THE BASIC RENTAL FOR THE
PERIOD LEASED PREMISES LEASED PREMISES
- -----------------------------------------------------------------------
05/01/95 - 12/31/95 $11.50 $11,155.00
01/01/96 - 04/30/96 $11.50 $13,651.46
05/01/96 - 04/30/97 $12.00 $14,245.00
05/01/97 - 04/30/98 $12.50 $14,838.54
05/01/98 - 04/30/99 $13.00 $15,432.08
05/01/99 - 04/30/00 $14.00 $16,619.17
5. TENANT FINISH-WORK: ALLOWANCE. Tenant may construct tenant
-----------------------------
improvements in the Existing Premises and in the Expansion Area in accordance
with Exhibit B hereto.
---------
6. RATIFICATION. Tenant hereby ratifies and confirms its obligations
------------
under the Lease and represents and warrants to Landlord that it has no defenses
thereto.
7. BINDING EFFECT; GOVERNING LAW. Except as modified hereby, the Lease
-----------------------------
shall remain in full effect and this Amendment shall be binding upon Landlord
and Tenant and their respective successors and assigns. This Amendment shall be
governed by Texas law.
8. EXPENSE STOP. The "Base Amount" under ADDENDUM B to the Lease shall be
------------ ----------
adjusted to the 1995 Base Year expense stop.
Executed as of the date first written above.
LANDLORD: TENANT:
DALLAS METRO REAL ESTATE FUND I CPS SYSTEMS, INC.
By:/s/ Richard L. Faussek Jr. By:/s/ James K. Hoofard Jr.
-------------------------- -------------------------
Name: RICHARD L. FAUSSEK JR. Name: JAMES K. HOOFARD, JR.
----------------------- --------------------
TITLE: GENERAL PARTNER Title: PRESIDENT & COO
---------------------- --------------------
<PAGE>
EXHIBIT A
[Description Of The Expansion Area]
2,605 RENTABLE SQUARE FEET
2,265 USABLE SQUARE FEET
[FLOOR PLAN APPEARS HERE]
A-1
<PAGE>
EXHIBIT B
TENANT FINISH-WORK ALLOWANCE
----------------------------
1. Except as set forth in this Exhibit, Tenant accepts the Leased
Premises in their "as is" condition on the date that this lease is entered into.
2. On or before November 30, 1995 for the Existing Premises and for the
Expansion Area, Tenant shall provide to Landlord for its approval final working
drawings, prepared by an architect/designer that has been approved by Landlord
(which shall not be unreasonably withheld) of all improvements that Tenant
proposes to install in the Leased Premises; such working drawings shall include
(if applicable and if requested by the Landlord in writing) the partition
layout, ceiling plan, electrical outlets and switches, telephone outlets,
drawings for any modifications to the mechanical and plumbing systems of the
Building, and detailed plans and specifications for the construction of the
improvements called for under this Exhibit in accordance with all applicable
governmental laws, codes, rules, and regulations. Landlord's approval of such
working drawings shall not be unreasonably withheld, provided that (a) they
comply with all applicable governmental laws, codes, rules, and regulations, (b)
such working drawings are sufficiently detailed to allow construction of the
improvements in a good and workmanlike manner, and (c) the improvements depicted
thereon conform to the rules and regulations promulgated from time to time by
the Landlord for the construction of tenant improvements. As used herein,
"Working Drawings" shall mean the final working drawings approved by Landlord,
as amended from time to time by any approved changes thereto, and "WORK" shall
----
mean all improvements to be constructed in accordance with and as indicated on
the Working Drawings. Approval by Landlord of the Working Drawings shall not be
a representation or warranty of Landlord that such drawings are adequate for any
use, purpose, or condition, or that such drawings comply with any applicable law
or code, but shall merely be the consent of Landlord to the performance of the
Work. Tenant shall sign the Working Drawings to evidence its review and approval
thereof.
3. The Work shall be performed only by contractors and subcontractors
approved in writing by Landlord (which shall not be unreasonably withheld). All
contractors and subcontractors shall be required to procure and maintain
insurance against such risks, in such amounts, and with such companies as
Landlord may reasonably require. Certificates of such insurance, with paid
receipts therefor, must be received by Landlord before the Work is commenced.
The Work shall be performed in a good and workmanlike manner that is free of
defects and is in strict conformance with the Working Drawings, and shall be
performed in such a manner and at such times as to maintain harmonious labor
relations and not to interfere with or delay Landlord's other contractors, the
operation of the Building, and the occupancy thereof by other tenants. All
contractors and subcontractors shall contact Landlord and schedule time periods
during which they may use Building facilities in connection with the Work (e.g.,
elevators, excess electricity, etc.).
4. Notwithstanding any provision to the contrary in this Amendment,
Tenant's obligation to pay Basic Rental and Tenant's share of Excess hereunder
shall commence on the scheduled Effective Date.
<PAGE>
5. Tenant shall bear the entire cost of performing the Work (including,
without limitation, design of the Work and preparation of the Working Drawings,
costs of construction labor and materials, general tenant signage, related taxes
and insurance costs, all of which costs are herein collectively called the
("TOTAL CONSTRUCTION COSTS") in excess of the Construction Allowance
------------------------
(hereinafter defined). Upon approval of the Working Drawings and selection of a
contractor, Tenant shall promptly execute a work order agreement prepared by
Landlord which identifies such drawings, itemizes the Total Construction Costs
and sets forth the Construction Allowance.
6. Landlord shall provide to Tenant a construction allowance (the
"CONSTRUCTION ALLOWANCE"), to be used solely for tenant improvements within the
----------------------
Leased Premises, equal to (a) $3.00 per rentable square foot in the Existing
Premises and $12.00 per rentable square foot in the Expansion Area. If Total
Construction Cost for the Expansion Area are less than $31,260.00, the unused
portion may be used for additional tenant improvements within the Existing
Premises. However, if Tenant or its agent is managing the performance of the
Work, then Tenant shall not become entitled to full credit for the Construction
Allowance until the Work has been substantially completed and Tenant has caused
to be delivered to Landlord (1) all invoices from contractors, subcontractors,
and suppliers evidencing the cost of performing the Work together with lien
waivers from such parties, and a consent of the surety to the finished Work (if
applicable) and (2) a certificate of occupancy from the appropriate governmental
authority, if applicable to the work, or evidence of governmental inspection and
approval of the Work. Notwithstanding the preceding sentence, if Landlord or its
agents perform the work, the requirements in the preceding sentence shall be
waived.
7. Landlord or its affiliate shall supervise the Work, make disbursements
required to be made to the contractor, and act as a liaison between the
contractor and Tenant and coordinate the relationship between the Work, the
Building, and the Building's systems.
8. Tenant shall have the right to use the existing finish materials
stored in the Expansion Area at no cost to Tenant.
<PAGE>
TERM LOAN AGREEMENT
-------------------
THIS TERM LOAN AGREEMENT is entered into as of December 29, 1994, by and
between CPS ACQUISITION CORP., a Georgia corporation, and GREYHOUND FINANCIAL
CORPORATION, a Delaware corporation.
R E C I T A L S:
----------------
A. CPS Acquisition Corp., a Georgia corporation, is acquiring all of the
issued and outstanding capital stock of CPS Systems, Inc., a Texas corporation,
from the existing shareholders of CPS Systems, Inc., pursuant to that certain
Stock Purchase Agreement between such shareholders and PHF Associates, Inc., a
Georgia corporation (and whose interest has been assigned to CPS Acquisition
Corp.), dated as of November 11, 1994, in exchange for the payment of Five
Million Two Hundred Fifty Thousand Dollars ($5,250,000) cash, subject to
adjustments as set forth in the Stock Purchase Agreement.
B. Immediately following the consummation of the acquisition of the
capital stock of CPS Systems, Inc., CPS Acquisition Corp. proposes to merge with
and into CPS Systems, Inc., with CPS Systems, Inc. being the surviving
corporation. CPS Systems, Inc., will, by virtue of the merger and operation of
law, assume all of the obligations and liabilities of CPS Acquisition Corp.,
including all of CPS Acquisition Corp.'s obligations and liabilities under this
Term Loan Agreement and the promissory note and other documents pertaining
thereto.
C. CPS Acquisition Corp. desires to borrow from Greyhound Financial
Corporation a principal amount of One Million Five Hundred Thousand Dollars
($1,500,000), the proceeds of which will be used to pay a portion of the
purchase price of the capital stock of CPS Systems, Inc.
D. Greyhound Financial Corporation desires to grant the credit
accommodation requested by CPS Acquisition Corp., subject to the terms and
conditions set forth herein.
A G R E E M E N T:
------------------
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and intending to be legally bound,
the parties agree as follows:
ARTICLE 1
---------
DEFINITIONS AND DETERMINATIONS
------------------------------
1.1 Definitions. As used in this Term Loan Agreement and in the other Term
-----------
Loan Documents (as hereinafter defined), unless otherwise expressly
<PAGE>
indicated herein or therein, the following terms shall have the following
meanings (such meanings to be applicable equally to both the singular and plural
forms of the terms defined):
Accountants: an independent certified public accounting firm selected
-----------
by Borrower and satisfactory to Lender.
Accounting Changes: changes in generally accepted accounting
------------------
principles required by the promulgation of any rule, regulation,
pronouncement or opinion by the Financial Accounting Standards Board of the
American Institute of Certified Public Accountants (or any successor
thereto) or other appropriate authoritative body.
Acquisition: the transaction pursuant to which Acquisition
-----------
Corporation intends to acquire all of the Company's Stock.
Acquisition Corp.: CPS Acquisition Corp., a Georgia corporation.
-----------------
Acquisition Documents: the Stock Purchase Agreement and any and all
---------------------
other documents, instruments, or agreements pursuant to which the
Acquisition will be effected.
ADA: the Americans with Disabilities Act of 1990 (42 U.S.C. 12101, et
--- --
seq.) and all applicable rules, regulations, codes, ordinances and guidance
---
documents promulgated or published thereunder.
Affiliate: as to any Person, any other Person who directly or
---------
indirectly controls, is under common control with, or is controlled by such
Person. As used in this definition, "control" (including with its
correlatives "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of the power to direct (or cause the
direction of) the management and policies of another Person, whether
through ownership of securities, partnership or other ownership interests,
by contract or otherwise), provided that, in any event: (a) any Person who
owns directly or indirectly, five percent (5%) or more of the securities
having ordinary voting power for the election of directors or other
governing body of a corporation or five percent (5%) or more of the
partnership or other ownership interests of any other such Person (other
than as a limited partner of such other Person), whether voting or non-
voting will be deemed to "control" such corporation or other Person, and
(b) each director and officer of Borrower or any Subsidiary of Borrower
shall be deemed to be an Affiliate of Borrower.
Assignment of Contracts, Intangibles, Licenses and Permits: the
----------------------------------------------------------
assignment of contracts, intangibles, licenses and permits of Company, for
security purposes, executed by Company in favor of Lender, as it may be
from time to time amended, restated or replaced.
-2-
<PAGE>
Assignment of Life Insurance: the assignment required pursuant to
----------------------------
subsection 6.7.2, as it may be from time to time amended, restated or
replaced.
Assignment of Stock Purchase Agreement: the assignment of the Stock
---------------------------------------
Purchase Agreement, for security purposes, executed by Acquisition Corp. in
favor of Lender, with respect to the Stock Purchase Agreement, as it may be
from time to time amended, restated or replaced.
Assignment of Trademarks: the assignment of trademarks, for security
------------------------
purposes, executed by Company, in favor of Lender, as it may be from time
to time amended, restated or replaced.
Assumption Agreement: an assumption agreement to be executed by
--------------------
Company for Lender upon consummation of the Merger, pursuant to which
Company assumes all of the Term Loan Obligations.
Authorized Officer: any of the following officers of Borrower: Chief
------------------
Executive Officer, Chief Financial Officer/Treasurer/Controller or
Assistant Controller.
Bankruptcy Code: the United States Bankruptcy Code and any successor
---------------
statute thereto, and the rules and regulations issued thereunder, as in
effect from time to time.
Base Rate: the per annum rate of interest publicly announced, from
---------
time to time, by Citibank, N.A., New York, New York ("Citibank"), as the
base (or equivalent") rate of interest charged by Citibank to its largest
and most creditworthy commercial borrowers notwithstanding the fact that
some borrowers of Citibank may borrower from Citibank at rates less than
the announced base rate, or if Citibank ceases to publish its base rate,
then such other published rate as the holder of the Term Loan Note shall
determine to be comparable.
Base Term Loan Fee: the meaning given to in subsection 2.12.1.
------------------
Borrower: Acquisition Corp., prior to the Merger; and thereafter,
--------
Company (the entity surviving the Merger), and subject to the restrictions
on assignment and transfer contained in this Term Loan Agreement, the
successor and assigns of Company.
Borrower's Collateral: that portion of the Collateral which is owned
---------------------
by Borrower or in which Borrower otherwise has an interest.
Borrower's Stock: all of the present and (subject to the limitations
----------------
on the issuance of such stock contained herein) future issued and
outstanding stock of Borrower prior to the Merger; and from and after the
Merger, the Company's Stock.
Borrower's Stockholders: the Persons listed in Schedule 1.1
-----------------------
(Borrower's Stockholders).
-3-
<PAGE>
Borrower's Stockholders Pledge Agreement: a pledge of the Borrower's
----------------------------------------
Stock, executed prior to the Merger by Borrower's Stockholders in favor of
Lender, as it may be from time to time amended, restated or replaced.
Borrower's Warrantholders: the Persons listed in Schedule 1.1
-------------------------
(BORROWER'S WARRANTHOLDERS).
Business: with respect to Borrower, holding all of the capital stock
--------
of Company; and with respect to Company, the business conducted by Company
of designing, installing, licensing and maintaining proprietary computer
software; providing customer assistance with respect to such software; and
selling and maintaining computer hardware.
Business Day: any day other than a Saturday, Sunday or other day on
------------
which banks in Los Angeles, California, or New York, New York, are required
to close.
Capital Expenditure: with respect to any Person, any payment that is
-------------------
made or liability that is incurred by such Person for the lease, purchase,
improvement, construction or use of any Property, the value or cost of
which under GAAP is required to be capitalized and appears on such Person's
balance sheet in the category of property, plant or equipment, without
regard to the manner in which such payment or liability or the instrument
pursuant to which it is made is characterized by such Person or any other
Person.
Capitalized Lease: with respect to any Person, any lease of Property
-----------------
by such Person as lessee, the obligation for rental of which is required to
be capitalized under GAAP.
Chief Executive Officer: with respect to any Person, the chief
-----------------------
executive officer of such Person appointed to such duties by such Person's
Board of Directors.
Chief Financial Officer: with respect to any Person, the chief
-----------------------
financial officer of such Person appointed to such duties by such Person's
Board of Directors.
Closing: the disbursement of the Term Loan.
-------
Closing Date: the date of the Closing.
------------
Collateral: (a) all Property of Company, whether now owned or
----------
hereafter acquired, together with all additions thereto and accessions
thereof; (b) subject to the provisions of 6.17, Borrower's Stock; (c)
Company's Stock; (d) the Life Insurance; (e) any other Property in which
Lender is granted a Security Interest; and (f) the proceeds and products
whether tangible or intangible, of any of the foregoing.
Company: CPS Systems, Inc., a Texas corporation.
-------
-4-
<PAGE>
Company Security Documents: the Assignment of Contracts, Intangibles,
--------------------------
Licenses and Permits, the Assignment of Life Insurance, the Assignment of
Trademarks, and the Revolver Loan Agreement.
Company Stock: all of the issued and outstanding capital stock of
-------------
Company.
Company Stockholders Pledge Agreement: a pledge of Company's Stock,
-------------------------------------
executed by Borrower in favor of Lender, as it may be from time to time
amended, restated or replaced.
Controlled Group: with respect to any Person, all members of a
----------------
controlled group of corporations and all trades or businesses (whether or
not incorporated) under common control which, together with such Person,
are treated as a single employer under Section 414(b) and 414(c) of the
IRC.
Credit Facilities Documents: the Term Loan Documents and the Revolver
---------------------------
Loan Documents.
Default Rate: a per annum rate equal to the Term Loan Interest Rate
------------
from time to time in effect plus four hundred (400) basis points.
Depreciation: with respect to any period, all depreciation on
------------
Property taken during such period, as determined in accordance with GAAP.
Environmental Laws: any and all federal, state and local laws that
------------------
relate to or impose liability or standards of conduct concerning public or
occupational health and safety or the environment, as now or hereafter in
effect and as have been or hereafter may be amended or reauthorized,
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act (42 U.S.C. (S)9601 et seq.), the Hazardous
-- ---
Materials Transportation Act (42 U.S.C. (S)1802 et seq.), the Resources
-- ---
Conservation and Recovery Act (42 U.S.C. (S)6901 et seq.), the Federal
-- ---
Water Pollution Control Act (33 U.S.C. (S)1251 et seq.), the Toxic
-- ---
Substances Control Act (14 U.S.C. (S)2601 et seq.), the Clean Air Act (42
-- ---
U.S.C. (S)7401 et seq.), the National Environmental Policy Act (42 U.S.C.
-- ---
(S)4321 et seq.), the Refuse Act (33 U.S.C. (S)407 et seq.), the Safe
-- --- -- ---
Drinking Water Act (42 U.S.C. (S)300(f) et seq.), the Occupational Safety
-- ---
and Health Act (29 U.S.C. (S)651 et seq.), and all rules, regulations,
-- ---
codes, ordinances and guidance documents promulgated or published
thereunder, and the provisions of any licenses, permits, orders and decrees
issued pursuant to any of the foregoing.
ERISA: the Employee Retirement Income Security Act of 1974, as
-----
amended, and any successor statute thereto, and the rules and regulations
issued thereunder, as in effect from time to time.
ERISA Affiliates: as to any Person, any trade, business or other
----------------
entity, whether or not incorporated, which, together with such Person, is
treated as a single employer under Section 414(c) of the IRC.
-5-
<PAGE>
Event of Default: any of the Events of Default set forth in Section
----------------
8.1.
Excess Cash Flow: for any period, Operating Cash Flow (calculated,
----------------
however, using permitted rather than actual Capital Expenditures) for such
period minus Total Contractual Debt Service.
-----
Excluded Trade Payables: with respect to any Person, such Person's
-----------------------
normal and customary trade payables incurred in the ordinary course of
business and paid within 90 days from the date incurred, [or, if not paid
within ninety (90) days from the date incurred,payment is being disputed
pursuant to a Permitted Protest or the normal terms offered to such Person
by the trade creditor provide that payment is due more than ninety (90)
days from the incurrence of the trade payable].
Existing Leases: the Leases (if any) so described in Schedule 1.1
---------------
(Leases) under which Borrower or Company is a tenant.
Existing Operating Agreements: the Operating Agreements (if any) so
-----------------------------
described in Schedule 1 (Operating Agreements) for Borrower and Company.
Fees: the Term Loan Fees and the Revolver Loan Fees.
----
Fiscal Year: with respect to Borrower, the twelve (12) month period
-----------
beginning on each January 1 and ending on the following December 31; and
with respect to Company, the twelve (12) month period beginning on each
January 1 and ending on the following December 31.
GAAP: generally accepted accounting principles in the United States
----
as in effect from time to time during the period in which such principles
are to be applied, which shall include the official interpretations thereof
by the Financial Accounting Standards Board, or any successor thereto, and
Accounting Changes.
Good Funds: United States Dollars available to Lender in federal
----------
funds at or before 1:00 p.m. Chicago time on a Business Day by virtue of
receipt by Union Bank, in accordance with Section 2.11.
Governmental Body: any foreign, federal, state, municipal or other
-----------------
government, or any department, commission, board, bureau, agency, public
authority or instrumentality thereof or any court or arbitrator.
Hazardous Materials: any pollutant (including, without limitation,
-------------------
petroleum, or any portion thereof), hazardous, toxic or dangerous waste,
substance or material defined as such in or for purposes of any
Environmental Law.
Incipient Default: any event or condition which, with the giving of
-----------------
notice or the lapse of time, or both, would become an Event of Default.
-6-
<PAGE>
Indebtedness: With respect to any Person, all liabilities, obligations and
------------
reserves of such Person, contingent or otherwise, which in accordance with GAAP,
would be reflected as a liability on a balance sheet or would be required to be
disclosed in a financial statement, including, without limitation or
duplication, the following: (a) all Indebtedness for Borrowed Money; (b) all
obligations secured by any Lien upon Property of the Person for whom such
determination is being made, whether or not such obligation or liability is
assumed by such Person; (c) all guaranties, letters of credit and other
contingent obligations, including, without limitation, obligations to repurchase
or reimburse; (d) obligations with respect to the capital stock of the Person
for whom such determination of Indebtedness is being made, which capital stock
is subject either to mandatory redemption or redemption at the option of the
holder of such stock, whether such mandatory or optional redemption is in whole
or in part; and (e) liabilities with respect to unfunded, vested benefits under
any Plan and with respect to withdrawal liabilities incurred under ERISA with
respect to any Multi-employer Plan by any member of a Controlled Group.
Indebtedness for Borrowed Money: with respect to any Person, without
-------------------------------
duplication, all Indebtedness of such Person (a) with respect to borrowed money,
(b) evidenced by a note, debenture or other like written obligation to pay money
(including, without limitation, with respect to Borrower, all of Borrower's
Obligations), (c) with respect to obligations under Capitalized Leases or for
the deferred purchase price of Property, or (d) pertaining to obligations under
conditional sales or other title retention agreements, and all guaranties of any
or all of the foregoing.
Insured Persons: Paul E. Kana and James K. Hoofard, jr.
---------------
Intellectual Property: the patent, copyrights trademarks, service marks,
---------------------
trade names, and applications for any of the foregoing so described in SECTION
1.1 (INTELLECTUAL PROPERTY).
Interest Hedge Contract: an interest rate cap, hedge or similar agreement
-----------------------
to be executed by and between Borrower and a financial institution acceptable to
Lender, which agreement shall (a) be in effect for the first two (2) Loan Years,
(b) at the option of Lender, be renewed for an additional two (2) year period,
except that Lender agrees that if a renewal is available for a period of one
- -----------------------------------------------------------------------------
year, such renewal shall be for such one year period, (c) be in an amount of not
- ----------------------------------------------------
less than the product of (i) .75, multiplied by (B) the Term Loan Principal
Balance which is outstanding (A) as of the Closing Date, with respect to the
agreement described in clause (a) hereof or (ii) as of the date of renewal, with
respect to the agreement described in clause (b) hereof, (d) provide protection
for borrower if the Base Rate is in excess of eleven and one half percent
(11.5%) and (e) otherwise be in form and content acceptable to Lender.
Investment: with respect to any Person, the amount paid or committed to be
----------
paid or the value of Property or wages contributed or
-7-
<PAGE>
committed to be contributed by the Person making the Investment on its
account for or in connection with the acquisition by such Person of any
stock, partnership or other ownership interest, bonds, notes, debentures,
or any other security of the Person in whom such investment is made or any
evidence of Indebtness by reason of a loan advance, extension of credit,
guaranty or other similar obligation of any debt, liability or Indebtedness
of such Person in whom the Investment is made; provided, however, that the
-------- -------
term "Investment" shall not include (a) trade and customer accounts
receivable of such Person for inventory sold by it or services rendered by
it in the ordinary course of business and payable in accordance with
customary trade terms, or any letters of credit or other instruments
securing the same, or (b) reasonable advances by such Person in the
ordinary course of business to its employees for travel expenses, drawing
accounts and similar expenditures.
IRC: the Internal Revenue Code of 1986, as amended, and any successor
---
statute thereto, and the rules, regulations and interpretations issued
thereunder, as in effect from time to time.
Leasehold Property: the real property which is the subject of the
------------------
Leases.
Leases: the Existing Leases and, without implying Lender's consent to
------
the formation of any such lease except in accordance with the terms of this
Term Loan Agreement, any and all future leases or subleases under which
Borrower or Company has a leasehold or subleasehold interest in real
property.
Lender: Greyhound Financial Corporation, a Delaware corporation, and
------
its successors and assigns.
Lien: any mortgage, pledge, assignment, lien, charge, encumbrance or
----
security interest of any kind, or the interest of a vendor or lessor under
any conditional sale agreement, or other title retention agreement.
Loans: collectively, the Term Loan and the Revolver Loan.
-----
Loan Year: a period from the Closing Date through the first
---------
anniversary of the Closing Date and, thereafter, each twelve (12) month
period following such anniversary.
Material Adverse Effect: with respect to any set of circumstances or
-----------------------
events and their effect on a Person, the reasonable likelihood of a
material and adverse effect on (i) such Person's financial condition,
operations, prospects or profits, (ii) the validity or enforceability
against such Person of any Credit Facilities Document to which such Person
is a party or any of the transactions contemplated thereby, (iii) the
ability of such Person to perform its obligations under any of the Credit
Facilities Loan Documents to which such Person is a party, (iv) the
priority against such Person of the Security Interests (other than
-8-
<PAGE>
Permitted Prior Liens), or (v) with respect to Borrower only, the value of
the Collateral.
Maturity Date: the fourth anniversary of the Closing Date.
-------------
Merger: the merger of Acquisition Corp. into Company.
------
Merger Documents: that Plan of Merger between Company and Borrower,
----------------
and, after the merger, the Certificate of Merger issued by the Texas and
Georgia Secretaries of State.
Multi-employer Plan: a "multi-employer plan" as defined in Section
-------------------
4001(a)(3) of ERISA under which Borrower is an employer.
Negotiable Collateral: all of Company's present and future letters of
---------------------
credit, notes, drafts, instruments, documents, personal property leases
(where such Person is the lessor) and chattel paper.
Net Worth: at any time with respect to a Person, all amounts which in
---------
accordance with GAAP should be included in shareholder's equity of such
Person.
Notes: collectively, the Term Loan Note and the Revolver Loan Note.
-----
Obligations: collectively, the Term Loan Obligations and the Revolver
-----------
Loan Obligations.
Operating Agreement: any lease, license, equipment lease, collective
-------------------
bargaining agreement, servicing agreement, service mark, trademark, patent,
copyright, permit, Governmental Body approval or other agreement relating
to the operation of the Business of Borrower or Company.
Operating Cash Flow: for any period, the net income or loss of
-------------------
Borrower (excluding the effect of any changes in GAAP and extraordinary
gains or losses), plus depreciation, amortization, interest expense, the
Term Loan Maintenance Fee, and the Unused Line Fee, accrued but unpaid
federal and state income taxes and other non-cash expenses, and minus its
-----
actual state and federal income taxes paid, other non-cash income, and
actual Capital Expenditures.
PBGC: the Pension Benefit Guaranty Corporation or any Governmental
----
Body succeeding to its functions.
Permitted Liens: any of the following Liens:
---------------
(a) the Security Interests;
(b) Liens for taxes or assessments and similar charges, which
either are (i) not delinquent or (ii) being contested
diligently and in good faith by appropriate
-9-
<PAGE>
proceedings, and as to which Borrower has set aside reserves on
its books which are satisfactory to Lender;
(c) statutory Liens, such as mechanic's, materialman's,
warehouseman's, carrier's or other like Liens, incurred in good
faith in the ordinary course of business, provided that the
--------
underlying obligations relating to such Liens are paid in the
ordinary course of business or the repayment of such obligations
is otherwise secured in a manner satisfactory to Lender;
(d) Zoning ordinances and, to the extent acceptable to Lender,
easements, licenses, reservations, provisions, covenants,
conditions and other title exceptions;
(e) Liens to secure payment of insurance premiums (i) to be paid in
accordance with applicable laws in the ordinary course of
business relating to payment of worker's compensation, or (ii)
that are required for the participation in any fund in connection
with worker's compensation, unemployment insurance, old-age
pensions or other social security programs;
(f) Liens arising out of adverse judgments or awards against Borrower
on appeal, provided that (i) no Event of Default would exist with
--------
respect thereto pursuant to subsection 8.1.6 and (ii) Borrower
diligently is pursuing such appeal pursuant to a Permitted
Protest;
(g) subject to the terms of the Subordination Agreement, the
Subordinated Indebtedness Liens; and
(h) the security interest retained by International Business Machines
Corporation pursuant to that Value Added Reseller Agreement
between it and Company, a copy of which is attached hereto as
Exhibit 1.1 (IBM AGREEMENT) or by another hardware manufacturer
under any similar agreement between it and Company.
Permitted Prior Liens: (a) the Permitted Liens which are described in
---------------------
clause (b) and (c) of the definition of that term and are accorded priority to
the Security Interests by law; and (b) the Permitted Liens described in clauses
(d), (e) and (f) of the definition of that term, subject to the limitations set
forth therein.
Permitted Protest: the right of Borrower to protest any Lien, tax or other
-----------------
charge, other than any such Lien or charge which constitutes a portion of the
Obligations, provided (a) at the option of Lender, either (i) the repayment of
the obligations which gave rise to such Liens, taxes or other charges is secured
in a manner satisfactory to Lender within sixty (60) days after such obligations
become due and owing or (ii) a
-10-
<PAGE>
reserve with respect to such obligations is established on the Books in an
amount which is satisfactory to Lender, (b) any such protest is instituted
and diligently prosecuted by Borrower in good faith and (c) Lender is
satisfied that, while any such protest is pending, there will be no
impairment of the enforceability, validity or priority of any of the
Security Interests.
Person: any individual, firm, corporation, business enterprise,
------
trust, association, joint venture, partnership, Governmental Body or other
entity, whether acting in an individual, fiduciary or other capacity.
Plan: with respect to any Person, any employee pension benefit plan
----
subject to Title IV of ERISA, established or maintained by such Person, or
any such Plan to which such Person is required to contribute on behalf of
any of its employees.
Property: all types of real, personal or mixed property and all types
--------
of tangible or intangible property.
Qualified Depository: a member bank of the Federal Reserve System
--------------------
having a combined capital and surplus of at least One Hundred Million
Dollars ($100,000,000).
Real Property: all legally or beneficially owned estates in real
-------------
property, except leasehold estates in the Leasehold Property.
Revolver Loan: the revolving loan in principal amount not to exceed
-------------
$1,000,000 at any time to be made to Company pursuant to the Revolver Loan
Documents.
Revolver Loan Agreement: that Revolver Loan and Security Agreement to
-----------------------
be entered into between Company and Lender simultaneously with the Closing,
as it may be from time to time renewed, amended, restated or replaced.
Revolver Loan Documents: the Revolver Loan Agreement and the other
-----------------------
documents now or hereafter executed in connection with the Revolver Loan.
Revolver Loan Fees: the meaning given to it in the Revolver Loan
------------------
Agreement.
Revolver Loan Guaranty: an agreement, executed by Acquisition Corp.,
----------------------
pursuant to which Acquisition Corp. (subject to the provisions of Section
6.17) shall unconditionally guarantee full payment and performance of the
Revolver Loan Obligations and fully subordinate any Indebtedness now or
hereafter owing by Acquisition Corp. to Company and the Liens pertaining to
such Indebtedness.
Revolver Loan Note: the promissory note executed by Company pursuant
------------------
to the Revolver Loan Agreement.
-11-
<PAGE>
Revolver Loan Obligations: the covenants, agreements, obligations and
-------------------------
conditions to be paid or performed by Company and/or Borrower under the
Revolver Loan Documents (including the Revolver Loan Guaranty).
Revolver Loan Principal Balance: the principal balance of the
-------------------------------
Revolver Loan which is outstanding from time to time.
Security Documents: this Term Loan Agreement, the Assignment of Stock
------------------
Purchase Agreement, the Company Security Documents, the Borrower's
Stockholders Pledge Agreement, the Company's Stockholders Pledge Agreement,
and any and all other documents now or hereafter executed to evidence or
perfect the Security Interests in the Collateral.
Securities Act: the Securities Act of 1933, as amended, or any
--------------
similar federal statue, and the rules and regulations of the Securities and
Exchange Commission promulgated thereunder, as in effect from time to time.
Security Interests: the Liens in the Collateral granted to Lender
------------------
pursuant to the Term Loan Documents.
Senior Contractual Debt Service: for any period, the sum of: (a)
-------------------------------
payments made or required to be made by Borrower or Company during such
period for principal and interest on the Term Loan, interest only on the
Revolver Loan, the Term Loan Maintenance Fee and the Unused Line Fee due,
excluding, however, any Excess Cash Flow prepayments made or required to be
made pursuant to subsection 2.8.3; and (b) without implying Lender's
consent to any such Capitalized Lease, payments due on Capitalized Leases
of Borrower or Company.
Shareholder Debt: long-term debt as of December 28, 1994 in the
----------------
principal amount of Eight Hundred Sixty-Three Thousand Fifty-Three and
03/100 Dollars ($863,053.03) owing to the following former shareholders of
Company: Paul A. Hughes and Gloria P. Schlab.
Solvency Certificate (Borrower): a certificate executed by the Chief
-------------------------------
Executive Officer and Chief Financial Officer of Borrower with respect to
the solvency of Borrower and related matters.
Solvency Certificate (Company): a certificate executed by the Chief
------------------------------
Executive Officer and Chief Financial Officer of Company with respect to
the Solvency of Company and related matters.
Solvent: with respect to any Person, as of the date as to which such
-------
Person's solvency is to be measured:
(a) the "fair saleable value" (defined below) of the assets of
such Person is in excess of the total amount of the liabilities of
such Person (including contingent liabilities) as they become absolute
and matured:
-12-
<PAGE>
(b) such Person has sufficient capital to conduct its business;
and
(c) such Person is able to meet its debts as they mature.
For purpose of this definition, the phrase "fair saleable value" shall mean
the amount which may be realized within a reasonable time through a sale of
such Person as a going concern in a transaction between a willing and able
buyer under no compulsion to buy and a willing and able seller under no
compulsion to sell.
Stock Purchase Agreement: collectively, that Stock Purchase Agreement
------------------------
dated as of November 11, 1994, by and among PHF Associates, Inc. (to whose
interest Acquisition Corp. has succeeded), as buyer, and Clayton O.
Callaway, Gary P. Caldwell, Robert F. Kiesling, Janice H. McCord, James K.
Hoofard, Jr., Katherine M. Williamson, Richard G. Bingham, II, and Stanton
W. Galbraith, as sellers, and the escrow agreement related thereto.
Subordinated Indebtedness: the Indebtedness to be owned by Borrower to
-------------------------
Subordinated Lender in the Current principal amount of Two Million One
Hundred Thousand Dollars ($2,100,000).
Subordinated Indebtedness Documents: all loan documents executed and
-----------------------------------
delivered by Borrower, Company or their respective Affiliates related to
the Subordinated Indebtedness.
Subordinated Indebtedness Liens: the Liens granted to Subordinated
-------------------------------
Lender pursuant to the Subordinated Indebtedness Documents and junior to
the Security Interests.
Subordinated Lender: Hanifen Imhoff Mezzanine Fund, L.P., a Colorado
-------------------
limited partnership.
Subordination Agreement: that Subordination and Intercreditor
-----------------------
Agreement to be executed by Lender, Subordinated Lender, Borrower,
Borrower's Stockholders, Company and Company's Stockholders simultaneously
with Closing.
Subsidiary: with respect to any Person, any corporation, association,
----------
partnership, joint venture or other business entity of which such Person,
directly or indirectly, either (a) with respect to a corporation, owns or
controls fifty percent (50%) or more of the voting power and has the
ability to elect at least a majority of the board of directors or similar
managing body, whether or not a class or classes shall or might have voting
power by reason of the happening of any contingency, or (b) with respect to
an association, partnership, joint venture or other business entity, is
entitled to share in fifty percent (50%) or more of the profits and losses,
however determined, and has voting control with respect thereto.
-13-
<PAGE>
Term Loan: the Senior Term Loan made pursuant to this Term Loan
---------
Agreement and described in Paragraph 2.1.
Term Loan Interest Rate: a variable per annum rate equal to the Base
-----------------------
Rate plus two hundred fifty (250) basis points, which rate shall be
adjusted as and when the Base Rate changes.
Term Loan Agreement: this Term Loan Agreement, as it may be from time
-------------------
to time renewed, amended, restated or replaced.
Term Loan Documents: the Term Loan Documents (Closing) and all other
-------------------
documents now or hereafter executed in connection with the Term Loan.
Term Loan Documents (Closing): the following loan documents:
----------------------------
(a) this Term Loan Agreement;
(b) the Term Loan Note;
(c) the Security Documents;
(d) the Environmental Certificates;
(e) the Solvency Certificate (Borrower);
(f) the Solvency Certificate (Company);
(g) UCC financing statements executed by debtors with respect to
the Collateral:
(h) the Term Loan Guaranty;
(i) the Subordination Agreement; and
(j) such other instruments and documents as Lender may require
at Closing to evidence the Term Loan and to evidence and
perfect the Security Interests.
Term Loan Fees: collectively, the Base Term Loan Fee, the Term Loan
--------------
Maintenance Fee and the Term Loan Success Fee.
Term Loan Guaranty: an agreement, executed by Company, pursuant to
------------------
which Company (subject to the provisions of Section 6.17) shall
unconditionally guarantee full payment and performance of the Term Loan
Obligations and fully subordinate any Indebtedness now or hereafter owing
by Company to Borrower and the Liens pertaining to such Indebtedness.
Term Loan Maintenance Fee: the fee described in subsection 2.12.2(b).
-------------------------
-14-
<PAGE>
Term Loan Note: the promissory note executed by Borrower in a form
--------------
acceptable to Lender in the principal amount of $1,500,000 to evidence the
Term Loan.
Term Loan Obligations: the covenants, agreements, obligations and
---------------------
conditions to be paid or performed by Borrower under the Term Loan
Documents.
Term Loan Prepayment Premium: the meaning given to it in subsection
----------------------------
2.8.1 (b).
Term Loan Principal Balance: the principal balance of the Term Loan
---------------------------
which is outstanding from time to time.
Term Loan Success Fee: the meaning given to it in subsection 2.12.3
---------------------
Total Contractual Debt Service: for any period, the sum of Senior
-------------------------------
Contractual Debt Service and payments made on the Subordinated Indebtedness
to the extent such payments are not prohibited pursuant to the terms of the
Subordination Agreement.
Total Debt: at any time, the sum of the unpaid principal balance of
----------
(a) the Term Loan, (b) the Revolver Loan, (c) the Subordinated Indebtedness
and (d) without implying Lender's consent to any such Indebtedness, all
other Indebtedness for Borrowed Money of Borrower and Company.
Transaction Documents: the Term Loan Documents, the Revolver Loan
---------------------
Documents, the Acquisition Documents and the Merger Documents.
UCC: The Uniform Commercial Code, as from time to time adopted in the
---
State of Arizona .
Unused Line Fee: the meaning given to in the Revolver Loan Agreement.
---------------
1.2 Time Periods. In this Term Loan Agreement and the other Term Loan
------------
Documents, in the computation of periods of time from a specified date to a
later specified date, (a) the word "from" means "from and including," (b) the
words "to" and "until" each mean "to, but excluding" and (c) the words
"through," "end of" and "expiration" each mean "through and including." Unless
otherwise specified, all references in this Term Loan Agreement and the other
Term Loan Documents to (a) a "month" shall be deemed to refer to a calendar
month, (b) a "quarter" shall be deemed to refer to a calendar quarter, and (c) a
"year" shall be deemed to refer to a calendar year.
1.3 Accounting Terms and Determinations. All accounting terms not
-----------------------------------
specifically defined herein shall be construed, all accounting determinations
hereunder shall be made, and all financial statements required to be delivered
pursuant hereto shall be prepared, in accordance with GAAP. If any Accounting
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<PAGE>
Changes occur and such changes result in a change in the method of calculation
of financial covenants, standards or terms contained in this Term Loan
Agreement, then Borrower and Lender agree to enter into negotiations to amend
such provisions of this Term Loan Agreement so as to reflect such Accounting
Changes with the desired result that the criteria for evaluating the financial
condition of Borrower shall be the same after such Accounting Changes as if such
Accounting Changes had not been made.
1.4 References. All references in this Term Loan Agreement to "Article,"
----------
"Section," "subsection," "subparagraph," "clause," "Exhibit," or "Schedule,"
unless otherwise indicated, shall be deemed to refer to an Article, Section,
subsection, subparagraph, clause, Exhibit or Schedule, as applicable, of this
Term Loan Agreement.
1.5 Schedules and Exhibits. All of the schedules and exhibits attached to
----------------------
this Term Loan Agreement shall be deemed to be incorporated herein by reference.
1.6 Lender's Discretion. Whenever the terms "satisfactory to Lender,"
-------------------
"determined by Lender," "acceptable to Lender," consent of Lender," "Lender
shall elect," "Lender shall request," "in Lender's judgment," or similar terms
are used in the Term Loan Documents, except as otherwise specifically provided
therein, such terms shall mean satisfactory to, at the election of, determined
by, acceptable to, requested by, or judged by, as applicable, Lender in its sole
and unlimited discretion.
1.7 Borrower's Knowledge. Any statements, representations or warranties
--------------------
that are based upon the knowledge of Borrower shall be deemed to have been made
after due inquiry by Borrower with respect to the matter in question.
1.8 Payments in Kind. For purposes of this Term Loan Agreement, any
----------------
payment of Indebtedness or interest accrued on Indebtedness which is made
through the delivery of a promissory note or other instrument evidencing
additional Indebtedness, shall not be considered to have been "made" or "paid"
hereunder until such time as the obligor with respect to such promissory note or
other instrument makes payment on the same in cash or other form of legal
tender, and until such time as payment is so made the Indebtedness represented
by such promissory note or other instrument shall be considered "due" hereunder.
ARTICLE 2
---------
TERM LOAN AND TERMS OF PAYMENT
------------------------------
2.1 Amount of Term Loan. The Term Loan shall consist of an advance in the
-------------------
amount of One Million Five Hundred Thousand Dollars ($1,500,000) disbursed to
(or at the direction of) Borrower on the Closing Date.
2.2 Reborrowing. Borrower shall not be entitled to reborrow any portion
-----------
of the principal balance of the Term Loan that is repaid or prepaid.
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<PAGE>
2.3 Closing.
-------
2.3.1 Disbursement of the Term Loan on Closing Date. On the Closing
---------------------------------------------
Date, provided no Incipient Default or Event of Default shall exist and all
of the terms and conditions set forth in Article 4 shall have been
satisfied, Lender shall make the Term Loan to Borrower, the proceeds of
which shall be disbursed in accordance with the instructions described on
Exhibit 2.3.1.
2.3.2 Notification of Closing. Borrower shall provide Lender with at
-----------------------
least forty-eight (48) hours prior written notice of the Closing, which
notice shall enable Lender to arrange for the availability of funds. In the
event the Closing does not take place on the date specified in such notice,
Borrower shall reimburse Lender for the costs incurred by Lender to
maintain the necessary funds available for the Closing, at the rate of two
percent (2%) per annum on the Term Loan for the number of days which elapse
between the date specified in such notice and the date upon which the
Closing actually occurs (which number of days shall not include the date
specified in Borrower's notice, but shall include the Closing Date).
2.4 Interest.
--------
2.4.1 Interest Rate. Except as provided in Section 2.7 or elsewhere
-------------
in the Term Loan Documents, the Term Loan shall bear interest at the Term
Loan Interest Rate.
2.4.2 Interest Computation. Interest shall be computed on the basis
--------------------
of a year consisting of three hundred sixty (360) days and charged for the
actual number of days during the period for which interest is being
charged.
2.4.3. Maximum Interest. Notwithstanding any provision to the contrary
----------------
herein contained, Lender shall not collect a rate of interest on any
obligation or liability due and owing by Borrower to Lender in excess of
the maximum contract rate of interest permitted by applicable law. Lender
and Borrower have agreed that the interest laws of the State of Arizona
shall govern the relationship between them, but in the event of a final
adjudication to the contrary, Borrower shall be obligated to pay, nunc pro
tunc, to Lender only such interest as then shall be permitted by the laws
of the state found to govern the contract relationship between Lender and
Borrower. All interest found in excess of that rate of interest allowed and
collected by Lender shall be applied to the principal balance in such
manner as to prevent the payment and collection of interest in excess of
the rate permitted by applicable law.
2.5 Payment of Principal and Interest. The principal of and interest on
---------------------------------
the Term Loan shall be due and payable in forty-seven (47) consecutive monthly
installments of Thirty-Two Thousand Six Hundred Fourteen Dollars ($32,614)
each, commencing on February 1, 1995, and continuing on the first day of each
month thereafter through and including December 1, 1998. All remaining
principal, accrued and unpaid interest, the Term Loan Success Fee, any balance
of the Term
-17-
<PAGE>
Loan Maintenance Fee and any other sums due and owing pursuant to the Term Loan
Documents shall be due and payable on the Maturity Date.
2.6 Late Charges. If a payment of principal, or interest to be made
------------
pursuant to this Term Loan Agreement becomes past due for a period in excess of
ten (10) Business Days, Borrower shall pay on demand to Lender a late charge of
two percent (2%) of the amount of such overdue payment.
2.7 Default Rate. Payments of principal, interest and any other amounts
------------
due and payable under the Term Loan Documents shall, at the option of Lender,
earn interest after they are due at the Default Rate. At the option of Lender,
-----
while an Event of Default exists, and in all events after an acceleration of the
Term Loan Obligations by Lender, interest shall accrue on the entire outstanding
principal balance of the Term Loan at the Default Rate.
2.8 Prepayments.
-----------
2.8.1 Prepayment of the Term Loan. Borrower may voluntarily prepay
---------------------------
the principal balance of the Term Loan in whole, but not in part, at any
time, subject to the following conditions:
(a) Notice of Prepayment. Not less than thirty (30) days
--------------------
prior to the date upon which Borrower desires to make such prepayment,
Borrower shall deliver to Lender written notice of its intention to
prepay, which notice shall be irrevocable and state the prepayment
date:
(b) Term Loan Prepayment Premium. Borrower shall pay to
----------------------------
Lender, concurrently with such prepayment of the Term Loan Principal
Balance: (i) a prepayment premium (the "Term Loan Prepayment Premium")
equal to (A) five precent (5%) of the amount prepaid if such
prepayment is made during the first Loan Year, (B) four percent (4%)
of the amount prepaid if such prepayment is made during the second
Loan Year, (C) three percent (3%) of the amount prepaid if such
prepayment is made during the third Loan Year, and (D) two percent
(2%) of the amount prepaid if such prepayment is made during the
fourth Loan Year; (ii) accrued and unpaid interest through the date of
such prepayment on the principal balance being prepaid; and (iii) any
and all of the other Obligations then due which remain unpaid,
including without limitation, and the unpaid balance of the Term Loan
Maintenance Fee.
(c) Revolver Loan. The Revolver Loan, including, without
-------------
limitation, the Revolver Loan Prepayment Premium (as defined in the
Revolver Loan Agreement) and the unpaid Revolver Loan Fees shall be
paid pursuant to the provisions of Revolver Loan Agreement.
2.8.2 Additional Payments. Borrower shall pay to Lender any and all
-------------------
reasonable out-of-pocket expenses incurred by Lender in connection with
such prepayment, including, without limitation, reasonable attorneys' fees
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<PAGE>
and other costs of preparing, filing and/or recording documents
releasing the Collateral.
2.8.3 Excess Cash Flow Prepayments. Within thirty (30) days after
----------------------------
the receipt by Lender of the annual financial statements described in
subsection 6.3.2, Lender may deliver a notice to Borrower requiring
Borrower to repay the Term Loan in an amount not to exceed fifty percent
(50%) of Excess Cash Flow for the Fiscal Year covered by such financial
statements. All prepayments under this subsection 2.8.3 shall be paid to
Lender from Excess Cash Flow before Borrower pay any dividends, bonuses, or
------
capital distributions. Any prepayments required under this subsection 2.8.3
are strictly at the sole option of Lender.
2.8.4 Prepayment of Life Insurance Proceeds. Proceeds received by
-------------------------------------
lender from the Life Insurance shall be applied as a prepayment of the
Obligations in such order and manner as Lender may determine. Lender shall
notify Borrower promptly of the receipt by Lender of any proceeds from the
Life Insurance.
2.8.5 Interest Hedge Contract. Proceeds of the Interest Hedge
-----------------------
Contract shall be applied as a prepayment of the Term Loan Principal.
Lender shall give Borrower prompt notice of the receipt by Lender of any
proceeds of the Interest Hedge Contract.
2.8.6 Prepayment of Stock Purchase Agreement Proceeds. Proceeds of
-----------------------------------------------
the Stock Purchase Agreement shall be applied to the Term Loan Principal
Balance.
2.8.7 Permitted Voluntary Partial Prepayments. Borrower may not make
---------------------------------------
voluntary partial principal prepayments on the Term Loan Note in addition
to the payments it is required to make pursuant to the Term Loan Agreement.
2.8.8 No Term Loan Prepayment Premium. No Term Loan Prepayment
-------------------------------
Premium shall be payable with respect to any prepayment received by Lender
pursuant to subsection 2.8.3, 2.8.4, 2.8.5 or 2.8.6
2.8.9 Involuntary Prepayment. Any payment of the principal balance
----------------------
received by Lender resulting from the exercise by Lender of any remedy
available to Lender subsequent to the occurrence of an Event of Default and
the acceleration of the Term Loan Obligations shall be deemed to be a
prepayment subject to the provision of this Section 2.8, and the applicable
Term Loan Prepayment Premium [calculated in accordance with subsection
2.8.1 (b)] and any other payment (including, without limitation, the Term
Loan Success Fee and the unpaid balance of the Term Loan Maintenance Fee)
required under Section 2.8.1(b) shall be payable on demand with respect to
such payment.
2.9 Application of Prepayments. Subject to Lender's rights under this
--------------------------
Term Loan Agreement or any of the other Credit Facilities Documents to apply
such proceeds in a different manner, any proceeds of the Collateral received by
Lender
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<PAGE>
when no Event of Default exists shall be applied by Lender in the following
order of priority:
2.9.1 Late Charges and Fees. First, to the payment of any and all
---------------------
late charges, all fees (including the Fees) and expenses due to Lender
under the Credit Facilities Documents;
2.9.2 Revolver Loan Interest. Second, to the payment of the
----------------------
interest which shall be due and payable on the Revolver Loan Principal
Balance at the time of such payment;
2.9.3 Term Loan Interest. Third, to the payment of interest which
------------------
shall be due and payable on the Term Loan Principal Balance at the time of
such payment;
2.9.4 Term Loan Principal. Fourth, to the payment of the Term
-------------------
Loan Principal due on to Term Loan Note;
2.9.5 Revolver Loan Principal. Fifth, to the payment of the
-----------------------
Revolver Loan Principal Balance; and
2.9.6 Borrower. Sixth, any surplus to the Borrower or such other
--------
Person(s) as may be entitled thereto.
Prepayments of principal received by Lender pursuant to subsections 2.8.3,
2.8.4, 2.8.5 and 2.8.6 shall be applied to the payment of installments of the
Principal Balance in the inverse order of maturity.
2.10 Payments after Event of Default. All payments received by Lender
-------------------------------
during the existence of any Event of Default shall be applied in accordance with
Section 8.6.
2.11 Method of Payment; No Setoff; Good Funds.
----------------------------------------
2.11.1 Method of Payment. Except as may be otherwise provided in
-----------------
the Revolver Loan Agreement with respect to payments due after the Merger,
all payments to be made by Borrower pursuant to the Term Loan Documents
shall be made to Lender by wire transfer to the account of Lender at Union
Bank, 445 So. Figueroa St., Los Angeles, California, Credit Greyhound
Financial Corporation, Credit Account No. 0700470377, ABA 122000496
reference: CPS Acquisition Corp., or to such other address as Lender shall
notify Borrower.
2.11.2 No Setoff. All payments hereunder and under the other Term
---------
Loan Documents made by or on behalf of Borrower shall be made without
setoff or counterclaim and free and clear of, and without deduction or
withholding for or on account of, any federal, state or local taxes.
2.11.3 Good Funds. Payment shall not be deemed to have been
----------
received by Lender until Lender is in receipt of Good Funds.
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<PAGE>
2.12 Payment of Term Loan Fees.
-------------------------
2.12.1 Term Loan Fee. Borrower will pay a loan fee in the amount of
-------------
Thirty Thousand Dollars ($30,000) on or before the Closing Date ("Base Term
Loan Fee").
2.12.2 Term Loan Maintenance Fee. Borrower shall pay to Lender a
-------------------------
fee ("Term Loan Maintenance Fee") in an amount equal to Two Hundred
Thousand Dollars ($200,000). The Term Loan Maintenance Fee shall be paid in
forty-seven (47) equal monthly installments of Four Thousand One Hundred
Sixty-Six and 77/100 Dollars ($4,166.77) each, commencing on the first day
of February, 1995, and continuing on the first day of each month thereafter
until fully paid; and the unpaid balance of the Term Loan Maintenance Fee
shall be due and payable by Borrower on the earlier (a) of the prepayment
of the Term Loan Obligations or (b) the Maturity Date.
2.12.3 Term Loan Success Fee. Borrower shall pay to Lender a fee
---------------------
("Term Loan Success Fee") in an amount equal to Fifty Thousand Dollars
($50,000) on the earlier to occur of (a) prepayment of the Term Loan
Obligations or (b) the Maturity Date.
2.12.4 Fees Earned and Non-Refundable. The Term Loan has been fully
------------------------------
earned by Lender and is non-refundable in all instances. The Term Loan
Maintenance Fee and the Term Loan Success Fee shall be deemed fully earned
upon Closing and are non-refundable in all instances.
ARTICLE 3
---------
NOTE, SECURITY AND GUARANTIES
-----------------------------
3.1 Note. The Term Loan shall be evidenced by the Term Loan Note.
----
3.2 Grant of Security Interest. The Obligations shall be secured by the
--------------------------
Security Interests, which shall be superior and prior to all other Liens except
the Permitted Prior Liens.
3.3 Borrower's Stockholders Pledge Agreement. In consideration for
----------------------------------------
Lender's providing financing to Borrower and to secure payment and performance
of all of the Term Loan Obligations: (a) the Borrower's Stockholders shall
pledge to Lender the Borrower's Stock pursuant to Borrower's Stockholders Pledge
Agreement; and (b) the Company's Stockholders shall pledge to Lender all of the
Company's Stock.
3.4 Guaranties. In consideration of Lender's providing financing to
----------
Borrower, Company shall, until the Merger has been consummated, guarantee
payment and performance of all of the Term Loan Obligations in accordance with
the terms and conditions of the Guaranty, which Guaranty shall be joint,
several and primary with the obligations of Borrower.
3.5 Maintenance of Security Documents; Releases Upon Termination. Borrower
------------------------------------------------------------
shall maintain the Security Documents or cause the Security Documents
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<PAGE>
to be maintained in full force effect until full and permanent satisfaction of
the Obligations. Upon the full and permanent satisfaction of and payment in full
of all of the Obligations, Lender shall deliver to Borrower, after receipt of
request therefor and at Borrower's expense, releases and satisfactions of all
financing statements, mortgages, notices of assignment and other registrations
of security.
3.6 Recourse to Security. Recourse to security shall not be required for
--------------------
any of the Obligations nor shall Lender be required to first marshal, dispose
of, or realize upon the Collateral or any other security.
ARTICLE 4
---------
CONDITIONS OF CLOSING
---------------------
Lender's obligation to make the Term Loan shall be subject to the
satisfaction at Borrower's expense of all of the following conditions on or
before the Closing Date, but not later than December 31, 1994, in a manner, form
and substance satisfactory to Lender, and if such conditions are not so
satisfied on or before such date, Lender's commitment hereunder to make the Term
Loan shall expire:
4.1 Representations and Warranties. On the closing Date the
------------------------------
representations and warranties of Borrower set forth in the Documents to which
Borrower is a party shall be true and correct when made and at and as of the
time of the Closing, except to the extent that such representations and
warranties expressly relate to an earlier date.
4.2 Delivery of Documents. The following shall have been delivered to
---------------------
Lender, each duly authorized and executed, where applicable, all of which shall
be acceptable in form and substance to Lender:
4.2.1 the Term Loan Documents (Closing);
4.2.2 a certificate of the respective Secretaries (or an Assistant
Secretary) of Borrower and Company which delivers to Lender the following
and certifies as to the true and complete nature of the following:
(a) a certificate of incumbency for Borrower and Company;
(b) a certificate of good standing for Borrower and Company in
each state in which it is organized and/or qualified to do business;
(c) certified copies of the corporate charter and bylaws of
Borrower and Company, together with all effective and proposed
amendments thereto;
(d) certified copies of resolutions adopted by the board of
directors of Borrower and Company authorizing the execution and
-22-
<PAGE>
delivery of the Term Loan Documents to which they are parties and the
consummation of the transactions contemplated therein;
4.2.3 certified or executed original true and complete copies of:
(a) Existing Leases;
(b) any other Existing Operating Agreements of Borrower,
including, without limitation, employment and non-
competition agreements of Borrower's employees and other
instruments, documents, certificates, consents, waivers and
opinions as Lender may reasonably request;
(c) the Subordinated Indebtedness Documents;
(b) the Acquisition Documents; and
(e) the Merger Documents.
4.2.4 share certificates representing the Borrower's Stock and the
Company's Stock; and
4.2.5 a Request for Advance, Certification and Disbursement
Instructions in form and substance identical to Exhibit 4.2.5, properly
completed.
4.3 Representations and Warranties; Performance; No Default. The
-------------------------------------------------------
representations and warranties of Borrower set forth in this Term Loan Agreement
and in each of the other Term Loan Documents shall be true and complete in all
respects. Borrower shall have performed and complied with all agreements and
conditions contained in the Term Loan Documents to be performed by or complied
with by prior to or at the Closing, and no Event of Default or Incipient Default
shall then exist or result from the making of the Term Loan.
4.4 Opinions of Counsel. Lender shall have received a favorable legal
-------------------
opinion dated the Closing Date from counsel to Borrower, Company and other
parties to the Term Loan Documents, which counsel are satisfactory to Lender.
The opinions described shall cover the due authorization, execution, delivery,
enforceability, validity and binding effect of the Term Loan Documents and
Security Interests, compliance with applicable usury laws, the enforceability
under the laws of Texas of the choice of Borrower and Company and Lender that
Arizona law shall govern the Term Loan and the Term Loan Documents, together
with opinions that the Term Loan is not usurious under Texas law (without
reliance on any usury savings clause) and with respect to such other matters as
Lender may require. Each opinion of counsel described in this Section 4.4 shall
confirm, to the satisfaction of Lender, that such opinion is being delivered to
Lender at the instruction of the party represented by such counsel, that Lender
is entitled to rely on such opinion and that, for purposes of such reliance,
Lender is deemed to be in privity with each such opining counsel.
-23-
<PAGE>
4.5 Approval of Term Loan Documents and Security Interests. Lender shall
------------------------------------------------------
have received evidence that there have been obtained all approvals and/or
consents of, or other action by, any shareholder, Governmental Body or other
Person whose approval or consent is necessary or required to enable Borrower and
Company to (a) enter into and perform their respective Obligations under the
Term Loan Documents to which they are parties and (b) grant to Lender the
Security Interests.
4.6 Security Interests. All filings of UCC financing statements and all
------------------
other filings and actions necessary to perfect and maintain the Security
Interests as first, valid and perfected Liens in the Property covered thereby,
subject only to Permitted Prior Liens, shall have been filed or taken and
confirmation thereof shall have been received by Lender.
4.7 INTENTIONALLY LEFT BLANK.
4.8 Financial Statements and Projections. Lender shall have received (i)
------------------------------------
such financial statements, reports and tax returns relating to the operations of
Borrower and Company as Lender shall request, including, without limitation,
pro-forma balance sheets and operating projections, indicating that from and
after the Closing Date, and after giving effect to the transactions contemplated
by the Transaction Documents, based on the projections contained therin,
Borrower and Company shall remain solvent and retain sufficient capital to carry
on their respective Businesses and pay their respective debts as they mature,
including the Loans.
4.9 Material Adverse Change. No circumstance or event shall have occurred
-----------------------
which (a) has or could have a Material Adverse Effect on Borrower or Company, or
(b) has or could have a Material Adverse Effect on (i) the ability of any Person
to perform its obligations under any of the Term Loan Documents to which such
Person is a party, or (ii) the projections for financial performance of the
Businesses of Borrower and Company as set forth in any of the documents or
papers furnished to Lender by Borrower or its representatives.
4.10 Payments of Fees. Borrower shall pay to Lender the Base Term Loan
----------------
Fee. Borrower acknowledges that this fee is non-refundable and has been earned
by Lender.
4.11 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connections with the transactions contemplated by the Term Loan Documents and
all documents and instruments incident to such transactions shall be
satisfactory to Lender and its counsel, and Lender and its counsel shall have
received all such counterpart originals or certified or other copies as Lender
or its counsel may request. Lender shall have received such documents as Lender
may require to establish (a) the proper organization and good standing of
Borrower and Company and their respective authority to transact business in any
jurisdiction in which the failure to be so authorized would have a Material
Adverse Effect on such persons and (b) the authority of each Person who is any
party of any of the Term Loan Documents to execute such Term Loan Documents.
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<PAGE>
4.12 Title: Use of Assets. Lender shall be satisfied that Borrower and
--------------------
Company have good, marketable and legal title to their respective Properties and
that they at all times shall be entitled to the use and quiet enjoyment of all
assets necessary and desirable for the continued ownership and operation of
their respective Businesses and such Property at each location at which such
Businesses presently are conducted, including, without limitation, the use of
equipment, inventory, fixtures, Operating Agreements, offices, warehouses and
means of ingress and egress thereto, including any easements or rights-of-way
necessary to reach any equipment or other items necessary for the operation of
their respective Businesses.
4.13 Compliance with Americans with Disabilities Act. Evidence satisfactory
----------------------------------------------
to Lender that, as of the Closing Date, Borrower and Company are in compliance
with the ADA, or, if any renovations of either such Person's facilities or
modifications of either such Person's prior employment practices shall be
required to bring them into compliance with the ADA, review and approval by
Lender of Borrower's proposed plan to come into such compliance.
4.14 Broker Fees. If services of a broker have been performed in
-----------
connection with the Term Loan, Borrower shall pay all fees for such services and
deliver to Lender evidence of such payment (or evidence that the broker has
released any claims against Lender), and such fees shall not be included within
transaction costs to be paid/reimbursed with Term Loan proceeds.
4.15 Operating Agreements and Leases. The Existing Leases and other
-------------------------------
material Operating Agreements of Borrower and Company shall be satisfactory to
Lender. If required by Lender, each lessor under the Existing Leases shall have
delivered to Lender a consent and lien waiver, in form and substance
satisfactory to Lender.
4.16 Searches and References. Lender shall have received searches of the
-----------------------
records of the U.S. Bureau of Patents and Trademarks and the U.S. Copyright
Office with respect to the Intellectual Property (if required) and shall have
received UCC, tax lien, litigation, judgment and bankruptcy searches on
Borrower and Company and any other entities which owned any of Company's
Property. Such searches, reports and references shall be acceptable to Lender.
Lender shall have received credit references, and customer supplier and bank
references acceptable to Lender for Borrower and Company as Lender may require.
4.17 Releases. Borrower shall provide all other documents necessary to
--------
evidence the release of any and all Liens, other than the Permitted Liens on the
Collateral, including, without limitation, termination of financing statements.
4.18 Insurance. Lender shall have received, at least one Business Day
---------
prior to the Closing Date, evidence satisfactory to Lender that all insurance
coverage required pursuant to Section 6.7.1 is in full force and effect,
including originals or certified copies of the policies of such insurance.
4.19 Life Insurance. Lender shall have received a completed and signed
--------------
application of the Life Insurance, together with evidence that an application
has been made for the Life Insurance.
-25-
<PAGE>
4.20 Transaction Costs. Lender shall have reviewed and approved, on or
-----------------
before the Closing Date, an itemized list of the transaction costs incurred by
Borrower in connection with the incurring by Borrower of the Indebtedness
represented by the Transaction Documents, the closing of the transaction
contemplated by the Transaction Documents, and the other transactions which are
to be consummated on the Closing Date, together with appropriate backup
documentation required by, and satisfactory to, Lender.
4.21 Shareholder Debt. Lender shall have received evidence that the
----------------
Shareholder Debt has been discharged in consideration of a payment not to exceed
the par value of such debt.
4.22 Subordinated Indebtedness. The terms and conditions of the
-------------------------
Subordinated Indebtedness and the Subordinated Indebtedness Documents shall be
satisfactory to Lender.
4.23 Acquisition Documents. The terms and conditions of the Acquisition and
---------------------
the Acquisition Documents shall be satisfactory to Lender.
4.24 Merger Documents. The terms and conditions of the Merger and the
----------------
Merger Documents shall be satisfactory to Lender.
4.25 Employment Agreements. Lender shall have reviewed and approved the
---------------------
terms and conditions of all employment agreements between Borrower and its
employees.
4.26 Equity Investment. Lender shall have received evidence satisfactory to
-----------------
it that on or before Closing, Borrower's Stockholders shall have made a cash
equity investment in Borrower of not less than Nine Hundred Fifty Thousand
Dollars ($950,000).
4.27 Other Information. Borrower shall have furnished Lender such other
-----------------
information concerning itself and the transactions contemplated hereby as Lender
may reasonably require.
4.28 Revolver Loan. The Revolver Loan Documents shall have been executed
-------------
and delivered to Lender and Borrower shall have minimum availability under the
Revolver Loan in an amount not less than Five Hundred Thousand Dollars
($500,000).
ARTICLE 5
---------
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants to Lender as follows:
5.1 Corporate Existence and Power. Borrower is a corporation duly
-----------------------------
organized, validly existing and in good standing under the laws of Georgia;
Company is a corporation duly organized, validly existing and in good standing
under the laws of Texas; each of Borrower and Company has all requisite
corporate power and authority to own its Property and to carry on its Business;
each of
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<PAGE>
Borrower and Company is in good standing and authorized to do business in each
jurisdiction in which the failure so to qualify would have a Material Adverse
Effect on such Person; and, in any event, Company is in good standing and
authorized to do business in each jurisdiction in which each site of its
Business is now located.
5.2 Authority. Each of Borrower and Company has full corporate power and
---------
authority to enter into, execute, deliver and carry out the terms of the Term
Loan Documents to which it is a party and to incur its Obligations under the
Term Loan Documents, all of which have been duly authorized by all proper and
necessary corporate action (including the consent of shareholders where
required) and are not prohibited by the corporate charter or by-laws of such
Person. There is no provision in the articles of incorporation or bylaws of
Borrower or Company, or in the laws of the state of incorporation of such
Person, requiring any vote or consent of shareholders to authorize the creation
of the Security Interests granted by such Person, which power is vested
exclusively in the board of directors of such Person.
5.3 Capital Stock and Related Matters: Subsidiaries.
-----------------------------------------------
5.3.1 Capitalization of Borrower. Exhibit 5.3.1 sets forth a complete
--------------------------
description of the capitalization of Borrower. All of Borrower's Stock is
validly issued, fully paid and non-assessable, and has been issued in
compliance with all applicable federal and state securities laws, rules and
regulations. All of the shares of the Borrower's Stock are owned
beneficially and of record by Borrower's Shareholders, free and clear of
all Liens except as described in Schedule 5.3.1. There is no other Person
which directly or indirectly owns (beneficially or of record) any interest
in Borrower.
5.3.2 Other Restrictions of Borrower. Except as set forth on Schedule
------------------------------
5.3.2, Borrower (a) is not a party to or has no knowledge of any agreements
restricting the transfer of any shares of Borrower's Stock; (b) has no
outstanding stock or securities convertible into or exchangeable or
exercisable for any shares of Borrower's Stock, or any rights to subscribe
for or to purchase, or any options for the purchase of, or any agreements
providing for the issuance (contingent or otherwise) of, or any calls,
commitments or claims of any character relating to, any shares of the
Borrower's Stock or any securities convertible into or exchangeable or
exercisable for any shares of the Borrower's Stock; and (c) is not subject
to any obligation to acquire or retire any shares of Borrower's Stock or
any convertible securities, rights or options for any shares of Borrower's
Stock. Borrower is not required to file, and Borrower has not filed,
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended,
a registration statement relating to any class of debt or equity
securities.
5.3.3 Subsidiaries of Borrower. Schedule 5.3.3 sets forth a complete
------------------------
list of the Subsidiaries of Borrower.
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5.3.4 Capitalization of Company. Exhibit 5.3.4 sets forth a complete
-------------------------
description of the capitalization of Company. All of Company's Stock is
validly issued, fully paid and non-assessable, and has been issued in
compliance with all applicable federal and state securities laws, rules and
regulations. All of the shares of the Company's Stock are owned
beneficially and of record by Company's Shareholders, free and clear of all
Liens except as described in Schedule 5.3.4. There is no other Person,
which directly or indirectly owns (beneficially or of record) any interest
in Company.
5.3.5 Other Restrictions of Company. Except as set forth on Schedule
-----------------------------
5.3.5 or for Liens which will be removed at Closing, Company (a) is not a
party to or has no knowledge of any agreements restricting the transfer of
any shares of Company's Stock; (b) has no outstanding stock or securities
convertible into or exchangeable or exercisable for any shares of Company's
Stock, or any rights to subscribe for or to purchase, or any options for
the purchase of, or any agreements providing for the issuance (contingent
or otherwise) of, or any calls, commitments or claims of any character
relating to, any shares of the Company's Stock or any securities
convertible into or exchangeable or exercisable for any shares of the
Company's Stock; and (c) is not subject to any obligation to acquire or
retire any shares of Company's Stock or any convertible securities, rights
or options for any shares of Company's Stock. Company is not required to
file, and Company had not filed, pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, a registration statement relating to any
class of debt or equity securities.
5.3.6 Subsidiaries of Company. Schedule 5.3.6 sets forth a complete
-----------------------
list of the Subsidiaries of Company.
5.4 Binding Agreements. This Term Loan Agreement and the other Term Loan
------------------
Documents, when executed and delivered, shall constitute the valid and legally
binding obligations of Borrower and Company to the extent they are a party
thereto, enforceable against such Person in accordance with their respective
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement
of creditors' rights generally and by equitable principles (whether or not any
action to enforce such document is brought at law or in equity).
5.5 Solvency; Bankruptcy: Creditors.
-------------------------------
5.5.1 Solvency. Borrower and Company are Solvent.
--------
5.5.2 No Contemplated Bankruptcy. Neither Borrower nor Company
--------------------------
contemplates the filing of a petition in bankruptcy or for a reorganization
under the U.S. Bankruptcy Code (or other applicable laws) and has no
knowledge of any threatened bankruptcy or insolvency proceeding against
Borrower or Company.
5.5.3 Hindering Creditors. Borrower, by executing, delivering or
-------------------
performing the transactions contemplated by the Term Loan Documents, or by
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taking any action with respect thereto, does not intend to hinder, delay or
defraud either its present or future creditors.
5.6 Location of Principal Place of Business; Other Facility Sites.
-------------------------------------------------------------
5.6.1 Principal Place of Business. The chief executive office and
---------------------------
principal place of business of Borrower is located at Atlanta, Georgia.
5.6.2 Location of Goods and Offices. All inventory, equipment, other
-----------------------------
Goods and offices that now used and contemplated to be used after the
Closing Date in the operation of the Business of Borrower are located at
the sites listed in Schedule 5.6.2.
5.7 Title to Property, Liens. Borrower and Company have good and
------------------------
marketable title to all of their respective Property, except the portion thereof
consisting of Company's Leasehold Properties and Company's leased equipment, all
of which has been leased in the ordinary course of Company's business; and
Company has a valid leasehold estate in Company's Leasehold Property and
lessee's interest in all leased Equipment. All of such Property is free and
clear of all Liens, except Permitted Liens. The applicable Security Documents
shall create valid and perfected first Liens in the Property of Company, subject
only to Permitted Prior Liens.
5.8 Projections and Financial Statements.
------------------------------------
5.8.1 Financial Statements. Borrower has delivered to Lender
--------------------
financial statements described in Schedule 5.8.1. Such financial statements
(a) comport with the books of Borrower or Company, as the case may be; (b)
are complete and correct in all material respects, subject to normal year-
end adjustments; and (c) fairly present in all material respects, subject
to normal year-end adjustments, the financial condition and the results of
operations as of the dates and for the periods described therein with
respect to the subject thereof.
5.8.2 Pro Forma Balance Sheet. Borrower has delivered to Lender
-----------------------
pro-forma balance sheets for itself and Company as of the Closing Date
(which assume the consummation of the transactions contemplated by the
terms of the Term Loan Documents). Such pro-forma balance sheets present
fairly the anticipated financial condition of the Borrower and Company as
of the Closing Date, except that such pro-forma balance sheet (a) does not
reflect any year-end adjustments, provided that, to the best of the
knowledge of Borrower, there will be no material adjustments to such pro-
forma balance sheet and (b) has not been audited.
5.8.3 Forecasts. Borrower has delivered to Lender forecasts of the
---------
future operations of Borrower and Company, consisting of balance sheets,
cash flow statements and income statements of Borrower and Company,
together with a statement of the underlying assumptions upon which such
forecasts are based. Such forecasts (a) have been prepared in good faith
and (b) represent the good faith opinion of Borrower and its senior
management as to the course of the Business of Borrower and Company.
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<PAGE>
5.9 Litigation. Except as set forth in Schedule 5.9, there are no actions,
----------
suits, arbitration proceedings or claims pending or, to the best knowledge of
Borrower, threatened against Borrower or Company or maintained by Borrower or
Company at law or in equity or before any Governmental Body. None of the matters
set forth in Schedule 5.9 (if any), if adversely determined, could have a
Material Adverse Effect on Borrower or Company; and none of such matters calls
into question the validity or enforceability of any of the Term Loan Documents
or any of the transactions contemplated thereby or the priority of the Security
Interests.
5.10 Conflicting Agreements: Consents. Neither Borrower nor Company is in
--------------------------------
default under any agreement to which it is a party or by which it or any of its
Property is bound, and there is no event or condition which, with the giving of
notice or the lapse of time, or both would become a default under any agreement
to which it is a party or by which it or any of its Property is bound, the
effect of which default might have a Material Adverse Effect on Borrower or
Company or the validity or enforceability of any of the Term Loan Documents or
any of the transactions contemplated thereby or the priority of the Security
Interests. No authorization, consent, approval or other action by, and no notice
to or filing with, any shareholder, any Governmental Body or any other Person
which has not already been obtained, taken or filed, as applicable, is required
(a) for the due execution, delivery or performance by Borrower or Company of any
of the Term Loan Documents to which it is a party or (b) as a condition to the
validity or enforceability of any of the Term Loan Documents to which it is a
party or any of the transactions contemplated thereby or the priority of the
Security Interests, except for certain filings to establish and perfect the
Security Interests. No provision of any mortgage, indenture, contract,
agreement, statute, rule, regulation, judgment, decree or order binding on
Borrower or Company, or affecting the Business or Property of Borrower or
Company, conflicts with, or requires any consent which has not already been
obtained or is anticipated to be obtained as described above, or in any way
would prevent the execution, delivery or performance of the terms of any of the
Term Loan Documents. The execution, delivery or performance of the terms of the
Term Loan Documents shall not constitute a default under, or result in the
creation or imposition of, or obligation to create, any Lien upon the Property
of Borrower or Company pursuant to the terms of any such mortgage, indenture,
contract or agreement.
5.11 Taxes. Each of Borrower and Company has filed or caused to be filed
-----
all tax returns required to be filed, and has paid, or has made adequate
provision for the payment of, all taxes due and payable on such returns or to
become due and payable upon the filing of such returns or in any assessments
made against it and any of its Property; and no tax liens have been filed and,
to the best knowledge of Borrower, no claims are being asserted in respect of
such taxes which (a) (i) are required by GAAP to be reflected in its financial
statements or (ii) would have a Material Adverse Effect on Borrower or Company,
and (b) are not so reflected therein. The charges, accruals and reserves on the
books of Borrower and Company with respect to all federal, state, local and
other taxes are considered by the management of Borrower to be adequate, and
Borrower has no knowledge of any unpaid assessment which is or might be due and
payable against it or any of its Property, except such assessments as are being
contested in good
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<PAGE>
faith and by appropriate proceedings diligently conducted, and for which
adequate reserves have been set aside in accordance with GAAP.
5.12 Compliance with Applicable Laws. Neither Borrower nor Company is in
-------------------------------
default with respect to any judgment, order, writ, injunction, decree or
decision of any Governmental Body, which default would have a Material Adverse
Effect on either such Person. Each of Borrower and Company is in compliance in
all material respects with all applicable statutes and regulations, including
Environmental Laws, of all Governmental Bodies, a violation of which would have
a Material Adverse Effect on such Person or the validity or enforceability of
any of the Term Loan Documents or any of the transactions contemplated thereby
or the priority of the Security Interests.
5.13 Regulatory Matters. Each of Borrower and Company has duly and timely
------------------
filed all material reports and other filings which are required to be filed by
it under any rules or regulations promulgated by any Governmental Body or other
Person having jurisdiction over the operation of its Business. All information
provided by or on behalf of Borrower and Company in any filing with any
Governmental Body or other Person having jurisdiction over the operation of its
Business was, at the time of filing, true, complete and correct in all material
respects when made, and the appropriate Person has been notified of any
substantial or significant changes in such information as may be required in
accordance with applicable laws, rules and regulations.
5.14 Environmental Matters. Except to the extent set forth in the
---------------------
Disclosure Schedule to the Environmental Certificate, (a) each of Borrower and
Company is in compliance in all material respects with all applicable
Environmental Laws and (b) there currently are not any known Hazardous
Materials generated, manufactured, released, stored, buried or deposited over,
beneath, in or on (or used in the construction and/or renovation of) the
Property in violation of applicable Environmental Laws.
5.15 Application of Certain Laws and Regulations. Neither Borrower, Company
-------------------------------------------
nor any Affiliate of Borrower or Company is:
5.15.1 Investment Company Act. an "investment company," or a company
----------------------
"controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended;
5.15.2 Holding Company Act. a "holding company," or a "subsidiary
-------------------
company" of a "holding company," or an "affiliate" of a "holding company"
or of a "subsidiary company" of a "holding company," as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended;
5.15.3 Regulations as to Borrowing. subject to any statute or
---------------------------
regulation which regulates the incurrence of any Indebtedness for Borrowed
Money, including, without limitation, statutes or regulations relative to
common or interstate carriers or to the sale of electricity, gas, steam,
water, telephone, telegraph or other public utility services;
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<PAGE>
5.15.4 Foreign or Enemy Status. (a) an "enemy" or an "ally of an
-----------------------
enemy" within the meaning of Section 2 of the Trading With the Enemy Act,
(b) a "national" of a foreign country designated in Executive Order No.
8389, as amended, or of any "designated enemy country" as defined in
Executive Order No. 9095, as amended, of the President of the United States
of America, in each case within the meaning of such Executive Orders, as
amended, or of any regulation issued thereunder, (c) a "national of any
designated foreign country" within the meaning of the Foreign Assets
Control Regulations or of the Cuban Assets Control Regulations of the
United States of America (Code of Federal Regulations, Title 31, Chapter V,
Part 515, Subpart B, as amended), or (d) an alien or a representative of
any alien or foreign government within the meaning of Section 310 of Title
47 of the United States Code.
5.16 Margin Regulations. None of the transactions contemplated by this Term
------------------
Loan Agreement or any of the other Term Loan Documents, including the use of the
proceeds of the Term Loan, have violated or shall violate or result in a
violation of Section 7 of the Securities Exchange Act of 1934, as amended, or
any regulations issued pursuant thereto, including, without limitation,
Regulations G, T, U and X, and Borrower does not own or intend to carry or
purchase any "margin security" within the meaning of such Regulation G or U.
5.17 Other Indebtedness. There is no, and upon Closing there will be no,
------------------
Indebtedness for Borrowed Money owned by Borrower or Company to any Person,
except the Obligations and the Subordinated Indebtedness.
5.18 Certain Agreements. Neither Borrower nor Company (a) has committed to
------------------
make any Investment, (b) is a party to any indenture, agreement, contract,
instrument or lease or subject to any charter, bylaw or other corporate
restriction or any injunction, order, restriction or decree, which is so unusual
or burdensome so as to cause, in the foreseeable future, a Material Adverse
Effect on either such Person, (c) is a party to any "take or pay" contract under
which it is the purchaser, (d) has any contingent or long-term liability or
commitment, including management contracts (excluding employment contracts of
full-time individual officers or employees) except those set forth in SCHEDULE
5.19, and (e) has assumed, guaranteed or endorsed, or otherwise become directly
or contingently liable in connection with any liability of any other Person,
except for the endorsement of checks and other negotiable instruments for
collection in the ordinary course of business.
5.19 Business and Property of Borrower.
---------------------------------
5.19.1 Business and Property. After the Closing, Borrower will
---------------------
immediately merge into Company. Company does not propose to engage in any
business or activity other than its Business. Each of Borrower and Company
owns or has the right to use all Property which is necessary for the
conduct of its Business, as its Business is proposed to be conducted
following the Closing Date.
5.19.2 Real Property; Leases. There is set forth in Schedule 1.1 (Real
---------------------
Property) a description or all existing Real Property
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<PAGE>
of Borrower and Company. There is set forth in Schedule 1.1 (Existing
Leases) a list of all existing Leases of Borrower and Company. Each Lease
is in full force and effect, there has been no material default in the
performance of any of its terms or conditions by Borrower or Company or, to
the knowledge of Borrower, by any landlord thereunder, and no claims of
default have been asserted with respect thereto. The present and
contemplated use of the Real Property and Leasehold Property of Borrower
and Company is in compliance with all applicable zoning ordinances and
regulations and other laws and regulations.
5.19.3 Operation and Maintenance of Equipment. Neither Borrower,
--------------------------------------
Company nor, to the knowledge of Borrower, any other Person owning or
operating any equipment necessary for the operation of the Business of
Borrower or Company has used, operated or maintained the same in a manner
which now or hereafter could result in the cancellation or termination of
the right of Borrower or Company to use the same or which could result in
any material liability of Borrower for damages in connection therewith. All
of the equipment and other tangible personal property owned by Borrower or
Company is in good operating condition and repair, reasonable wear and tear
from ordinary usage excepted, and has been used, operated and maintained in
compliance with all applicable laws, rules and regulations.
5.19.4 Intellectual Property. There is set forth in Schedule 1.1
---------------------
(Intellectual Property) a list of all existing patents, copyrights,
trademarks and trade names owned by Borrower or Company and applications
therefor submitted by such Person. There is set forth in Schedule 1.1
(Existing Operating Agreements) a list of all existing Operating Agreements
of Borrower and Company. Neither Borrower nor Company has been charged with
any material infringement of any patent, copyright, trademark, or service
mark, or notified or advised of any such claim. Each of Borrower and
Company owns, possesses or has the right to use all Operating Agreements,
and all rights with respect thereto, necessary for the conduct of its
Business as heretofore conducted and as proposed to be conducted after the
Closing Date, without any known conflict with the rights of others and, in
each case, free of any Liens other than Permitted Liens. No event has
occurred that could result in the cancellation or termination of any
Operating Agreement or the imposition thereunder of any liability upon
Borrower or Company, and there is no reason to believe that any Operating
Agreement will not be renewed in the ordinary course, except where the
failure to renew would not have had a Material Adverse Effect on Borrower
or Company. Except as set forth in Schedule 5.19, neither Borrower nor
Company has any Operating Agreement which consists of a license to use
patents, copyrights, trademarks, service marks, trade names, or other
similar items of intellectual property. The consummation of the transaction
contemplated hereby will not alter or impair any right, title or interest
of Borrower or Company in any of its Operating Agreements, except for
Security Interests in favor of Lender.
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<PAGE>
5.20 No Misrepresentation. No representation or warranty made by Borrower
--------------------
or any Person other than Lender and contained herein or in the order Term Loan
Documents, and no certificate, information or report furnished or to be
furnished by or on behalf of Borrower or any Person other than Lender in
connection with any of the Term Loan Documents or any of the transactions
contemplated hereby or thereby, contains or shall contain a misstatement of
material fact, or omits or shall omit to state a material fact required to be
stated in order to make the statements contained herein or therein not
misleading in the light of the circumstances under which such statements were
made. There is no fact known to or reasonably foreseen by Borrower that shall
have a Material Adverse Effect on Borrower or Company other than facts which
generally are known to the public, that has not expressly been disclosed to
Lender in writing.
5.21 Plans. Neither Borrower nor Company is a member of any Multi-employer
-----
Plan. Each Plan maintained by Borrower or Company is in material compliance with
the applicable provisions of ERISA and the IRC, and Borrower and Company have
filed all reports required to be filed by ERISA and the IRC in respect of such
Plan. Borrower, Company and each of their respective ERISA Affiliates has met
all requirements imposed by ERISA and the IRC in respect of the funding of all
Plans, including, without limitation, the making when due of all required
installment contributions to such Plans. There has not been, with respect to any
Plan maintained by Borrower or Company, any prohibited transaction, reportable
event, or accumulated funding deficiency, as those terms are defined in ERISA.
5.22 Employee Matters.
----------------
5.22.1 Union Activities. None of the employees of Borrower or Company
----------------
is subject to any collective bargaining agreement, and there are no
strikes, work stoppages or controversies pending or, to the best knowledge
of Borrower, threatened against Borrower or Company by any of its
employees, other than employee grievances arising in the ordinary course of
business which do not in the aggregate have a Material Adverse Effect on
Borrower or Company.
5.22.2 Claims Relating to Employment. Neither Borrower nor Company nor
-----------------------------
any employee is subject to any employment agreement or non-competition
agreement with any former employer or any other Person, which agreement
would (a) prohibit Borrower or Company from using any material information
which Borrower or Company would not otherwise be prohibited from using or
(b) raise any legal considerations relating to unfair competition, trade
secrets or propriety information.
5.23 Use of Term Loan Proceeds. The proceeds of the Term Loan will be used
-------------------------
by Borrower to pay a portion of the purchase price for the Company's Stock
in connection with the Acquisition, as more fully provided in Exhibit
2.3.1.
5.24 Good Consideration. The Term Loan Documents and the transactions
------------------
contemplated thereby have been or will be executed, delivered and performed
in good faith and in exchange for reasonably equivalent value.
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<PAGE>
5.25 No Default. There is neither an Event of Default nor Incipient Default
----------
under the Term Loan Documents.
5.26 Additional Representations and Warranties. The representations,
-----------------------------------------
warranties and covenants contained in this Article 5 are in addition to, and not
in derogation of, the representations, warranties and covenants contained
elsewhere in the Term Loan Documents and shall be deemed to be made and
reaffirmed prior to the making of the Term Loan.
ARTICLE 6
---------
AFFIRMATIVE COVENANTS
---------------------
Until all of the Term Loan Obligations are paid and performed in full
(other than the Term Loan Obligations arising under Section 9.2 with respect to
which there is no pending or threatened event or situation known to Borrower
which could give rise to an indemnity obligation of Borrower under Section 9.2),
Borrower agrees that:
6.1 Legal Existence; Good Standing. Subject to the provisions of Section
------------------------------
6.17, Borrower shall maintain, and shall cause Company to maintain, their
respective corporate existence and their respective good standing in the
jurisdiction of its incorporation and maintain their respective qualification in
each jurisdiction in which the failure to qualify would have a Material Adverse
Effect on Borrower or Company.
6.2 Inspection. Borrower shall permit and shall cause Company to permit
----------
representatives of Lender to (a) visit their respective offices, (b) examine
their respective books and Accountants' reports relating thereto, (c) make
copies or extracts therefrom, (d) discuss the Business and affairs of such
Person with their respective employees, (e) examine and inspect their respective
Property, and (f) meet and discuss the Business and affairs of such Person with
the Accountants, all at reasonable times and upon reasonable prior notice.
Borrower hereby acknowledges that the provisions of this Section 6.2 shall
permit Lender to conduct (x) an annual inspection of some or all of the
Collateral and (y) an audit of the Books of Borrower and Company at such times
as Lender may require or may be otherwise expressly provided herein.
6.3 Financial Statements and Other Information. Borrower shall maintain a
------------------------------------------
standard system of accounting in accordance with GAAP and furnish or cause to be
furnished to Lender:
6.3.1 Monthly Statements. Within thirty (30) days after the end of
------------------
each month, the following statements and reports for Borrower and Company:
(a) a statement of profit and loss, a balance sheet, and a
statement of cash flows for Borrower and Company as of the
end of each month, showing operating results for such month
and for the period from the beginning of the then Fiscal
Year through the end of such month, and for the comparable
period of the preceding Fiscal Year;
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<PAGE>
(b) a detailed accounts receivables aging report;
(c) a detailed accounts payable aging report;
(d) a perpetual inventory listing;
(e) a detailed trial balance; and
(f) monthly reconciled bank statements.
6.3.2 Annual Statements. As soon as available and in any event within
-----------------
ninety (90) days after the close of each Fiscal Year, on a consolidated and
consolidating basis; a statement of profit and loss, a balance sheet, and a
statement of cash flows for Borrower and Company, as of the end of such
Fiscal Year, setting forth in each case in comparison form the
corresponding figures for the preceding year. Such annual financial
statements shall be audited and accompanied by an opinion of the
Accountants stating that (i) the examination by the Accountants in
connection with such financial statements has been made in accordance with
generally accepted auditing standards and, accordingly, included such tests
of the accounting records and such other procedures as were considered
necessary under the circumstances, (ii) such financial statements have been
prepared in accordance with GAAP, and (iii) such financial statements
fairly present the financial position and results of operations of the
Person(s) which is/are the subject of such statements; and
6.3.3 Officer's Certificates. The financial statements of Borrower
----------------------
and Company described in subsections 6.3.1 and 6.3.2 shall be accompanied
by a certificate of the Chief Financial Officer of such Person in the form
of EXHIBIT 6.3.3. reasonable detail (a) certifying that no condition or
event has occurred or exists which constitutes an Incipient Default or an
Event of Default, or, if so, specifying in any such certificate such
violations, conditions and events, and the nature and status thereof, and
what actions Borrower proposes to take with respect thereto, and (b)
showing all calculations necessary to demonstrate compliance with the
provisions of Article 6 of this Term Loan Agreement. Simultaneously with
the delivery of the annual audited financial statements, Borrower also
shall deliver to Lender a certificate from the respective Chief Executive
Officers of Borrower and Company, certifying that, to the best of the
knowledge of such Chief Executive Officer, Borrower and Company are in
compliance with all applicable Environmental Laws and confirming the
absence of matters which would require notice to Lender pursuant to the
provisions of Section 6.7.
6.3.4 Accountant's Certificate. Simultaneously with the delivery of
------------------------
the certified statements required by subsection 6.3.2, copies of a
certificate of the Accountants for Borrower and Company stating that, (a)
in making the examination necessary for their audit of the financial
statements of Borrower and Company for such year, nothing came to their
attention of a financial or accounting nature that caused them to believe
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<PAGE>
that (i) Borrower or Company, as the case may be, was not in compliance
with the terms, covenants, provisions or conditions of any of the Term Loan
Documents or (ii) there had occurred an Incipient Default or Event of
Default, or (b) specifying all such instances of non-compliance and the
nature of the status thereof.
6.3.5 Audit Reports. Within five (5) Business Days after receipt
-------------
thereof, a copy of each report, other than the reports referred to in
subsection 6.3.3, including any so-called "Management Letter" or similar
report, submitted to Borrower by the Accountants in connection with any
annual, interim or special audit made by the Accountants of the books of
Borrower.
6.3.6 Notice of Change of Accountants; Accountants' Cooperation. At
---------------------------------------------------------
least thirty (30) days prior to any change of Accountants of Borrower or
Company, notice that such change is to occur together with the name of the
new Accountants and an appropriate letter of the type described below in
this subsection addressed to such new Accountants. Such new Accountants
shall be an independent, public accounting firm satisfactory to Lender.
Borrower authorizes and shall cause Company to authorize Lender to
communicate directly with its officers and employees and with their
respective Accountants. Borrower authorizes and shall cause Company to
authorize the Accountants to disclose to Lender any and all financial
statements, work papers and other information of any kind that they may
have with respect to Borrower or Company and the Business of such Person
and financial and other affairs. Lender shall treat information so obtained
as confidential, except Lender shall be permitted to disclose such
information on a need-to-know basis to such Persons as Lender reasonably
deems necessary. Upon the request of Lender, Borrower shall deliver a
letter addressed to such Accountants instructing them to comply with the
provisions of this Section.
6.3.7 Notice of Defaults; Loss. Within five (5) Business Days after
------------------------
the occurrence of any such event, written notice if: (a) any Indebtedness
of Borrower or Company is declared or shall become due and payable prior to
its declared or stated maturity, or called and not paid when due; (b) an
event has occurred that enables the holder of any Indebtedness of Borrower
or Company or of any note, certificate or security evidencing any such
Indebtedness of Borrower or Company to declare such Indebtedness due and
payable prior to its stated maturity; (c) there shall occur and be
continuing an Incipient Default or Event of Default, accompanied by a
statement of the Chief Executive Officer of Borrower or Company setting
forth what action Borrower or Company, as the case may be (and any other
obligor with respect to which the Incipient Default or Event of Default has
occurred) proposes to take in respect thereof; or (d) any event shall occur
causing loss or depreciation in the value of assets having a Material
Adverse Effect on Borrower or Company, including the amount or the
estimated amount of any such loss or depreciation or adverse effect.
6.3.8 Notice of Suits, Adverse Events. Within five (5) Business Days
-------------------------------
after the occurrence of any such event, written notice of: (a) any
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citation, summons, subpoena, order to show cause or other order naming
Borrower or Company a party to any proceeding before any Governmental Body
which may have a Material Adverse Effect on Borrower or Company, and
including with such notice a copy of such citation, summons, subpoena,
order to show cause or other order; (b) any lapse or other termination of
any license, permit, franchise, agreement or other authorization issued to
Borrower or Company by any Governmental Body or any other Person or the
refusal to renew or extend any such license, permit, franchise, agreement
or other authorization; and (c) any dispute between Borrower or Company and
any Governmental Body or any other Person; provided that notice shall not
be required pursuant to clauses (b) or (c) above unless the lapse,
termination, refusal or dispute referred to in such clauses may have a
Material Adverse Effect on Borrower or Company.
6.3.9 Reports to Security Holders. Creditors and Governmental Bodies.
--------------------------------------------------------------
(a) Within five (5) Business Days after becoming available,
copies of (i) all financial statements, reports, notices and proxy
statements sent or made available generally by Borrower or Company to
its security holders, (ii) all regular and periodic reports and all
registration statements and prospectuses filed by Borrower with any
securities exchange or with the Securities and Exchange Commission or
any Governmental Body succeeding to any of its functions, and (iii)
all statements generally made available by Borrower, Company or others
concerning material developments in the Business of Borrower or
Company.
(b) Within five (5) Business Days after becoming available,
copies of any periodic or special reports filed by Borrower or Company
with any Governmental Body or Person, if such reports indicate any
material change in the financial condition, operations, Business,
profits, prospects or Property of such Person, or if copies thereof
are requested by Lender, and copies of any material notices and other
communications from any Governmental Body or Person which specifically
relate to Borrower or Company.
6.3.10 ERISA Notices and Requests.
--------------------------
(a) Within five (5) Business Days after the occurrence of any
such event, written notice if (i) Borrower or Company shall fail to
make any payments when due and payable under any Plan, or (ii)
Borrower or Company shall receive notice from the Internal Revenue
Service or the Department of Labor that it shall have failed to meet
the minimum funding requirements of any Plan, and include therewith a
copy of such notice, or (iii) Borrower or Company gives or is required
to give notice to the PBGC of any "reportable event" (as defined in
Title IV of ERISA) in respect of any Plan which might constitute
grounds for a termination of such Plan under Title IV of ERISA, or
knows that the plan administrator of any Plan has given or is required
to give notice of any such reportable event, or (iv) a
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notice of intent to terminate any Plan is filed with the PBGC, or (v)
proceedings are instituted by the PBGC under Section 4042 of ERISA to
terminate, or to appoint a trustee to administer, any Plan of Borrower
or Company, or (vi) any prohibited transaction occurs involving the
assets of any Plan, or (vii) Borrower or Company or any of its ERISA
Affiliates fails to make a required installment or other payment to
any Plan if such failure would result in the imposition of a Lien upon
the Property of Borrower or Company pursuant to Section 412(n) of the
IRC.
(b) Copies of any request for a waiver of the funding standards
or any extension of the amortization periods required by Sections 303
and 304 of ERISA or Section 412 of the IRC within five (5) Business
Days after any such request is submitted to the Department of Labor or
the Internal Revenue Service, as the case may be.
6.3.11 Shareholder Lists. Simultaneously with the delivery of the
-----------------
certified statement required by subsection 6.3.2, a complete listing of all
holders of record of each class of equity security of Borrower or Company
and of warrants and/or options to acquire such equity securities, and (to
the best of Borrower's knowledge) all beneficial holders of such equity
securities, warrants and options, together with the exercise price
applicable to any warrants and options.
6.3.12 Deposit Accounts. Simultaneously with the delivery of the
----------------
certified statement required by Section 6.3.2 and at any other time upon
Lender's request, a list of all deposit accounts of Borrower or Company,
containing the name and address of the depository financial institution
with respect to such deposit accounts. Borrower shall also promptly (but in
no event more than ten (10) days after opening or closing a deposit
account) notify Lender of each deposit account of Borrower or Company which
from time to time is opened or closed.
6.3.13 Annual Budget. Not later than the end of each of its Fiscal
-------------
Years, Borrower will deliver and cause Company to deliver to Lender their
respective operating budgets for the succeeding Fiscal Year.
6.3.14 Other Information.
-----------------
(a) Within five (5) Business Days after the occurrence of any
such event, notice: (i) if any officer of Company or any employee will
no longer be actively involved in the Business of Company or if the
functions of such officer or employee will be performed by a different
person, (ii) change of location of the Collateral, (iii) any change in
the name of Borrower or Company or the name(s) under which it is
conducting business, or (iv) any sale or purchase of Property by
Borrower or Company outside the ordinary course of business; and
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(b) Within five (5) Business Days after Lender's request
therefor, and so long as reasonably available, such other information
concerning the financial condition, operations, Business, prospects or
Property of Borrower or Company as Lender may from time to time
reasonably request.
6.4 Taxes; Tax Returns.
------------------
6.4.1 Payment. Borrower shall pay and shall cause Company to pay in
-------
full, before delinquency or before the expiration of any extension period,
all assessments and taxes, whether real, personal or otherwise, due or
payable by, or imposed, levied or assessed against Borrower, Company or any
of their respective Property; provided; however, that Borrower shall not be
-------- -------
required to pay or discharge any such assessment or tax if the payment
thereof is being contested pursuant to a Permitted Protest.
6.4.2 Tax Returns. Borrower shall furnish and shall cause Company to
-----------
furnish to Lender true, complete and correct copies of their respective
income tax returns filed with the Internal Revenue Service annually, within
thirty (30) days following such filing (but no later than August 30). If
Borrower or Company files its tax returns for any year after March 15, it
shall provide Lender with a copy of its request for or extension of the
time in which to file federal income tax returns.
6.5 Reports to Governmental Bodies and Other Persons. Borrower shall
------------------------------------------------
timely file and shall cause Company to file all reports, applications,
documents, instruments and information required to be filed pursuant to all
rules, regulations or requests of any Governmental Body or other Person having
jurisdiction over such Persons, including, without limitation, such of the Term
Loan Documents as are required to be filed with any such Governmental Body or
other Person pursuant to applicable rules and regulations promulgated by such
Governmental Body or other Person.
6.6 Maintenance of Licenses and Other Operating Agreements. Borrower shall
------------------------------------------------------
maintain and shall cause Company to maintain in force at all times, and apply in
a timely manner for renewal of, all their respective licenses, approvals,
permits, franchises, patents, copyrights, trademarks, service marks, trade
names, and other Operating Agreements necessary for the continuation of the
operation of their respective Businesses, unless the loss thereof would not have
a Material Adverse Effect on such Person. Borrower shall give and shall cause
Company to give Lender at least thirty (30) days prior written notice of the
proposed material amendment of any of their respective Operating Agreements,
including, without limitation, any amendment thereto, which would result in the
loss of any material benefit or the incurrence of any material detriment by
Borrower or Company under the terms of such agreement, substantially impair the
value of the Collateral or otherwise have a Material Adverse Effect on Borrower
or Company.
6.7 Insurance.
---------
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6.7.1 General. Borrower shall obtain, maintain and deliver, and
-------
shall cause Company to obtain, maintain and deliver, to Lender at all
times and in full force and effect such casualty, hazard, business
interruption, public liability, product liability, and other insurance as
is required by Lender, written by insurers and in amounts and forms
satisfactory to Lender. Except in the case of any minor casualty which in
no event involves a loss of more than Ten Thousand Dollars ($10,000) and
subject to the rights of holders of Permitted Prior Liens, in case of loss,
Lender shall be entitled to receive all insurance proceeds from policies
required to be maintained hereunder. Lender may apply such proceeds to the
payment of the Obligations (including any unpaid Fees) in such order and
manner as it may elect or, at its option, apply such proceeds to
restoration and repair of the of the damaged Property upon such conditions
as Lender may impose. Application of insurance proceeds by Lender,
regardless of the manner or order, shall not waive full and timely
performance of any of Obligations, cure or waive any default by Borrower in
the full and timely performance of the Obligations, or invalidate or affect
any act hereunder because of such default. Lender shall not be obligated to
see to the proper application of any insurance proceeds paid over to
Borrower or Company. Borrower shall promptly notify Lender of substantial
loss or damage to the Property and make proof of loss if loss or damage
occurs that is covered by insurance. Borrower hereby appoints Lender as its
attorney-in-fact to do any of the following at Lender's option: make proof
of loss, adjust or compromise in the name of Borrower any loss covered by
an insurance policy on Borrower's Collateral and collect and receipt for
the proceeds from such policies. If Lender acquires title to Borrower's
Collateral or Borrower's Collateral is sold pursuant to subsection 8.3.3.,
then Lender or the purchaser at foreclosure, as the case may be, shall
become the owner of the insurance policies required pursuant to this
subsection, the unearned premiums on the policies and insurance proceeds
relating to prior damage to the Collateral.
6.7.2 Life Insurance. Prior to February 28, 1995, Borrower shall
--------------
assign the Life Insurance to Lender pursuant to an assignment form
("Assignment of Life Insurance"), in form and substance substantially
indentical to Exhibit 6.7.2, subject to such reasonable changes thereto as
Lender may make to such form for its use after the date of this Term Loan
Agreement. Borrower hereby grants to Lender a Security Interest in the Life
Insurance, all replacements and proceeds thereof, any supplementary
contract issued in connection therewith and the proceeds thereof (including
without limitation, the beneficiary's interest therein, collectively
referred to as the "Life Insurance Collateral") to secure payment and
performance of all Obligations. The insurer under the Life Insurance and
the terms and conditions of the Life Insurance are subject to the approval
of Lender. Replacement policies as to each policy compromising the Life
Insurance shall be delivered to Lender not later than thirty (30) days
before the expiration date of each insurance policy as evidence of the
renewal of such Life Insurance. The Life Insurance shall require the
insurer to provide Lender with thirty (30) days advance written notice of
any cancellation and/or any material change in coverage.
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<PAGE>
On or before delivery of the Assignment of Life Insurance, Borrower shall
execute in favor of Lender a UCC-1 financing statement reflecting Lender's
Security Interest in the Life Insurance. Notwithstanding anything herein to
the contrary, upon the maturity of the Life Insurance or upon the death of
the Insured Persons, the proceeds of the Life Insurance shall be paid
directly to Lender, shall be treated as a prepayment and shall be applied
against the Obligations (including any unpaid Fees) in such order and
manner as Lender may determine. No prepayment premium shall be due and
owing in connection with such prepayment. To the extent that the proceeds
of the Life Insurance exceed the amount of the Obligations, any such excess
shall be promptly paid by Lender directly to Borrower. Upon the payment in
full and performance of all of the Obligations, Lender shall reassign and
deliver the Life Insurance Collateral to Borrower. In the event of the
termination or other cessation of employment by any Insured Person with
Borrower not resulting from the death of any Insured Person, Lender shall
reassign and deliver the Insurance Collateral to Borrower upon delivery to
Lender of replacement Insurance Collateral, in form and substance
satisfactory to Lender, insuring such of Borrower's then existing officers
and other key employees as Lender shall determine, provided, however, that
in no event shall the aggregate of insurance required to be provided by
Borrower exceed the aggregate amount of insurance required to be maintained
hereunder with respect to the Insured Persons.
6.8 Environmental Matters. Borrower shall provide to Lender and shall
---------------------
cause Company to provide to Lender, within three (3) Business Days after receipt
thereof, a copy of (a) any notice of any violation or administrative or judicial
complaint or order having been filed or about to be filed against Borrower or
Company, their respective Real Property or Leasehold Property or any other real
property used by Borrower or Company alleging violations of any law, ordinance
and/or regulation requiring Borrower or Company to take any action in connection
with the release, transportation and/or clean-up of any Hazardous Materials, or
(b) any notice from any Governmental Body or any other Person alleging that
Borrower or Company is or may be liable for costs associated with a response or
clean-up of any Hazardous Materials or any damages resulting from a release or
transportation of Hazardous Materials. Borrower shall comply, and shall cause
Company to comply, at their sole cost and expense, in all material respects (or
comply in all respects if the failure to do so could have a Material Adverse
Effect on Borrower or Company) with the foregoing notices or diligently contest
in good faith by appropriate proceedings any demands set forth in such notices
and, in all events, shall at all times comply in all material respects with, and
be responsible for, all applicable Environmental Laws.
6.9 Leases.
------
6.9.1 Future Leases. Concurrently with the execution by Borrower or
-------------
Company as lessee under any Lease pertaining to real property, shall deliver to
Lender or cause Company to deliver to Lender: (a) notice of the execution of
such Lease, together with a conformed copy thereof, (b) at the option of Lender,
either a (i) collateral assignment of such Operating Lease in favor of
Lender or (ii) leasehold mortgage or deed of trust with respect to the lessee's
interest
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<PAGE>
in the Leasehold Property which is the subject of such Lease; (c) an estoppel
letter, consent and lien waiver from the lessor under such Lease and (d) if
Lender has elected to obtain a leasehold mortgage or deed of trust on such
Property, a lender's policy of title insurance, which policy shall be in an
amount and contain such endorsements as shall be required by Lender, all of
which items described in clauses (b)-(d) shall be in form and content
satisfactory to Lender.
6.9.2 Existing Leases. On or before April 1, 1995, unless Borrower has
---------------
replaced such Lease with another Lease as to which Borrower has satisfied the
requirements of Section 6.9.1, Borrower shall deliver or cause Company to
deliver to Lender (a) a collateral assignment of that Existing Lease covering
Company's chief executive office in Dallas, Texas, and (b) an estoppel letter,
consent and lien waiver from the lessor under such Lease.
6.10 Future Acquisitions of Real Property. Borrower, concurrently with the
------------------------------------
(a) execution by Borrower or Company of any contract relating to the purchase by
Borrower or Company of Real Property, shall deliver or cause Company to deliver
to Lender notice of the execution of such contract, together with a conformed
copy of such contract and (b) closing of the purchase of such real property,
deliver to Lender or cause Company to deliver to Lender, in form and content
satisfactory to Lender (i) a first mortgage or deed of trust in favor of Lender
on such Real Property, (ii) a lender's policy of title insurance on such Real
Property, which policy of title insurance shall be in an amount and contain such
endorsements as may be required by Lender, and (iii) such other documents and
assurances with respect to such Real Property as Lender may require.
6.11 Compliance with Laws. Borrower shall comply and shall cause Company
--------------------
to comply with all laws, regulations, judgments, orders, injunctions, decrees
and decisions of all Governmental Bodies applicable to such Persons and their
respective operations.
6.12 Maintenance of Properties. Borrower shall maintain and shall cause
-------------------------
Company to maintain in good working order and condition, subject to normal wear
and tear from ordinary usage, all of Property.
6.13 Payment of Indebtedness. Borrower shall promptly pay and shall cause
-----------------------
Company to pay when due all their respective Indebtedness of Borrower.
6.14 Infringement Actions. Borrower shall maintain, defend and prosecute,
--------------------
and shall cause Company to maintain, defend and prosecute fully all infringement
actions with respect to their respective patents, copyrights, trademarks,
service marks, trade names, and other intellectual property.
6.15 Senior Debt Service Coverage Covenants. Borrower and Company shall
--------------------------------------
maintain after the Closing Date an Operating Cash Flow on a combined basis of at
least One Hundred Fifty percent (150%) of the Senior Contractual Debt Service.
Compliance with this covenant will be measured quarterly throughout the term of
the Term Loan on a trailing twelve (12) month basis, except for the first three
(3) calendar quarters during the term of the Term Loan, during which the
covenant shall be measured with reference back to the Closing Date.
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<PAGE>
6.16 Total Debt Service Coverage Covenants. Borrower and Company shall
-------------------------------------
maintain after the Closing Date an Operating Cash Flow on a combined basis of at
least (a) One Hundred Five percent (105%) of the Total Contractual Debt Service
through December 31, 1995, and (b) thereafter One Hundred Ten percent (110%).
Compliance with this covenant will be measured quarterly throughout the term of
the Revolver Loan on a trailing twelve (12) month basis, except for the first
three (3) calendar quarters during the term of the Term Loan, during which the
covenant shall be measured with reference back to the Closing Date.
6.17 Merger: Delivery of Assumption Agreement. Borrower shall cause the
----------------------------------------
merger to be consummated not later than the next Business Day after Closing and
to cause Company to execute the Assumption Agreement immediately upon
consummation of the Merger.
6.18 Source Code On or before March 1, 1995, Borrower shall cause Company
-----------
to enter into an escrow agreement among Company, Lender and an escrow agent
satisfactory to Lender pursuant to which the source code(s) described in
SCHEDULE 6.18 shall be escrowed in a manner satisfactory to Lender. Borrower
shall cause Company to escrow modifications to the source code(s) from time to
time not to exceed one time per year at Lender's request.
6.19 Minimum Current Ratio: Borrower shall cause Company to maintain a
---------------------
current ratio of at least 1.15 to 1.0, tested quarterly. As used herein,
"current ratio" means at any time the ratio of current assets, as determined in
accordance with GAAP, to current liabilities as determined in accordance with
GAAP but excluding the Revolver Principal Balance.
ARTICLE 7
---------
NEGATIVE COVENANTS
------------------
7.1 Borrower Covenants. Until all of the Obligations are paid and
------------------
performed in full, Borrower shall not do, and shall not permit or suffer Company
to do, any of the following:
7.1.1 Indebtedness. Create, incur, assume or suffer to exist any
------------
liability for Indebtedness, except (a) the Obligations, (b) the
Subordinated Indebtedness, and (c) Excluded Trade Payables of such Person.
7.1.2 Liens. Create, incur, assume or suffer to exist any Lien upon
-----
any of the Property of such Person, whether now owned or hereafter
acquired, except Permitted Liens.
7.1.3 Consolidation, Merger and Acquisition. Subject to the
-------------------------------------
provisions of Section 6.17, consolidate with or merge with or into any
Person, or acquire directly or indirectly all or substantially all of the
capital stock or Property of any Person.
7.1.4 Limitation on Other Liabilities. Assume, guarantee, endorse,
-------------------------------
contingently agree to purchase, become liable in respect of any letter of
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credit, or otherwise become liable upon the obligation of any Person;
provided, however, the foregoing shall not prohibit the negotiation of
-------- -------
Negotiable Collateral of Borrower or Company for deposit or collection or
similar transactions in the ordinary course of business.
7.1.5 Dividends and Purchase of Stock; Distributions. Declare or pay
----------------------------------------------
any dividends or apply any of the Property of such Person to the purchase,
redemption or other retirement of, or set apart any sum for the payment of
any dividends on, or make any other distribution by reduction of capital or
otherwise in respect of, any shares of Borrower's Stock.
7.1.6 Investments. Purchase or otherwise acquire, hold or invest in
-----------
the capital stock of, or any other interest in, any arrangement for the
purpose of providing funds or credit to, or make any other Investment,
whether by way of capital contribution or otherwise, in or with any Person,
including, without limitation, any of the Affiliates, except for the
following Investments having a maturity not exceeding ninety (90) days: (a)
Investments in direct obligations of, or instruments unconditionally
guaranteed by, the United States of America or in certificates of deposit
issued by a Qualified Depository; (b) Investments in commercial or finance
paper which is rated either "Aaa" or "AAA" -or better by Moody's Investors
Services, Inc., or Standard & Poor's Corporation, respectively, or at the
equivalent rate by any of their respective successors; or (c) any interests
in any money market account maintained with a Qualified Depository, the
Investments of which are restricted to the types specified in clause (a)
above.
7.1.7 Capital Structure Changes. Issue or sell any additional shares
-------------------------
of the capital stock of such Person or any securities convertible into or
exercisable for any shares of such capital stock other than shares issued
pursuant to an employee incentive stock option plan approved by such
Person's board of directors and consented to by Lender, such consent not to
be unreasonably withheld or otherwise allow for the change in control of
such Person.
7.1.8 Corporate Offices; Name: Records. Transfer the chief executive
--------------------------------
office or principal place of business, establish new offices or locations
or change or relocate existing offices or locations of such Person, change
corporate name of such Person, add any new fictitious business name or
maintain records (including computer printouts and programs) with respect
to accounts or keep inventory or equipment at any locations other than
those at which the same currently are kept or maintained and transfers of
Inventory in the ordinary course of business, except with the prior written
consent of Lender and after the delivery to and filing by Lender of
financing statements in form satisfactory to Lender; provided that in
connection with any addition to or change in the location of any office or
place of business of Borrower or Company, Borrower shall give or cause
Company to give at least ten (10) days prior written notice of such event,
together with the address of the new location.
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7.1.9 Management. Enter into any management contract permitting a
----------
third party to manage any portion of its Business.
7.1.10 Sales Practices. Sell goods on the basis of any of the
---------------
following: a sale on extended terms, "dating," a bill-and-hold sale, a
consignment sale, a sale and return, a "guaranteed sale" (i.e., one in
----
which such Person guarantees resale by vendee or agrees to accept return of
such goods), or any other sale pursuant to which such Person agrees to
accept the return of goods, or to exchange the same upon the happening of
any event other than failure to conform with quality specifications except
where Lender first has been advised of such proposed transaction and
consented thereto in writing.
7.1.11 Fundamental Business Changes. Engage in any business other
----------------------------
than the Business of such Person or a business substantially related to
such Business or materially change the nature of such Business.
7.1.12 Fiscal Year. Change its fiscal year.
-----------
7.1.13 Sale or Transfer of Assets. Sell, lease, assign, transfer or
--------------------------
otherwise dispose of its Property except for (a) sales or leases of
Inventory of such Person in the ordinary course of business and (b)
disposition of (i) Property which is not material to or necessary for the
continued operation of the Business of such Person, provided, however, that
-------- -------
the proceeds from such disposition shall remain subject to the Security
Interests, or (ii) unusable items or equipment which promptly are replaced
with new items or equipment of like function and comparable value to the
unusable items or equipment when the same were new; provided, however, that
-------- -------
such replacement items and equipment shall become subject to the Security
Interests.
7.1.14 Payments on Subordinated Indebtedness. Make any payment on the
-------------------------------------
Subordinated Indebtedness, except as provided in the Subordination
Agreement.
7.1.15 Amendment of Charter and By-laws. Amend, modify or waive any
--------------------------------
term or provision of its corporate charter or by-laws, unless required by
law.
7.1.16 Amendment of the Acquisition Documents or Subordinated
------------------------------------------------------
Indebtedness Documents. Amend, modify or waive any term or provision of any
----------------------
of the Acquisition Documents or the Subordinated Indebtedness Documents.
7.1.17 Transactions with Affiliates. Sell, lease, assign, transfer or
----------------------------
otherwise dispose of any Property to any Affiliate of such Person, or lease
Property, render or receive services or purchase assets from any such
Affiliate, unless such transaction is on terms and at rates no more
favorable than those that would have been provided in an arms-length
transaction between such Person and an unrelated third party
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7.1.18 Bank Deposits. Change the banks or savings institutions when
-------------
such Person maintains deposit account without at least ten (10) days prior
notification to Lender.
7.1.19 Compliance with ERISA. (a) Terminate, or permit any member of a
---------------------
Controlled Group of which Borrower or Company is a part to terminate, or take
any other action with respect to, any Plan (including, without limitation, a
substantial cessation of operations within the meaning of Section 4068(f) of
ERISA) which would result in any material liability of such Person or any member
of a Controlled Group of which such Person is a part, to the PBGC or to any
Plan, or (b) permit the occurrence of any "reportable event" (as defined in
Title IV of ERISA), or any other event or condition, which presents a risk of
such a termination by the PBGC of any Plan, or (c) permit the present value of
all benefit liabilities under all Plans to exceed the current value of the
assets of such Plans allocable to such benefit liabilities, or (d) permit any
unfunded benefit liabilities within the meaning of Section 4001(a)(18) of ERISA
allocable to such Person or its ERISA Affiliates.
7.1.20 Salaries; Bonuses. During any of its Fiscal Years, pay annual
-----------------
compensation including, without limitation, salaries, bonuses (except as
provided below) and consulting fees, to Borrower's Stockholders in excess of the
sum of Three Hundred Thousand Dollars ($300,000) on a combined basis per each of
its Fiscal Years; provided that no compensation shall be paid to a Borrower's
Stockholder who ceases to be actively engaged in the Business of Company and
compensation shall be paid only to the extent reasonable; and provided further
the limitation on total compensation to Borrower's Stockholders shall not apply
to incentive compensation paid to Borrower's Stockholders actively engaged in
the Business of Company pursuant to a plan which has been adopted by the board
of directors of Company and has been approved by Lender, such approval not to be
unreasonably withheld.
7.1.21 Proxy Recognition. Recognize or give effect to any proxy given in
-----------------
violation of Borrower's Stockholders Pledge Agreement.
7.1.22 Capital Expenditures. Without Lender's prior written consent,
--------------------
make Capital Expenditures on a combined basis in any twelve (12) month period in
excess of Three Hundred Thousand Dollars ($300,000).
7.1.23 Limitation on Rental Payments. Become obligated, as lessee, under
-----------------------------
any Lease if, at the time of entering into such Lease and after giving effect
thereto, the aggregate rentals payable by Borrower and Company in any one fiscal
year under all Leases would exceed $300,000 plus 5% of Net Revenues for such
fiscal year; and for such purpose, "Net revenues" shall mean the net revenue of
Company and Borrower on a combined basis before deducting costs and expenses.
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ARTICLE 8
---------
DEFAULT AND REMEDIES
--------------------
8.1 Events of Default. The occurrence of any of the following shall
-----------------
constitute an Event of Default under the Term Loan Documents:
8.1.1 Default in Payment. If Lender shall fail to receive when due
------------------
and payable, (a) any amount payable under the Term Loan Note or (b)
any other payment due under this Term Loan Agreement or any of the
other Term Loan Documents.
8.1.2 Breach of Covenants.
-------------------
(a) If Borrower shall fail to observe or perform any covenant
or agreement made by Borrower contained in Section 6.1, 6.2,
6.4, 6.5, 6.6, 6.7.1, 6.7.2, 6.8, 6.9, 6.10, 6.15, 6.16, 6.17,
6.18, 6.19, or 7.1; or
(b) If Borrower shall fail to observe or perform any covenant
or agreement (other than those referred to elsewhere in this
Section 8.1) made by Borrower in any of the Term Loan Documents
to which Borrower is a party, and such failure shall continue
unremedied (i) for a period of five (5) Business Days after
notice of such failure to Borrower in the case of any failure
which can be cured by the payment of money alone, or (ii) for a
period of twenty (20) Business Days after notice to Borrower in
the case of any other default or violation.
8.1.3 Breach of Warranty. If any representation or warranty which is
------------------
made by a Person other than Lender and is contained in the Term Loan
Documents or in any certificate furnished to Lender under the Term
Loan Documents by or on behalf of Borrower proves to be, in any
material adverse respect, false or misleading as of the date deemed
made.
8.1.4 Other Term Loan Documents. If an "Event of Default" occurs, as
-------------------------
the term may be defined herein or in the other Term Loan Documents.
8.1.5 Default Under Any Indebtedness. If(a) Borrower at any time
------------------------------
shall be in default (as principal or guarantor or other surety) in the
payment of any principal of or premium or interest on any Indebtedness
for Borrowed Money (other than Borrower's Obligations) beyond the
greater of (i) fifteen (15) days or (ii) the grace period, if any,
applicable thereto and the aggregate amount of such payments then in
default beyond such grace period shall exceed Twenty Thousand Dollars
($20,000) with respect to Borrower, or (b) any default shall occur in
respect of any issue of Indebtedness for Borrowed Money (other than
Borrower's Obligations) outstanding in a principal amount of at least
Twenty Thousand Dollars ($20,000) with respect to Borrower,or in
respect of any agreement or instrument relating to any such issue or
indebtedness for Borrowed Money,
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and such default shall continue beyond the greater of (x) thirty (30) days or
(y) the grace period, if any, applicable thereto.
8.1.6. Bankruptcy, Etc.
----------------
(a) If Borrower shall (i) generally not be paying its debts as they
become due, (ii) file, or consent, by answer or otherwise, to the filing
against Borrower of a petition for relief or reorganization or arrangement
or any other petition in bankruptcy or insolvency under the laws of any
jurisdiction, (iii) make an assignment for the benefit of creditors, (iv)
consent to the appointment of a custodian, receiver, trustee or other
officer with similar powers for Borrower or any of Borrower's Collateral,
(v) be adjudicated insolvent, or (vi) take corporate action for the
purpose of any of the foregoing.
(b) If a petition for relief or reorganization, arrangement or
liquidation, or any other petition in bankruptcy or insolvency, or the
appointment of a custodian, receiver, trustee or other officer with similar
powers under the laws of any jurisdiction is filed against Borrower or any
of Borrower's Collateral or a custodian, receiver, trustee or other officer
with similar powers is appointed for any of Borrower's Collateral, and such
proceeding is not dismissed and/or appointment vacated within ninety (90)
days thereafter.
8.1.7 Judgements. If there shall exist a final judgement or award against
----------
Borrower which shall have been outstanding for a period of thirty (30) days or
more from the date of the entry thereof and shall not have been discharged in
full or stayed pending appeal provided that the aggregate amount of all such
judgements and awards exceeds Twenty Thousand Dollars ($20,000) for Borrower.
8.1.8 Impairment of Licenses. If (a) any Governmental Body shall (i)
----------------------
revoke, terminate, suspend or adversely modify any license, permit, approvals,
or trademark, service mark or trade name of Borrower, the continuation of which
is material to the continuation of Business, or (ii) commence proceedings to
suspend, revoke, terminate or adversely modify any such license, permit,
approvals, trademark, service mark, or trade name and such proceedings shall not
be dismissed or discharged within sixty (60) days, or (iii) schedule or conduct
a hearing on the renewal of any such license, permit, trademark, service mark or
trade name and the staff of the Governmental Body having jurisdiction over such
hearing issues a report recommending the termination, revocation, suspension or
material or adverse modification of such license, permit, approvals, trademark,
trade name, service mark or service name, (b) there shall exist any violation or
default in the performance of, or (c) an Operating Agreement shall cease to be
in full force and effect unless an event occurring under (a), (b) or (c) does
not have a Material Adverse Effect on Borrower.
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8.1.9 Collateral. If any material portion of the collateral shall be
----------
seized or taken by a Governmental Body, or Borrower shall fail to maintain
the Security Interests and the priority of the Term Loan Documents as
against any Person, or the title and rights of Borrower or any surety to
any material portion of the Collateral shall have become the subject matter
of litigation which might, in the reasonable opinion of Lender, upon final
determination result in impairment or loss of the security provided by the
Term Loan Documents.
8.1.10 Plans. If an event or condition specified in subsection 6.3.13
-----
hereof shall occur or exist with respect to any Plan and, as a result of
such event or condition, together with all other such events or conditions,
Borrower, Company or any of their respective ERISA Affiliates shall incur,
or, in the opinion of Lender, reasonably be likely to incur, a liability to
a Plan or the PBGC (or both) which, in the reasonable judgment of Lender,
would have a Material Adverse Effect on Borrower or Company.
8.1.11 Company or Surety Defaults. If any of the events enumerated in
--------------------------
subsection 8.1.2, 8.1.4, 8.1.5, 8.1.6, 8.1.7, 8.1.8 or 8.1.9 occurs with
respect to Company or any other surety (other than one of Borrower's
Stockholders) or any Collateral granted by such Person for the performance
of the Term Loan Obligations.
8.1.12 Material Adverse Effect. If any act or event has occurred or
-----------------------
circumstance exists which act, event or circumstance is no enumerated in
this Section 8.1 and has a Material Adverse Effect on Borrower or Company.
8.1.13 Revolver Loan. If any "Event of Default" shall occur, as that
-------------
term is defined under any of the Revolver Loan Documents.
8.1.14 Change of Control. If less than fifty-one percent (51%) of the
-----------------
Borrower's Stock ceases to be owned by one or more of the Borrower's
Stockholders.
8.2 Acceleration of Borrower's Obligations.
--------------------------------------
8.2.1 Upon the occurrence of any Event of Default described in clauses
(ii), (iii), (iv) and (v) of subsection 8.1.5(a) or in 8.1.5(b), all of the
Term Loan Obligations at that time outstanding automatically shall mature
and become due and payable in full.
8.2.2 Upon the occurrence of any other Event of Default not described
in subsection 8.2.1, Lender, at any time (unless such Event of Default
shall have been waived in writing or remedied), at its option, without
further notice or demand, may declare all of the Term Loan Obligations due
and payable.
8.2.3 If the Term Obligations are accelerated pursuant to either
subsection 8.2.1 or 8.2.2, the Term Loan Obligation immediately shall
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mature and become due and payable, all without presentment, demand, protest
or notice, all of which hereby are waived.
8.3 Remedies on Default. In addition to acceleration under paragraph
-------------------
8.2, upon the occurrence of an Event of Default, Lender, at its option, may:
8.3.1 Enforcement of Security Interests. Enforce its rights and
---------------------------------
remedies under the Term Loan Documents in accordance with their respective
terms.
8.3.2 Receiver. Have a receiver appointed for Borrower or its
--------
Property.
8.3.3 Possession of Collateral. Without further notice or demand and
------------------------
without legal process, take possession of the Collateral wherever found
and, for this purpose, enter upon any property occupied by or in the
control of Borrower; and Borrower, upon demand by Lender, shall at its sole
cost and expense assemble or cause the Collateral to be assembled and
deliver or cause the Collateral to be delivered to Lender or to a place
designated by Lender that is reasonably convenient to Borrower and Lender.
8.3.4 Sale of Collateral. After notice to Borrower, sell all or any
------------------
portion of the Collateral at public or private sale either with or without
having such Collateral at the place of sale.
8.3.5 Other Remedies. Enforce any of the other rights or remedies
--------------
accorded to Lender at equity or law, by virtue of statute (including,
without limitation, the UCC) or otherwise.
8.4 No Obligation to Preserve. Borrower agrees that Lender has no
-------------------------
obligation to preserve any Collateral for the benefit of any Person.
8.5 Sale. Any notice of sale or other disposition of the Collateral given
----
not less than ten (10) Business Days prior to such proposed action in connection
with the exerciser of Lender's rights and remedies shall constitute commercially
reasonable and fair notice of such action. For such purpose, notice of public
sale describing the Collateral to be sold in general non-specific terms and
published once no later than ten (10) business days prior to the public sale
shall be deemed commercially reasonable and fair notice of such public sale. No
notice of any public or private sale need be given if the Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market. Borrower expressly agrees that, with respect to any
disposition of accounts, instruments and general intangibles, it shall be
commercially reasonable for Lender to direct any prospective purchaser thereof
to ascertain directly from Borrower any and all information concerning such
Collateral, including, but not limited to, the terms of payment, aging and
delinquency, if any, the financial condition of any account debtor or other
obligor thereon or guarantor thereof, and any collateral therefor. Lender may
postpone or adjourn any such sale from time to time by announcement at the time
and place or sale stated on the notice of sale or by announcement of any
adjourned sale, without being required to give a further notice of sale. Lender,
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so far as may be lawful, may purchase all or any part of the Collateral offered
at any sale made in the enforcement of Lender's rights hereunder. Any such
sale may be for cash or, unless prohibited by applicable law, upon such credit
or installment as Lender may determine. The net proceeds of such sale shall be
credited to the Obligations only when such proceeds are actually received by
Lender in good current funds.
8.6 Application of Funds. Any funds received by Lender pursuant to the
--------------------
exercise of any rights accorded to Lender pursuant to, or by the operation of
any of the terms of, any of the Term Loan Documents, including, without
limitation, insurance proceeds, condemnation proceeds or proceeds from the sale
of Collateral, shall be applied by Lender in the following order of priority:
8.6.1 Expenses. First, to the payment of (a) all fees and expenses,
--------
including, without limitation, court costs, fees of appraisers, title
charges, costs of maintaining and preserving the Collateral, costs of sale,
and all other costs incurred by Lender in exercising any rights accorded to
Lender pursuant to the Credit Facilities Documents or by applicable law,
including, without limitation, attorneys' fees, and (b) all Liens superior
to the Liens of Lender except such superior Liens subject to which any
sale of the Collateral may have been made;
8.6.2 Obligations. Next, to the payment of the remaining portion of
-----------
Obligations, including, without limitation, the unpaid balance of the Fees,
in such order and manner as Lender may determine; and
8.6.3 Surplus. Any surplus, to the Person or Persons entitled
-------
thereto.
Borrower shall be liable for any deficiency remaining after application of such
proceeds of the Collateral to the Obligations.
8.7 Lender's Right to Perform. Lender may, at its option, and without
-------------------------
any obligation to do so, pay, perform and discharge any and all obligations
(including, without limitation, the Borrower's Obligations under Section 6.7.1)
agreed to be paid or performed in the Term Loan Documents by Borrower or any
surety for the performance of the Borrower's Obligations if such Person has
failed to do so and either (a) an Event of Default exists or (b) Lender in its
judgment deems such action necessary to protect any of the Collateral or its
value. For such purposes, Lender may use the proceeds of the Collateral. All
amounts expended by Lender is so doing or in exercising any of its remedies
following an Event of Default shall become part of the Term Loan Obligations,
shall be immediately due and payable by Borrower to Lender upon demand, and
shall bear interest at the Default Rate from the dates of such expenditure until
paid.
ARTICLE 9
---------
EXPENSES AND INDEMNITY
----------------------
9.1 Attorneys' Fees and Other Fees and Expenses. Whether or not any of
-------------------------------------------
the transactions contemplated by this Term Loan Agreement shall be consummated,
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Borrower agrees to pay to Lender on demand all reasonable expenses incurred by
Lender in connection with the transactions contemplated hereby (including,
without limitation, any appraisal fees, title insurance premiums and recording
charges) and in connection with any amendments, modifications or waivers
(whether or not the same become effective) under or in respect of any of the
Term Loan Documents, including, without limitation:
9.1.1 Fees and Expenses for Preparation of Term Loan Documents. All
--------------------------------------------------------
expenses, disbursements and attorneys' fees (including, without limitation,
charges for required lien searches, reproduction of documents, long
distance telephone calls and overnight express carriers) of special counsel
and other counsel retained by Lender in connection with the preparation and
negotiation of any of the Term Loan Documents or any amendments,
modifications or waivers hereto or thereto (whether or not the same become
effective).
9.1.2 Fees and Expenses in Enforcement of Rights or Defense of Term
-------------------------------------------------------------
Loan Documents. Any expenses or other costs, including attorneys' fees and
--------------
expert witness fees, incurred by Lender in connection with the enforcement
or collection against Borrower of any provision of any of the Term Loan
Documents, and in connection with or arising out of any litigation,
investigation or proceeding instituted by any Governmental Body or any
other Person with respect to any of the Term Loan Documents, whether or not
suit is instituted, including, without limitation, such costs or expenses
arising from the enforcement or collection against any Obligor of any
provision of any of the Term Loan Documents in any state or federal
bankruptcy or reorganization proceeding.
9.2 Indemnity. Borrower agrees to indemnify and save Lender harmless
---------
to and from the following:
9.2.1 Brokerage Fees. The fees, if any, of brokers and finders.
--------------
9.2.2 Securities Violations, Matters Relating to Bankruptcy. Any loss,
-----------------------------------------------------
cost, liability, damage or expense (including attorneys' fees) incurred by
Lender in investigating, preparing for, defending against, or providing
evidence, producing documents or taking other action in respect of any
commenced or threatened litigation, administrative proceeding, suit
instituted by any creditors of Borrower or investigation under any federal
securities law, the Bankruptcy Code, any relevant state corporate statute
or any other securities law, bankruptcy law or law affecting creditors
generally of any jurisdiction, or any regulation pertaining to any of the
foregoing, or at common law or otherwise, relating, directly or indirectly,
to the transactions contemplated by the Term Loan Documents, except that
nothing herein shall require Borrower to indemnify and save Lender harmless
from liability for losses, costs, damages or expenses, the sole and
proximate cause of which is (a) Lender's own gross negligence or willful
misconduct or (b) Lender's violation of its corporate charter or by-laws or
of laws or regulations applicable to Lender.
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9.2.3 Operation of Collateral; Joint Venturers. Any loss, cost,
----------------------------------------
liability, damage or expense (including attorneys' fees) incurred in
connection with the ownership, operation or maintenance of the Collateral,
the construction of Lender and Borrower as having the relationship of joint
venturers or partners or the determination that Lender or Borrower has
acted as agent for the other.
9.2.4 Environmental Indemnity. Any and all claims, losses, damages,
-----------------------
response costs, clean-up costs and expenses suffered and/or incurred at any
time by Lender arising out of or in any way relating to the existence at
any time of any Hazardous Materials in, on, under, at, transported to or
from, or used in the construction and/or renovation of, any of the Real
Property or Leasehold Property, and/or the failure of Borrower to perform
its obligations and covenants hereunder with respect to environmental
matters, including, but not limited: (a) claims of any Persons for damages,
penalties, response costs, clean-up costs, injunctive or other relief, (b)
costs of removal and restoration, including fees of attorneys and experts,
and costs of reporting the existence of Hazardous Materials to any
Governmental Body, and (c) any expenses or obligations, including
attorneys' fees and expert witness fees, incurred at, before and after any
trial or other proceeding before any Governmental Body or appeal therefrom
whether or not taxable as costs, including, without limitation, witness
fees, deposition costs, copying and telephone charges and other expenses,
all of which shall be paid by Borrower to Lender when incurred by Lender.
ARTICLE 10
----------
MISCELLANEOUS
-------------
10.1 Notices. All notices, requests or demands required or permitted to be
-------
given under the Term Loan Documents shall be in writing, and shall be deemed
effective (a) upon hand delivery, if hand delivered; (b) one (1) Business Day
after such are deposited for delivery via Federal Express or other nationally
recognized overnight courier service; or (c) three (3) Business Days after such
are deposited in the United States mails, certified or registered mail, all with
delivery charges and/or postage prepaid, and addressed as shown below, or to
such other address as the party being notified may have requested in writing to
the other party. Written notice may be given by telecopy to the telecopier
number shown below or to such other number as the party being notified may have
requested in writing to the other party, provided that such notice shall not be
deemed effective unless it is confirmed within twenty-four (24) hours by hand
delivery, courier delivery or mailing of a copy of such notice in accordance
with the requirements set forth above.
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<PAGE>
If to Borrower: CPS Acquisition Corp.
c/o CPS Systems, Inc.
3400 Carlisle St., Suite 500
Dallas, Texas 75204
Attn: Paul E. Kana
Telecopy No.: (214) 720-1380
If to Lender: Greyhound Financial Corporation
Dial Corporate Center
1850 North Central Avenue
Phoenix, Arizona 85077-1141
Attn: Vice-President Law
Telecopy No.: (602) 207-5036
Greyhound Financial Corporation
311 So. Wacker, Suite 2725
Chicago, Illinois 60606
Attn: Portfolio Manager
Telecopy No.: (312) 322-7250
10.2 Survival of Term Loan Agreement; Indemnities. All covenants,
--------------------------------------------
agreements, representations and warranties made in the Term Loan Documents and
in the certificates delivered pursuant hereto shall survive the making by Lender
of the Term Loan and the execution and delivery to Lender of the Term Loan Note
and of all other Term Loan Documents and shall continue in full force and effect
so long as any of Obligations remain outstanding, unperformed or unpaid.
Notwithstanding the repayment of all amounts due under the Term Loan Documents,
the cancellation of the Notes and the release and/or cancellation of any and all
of the Term Loan Documents or the foreclosure of any Liens on the Collateral,
the obligations of Borrower to indemnify Lender with respect to the expenses,
damages, losses, costs and liabilities described in Section 9.2 shall survive
until all applicable statute of limitations periods with respect to actions
which may be brought against Lender have run.
10.3 Further Assurance. Borrower shall execute and deliver to Lender,
-----------------
prior to or concurrently with its execution and delivery of this Term Loan
Agreement and at any time thereafter at the request of Lender, all financing
statements, continuation financing statements, fixture filings, security
agreements, chattel mortgages, pledges, assignments, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other documents that Lender
may reasonably request, in form satisfactory to Lender, to perfect and continue
perfected the Security Interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Term Loan Documents.
10.4 Taxes and Fees. Should any tax (other than taxes based upon the net
--------------
income of Lender), recording or filing fees become payable in respect of any of
the Term Loan Documents, or any amendment, modification or supplement thereof,
Borrower agrees to pay the same to Lender on demand, together with any interest
or penalties thereon attributable to any delay by Borrower in meeting Lender's
demand, and agrees to hold Lender harmless with respect thereto.
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10.5 Serverability. In the event that any provision of any Term Loan
-------------
Document is deemed to be invalid by reason of the operation of any law, or by
reason of the interpretation placed thereon by any court or other Governmental
Body, as applicable, such Term Loan Document shall be construed as not
containing such provision and the invalidity of such provision shall not affect
the validity of any other provisions hereof, and any and all other provisions
hereof which otherwise are lawful and valid shall remain in full force and
effect. In lieu of each such unenforceable provision there shall be added
automatically as a part of such Term Loan Document, a provision that is legal,
valid and enforceable and is in similar in terms to such unenforceable
provisions as may be possible.
10.6 Waiver. No delay on the part of Lender in exercising any right,
------
power or privilege hereunder shall operate as a waiver thereof, and no single
or partial exercise of any right, power or privilege hereunder shall preclude
other or further exercise thereof, or be deemed to establish a custom or course
of dealing or performance between the parties hereto, or preclude the exercise
of any other right, power or privilege.
10.7 Modification of Term Loan Documents. No modification or waiver of
-----------------------------------
any provision of any of the Term Loan Documents shall be effective unless the
same shall be in writing and executed by the Person sought to be charged with
the effect thereof, and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given. No notice to or
demand on Borrower in any case shall entitle Borrower to any other or further
notice or demand in the same, similar or other circumstances.
10.8 Captions. The headings in this Term Loan Agreement are for purposes
--------
of reference only and shall not limit or otherwise affect the meaning hereof.
10.9 Successors and Assigns. This Term Loan Agreement shall be binding
----------------------
upon and inure to the benefit of and be enforceable by the respective
successors and assigns of the parties hereto, provided, however, that neither
this Term Loan Agreement nor any rights or obligations hereunder shall be
assignable by Borrower without the prior express written consent of Lender, and
any purported assignment made in contravention hereof shall be void. No standard
of reasonableness shall attach to Lender's discretion in consenting or not
consenting to any assignment.
10.10 Remedies Cumulative. All rights and remedies of Lender pursuant to
-------------------
this Term Loan Agreement, any other Term Loan Documents or otherwise, shall be
cumulative and non-exclusive, and may be exercised singularly or concurrently.
Lender shall not be required to prosecute collection, enforcement or other
remedies against Borrower before proceeding to enforce or resort to any
Collateral.
10.11 Entire Agreement; Conflict. This Term Loan Agreement and the other
--------------------------
Term Loan Documents, all executed prior or pursuant hereto, constitute the
entire agreement between the parties hereto with respect to the transactions
contemplated hereby or thereby and supersede any prior agreements, whether
written or oral, relating to the subject matter hereof. In the event of a
conflict between the terms and conditions set forth in one Term Loan Document
and the terms and conditions set forth in any other Term Loan Document, the
provisions imposing the
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greatest obligation upon Borrower, Company or other sureties for the Term Loan
Obligations and granting the most expansive rights to Lender shall control.
10.12 Participation. Lender shall have the right without the consent of or
-------------
notice to Borrower to grant participating interests in the Term Loan. If
Borrower receives notice from Lender of the grant of a participation interest,
Borrower shall comply with any request set forth in such notice as to the
payment directly to the participant of such participant's proportionate share of
payments due from Borrower with respect to the Term Loan.
10.13 Joint and Several Liability. Any obligations of more than one party
---------------------------
hereunder, including, without limitation, any obligations of Borrower, shall be
joint and several obligations of such parties.
10.14 Choice of Law; Jurisdiction; Venue; Waiver of Jury Trial.
--------------------------------------------------------
10.14.1 THIS TERM LOAN AGREEMENT AND THE OTHER TERM LOAN DOCUMENTS
AND THE RIGHTS, DUTIES AND OBLIGATIONS OF THE PARTIES THERETO SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE
OF ARIZONA AND TO THE EXTENT THEY PREEMPT THE LAWS OF SUCH STATE, THE LAWS
OF THE UNITED STATES.
10.14.2 BORROWER: (A) HEREBY IRREVOCABLY SUBMITS ITSELF TO THE
PROCESS, JURISDICTION AND VENUE OF THE COURTS OF THE STATE OF ARIZONA,
MARICOPA COUNTY, AND TO THE PROCESS, JURISDICTION, AND VENUE OF THE UNITED
STATES DISTRICT COURT FOR THE DISTRICT OF ARIZONA, FOR THE PURPOSES OF
SUIT, ACTION OR OTHER PROCEEDINGS ARISING OUT OF OR RELATING TO THIS TERM
LOAN AGREEMENT OR THE SUBJECT MATTER HEREOF OR, IF LENDER INITIATES SUCH
ACTION, ANY COURT IN WHICH LENDER SHALL INITIATE SUCH ACTION AND THE CHOICE
OF SUCH VENUE SHALL IN ALL INSTANCES BE AT LENDER'S ELECTION; AND (B)
WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, HEREBY WAIVES AND AGREES
NOT TO ASSERT BY WAY OF MOTION, DEFENSE OR OTHERWISE IN ANY SUCH SUIT,
ACTION OR PROCEEDING ANY CLAIM THAT BORROWER IS NOT PERSONALLY SUBJECT TO
THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT SUCH SUIT, ACTION OR
PROCEEDING IS IMPROPER. BORROWER HEREBY WAIVERS THE RIGHT TO COLLATERALLY
ATTACK ANY JUDGMENT OR ACTION IN ANY OTHER FORUM.
10.14.3 LENDER AND BORROWER ACKNOWLEDGE AND AGREE THAT ANY
CONTROVERSY WHICH MAY ARISE UNDER ANY OF THE TERM LOAN DOCUMENTS WOULD BE
BASED UPON DIFFICULT AND COMPLEX ISSUES AND THEREFORE, THE PARTIES AGREE
THAT ANY LAWSUIT ARISING OUT OF ANY SUCH CONTROVERSY SHALL BE TRIED BY A
JUDGE SITTING WITHOUT A JURY, AND BORROWER HEREBY KNOWINGLY AND VOLUNTARILY
WAIVES TRIAL BY JURY IN ANY SUCH PROCEEDING.
10.14.4 ALL OF THE PROVISIONS SET FORTH IN THIS PARAGRAPH ARE A
MATERIAL INDUCEMENT FOR LENDER'S MAKING THE TERM LOAN TO BORROWER.
[Borrower's initials [SIGNATURE ILLEGIBLE]]
-------------------
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10.15 WRITTEN CREDIT AGREEMENT. THIS TERM LOAN AGREEMENT AND THE OTHER TERM
------------------------
LOAN DOCUMENTS HEREIN COLLECTIVELY CONSTITUTE THE WRITTEN CREDIT AGREEMENT WHICH
IS THE COMPLETE AND FINAL EXPRESSION OF THE CREDIT AGREEMENT BETWEEN BORROWER
AND LENDER WITH REGARD TO THE EXTENSION OF CREDIT AND/OR FINANCIAL ACCOMMODATION
REFERRED TO HEREIN AS THE SAME EXISTS TODAY AND SUCH WRITTEN CREDIT AGREEMENT
MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR ORAL OR WRITTEN CREDIT
AGREEMENT OR OF ANY CONTEMPORANEOUS ORAL CREDIT AGREEMENT BETWEEN BORROWER AND
LENDER. BORROWER AGREES THAT ALL NON-STANDARD TERMS OF THE CREDIT AGREEMENT
BETWEEN BORROWER AND LENDER WITH RESPECT TO THE EXTENSION OF CREDIT REFERRED TO
HEREIN AND ALL PRIOR ORAL CREDIT AGREEMENTS AND CONTEMPORANEOUS ORAL AND WRITTEN
CREDIT AGREEMENTS BETWEEN THEM WITH RESPECT TO THE EXTENSION OF CREDIT REFERRED
TO HEREIN ARE SUFFICIENTLY SET FORTH HEREIN AND IN THE OTHER TERM LOAN
DOCUMENTS, WITHOUT EXCEPTION. BY SIGNING AND/OR ACCEPTING THIS TERM LOAN
AGREEMENT, BORROWER AND LENDER AFFIRM THAT NO UNWRITTEN ORAL CREDIT AGREEMENT
BETWEEN BORROWER AND LENDER WITH REGARD TO THE AFORESAID EXTENSION OF CREDIT OR
OTHER FINANCIAL ACCOMMODATION EXISTS.
10.16 TIME OF ESSENCE. TIME IS OF THE ESSENCE FOR THE PERFORMANCE BY
---------------
BORROWER AND THE OTHER OBLIGORS OF THE OBLIGATIONS SET FORTH IN THIS TERM LOAN
AGREEMENT AND THE OTHER TERM LOAN DOCUMENTS.
10.17 COUNTERPARTS. This Term Loan Agreement may be executed by the parties
------------
hereto in several counterparts and each such counterpart shall be deemed to be
an original, but all such counterparts shall together constitute but one and the
same agreement.
10.18 SURETYSHIP RIGHTS AND DEFENSES. To the extent that any of the
------------------------------
Security Documents secures the Obligations of Company, Borrower hereby agrees
that all of its agreements set forth in the Revolver Loan Guaranty with respect
to suretyship rights and defenses by virtue of its status as a guarantor are and
shall be applicable to all suretyship rights and defenses Borrower may have by
virtue of it being a surety in any other capacity for the Obligations of
Company.
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IN WITNESS WHEREOF, this Term Loan Agreement has been executed and
delivered by each of the parties hereto by a duly authorized officer of each
such party on the date first set forth above.
LENDER: GREYHOUND FINANCIAL CORPORATION, a
Delaware corporation
By:/s/Patricia Murray
--------------------------------
Patricia Murray, Vice-President
CPS ACQUISITION CORP., a Georgia
corporation
By:/s/Paul E. Kana
--------------------------------
Paul E.Kana, President
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LIST OF EXHIBITS AND SCHEDULES
------------------------------
Schedule 1.1 (Borrower's Stockholders)
Schedule 1.1 (Borrower's Warrantholders)
Schedule 1.1 (Leases)
Schedule 1.1 (Intellectual Property)
Schedule 1.1 (Existing Operating Agreements)
Schedule 5.3.1 (Liens on Borrower's Stock)
Schedule 5.3.2 (Other Restrictions on Borrower's Stock)
Schedule 5.3.3 (Subsidiaries of Borrower)
Schedule 5.3.4 (Lien's on Company's Stock)
Schedule 5.3.6 (Subsidiaries of Company)
Schedule 5.6.2 (Location of Borrower's Goods and Offices)
Schedule 5.8.1 (Borrower's Financial Statements)
Schedule 5.9 (Litigation)
Schedule 5.19 (Operating Agreements)
Schedule 6.18 (Source Codes)
Exhibit 1.1 (IBM Agreement)
Exhibit 2.3.1 (Uses of Funds)
Exhibit 4.2.5 (Request for Advance, Certification and Disbursement
Instructions)
Exhibit 5.3.1 (Capitalization of Borrower)
Exhibit 5.3.4 (Capitalization of Company)
Exhibit 6.3.3 (Certificate of Chief Financial Officer)
Exhibit 6.7.2 (Assignment of Life Insurance)
-60-
<PAGE>
SCHEDULE 1.1
------------
(BORROWER'S STOCKHOLDERS)
Paul E. Kana, Sidney H. Courdier, Brian R. Wilson, G. Dean Booth, and James K.
Hooford, Jr.
<PAGE>
SCHEDULE 1.1
------------
(BORROWER'S WARRANTHOLDERS)
Hanifen Imhoff Mezzanine Fund, L.P. and Percival Hudgins & Company, Inc.
<PAGE>
SCHEDULE 1.1
------------
(LEASES)
1. Office Lease dated April 30, 1991 between Sovereign Center Company and
Company for lease of office at 9720 Town Park Drive, Suite 115, Houston,
Texas. Now on a month-to-month basis.
2. Lease Agreement dated July 1993 between West Texas Investors #103 and
Company for lease of office at 3311 - 81st Street, Lubbock, Texas. Now on a
month to-month basis.
3. Lease Agreement dated May 1, 1992, between Life and Casualty Insurance
Company and Company for lease of office at 900 Isom, Suite 102, San
Antonio, Texas. Expiration: 12-31-94.
4. Lease Agreement dated February 18, 1990, between Aetna Life Insurance
Company and Company for lease of principal executive offices at 3400
Carlisle, Suite 500, Dallas. Expiration: April 30, 1995.
5. Lease dated October 18, 1990 between Kroger Properties and Company for
office lease at 3840 S. 103, East Avenue, Tulsa, OK. Expiration: November
30, 1994 .
6. Agreement to Lease dated February 18, 1994 between Spectrum Real Estate
Service, Inc. and Company for office lease at 5205 West laurel, Tampa, FL.
Expiration: April 30, 1997.
7. Equipment Lease dated January 28, 1994 between Third Century Leasing and
Company for lease of three Mita copiers. Expiration: January 31, 1997.
8. Pitney Bowes Credit Corporation: Four equipment leases for postage meters
and scales.
<PAGE>
SCHEDULE 1.1
------------
(INTELLECTUAL PROPERTY)
1. Oklahoma trademark "INFOTRIEV".
2. Texas trademark or service mark "INFOTRIEV"
3. U.S. Trademark reg. no. 1288749 for "INFOTRIEV"
4. Copyright protection claimed on all Company Products and materials;
however, no copyrights have been registered.
<PAGE>
SCHEDULE 1.1
(EXISTING OPERATING AGREEMENTS)
CPS BUSINESS SYSTEMS. INC.
OKLAHOMA SHERIFF SYSTEM
-----------------------
<TABLE>
<CAPTION>
ITEM # DESCRIPTION ILF MLF MCA MSM IC ATH
- ------ ----------- --- --- --- --- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
810370 Basic Law Enforcement System
15.000* po $7.500 $138 $37 $74 $50 5/6/8
w/ Uniform Crime Reporting (UCR) includes:
.General Offense System
.Employee/Security System
.Name File/Known Offenders
.Night-Emergency Listing
.Fingerprint/Single Fingerprint File
.Calls for Service
.Warrants System/Civil Process
.Method of Operations (MO File)
.Criminal History
.Arrests
Basic Law - Less than 15.000 pop. 5.000 138 37 74 50 5/6/8
810390 Field Interview System (FIR) 1.500 33 10 20 50 1/2/2.5
810400 Pawn Shop System 2.000 40 11 22 50 1/2.2.5
810360 Juvenile System with UCR Reporting 1.500 33 10 20 50 1/3/4
810410 Small Jail Management 3.750 83 22 44 50 6/8/12
(Book-in for under 60 inmates)
810411 Large Jail Management 5.100 115 31 62 50 6/8/12
810420 Small County Computer Aided 10.400 260 70 139 50 6/8/12
Dispatching (Population of
under 40.000 people)
810345 Property Room Management 1.100 25 10 20 50 1/2/3
810230 Bogus Checks 3.300 75 20 40 50 8/12/16
810270 Fleet/Equipment Management 5.000 118 32 64 50
</TABLE>
NOTE: No training is provided by CPS Systems. DPS in Atlanta is the only
authorized training facility
For any IBM system, ADD 20% to the Initial License Fee.
February 11, 1991 Page 19-1
<PAGE>
CPS BUSINESS SYSTEMS, INC.
Commercial Accounting
---------------------
<TABLE>
<CAPTION>
ITEM # DESCRIPTION ILF MLF MCA MSM IC ATH
- ------ ----------- --- --- --- --- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
500012 Integrated General Ledger with $2,200 $53 $15 $29 $50
Fixed Budget Reporting
500860 Financial Report Writer 500 13 10 20 50
500052 Intergrated Accounts Payable 1,700 43 12 23 50
500060 Accounts Receivables 2,500 63 17 35 50
(Open Items)
500061 Accounts Receivables 1,200 30 10 20 50
(Balance Forward)
500042 Intergrated Payroll 2,000 50 13 27 50
500043 After-the-Fact Payroll with 1,000 25 10 20 50
941's & W2's
500720 Depreciation (Tax & Book) 1,800 45 12 24 50
500112 Inventory by Warehouse 3,000 75 20 40 50
500022 Purchase Orders 3,000 75 20 40 50
500270 Fleet/Equipment Management 4,750 118 32 64 50
</TABLE>
NOTE:
For any IBM system, ADD 20% to the Initial License Fee.
February 11, 1991 Page 20-1
<PAGE>
CPS BUSINESS SYSTEMS, INC.
OIL AND GAS PRODUCERS
---------------------
<TABLE>
<CAPTION>
ITEM # DESCRIPTION ILF MLF MCA MSM IC ATH
- ------ ----------- --- --- --- --- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
600012 General Ledger with YTD $3,500 $58 $23 $46 $50
& Comparative Statements
600860 Financial Report Writer 500 13 10 20 50
600052 Accounts Payable 3,200 50 21 43 50
600570 Joint-Interest Billing 3,500 38 23 46 50
(Requires 600061 or 600060)
600061 Accounts Receivables 1,750 ?? 12 24 50
(Balance Forward)
600060 Accounts Receivables 3,000 75 20 40 50
(Open Item)
600580 Revenue Distribution 2,750 69 18 36 50
(Royal Payable)
600590 WPT Module (Rev. Dist.) 1,200 30 10 20 50
600600 Revenue Accounting with WPT
Module 3,500 88 23 46 50
600042 Payroll 3,000 75 20 40 50
600044 Expanded Drilling Payroll 3,000 75 20 40 50
600043 After-the-Fact Payroll with 500 13 10 20 50
941's and W2's
600710 Lease Reporting 2,400 60 16 32 50
600610 Production Cost Report 2,400 60 16 32 50
(8/8 Information)
600620 Reserves and Economics
Evaluation 3,000 75 20 40 50
</TABLE>
NOTE:
For any IBM system, ADD 20% to the Initial License Fee.
February 11, 191 Page 20-2s
<PAGE>
CPS BUSINESS SYSTEMS, INC.
OIL AND GAS PRODUCERS
---------------------
<TABLE>
<CAPTION>
ITEM # DESCRIPTION ILF MLF MCA MSM IC ATH
- ------ ----------- --- --- --- --- -- ---
<S> <C> <C> <C> <C> <C> <C> <C>
600630 Monthly Production Reporting $1,500 $38 $10 $20 $50
(P1 & P2)
600640 (Depletion Requires 600012) 2,400 60 16 32 50
600720 Depreciation (Tax & Book) 2,400 60 16 32 50
(Requires 600012)
600660 Authorization for Expenditures 1,500 38 10 20 50
600670 Basic Land Management System 3,500 88 23 46 50
600680 Delay Rentals (Requires 600670) 2,000 50 13 26 50
600690 Land Joint Billing 2,000 50 13 26 50
(Requires 600670 & 600680)
600700 Lease Equipment Inventory 2,400 60 16 32 50
600790 Production Accounting 3,500 88 23 46 50
(Run, Ticket, Gas, Water)
600870 Partnership Accounting 2,500 63 17 34 50
600022 Purchase Orders 3,000 75 20 40 50
600270 Fleet/Equipment Management 4,750 118 32 64 50
</TABLE>
NOTE:
For any IBM system, ADD 20% to the Initial License Fee.
February 11, 1991 Page 20-2b
<PAGE>
SCHEDULE 5.3.1
--------------
(LIENS ON BORROWER'S STOCK)
NONE
<PAGE>
SCHEDULE 5.3.2
--------------
(OTHER RESTRICTIONS ON BORROWER'S STOCK)
Subordination Pledge to Hanifen Imhoff Mezzanine Fund, L.P.
<PAGE>
SCHEDULE 5.3.3
--------------
(SUBSIDIARIES OF BORROWER)
CPS Systems, Inc. is a subsidiary of CPS Acquisition Corp. until those entities
are merged.
<PAGE>
SCHEDULE 5.3.4
--------------
(LIENS ON COMPANY'S STOCK)
Pledge of 7,132 shares of CPS Systems, Inc. treasury stock to secure
indebtedness to Paul A. Hughes and Gloria P. Schlab, which pledge will be
released at closing.
<PAGE>
SCHEDULE 5.3.6
--------------
(SUBSIDIARIES OF COMPANY)
NONE
<PAGE>
SCHEDULE 5.6.2
LOCATION OF GOODS AND OFFICES
CPS OFFICES
CPS - DALLAS (214) 855-5277
3400 Carlisle, Suite 500 AFTER HOURS (214) 855-5278
Dallas, TX 75204 TOLL FREE (800) 858-5277
FAX (214) 720-1380
CPS - HOUSTON (713) 981-4076
9720 Town Park Dr., Suite 115 FAX (713) 981-4077
Houston, TX 77036
CPS - LUBBOCK (806) 791-2406
3311 81St Street, Suite S
Lubbock, TX 79423
CPS - OKLAHOMA CITY (405) 942-7696
1300 South Meridan, Suite 103
Oklahoma City, OK 73108
CPS - SAN ANTONIO (210) 366-0263
900 Isom Rd., Suite 310 FAX (210) 366-0247
San Antonio, TX 78216
CPS - TAMPA (813) 288-9880
5005 West Laurel, Suite 215 TOLL FREE (800) 858-5276
Tampa, FL 33607 FAX (813) 288-9791
CPS - TULSA (918) 665-6755
3840 South 103rd Ave., Suite 216 AFTER HOURS (918) 665-6757
Tulsa, OK 74146 OR (918) 665-6590
FAX (918) 665-6758
CPS - WICHITA FALLS JIM PURDLE (817) 696-1733
3508 McNeil, Suite D NEIL HULL (817) 696-1724
WICHITA FALLS, TX 76308 FAX (817) 696-2058
<PAGE>
SCHEDULE 5.8.1
--------------
(BORROWER FINANCIAL STATEMENTS)
Audited year end financial statements for CPS Systems, Inc. for years 1990
through 1993 and unaudited interim 1994 financial statement for CPS Systems,
Inc. through November 30, 1994.
<PAGE>
SCHEDULE 5.9
------------
(LITIGATION)
A complaint alleging discrimination based on sex was filed in Tampa,
Florida, with the EEOC by Dea Knapp. Mrs. Knapp was terminated shortly following
her return from pregnancy leave, based on her substandard performance before and
after the leave. Such finding was upheld by the investigator for the Florida
Human Relations Department; however, the Department issued a conflicting finding
of just cause for Mrs. Knapp's complaint. No suit has been filed by Mrs. Knapp,
and efforts toward settlement have been unsuccessful.
A charge of discrimination based on sex and sexual harassment was filed
September 14, 1994, with the EEOC in Dallas by Kathy S. Shoults. Ms. Shoults
alleged that he was harassed on the day she resigned. The Company strongly deny
the claim. No further action has been taken by any party on such complaint.
<PAGE>
SCHEDULE 5.19
-------------
(OPERATING AGREEMENTS)
NONE
<PAGE>
SCHEDULE 6.18
-------------
(SOURCE CODES)
Source Codes of current products being marketed by Company.
<PAGE>
EXHIBIT 1.1
(IBM AGREEMENT)
You agree to pay amount equal to any applicable taxes resulting from any
transaction under this Agreement. This does not include taxes based on our
net income. You are responsible for personal property taxes for each
Product from the date we ship it to you or the End User.
You agree to provide us with valid reseller-exemption documentation for
each applicable taxing jurisdiction. Otherwise, we will charge you all
applicable state and local taxes or duties. You agree to notify us promptly
if this documentation is revoked or modified. You are liable for any claims
or assessments that result from any taxing jurisdiction refusing to
recognize your exemption.
FAILURE TO PAY ANY AMOUNTS DUE
If your account becomes delinquent, you agree that we may do one or more of
the following:
1. impose a finance change, up to the maximum permitted by law, on the
delinquent portion of, the balance due:
2. repossess any Products if we do so, you agree to pay all expenses
associated with repossession and collection, including reasonable
attorney's fees. You agree to make the Products available to us at
a site that is mutually convenient:
3. terminate this Agreement: or
4. pursue any other remedy available at law.
In addition, if your account with any of our subsidiaries becomes
delinquent, we may terminate this Agreement.
12. TITLE
As an Aggregator, when you order a Machine from us, we do not transfer
title to you. As any other remarkater, when you order a Machine, we
transfer title to you when the Machine is shipped by us or your Aggregator.
Any prior transfer of title to a Machine to you is void from its inception
when 1) it is accepted as a returned Machine or 2) you deliver it under the
IBM Employee Sales Program.
If an End User orders a Machine from us (and not from you) and we pay you a
fee to deliver that Machine, we transfer title to the End User (and not to
you) when you deliver the Machine.
We do not transfer title to Programs.
PURCHASE MONEY SECURITY INTEREST
We reserve a purchase money security interest in a Machine, and you grant
us a purchase money security interest in your proceeds from the sale of,
and your accounts receivable for, a Product, until we receive the amounts
due. For a feature, conversion, or upgrade involving the removal of parts
that become our property, we reserve the security interest until we receive
the amounts due and the removed parts. You agree to sign an appropriate
document (for example, a "UCC-1") to permit us to perfect our purchase
money security interest.
END USER LEASE FINANCING
If an End User obtain a Lease for a Machine for legitimate financing
purposes, you may transfer title to the Machine to the lessor. You may
finance End Users, Product acquisitions.
13. RISK OF LOSS
We bear the risk of loss for a Product until its initial delivery from us.
<PAGE>
EXHIBIT 2.3.1
-------------
(USE OF FUNDS)
1. The proceeds of the Term Loan will be used by CPS Acquisition Corp. to
finance its acquisition of CPS Systems, Inc.
2. The proceeds of the Revolver Loan will be used for working capital by CPS
Systems, Inc.
<PAGE>
EXHIBIT 4.2.5
(REQUEST FOR ADVANCE, CERTIFICATION AND
DISBURSEMENT INSTRUCTIONS)
REQUEST FOR ADVANCE, CERTIFICATION
AND DISBURSEMENT INSTRUCTIONS
1. The undersigned ("Borrower") requests Greyhound Financial Corporation
("Lender") to disburse loan proceeds in the amount of One Million Five Hundred
Thousand Dollars ($1,500,000) upon receipt hereof, pursuant to the Term Loan and
Security Agreement between such parties dated as of December 30, 1994 (with all
amendments, "Agreement").
2. Borrower certifies that all conditions required by the Agreement to be
satisfied prior to the requested disbursement have been satisfied.
3. Borrower hereby instructs Lender to disburse the advance as follows:
(i) Amount: $1,500,000
Name: CPS Shareholders Clearing Account
Bank: Comerica Bank - Texas
Bank Address:__________________________
Notify Debbie Sue Brewer 890-4660 upon
arrival
ABA Routing No.: 111000753
Credit:________________________________
Account No. 7833-07758-4
(ii) Amount: $_____________________
Name:__________________________________
Bank:__________________________________
Bank Address:__________________________
_______________________________________
ABA Routing No.:_______________________
Credit:________________________________
Account No.:___________________________
(iii) Amount: $_____________________
Name:__________________________________
Bank:__________________________________
Bank Address:__________________________
_______________________________________
ABA Routing No.:_______________________
Credit:________________________________
Account No.:___________________________
(iv) Amount: $_____________________
Name:__________________________________
Bank:__________________________________
Bank Address:__________________________
_______________________________________
ABA Routing No.:_______________________
Credit:________________________________
<PAGE>
Account No.: ______________________
4. Borrower acknowledges and agrees that, even though all or a portion
of the disbursements described above are to be directed to entities other than
Borrower, receipt of such disbursements by such payees shall constitute receipt
of the undersigned.
5. Except as otherwise defined herein otherwise requires, all capitalized
terms used meaning given to them in the Agreement.
DATED: December 30, 1994
BORROWER CPS ACQUISITION CORP.,
a Georgia corporation
By: /s/ Paul E. Kana
---------------------------
Type/Print Name: Paul E. Kana
Title: President
-2-
<PAGE>
EXHIBIT 5.3.1
-------------
(CAPITALIZATION OF BORROWER)
SHAREHOLDER NUMBER OF SHARES
- ------------ ----------------
Paul E. Kana 2918
CPS Systems, Inc.
3400 Carlisle
Suite 500
Dallas, Tx 75204
Sid H. Cardier 2918
Weybourne
#10 WRAY Park Rd.
Reigate, Surrey
England RH20DD
Brian R. Wilson 2918
22 Avnall Road
London, England
N51DP
James K. Hoofard 623
CPS Systems, Inc.
3400 Carlisle
Suite 500
Dallas, Tx 75204
G. Dean Booth 623
Booth, Wade & Campbell
3100 Cumberland Cir
Suite 1500
Atlanta, GA 30339
<PAGE>
EXHIBIT 5.3.4(POST MERGER)
-------------
(CAPITALIZATION OF COMPANY)
SHAREHOLDER NUMBER OF SHARES
- ------------ ----------------
Paul E. Kana 2918
CPS Systems, Inc.
3400 Carlisle
Suite 500
Dallas, TX 75204
Sid H. Cardier 2918
Weybourne
#10 WRAY Park Rd.
Reigate, Surrey
England RH20DD
Brian R. Wilson 2918
22 Avnall Road
London, England
N51DP
James K. Hoofard 623
CPS Systems, Inc.
3400 Carlisle
Suite 500
Dallas, TX 75204
G. Dean Booth 623
Booth, Wade & Campbell
3100 Cumberland Cir
Suite 1500
Atlanta, GA 30339
<PAGE>
EXHIBIT 6.3.3
-------------
(TO BE PROVIDED POST-CLOSING)
<PAGE>
EXHIBIT 6.7.2
-------------
(ASSIGNMENT OF LIFE INSURANCE)
To be on life insurer's form, subject to Lender's approval, which approval shall
not unreasonably be withheld.
<PAGE>
========================================================
CPS ACQUISITION CORP.
and
CPS SYSTEMS, INC.
NOTE AGREEMENT
Dated as of December 29, 1994
$2,100,000 12% Senior Subordinated Secured Note
Due December 31, 2000
and
Warrant to Purchase
Shares of Common Stock
========================================================
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. INTERPRETATION OF AGREEMENT; DEFINITIONS...................... 1
1.1. Definitions................................................... 1
1.2. Accounting Principles......................................... 11
1.3. Directly or Indirectly........................................ 11
SECTION 2. DESCRIPTION OF NOTE AND COMMITMENT............................ 11
2.1. Description of Note and Warrant............................... 11
2.2. Security for the Note......................................... 11
2.3. Commitment, Closing Date...................................... 11
SECTION 3. PAYMENTS ON THE NOTE.......................................... 12
3.1. Mandatory Payments of Principal............................... 12
3.2. Optional Prepayments of Principal............................. 12
3.3. Notice of optional Principal Prepayments...................... 13
3.4. Payments of Interest.......................................... 13
3.5. Payment Upon Change of Certain Officers....................... 13
3.6. Direct Payment................................................ 14
3.7. Manner of Payment............................................. 14
SECTION 4. REPRESENTATIONS............................................... 14
4.1. Representations of the Company................................ 14
4.2. Representations of Purchaser.................................. 14
SECTION 5. CLOSING CONDITIONS............................................ 14
5.1. Conditions.................................................... 14
5.2. Waiver of Conditions.......................................... 15
SECTION 6. COMPANY COVENANTS............................................. 17
6.1. Corporate Existence, Etc...................................... 17
6.2. Insurance..................................................... 17
6.3. Taxes, Claims for Labor and Materials,
Compliance with Laws........................................ 17
6.4. Maintenance, Etc.............................................. 18
6.5. Nature of Business............................................ 18
6.6. Certain Financial Covenants................................... 18
6.7. Limitation on Liens........................................... 19
6.8. Limitation on Rental Payments, Sale and
Leasebacks.................................................. 20
6.9. Restricted Payment............................................ 20
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.10. Investments................................................... 21
6.11. Change of Control, Mergers, Consolidation and
Sales of Assets............................................. 21
6.12. Guaranties.................................................... 23
6.13. Greyhound Agreement........................................... 23
6.14. Transaction with Affiliates................................... 23
6.15. Termination of Pension Plans.................................. 23
6.16. Financial Statements, Report and
Rights of Inspection........................................ 24
6.17 Indemnity..................................................... 27
SECTION 7. EVENTS OF DEFAULTS AND REMEDIES THEREFOR...................... 29
7.1. Events of Defaults............................................ 29
7.2. Notice to Purchaser........................................... 30
7.3. Acceleration of Maturities.................................... 30
7.4. Acceleration of Senior Debt................................... 31
SECTION 8. SUBORDINATION OF THE NOTE..................................... 31
SECTION 9. MISCELLANEOUS................................................. 31
9.1. Purchaser's Consent Required.................................. 31
9.2. Loss, Theft, Etc. of Note..................................... 32
9.3. Brokerage and Other Fees...................................... 32
9.4. Powers and Rights Not Waived.................................. 32
9.5. Notices....................................................... 32
9.6. Successors and Assigns........................................ 32
9.7. Survival of Covenants and Representations..................... 33
9.8. Amendments.................................................... 33
9.9. Headings...................................................... 33
9.10. Maximum Interest Rate......................................... 33
9.11. The Company and Acquisition Corp.............................. 33
9.12. Governing Law................................................. 34
</TABLE>
EXHIBIT A Form of 12% Subordinated Secured Note
EXHIBIT B Form of Warrant
EXHIBIT C Representations and Warranties of the Company
EXHIBIT D Description of Closing Opinion of Counsel to
the Company and to Acquisition Corp.
-ii-
<PAGE>
CPS ACQUISITION CORP.
3400 Carlisle, Suite 500
Dallas, Texas 75240
NOTE AGREEMENT
$2,100,000 12% Senior Subordinated Secured Note
Due December 31, 2000
and
Warrant to Purchase
Shares of Common Stock
Dated as of
December 29, 1994
Hanifen Imhoff Mezzanine Fund, L.P.
c/o Hanifen Imhoff Capital Partners
1125 17th Street, Suite 2520
Denver, Colorado 80202
Gentlemen:
Acquisition Corp. has been formed to acquire all outstanding Common
Stock of the Company and, as part of the same transaction, to be merged into the
Company (the "Merger). You (hereafter, "Purchaser") have indicated your
intention to provide a portion of the financing for the stock acquisition: Both
Acquisition Corp. and the Company, by their execution of this Agreement, agree
to be jointly and severally obligated for the Company's obligations hereunder
prior to the effective date of the Merger. Thereafter the Company, as the entity
surviving the Merger, will be the sole obligor hereunder. Accordingly, the term
"Company" herein will refer to both Acquisition Corp. and the Company prior to
the effective date of the Merger and only to the Company after the Merger. The
parties hereby agree.
SECTION 1. INTERPRETATION OF AGREEMENT; DEFINITIONS.
1.1. Definitions. Unless the context otherwise requires, the terms
hereinafter set forth when used herein shall have the following meanings and the
following definitions shall be equally applicable to both the singular and
plural forms of any of the terms herein defined:
"Acquisition Corp." shall mean CPS Acquisition Corp., a Georgia
corporation.
"Affiliate" shall mean any Person (other than a Subsidiary) (a) that
directly or indirectly through one or
<PAGE>
more intermediaries controls, or is controlled by, or is under common control
with, the Company, (b) that beneficially owns or holds 5% or more of any class
of the Voting Stock of the Company or (c) 5% or more of the Voting Stock (or in
the case of a Person that is not a corporation, 5% or more of the equity
interest) of which is beneficially owned or held by the Company or a Subsidiary.
The term "control" is defined below.
"Borrowed Indebtedness" shall mean (a) the Greyhound Debt, (b)
Indebtedness evidenced by the Note, and (c) any substitutions or replacements
thereof made with the prior approval of Purchaser.
"Cash Flow" shall mean, for any applicable period, the sum, without
duplication, for such period of;
(a) net income of the Company determined in accordance with
GAAP;
plus
(b) the amount deducted, in determining net income referenced in
clause (a) above, of Interest Expense of the Company determined in accordance
with GAAP;
plus
(c) the amount deducted, in determining net income referenced in
clause (a) above, as depreciation of assets of the Company, determined in
accordance with GAAP;
plus
(d) the amount deducted, in determining net income referenced in
clause (a) above, as amortization of assets of the Company, determined in
accordance with GAAP;
plus
(e) accrued federal and state income tax expenses and other
non-cash expenses;
minus
(f) actual federal and state income taxes paid, items of
non-cash income and actual capital expenditures made.
"Change of Control" shall mean a change in the Control of the Company,
whether occurring through merger, sale of assets or stock, exchange of
Securities, or otherwise, except that a sale or other transfer of Common Stock
or other
-2-
<PAGE>
Voting Stock by a Principal Shareholder to another Principal Shareholder shall
not be deemed a "Change of Control."
"Chief Financial Officer" shall mean the Chief Financial Officer of
the Company.
"Closing Date" shall have the meaning set forth in (S) 2.3.
"Collateral" shall mean and include the Company's accounts receivable
and inventory and all outstanding Common Stock held by the Shareholders and all
other property carried by the Collateral Documents.
"Collateral Documents" shall mean and include the Security Agreements.
"Commitment Letter" shall mean the letter dated December 7, 1994
between the Company and Purchaser concerning terms of this Agreement, the
Warrant and other aspects of the transactions contemplated hereby.
The term "Common Stock" shall mean, collectively, (a) the Company's
Common Stock, $.01 par value, (b) any other class of capital stock of the
Company hereafter authorized that is not limited to a fixed sum or percentage of
par or stated value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon any liquidation,
dissolution or winding up of the Company and (c) any other class or classes of
Voting Stock.
"Company" shall mean Acquisition Corp. and the Company, jointly and
severally, prior to the effective date of the Merger; thereafter, the term shall
mean the Company alone, and any Person who succeeds to all or substantially all
of the assets and business of the Company. Unless the context otherwise
indicates, the term "Company" shall also include, individually and collectively,
any Subsidiary.
"Control" shall mean the possession, directly or indirectly, of the
power to direct or cause the direction of management and policies of a Person,
whether through ownership of Voting Stock, by contract or otherwise, as term
"control" is more fully defined in Rule 405 under the Securities Act.
"Debt" of any Person shall mean as of the date of any determination
thereof:
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(a) all Indebtedness of such Person for borrowed money evidenced
by notes, bonds, debentures or similar evidences of Indebtedness of such Person,
(b) obligations secured by any Lien upon property or assets
owned by such Person, even though such Person has not assumed or become liable
for the payment of such obligation including, without limitation, obligations
secured by Liens arising from the sale or transfer of notes or accounts
receivable,
(c) obligations created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such
Person, notwithstanding the fact that the rights and remedies of the seller,
lender or lessor under such agreement in the event of default are limited to
repossession or sale of property including, without limitation, obligations
secured by Liens arising from the sale or transfer of notes or accounts
receivable, but, in all events, excluding trade payables and accrued expenses
constituting current liabilities,
(d) reimbursement obligations in respect of credit enhancement
instruments which are, in substance, financial guaranties of the obligations of
Persons other than the Company or its Subsidiaries,
(e) reimbursement obligations in respect of credit enhancement
instruments, which reimbursement obligations are then due and payable,
(f) obligations of such Person representing the deferred and
unpaid purchase price of any property or business or services, excluding trade
payables and accrued expenses constituting current liabilities,
(g) obligations under swaps or other financial hedges, and
(h) Guaranties of obligations of others of the character
referred to hereinabove in this definition, but not including guaranties of any
Debt described in Clauses (a) through (g).
"Default" shall mean any event or condition the occurrence of which
would, with the lapse of time or the giving of notice, or both, constitute an
Event of Default.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended, and any successor statute of similar import, together with the
regulations thereunder, in
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each case as in effect from time to time. References to sections of ERISA shall
be construed to also refer to any successor sections.
"ERISA Affiliate" shall mean any corporation, trade or business that
is, along with the Company, a member of a controlled group of corporations or a
controlled group of trades or businesses, as described in section 414(b) and
414(c), respectively, of the Code or Section 4001 of ERISA.
"Event of Default" shall have the meaning set forth in (S) 7.1.
"Financing Documents" shall mean and include the Note Agreement, the
Collateral Documents, the Warrant and the Note.
"GAAP" shall mean generally accepted accounting principles at the
time.
"Greyhound" shall mean Greyhound Financial Corporation, a Delaware
corporation.
"Greyhound Agreements" shall mean the two loan agreements dated as of
December 29, 1994 between the Company and Greyhound covering the Senior Debt.
"Greyhound Debt" shall mean all Indebtedness of the Company under the
Greyhound Agreements, such Indebtedness, as to principal, not to exceed (a)
$1,500,000 with respect to the Senior Term Loan and $1 million with respect to
the Revolver Loan, as those terms are defined in the Greyhound Agreements.
"Guaranties" by any Person shall mean all obligations (other than
endorsements in the ordinary course of business of negotiable instruments for
deposit or collection) of such Person quaranteeing, or in effect quaranteeing,
any Indebtedness, dividend or other obligation of any other Person (the "primary
obligor") in any manner, whether directly or indirectly, including, without
limitation, all obligations incurred through an agreement, contingent or
otherwise, by such Person: (a) to purchase such Indebtedness or obligation or
any property or assets constituting security therefor, (b) to advance or supply
funds (i) for the purchase or payment of such Indebtedness or obligation, or
(ii) to maintain working capital or other balance sheet condition or otherwise
to advance or make available funds for the purchase or payment of such
Indebtedness or obligation, (c) to lease property or to purchase Securities or
other property or services primarily
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for the purpose of assuring the owner of such Indebtedness or obligation of the
ability of the primary obligor to make payment of the Indebtedness or
obligation, or (d) otherwise to assure the owner of the Indebtedness or
obligation of the primary obligor against loss in respect thereof. For the
purposes of all computations made under this Agreement, a Guaranty in respect of
any Indebtedness for borrowed money shall be deemed to be Indebtedness equal to
the principal amount of such Indebtedness for borrowed money that has been
guaranteed, and a Guaranty in respect of any other obligation or liability or
any dividend shall be deemed to be Indebtedness equal to the maximum aggregate
amount of such obligation, liability or dividend.
"Indebtedness" of any Person shall mean and include all obligations of
such Person that in accordance with GAAP is classified upon a balance sheet of
such Person as liabilities of such Person, and in any event includes all Debt.
"Initial Public Offering" shall mean the first issuance of shares of
Common Stock by the Company pursuant to a public distribution in which the
Company Stock shall be listed and traded on a national or regional exchange or
in the NASDAQ over-the-counter market.
"Intangible Assets" shall mean, as of the date of any determination
thereof, the total amount of all goodwill, patents, trade names, trademarks,
copyrights, franchises, experimental expense, organizational expense,
unamortized debt discount and expense, deferred assets other than prepaid
insurance and prepaid taxes, the excess of cost of shares acquired over book
value of related assets and such other assets as are properly classified as
"intangible assets" in accordance with GAAP, of the Company and its
Subsidiaries.
"Intercreditor Agreement" shall mean the Subordination and
Intercreditor Agreement dated as of December 29, 1994 among Greyhound,
Purchaser, Acquisition Corp. and the Company, setting forth certain rights and
obligations of the parties.
"Interest Charges" for any period shall mean all interest and expense
on any particular Indebtedness for which such calculations are being made
(excluding amortization of capitalized interest). Computations of Interest
Charges on a pro forma basis for Indebtedness having a variable interest rate
shall be calculated at the rate in effect on the date of any determination.
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"Investments" shall mean all investments, in cash or by delivery of
property made, directly or indirectly, in any Person, whether by acquisition of
shares of capital stock, indebtedness or other obligations or Securities or by
loan, advance, capital contribution or otherwise; provided, however, that
"Investments" shall not mean or include routine investments in property to be
used or consumed in the ordinary course of business.
"Lease" shall mean any lease of real or personal property, including
office and equipment Lease, under which the Company shall be required to pay
Rentals.
"Lien" shall mean any interest in property securing an obligation
owned to, or a claim by, a Person other than the owner of the property, whether
such interest is based on the common law, statute or contract, and including but
not limited to the security interest lien arising from a mortgage, encumbrance,
pledge, conditional sale or trust receipt or a lease, consignment or bailment
for security purposes. The term "Lien" shall include reservations, exceptions,
encroachments, easements, right-of-way, covenants, conditions, restrictions,
leases and other title exceptions and encumbrances (including, with respect to
stock, stockholder agreements, voting trust agreements, buy-back agreements and
all similar arrangements) affecting property. For the purposes of this
Agreement, the Company or a Subsidiary shall be deemed to be the owner of any
property which it has acquired or holds subject to a conditional sale agreement,
capitalized lease or other arrangement pursuant to which title to the property
has been retained by or vested in some other Person for security purposes and
such retention or vesting shall constitute a Lien.
"Merger" shall mean the merger of Acquisition Corp. into the Company,
the effective date of which Merger shall be the date that the Merger is
effective, under the corporate laws of Texas, defined for this purpose to mean
the time and date on which the corporate existence of Acquisition Corp. shall
cease and the Company shall remain as the surviving entity.
"Multiemployer Plan" shall have the same meaning as in ERISA.
"Net Income" for any period shall mean the net income of the Company
excluding (but only to the extent otherwise included):
(a) extraordinary items;
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(b) earnings or losses from sales of fixed or capital assets;
(c) earnings or losses attributable to any period other than the
period of calculation;
(d) earnings or entities that are not Subsidiaries, except to
the extent actually paid in cash;
(e) earnings of any Subsidiary the payment of which is
prohibited by law, rule, regulation or contract; and
(f) earnings attributable to minority interests (meaning shares
of stock of any class of a Subsidiary) that are not owned by the Company.
"Net Revenue" for any period shall mean the net revenue of the Company
before deducting costs and expenses.
"Note" shall have the meaning set forth in (S) 2.1 and shall include
any Note or Notes issued in exchange or in substitution therefor.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Performance-Based Shareholder Bonuses" shall mean cash bonuses
awarded under a written plan the terms of which shall have been approved in
advance by (a) each holder of the Borrowed Indebtedness and (b) the board of
directors of the Company. The awarding of one or more such bonuses without such
prior approval shall be an Event of Default under (S) 7.1(d).
"Person" shall mean an individual, partnership, corporation, trust or
unincorporated organization, and a government or agency or political subdivision
thereof.
"Plan" means a "pension plan," as such term is defined in ERISA,
established or maintained by the Company or any ERISA Affiliate or as to which
the Company or any ERISA Affiliate contributed or is a member or otherwise may
have any liability.
"Principal Shareholders" shall mean Paul E. Kana, Sid H. Cordier and
Brian R. Wilson and their respective permitted assignees and successors in
interest.
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"Purchaser" shall mean Hanifen Imhoff Mezzanine Fund, L.P., a Colorado
limited partnership.
"Rentals" shall mean and include as of the date of any determination
thereof all fixed payments (including as such all payments which the lessee is
obligated to make to the lessor on termination of Leases or surrender of the
property) payable by the Company as lessee or sublessee under Leases of real or
personal property, but shall be exclusive of any amounts required to be paid by
the Company (whether or not designated as rents or additional rents) on account
of maintenance, repairs, insurance, taxes and similar charges. Fixed rents under
any so-called "percentage leases" shall be computed solely on the basis of the
minimum rents, if any, required to be paid by the lessee regardless of sales
volume or gross revenues.
"Reportable Event" shall have the same meaning as in ERISA.
"SBA" shall mean the federal Small Business Administration.
"Security" shall have the same meaning as in Section 2(1) of the
Securities Act.
"Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar federal statute, and the rules and regulations of the Securities
and Exchange Commission thereunder, all as the same shall be in effect at the
time.
"Security Agreements" shall include the Security Agreement (Stock),
covering Common Stock of the Company pledged hereunder by the Shareholders, and
the Security Agreement (General) covering the Company's accounts, inventory and
other property therein identified, subordinate only to the prior security
interest of Greyhound.
"Senior Debt" of the Company shall mean all Greyhound Debt.
"Shareholders" shall mean the Principal Shareholders plus James K.
Hoofard, Jr. and E. Dean Booth.
"Shareholders Agreements" shall mean existing Employment Agreements
between the Company and one or more of the shareholders.
"Shareholders Compensation" shall mean payments by the Company to the
Shareholders in the form of (a) salaries, bonuses (other than Performance-Based
Shareholder Bonuses),
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commissions, directors' fees and similar work-related compensation contemplated
by the Shareholders Agreements and (b) contributions to executive and/or
employee benefit plans that qualify under sections 125 and 401(k) of the
Internal Revenue Code. Reimbursement of reasonable and necessary expense items
shall not be deemed to be "Shareholders Compensation."
The term "subsidiary" shall mean as to any particular parent
corporation any corporation of which more than 50% (by number of votes) of the
Voting Stock shall be beneficially owned, directly or indirectly, by such parent
corporation. The term "Subsidiary" shall mean any direct or indirect subsidiary
of the Company.
"Tangible Assets" shall mean as of the date of any determination
thereof the total amount of all assets of the Company (less depreciation,
depletion and other properly deductible valuation reserves) after deducting
Intangible Assets.
"Tangible Net Worth" shall mean shareholders' equity minus Intangible
Assets.
"Total Contractual Debt Service" shall have the meaning given to such
term in the Greyhound Agreements.
"Voting Stock" shall mean Securities of any class or classes, the
holders of which are ordinarily, in the absence of contingencies, entitled to
elect the corporate directors (or Persons performing similar functions).
"Warrant" shall mean the Warrant described in (S) 2.1 issued by the
Company to Purchaser, a copy of which is attached as Exhibit B.
"Wholly-owned" when used in connection with any Subsidiary shall mean
a Subsidiary of which all of the issued and outstanding shares of stock (except
shares required as directors' qualifying shares) shall be owned directly or
indirectly by the Company.
"Working Capital" shall mean, as of the date of any determination
thereof, (a) current assets of the Company included in such computation of
current assets minus (b) current liabilities of the Company excluding the
payment of current maturities of Borrowed Indebtedness otherwise included in the
computation of current liabilities.
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1.2. Accounting Principles. Where the character or amount of any asset
or liability or item of income or expense is required to be determined or any
consolidation or other accounting computation is required to be made for the
purposes of this Agreement, the same shall be done in accordance with GAAP. If
the Company shall at any time have a Subsidiary, the Company's financial
statements and other financial requirements under this Agreement shall be
reported on a consolidated basis.
1.3. Directly or Indirectly. Where any provision in this Agreement
refers to action to be taken by any Person, or which such Person is prohibited
from taking, such provision shall be applicable whether the action in question
is taken directly or indirectly by such Person.
SECTION 2. DESCRIPTION OF NOTE AND COMMITMENT.
2.1. Description of Note and Warrant. The Company will authorize the
issue and sale to Purchaser of (a) its 12% Senior Subordinated Secured Note in
the principal amount of $2,100,000 (the "Note") to be dated the date of issue,
to bear interest from such date at the rate of 12% per annum, payable quarterly
on the 30th day of March, June, September and December in each year (commencing
March 30, 1995) and at maturity and to bear interest on the overdue principal,
if any, and (to the extent legally enforceable) on any overdue installment of
interest at the rate of 19% per annum after the date due, whether by
acceleration or otherwise, until paid, to be expressed to mature on December 31,
2000, and to be substantially in the form attached hereto as Exhibit A and (b) a
Warrant (the "Warrant") substantially in the form of Exhibit B hereto to
purchase shares of Common Stock of the Company. Interest on the Note shall be
computed on the basis of a 360-day year of twelve 30-day months. The Note is not
subject to prepayment or redemption at the option of the Company prior to its
expressed maturity date except on the terms and conditions and in the amounts
and with the premium set forth in (S) 3.
2.2. Security for the Note. The Note shall be secured and supported by
the Collateral covered by the Collateral Documents, which Collateral includes
substantially all assets of the Company and all of the issued and outstanding
Common Stock of the Company. The lien of the Collateral Documents shall be
subordinate and junior to the collateral taken by Greyhound to secure the Senior
Debt.
2.3. Commitment, Closing Date. (a) Subject to the terms and conditions
hereof and on the basis of the
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representations and warranties hereinafter set forth, on the Closing Date the
Company shall issue and sell to Purchaser, and Purchaser shall purchase and
receive from the Company, the Note, at a price equal to the principal amount
thereof.
(b) Delivery of the Note and the Warrant will be made at the
offices of Streich Lang, Rennaissance One, Two N. Central Avenue, Phoenix,
Arizona 85004-2391 (or at such other location as agreed to by the Company and
Purchaser) against payment therefor in immediately available funds in the amount
of the purchase price at 11:00 A.M., Phoenix Time, on December 30, 1994, or such
other date or in such other manner (including manner of payment and transfer of
funds) as shall mutually be agreed upon by the Company and Purchaser (the
"Closing Date"). The Note will be delivered to Purchaser in substantially the
form attached hereto as Exhibit A for the full amount of its purchase,
registered in Purchaser's name or in the name of Purchaser's nominee, all as
Purchaser may specify at any time prior to the Closing Date.
(c) Both GAAP and regulations of the Internal Revenue Service
now in effect require a determination of the value of the Warrant. After taking
into account the general condition of the bond market at this time (including
prevailing interest rates), the exercise price of the Warrant, the restrictions
on transfer and all other matters concerning the Note and the Warrant, the
Company is of the opinion and understands that Purchaser is of the opinion
(based on the information contained in the letter of Shenkin Kurtz Baker & Co.,
P.C., to Purchaser dated December 29, 1994) that the Warrant would have a value
of not more than $85,680.
SECTION 3. PAYMENTS ON THE NOTE.
Subject to such restrictions as may be imposed by the Intercreditor
Agreement (as long as such agreement is in full force and effect):
3.1. Mandatory Payments of Principal. The Company shall make two
principal payments upon the Note, each in the amount of $1,050,000, one on
December 31, 1999 and the other on December 31, 2000. No premium shall be
required on any mandatory prepayment made pursuant to this (S) 3.1, but any
accrued interest thereon shall be paid at the time of such prepayment.
3.2. Optional Prepayments of Principal. The Company shall have the
right, at any time and from time to time, to prepay the principal indebtedness
evidenced by the Note, in whole or in part (but if in part then in a minimum
principal
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amount of $100,000) by making such prepayment, together with
(a) accrued interest thereon to the date of prepayment and
(b) a premium determined as follows:
If Prepayment
Date Is During the Required Premium
Calendar Year Commencing (% of Prepayment
January 1 Amount)
------------------------ ----------------
1995 3%
1996 2%
1997 1%
1998 -0-
1999 -0-
All prepayments under this (S) 3.2 shall be applied ratably to future principal
payments required under (S) 3.1.
3.3. Notice of Optional Principal Prepayments. The Company shall give
notice to Purchaser of any prepayment of the Note pursuant to (S) 3.2 not less
than 30 days nor more than 60 days before the date fixed for such optional
prepayment specifying (a) such date, (b) the principal amount of the Note to be
prepaid on such date, (c) that a premium may be payable, (d) the date when the
premium will be calculated, (e) the estimated premium, and (f) the accrued
interest applicable to the prepayment. Such notice of prepayment shall also
certify all facts, if any, that are conditions precedent to any such prepayment.
Notice of prepayment having been so given, the amount of the prepayment
(together with accrued thereto) shall become due and payable on the prepayment
date specified in the notice.
3.4. Payments of Interest. To the extent not allowed by the
Intercreditor Agreement, the quarterly payments of interest by the Company
specified in (S) 2.1 shall be added to the principal of the Note and shall bear
interest thereon at the 12% annual rate specified herein and in the Note from
their due dates until paid. Any such delayed payments shall be paid by the
Company promptly after the restrictions of the Intercreditor Agreement have been
removed, either by termination of such agreement or otherwise.
3.5. Direct Payment. Notwithstanding anything to the contrary in this
Agreement or the Note, the Company shall, upon notice from Purchaser, make all
future payments due on the Note (a) directly to Purchaser or its nominee or
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(b) directly to an account in a United States bank designated by Purchaser.
3.6. Manner of Payment. Unless otherwise agreed by the parties, all
payments required hereunder or by the Note shall be in immediately available
funds to such account or accounts as Purchaser shall direct.
SECTION 4. REPRESENTATIONS.
4.1. Representations of the Company. The Company and Acquisition Corp.
each represents and warrants that all representations and warranties set forth
in Exhibit C are true and correct as of the date hereof and are incorporated
herein by reference with the same force and effect as though herein set forth in
full.
4.2. Representations of Purchaser. Purchaser represents, and in
entering into this Agreement the Company understands, that Purchaser is
acquiring the Note and the Warrant for the purpose of investment and not with a
view to the distribution thereof, and that Purchaser has no present intention of
selling, negotiating or otherwise disposing of the Note or the Warrant.
SECTION 5. CLOSING CONDITIONS.
5.1. Conditions. Purchaser's obligation to purchase the Note and the
Warrant on the Closing Date shall be subject to the performance by the Company
of its agreements hereunder that by their terms are to be performed at or prior
to the time of delivery of the Note and the Warrant and to the following further
conditions precedent:
(a) Closing Certificate. Purchaser shall have received a
certificate dated the Closing Date, signed by the President or a Vice President
of the Company, the truth and accuracy of which shall be a condition to
Purchaser's obligation to purchase the Note and the Warrant to the effect that
(i) the representations and warranties of the Company set forth in Exhibit C are
true and correct on and with respect to the Closing date, (ii) the Company has
performed all of its obligations hereunder that are to be performed on or prior
to the Closing Date, and (iii) no Default or Event of Default has occurred and
is continuing.
(b) Legal Opinion. Purchaser shall have received from Booth,
Wade & Campbell, counsel to the Company,
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its opinion dated the Closing Date, in form and substance satisfactory to
Purchaser, and covering the matters set forth in Exhibit D.
(c) Valuation Opinion. Purchaser shall have obtained from Shenkin
Kurtz Baker & Co., P.C., a written opinion as to the valuation of the Warrant in
form and substance satisfactory to Purchaser and its counsel.
(d) Acquisition and Application of Certain Proceeds. Upon or prior to
the issuance and sale of the Note and the Warrant to Purchaser, the Shareholders
shall have acquired all outstanding Common Stock of the Company, upon terms and
conditions and in form and substance satisfactory to Purchaser.
(e) Certain Expenses. Concurrently with the delivery of the Note and
the Warrant on the Closing Date, the Company shall have paid the balance of the
"Processing Fee" and "Eligible Costs" that the Company agreed to pay to
Purchaser pursuant to the terms of the Commitment Letter. Upon receipt of a
supplemental statement within 60 days after the Closing Date, the Company shall
pay such additional "Eligible Costs" as were not reflected in Purchaser's
accounting records at the Closing Date.
(f) SBA Forms. Purchaser shall have received the Company's signature
on SBA Forms 480 and 652 concerning size status and nondiscrimination
requirements, respectively.
(g) Execution of Collateral Documents. The Company shall have
executed, acknowledged and delivered the Collateral Documents and they shall
have been recorded or filed for record in each public office wherein such
recording or filing is deemed necessary or appropriate by Purchaser or its
counsel to perfect the lien thereof as against creditors of or purchasers from
the Company. Without limiting the foregoing, all taxes, fees and other charges
in connection with the execution, delivery, recording and filing of the
foregoing instruments shall have been paid by the Company.
(h) Delivery of Possession. The Company shall have delivered to
Purchaser all securities, evidences of title or other documents, reasonably
necessary for perfecting Purchaser's security interest in any of the Collateral,
appropriately endorsed, if necessary, to perfect or allow perfection of such
security interest.
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(i) Satisfactory Proceedings. All proceedings taken in
connection with the transactions contemplated by this Agreement, and all
documents necessary to the consummation thereof (including, specifically, but
without limitation, the charter and bylaws of the Company), shall be
satisfactory in form and substance to Purchaser and its counsel, and Purchaser
shall have received a copy (executed or certified as may be appropriate) of all
legal documents or proceedings taken in connection with the consummation of such
transactions.
(j) Stock Purchase Transaction. The Shareholders shall have
acquired all outstanding Common Stock, the Merger shall have become affective
under Texas corporate laws, and the Greyhound Agreements shall have been
executed and delivered and, in the case of the term loan thereunder, funds
delivered in the amount therein required. In addition, all indebtedness owed by
the Company to Paul A. Hughes and Gloria P. Schlab shall have been paid in full
and the shares of Common Stock pledged thereunder shall have been returned to
the Company to be held as treasury stock.
(k) No Changes. Since September 30, 1994 there shall not have
been any change in the condition, financial or otherwise, of the Company as
shown on the financial statements, of such date, other than those changes in the
ordinary course of business, none of which individually or in the aggregate
shall have been materially adverse.
5.2. Waiver of Conditions. If on the Closing Date the Company fails to
tender the Note and the Warrant to Purchaser or if any of the conditions
specified in (S) 5.1 have not been fulfilled, Purchaser may thereupon elect to
be relieved of all further obligations under this Agreement. Without limiting
the foregoing, if any of the conditions specified in (S) 5.1 have not been
fulfilled, Purchaser may waive compliance by the Company with any such condition
to such extent as Purchaser may in its sole discretion determine. Nothing in
this (S) 5.2 shall operate to relieve the Company of any of its obligations
hereunder or to waive any of Purchaser's rights against the Company.
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SECTION 6. COMPANY COVENANTS.
Except with prior approval of Purchaser, from and after the Closing
Date and continuing so long as any amount remains unpaid on the Note:
6.1. Corporate Existence, Etc. The Company shall preserve and keep in
full force and effect its corporate existence and all licenses and permits
necessary to the proper conduct of its business, provided that the foregoing
shall not prevent any transaction permitted by (S) 6.11.
6.2. Insurance. (a) The Company shall maintain, and shall cause any
Subsidiary to maintain, insurance coverage by financially sound and reputable
insurers and in such forms and amounts and against such risks as are customary
for corporations of established reputation engaged in the same or a similar
business and owning and operating similar properties, including such insurance
as may be required by the Greyhound Agreement.
(b) In addition to the foregoing, within 60 days after the date
of this Agreement, the Company shall purchase, maintain and own life insurance
policies (which shall be satisfactory in form and substance to Purchaser and
shall be issued by life insurance companies satisfactory to Purchaser) covering
the following Shareholders in the respective amounts set forth opposite their
names) naming Greyhound and Purchaser, in that order, as beneficiaries:
Insured Person Amount of Insurance
- -------------- -------------------
Paul E. Kana $1 million
James K. Hoofard, Jr. $1 million
6.3. Taxes, Claims for Labor and Materials, Compliance with Laws. The
Company shall promptly pay and discharge all lawful taxes, assessments and
governmental charges or levies imposed upon the Company or upon or in respect of
all or any part of the property or business of the Company, all trade accounts
payable in accordance with usual and customary business terms, and all claims
for work, labor or materials, which if unpaid might become a Lien upon any
property of the Company; provided the Company shall not be required to pay any
such tax, assessment, charge, levy, account payable or claim if (i) the
validity, applicability or amount thereof is being contested in good faith by
appropriate actions or proceedings that will prevent the forfeiture or sale of
any property of the Company or such Subsidiary or any material interference with
the use thereof by the Company or
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such Subsidiary, or (ii) the Company or such Subsidiary shall set aside on its
books, reserves deemed by it to be adequate with respect thereto. The Company
shall promptly comply and shall cause each such Subsidiary to comply in all
material respects with all laws, ordinances or governmental rules and
regulations to which it is subject including, without limitation, the
Occupational Safety and Health Act of 1970, as amended, ERISA and all
environmental laws, the violation of which could materially and adversely affect
the properties, business, prospects, profits or condition of the Company or
would result in any Lien not permitted under (S) 6.7.
6.4. Maintenance, Etc. The Company shall maintain, preserve and keep
its properties that are used or useful in the conduct of its business (whether
owned in fee or a leasehold interest) in good repair and working order and from
time to time shall make all necessary repairs, replacements, renewals and
additions so that at all times the efficiency thereof shall be maintained.
6.5. Nature of Business. The Company shall not engage in any business
if, as a result, the general nature of the business that would then be engaged
in by the Company would be substantially changed from the general nature of the
business engaged in by the Company on the date of this Agreement.
6.6. Certain Financial Covenants. The Company, on a consolidated
basis, shall at all times maintain the following ratios and standards on a
four-quarter rolling average basis:
(a) A minimum current ratio (the ratio of current assets to
current liabilities minus obligations under the Greyhound Revolver Loan) of not
less than 1.1-to-1.
(b) Indebtedness for borrowed money shall include only the
Borrowed Indebtedness.
(c) A ratio of Cash Flow to Total Contractual Debt Service of at
least 1-to-1. Compliance with this covenant shall be measured quarterly
throughout the term of the Indebtedness hereunder on a trailing 12-month basis,
except that during the first three quarters of 1995 this covenant shall be
measured with reference back to the Closing Date.
(d) Shareholders Compensation shall not exceed $300,000 in each
fiscal year.
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6.7. Limitation on Liens. The Company shall not create or incur, or
suffer to be incurred or to exist, any Lien on its property or assets, whether
now owned or hereafter acquired, or upon any income or profits therefrom, or
transfer any property for the purpose of subjecting the same to the payment of
obligations in priority to the payment of its general creditors, or acquire or
agree to acquire any property or assets upon conditional sales agreements or
other title retention devices, except:
(a) Liens for property taxes and assessments or governmental
charges or levies and Liens securing claims or demands of mechanics and
materialmen, and Liens on deposits securing contested taxes and/or import
duties, provided that payment thereof is not at the time required by (S) 6.3;
(b) Liens of or resulting from any judgment or award, the time
for the appeal or petition for rehearing of which shall not have expired, or in
respect of which the Company or a Subsidiary shall at any time in good faith be
prosecuting an appeal or proceeding for a review and in respect of which a stay
of execution pending such appeal or proceeding for review shall have been
secured;
(c) Liens incidental to the conduct of business or the ownership
of properties and assets (including Liens in connection with worker's
compensation, unemployment insurance and other like laws, carriers',
warehousemen's and attorneys' liens and statutory landlords' liens) and Liens to
secure the performance of bids, tenders or trade contracts, or to secure
statutory obligations, surety or appeal bonds or other Liens of like general
nature incurred in the ordinary course of business and not in connection with
the borrowing of money, provided in each case, the obligation secured is not
overdue or, if overdue, is being contested in good faith by appropriate actions
or proceedings;
(d) Liens incurred after the Closing Date given to secure the
payment of the purchase price incurred in connection with the acquisition after
the Closing Date of fixed assets useful and intended to be used in carrying on
the business of the Company, including Liens existing on such fixed assets at
the time of acquisition thereof or at the time of acquisition by the Company of
any business entity then owing such fixed assets, whether or not such existing
Liens were given to secure the payment of the purchase price of the fixed assets
to which they attach so long as they were not incurred, extended or renewed in
contemplation of such acquisition, provided that (i) the Lien shall attach
solely to the fixed assets acquired or purchased, (ii) at the time of
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acquisition of such fixed assets, the aggregate amount remaining unpaid on all
Indebtedness secured by Liens on such fixed assets whether or not assumed by the
Company shall not exceed an amount equal to the lesser of the total purchase
price or fair market value at the time of acquisition of such fixed assets (as
determined in good faith by the Chief Financial Officer of the Company), and
(iii) the aggregate unpaid principal amount of all Debt of the Company secured
by any Lien shall have been incurred within the applicable limitations set forth
in (S) 6.6; or
(e) Liens retained by International Business Machines
Corporation pursuant to the Value Added Reseller Agreement dated March 27, 1990,
between it and the Company or by another hardware manufacturer under any similar
agreement between it and the Company; or
(f) Liens on property securing the Borrowed Indebtedness.
6.8. Limitation on Rental Payments, Sale and Leasebacks. (a) The
Company shall not become obligated, as lessee, under any Lease if, at the time
of entering into such Lease and after giving effect thereto, the aggregate
Rentals payable by the Company in any one fiscal year under all Leases would
exceed $300,000 plus 5% of Net Revenues for such fiscal year.
(b) The Company shall not enter into any arrangement whereby the
Company shall sell or transfer any property owned by the Company to any Person
other than the Company and thereupon the Company shall lease or intend to lease,
as lessee, the same property (a "Sale-Leaseback").
6.9. Restricted Payment. The Company shall not, except as hereinafter
provided:
(a) Declare or pay any dividends (except dividends or other
distributions payable solely in shares of capital stock of the Company);
(b) Directly or indirectly purchase, redeem or retire any shares
of its capital stock of any class or any warrants (other than the Warrant or
Restricted Stock, as defined in the Warrant); or
(c) Make any other payment or distribution, either directly or
indirectly or through any Subsidiary, in respect of its capital stock.
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6.10. Investments. The Company shall not make any Investments, other
than:
(a) Investments by the Company in and to Subsidiaries,
including any Investment in a corporation which, after giving effect to such
Investment, will become a Subsidiary;
(b) Investments in commercial paper maturing in 270 days or
less from the date of issuance which, at the time of acquisition by the Company
or any Subsidiary, is accorded the highest rating by Standard & Poor's
Corporation, Moody's Investors Service, Inc. or other nationally recognized
credit rating agency of similar standing;
(c) Investments in direct obligations of the United States of
America or any agency or instrumentality of the United States of America, the
payment or guarantee of which constitutes a full faith and credit obligation of
the United States of America, in either case, maturing in 12 months or less from
the date of acquisition thereof;
(d) Investments in certificates of deposit maturing within one
year from the date of issuance thereof, issued by a bank or trust company
organized under the laws of the United States or any state thereof, having
capital, surplus and undivided profits aggregating at least $100,000,000 and
whose long-term certificates of deposit are, at the time of acquisition thereof
by the Company or a Subsidiary, rated AA or better by Standard & Poor's
Corporation or Aa or better by Moody's Investors Service, Inc.; and
(e) Receivables arising from the sale of goods and services in
the ordinary course of business of the Company and its Subsidiaries.
For purposes of this (S) 6.10, at any time when a corporation becomes
a Subsidiary, all Investments of such corporation at such time shall be deemed
to have been made by such corporation, as a Subsidiary, at such time.
6.11. Change of Control, Mergers, Consolidations and Sales of Assets.
Except with respect to the Merger, (a) The Company shall not (i) cause or allow
a Change of Control, (ii) consolidate with or be a party to a merger with any
other corporation, or (iii) sell, lease or otherwise dispose of all or any
substantial part (as defined in paragraph (c) of this (S) 6.11) of the assets of
the Company and its Subsidiaries, provided, however, that:
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(A) any Subsidiary may merge or consolidate with or into
the Company or any Wholly-owned Subsidiary so long as
in any merger or consolidation involving the Company,
the Company shall be the surviving or continuing
corporation;
(B) the Company may consolidate or merge with any other
corporation if (1) the Company shall be the surviving
or continuing corporation and (2) at the time of such
consolidation or merger and after giving effect thereto
no Default or Event of Default shall have occurred and
be continuing; and
(C) any Subsidiary may sell, lease or otherwise dispose of
all or any substantial part of its assets to the
Company or any Wholly-owned Subsidiary.
(b) The Company shall not permit any Subsidiary to issue or sell
any shares of stock of any class (including as "stock" for the purposes of this
(S) 6.11, any warrants, rights or options to purchase or otherwise acquire stock
or other Securities exchangeable for or convertible into stock) of such
Subsidiary to any Person other than the Company or a Wholly-owned Subsidiary,
except in satisfaction of the Validly pre-existing preemptive rights of minority
shareholders in connection with the simultaneous issuance of stock to the
Company and/or a Subsidiary whereby the Company and/or such Subsidiary maintain
their same proportionate interest in such Subsidiary.
(c) As used in this (S) 6.11, a sale, lease or other disposition
of assets shall be deemed to be a "substantial part" of the assets of the
Company only if (i) the book value of such assets, when added to the book value
of all other assets sold, leased or otherwise disposed of by the Company (other
than in the ordinary course of business) during the same fiscal year, exceeds
10% of Tangible Assets, determined as of the end of the immediately preceding
fiscal year or if (ii) the book value of such assets when added to the book
value of all other assets sold, leased or otherwise disposed of by the Company
(other than in the ordinary course of business) after the Closing Date, exceeds
25% of Tangible Assets, determined as of the end of the immediately preceding
fiscal year. For the purpose of making any determination of "substantial part"
sales of assets in
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excess of the foregoing restrictions shall be excluded if the Company offers to
apply as a prepayment of the principal amount of the Note the amount of such
excess sales and makes such payment if Purchaser accepts the Company's offer in
accordance with the terms of such offer. Any such payment shall be treated as an
optional prepayment under (S) 3.2 and shall be accompanied by the payment of a
premium as therein set forth.
6.12. Guaranties. The Company shall not, and shall not permit any
Subsidiary to, become or be liable in respect of any Guaranty except (a)
Guaranties of the Company or any Subsidiary incurred in the ordinary course of
business and which are not Guaranties of Debt or (b) Guaranties of the Company
included in Debt which are limited in amount to a stated maximum dollar exposure
which are otherwise permitted by the provisions of this Agreement.
6.13. Greyhound Agreement. The Company shall not cause or permit any
waiver, amendment, consent or modification of the terms of the Greyhound
Agreement that would have a materially adverse effect upon Purchaser's benefits
and relative relationships under this Agreement and the Warrant.
6.14. Transactions with Affiliates. (a) The Company shall not enter
into or be a party to any transaction or arrangement with any Affiliate
(including, without limitation, the purchase from, sale to or exchange of
property with, or the rendering of any service by or for, any Affiliate), except
in the ordinary course of and pursuant to the reasonable requirements of the
Company's business and upon fair and reasonable terms no less favorable to the
Company than would be obtained in a comparable arm's-length transaction with a
Person other than an Affiliate.
(b) The Company shall not enter into any employment,
management, consulting or benefit programs of any type with or with respect to
the Principal Shareholders, other than the Shareholders Agreements. The
Shareholders Agreements shall not be amended in any material respect without the
prior consent of Purchaser.
6.15. Termination of Pension Plans. The Company shall not and shall
not permit any Subsidiary to withdraw from any Multiemployer Plan or permit any
employee benefit plan maintained by it to be terminated if such withdrawal or
termination could result in withdrawal liability in excess of $50,000 (as
described in Part 1 of Subtitle E of Title IV of ERISA) or the imposition of a
Lien on any property of the Company or any Subsidiary pursuant to Section 4608
of ERISA.
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6.16. Financial Statements, Reports and Rights of Inspection. The
Company shall keep proper books of record and account in which full and correct
entries will be made of all dealings or transactions of, or in relation to, the
business and affairs of the Company, in accordance with GAAP consistently
applied (except for changes disclosed in the financial statements furnished to
Purchaser pursuant to this (S) 6.16 and concurred in by the independent public
accountants referred to in paragraph (c) hereof), and shall furnish to Purchaser
so long as Purchaser is the holder of the Note:
(a) Monthly Statements. As soon as available and in any event
within 30 days after the end of each monthly fiscal period (except the last such
monthly period) of each fiscal year, copies of:
(i) balance sheet of the Company as of the close of such
monthly fiscal period, and, beginning with the monthly fiscal period ending
on January 31, 1995, setting forth in comparative form the projected budget
figures for such monthly period and the figures for the fiscal year then
most recently ended.
(ii) statement of income of the Company for such monthly
fiscal period and for the portion of the fiscal year ending with such
monthly fiscal period, in each case setting forth in comparative form the
projected budget figures for such periods and the figures for the
corresponding periods of the preceding fiscal year, and
(iii) statement of cash flow of the Company, for such
monthly fiscal period and the portion of the fiscal year ending with such
monthly fiscal period, setting forth in comparative form the projected
budget figures for such period and the figures for the corresponding period
of the preceding fiscal year,
all in reasonable detail and certified as complete and correct by the Chief
Financial Officer.
(b) Quarterly Statements. As soon as available and in any event
within 30 days after the end of each quarterly fiscal period of each fiscal
year, copies of:
(i) balance sheets of the Company as of the close of such
quarterly fiscal period, setting forth in comparative form the projected
budget figures for such period and the figures for the fiscal year then
most recently ended,
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(ii) statement of income of the Company for such quarterly
fiscal period and for the portion of the fiscal year ending with such
quarterly fiscal period, in each case setting forth in comparative form the
projected budget figures for such periods and the figures for the
corresponding periods of the preceding fiscal year, and
(iii) statement of cash flow of the Company for such
quarterly fiscal period and for the portion of the fiscal year ending with
such quarterly fiscal period, setting forth in comparative form the
projected budget figures for such period and the figures for the
corresponding period of the preceding fiscal year,
all in reasonable detail and certified as complete and correct by the Chief
Financial Officer.
(c) Annual Statements. As soon as available and in any event
within 90 days after the close of each fiscal year of the Company, copies of the
balance sheets of the Company as of the close of such fiscal year, and
statements of income and retained earnings and cash flow of the Company for such
fiscal year, in each case setting forth in comparative form the projected budget
figures for such periods and the figures for the preceding fiscal year, all in
reasonable detail and accompanied by a report thereon of a firm of independent
public accountants of recognized national standing selected by the Company to
the effect that the financial statements present fairly, in all material
respects, the financial position of the Company as of the end of the fiscal year
being reported on and the results of the operations and cash flow for said year
in conformity with GAAP and that the examination of such accountants in
connection with such financial statements has been conducted in accordance with
generally accepted auditing procedures as said accountants deemed necessary in
the circumstances.
(d) Budget and Projections. As soon as practicable and in any
event prior to 30 days following the commencement of each new fiscal year,
reasonably detailed statements showing projected revenues, expenses, income and
capital expenditures for the Company for such fiscal year.
(e) Audit Reports. Promptly upon their becoming available, one
copy of each interim or special audit made by independent accountants of the
books of the Company and any management letter received from such accountants.
(f) Income Tax Returns. As soon as practicable after filing with
the Internal Revenue Service, complete
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copies of all federal income tax returns, excluding all schedules thereto.
(g) SEC and Other Reports, if Applicable. Promptly upon receipt
thereof, one copy of each financial statement, report, notice or proxy statement
sent by the Company to shareholders generally and of each regular or periodic
report, and any registration statement or prospectus filed by the Company or any
Subsidiary with any securities exchange or the Securities and Exchange
Commission or any successor agency, and copies of any orders in any proceedings
to which the Company is a party, issued by any governmental agency, federal or
state, having jurisdiction over the Company.
(h) ERISA Reports, if Applicable. Promptly upon the occurrence
thereof, written notice of (i) a Reportable Event with respect to any Plan; (ii)
the institution of any steps by the Company, any ERISA Affiliate, the PBGC or
any other person to terminate any Plan; (iii) the institution of any steps by
the Company or any ERISA Affiliate to withdraw from any Plan; (iv) a non-exempt
"prohibited transaction" within the meaning of section 406 of ERISA in
connection with any Plan; (v) any material increase in the contingent liability
of the Company with respect to any post-retirement welfare liability; or (vi)
the taking of any action by, or the threatening of the taking of any action by,
the Internal Revenue Service, the Department of Labor of the PBGC with respect
to any of the foregoing.
(i) Officer's Certificates. Within the periods provided in
paragraphs (b) and (c) above, a certificate of the Chief Financial Officer
stating that such officer has reviewed the provisions of this Agreement and
setting forth: (i) the information and computations (in sufficient detail)
required in order to establish whether the Company was in compliance with the
requirements of (S) 6 at the end of the period covered by the financial
statements then being furnished, and (ii) whether there existed as of the date
of such financial statements and whether, to the best of such officer's
knowledge, there exists on the date of the certificate or existed at any time
during the period covered by such financial statements any Default or Event of
Default and, if any such condition or event exists on the date of the
certificate, specifying the nature and period of existence thereof and the
action the Company is taking and proposes to take with respect thereto.
(j) Accountant's Certificates. Within the period provided in
paragraph (c) above, a certificate of the accountants who render an opinion with
respect to such
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financial statements, stating that they have reviewed this Agreement and stating
further whether, in making their audit, such accountants have become aware of
any Default or Event of Default under any of the terms or provisions of this
Agreement insofar as any such terms or provisions pertain to or involve
accounting matters or determinations, and if any such condition or event then
exists, specifying the nature and period of existence thereof.
(k) Requested Information. With reasonable promptness, such
other data and information as Purchaser may reasonably request. Without limiting
the foregoing, upon reasonably notice the Company shall permit Purchaser (or
such Persons as Purchaser may designate, including representations of the SBA)
to visit and inspect any of the properties of the Company or any Subsidiary, to
examine all of their books of account, records, reports and other papers, to
make copies and extracts therefrom and to discuss their respective affairs,
finances and accounts with their respective officers and independent public
accountants (and by this provision the Company authorizes such accountants to
discuss with Purchaser the finances and affairs of the Company), all at such
reasonable times and as often as may be reasonably requested. In particular, the
Company shall allow a reasonable visit and review by Purchaser or its
representatives within 90 days after the Closing Date for the purpose of
ascertaining that proceeds of its Note purchase were used as specified in
paragraph 12 of Exhibit C.
6.17. Indemnity. The Company shall reimburse and pay purchaser for all
fees, costs and expenses (including, without limitation, reasonable attorneys'
fees, court costs and reasonable legal expenses and consultants' and experts'
fees and expenses), incurred or expended in connection with (a) the breach by
the Company of any representation or warranty contained in any of the Financing
Documents, (b) the failure by the Company to perform any agreement, covenant,
condition, indemnity or obligation contained in any of the Financing
Documents, (c) Purchaser's exercise of any of its rights and remedies under any
of the Financing Documents, or (d) the protection of the Collateral and the
liens thereon and security interests therein. The Company shall indemnify and
hold harmless Purchaser and any Persons owned or controlled by or affiliated
with Purchaser, and their respective directors, officers, shareholders,
partners, employees, consultants and agents (herein individually called an
"Indemnified Party," and collectively called "Indemnified Parties") from and
against, and reimburse and pay Indemnified Parties with respect to, any and all
claims, demands, liabilities, losses, damages (including without limitation,
actual, consequential,
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exemplary and punitive damages), causes of action, judgments, penalties, fees,
costs and expenses (including, without limitation, reasonable attorneys' fees,
court costs and reasonable legal expenses and consultants' and experts' fees and
expenses), of any and every kind or character, known or unknown, fixed or
contingent, that may be imposed upon, asserted against or incurred or paid by or
on behalf of any Indemnified Party on account of, in connection with, or arising
out of (i) any bodily injury or death or property damage occurring in or upon or
in the vicinity of any Company office or the Collateral through any cause
whatsoever, (ii) any act performed or omitted to be performed hereunder or the
breach of or failure to perform any warranty, representation, indemnity,
covenant, agreement or condition contained in any of the Financing Documents,
(iii) any transaction, act, omission, event or circumstance arising out of or in
any way connected with the Collateral or with any of the Financing Documents,
and (iv) the violation of or failure to comply with any statute, law, rule,
regulation or order now existing or hereafter occurring, including, without
limitation, environmental laws and statutes, laws, rules, regulations and orders
relating to pollutants, contaminants, wastes or hazardous, dangerous or toxic
substances. Without limiting the generality of the foregoing, it is the
intention of Borrower and Borrower agrees that the foregoing indemnities shall
apply to each Indemnified Party with respect to claims, demands, liabilities,
losses, damages (including, without limitation, actual, consequential, exemplary
and punitive damages), causes of action, judgments, penalties, fees, costs and
expenses (including without limitation, reasonable attorneys' fees, court costs
and reasonable legal expenses and consultants' and experts' fees and expenses)
of any and every kind or character, known or unknown, fixed or contingent, that
in whole or in part are caused by or arise out of the negligence of such
Indemnified Party. Notwithstanding the foregoing, such indemnities shall not
apply to any Indemnified Party to the extent the subject of the Indemnification
is caused by or arises out of the gross negligence or willful misconduct of such
Indemnified Party. The foregoing indemnities shall not terminate upon release,
foreclosure or other termination of the Collateral Documents, but shall survive
foreclosure of the liens and security interests created by the Documents or
conveyance in lieu of foreclosure and the payment of the Note and the discharge
and release of the liens and security interest created by the Financing
Documents. Any amount to be paid hereunder by the Company to Purchaser or for
which the Company has indemnified an Indemnified Party shall be a demand
obligation owing by Borrower to Lender, shall bear interest at the default rate
specified in the Note (19%) until paid, and shall constitute a part of the
Indebtedness secured and evidenced by the Collateral Documents.
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SECTION 7. EVENTS OF DEFAULT AND REMEDIES THEREFOR.
7.1 Events of Default. Any one or more of the following shall
constitute an "Event of Default" as such term is used herein:
(a) Default shall occur in the payment of interest on the Note
when the same shall have become due; or
(b) Default shall occur in the making of any payment of the
principal of the Note or premium thereon, if any, at the expressed or any
accelerated maturity data or at any date fixed for prepayment; or
(c) Default shall be made in the payment when due (whether by
lapse of time, by declaration, by call for redemption or otherwise) of the
principal of or interest on any Debt (other than the Note) of the Company and
such default shall continue beyond the period of grace, if any, allowed with
respect thereto; or
(d) Default or the happening of any event shall occur under any
indenture, agreement or other instrument under which any Debt of the Company may
be issued and such default or event shall continue for a period of time
sufficient to permit the acceleration of the maturity of any Debt of the company
outstanding thereunder; or
(e) Default shall occur in the observance or performance of any
covenant or agreement contained in (S)(S) 6.1, 6.2, 6.3, 6.6, 6.8, 6.9, 6.11,
6.13, 6.16(a) through (f) and (k), and 6.17; or
(f) Default shall occur in the observance or performance of any
other provision of this Agreement or any other Financing Document that is not
remedied within 30 days after the earlier of (i) the day on which the Company
first obtains knowledge of such default, or (ii) the day on which notice thereof
is given to the Company by Purchaser, provided that such failure shall not be an
Event of default if the nature of the failure cannot be cured within 30 days and
Company has commenced curative action within such 30-day period and is
proceeding in good faith and by appropriate action to its completion; or
(g) The Company's representation and warranty in paragraph 12
of Exhibit C, involving the use of net proceeds from the sale of the Note to
purchase Common Stock, shall prove to be untrue, in that such proceeds or a
material portion thereof were diverted to another use without Purchaser's prior
consent; or
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(h) Any other material representation or warranty made by the
company herein or in any other Financing Document, or made by the Company in any
statement or certificate furnished by the Company in connection with the
consummation of the issuance and delivery of the Note or the warrant or
furnished by the Company pursuant hereto or pursuant to any Financing Document,
is untrue in any material respect as of the date of the issuance or making
thereof; or
(i) Final judgement or judgements for the payment of money
aggregating in excess of $100,000 is or are outstanding against the Company or
against any of its property or assets and any one of such judgments has
remained unpaid, unvacated, unbonded or unstayed by appeal or otherwise for a
period of 30 days from the date of its entry; or
(j) A custodian, liquidator, trustee or receiver is appointed
for the Company or for the major part of its property and is not discharged
within 30 days after such appointment; or
(K) The Company becomes insolvent or bankrupt, is generally not
paying its debts as they become due or makes an assignment for the benefit of
creditors, or the Company applies for or consents to the appointment of a
custodian, liquidator, trustee or receiver for the Company or for the major part
of its property, or
(l) Bankruptcy, reorganization, arrangement or insolvency
proceedings, or other proceedings for relief under any bankruptcy or similar law
or laws for the relief of debtors, are instituted by or against the Company or
any Subsidiary and, if instituted against the Company or any Subsidiary, are
consented to or are not dismissed within 60 days after such institution; or
(m) A material adverse change, including any overtly threatened
or pending litigation, investigation or administrative proceeding, occurs or, in
Purchaser's opinion, is likely to occur in the financial condition, business
operations, organization or property of the Company or either of its
subsidiaries.
7.2. Notice of Purchaser. When any Event of Default described in the
foregoing (S) 7.1 has occurred, the Company shall give notice thereof to
Purchaser within 10 business days of such event.
7.3. Acceleration of Maturities. Except as otherwise provided in the
Intercreditor Agreement, when an Event of Default has happened and is
continuing, Purchaser may, by
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notice to the Company, declare the entire principal and all interest accrued on
the Note to be, and the Note shall thereupon become, forthwith due and payable,
without any presentment, demand, protest or other notice of any kind, all of
which are hereby expressly waived. Thereupon the Company will forthwith pay to
Purchaser the entire principal and interest accrued on the Note. No course of
dealing on Purchaser's part nor any delay or failure on its part to exercise
any right shall operate as a waiver of such right or otherwise prejudice
Purchaser's rights, powers and remedies. The Company further shall, to the
extent permitted by law, pay to Purchaser all reasonable costs and expenses
incurred by Purchaser in the collection of the Note upon any default hereunder
or thereon, including reasonable compensation to Purchaser's attorneys for all
services rendered in connection therewith. Nothing herein shall be deemed a
waiver of (a) Purchaser's rights under any of the Collateral Documents or (b)
its right to sue the Company or other responsible Persons for loss of profit and
other damages suffered if there is an Event of Default under (s) 7.1 (g).
7.4. Acceleration of Senior Debt. The Company agrees, for the benefit
of Purchaser, that if the Senior Debt is declared due and payable before its
expressed maturity because of a default thereunder, (a) the Company shall give
prompt notice thereof to Purchaser and (b) if allowed by the Intercreditor
Agreement, the Note and the indebtedness evidenced thereby shall become
immediately due and payable upon demand, regardless of the expressed maturity
thereof.
SECTION 8. SUBORDINATION OF THE NOTE.
The Indebtedness evidenced by the Note, and any renewals or extensions
thereof, shall at all times be wholly subordinate and junior in right of payment
to the Senior Debt, as more fully set forth in the Intercreditor Agreement.
SECTION 9. MISCELLANEOUS.
9.1. Purchaser's Consent Required. Any term, covenant, agreement or
condition of this Agreement binding upon or to be performed or complied with by
the Company may be waived (either generally or in a particular instance and
either retroactively or prospectively) with Purchaser's consent. No such
consent shall be given, however, until Purchaser shall have been supplied with
sufficient information to enable Purchaser to make an informed decision with
respect thereto.
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9.2. Loss, Theft, Etc. of Note. Upon receipt of evidence
satisfactory to the Company of the loss, theft, mutilation or destruction of the
Note and, if reasonably requested by the Company, a reasonable indemnification
by Purchaser, the Company shall make and deliver without expense to Purchaser, a
new Note, of like tenor and issue, in lieu of such lost, stolen, destroyed or
mutilated Note.
9.3. Brokerage and Other Fees. In addition to the fees and costs
contemplated by the Commitment Letter, all expenses relating to any proposed or
actual amendment, waivers or consents pursuant to the provisions hereof,
including, without limitation, any amendments, waivers or consents resulting
from any work-out, renegotiation or restructuring relating to the performance by
the Company of its obligations under this Agreement, the Note and the other
Financing Documents. The Company also shall pay and save Purchaser harmless
against any liability for all brokerage fees and commissions payable or claimed
to be payable to any Person in connection with the transactions contemplated by
this Agreement and the other Financing Documents.
9.4. Powers and Rights Not Waived. No delay or failure on the part
of Purchaser in the exercise of any power or right shall operate as a waiver
thereof; nor shall any single or partial exercise of the same preclude any
other or further exercise thereof, or the exercise of any other power or right,
and the rights and remedies of Purchaser are cumulative to, and are not
exclusive of, any rights or remedies Purchaser would otherwise have.
9.5. Notices. Any notice, demand or delivery to be made pursuant to
the provisions of this Agreement shall be in writing and (a) shall be deemed to
have been given or made one day after the date sent (i) if by the Company, by
prepaid overnight delivery addressed to Purchaser at its address appearing on
the first page of this Agreement or (ii) if by Purchaser, by prepaid overnight
delivery addressed to the Company at 3400 Carlisle, Suite 500, Dallas, Texas
75240; and (b) if given by courier, confirmed telegram, confirmed facsimile
transmission or confirmed telex shall be deemed to have been made or given when
received. Purchaser and the Company may each designate a different address by
notice to the other in the manner provided in this (s) 9.5.
9.6. Successors and Assigns. This Agreement and the rights evidenced
hereby shall inure to the benefit of and be binding upon and the successors and
permitted assigns of the Company and Purchaser.
-32-
<PAGE>
9.7. Survival of Covenants and Representations. All covenants,
representations and warranties of the Company herein and in any certificates
delivered pursuant hereto, whether or not in connection with the Closing Date,
shall survive the closing and delivery of this Agreement, the Note and the other
Financing Documents.
9.8 Amendments. This Agreement may not be modified, supplemented,
varied or amended except by an instrument in writing signed by the Company and
Purchaser.
9.9. Headings. The index and the descriptive headings of sections of
this Agreement are provided solely for convenience of reference and shall not,
for any purpose, be deemed a part of this Agreement.
9.10. Maximum Interest Rate. It is not intended hereby to charge
interest at a rate in excess of the maximum rate of interest permitted to be
charged to the Company under applicable law, but if, notwithstanding such
intention, interest in excess of the maximum rate shall be paid hereunder, the
excess shall be retained by Purchaser as additional cash collateral for the
payment of the Note, unless such retention is not permitted by law or by the
Intercreditor Agreement, in which case the interest rate on the Note shall be
adjusted to the maximum permitted under applicable law during the period or
periods that the interest rate otherwise provided herein would exceed such rate.
9.11. The Company and Acquisition Corp. Upon the execution of this
Agreement by the Company and Acquisition Corp., the terms and conditions herein
and in the other Financing Documents, to the extent possible, shall apply
jointly and severally to each of such entities, and each shall be jointly and
severally liable thereunder, until the effective date of the Merger, defined for
this purpose to be the time and date on which the corporate existence of
Acquisition Corp. shall cease and the Company shall remain as
-33-
<PAGE>
the surviving entity. After such date, the Company and Purchaser shall be the
only parties to this Agreement. If for any reason the Merger has not been
accomplished on or before December 31, 1994 to the satisfaction of Purchaser in
its sole judgment, this Agreement shall terminate and neither the company nor
Acquisition Corp. shall be liable to Purchaser, or Purchaser to either of such
entities, except as set forth in the Commitment Letter and in (S) 6.17 of this
Agreement. The terms of this (S) 9.11 shall survive such termination of this
Agreement.
9.12. Governing Law. This Agreement and all matters concerning this
Agreement, including the Note, shall be governed by the laws of the State of
Colorado for contracts entered into and to be performed in such state without
regard to principles of conflicts of laws.
* * * * * *
The execution hereof by Purchaser shall constitute a contract between
the parties for the uses and purposes hereinabove set forth, and this Agreement
may be executed in any number of counterparts, each executed counterpart
constituting an original but all together only one agreement.
CPS ACQUISITION CORP.
By [SIGNATURE ILLEGIBLE]
----------------------------
Its President
CPS SYSTEMS, INC.
By [SIGNATURE ILLEGIBLE]
----------------------------
Its President
Accepted as of December 29, 1994.
HANIFEN IMHOFF MEZZANINE FUND, L.P.
By: Hanifen Imhoff Capital
Partners
By [SIGNATURE ILLEGIBLE]
------------------------------
Managing Partner
-34-
<PAGE>
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
AND CANNOT BE TRANSFERRED EXCEPT PURSUANT TO REGISTRATION OR AN EXEMPTION
THEREFROM.
CPS ACQUISITION CORP.
and
CPS SYSTEMS, INC.
12% Senior Subordinated Secured Note
Due December 31, 2000
$2,100,000 December 30, 1994
CPS Acquisition Corp., a Georgia corporation, and CPS Systems, Inc., a
Texas corporation ("Makers"), for value received, hereby promise to pay to
HANIFEN IMHOFF MEZZANINE FUND, L.P.
or registered assigns
on December 31, 2000
the principal amount of
Two Million One Hundred Thousand Dollars ($2,100,000)
and to pay interest (computed on the basis of a 360-day year of twelve 30-day
months) on the principal amount from time to time remaining unpaid hereon at the
rate of 12% per annum from the date hereof until maturity, payable quarterly on
the 30th of each March, June, September and December in each year (commencing
the first of such dates after the date hereof), and at maturity. Makers agree to
pay interest on overdue principal, and (to the extent legally enforceable) on
any overdue installment of interest, at the rate of 19% per annum after the due
date, whether by acceleration or otherwise, until paid. Both the Principal
hereof and interest hereon are payable at the principal office of Colorado
National Bank, Denver, Colorado, in coin or currency of the United States of
America that at the time of payment shall be legal tender for the payment of
public and private debts.
This Note is issued or to be issued under and pursuant to the terms
and provisions of the Note Agreement dated as of December 29, 1994 (the "Note
Agreement"), entered into by Makers with the Purchaser therein referred to and
is secured by the Collateral Douments (as defined in the Note Agreement).
Reference is hereby made to the Collateral Documents for a full statement of
terms and provisions thereof and for a description of the collateral thereunder.
EXHIBIT A
(to Note Agreement)
<PAGE>
This Note may be declared due prior to its expressed maturity date on
the terms and in the manner provided in the Note Agreement.
This Note is not subject to prepayment or redemption at the option of
Makers prior to its expressed maturity date except on the terms and conditions
and in the amounts and with the premium set forth in the Note Agreement.
This Note and the indebtedness evidenced hereby, including principal,
premium and interest, is expressly subordinate and junior to any and all Senior
Debt (as defined in the Note Agreement), all on the terms and to the extent more
fully set forth in the Intercreditor Agreement defined below.
The holder of this Note is registered on the books of Makers. It is
transferable only by surrender at the principal office of Makers duly endorsed
or accompanied by a written instrument of transfer duly executed by such holder
or holders's attorney duly authorized in writing. Payment of or on account of
principal, premium and interest on this Note shall be made only to or upon the
order in writing of such holder.
Notwithstanding anything to the contrary contained herein, the
payment of all outstanding principal hereunder and all accrued but unpaid
interest thereon shall be governed by and construed in accordance with the terms
and conditions of the "Intercreditor Agreement" defined in the Note Agreement.
So long as Makers are making the principal and interest payments under this Note
pursuant to the Intercreditor Agreement, the Company's failure to make the
principal payment at the stated maturity hereof shall not constitute a default
under the Note Agreement.
In the event of any conflict between the terms and provisions of the
Note Agreement and those of the Intercreditor Agreement with respect to the
payment of principal and interest under the Note, the terms and provisions of
the Intercreditor Agreement shall prevail.
The obligations of the Makers under this Note are joint and several.
Makers waive presentment, notice of dishonor and protest with respect to any
payment due under this Note.
CPS ACQUISITION CORP. CPS SYSTEMS, INC.
By_________________________________ By_________________________________
Its President Its President
A-2
<PAGE>
================================================================================
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER STATE
SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD OR TRANSFERRED IN VIOLATION OF SUCH
ACT OR LAW OR THE PROVISIONS OF THIS WARRANT.
Warrant No. 1
No. of Shares: 1,856 Dated: December 29, 1994
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
OF
CPS SYSTEMS, INC.
(successor by merger to
CPS Acquisition Corp.)
================================================================================
EXHIBIT B
(to Note Agreement)
<PAGE>
REPRESENTATIONS AND WARRANTIES
The Company and Acquisition Corp. each represents and warrants to
Purchaser as follows (with such changes as may be needed to reflect differences
in the makeup or status of the respective entities):
1. Corporate Organization and Authority. Such entity:
(a) is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation;
(b) has all requisite power and authority and all necessary
licenses and permits to own and operate its properties and to carry on its
business as now conducted and as presently proposed to be conducted
except where the failure to have such licenses and permits, either
singularly or in the aggregate, would not have a material adverse effect on
its business; and
(c) is duly licensed or qualified and is in good standing as a
foreign corporation in each jurisdiction wherein the nature of the business
transacted by it or the nature of the property owned or leased by it makes
such licensing or qualification necessary except where the failure to be so
licensed, qualified or in good standing, either singularly or in the
aggregate, would not have a material adverse effect on its business.
2. Financial Information. (a) Its financial information heretofore
delivered by it to Purchaser, is true, correct and complete.
(b) Since September 30, 1994 there has been no change in its
condition, financial or otherwise, as shown on the balance sheet as of such
date except changes in the ordinary course of business, none of which
individually or in the aggregate has been materially adverse.
3. Indebtedness. It has no material Debt as of the date hereof other
than as shown on such balance sheet.
4. Full Disclosure. Neither the financial information referred to in
paragraph 2 hereof nor the Note Agreement or any other written statement
furnished by it or its agents to Purchaser in connection with the
EXHIBIT C
(to Note Agreement)
<PAGE>
negotiation of the sale of the Note and Warrant, contains any untrue statement
of a material fact or omits a material fact necessary to make the statements
contained therein or herein not misleading. There is no fact peculiar to such
entity that it has not disclosed to Purchaser in writing that materially
adversely affects nor, so far as it can now reasonably foresee, will materially
adversely affect its properties, business, profits or condition (financial or
otherwise).
5. Pending Litigation. Except as shown on any attachment hereto,
there are no proceedings pending or, to the knowledge of such entity, threatened
against or affecting it in any court or before any governmental authority or
arbitration board or tribunal that are likely to materially and adversely affect
its properties, business, profits or condition (financial or otherwise).
6. Title to Properties. Such entity has good and marketable title to
all material parcels of real property owned by it and has good title to all the
other material items of property it purports to own, including that reflected in
the most recent balance sheet referred to in paragraph 2 hereof, except as sold
or otherwise disposed of in the ordinary course of business and except for Liens
permitted by the Note Agreement.
7. Patents and Trademarks. Such entity owns, possesses or has
applied for all the patents, trademarks, trade names, service marks,
copyright, licenses and rights with respect to the foregoing necessary for the
present and planned future conduct of its business, without any known conflict
with the rights of others.
8. Sale is Legal and Authorized. The sale of the Note and Warrant
and compliance by such entity with all of the provisions of the Financing
Documents:
(a) are within its corporate powers;
(b) will not violate any provisions of any law or any order of
any court or governmental authority or agency and will not conflict with or
result in any breach of any of the terms, conditions or provisions of, or
constitute a default under its Articles of Incorporation or bylaws or any
indenture or other agreement or instrument to which it is a party or by
which it may be bound or result in the imposition of any Liens or
encumbrances on any of its property (other than as contemplated in the
Note Agreement and the Financing Documents); and
C-2
<PAGE>
(c) have been duly authorized by proper corporate action on the
part of such entity (no action by shareholders being required by law, by
its Articles of Incorporation or bylaws or otherwise), and the Financing
Documents constitute the legal, valid and binding obligations, contracts
and agreements of such entity, enforceable in accordance with their
respective terms.
9. No Defaults. No Default or Event of Default has occurred and is
continuing. Such entity is not in default in the payment of principal or
interest on any Debt and is not in default under any instrument or instruments
or agreements under and subject to which any Debt has been issued. No event has
occurred and is continuing under the provisions of any such instrument or
agreement which with the lapse of time or giving of notice, or both, would
constitute an event of default thereunder.
10. Governmental Consent. No further approval, consent or withholding
of objection on the part of any regulatory body, state, federal or local, is
necessary in connection with the execution and delivery by such entity of the
Financing Documents or compliance with any of the Financing Documents.
11. Taxes. All tax returns required to be filed by such entity in
any jurisdiction have, in fact, been filed, and all taxes, assessments, fees and
other governmental charges upon any of them or upon any of their properties,
income or franchises that are shown to be due and payable in such returns have
been paid. Except as shown on any attachment hereto, such entity does not know
of any proposed additional tax assessment against it for which adequate
provisions has not been made on its accounts, and no material controversy in
respect of additional federal or state income taxes due since such date is
pending or to its knowledge threatened. The provisions for taxes in its books
are adequate for all open years, and for its current fiscal period.
12. Use of Proceeds. All of the net proceeds from the sale of the
Note will be used to purchase Common Stock as contemplated hereunder and to pay
the closing costs associated with such transaction.
13. ERISA. The consummation of the transactions provided for in the
Financing Documents and compliance by the Company with the provisions thereof
will not involve any prohibited transaction within the meaning of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended.
C-3
<PAGE>
Each Plan complies in all material respects with all applicable statutes and
governmental rules and regulations, and, with respect to the period on and after
December 21, 1987 and, to the best knowledge of such entity after diligent
inquiry, with respect to the period prior to December 21, 1987, (a) no
Reportable Event has occurred and is continuing with respect to any Plan, (b)
neither such entity nor any ERISA Affiliate has withdrawn from any Plan or
Multiemployer Plan or instituted steps to do so, and (c) no steps have been
instituted to terminate any Plan. No condition exists or event or transaction
has occurred in connection with any Plan which could result in the incurrence by
such entity or any ERISA Affiliate of any material liability, fine or penalty.
No Plan, nor any trust created thereunder, has incurred any "accumulated funding
deficiency" as defined in Section 302 of ERISA nor does the present value of all
benefits vested under all Plans exceed, as of the last annual valuation date,
the value of the assets of the Plans allocable to such vested benefits. Neither
such entity nor any ERISA Affiliate has any contingent liability with respect to
any post-retirement "welfare benefit plan" (as such term is defined in ERISA)
except as has been disclosed to Purchaser.
14. Compliance with Law. Such entity (a) is not in violation of any
material law, ordinance, franchise, governmental rule or regulation to which it
is subject; or (b) has failed to obtain or apply for the transfer of any
license, permit, franchise or other governmental authorization necessary to the
ownership of its property or to the conduct of its business, which violation or
failure to obtain would materially adversely affect its business, prospects,
profits, properties or condition (financial or otherwise) or materially impair
its ability to perform its obligations contained in the Financing Documents. It
is not in default with respect to any order of any court or governmental
authority or arbitration board or tribunal, which default could materially
adversely affects its business, prospects, profits, properties or condition,
financial or otherwise, or impair its ability to perform its obligations
contained in the Financing Documents.
15. Compliance with Environmental Laws. Such entity is not in
violation of any applicable environmental law that could have a material adverse
effect on its business, prospects, profits, properties or condition (financial
or otherwise).
16. Capital Stock. The authorized capital stock of the Company
consists of 100,000 shares of Common Stock $.01 par value. Upon the closing of
the transactions contemplated
C-4
<PAGE>
by the Note Agreement, there will be 10,000 shares of Common Stock issued and
outstanding. In addition, the board of directors of the Company has duly
reserved a sufficient quantity of shares of Common Stock for issuance upon
exercise of the Warrant. No shareholder of the Company or any other person is
entitled to preemptive or similar rights with respect to shares of Common Stock
that are issuable upon exercise of the Warrant and if and when the Warrant is
exercised in accordance with the provisions thereof, the shares of Common Stock
to be delivered by the Company to Purchaser in connection with such exercise
will be validly issued, fully paid and nonassessable.
17. Solvency. On the Closing Date and after giving effect to the
Indebtedness created by the Note;
(a) The fair saleable value of the property of such entity is
greater than the total amount of its liabilities (including contingent and
unliquidated liabilities) on the Closing Date; and
(b) such entity is able to pay all of its liabilities as they
mature and does not have unreasonably small capital for the business about
to be engaged.
In computing the amount of contingent or liquidated liabilities at any
time, such liabilities will be computed at the amount which, in light of all the
facts and circumstances existing at such time, represents the amount that can
reasonably be expected to become an actual or matured liability.
18. Collateral. (a) The Collateral has not suffered damage or
destruction that renders it inoperable and, under applicable zoning, use,
environmental protection and other laws, ordinances, rules and regulations, such
properties may be used for the present use and purpose as described in the
Agreement. The Collateral is free and clear of all Liens other than
encumbrances permitted by the Collateral Documents.
(b) The Collateral Documents and/or financing statements with
respect thereto have been filed for record in all public offices wherein
such filing is necessary to perfect, fully preserve and protect the lien of
Purchaser under the Collateral Documents against creditors perfected
security interest in the Collateral specifically described therein (or, in
lieu of filing financing statements, the Collateral described therein has
been delivered into the possession of the pledgee thereunder which
constitutes perfection of the Collateral described therein).
C-5
<PAGE>
19. Employment Agreements, Etc. Neither such entity nor the Shareholders
are parties to any management, consulting, employment or shareholders agreement
between or among such entity and one or more of the Shareholders (or the
shareholders of Acquisition Corp.), other than the Shareholders Agreements.
C-6
<PAGE>
DESCRIPTION OF CLOSING OPINIONS OF COUNSEL TO THE COMPANY
AND TO ACQUISITION CORP.
The closing opinion of _____________________________, counsel to the
Company (or Acquisition Corp., as the case may be), which is called for by $
5.1(b) of the Agreement, shall be dated the Closing Date and addressed to
Purchaser, shall be satisfactory in scope and form to Purchaser, and shall be to
the effect that (with such changes as may be needed to reflect differences in
the makeup or status of the respective entities):
(1) Such entity is a corporation, duly incorporated, legally existing
and in good standing under the laws of its state of incorporation [naming
it], has corporate power and authority and is duly authorized to enter into
and perform the Financing Agreements, and to issue the Note and the Warrant
and incur the Indebtedness to be evidenced by the Note and has full
corporate power and authority to conduct the activities in which it is now
engaged, and is duly licensed or qualified and is in good standing as a
foreign corporation in each jurisdiction in which the character of the
properties owned or leased by it or the nature of the business transacted
by it makes such licensing or qualification necessary;
(2) The Note Agreement has been duly authorized, executed and
delivered by such entity and constitutes the legal, valid and binding
agreement of such entity enforceable in accordance with its terms, subject
to applicable bankruptcy, insolvency or similar laws affecting creditors'
rights generally, and subject as to enforceability to general principles of
equity (regardless of whether enforcement is sought in a proceeding in
equity or at law).
(3) Financing Documents have been duly authorized, executed and
delivered by such entity and constitute its legal, valid and binding
agreements enforceable in accordance with the terms of each such
document, subject to applicable bankruptcy, insolvency or similar laws
affecting creditors' rights generally, and subject as to enforceability to
general principles of equity (regardless of whether enforcement is sought
in a proceeding in equity or at law) and except that certain remedies
provided for in the Collateral Documents may be limited by applicable law
(none of which limitations will, however, in our opinion, materially
interfere with the practical realization of the security provided by the
Financial Documents).
EXHIBIT D
(to Note Agreement)
<PAGE>
(4) The Note has been duly authorized by proper corporate action on the
part of the Company or Acquisition Corp., as the case may be, has been duly
executed by its authorized officers and constitutes its legal, valid and binding
obligation enforceable in accordance with the terms of the Note, subject to
applicable bankruptcy, insolvency or similar laws affecting creditors' rights
generally, and subject as to enforceability to general principles of equity
(regardless of whether enforcement is sought in a proceeding in equity or at
law).
(5) The Warrant has been duly authorized by proper corporate action on the
part of the Company, has been duly executed and delivered by authorized officers
of the Company and constitutes the legal, valid and binding agreement of the
Company enforceable in accordance with its terms, except as enforcement of such
terms may be limited by bankruptcy, insolvency or similar laws and legal and
equitable principles affecting or limiting the availability of equitable
remedies and except that enforcement of the provisions with respect to
indemnities contained in the Warrant may be limited by public policy
consideration.
(6) No approval, consent or withholding of objection on the part of, or
filing, registration or qualification with, any governmental body, federal,
state or local, is necessary in connection with the execution and delivery of
the Note Agreement, the Warrant, the Collateral Documents or the Note.
(7) The issuance and sale of the Note and the Warrant, the issuance of any
Common Stock upon exercise of the Warrants, and the execution, delivery and
performance by such entity of the Note Agreement, the Warrant and the Collateral
Documents will not violate preemptive rights of other holders of capital stock
of such entity existing under its Articles of Incorporation and bylaws or under
the applicable corporate laws of its state of incorporation or any other
agreement or instrument known to such counsel, or trigger any anti-takeover
rights of other holders of such entity's capital stock or conflict with or
result in any breach of any of the provisions of or constitute a default under
or result in the creation or imposition of any Lien upon any of its property
pursuant to the provisions of its Articles of Incorporation or bylaws or under
corporate laws of its state of incorporation or any agreement or other
instrument known to such counsel to which such entity is a party or by which it
may be bound.
D-2
<PAGE>
(8) The issuance, sale and delivery of the Note and the Warrant under
the circumstances contemplated by the Agreement constitute an exempt
transaction under the registration provisions of the Securities Act of
1933, as amended, and do not under existing law require the registration of
the Note or the Warrant under the Securities Act of 1933, as amended.
(9) The authorized capital stock of such entity consists of
______________ shares of Common Stock, $_____________ par value, of which
_____________ shares are issued and outstanding and _____________ shares
have been reserved for issuance upon exercise of the warrant.
(10) Assuming compliance by the Company with the terms and provisions
of the Warrant, the shares of Common Stock issuable upon exercise thereof
will be validly issued, fully paid and nonassessable.
This opinion shall cover such other matters relating to the Note
Agreement and the sale of the Note and the Warrant as Purchaser may reasonably
request. With respect to matters of fact on which such opinion is based, counsel
shall be entitled to rely on appropriate certificates of public officials and
officers of the entity that is the subject of closing opinion.
D-3
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES
CDP SYSTEMS, INC., A FLORIDA CORPORATION
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated January 22, 1997 (except for Note I, as to
which the date is October 23, 1997), accompanying the financial statements and
schedule of CPS Systems, Inc. for each of the two years in the period ended
December 31, 1996 contained in the Form SB-2, Registration Statement under the
Securities Act of 1933 (the "Registration Statement") and in the Prospectus
which forms a part of that Registration Statement. We consent to the use of the
aforementioned reports in the Registration Statement and Prospectus, and to the
use of our name as it appears under the caption "Experts".
GRANT THORNTON LLP
Atlanta, Georgia
October 31, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CPS SYSTEMS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 592,000 447,000
<SECURITIES> 0 0
<RECEIVABLES> 1,536,000 1,633,00
<ALLOWANCES> 27,000 42,000
<INVENTORY> 92,000 175,000
<CURRENT-ASSETS> 2,413,000 2,565,000
<PP&E> 456,000 484,000
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 6,134,000 6,137,000
<CURRENT-LIABILITIES> 2,110,000 2,197,000
<BONDS> 0 0
0 0
0 0
<COMMON> 39,000 39,000
<OTHER-SE> 485,000 618,000
<TOTAL-LIABILITY-AND-EQUITY> 6,134,000 6,137,000
<SALES> 8,363,000 5,406,000
<TOTAL-REVENUES> 8,363,000 5,406,000
<CGS> 1,750,000 1,486,000
<TOTAL-COSTS> 5,528,000 3,199,000
<OTHER-EXPENSES> 434,000 221,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 731,000 192,000
<INCOME-PRETAX> 81,000 307,000
<INCOME-TAX> 165,000 174,000
<INCOME-CONTINUING> (246,000) 133,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (246,000) 133,000
<EPS-PRIMARY> (.06) .03
<EPS-DILUTED> (.06) .03
</TABLE>
