<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-14001
CUMETRIX DATA SYSTEMS CORP.
(Exact Name of Registrant as Specified in its Charter)
California 95-4574138
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
957 Lawson Street, Industry, California 91748
(Address, Including Zip Code, Of Registrant's Principal Executive Offices)
(626) 965-6899
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Security Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the last 90 days. Yes [X] No [ ]
As of February 16, 1999, the Registrant had 7,452,500 shares of Common
Stock, without par value, issued and outstanding.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1. Condensed Balance Sheets - December 31, 1998 and March 31, 1998
2. Condensed Statements of Operations - Three Months Ended December
31, 1998 and 1997
3. Condensed Statements of Operations - Nine Months Ended December
31, 1998 and 1997
4. Condensed Statements of Cash Flows - Nine Months Ended December
31, 1998 and 1997
5. Notes to Financial Statements
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CUMETRIX DATA SYSTEMS CORP.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, March 31,
1998 1998
--------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 9,439,425 $ 4,415,690
Trade receivables, net of allowance for
doubtful accounts of $137,000 and $57,000 at
December 31, 1998 and March 31, 1998,
respectively....................................... 3,951,435 3,885,803
Inventories......................................... 3,580,356 2,001,597
Deferred taxes...................................... 159,525 133,647
Prepaid expenses.................................... 186,172 45,983
----------- -----------
Total current assets........................... 17,316,913 10,482,720
----------- -----------
FIXED ASSETS, net........................................ 347,623 87,538
DEFERRED OFFERING COSTS.................................. - 514,927
CAPITALIZED PURCHASED SOFTWARE COSTS..................... 1,100,000 1,100,000
INVESTMENT............................................... 100,000 -
----------- -----------
Total Assets................................... $18,864,536 $12,185,185
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................... $ 6,012,887 $ 7,822,652
Accrued expenses.................................... 115,012 641,844
Income taxes payable................................ 6,102 717,013
Current portion of long-term debt................... 3,962 1,203,707
----------- -----------
Total current liabilities...................... 6,137,963 10,385,216
----------- -----------
LONG-TERM DEBT, net of current portion................... 5,860 8,864
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value: Authorized,
2,000,000 shares; issued and outstanding, none..... - -
Common stock, no par value: Authorized,
20,000,000 shares; issued and outstanding,
7,452,500 and 4,750,000 at December 31, 1998 and
March 31, 1998, respectively....................... 11,967,061 1,042,589
Retained earnings................................... 753,652 748,516
----------- -----------
Total shareholders' equity..................... 12,720,713 1,791,105
----------- -----------
Total liabilities and shareholders' equity..... $18,864,536 $12,185,185
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed balance sheets.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
NET SALES............................................ $16,251,491 $19,799,736
COST OF PRODUCTS..................................... 15,740,845 18,972,036
----------- -----------
Gross profit..................................... 510,646 827,700
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 796,548 418,866
----------- -----------
Income (Loss) from operations.................... (285,902) 408,834
INTEREST EXPENSE..................................... 1,894 12,625
INTEREST INCOME...................................... 101,071 10,082
----------- -----------
Income (loss) before provision (benefit) for
income taxes..................................... (186,725) 406,291
PROVISION (BENEFIT) FOR INCOME TAXES................. (76,719) 162,516
----------- -----------
NET INCOME (LOSS).................................... (110,006) 243,775
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE................. $ (0.01) $ 0.05
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
NET SALES............................................ $54,084,126 $49,175,291
COST OF PRODUCTS..................................... 52,592,335 47,100,756
----------- -----------
Gross profit..................................... 1,491,791 2,074,535
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 1,898,243 1,029,504
----------- -----------
Income (Loss) from operations.................... (406,452) 1,045,031
INTEREST EXPENSE..................................... 4,098 13,908
INTEREST INCOME...................................... 421,738 10,723
----------- -----------
Income before provision for income taxes......... 11,188 1,041,846
PROVISION FOR INCOME TAXES........................... 6,052 416,738
----------- -----------
NET INCOME........................................... 5,136 625,108
=========== ===========
BASIC AND DILUTED EARNINGS PER SHARE................. $ 0.00 $ 0.13
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 5,136 $ 625,108
Adjustments to reconcile net income to net
cash and cash equivalents used in operating
activities:
Depreciation and amortization...................... 18,900 2,847
Amortization of deferred financing costs........... - 12,100
Provision for doubtful accounts.................... 128,000 56,310
Loss on receivable from director................... - 100,000
Options issued for services........................ 21,000 -
Changes in assets and liabilities:
Trade receivables.................................. (193,632) (2,284,437)
Inventories........................................ (1,578,759) (2,391,716)
Deferred taxes..................................... (25,878) (41,788)
Prepaid expenses................................... (174,488) (18,830)
Other.............................................. 34,299 (129,250)
Accounts payable................................... (1,809,765) 5,258,818
Accrued expenses................................... (526,832) 22,450
Income taxes payable............................... (710,911) 393,713
----------- -----------
Net cash provided(used) by operating
activities...................................... (4,812,930) 1,605,325
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets............................... (278,985) (8,684)
Receivables from related parties........................ - 39,700
Purchase of Capitalized Software Costs.................. - (150,000)
Cash paid for investment................................ (100,000) -
----------- -----------
Net cash provided (used) in investing
activities...................................... (378,985) (118,984)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering, net.............. 11,203,472 -
Payments on bank borrowings............................. - (2,516)
Proceeds from Note...................................... - 550,000
Payments on long-term debt.............................. (1,202,749) -
Payments on Notes....................................... - (300,000)
Proceeds from stock issuance............................ - 749,200
Deferred offering costs................................. 514,927 -
Purchase of Stock from Shareholder...................... (300,000) -
----------- -----------
Net cash provided by financing activities........ 10,215,650 996,684
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 5,023,735 2,483,025
CASH AND CASH EQUIVALENTS, beginning of period............ 4,415,690 479,796
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................. $ 9,439,425 $ 2,962,821
=========== ===========
CASH PAID FOR INTEREST 1,894 1,808
CASH PAID FOR INCOME TAXES 730,000 13,000
</TABLE>
The accompanying notes are an integral part of these condensed statements.
<PAGE>
CUMETRIX DATA SYSTEMS CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information and footnote disclosures normally included in financial statements
prepared in conformity with generally accepted accounting principles have been
omitted or condensed pursuant to the rules and regulations of the Securities and
Exchanges Commission (SEC). These statements should be read in conjunction with
the Company's March 31, 1998 audited financial statements and notes thereto
included in the Company's Form 10-K dated June 5, 1998, including all amendments
thereto. In the opinion of management, these interim financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation of the financial position and results of operations for
each of the periods presented. The results of operations and cash flows for such
periods are not necessarily indicative of results to be expected for the full
year.
2. Earnings Per Common Share
Earnings per share calculations are in accordance with SFAS No. 128,
"Earnings per Share" (SFAS 128). Accordingly, "basic" earnings per share is
computed by dividing net income by the weighted average number of shares
outstanding for the year. "Diluted" earnings per share is computed by dividing
net income by the total of the weighted average number of shares outstanding
plus the dilutive effect of outstanding stock options (applying the treasury
stock method). Earnings per share amounts for 1997 have been restated to reflect
the adoption of SFAS No. 128.
A reconciliation of the basic weighted average number of shares outstanding
and the diluted weighted average number of shares outstanding for each of the
three and nine month periods ended December 31, follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
December 31, December 31,
--------- --------- --------- ---------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average number
of common shares
outstanding-Basic 7,432,087 4,499,444 7,355,773 4,477,590
Dilutive effect of
outstanding stock
options and warrants - 134,348 226,200 78,394
--------- --------- --------- ---------
Weighted average number
of common shares
outstanding-Diluted 7,432,087 4,633,792 7,581,973 4,555,984
========= ========= ========= =========
</TABLE>
3. Reclassifications
Certain amounts in the 1997 Financial Statements have been reclassified to
conform to the 1998 presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Overview
The Company was founded in April 1996, and until December of 1996 operated
entirely as a distributor and value added reseller of computer equipment and
related hardware components and software peripherals. In December of 1996, the
Company entered the system configuration business. This process required certain
organizational and operational changes to effectively position the Company as a
provider of configuration and integration solutions to various levels within the
distribution, integration and end-user markets.
In order to enhance its competitive advantage in the systems integration
market, the Company has entered into a perpetual non-exclusive licensing
agreement with Computer Aided Software Integration, Inc. ("CASI") to license
CASI's Configurator software for use in the development and commercialization of
the Company's ACSA Solution. The Company paid CASI a one-time license fee of
$1.1 million. The payments for the license agreement were capitalized and will
be amortized starting when the configurator software is placed in service over
the useful life of the software, which, for accounting purposes, is currently
estimated to be between three and five years.
Although the Company had anticipated implementing the ACSA Solution by
December 31, 1998, the Company has experienced significant delays in
implementing the ACSA Solution due primarily to a dispute related to the
Reseller Agreement dated September 15, 1997, with CASI and CASI's subsequent
refusal to provide the Company with the necessary training to operate its
Configurator software and related technical support. CASI is obligated to
provide such training and technical support to the Company under the terms of
the License Agreement, dated September 15, 1997, by and between the Company and
CASI, pursuant to which the Company licensed the Configurator software. The
Company is attempting to resolve the delays it is experiencing with CASI. The
delays in implementing the ACSA Solution also result, in part, from staff
turnover. While there can be no assurance, the Company currently anticipates the
availability of the ACSA Solution in the fourth quarter of fiscal year 1999.
Delays in implementing the ACSA Solution have caused the Company to derive its
revenues almost exclusively from the Company's computer products distribution
business, which has gross margins significantly lower than those the Company
believes to be available in the system configuration business. In light of high
legal expenses inherant in litigating the matter, the company opted to negotiate
an amicable resolution with CASI. Based on current discussions, the Company
believes that it will reach an amicable outcome in this matter with CASI.
However, there can be no assurance that the Company will succeed in reaching a
solution to the dispute with CASI that is acceptable to the Company.
Competitive factors in the Computer Products market include price, service
and support, the variety of products offered, and marketing and sales
capabilities. While the Company believes that it competes successfully with
respect to most, if not all of these factors, there can be no assurance that it
will continue to do so in the future. The industry has come to be characterized
by aggressive price cutting which intensified in the first quarter of fiscal
1999 as a result of industry wide pricing pressures
<PAGE>
resulting from excess supplies from major manufacturers and reduced demand in
the overall personal computer industry. These factors can in part be traced to
the economic slow-down in Asia and excess worldwide build up of personal
computers in the first calendar quarter of 1998. The Company expects that these
factors may continue to sustain pricing pressures at least until the end of the
fourth fiscal quarter and possibly longer. As a result of these pricing
pressures, the Company's margins have been pressured and the Company has
declined to compete for certain lower margin business. However, the Company will
need to continually provide competitive prices, superior product selection and
delivery response time in order to remain competitive. If the Company were to
fail to compete favorably with respect to any of these factors, the Company's
business and operating results may be adversely affected.
Also, the Company's business is subject to certain quarterly influences.
Historically, net sales and operating profits were generally higher in the third
fiscal quarter due to the purchasing patterns of personal computer integrators
and resellers and are generally lower in the first and second fiscal quarters
due primarily to lower industry shipments. The Company's lower sales in the
third fiscal quarter ended December 31, 1998 as compared to December 31, 1997,
however, run counter to these quarterly influences, a result the Company
attributes to its unwillingness to compete for low margin business in the
hardware distribution market.
During the third quarter, the Company began the implementation of an
internet strategy designed to give the Company e-commerce and internet auction
capabilities. The Company has begun to form a wholly-owned subsidiary to focus
on the Company's internet initiatives.
In December, 1998, the Company purchased Preferred Stock of Online
Transactions Technologies, Inc., a California corporation ("OTT"), which
develops e-commerce and internet auction websites for $100,000. On February 1,
1999, the Company exercised an option to purchase $900,000 of additional
Preferred Stock in OTT for a 27.8% equity stake in OTT on a fully-diluted basis.
The Company holds an option to purchase up to an aggregate 50% equity stake in
OTT. The Company has begun to work with OTT to develop and implement the
Company's internet strategy, which it expects to include e-commerce and internet
auction websites.
The implementation of the Company's internet strategy will result in the
Company incurring significant expenses in the fourth quarter which will not be
offset by internet-related revenues.
This discussion summarizes the significant factors affecting the operating
results, financial condition and liquidity/cash flows of the Company for the
quarters ended December 31, 1998 and 1997 and nine months ended December 31,
1998 and 1997. The Company has a limited history of operations.
Special Note Regarding Forward-Looking Information
This Report contains statements that constitute "forward-looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934 and Section 27A of the Securities Act of 1933. The words "expect,"
"estimate," "anticipate," "predict," "believe," and similar expressions and
<PAGE>
variations thereof are intended to identify forward-looking statements. Such
statements appear in a number of places in this filing and include statements
regarding the intent, belief or current expectations of the Company, its
Directors or Officers with respect to, among other things (a) trends effecting
the financial condition and results of operations of the Company and (b) the
business and growth strategies of the Company. The shareholders of the Company
are cautioned not to put undue reliance on such forward-looking statements.
Such forward-looking statements are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from
those projected in this Report, for the reasons, among others, discussed in
"Future Operating Results" below and under the caption, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Risk
Factors" in the Company's Annual Report on Form 10-K for Fiscal 1998, filed with
the Securities and Exchange Commission. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof. Readers should carefully review
the risk factors referred to above and the other documents the Company files
from time to time with the Securities and Exchange Commission, including the
Company's Annual Report on Form 10-K for the fiscal year 1998, the quarterly
reports on Form 10-Q filed by the Company during the remainder of fiscal 1999,
and any current reports on Form 8-K filed by the Company.
Results of Operations
Three Months Ended December 31, 1998 and 1997.
Net Sales. Net sales for the quarter ended December 31, 1998 were $16,251,491
compared to $19,799,736 in the previous year. This decrease of $3,548,245 or
17.9% in net sales results from sustained industry oversupply, resulting pricing
pressures and the Company's determination to attempt to defend margins, where
the Company has increased gross profits as a percentage of net sales from 2.8%
in the second quarter to 3.1% in the third quarter, rather than pursue sales
growth through low margin sales. Net sales declined from $19,418,109 in the
second quarter to $16,251,491 primarily due to the Company's unwillingness to
compete for lower margin business in the computer products distribution
business. The Company expects that its historical annual growth rate for net
sales will not be sustained in fiscal 1999 and that these pricing pressures will
continue to affect gross profit.
Cost of Products. Cost of products decreased $3,216,562 from $18,957,407 to
$15,740,845 for the quarter ended December 31, 1997 and 1998, respectively. This
decrease is mainly attributable to the decrease in net sales.
Gross Profit. Gross profit for the quarter ended December 31, 1998 was
$510,646 compared to $827,700 in the quarter ended December 31, 1997. Gross
profit as a percentage of net sales was 3.1% for the quarter ended December 31,
1998 compared to 4.2% for the quarter ended December 31, 1997. This represents a
26.2% decrease in gross profit, and is mainly attributable to industry
oversupply and the resulting pricing pressures facing the industry as a whole.
As discussed under "Net Sales" above, the Company increased gross profits as a
percentage of net sales from 2.8% in the second quarter to 3.1% in the third
quarter.
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for quarter ended December 31, 1998 were $796,548
compared to $418,866 for the quarter ended December 31, 1997.
The major components of selling, general and administrative expenses for
the periods include the following:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
------- -------
<S> <C> <C>
Payroll (including commissions) 395,000 327,000
Rent 18,000 11,000
Insurance 27,000 5,000
Advertising/Brochure 18,000 1,000
Legal, Accounting and other professional services 53,000 1,000
Credit and Collection 100,000 38,000
Public Relations 27,000 -
Other (under 5%) 158,548 35,866
------- -------
Total 796,548 418,866
======= =======
</TABLE>
The increase of $377,682 in selling, general and administrative expenses is
attributable to increased staff and overhead to support the higher levels of
sales and marketing activity. In addition, the Company hired additional
personnel in finance and administration to facilitate growth of the Company's
infrastructure and revenue expansion. SG&A costs in the quarter included rent in
a larger facility, D&O insurance costs, legal and accounting costs, an
additional provision for bad debt expense, and other costs related to being a
public company. In addition, in accordance with FAS No. 123, the Company has
included in SG&A a non-cash charge of $21,000 to public relations expense and a
corresponding credit to Paid in Capital upon issuance of options to outside
consultants.
Interest Income
Interest income of $101,071 for the quarter ended December 31, 1998 is
primarily due to interest income earned on the investment of proceeds from the
initial public offering.
Net Income
Net loss for the quarter ended December 31, 1998 was $110,006 compared to
net income of $243,775 for the quarter ended December 31, 1997. The decrease of
$353,781 is mainly attributable to the decrease in sales, gross profit, higher
selling, general and administrative expenses, offset by interest income.
Nine Months Ended December 31, 1998 and 1997.
Net Sales. Net sales for the nine months ended December 31, 1998 were
$54,084,126 compared to $49,175,291 in the previous year. This increase of
$4,908,835 or 10% in net sales is attributable to growth of the Company's
<PAGE>
sales force and an increase in the Company's available combined purchasing
credit (including its vendor credit and a new credit facility of $25 million,
consisting of a $20 million flooring line of credit and a $5 million revolving
line of credit (together, the "Finova Line"), from Finova Capital Corporation
which allowed the Company to increase its ability to purchase product to fulfill
more sales orders. However, as a result of sustained industry oversupply,
resulting pricing pressures and the Company's determination to attempt to defend
margins rather than pursue sales growth through low margin sales, the Company
expects that its historical annual growth rate for net sales will not be
sustained in fiscal 1999 and that these pricing pressures will continue to
affect gross profit.
Cost of Products. Cost of products increased $5,491,579 from $47,100,756 to
$52,592,335 for the nine months ended December 31, 1997 and 1998, respectively.
This increase is mainly attributable to the increase in net sales.
Gross Profit. Gross profit for the nine months ended December 31, 1998 was
$1,491,791 compared to $2,074,535 in the nine months ended December 31, 1997.
Gross profit as a percentage of net sales was 2.8% for the nine months ended
December 31, 1998 compared to 4.2% for the nine months ended December 31, 1997.
This represents a 33% decrease in gross profit, and is mainly attributable to
industry oversupply and the resulting pricing pressures facing the industry as a
whole.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for nine months ended December 31, 1998 were $1,898,243
compared to $1,029,504 for the nine months ended December 31, 1997.
The major components of selling, general and administrative expenses for
the periods include the following:
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
1998 1997
--------- ---------
<S> <C> <C>
Payroll (including commissions) 1,069,000 707,000
Rent 54,000 36,000
Insurance 72,000 13,000
Advertising/Brochure 24,000 1,000
Legal, Accounting and other professional services 147,000 5,000
Credit and Collection 190,000 99,000
Public Relations 27,000 -
Write-off of related party receivable - 100,000
Other (under 5%) 315,243 68,504
--------- ---------
Total 1,898,243 1,029,504
========= =========
</TABLE>
The increase of $868,739 in selling, general and administrative expenses is
attributable to increased staff and overhead to support the higher levels of
sales and marketing activity. The Company's salaries of its executive officers
are at levels the Company believes to be commensurate with current market value
compared to the nine months ended December 31, 1997. In addition, the Company
hired additional personnel in finance and administration to
<PAGE>
facilitate growth of the Company's infrastructure and revenue expansion. SG&A
costs in the period included rent in a larger facility, D&O insurance costs,
legal and accounting costs, an additional provision for bad debt expense, and
other costs related to being a public company. In addition, in accordance with
FAS No. 123, included in SG&A a non-cash charge of $21,000 to public relations
expense and a corresponding credit to Paid in Capital upon issuance of options
to outside consultants.
Interest Income
Interest income of $421,738 for the nine months ended December 31, 1998 is
primarily due to interest income earned on the investment of proceeds from the
initial public offering.
Net Income
Net income for the nine months ended December 31, 1998 was $5,136 compared
to $625,108 for the nine months ended December 31, 1997. The decrease of
$619,972 is mainly attributable to the decrease in gross profit, higher selling,
general and administrative expenses, offset by interest income.
Year 2000 Update
General
The Company has begun a Year 2000 Project (the "Project"). The Project
will address this issue of whether computer programs and imbedded computer chips
will be able to distinguish between the years 1900 and 2000. First, the Company
will evaluate its Year 2000 readiness for both information technology ("IT") and
non-information technology ("non-IT") systems. Non-IT systems typically include
embedded technology in electronic equipment, such as microprocessors, and are
more difficult to assess and repair than IT systems. Second, for both IT and
non-IT systems, the Company will implement any necessary changes it believes
will make the Company ready for the year 2000. Third, the Company will evaluate
the readiness of its major vendors and customers to determine what impact, if
any, their readiness will have on the Company.
Project
To be Year 2000 Compliant, IT and non-IT systems must (a) consistently
handle data information before, during and after January 1, 2000, including
accepting date input, providing date output, and performing calculations on
dates or portions of dates, (b) function accurately and without interruption
before, during and after January 1, 2000, without any change in operations
associated with the turn of the century, and (c) store and provide output of
date information in a manner that is not ambiguous as to the century. The
Company has determined that its present accounting software is not Year 2000
Compliant. The Company has begun the implementation of a new accounting system
that will be Year 2000 Compliant, which the Company expects to complete before
the end of fiscal year 1999.
The Company will assess the computer systems of customers, vendors and
other outside parties with whom the Company does business. While the Company
<PAGE>
expected to begin this assessment during the third quarter, the Company has
delayed its assessment until the end of the fourth quarter of fiscal 1999 and
the first quarter of fiscal 2000. The Company does not anticipate that such an
assessment will reveal significant potential problems or require the Company to
incur substantial costs.
Costs
The total cost associated with required modifications to become Year 2000
Compliant is not expected to be material to the Company's financial position.
It is estimated that the cost of implementing the new accounting system will not
exceed $150,000. The Company does not expect the costs associated with the
project to be material.
Risks Associated with the Year 2000 Problem
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failure could materially and adversely effect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 Compliance of third party suppliers and customers,
the Company is unable to determine at this time whether the consequences of any
Year 2000 non-Compliance will have a material impact on the Company's results of
operations, liquidity or financial condition. The Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 Compliance and readiness of its
material suppliers, customers and other third parties. The Company believes
that, with the implementation of the new accounting system and completion of the
Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced. The Project will not, however, evaluate the
effect of the Year 2000 problem on the computer products industry, the software
configuration industry or related industries within which the Company does
business, or the domestic or global economy. Any industry-wide or economy-wide
effects of the Year 2000 problem may have a material adverse effect on the
Company's results of operations, liquidity or financial condition.
Readers are cautioned that forward-looking statements contained in this
Year 2000 Update should be read in conjunction with the Company's disclosures
under the heading, "Special Note on Forward-looking Statements," beginning on
page 8 above. Readers should understand that the dates on which the Company
believes the Project will be completed are based upon Management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, or that there will not be a delay in, or increased costs associated
with, the implementation of the Company's Year 2000 Project. A delay in
specific factors that might cause differences between the estimates and actual
results include, but are not limited to, the availability and cost of personnel
trained in these areas, the ability of locating correct all relevant computer
code, timely responses to and corrections by third parties and suppliers, the
ability to implement interfaces between the new systems and the systems not
being replaced, and similar uncertainties. Due to
<PAGE>
the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third parties and the inter-
connection of national and international businesses, the Company cannot ensure
that its ability to timely and cost effectively resolve problems associated with
the Year 2000 issue that may effect its operations and business, or expose it to
third party liability.
Liquidity and Capital Resources
The Company has historically met its working capital and capital
expenditure requirements through a combination of cash flows from operations,
bank financing, vendor credit lines, the sale of equity and the Bridge
Financing.
On April 8, 1998, the Company's initial public offering (the "Initial
Public Offering") of 2,702,500 shares of Common Stock at $5 per share including
overallotment of 352,500 shares provided net proceeds (after deducting issuance
costs) of $11,200,000.
In the third quarter of fiscal year 1998, the Company completed a financing
(the "Bridge Financing") consisting of the sale of 20 units which generated
gross proceeds of $1 million (net proceeds of approximately $678,000). Each unit
was comprised of: (i) an unsecured promissory note of the Company in the
principal amount of $20,000 (ii) 15,000 shares of Common Stock of the Company,
and (iii) 5,000 warrants of the Company, each to purchase one share of Common
Stock of the Company, at an initial exercise price of $3.00 per share, subject
to adjustment, during the 36-month period commencing one year from the date the
Bridge Warrants were issued. The Company repaid $250,000 of the principal amount
of the CASI Note and $50,000 of the Datatec Note out of the proceeds of the
Bridge Financing. The Company paid the remainder of its indebtedness under the
CASI note and the Datatec Note from proceeds of the Initial Public Offering.
In June 1997, the Company obtained credit for inventory purchases through
Finova Capital Corporation ("Finova"). In September 1998, the Company entered
into a new credit facility with Finova, which consists of a $20 million flooring
line of credit, secured by certain inventory and equipment, as well as an
additional $5 million revolving line of credit secured by accounts receivables
and inventory. Unless the Company fails to pay Finova within the agreed upon
period, all finance costs associated with this line are charged by Finova to the
Company's vendors. At December 31, 1998, the Company's Finova line was $20
million and the Company had a payable to Finova Capital Corporation of
approximately $762,000 included in accounts payable.
Net cash used by operating activities during the nine months ended December
31, 1998 was primarily attributable to an increase in inventories, prepaid
expenses, trade receivables, deferred taxes and decreases in accounts payable,
accrued expenses and income taxes payable. Net cash provided by financing
activities in the nine months ended December 31, 1998 was due primarily to
proceeds from the Company's initial public offering, offset by payments on notes
and deferred offering costs, and the repurchase of stock from a Shareholder.
<PAGE>
The Company believes that current funds and cash generated from operations
will be sufficient to meet its anticipated cash needs for working capital and
capital expenditures for at least the next year. The Company plans to spend
approximately $1,800,000 for its implementation of its Automated Custom System
Assembly Solutions for marketing, salaries and capital expenditures over the
next 12 months. The Company is dependent on the availability of accounts
receivable financing on reasonable terms and at levels that are high relative to
its equity base in order to maintain and increase its sales. No assurance can be
given that additional financing will be available or that, if available, it can
be obtained on terms favorable to the Company and its stockholders.
Income Taxes
The Company provides for income taxes using the liability method in
accordance with the Statement of Financial Accounting Standards No. 109 entitled
"Accounting for Income Taxes." The Company provides for federal and state income
taxes based on statutory rates. The provision for income taxes differ from the
amounts computed by applying the statutory federal income tax rate to income
before taxes primarily due to the effect of state income taxes net of the
related federal tax benefit.
Deferred income taxes are provided for income/expense items reported in
different periods for income tax and financial statement purposes. Deferred
income taxes are primarily attributable to temporary differences resulting from
depreciation, state income taxes and various accrued expenses. The Company has
no "tax loss carry forwards."
Inflation
The Company does not believe that inflation has had a material effect on
its results of operations. There can be no assurance, however, that the
Company's business will not be affected by inflation in the future.
Cautionary Statements and Risk Factors
Limited Operating History. The Company commenced operations in April 1996;
therefore, there is only limited financial information in existence upon which
an investment decision may be based. Although the Company has had periods of
profitability, the ability of the Company to sustain profitability will depend
in part upon the successful and timely introduction and operation of its ACSA
Centers, market acceptance of its internet strategy, continuation of the
Company's close relationships with its vendors and customers, successful
marketing of existing products and the Company's ability to finance inventories
and growth and to collect trade receivables in a timely manner. The likelihood
of the success of the Company in implementing its ACSA Centers and its internet
strategy must be considered in light of the difficulties and risks inherent in a
new business. There can be no assurance that revenues will increase
significantly in the future or that the Company will ever achieve profitable
operations for the ACSA Center or internet related businesses. There can be no
assurance that the Company will be able to generate and sustain profitability in
the future.
<PAGE>
Dependence Upon Key Personnel. The Company is highly dependent upon the
services of Max Toghraie and James Ung, its Chief Executive Officer and
President, respectively. Both James Ung and Max Toghraie are employed pursuant
to five year employment agreements. The success of the Company to date has been
in part dependent upon their efforts and abilities, and the loss of the services
of either of them for any reason could have a material adverse effect upon the
Company. In addition, the Company's work force includes executives and employees
with significant knowledge and experience in the Computer Products distribution
industry. The Company's future success will be strongly influenced by its
ability to continue to recruit, train and retain a skilled work force. While the
Company believes that it would be able to locate suitable replacements for its
executives or other personnel if their services were lost to the Company, there
can be no assurance that the Company would be able to do so on terms acceptable
to the Company. In particular, the location and hiring of suitable replacements
for Mr. Toghraie and Mr. Ung could be very difficult. The Company maintains a
key-man life insurance policy on the lives of Messrs. Toghraie and Ung with
benefits of $1,000,000 each, payable to the Company in the event of their death.
The benefits received under these policies would not be sufficient to compensate
the Company for the loss of the services of Mr. Toghraie or Mr. Ung should
suitable replacements not be employed.
Dependence Upon Relationships with Vendors. A key element of the Company's
past success and future business strategy involves the establishment of
relationships with certain major distributors and Computer Product
manufacturers. Purchases from these vendors account for the majority of the
Company's aggregate purchases for fiscal 1997, for the year ended March 31, 1998
and the present nine months ended December 31, 1998. For the year ended March
31, 1998, DSS Technology Distribution Partners, Inc. ("DSS"), a master
distributor of hard drives to the Company, accounted for 64% of the Company's
purchases. Certain of these vendors provide the Company with substantial
incentives in the form of rebates passed through from the manufacturer,
discounts, credits and cooperative advertising. There can be no assurance that
the Company will continue to receive such incentives in the future. Other than
ordinary purchase orders, the Company does not have written supply, distribution
or franchise agreements with any of its Computer Product vendors. Although the
Company believes that it has established close working relationships with its
principal vendors, the Company's success will depend, in large part, on
maintaining these relationships and developing new vendor relationships for its
existing and future product and service lines. Because the Company does not have
written contracts with any of its vendors, there can be no assurance that the
Company will be able to maintain these relationships. Periodically, Computer
Product suppliers consolidate their distribution networks and otherwise
restructure or limit their distribution channels. There can be no assurance that
the Company will continue to be selected to resell products by its principal
vendors. Termination or interruption of such relationships or modification of
the terms the Company receives from these vendors would materially adversely
affect the Company's financial position, operating results, and cash flows.
Certain of the products offered by the Company are subject to manufacturer
allocations, which limit the number of units of such products available to the
Company's vendors, which in turn may limit the number of units available to the
Company. In order to offer the products of most manufacturers, the Company is
required to obtain authorizations from the manufacturers to act as a reseller of
such products, which authorizations may be terminated at the
<PAGE>
discretion of the manufacturers at any time. There can be no assurance that the
Company will be able to obtain or maintain authorizations to offer products,
directly or indirectly, from new or existing manufacturers. Termination of the
Company's rights to act as a reseller of the products of one or more significant
manufacturers would have a material adverse effect on the Company's financial
position, operating results, and cash flows.
Possible Additional Financing Required. The Company's business is capital
intensive in that the Company is required to finance the purchase of Computer
Products in order to fill sales orders. In order to obtain necessary capital,
the Company relies primarily on unsecured vendor credit lines and the Finova
Line that is collateralized by equipment, accounts receivable and inventory. As
a result, the amount of credit available to the Company may be adversely
affected by factors such as delays in collection or deterioration in the quality
of the Company's accounts receivable, economic trends in the computer industry,
interest rate fluctuations and the lending or credit policies of the Company's
lenders and vendors. Many of these factors are beyond the Company's control.
Further, the Company must obtain Finova's written permission prior to arranging
other financing, and Finova may require certain acknowledgments and undertakings
from other lenders. There can be no assurance that Finova will permit additional
financing or that other lenders will provide the acknowledgments and
undertakings Finova may require. Any decrease or material limitation on the
amount of capital available to the Company under its financing arrangements or
vendor credit lines will limit the ability of the Company to fill existing sales
orders or expand its sales levels and, therefore, would have a material adverse
effect on the Company's financial position, operating results, and cash flows.
In addition, while the Company does not have significant exposure to interest
rate fluctuations under its current financing, any significant increases in
interest rates will increase the cost of possible future financing to the
Company which would have a material adverse effect on the Company's financial
position, operating results, and cash flows. The Company is dependent on the
availability of accounts receivable financing on reasonable terms and at levels
that are high relative to its equity base in order to maintain and increase its
sales. There can be no assurance that such financing will be available to the
Company in the future. The inability of the Company to have continuous access to
such financing at reasonable costs would severely and adversely impact the
Company's financial position, operating results, and cash flows.
Risk of Product Returns. As is typical of the computer industry, the Company
incurs expenses as a result of the return of products by customers. Such returns
may result from defective goods, inadequate performance relative to customer
expectations, distributor shipping errors and other causes which are outside the
Company's control. Although the Company's distributors and manufacturers have
specific return policies that enable the Company to return certain types of
goods for credit, to the extent that the Company's customers return products
which are not accepted for return by the distributor or manufacturer of such
products, the Company will be forced to bear the cost of such returns. Any
significant increase in the rate of product returns coupled with the
unwillingness by the Company's distributors or manufacturers to accept goods for
return could have a material adverse effect on the Company's financial position,
operating results, and cash flows.
<PAGE>
Product Mix; Risk of Declining Product Margins. As a result of sustained
industry oversupply and resulting pricing pressures, the Company's gross profit
percentage decreased from 4.2% for the nine months ended December 31, 1997 to
2.8% for the nine months ended December 31, 1998. Given the significant levels
of competition that characterize the Computer Products market especially desktop
hard drive market and recent pricing pressures and oversupply conditions, there
can be no assurance that the Company will maintain the current gross profit
margins or be able to achieve increases in profit margins. From time to time,
product margins will also be reduced as a result of marketing strategies
implemented by the Company. For instance, introductory pricing implemented by
the Company to develop market awareness of product lines, particularly disk
drives, of vendors new to the Company will have an adverse effect upon gross
profit margins and, potentially, earnings during the period promotional pricing
is offered. Moreover, in order to attract and retain many of its larger
customers, the Company frequently must agree to volume discounts and maximum
allowable mark-ups that serve to limit the profitability of sales to such
customers. Accordingly, to the extent that the Company's sales to such customers
increase, the Company's gross profit margins may be reduced, and therefore any
future increases in net income will have to be derived from continued sales
growth or effective expansion into higher margin business segments, neither of
which can be assured. Furthermore, low margins increase the sensitivity of the
business to increases in costs of financing, because financing costs to carry a
receivable can be very high compared to the low amount of gross profit on the
sale underlying the receivable itself. Any failure by the Company to maintain or
increase its profit margins and sales levels could have a material adverse
effect on the Company's results of operations and prospects for future growth.
Uncertainty of Commercialization of the ACSA Solution; Importance of ACSA to
Growth. The Company's ability to successfully implement, market and introduce
the ACSA Solution services on a timely basis will be a significant factor in the
Company's ability to improve its operating margins and remain competitive. The
Company's ability to market the ACSA Solution successfully will depend on the
Company convincing potential customers of the benefits of the ACSA Solution. The
Company has only recently commenced marketing the ACSA Solution. The Company
recently completed construction of its first ACSA Center located in Industry,
California. No ACSA Center is currently in operation and the Company currently
has no sales revenue attributable to the ACSA Solution or an ACSA Center. The
first ACSA Center will not be operational until the dispute with CASI is
resolved, testing is completed and ACSA dedicated staff are in place. Although
the Company is engaged in negotiations and discussions with a number of
potential customers, there can be no assurance that any such discussions will
lead to significant sales of the ACSA Solution, or that the ACSA Solution will
attain market acceptance. There can be no assurance that the Company will be
successful in the implementation, marketing and sale of ACSA Solution services.
Any failure by the Company to anticipate or respond in a cost-effective and
timely manner to market trends or customer requirements, or any significant
delays in introduction of ACSA services, could have a material adverse effect on
the Company's business, operating results and financial condition.
Lengthy Sales and Implementation Cycles for ACSA. The Company believes that
the purchase of the Company's ACSA Solution services will entail an enterprise-
wide decision by prospective customers and require the Company to engage in a
lengthy sales cycle, estimated at between three and twelve months,
<PAGE>
as the Company will be required to provide a significant level of education to
prospective customers regarding the use and benefits of the Company's ACSA
Solution services and products. Also, the purchase of ACSA Solution services
will often depend upon the successful coordination of marketing, system design
and installation efforts by the Company, end-user customers and others with
influence over the purchase decisions of the Company's customers such as
consultants, VARs and SIs. Purchase decisions will generally occur only after
significant internal analysis by each customer and will be subject to
competition with other capital spending priorities of certain customers. As a
result, the sales and customer implementation cycles will be subject to a number
of significant delays over which the Company has little or no control. Delay in
the sale or customer implementation of a limited number of transactions could
have a material adverse effect on the Company's business and results of
operations and could cause the Company's operating results to vary significantly
from quarter to quarter.
Dependence on CASI for Development and Enhancement of Configuration Software.
Under the Company's License Agreement with Computer-Aided Software Integration,
Inc. ("CASI"), CASI retains the source code of the Configurator software
required to operate the automated software configuration functions of the
Company's planned ACSA Solution and ACSA Centers, and retains all rights to
modify and enhance the Configurator software. CASI has agreed to provide the
Company with all enhancements and upgrades to the Configurator software used
internally or distributed by CASI to its customers, and to develop additional
enhancements requested by the Company at the Company's sole expense. Any
enhancements requested by the Company and implemented by CASI at CASI's expense
may be incorporated in the generally distributed version of CASI's software. If
CASI determines not to fund development of an enhancement then CASI must prepare
the enhancement at pre-agreed rates and ownership of the requested enhancement
will belong to the Company. Although the Company had anticipated implementing
the ACSA Solution by December 31, 1998, the Company has experienced significant
delays in implementing the ACSA Solution due primarily to a dispute related to
the Reseller Agreement dated September 15, 1997, with CASI and CASI's subsequent
refusal to provide the Company with the necessary training to operate its
Configurator software and related technical support. CASI is obligated to
provide such training and technical support to the Company under the terms of
the License Agreement, dated September 15, 1997, by and between the Company and
CASI, pursuant to which the Company licensed the Configurator software. The
Company is attempting to resolve the delays it is experiencing with CASI. The
delays in implementing the ACSA Solution also result, in part, from staff
turnover. While there can be no assurance, the Company currently anticipates the
availability of the ACSA Solution in the fourth quarter of fiscal year 1999.
Delays in implementing the ACSA Solution have caused the Company to derive its
revenues almost exclusively from the Company's computer products distribution
business, which has gross margins significantly lower than those the Company
believes to be available in the system configuration business. In light of high
legal expenses inherant in litigating the matter, the company opted to negotiate
an amicable resolution with CASI. Based on current discussions, the Company
believes that it will reach an amicable outcome in this matter with CASI.
However, there can be no assurance that the Company will succeed in reaching a
solution to the dispute with CASI that is acceptable to the Company. Further
failure by CASI to promptly and adequately perform its obligations under its
license agreement
<PAGE>
with the Company would have a material adverse effect on the Company.
Furthermore, there can be no assurance that CASI will fully comply with its
contractual obligations to the Company, that CASI will dedicate sufficient
software development capacity to satisfy the Company's requirements, or that the
Company's remedies in the event CASI does not perform its obligations will be
adequate. The Company has no capability to internally develop any enhancements
or upgrades. Failure or delay by CASI to fulfill the Company's anticipated needs
for enhancement and upgrading of the Configurator software would adversely
affect the Company's ability to market ACSA services and to become and remain
competitive in the software configuration market. In the event that CASI fails
to meet its obligations under the license, the Company has, among other rights,
the contractual right to the source code underlying the software, but there can
be no assurance that the Company will be able to obtain the source code in a
timely manner, if at all, because CASI is in possession of the only copies of
the source code. Even if the Company is able to obtain the source code under
such circumstances, internal maintenance and enhancement of the source code
could place a significant financial burden on the Company. See "Legal
Proceedings."
Limited Marketing Capabilities. The Company's operating results will depend
to a large extent on its ability to successfully market the ACSA Solution
services to personal computer manufacturers and multi-user system buyers. The
Company currently has limited marketing capability. The Company intends to use a
portion of the proceeds of the Offering to hire additional sales and marketing
personnel and outside consultants to market the ACSA Solution. There can be no
assurance that any marketing efforts undertaken by the Company will be
successful or will result in any significant sales of the ACSA Solution.
Management of Growth. Implementation of the Company's business plan,
including implementation of ACSA Solution services and the Company's internet
strategy and the general strains of the Company's growth will require that the
Company significantly expand its operations in all areas. This growth in the
Company's operations and activities will place a significant strain on the
Company's management, operational, financial and accounting resources.
Successful management of the Company's operations will require the Company to
continue to implement and improve its financial and management information
systems. The Company's ability to manage its future growth, if any, will also
require it to hire and train new employees, including management and technical
personnel, and motivate and manage its new employees and integrate them into its
overall operations and culture. The Company's failure to manage implementation
of its business plan would have a material adverse effect on the Company's
business, operating results and financial condition.
Risk of Potential Joint Ventures or Acquisitions. In the future, the Company
may acquire complementary companies, products or technologies and, although no
specific acquisitions currently are pending the Company has been negotiating
possible joint ventures to further its internet strategy. Acquisitions and joint
ventures involve numerous risks, including adverse short-term effects on the
combined business' reported operating results, impairments of goodwill and other
intangible assets, the diversion of management's attention, the dependence on
retention, hiring and training of key personnel, the amortization of intangible
assets and risks associated with unanticipated problems or legal liabilities. A
portion of the net proceeds of
<PAGE>
the Initial Public Offering may be used to fund such acquisitions at the broad
discretion of the Board of Directors. The Board of Directors may consummate such
acquisitions or joint ventures, if any, without permitting shareholders to
review or vote on such transactions, unless required under applicable law.
Construction of First ACSA Center. The Company has used approximately
$200,000 of the net proceeds from the Initial Public Offering to complete
construction of and to equip its first ACSA Center. It is expected that the
construction will require a substantial time commitment of certain members of
management. Although the first ACSA Center has been constructed, it is not
expected to be operational until the end of the fourth quarter 1999. Any delay
in completion of the first ACSA Center could result in delays in the
commencement of sales of assembly and custom software configuration services and
adversely affect the Company's business, operating results and financial
condition. There can be no assurance that the Company will be able to complete
the ACSA Center at the budgeted price. Additionally, there can be no assurance
that the ACSA Center will be available on time or that the Company will be
successful in timely hiring and training engineers and technicians necessary to
commence operations of the ACSA Center. Any such delay would delay the Company's
ability to commence offering the ACSA Solution and have a material adverse
effect upon the Company's business, operating results and financial condition.
Rapid Technological Change; New Product Introductions. The markets for the
Company's ACSA technology and its internet strategy are characterized by rapidly
changing technology and frequent new product introductions. Even if the
Company's ACSA Solution services using its licensed Configurator software and
its internet strategy gain initial market acceptance, the Company's success will
depend, among other things, upon its ability to enhance the ACSA Solution
services and its internet strategy and to develop and introduce new products and
services that keep pace with technological developments, respond to evolving
customer requirements and achieve continued market acceptance. There can be no
assurance that the Company will be able to identify, develop, manufacture,
market or support new products or offer new services successfully, that such new
products or services will gain market acceptance, or that the Company will be
able to respond effectively to technological changes or product announcements by
competitors. Any failure by the Company to anticipate or respond adequately to
technological developments and customer requirements or any significant delays
in product development or introductions could result in a loss of market share
or revenues.
Uncertainty of Commercial Acceptance of Internet Strategy. The Company has
developed, and is in the early stages of implementing, an internet strategy that
is intended to give the Company, among other things, e-commerce and internet
auction capabilities. The Company's ability to market its internet strategy
will depend on the Company convincing potential customers of the benefits of
transacting business with the Company using its internet capabilities. To date,
the Company's e-commerce and internet auction websites are not operational, and
the Company has not begun to market an e-commerce or internet auction capability
to its existing and potential customers. There can be no assurance that the
Company will be able to convince existing and potential customers to transact
business with the Company over its e-commerce and internet auction websites.
Failure by the Company to convince existing and potential customers to utilize
e-commerce and internet auction websites to
<PAGE>
transact business with the Company will have a material adverse effect on the
Company's internet strategy.
Reliance On Third Parties To Develop And Service E-commerce and Internet
Auction Websites. The Company depends on OTT to develop and service the e-
commerce and internet auction websites which the Company expects to develop in
connection with its internet strategy and, therefore, is only partially able to
control the development of and implementation of its internet strategy. The
ability of the Company to timely develop an internet capability is dependent, to
a significant degree, on OTT. If the Company's relationship with OTT is
terminated, the Company would be forced to either enter into a relationship with
another third party provider or undertake to develop and service its internet
strategy internally. This would likely require the Company to incur additional
expenses in connection with such conversion and result in a significant delay in
the implementation of the Company's internet strategy.
Success of Internet Strategy Dependent Upon The Continued Growth Of Online
Commerce. The long-term viability of the Company's internet strategy depends
upon widespread consumer acceptance and use of the Internet as a medium of
commerce. Use of the Internet e-commerce is at an early stage of development,
and demand and market acceptance for recently introduced services and products
over the Internet is very uncertain. The Company cannot predict the extent to
which consumers will be willing to shift their purchasing habits to the online
medium.
The Internet may not become a viable commercial marketplace for a number of
reasons, including potentially inadequate development of the necessary network
infrastructure, delayed development of enabling technologies and inadequate
performance improvements. In addition, the Internet's viability as a commercial
marketplace could be adversely affected by increased government regulation.
Changes in or insufficient availability of telecommunications services or other
services to support the Internet also could result in slower response times and
adversely affect usage of the Internet generally. Also, negative publicity and
consumer concern about the security of transactions conducted on the Internet
and the privacy of users may also inhibit the growth of commerce on the
Internet.
Industry Evolution and Price Reductions; Changing Methods of Distribution.
The personal computer industry is undergoing significant change. The industry
has become more accepting of large volume, cost-effective channels of
distribution such as computer superstores, consumer electronics and office
supply superstores, national direct marketers and mass merchants. In addition,
many traditional computer resellers are consolidating operations and acquiring
or merging with other resellers to increase efficiency. This current industry
reconfiguration has resulted in increased pricing pressures. Decreasing prices
of computer products require the Company to sell a greater number of products to
achieve the same level of net sales and gross profit. The continuation of such
trend would make it more difficult for the Company to maintain or to increase
its net sales and net income. In addition, it is possible that the historically
high rate of growth of the personal computer industry may slow at some point in
the future. If the growth rate of the personal computer industry were to
decrease, the Company's financial position, operating results, and cash flows
could be materially adversely affected. Furthermore, new methods of distribution
and sales of Computer Products, such as on-line shopping services
<PAGE>
and catalogs published on CD-ROM, may emerge in the future. Computer Products
and software manufacturers have sold, and may in the future intensify their
efforts to sell, their products directly to end users. From time to time,
certain vendors have instituted programs for the direct sale of large orders of
Computer Products and software to certain major corporate accounts. These types
of programs may continue to be developed and used by various vendors. While the
Company attempts to anticipate future distribution trends, any of these
distribution methods or competitive programs, if expanded, could have a material
adverse effect on the Company's financial position, operating results, and cash
flows.
Availability of Components. The computer component and computer assembly
businesses have from time to time experienced periods of extreme shortages in
product supply, generally as the result of demand exceeding available supply.
When these shortages occur, suppliers tend either to slow down shipments or
place their customers "on allocation," reducing the number of units sold to each
customer. While the Company believes that it has well-established relationships
with vendors and that it has not been adversely affected by recent shortages in
certain storage and other computer components, no assurance can be given that
future shortages will not adversely impact the Company.
Competition. The Company faces intense competition, both in its selling
efforts and purchasing efforts, from the significant number of companies that
configure and/or assemble personal computers, manufacture or distribute disk
drives and offer software configuration services. Many of these companies, such
as CompuCom Systems, Inc., CDW Computer Centers, Inc., Vanstar Corp. and Inacom,
Inc. in the Computer Products distribution market, large computer manufacturers
such as IBM Corp. and Compaq Computer Corporation, which provide custom
configuration and automated software configuration for standardized systems,
large distributors such as Ingram Micro Inc., Vanstar Corp., En Point
Technologies, Inc., Microwarehouse, Inc. and CompuCom Systems, Inc. in the
systems integration and network services market, have substantially greater
assets and possess substantially greater financial and personnel resources than
those of the Company and may develop software, or services or products which are
comparable to the ACSA Solution. Many competing distributors also carry or offer
brands or product lines which the Company does not carry. Generally, large disk
drive and personal computer component manufacturers and large distributors do
not focus their direct selling efforts on small to medium sized OEMs and
distributors, which constitute the vast majority of the Company's customers;
however, as the Company's customers increase in size, disk drive and component
manufacturers may find it cost effective to focus direct selling efforts on
those customers, which could result in the loss of customers or pressure on
margins. In addition, CASI and/or Datatec Systems Inc. ("Datatec"), formerly
known as Glasgal Communications, Inc., the parent corporation of CASI, may
directly enter into the Company's integration and configuration markets using
the software the Company has licensed from CASI. While no operating division or
subsidiary of Datatec is currently competing in the Company's markets, there can
be no assurance that Datatec will not decide to directly compete with the
Company in the future. Further, the terms of the Company's license agreement
with CASI allows CASI to license the software used in the ACSA Solution and the
ACSA Centers to new or existing direct competitors of the Company. There can be
no assurance that the Company will be able to continue to compete effectively
with existing or potential competitors.
<PAGE>
Industry Cyclicality. The personal computer component distribution industry
has been affected historically by general economic downturns, which have had an
adverse economic effect upon manufacturers and corporate end users of personal
computers, as well as component distributors such as the Company. In addition,
the life cycle of existing personal computer products and the timing of new
product development and introduction can affect demand for disk drives and other
personal computer components. Any downturns in the personal computer component
distribution industry, or the personal computer industry in general, could
adversely affect the Company's business and results of operations.
Asian Market Instability. Economies and financial markets in Asia have
recently experienced significant turmoil. A non-material portion of the
Company's revenues are derived from sales to businesses which primarily export
Computer Products to Asian customers. Also certain of the Company's vendors are
based in Korea, Japan and other Asian countries. Asian financial market
instability may adversely impact customer orders or the Company's ability to
obtain products from its Asian vendors. The financial instability in these
regions has had an adverse impact on the financial position of end-users in the
region which has been a contributing factor to the oversupply condition and
pricing pressures currently impacting the Company (because Asian vendors have
channeled excess inventory into the North American market at reduced prices and
have reduced component demand from domestic manufacturers who export to Asia)
and could also impact future orders from the Company's customers and/or the
ability of such end users to pay the Company's customers, which could also
impact the ability of such customers to pay the Company. If the Company's
customers who export into Asia are unable to maintain export sales or current
margins on such export sales, the Company's sales and/or sales margins may be
adversely affected. Additionally, if the Company's vendors in these regions are
unable to continue to supply the Company, the Company may be adversely impacted.
Foreign Trade Regulation. A significant number of the products distributed
by the Company are manufactured in Taiwan, China, Korea, Japan and the
Philippines. The purchase of goods manufactured in foreign countries is subject
to a number of risks, including economic disruptions, transportation delays and
interruptions, foreign exchange rate fluctuations, imposition of tariffs and
import and export controls and changes in governmental policies, any of which
could have a material adverse effect on the Company's business and results of
operations. The ability to remain competitive with respect to the pricing of
imported components could be adversely affected by increases in tariffs or
duties, changes in trade treaties, strikes in air or sea transportation,
fluctuation in currency and possible future United States legislation with
respect to pricing and import quotas on products from foreign countries. For
example, it is possible that political or economic developments in China, or
with respect to the United States' relationship with China, could have an
adverse effect on the Company's business. The Company's ability to remain
competitive could also be affected by other governmental actions related to,
among other things, anti-dumping legislation and international currency
fluctuations. While the Company does not believe that any of these factors
adversely impact its business at present, there can be no assurance that these
factors will not materially adversely affect the Company in the future. Any
significant disruption in the delivery of merchandise from the Company's
suppliers, substantially all of whom are foreign, would also have a material
adverse impact on the Company's business and results of operations.
<PAGE>
Possible Issuance of Preferred Stock; Barriers to Takeover. The Company's
Articles of Incorporation authorize the issuance of up to 2,000,000 shares of
Preferred Stock. Following the Offering, no shares of Preferred Stock of the
Company will be outstanding, and the Company has no present intention to issue
any shares of Preferred Stock. However, because the rights and preferences for
any series of Preferred Stock may be set by the Company's Board of Directors in
its sole discretion, the rights and preferences of any such Preferred Stock are
likely to be superior to those of the Common Stock and thus could adversely
affect the rights of the holders of Common Stock. The Company currently has no
commitments or contracts to issue any additional securities. Any securities
issuances might result in a reduction in the book value or market price of the
outstanding shares. Further, any new issuances could be used for anti-takeover
purposes or might be used as a method of discouraging, delaying or preventing a
change of control of the Company. Additionally, certain provisions of the
Company's Articles of Incorporation and Bylaws could delay or make more
difficult a merger, tender offer or proxy contest involving the Company.
No Dividends Anticipated. The Company has never declared or paid dividends
on its Common Stock. After the consummation of this Offering, the Company does
not intend for the foreseeable future to declare or pay any cash dividends and
intends to retain earnings, if any, for the future operation and expansion of
the Company's business.
Delisting from The Nasdaq SmallCap Market; Potential Penny Stock
Classification. The Company's Common Stock is quoted on The Nasdaq SmallCap
Market and listed on the Boston Stock Exchange. However, there can be no
assurance that a trading market for the Common Stock will develop, or if
developed, that it will be maintained. No assurance can be given that the
Company will be able to satisfy the criteria for continued quotation on The
Nasdaq SmallCap Market or the criteria for continued listing on the Boston Stock
Exchange following this Offering. Failure to meet the maintenance criteria in
the future may result in the Common Stock not being eligible for quotation or
listing. If the Company were removed from The Nasdaq SmallCap Market and the
Boston Stock Exchange, trading, if any, in the Common Stock would thereafter
have to be conducted in the over-the-counter market in so-called "pink sheets"
or, if then available, the OTC Bulletin Board. As a result, holders of the
Common Stock would find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of, the Common Stock.
In addition, if the Common Stock is delisted from trading on Nasdaq and the
Boston Stock Exchange and the trading price of the Common Stock is less than
$5.00 per share, trading in the Common Stock would also be subject to the
requirements of Rule 15g-9 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). Under such rule, broker/dealers who
recommend such low-priced securities to persons other than established customers
and accredited investors must satisfy special sales practice requirements,
including a requirement that they make an individualized written suitability
determination for the purchaser and receive the purchaser's written consent
prior to the transaction. The Securities Enforcement Remedies and Penny Stock
Reform Act of 1990 also requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
regulations adopted by the Securities Exchange Commission (the "Commission"),
<PAGE>
any equity security not traded on an exchange or quoted on Nasdaq that has a
market price of less than $5.00 per share, subject to certain exceptions),
including the delivery, prior to any penny stock transaction, of a disclosure
schedule explaining the penny stock market and the risks associated therewith.
Such requirements could severely limit the market liquidity of the Common Stock
and the ability of purchasers in this Offering to sell their securities in the
secondary market. There can be no assurance that the Common Stock will not be
delisted or treated as a penny stock.
Elimination of Cumulative Voting. The Articles of Incorporation of the
Company provide that at such time as the Company has (i) shares listed on the
New York Stock Exchange or the American Stock Exchange, or (ii) securities
designated for trading as a national market security on the National Association
of Securities Dealers Automatic Quotation System (or any successor national
market system) if the Company has at least 800 or more holders of its Common
Stock as of the record date of the Company's most recent annual meeting of
shareholders, the cumulative voting rights of shareholders will cease. The
Company believes that it has more than 800 holders. If the Company has shares
listed on the New York Stock Exchange or the American Stock Exchange, or
designated for trading as national market securities on The Nasdaq National
Market System, cumulative voting rights of shareholders will cease. Elimination
of cumulative voting will have the effect of making it more difficult for
minority shareholders to obtain representation on the Board of Directors.
Limitation of Liability and Indemnification. The Company's Articles of
Incorporation, as amended, (the "Articles") include a provision that eliminates
the personal liability of its directors to the Company for monetary damages for
breach of their fiduciary duties (subject to certain limitations) as a director
to the fullest extent permissible under California law. The Company's Articles
and Bylaws allow the Company to provide for indemnification of its Directors the
fullest extent permitted by law. The Bylaws allow the Company to enter into
indemnity agreements with individual directors, officers, employees and other
agents. The Company has entered into indemnification agreements designed to
provide the maximum indemnification permitted by law with all the directors of
the Company. These agreements, together with the Company's Bylaws and Articles,
may require the Company, among other things, to indemnify these directors
against certain liabilities that may arise by reason of their status or service
as directors (other than liabilities resulting from willful misconduct of a
culpable nature), to advance expenses to them as they are incurred, provided
that they undertake to repay the amount advanced if it is ultimately determined
by a court that they are not entitled to indemnification, and to obtain
directors' and officers' insurance if available on reasonable terms. The Company
has purchased and does maintain directors' and officers' liability insurance. As
a result of the provisions in the Company's Articles and in the indemnification
agreements, it may be more difficult for shareholders to obtain relief against a
director for breaches of such director's fiduciary duty than if these provisions
were not included in the Company's Articles and Bylaws.
No Earthquake Insurance. The Company's executive office, warehouse and
assembly facility is located in a Company-leased facility in Industry,
California, an area which experienced damage in the 1994 Northridge, California
earthquake. The Company does not currently carry insurance against earthquake-
related risks.
<PAGE>
Disclosure Regarding Forward-Looking Statements. This Report contains
statements that constitute "forward-looking statements" within the meaning of
Section 21E of the Securities Exchange Act of 1934 and Section 27A of the
Securities Act of 1933. The words "expect," "estimate," "anticipate,"
"predict," "believe," and similar expressions and variations thereof are
intended to identify forward-looking statements. Such statements appear in a
number of places in this filing and include statements regarding the intent,
belief or current expectations of the Company, its Directors or Officers with
respect to, among other things (a) trends effecting the financial condition of
results of operations of the Company and (b) the business and growth strategies
of the Company. The shareholders of the Company are cautioned not to put undue
reliance on such forward-looking statements. Such forward-looking statements
are not guarantees of future performance and involve risks and uncertainties.
Actual results may differ materially from those projected in this Report, for
the reasons, among others, discussed in "Future Operating Results" below and
under the caption, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Risk Factors" in the Company's Annual Report on
Form 10-K for Fiscal 1998, filed with the Securities and Exchange Commission.
The Company undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof.
Readers should carefully review the risk factors referred to above and the other
documents the Company files from time to time with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K for the fiscal
year 1998, the quarterly reports on Form 10-Q filed by the Company during the
remainder of fiscal 1999, and any current reports on Form 8-K filed by the
Company.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is periodically subject to legal actions which arise in the
ordinary course of its business. The Company does not believe that any such
action is material to its results of operation or financial condition.
The Company has been involved in a disagreement with CASI concerning the
interpretation of certain provisions of the Reseller Agreement, dated September
15, 1997, between CASI and the Company (the "Reseller Agreement"). By letter
dated November 9, 1998, attorneys for CASI purported to terminate the Reseller
Agreement on behalf of CASI.
The Company strongly disagrees with CASI's right to terminate the Reseller
Agreement and is currently evaluating its legal options.
CASI is obligated to provide training and technical support to the Company
under the terms of the License Agreement, dated September 15, 1997, by and
between the Company and CASI, pursuant to which the Company licensed the
Configurator software. To date, CASI has failed to provide such training and
technical support to the Company, which has resulted in the delays of the
implementation of the ACSA Solution. The Company has opted to resolve the CASI
matter amicably and is attempting to reach an agreement with CASI. However, the
Company will keep it's legal options open pending final resolution of this
matter. However, there can be no assurance that the Company will succeed in
reaching a solution to the dispute with CASI that is acceptable to the Company.
ITEM 2. CHANGES IN SECURITIES
Recent Sales of Unregistered Securities
In October, 1998, the Company issued to 8607 Colonial Group, Inc.
("Colonial") an option (the "Colonial Option") to purchase up to 50,000 shares
of the Company's Common Stock at an initial exercise price of $5.00 per share.
Colonial provides public relations consulting services to the Company. The
Colonial Option vested as to 5,000 shares immediately upon issuance and vests,
as to the remaining 45,000 shares, monthly beginning October 1998 and ending
June 1999.
Use of Proceeds
The Company's Registration Statement on Form S-1 (File No. 333-43151)
relating to the offer and sale (the "Offering") of an aggregate of 2,350,000
shares (the "Firm Shares") of Common Stock, without par value (the "Common
Stock"), of the Company was declared effective by the Securities and Exchange
Commission (the "Commission") on April 7, 1998. The managing underwriter for
the Offering was Joseph Stevens & Company, Inc. (the "Managing Underwriter").
The Offering commenced on April 8, 1998 and the sale of 2,350,000 shares
closed on April 14, 1998, with the sale of an additional 352,500 shares (the
"Option Shares" and, together with the Firm Shares, the "Shares") closing on
April 23, 1998 (which were sold by the Company upon the exercise of the over-
allotment option granted to the underwriters). All the Shares were sold
<PAGE>
in the Offering at an aggregate price of $5.00 per share, for aggregate proceeds
of $13,512,500. After deducting underwriting discounts and commissions of
$0.4625 per share, and other issuance costs, the Company received net proceeds
of approximately $11,200,000. On April 14, 1998, the Company also received
$0.001 per warrant, for an aggregate of $23.50, in consideration of unregistered
5-year warrants to purchase 235,000 shares of Common Stock at an initial
exercise price of 165% of the Offering price, exercisable one year after the
effective date of the Registration Statement, granted to the Managing
Underwriter in connection with the Offering. See "Recent Sales of Unregistered
Securities."
As of December 31, 1998, the Company had used the proceeds as follows: (i)
payments on notes payable of $1,200,000, (ii) purchases of fixed assets -
$279,000, (iii) repurchase of stock from shareholder for $300,000 and (iv)
investment in OTT of $100,000. The remaining proceeds of $9,321,000 are
available to fund the construction of the First ACSA Center, payment to OTT for
$900,000, and for working capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The Annual Meeting of Shareholders of Cumetrix Data Systems Corp. (the
"Annual Meeting") took place on Monday, October 5, 1998, at the offices of the
Company.
The Company's six directors, namely Max Toghraie, James Ung, Mei Yang,
Nancy Hundt, David Tobey and Philip Alford were re-elected and will continue to
act in their same capacities in the ensuing year. Actual votes cast at the
meeting were as follows:
<TABLE>
<S> <C>
Max Toghraie 7,044,866 votes for and 16,100 withheld.
James Ung 7,044,866 votes for and 16,100 withheld
Mei Yang 7,043,866 votes for and 17,100 withheld
Nancy Hundt 7,044,866 votes for and 16,100 withheld
David Tobey 7,044,866 votes for and 16,100 withheld
Philip Alford 7,044,866 votes for and 16,100 withheld
</TABLE>
Also approved at the Annual Meeting was the increase of the maximum number
of shares of Common Stock that may be issued pursuant to awards granted under
the Company's 1997 Stock Plan from 500,000 shares to 1,000,000 shares. Actual
votes cast at the meeting were as follows: 4,777,166 votes for, 139,650 against
and 10,250 abstaining. 2,133,900 shares did not vote on the proposal.
No other matters were voted on by the shareholders of the Company at the
Annual Meeting.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
10.1 Loan and Security Agreement, dated as of October 22, 1998,
by and between the Company and Finova Capital Corporation
10.2 Schedule to Loan and Security Agreement, dated October 22,
1998
10.3 Secured Revolving Credit Note, dated as of October 22,
1998, by the Company in favor of Finova Capital
Corporation
10.4 Preferred Stock Purchase Agreement, dated as of December
15, 1998, by and between the Company and Online Transaction
Technologies, Inc.
10.5 First Stock Option Agreement, dated as of December 30,
1998, by and between the Company and Online Transaction
Technologies, Inc.
Exhibit 27 Financial Data Schedule
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
CUMETRIX DATA SYSTEMS CORP.
Date: February 16, 1999 /s/ Carl L Wood
Chief Financial Officer
<PAGE>
Exhibit Index
-------------
10.1 Loan and Security Agreement, dated as of October 22, 1998, by and between
the Company and Finova Capital Corporation
10.2 Schedule to Loan and Security Agreement, dated October 22, 1998
10.3 Secured Revolving Credit Note, dated as of October 22, 1998, by the
Company in favor of Finova Capital Corporation
10.4 Preferred Stock Purchase Agreement, dated as of December 15, 1998, by and
between the Company and Online Transaction Technologies, Inc.
10.5 First Stock Option Agreement, dated as of December 30, 1998, by and
between the Company and Online Transaction Technologies, Inc.
27 Financial Data Schedule.
<PAGE>
EXHIBIT 10.1
[LETTERHEAD OF FINOVA FINANCIAL INNOVATORS]
LOAN AND SECURITY AGREEMENT
Cumetrix Data Systems Corp.
--------------------------
Borrower
957 Lawson Street
City of Industry, California 91748
----------------------------------
Address
95-4574138
----------
Borrower Fed ID Tax No.
$25,000,000
Amount of Credit Facility
10/22/98
-------------------------
Date
================================================================================
INVENTORY FINANCE
================================================================================
<PAGE>
THIS LOAN AND SECURITY AGREEMENT ("Agreement") dated the date set forth above,
is entered into by and between the borrower named above (the "Borrower"), whose
address is set forth above and FINOVA Capital Corporation ("FINOVA"), whose
address is 1060 First Avenue, King of Prussia, Pennsylvania 19406.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have the
-------------
definitions set forth below:
"Affiliate" means any Person controlling, controlled by or under common control
- ----------
with Borrower. For purposes of this definition, "control" means the possession,
directly or indirectly, of the power to direct or cause direction of the
management and policies of any Person, whether through ownership of common or
preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of Borrower, any
shareholder or subsidiary of Borrower, and any other Person with whom or which
Borrower has common shareholders, officers or directors.
"Business Day" means any day on which commercial banks in both King of Prussia,
- -------------
Pennsylvania and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities incurred for
- ---------------------
the acquisition of any fixed asset or improvement, replacement, substitution or
addition thereto which has a useful life of more than one year and including,
without limitation, those arising in connection with Capital Leases.
"Capital Lease" means any lease of property by Borrower that, in accordance with
- --------------
generally accepted accounting principles, should be capitalized for financial
reporting purposes and reflected as a liability on the balance sheet of
Borrower.
"Code" means the Uniform Commercial Code as adopted and in effect in the State
----
of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
----------
"Current Assets" at any date means the amount at which the current assets of
--------------
Borrower would be shown on a balance sheet of Borrower as at such date, prepared
in accordance with generally accepted accounting principles provided
--------
that amounts due from Affiliates and investments in Affiliates shall be excluded
therefrom.
"Current Liabilities" at any date means the amount at which the current
- ---------------------
liabilities of Borrower would be shown on a balance sheet of Borrower, including
the Revolving Credit as at such date, prepared in accordance with generally
accepted accounting principles.
"Deposit Accounts" has the meaning set forth in Section 9105 of the Code.
----------------
"Earnings Before Interest and Taxes" for any fiscal period of Borrower means the
----------------------------------
net income of Borrower for such fiscal period, plus interest expense and
provision for income taxes for such fiscal period, and minus non-recurring
miscellaneous income and expenses, all calculated in accordance with generally
accepted accounting principles, consistently applied.
"Eligible Inventory" is defined as set forth in the Schedule.
------------------
"Eligible Receivables" is defined as set forth in the Schedule.
--------------------
"Equipment" means all of Borrower's present and hereafter acquired machinery,
---------
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"ERISA" means the Employment Retirement Income Security Act of 1974, as amended,
-----
and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not incorporated and
---------------
whether or not foreign) which is or may hereafter become a member of a group of
which Borrower is a member and which is treated as a single employer under ERISA
Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"Floorplanned Inventory" means all Inventory from such manufacturer or vendors
----------------------
acceptable to FINOVA from time to time, financed by FINOVA pursuant to Section
2.4 of this Agreement.
"Floorplan Loans" has the meanings set forth in the Schedule.
---------------
"Floorplan Loans Borrowing Base" has the meaning set forth in the Schedule.
------------------------------
"General Intangibles" means all general intangibles of Borrower, whether now
-------------------
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against FINOVA, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation credit, liability,
property and other insurance) tax refunds and claims, computer programs, discs,
tapes and tape files, claims under guaranties, security interests or other
security held by or granted to Borrower to secure payment of any of the
Receivables by an account debtor, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Guarantors" means the persons set forth on the Schedule.
----------
"Indebtedness" means all of Borrower's present and future obligations,
------------
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases) or conditional sales contract or other
-1-
<PAGE>
title retention agreement with respect to property used or acquired by Borrower,
even though the rights and remedies of the lessor, seller or lender are limited
to repossession, (iv) all unfunded pension fund obligations and liabilities and
(v) deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
------------
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease, all raw materials, work in
process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's business or
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing of such goods, merchandise or other personal property, and all
documents of title or other documents representing them.
"IRC" means the Internal Revenue Code of 1986, as amended, and the regulations
---
thereunder.
"Loan Documents" means, collectively, this Agreement, any note or notes executed
--------------
by Borrower and payable to FINOVA, and any other agreement entered into in
connection with this Agreement, together with all alterations, amendments,
changes, extensions, modifications, refinancings, refundings, renewals,
replacements, restatements, or supplements, of or to any of the foregoing.
"Loan Party" means Borrower, each Subordinating Creditor and each other party
----------
(other than FINOVA) to any Loan Document.
"Maximum Floorplan Amount" has the meaning set forth in the Schedule.
------------------------
"Minimum Working Capital" at any date means an amount equal to (i) the sum of
-----------------------
the amount at which Borrower's cash, Receivables and Inventory (calculated at
the lower of cost or market and determined on a first-in, first-out basis) would
be shown on a balance sheet of Borrower at such date prepared in accordance with
generally accepted accounting principles, provided that amounts due from
--------
Affiliates shall be excluded therefrom, minus (ii) Current Liabilities of
-----
Borrower at such date. The balance of any revolving credit line will be
considered as a Current Liability for the purpose of this calculation.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA Sections
------------------
3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of Borrower or
any ERISA Affiliate.
"Net Worth" at any date means the Borrower's net worth as determined in
---------
accordance with generally accepted accounting principles, consistently applied.
"Obligations" means all present and future loans, advances, debts, liabilities,
-----------
obligations, covenants, duties and indebtedness at any time owing by Borrower to
FINOVA, whether evidenced by this Agreement, any note or other instrument or
document, whether arising from an extension of credit, opening of a letter of
credit, banker's acceptance, loan, guaranty, indemnification or otherwise,
whether direct or indirect (including, without limitation, those acquired by
assignment and any participation by FINOVA in Borrower's debts owing to others),
absolute or contingent, due or to become due, including, without limitation,
all interest, charges, expenses, fees, attorney's fees, expert witness fees,
examination fees, letter of credit fees, collateral monitoring fees, closing
fees, facility fees, anniversary fees, Termination Fees, Minimum Interest
Charges and any other sums chargeable to Borrower hereunder or under any other
agreement with FINOVA.
"PBGC" means the Pension Benefit Guarantee Corporation.
----
"Permitted Encumbrance" means each of the liens, mortgages and other security
---------------------
interests set forth on the Schedule and incorporated herein by this reference.
"Person" means any individual, sole proprietorship, partnership, joint venture,
------
trust, unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for employees
----
of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the date set
-------------------
forth in the Schedule, and as of each subsequent date on which audited balance
sheets are delivered to FINOVA from time to time hereunder, and the related
statements of operations, changes in stockholder's equity and changes in cash
flow for the periods ended on such dates.
"Prohibited Transaction" means any transaction described in Section 406 of ERISA
----------------------
which is not exempt by reason of Section 408 of ERISA, and any transaction
described in Section 4975(c) of the IRC which is not exempt by reason of Section
4975(c)(2) of the IRC.
"Receivables" means all of Borrower's now owned and hereafter acquired accounts
-----------
(whether or not earned by performance), proceeds of any letters of credit naming
Borrower as beneficiary, contract rights, chattel paper, instruments, documents
and all other forms of obligations at any time owing to Borrower, all guaranties
and other security therefor, whether secured or unsecured, all merchandise
returned to or repossessed by Borrower, and all rights of stoppage in transit
and all other rights or remedies of an unpaid manufacturer or vendor, lienor or
secured party.
"Renewal Term" has the meaning set forth on the Schedule.
------------
"Reportable Event" means a reportable event described in Section 4043 of ERISA
----------------
or the regulations thereunder, a withdrawal from a Plan described in Section
4063 of ERISA, or a cessation of operations described in Section 4068(f) of
ERISA.
"Revolving Credit Line Interest Rate" has the meaning set forth on the Schedule.
-----------------------------------
"Revolving Loans" has the meaning set forth on the Schedule.
---------------
"Revolving Loans Borrowing Base" has the meaning set forth on the Schedule.
------------------------------
"RMA Credits" means credit memoranda for return merchandise authorizations
-----------
issued by manufacturer or vendors of Floorplanned Inventory which are within
forty-five (45) days of their issuance date.
"Subordinated Debt" means liabilities of Borrower for which the repayment is
-----------------
subordinated to the payment and performance of the Obligations, pursuant to a
subordination agreement of FINOVA's standard form.
"Tangible Capital Funds" at any date means an amount equal to, (i) the sum of
----------------------
the amounts at which Borrower's cash, Receivables, Inventory (calculated at the
lower of cost or market and determined on a first-in,
-2-
<PAGE>
first-out basis) and net fixed assets would be shown on a balance sheet of
Borrower at such date prepared in accordance with generally accepted accounting
principles, provided that amounts due from Affiliates shall be executed
therefrom, minus (ii) Total Liabilities of Borrower at such date (excluding
-----
Subordinated Debt of Borrower from such Total Liabilities).
"Tangible Net Worth" at any time means Tangible Capital Funds minus Subordinated
------------------
Debt.
"Term Loan" has the meaning set forth on the Schedule.
---------
"Total Facility" has the meaning set forth on the Schedule.
--------------
"Valid Price Protection" means any credit memorandum issued by any manufacturer
----------------------
or vendor of Floorplanned Inventory to reimburse Borrower for a decrease in the
value of Borrower's Floorplanned Inventory supplied by such manufacturer or
vendor caused by such manufacturer or vendor's reduction of the purchase price
from the manufacturer or vendor of such Floorplanned Inventory.
1.2 Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set forth herein and provided
--------------
that no Event of Default or event which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default, may have
occurred and be continuing, FINOVA may, upon Borrower's request, make advances
to Borrower from time to time in an aggregate outstanding principal amount not
to exceed the Total Facility amount (the "Total Facility") set forth on the
schedule hereto (the "Schedule"), subject to deduction of reserves for accrued
interest and such other reserves as FINOVA deems proper from time to time, and
less unreimbursed amounts FINOVA may be obligated to pay in the future on behalf
of Borrower. The Schedule is an integral part of this Agreement and all
references to "herein", "herewith" and words of similar import shall for all
purposes be deemed to include the Schedule.
2.2 Loans. Advances under the Total Facility ("Loans") shall be comprised of
-----
the amounts and at the advance rates shown on the Schedule. FINOVA may, in its
sole discretion, adjust the advance rates set forth on the Schedule.
2.3 Reconciliation Payments. If at any time or for any reason (i) the
-----------------------
outstanding principal amount of Revolving Loans exceeds any of the applicable
dollar or percentage limitations contained in the Schedule (any such excess, a
"Revolver Overloan"): (ii) the sum of (a) the aggregate outstanding principal
amount of Floorplan Loans plus (b) approvals given by FINOVA to a manufacturer
or vendor of Floorplanned Inventory exceeds the Maximum Floorplan Amount (any
such excess a "Floorplan Overloan"); or (iii) the aggregate outstanding
principal amount of Floorplan Loans exceeds the sum of (x) the amount of
Floorplanned Inventory plus (y) the Valid Price Protection plus (z) the RMA
Credits (any such excess, a "Floorplan Collateral Coverage Reconciliation"),
then Borrower shall, upon FINOVA's demand, immediately pay to FINOVA, in cash,
the full amount of such Revolver Overloan or Floorplan Collateral Coverage
Reconciliation (each, an "Overloan"). As long as no event of default shall have
occurred, FINOVA may consent to reserve Floorplan Collateral Coverage
Reconciliation amounts against Revolving Loan excess availability, in lieu of a
cash payment. Without limiting Borrower's obligation to repay to FINOVA on
demand the amount of any such Overloan, (a) on the date on which any inventory
report is required to be delivered to FINOVA hereunder Borrower shall repay in
full any Floorplan Collateral Coverage Reconciliation described therein to the
extent such Floorplan Collateral Coverage Reconciliation is not reserved against
and deducted from availability under the Revolving Loans, and (b) Borrower shall
pay FINOVA interest on the outstanding principal amount of any Revolver Overloan
or Floorplan Collateral Coverage Reconciliation, on demand, at the rate set
forth on the Schedule.
2.4. Floorplan Credit Line. At the request of Borrower and as part of the Total
---------------------
Facility, FINOVA may, in its sole discretion, make Floorplan Loans to or for the
account of Borrower for the purpose of financing Floorplanned Inventory proposed
by Borrower to be financed pursuant to this Section 2.4 (the "Floorplan Credit
Line"). At no time shall the sum of Borrower's Obligations to FINOVA in respect
of the Floorplan Credit Line exceed the amount specified in the Schedule. Upon
receipt by FINOVA of an invoice for Floorplanned Inventory from Borrower or the
manufacturer or vendor of such Floorplanned Inventory, which invoice is
acceptable to FINOVA in its sole discretion, FINOVA shall, if it elects to
finance such Floorplanned Inventory, make a Floorplan Loan to Borrower in an
amount not to exceed (subject to the other limitations set forth in this
Agreement) the cost, as reflected on the manufacturer or vendor's invoice, of
such Floorplanned Inventory, including freight. FINOVA may, in its sole
discretion, refuse to make a Floorplan Loan against any invoice. If FINOVA
elects to make a Floorplan Loan, FINOVA may disburse the proceeds of such
Floorplan Loan, less the amount of any discount agreed to between FINOVA and the
manufacturer or vendor of the Floorplanned Inventory, directly to such
manufacturer or vendor on Borrower's behalf in accordance with the payment
arrangement then in effect between FINOVA and such manufacturer or vendor.
FINOVA will charge Borrower's loan account for the full amount of the Floorplan
Loan without regard to any discount that FINOVA may be entitled to receive
pursuant to any payment arrangement referred to in the immediately preceding
sentence. The Floorplan Credit Line is an uncommitted line of credit, may be
terminated in whole or in part by FINOVA, in its sole discretion, at any time
and, upon such termination, no further Floorplan Loans shall be available from
FINOVA.
2.5 Loan Account. All advances made hereunder shall be added to and deemed part
------------
of the Obligations when made. FINOVA may from time to time charge all
Obligations of Borrower when due to Borrower's loan account with FINOVA.
2.6 Revolving Credit Line and Term Loan Interest; Fees. Borrower shall pay
--------------------------------------------------
FINOVA interest on the daily outstanding balance of the Revolving Credit Line
and on the Term Loan, if any, at the per annum rates set forth on the Schedule
and as applicable. Borrower shall also pay FINOVA the fees set forth on the
Schedule.
2.7 Floorplan Credit Line Interest. In the event that Borrower fails to make
------------------------------
any payment to FINOVA when due with respect to the Floorplan Credit Line,
Borrower shall pay FINOVA interest on the daily amount past due at the
applicable per annum rate set forth on the Schedule. In addition, in the event
that FINOVA elects to make advances under the Floorplan Credit Line which are
not subsidized by the manufacturer or vendor, such advances will bear interest
from the invoice date until the due date at the applicable rate set forth in the
Schedule. All such interest shall be payable upon demand of FINOVA.
2.8 Revolving Credit Line and Term Loan Default Interest Rate. Upon the
---------------------------------------------------------
occurrence and during the continuation of an Event of Default,
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<PAGE>
Borrower shall pay FINOVA interest on the daily outstanding balance of the
Revolving Credit Line and the Term Loan at a rate per annum which is three
percentage points (3.0%) in excess of the rate which would otherwise be
applicable thereto pursuant to the Schedule. All such default interest shall be
payable upon demand of FINOVA.
2.9 Examination Fees. Borrower agrees to pay to FINOVA an examination fee in
----------------
the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
2.10 Excess Interest. The contracted for rate of interest of the loan
---------------
contemplated hereby, without limitation, shall consist of the following: (i) the
interest rate set forth on the Schedule, calculated and applied to the principal
balance of the Obligations in accordance with the provisions of this Agreement;
(ii) interest after an Event of Default, calculated and applied to the amount of
the Obligations in accordance with the provisions hereof; and (iii) all
Additional Sums (as herein defined), if any. Borrower agrees to pay an effective
contracted for rate of interest which is the sum of the above-referenced
elements. The examination fees, attorneys fees, expert witness fees, letter of
credit fees, collateral monitoring fees, closing fees, facility fees, other
charges, goods, things in action or any other sums or things of value paid or
payable by Borrower (collectively, the "Additional Sums"), whether pursuant to
this Agreement or any other documents or instruments in any way pertaining to
this lending transaction, or otherwise with respect to this lending transaction,
that under any applicable law may be deemed to be interest with respect to this
lending transaction, for the purpose of any applicable law that may limit the
maximum amount of interest to be charged with respect to this lending
transaction, shall be payable by Borrower as, and shall be deemed to be,
additional interest and for such purposes only, the agreed upon and "contracted
for rate of interest" of this lending transaction shall be deemed to be
increased by the rate of interest resulting from the inclusion of the Additional
Sums.
It is the intent of the parties to comply with the usury laws of the State
of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that
notwithstanding any provisions to the contrary in this Agreement, or in any of
the documents securing payment hereof or otherwise relating hereto, in no event
shall this Agreement or such documents require the payment or permit the
collection of interest in excess of the maximum contract rate permitted by the
Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such
excess of interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, shared or received in
connection with the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Borrower nor any other person or entity now or
hereafter liable for the payment of the Obligations shall be obligated to pay
the amount of such interest to the extent that it is in excess of the Maximum
Interest Rate, (3) any such excess which may have been collected shall be either
applied as a credit against the then unpaid principal amount of the Obligations
or refunded to Borrower, at FINOVA's option, and (4) the effective rate of
interest shall be automatically reduced to the Maximum Interest Rate. It is
further agreed, without limiting the generality of the foregoing, that to the
extent permitted by the Applicable Usury Law; (x) all calculations of interest
which are made for the purpose of determining whether such rate would exceed the
Maximum Interest Rate shall be made by amortizing, prorating, allocating and
spreading during the period of the full stated term of the loan evidenced
hereby, all interest at any time contracted for, charged or received from
Borrower or otherwise in connection with such loan; and (y) in the event that
the effective rate of interest on the loan should at any time exceed the Maximum
Interest Rate, such excess interest that would otherwise have been collected had
there been no ceiling imposed by the Applicable Usury Law shall be paid to
FINOVA from time to time, if and when the effective interest rate on the loan
otherwise falls below the Maximum Interest Rate, to the extent that interest
paid to the date of calculation does not exceed the Maximum Interest Rate, until
the entire amount of interest which would otherwise have been collected had
there been no ceiling imposed by the Applicable Usury Law has been paid in full.
Borrower further agrees that should the Maximum Interest Rate be increased at
any time hereafter because of a change in the Applicable Usury Law, then to the
extent not prohibited by the Applicable Usury Law, such increases, if
applicable, shall apply to all indebtedness evidenced hereby regardless of when
incurred; but, again to the extent not prohibited by the Applicable Usury Law,
should the Maximum Interest Rate be decreased because of a change in the
Applicable Usury Law, such decreases shall not apply to the indebtedness
evidenced hereby regardless of when incurred.
2.11 Principal Payments; Proceeds of Collateral
------------------------------------------
(a) Principal Payments. Except where evidenced by notes or other instruments
-----------------
issued or made by Borrower to FINOVA specifically containing payment provisions
which are in conflict with this Section 2.11(a) (in which event the conflicting
provisions of said notes or other instruments shall govern and control), that
portion of the Obligations consisting of principal payable on account of
Revolving Loans and Floorplan Loans shall be payable by Borrower to FINOVA
immediately upon the earliest of (i) the receipt by FINOVA or Borrower of any
proceeds of any of the Collateral, to the extent of said proceeds, (ii) the
occurrence of an Event of Default in consequence of which FINOVA elects to
accelerate the maturity and payment of such loans, (iii) any termination of this
Agreement pursuant to Section 9.2 hereof, or (iv) in the case of any Floorplan
Loan, the date that is the number of days set forth in Exhibit A to this
Agreement after the invoice date for the Floorplanned Inventory purchased with
the proceeds of such Floorplan Loan, which number of days are specified opposite
the name of the manufacturer or vendor of such Floorplanned Inventory in such
Exhibit A (each a "Due Date") (and FINOVA shall have the right, in its sole
discretion, to amend or supplement such Exhibit A in whole or in part by
delivery from time to time of a new such Exhibit A to Borrower), provided,
--------
however, that any Revolver Overloan or Floorplan Collateral Coverage
- -------
Reconciliation shall be payable on demand pursuant to the provisions of
Section 2.3 hereof. Provided that there is sufficient Eligible Inventory, as
determined by FINOVA in its sole discretion, to cover a specific invoice,
Borrower and FINOVA may agree to extend the due date of such specific invoice,
on such terms and conditions as are established by FINOVA in its sole
discretion, and consented to by Borrower.
(b) Collections. To the extent Borrower receives any collection of Receivables,
-----------
it shall receive all payments as trustee of FINOVA and immediately deliver all
payments to FINOVA in their original form as set forth below, duly endorsed in
blank, provided, however, that any checks that come into Borrower's possession
may only be accepted by Borrower for payment by deposit into the lockbox
account. FINOVA or its designee may, at any time, notify account debtors that
the Receivables have been assigned to FINOVA and of FINOVA's security interest
therein, and may collect the Receivables directly and charge the collection
costs and expenses to Borrower's loan account. Borrower agrees that, in
computing the charges under this Agreement, all items of payment shall be deemed
applied by FINOVA on account of the Obligations the number of Business Days
referenced in the Schedule after receipt by FINOVA of good funds which have been
finally credited to FINOVA's account, whether such funds are received directly
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<PAGE>
from Borrower or from the Blocked Account (as herein defined) bank or the
Dominion Account (as herein defined) bank, pursuant to Section 2.11(c) hereof.
The above calculation shall apply as a charge against collections regardless of
Borrower's obligations to FINOVA, if any. FINOVA is not, however, required to
credit Borrower's account for the amount of any item of payment which is
reasonably unsatisfactory to FINOVA in its sole discretion and FINOVA may charge
Borrower's loan account for the amount of any item of payment which is returned
to FINOVA unpaid. In this Agreement or in any Loan Document, whenever there is a
reference to "receipt by FINOVA of funds," or language of similar effect
regarding the receipt of funds by FINOVA, in order to be credited to the
applicable account on the date that good funds were received by FINOVA (either
directly or through a bank account, lockbox or similar arrangement) the funds
must reach FINOVA no later than 10:00 a.m., Eastern time, on that date. Any
Funds reaching FINOVA after 10:00 a.m., Eastern time, will be credited to the
applicable account on the next immediately following Business Day.
(c) Establishment of a Lockbox Account or Dominion Account. All proceeds of
------------------------------------------------------
Collateral shall, at the direction of FINOVA, be deposited by Borrower into a
lockbox account, or such other "blocked account" as FINOVA may require (each, a
"Blocked Account") pursuant to an arrangement with such bank as may be selected
by Borrower and be acceptable to FINOVA. As long as no Event of Default shall
have occurred, and Borrower outstandings under the Revolving Credit Facility do
not average in excess of One Million Five Hundred Thousand ($1,500,000) dollars
for over 90 days, a lockbox and blocked account will not be required. If
Borrower's average outstandings under the Revolving Credit Facility exceed One
Million Five Hundred Thousand ($1,500,000) for over 90 days, Borrower agrees
immediately upon FINOVA's request, in FINOVA's sole discretion, to implement a
lockbox and Blocked Account. As long as no Event of Default shall have occurred,
FINOVA will direct the bank to transfer available funds in the Blocked Account
to Borrower's operating checking account. If any Event of Default shall have
occurred under this agreement, FINOVA reserves the right in its sole discretion
and by its sole authorization, to direct said bank to transfer such funds to
FINOVA, either to any account maintained by FINOVA at said bank or by wire
transfer to appropriate account(s) of FINOVA. All funds deposited into the
lockbox and Blocked Account shall immediately become the sole property of FINOVA
and Borrower shall obtain the agreement by such bank to waive any offset rights
against the funds so deposited. Until such time as FINOVA receives all funds via
wire transfer from the Blocked Account, Borrower will arrange for the bank to
send FINOVA a duplicate copy of the monthly statement for each operating
checking account. FINOVA will compute the charges under this Agreement regarding
collections based on the deposits exhibited on the bank checking account
statements. FINOVA assumes no responsibility for any Blocked Account
arrangement, including without limitation, any claim of accord and satisfaction
or release with respect to deposits accepted by any bank thereunder.
Alternatively, FINOVA may establish depository accounts in the name of FINOVA at
a bank or banks for the deposit of such funds (each, a "Dominion Account") and
Borrower shall deposit all proceeds of Receivables and all cash proceeds of any
Collateral or cause same to be deposited, in kind, in such Dominion Accounts of
FINOVA in lieu of depositing same to Blocked Accounts.
(d) Payments Without Deductions. Borrower shall pay principal, interest, and
---------------------------
all other amounts payable hereunder, or under any relating agreement, without
any deduction whatsoever, including, but not limited to, any deduction for any
setoff or counterclaim.
(e) Collection Days Upon Repayment. In the event Borrower repays the
------------------------------
Obligations in full at any time hereafter, such payment in full shall be
credited (conditioned upon final collection) to Borrower's loan account two (2)
Business Days after FINOVA's receipt thereof.
(f) Monthly Accountings. FINOVA shall provide Borrower monthly with an account
-------------------
of advances, charges, expenses and payments made pursuant to this Agreement.
Such account shall be deemed correct, accurate and binding on Borrower and
FINOVA and an account stated (except for reverses and reapplications of payments
made and corrections of errors discovered by FINOVA), unless Borrower notifies
FINOVA in writing to the contrary within thirty (30) days after each account is
rendered, describing the nature of any alleged errors or omissions.
(g) Collections and Administration. FINOVA may, at any time, whether or not an
------------------------------
Event of Default has occurred, without notice to or assent of Borrower, (i)
notify any account debtor of the fact that the Accounts and other Collateral
have been assigned to FINOVA by Borrower and that payment thereof is to be made
to the order of and directly to FINOVA, and (ii) after the occurrence of an
Event of Default, or an event which, with the giving of notice, passage of time,
or both, would become an Event of Default, demand, collect or enforce payment of
any Accounts or such other Collateral, but without any duty to do so, and FINOVA
shall not be liable for any failure to collect or enforce payment thereof. At
FINOVA's request, all invoices, or bills and statements sent to any account
debtor, other obligor or bailee, shall state that the Accounts and such
Collateral shall have been assigned to FINOVA and are payable directly and only
to FINOVA. FINOVA shall have the right, at any time, in FINOVA's name or in the
name of a nominee of FINOVA, to verify the validity, amount or any other matter
relating to the Accounts or the other Collateral, by mail, telephone or
otherwise.
2.12 Application of Collateral. FINOVA shall have the continuing and exclusive
-------------------------
right to apply or reverse and re-apply any and all payments to any portion of
the Obligations, and such application or re-application can be in any order or
manner that FINOVA deems necessary and appropriate. To the extent that Borrower
makes a payment or FINOVA receives any payment or proceeds of the Collateral for
Borrower's benefit which is subsequently invalidated, declared to be fraudulent
or preferential, set aside or required to be repaid to a trustee, debtor in
possession, receiver or any other party under any bankruptcy law, common law or
equitable cause, then, to such extent, the Obligations or part thereof intended
to be satisfied shall be revived and continue as if such payment or proceeds had
not been received by FINOVA.
3. COLLATERAL
3.1 Security Interest in the Collateral. To secure the payment and performance
-----------------------------------
of the Obligations when due, Borrower hereby grants to FINOVA a security
interest in all of Borrower's now owned or hereafter acquired or arising
Inventory, Equipment, Receivables, tax refunds, investments, Investment Property
(as defined in Section 9-115 of the Code), leasehold rights and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
money, proceeds of any keyman life insurance policy, any and all property now or
at any time hereafter in FINOVA's possession (including claims and credit
balances) any amounts owed to mutual customers of Borrower and FINOVA which are
floorplanned by FINOVA, and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third parties), all products
and all books and records related to any of the foregoing (all of the foregoing,
together with all other property in which FINOVA may be granted a lien or
security interest, is referred to herein, collectively, as the "Collateral").
-5-
<PAGE>
3.2. Perfection and Protection of Security Interests. Borrower shall, at its
-----------------------------------------------
expense, take all actions requested by FINOVA at any time to perfect, maintain,
protect and enforce FINOVA's security interest and other rights in the
Collateral and the priority thereof from time to time, including, without
limitation, (i) executing and filing financing or continuation statements and
amendments therof and executing and delivering such documents and titles in
connection with motor vehicles as FINOVA shall require, all in form and
substance satisfactory to FINOVA, (ii) maintaining a perpetual inventory and
complete and accurate stock record, (iii) delivering to FINOVA warehouse
receipts covering any portion of the Collateral located in warehouses and for
which warehouse receipts are issued, and transferring Inventory to warehouses
designated by FINOVA, (iv) placing notations on Borrower's books of account to
disclose FINOVA's security interest therein, and (v) delivering to FINOVA all
letters of credit on which Borrower is named beneficiary. FINOVA may file,
without Borrower's signature, one or more financing statements disclosing
FINOVA's security interest under this Agreement. Borrower agrees that a carbon,
photographic, Photostate or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
Borrower's agents or processors, Borrower shall notify such Person of FINOVA's
security interest in such Collateral and, upon FINOVA's request, instruct them
to hold all such Collateral for FINOVA's account subject to FINOVA's
instructions. From time to time, Borrower shall, upon FINOVA's request, execute
and deliver confirmatory written instruments pledging the Collateral to FINOVA,
but Borrower's failure to do so shall not affect or limit FINOVA's security
interest or other rights in and to the Collateral. Until the Obligations have
been fully satisfied and FINOVA's obligation to make further advances hereunder
has terminated, FINOVA's security interest in the Collateral shall continue in
full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its sole discretion, at any time
--------------------------
after FINOVA has requested the Borrower take any of the following action(s) and
Borrower has failed to do so, discharge any lien or encumbrance on the
Collateral or bond the same, pay any insurance, maintain guards, pay any service
bureau, obtain any record or take in any other action to preserve the Collateral
and charge the cost thereof to Borrower's loan account as an Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of such
---------
insurance as is required by FINOVA, written by insurers, in amounts, and with
Lender's Loss Payee and other endorsements, reasonably satisfactory to FINOVA.
All premiums shall be paid by Borrower as and when due. Accurate and complete
copies of all policies shall be delivered by Borrower to FINOVA. If Borrower
fails to comply with the section, FINOVA may (but shall not be required to)
procure such insurance at Borrower's loan account as an Obligation.
3.5 Collateral Reporting; Inventory.
-------------------------------
(a) Invoices. Borrower shall not re-date any invoice or sale from the original
--------
date thereof or make sales on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify FINOVA in writing. Without limiting the generality of the
foregoing, Borrower shall immediately issue and deliver to FINOVA credit
memoranda for any Receivable in excess of the amount set forth in the schedule
which becomes and ineligible account.
(b) Instruments. In the event any Receivable is or becomes evidenced by a
-----------
promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall immediately deliver such instrument to FINOVA
appropriately endorsed to FINOVA and, regardless of the form of any
presentment, demand, notice of dishonor, protest or notice of protest with
respect thereto. Borrower shall remain liable thereon until such instrument is
paid in full.
(c) Physical Inventory. Borrower shall maintain its computerized perpetual
------------------
inventory system and shall conduct a physical count of the Inventory at such
reasonable intervals as FINOVA shall request and promptly supply FINOVA with a
copy of such accounts accompanied by a report of the quantity and value
(calculated at the lower of cost or market value on a first in, first out basis)
of the Inventory and such additional information with respect to the Inventory
as FINOVA may reasonably request from time to time.
(d) Returns. For so long as no Event of Default has occurred and is continuing
-------
and subject to the provisions of Section 3.6(c), if any account debtor returns
any Inventory to Borrower in the ordinary course of its business, Borrower shall
promptly determine the reason for such return and promptly issue a credit
memorandum to the account debtor (sending a copy to FINOVA) in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (i) hold the returned Inventory in trust for
FINOVA, (ii) segregate all returned Inventory from all of Borrower's other
property, (iii) conspicuously label the returned Inventory as FINOVA's property,
and (iv) immediately notify FINOVA of the return of any Inventory, specifying
the reason for such return, the location and condition of the returned
Inventory, and on FINOVA's request deliver such returned Inventory to FINOVA.
Borrower shall not consign any Inventory. Borrower shall dispose of the Returned
Inventory solely according to FINOVA's written instructions and will not issue
and credits or allowances with respect to Returned Inventory without FINOVA's
prior written consent. All Returned Inventory shall remain subject to FINOVA's
liens. Whenever any Inventory is returned, the related Receivable shall be
deemed ineligible in the amount of the Returned Inventory and the Revolving
Credit Line shall be adjusted accordingly.
3.6 Receivables.
-----------
(a) Eligibility. Borrower hereby represents and warrants to FINOVA that: (1)
-----------
each existing Receivable represents, and each future Receivable will represent,
a bona fide sale or lease and delivery of goods by Borrower, in the ordinary
---- ----
course of Borrower's business; (ii) each existing Receivable is, and each future
Receivable will be, for a liquidated amount payable by the account debtor
thereon on the terms set forth in the invoice therefor or in the schedule therof
delivered to FINOVA, without offset, deduction, defense, or counterclaim; (iii)
no payment will be received with respect to any Receivable, and no credit,
discount (other than those discounts given in the ordinary course of business),
or extension, or agreement therefor will be granted on any Receivable, except as
reported to FINOVA in accordance with this Agreement; (iv) each copy of an
invoice delivered to FINOVA by Borrower will be a genuine copy of the original
invoice sent to the account debtor named therein; and (v) all goods described in
each invoice will have been delivered to the account debtor and all services of
Borrower described in each invoice will have been performed.
(b) Invoice. Borrower shall not re-date any invoice or sale or make sales on
-------
extended dating beyond that customary in Borrower's business or otherwise extend
or modify any Receivable. If Borrower becomes aware of any matter adversely
affecting the collectability or enforceability of any Receivable, including,
without limitation, information regarding an account debtor's creditworthiness,
Borrower will immediately so advice FINOVA in writing.
-6-
<PAGE>
(c) Inventory Returns. If an account debtor returns any Inventory to Borrower
-----------------
when no Event of Default exists hereunder. Borrower shall promptly determine the
reason for such return, shall immediately advise FINOVA of any returned
Inventory involving an amount in excess of the amount provided in the Schedule
from any single return or multiple returns within a three (3) Business Day time
frame, and may issue a credit memorandum to the account debtor in the
appropriate amount. Each such report shall indicate the reasons for the returns
and the locations and condition of the returned Inventory. In the event any
account debtor returns Inventory to Borrower during the existence of an Event of
Default hereunder, unless FINOVA otherwise agrees to the contrary, Borrower
shall: (i) hold the returned Inventory in trust for FINOVA; (ii) segregate all
returned Inventory from all of its other Property; (iii) dispose of the returned
Inventory solely according to FINOVA's written instructions; and (iv) not issue
any credits or allowances with respect thereto without FINOVA's prior written
consent. All returned Inventory shall remain subject to FINOVA's Liens. Whenever
any Inventory is returned, the related Receivable shall be deemed ineligible in
the amount of the returned Inventory and the Revolving Loans Borrowing Base
shall be adjusted accordingly.
If any representation or warranty herein or in any report submitted to
FINOVA is breached as to any Receivable or any Receivable ceases to be an
Eligible Receivable for any reason other than payment thereof, then FINOVA may,
in addition to its other rights hereunder, designate any and all Receivables
owing by that account debtor as not Eligible Receivables; provided, that FINOVA
--------
shall in any such event retain its security interest in all Receivables, whether
or not Eligible Receivables, until the Obligations have been fully satisfied and
FINOVA's obligations to provide loans hereunder has terminated.
(d) Disputes. Borrower shall notify FINOVA promptly of all disputes or claims
--------
and settle or adjust such disputes or claims at no expense to FINOVA, but no
discount, credit or allowance shall be granted to any account debtor and no
returns of merchandise shall be accepted by Borrower without FINOVA's consent,
except for discounts, credits and allowances made or given in the ordinary
course of Borrower's business in the absence of an Event of Default. Borrower
shall send FINOVA a copy of each credit memorandum in excess of the amount
provided in the Schedule as soon as issued or as soon as known by Borrower.
FINOVA may, at any time after the occurrence of any Event of Default, settle or
adjust disputes or claims directly with account debtors for amounts and upon
terms which FINOVA considers advisable in its reasonable credit judgement and,
in all cases. FINOVA shall credit Borrower's loan account with only the net
amounts received by FINOVA in payment of any Receivables.
3.7 Equipment.
---------
Borrower shall keep and maintain the Equipment in good operating condition and
repair and make all necessary replacements thereto to maintain and preserve the
value and operating efficiency thereof at all times consistent with Borrower's
past practice, ordinary wear and tear excepted. Borrower shall not permit any
item of Equipment to become a fixture (other than a trade fixture) to real
estate or an accession to other property.
3.8 Other License; No Disposition of Collateral.
-------------------------------------------
Borrower represents, warrants and covenants that (a) all Collateral is and shall
continue to be owned by its free and clear of all liens, claims and encumbrances
whatsoever (except for FINOVA's security interest, Permit Encumbrances, and such
other liens, claims and encumbrances as may be permitted by FINOVA in its sole
discretion from time to time in writing), and (b) Borrower shall not, without
FINOVA's prior written approval, sell, encumber or dispose of or permit the
sale, encumbrance or disposal of any Collateral or any interest of Borrower
therein, except for the sale of Inventory in the ordinary course of Borrower's
business, Equipment which is obsolete and non-material assets other than
Receivables and Inventory. The proceeds of any such sales shall be remitted to
FINOVA pursuant to this Agreement for application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan secured by
-------------------
the Collateral. FINOVA may, in its sole discretion, (i) exchange, enforce, waive
or release any of the Collateral, (ii) apply Collateral and direct the order or
manner of sale thereof as it may determine, and (iii) Upon the occurrence and
confirmation of an Event of Default, settle, compromise, collect or otherwise
liquidate any Collateral in any manner without affecting its right to take any
other action with respect to any other Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the initial advance
---------------
hereunder is subject to the fulfillment, to the satisfaction of FINOVA and its
counsel, of each of the following conditions and any additional conditions
specified in the Schedule on or prior to the date set forth on the Schedule (the
date of fulfillment of all such conditions, the "Closing Date"):
(a) Loan Documents. FINOVA shall have received each of the following Loan
--------------
Documents: (i) such loan and security agreements, notes, intellectual property
assignments and deeds of trust as FINOVA may require with respect to this
Agreement, executed by each of the parties thereto and, if applicable, duly
acknowledged for recording or filing in the appropriate governmental offices;
(ii) such Blocked Account or Dominion Account agreements as FINOVA shall
determine; (iii) such other documents, instruments and agreements in connection
herewith as FINOVA shall require, executed, certified and/or acknowledged by
such parties as FINOVA shall designate;
(b) Terminations by Existing Lender. Borrower's existing lender(s) shall have
-------------------------------
executed and delivered UCC termination statements and other documentation
evidencing the termination of its liens and security interest in the assets of
Borrower or a subordination agreement in form and substance satisfactory to
FINOVA in its sole discretion; and FINOVA shall have approved in its sole
discretion; and FINOVA shall have approved in its sole discretion any
outstanding payoff arrangements with the foregoing creditors;
(c) Charter Documents. FINOVA shall have received copies of Borrower's By-laws
-----------------
and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(d) Good Standing. FINOVA shall have received a certificate of corporate status
-------------
with respect to Borrower, and each other Loan Party, dated within thirty (30)
days of the Closing Date, by the Secretary of State of the state of
incorporation of Borrower or such Loan Party, which certificate shall indicated
that Borrower or such Loan Party is in good standing in such state;
(e) Foreign Qualification. FINOVA shall have received certificates of corporate
---------------------
status with respect to Borrower and each other Loan Party, each dated within
ten (10) days of the Closing Date, issued by the Secretary of State of each
state in which such party's failure to be duly qualified or licensed would have
a material adverse effect on its financial condition or assets, indicating that
such party is in good standing;
-7-
<PAGE>
(f) Authorizing Resolutions and Incumbency. FINOVA shall have received a
--------------------------------------
certificate from the Secretary of Borrower and each other Loan Party attesting
to (i) the adoption of resolutions of Borrower's Board of Director authorizing
the execution and delivery of this Agreement and the other Loan Documents to
which such Loan Party is a party, and authorizing specific officers of such Loan
Party to execute same, and (ii) the authenticity of original specimen signature
of such officers;
(g) Insurance. FINOVA shall have received the insurance certificates and
---------
certified copies of policies required by Section 3.4 hereof, in form and
substance satisfactory to FINOVA and its counsel;
(h) Compensation. Intentionally left blank;
------------
(i) Searches; Certificates of Title. FINOVA shall have received search
-------------------------------
reflecting the filing of it financing statements and fixture flings in such
jurisdictions as it shall determine, and shall have received certificates of
title with respect to the Collateral which shall have been duly executed in a
manner sufficient to perfect all of the security interests granted to FINOVA;
(j) Intentionally left blank.
(k) Fees. Borrower shall have paid all fees payable by it on the Closing Date
----
pursuant to this Agreement;
(l) Opinion of Counsel. FINOVA shall have received an opinion of Borrower's
------------------
counsel covering such matters as FINOVA shallreasonably request;
(m) Officer Certificate. FINOVA shall have received a certificate of the
-------------------
President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(n) Solvency Certificate. FINOVA shall have received a signed certificate of
--------------------
the Borrower's duly elected Chief Financial Officer or such other officer of
Borrower acceptable to FINOVA, concerning the solvency and financial condition
of Borrower, on FINOVA's standard form;
(o) Lockbox. Borrower and its legal counsel have reviewed FINOVA's standard
-------
Lockbox Agreement and agree to execute this Agreement at such time as described
in Section 2.11 (c) herein without any changes except such changes as may be
required by the bank and which are acceptable to FINOVA.
(p) Environmental Assessment. If required by FINOVA, Borrower shall have caused
------------------------
a Phase I Environmental Assessment to be conducted on the property or properties
owned or occupied by Borrower, all at Borrower's own expense and the results of
such assessment(s) shall have been in form and substance satisfactory to FINOVA
in its sole discretion. Such assessment(s) shall have included, in FINOVA's
discretion, core samplings, and shall have been conducted by an environmental
engineer acceptable to FINOVA;
(q) Environmental Certificate. FINOVA shall have received an Environmental
-------------------------
Certificate from Borrower, in form and substance satisfactory to FINOVA in its
discretion, with respect to all locations of Collateral; and
(r) Other Matters. All other documents and legal matters in connection with the
-------------
transaction contemplated by this Agreement shall have been delivered, executed
or recorded and shall be in form and substance satisfactory to FINOVA and its
counsel.
4.2 Subsequent Advances. The obligation of FINOVA to make any advance hereunder
-------------------
(including the initial advance) shall be subject to the further conditions
precedent that, on and as of the date of such advance.
(a) the representations and warranties of Borrower set forth in this Agreement
shall be accurate, before and after giving effect to such advance or issuance
and to the application of any proceeds thereof;
(b) no Event of Default and no event which, with notice or passage of time or
both, would constitute an Event of Default has occurred and is continuing, or
would result from such advance or issuance or from the application of any
proceeds thereof;
(c) no material adverse change has occurred in the Borrower's business,
operations, financial condition, or assets or in the Borrower's ability to repay
the Obligation; and
(d) FINOVA shall have received such other approvals, opinions or documents as
FINOVA shall reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly existing and
----------------
in good standing under the laws of the State set forth on the Schedule, is
qualified and authorized to do business and is in good standing in all states in
which such qualification and good standing are necessary in order for it to
conduct its business and own its property, and has all requisite power and
authority to conduct its business as presently conducted, to own its property
and to execute and deliver each of the Loan Documents to which it is a party and
perform all of its Obligations thereunder and has not taken any steps to wind
up, dissolve or otherwise liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding five (5) years, been
-----------
known by or used any other corporate or fictitious name except as set forth on
the Schedule, nor has Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any person
during such time, except as set forth on the Schedule;
5.3 Due Authorization. The execution, delivery and performance by Borrower of
-----------------
the Loan Documents to which it is a party have been authorized by all necessary
corporate action and do not and shall not constitute a violation of any
applicable law or of Borrower's Articles or Certificate of Incorporation or
By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which Borrower is a party
------------------
is the legal, valid and binding obligation of Borrower enforceable against
Borrower in accordance with its terms;
5.5 Intangible Property. Borrower possesses adequate assets, licenses, patents,
-------------------
patent applications, copyrights, trademarks, trademark applications and trade
names for the present and planned future conduct of its business without any
known conflict with the rights of others, and each is valid and has been duly
registered or filed with the appropriate governmental authorities;
-8-
<PAGE>
5.6 Capital. Borrower has capital sufficient to conduct its business, is able to
-------
pay its debts as they mature and owns property having a fair salable value
greater than the amount required to pay all of its debts (including contingent
debts);
5.7 Material Litigation. Borrower has no pending or overtly threatened
-------------------
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of FINOVA's interests therein;
5.8 Title: Security Interests of FINOVA. Borrower has good, indefeasible and
-----------------------------------
merchantable title to the Collateral and, upon the filing of UCC-1 Financing
Statements and the recording of any mortgages or deeds of trust with respect to
real property, in each case in the appropriate offices, this Agreement and such
documents shall create valid and perfected first priority liens in and to the
Collateral, subject only to Permitted Encumbrances;
5.9 Restrictive Agreements: Labor Contracts. Borrower is not a party or subject
---------------------------------------
to any contract or subject to any charge, corporate restriction, judgment,
decree or order materially and adversely affecting its business, assets,
operations, prospects or condition, financial or otherwise, or which restricts
its right or ability to incur Indebtedness, and it is not party to any labor
dispute. In addition, no labor contract is scheduled to expire during the
Initial Term of this Agreement, except as disclosed to FINOVA in writing prior
to the date hereof.
5.10 Laws. Borrower is not in violation of any applicable statute, regulation,
----
ordinance or any order of any court, tribunal or governmental agency, in any
respect materially and adversely affecting the Collateral or its business,
assets, operations, prospects or condition, financial or otherwise;
5.11 Consents. Borrower has obtained or caused to be obtained or issued any
--------
required consent of a governmental agency or other Person in connection with the
financing contemplated hereby;
5.12 Defaults. Borrower is not in default with respect to any note, indenture,
--------
loan agreement, mortgage, lease, deed or other agreement to which it is a party
or by which it or its assets are bound, nor has any event occurred which, with
the giving of notice or the lapse of time, or both, would cause such a default;
5.13 Financial Condition. The Prepared Financials fairly present Borrower's
-------------------
financial condition and results of operations and those of such other Persons
described therein as of the date thereof; there are no material omissions from
the Prepared Financials or other facts or circumstances not reflected in the
Prepared Financials; and there has been no material and adverse change in such
financial condition or operations since the date of the initial Prepared
Financials delivered to FINOVA hereunder;
5.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or has been in
-----
violation of any of the provisions of ERISA, any of the qualification
requirements of IRC Section 401(a) or any of the published interpretations
thereunder, nor has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed under Section
4041 of ERISA, nor has any Plan been terminated under ERISA. The PBGC has not
instituted proceedings to terminate, or appointed a trustee to administer, a
Plan. No lien upon the assets of Borrower has arisen with respect to a Plan. No
prohibited transaction or Reportable Event has occurred with respect to a Plan.
Neither Borrower nor any ERISA Affiliate has incurred any withdrawal liability
with respect to any Multiemployer Plan. Borrower and each ERISA Affiliate have
made all contributions required to be made by them to any Plan or Multiemployer
Plan when due. There is no accumulated funding deficiency in any Plan, whether
or not waived;
5.15 Taxes. Borrower has filed all tax returns and such other reports as it is
-----
required by law to file and has paid or made adequate provision for the payment
on or prior to the date when due of all taxes, assessments and similar charges
that are due and payable;
5.16 Locations. Borrower's chief executive office and the offices and locations
---------
where it keeps the Collateral (except for Inventory in transit) are at the
locations set forth on the Schedule, except to the extent that such locations
may have been changed after notice to FINOVA in accordance with Section 6.4
hereof;
5.17 Business Relationships. There exists no actual or threatened termination,
----------------------
cancellation or limitation of, or any modification or change in, the business
relationship between Borrower and any customer or any group of customers whose
purchases individually or in the aggregate are material to the business of
Borrower, or with any material supplier, and there exists no present condition
or state of facts or circumstances which would materially and adversely affect
Borrower or prevent Borrower from conducting such business after the
consummation of the transactions contemplated by this Agreement in substantially
the same manner in which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by Borrower pursuant to this
--------------
Agreement shall constitute (i) an automatic representation and warranty by
Borrower to FINOVA that there does not then exist any Event of Default and
(ii) a reaffirmation as of the date of said request of all of the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents.
6. COVENANTS.
Affirmative Covenants:
- ---------------------
Borrower covenants that, so long as any Obligation remains outstanding and this
Agreement is in effect, it shall:
6.1 Taxes. File all tax returns and pay or make adequate provision for the
-----
payment of all taxes, assessments and other charges on or prior to the date when
due;
6.2 Notice of Litigation. Promptly notify FINOVA in writing of any litigation,
--------------------
suit or administrative proceeding which may materially and adversely affect the
Collateral or Borrower's business, assets, operations, prospects or condition,
financial or otherwise, whether or not the claim is covered by insurance;
6.3 ERISA. Notify FINOVA in writing (i) promptly upon the occurrence of any
-----
event described in Paragraph 4043 of ERISA, other than a termination, partial
termination or merger of a Plan or a transfer of a Plan's assets and (ii) prior
to any termination, partial termination or merger of a Plan or a transfer of a
Plan's assets;
6.4 Change in Location. Notify FINOVA in writing forty-five (45) days prior to
------------------
any change in the location of Borrower's chief executive office or the location
of any Collateral, or Borrower's opening or closing of any other place of
business;
6.5 Corporate Existence. Maintain its corporate existence and its qualification
-------------------
to do business and good standing in all states necessary for the conduct of its
business and the ownership of its property and maintain adequate assets,
licenses, patents, copyrights, trademarks and trade names for the conduct of its
business;
-9-
<PAGE>
6.6 Labor Disputes. Promptly notify FINOVA in writing of any material labor
--------------
dispute to which Borrower is or may become subject and the expiration of any
labor contract to which Borrower is a party or bound;
6.7 Violations of Law. Promptly notify FINOVA in writing of any violation of
------------------
any law, statute, regulation or ordinance of any governmental entity, or of any
agency thereof, applicable to Borrower which may materially and adversely affect
the Collateral or Borrower's business, assets, prospects, operations or
condition, financial or otherwise;
6.8 Defaults. Notify FINOVA in writing within five (5) business days of
--------
becoming aware of Borrower's default under any note, indenture, loan agreement,
mortgage, lease or other agreement to which Borrower is a party or by which
Borrower is bound, or of any other default under any Indebtedness of
Borrower;
6.9 Capital Expenditures. Promptly notify FINOVA in writing of the making of any
--------------------
Capital Expenditure materially affecting Borrower's business, assets, prospects,
operations or condition, financial or otherwise;
6.10 Books and Records. Keep adequate records and books of account with respect
-----------------
to its business activities in which proper entries are made in accordance with
generally accepted accounting principles consistently applied, reflecting all of
its financial transactions;
6.11 Leases; Warehouse Agreement. Provide FINOVA with (i) copies of all
---------------------------
agreements between Borrower and any landlord or warehouseman which owns any
premises at which any Collateral may, from time to time, be located, and (ii)
landlord and mortgagee waivers in form acceptable to FINOVA with respect to all
locations where any Collateral is hereafter located;
6.12 Additional Documents. At FINOVA's request, promptly execute or cause to be
--------------------
executed and delivered to FINOVA any and all documents, instruments or
agreements deemed necessary by FINOVA to facilitate the collection of the
Obligations or the Collateral or otherwise to give effect to or carry out the
terms or intent of this Agreement or any of the other Loan Documents. Without
limiting the generality of the foregoing, if any of the Receivables with a face
value in excess of $1,000.00 arises out of a contract with the United States of
America or any department, agency, subdivision or instrumentality thereof,
Borrower shall promptly notify FINOVA of such fact in writing and shall execute
any instruments and take any other action required or requested by FINOVA to
comply with the provisions of the Federal Assignment of Claims Act;
6.13 Financial Covenants. Comply with the financial covenants set forth on the
-------------------
Schedule;
6.14 Issuing of Credit Memoranda. Borrower shall issue credit memoranda in the
---------------------------
ordinary course of its business no later than one (1) Business Day After; (i)
Borrower's receipt of returned goods or merchandise; or (ii) any account debtor
shall become entitled to a credit from Borrower under any other circumstances;
and
6.15 Other Covenants. Borrower shall comply with any other covenants set forth
---------------
on the Schedule.
Negative Covenants:
- ------------------
Without FINOVA's prior written consent, which consent FINOVA may withhold in its
sole discretion, so long as any Obligation remains outstanding and this
Agreement is in effect, Borrower shall not:
6.16 Mergers. Merger or consolidate with or acquire any other Person, or make
-------
any other material change in its capital structure or in its business or
operations which in FINOVA's sole discretion would adversely affect Borrower's
ability to repay the Obligations;
6.17 Loans. Make advances, loans or extensions of credit to, or invest in, any
-----
Person except in he ordinary course of Borrower's business with respect to trade
credit only;
6.18 Dividends. Declare or pay cash dividends upon any of its stock or
---------
distribute any of its property or redeem, retire, purchase or acquire
directly or indirectly any of its stock;
6.19 Adverse Transactions. Enter into any transaction which materially and
--------------------
adversely affects the Collateral or its ability to repay the Obligations in full
as and when due;
6.20 Indebtedness of Others. Become directly or contingently liable for the
----------------------
Indebtedness of any Person, except by endorsement of instruments for deposit;
6.21 Repurchase. Make a sale to any customer on a bill-and-hold, guaranteed
----------
sale, sale and return, sale on approval, consignment, or any other repurchase or
return basis;
6.22 Name. Use any corporate or fictitious name other than its corporate name
----
as set forth in its Articles or Certificate of Incorporation on the date hereof
or as set forth on the Schedule;
6.23 Prepayment. Prepay any Indebtedness other than trade payables and other
----------
than the Obligations;
6.24 Capital Expenditure. Make or incur any Capital Expenditure if, after
-------------------
giving effect thereto, the aggregate amount of all Capital Expenditures by
Borrower in any fiscal year would exceed the amount set forth on the Schedule;
6.25 Indebtedness. Create, incur, assume or permit to exist any Indebtedness
------------
(including Indebtedness in connection with Capital Leases) in excess of the
amount set forth on the Schedule, other than (i) the Obligations, (ii) trade
payables and other contractual obligations to suppliers and customers incurred
in the ordinary course of business, and (iii) other Indebtedness existing on the
date of this Agreement and reflected in the Prepared Financials (except
Indebtedness paid on the date of this Agreement from proceeds of the initial
advances hereunder) and (iv) unsecured Indebtedness fully subordinated to the
Obligations in and (iv) unsecured Indebtedness fully subordinated to the
Obligations in all respects and subject to a Subordination Agreement in form and
substance satisfactory to FINOVA;
6.26 Affiliate Transactions. Except as set forth below, sell, transfer,
----------------------
distribute or pay any money or property to any Affiliate, or invest in (by
capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, if no Event of Default has occurred, Borrower may
engage in transactions with Affiliates in the ordinary course of business, in
amounts and upon terms which are fully disclosed to FINOVA and which are no less
favorable to Borrower than would be obtainable in a comparable arm's length
transaction with a Person who is not an Affiliate;
6.27 Nature of Business. Enter into any new business or make any material change
------------------
in any of Borrower's business objectives, purposes or operations;
- 10 -
<PAGE>
6.28 FINOVA's Name. Use the name of FINOVA in connection with any of
-------------
Borrower's business or activities, except in connection with internal business
matters or as required in dealings with governmental agencies and financial
institutions or with trade creditors of Borrower, solely for credit reference
purposes; or
6.29 Margin Security. Own, purchase or acquire (or enter into any contract to
---------------
purchase or acquire) any "margin security" as defined by any regulation of the
Federal Reserve Board as now in effect or as the same may hereafter be in
effect.
7. DEFAULT AND REMEDIES.
7.1 Event of Default. Any one or more of the following events shall constitute
----------------
an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the Obligations
at stated maturity, upon acceleration or otherwise;
(b) Borrower or any other Loan Party fails or neglects to perform, keep, or
observe in any material respect any term, provision, condition, covenant or
agreement contained in any Loan Document to which Borrower or such other Loan
Party is a party; and Borrower fails to cure such default within 5 days of its
occurrence.
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise; and Borrower fails
to cure such default within 5 days of its occurrence.
(d) Borrower's ability to repay any portion of the Obligations or the value or
priority of FINOVA's security interest in the Collateral is materially impaired;
and Borrower fails to cure such default within 5 days of its occurrence.
(e) Any material portion of Borrower's assets is seized, attached, subjected to
a writ or distress warrant, is levied upon or comes into the possession of any
judicial officer unless such action is stayed and such attachment is dismissed
within thirty (30) days;
(f) Borrower shall generally not pay its debts as they become due or shall
enter into any agreement (whether written or oral), or offer to enter into any
agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by Borrower, or
any such proceeding is commenced against Borrower and remains undischarged or
unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment in an aggregate amount exceeding the
amount set forth in the Schedule is filed of record with respect to any of the
Collateral; and Borrower fails to cure such default within 5 days of its
occurrence.
(i) Any judgments are entered against Borrower in an aggregate amount exceeding
the amount set forth in the Schedule;
(j) Any default shall occur under any material agreement between Borrower and
any third party including, without limitation, any default which would result in
a right by such third party to accelerate the maturity of any Indebtedness of
Borrower to such third party; and Borrower fails to cure such default within 30
days of its occurrence.
(k) Any representation or warranty made or deemed to be made by Borrower, any
Affiliate or any other Loan party in any Loan Document or any other statement,
document or report made or delivered to FINOVA in connection therewith shall
prove to have been misleading in any material respect;
(l) Any Guarantor dies, becomes disabled, terminates or attempts to terminate
its Guaranty or any security therefor or becomes subject to any bankruptcy or
other insolvency proceeding;
(m) Any Prohibited Transaction or Reportable Event shall occur with respect to
a Plan which could have a material adverse effect on the financial condition of
Borrower; any lien upon the assets of Borrower in connection with any Plan shall
arise; Borrower or any of its ERISA Affiliates shall fail to make full payment
when due of all amounts which Borrower or any of its ERISA Affiliates may be
required to pay to any Plan or any Multiemployer Plan as one or more
contributions thereto; Borrower or any of its ERISA Affiliates creates or
permits the creation of any accumulated funding deficiency, whether or not
waived; and Borrower fails to cure such default within 30 days of its
occurrence. or
(n) Any transfer of more than ten percent (10%) of the issued and outstanding
shares of common stock or other evidence of ownership of Borrower.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may, at its
--------
option and in its sold discretion and in addition to all of its other rights
under the Loan Documents, terminate this Agreement and declare all of the
Obligations to be immediately payable in full. FINOVA shall also have all of
its rights and remedies under applicable law, including, without limitation, the
default rights and remedies of a secured party under the Code and upon the
occurrence of an Event of Default Borrower hereby consents to the appointment of
a receiver by FINOVA in any action initiated by FINOVA pursuant to this
Agreement and to the jurisdiction and venue set forth in Section 9.26 hereof,
and Borrower waives notice and posting of a bond in connection therewith.
Further, FINOVA may, at any time, take possession of the Collateral and keep it
on Borrower's premises, at no cost to FINOVA, or remove any part of it to such
other place(s) as FINOVA may desire, or Borrower shall, upon FINOVA's demand, at
Borrower's sole cost, assemble the Collateral and make it available to FINOVA at
a place reasonably convenient to FINOVA. FINOVA may sell and deliver any
Collateral at public or private sales, for cash, upon credit or otherwise, at
such prices and upon such terms as FINOVA deems advisable, at FINOVA's
discretion, and may, if FINOVA deems it reasonable, postpone or adjourn any sale
of the Collateral by an announcement at the time and place of sale or of such
postponed or adjourned sale without giving a new notice of sale. Borrower agrees
that FINOVA has no obligation to preserve rights to the Collateral or marshall
any Collateral for the benefit of any Person, at any time, including at all
times prior to the occurrence of an Event of Default. Upon the occurrence and
confirmation of an Event of Default, FINOVA is hereby granted a non-exclusive
license or other right to use, without charge, Borrower's labels, patents,
copyrights, name, trade secrets, trade names, trademarks and advertising matter,
or any similar property, in completing production, advertising or selling any
Collateral and Borrower's rights under all licenses and all franchise agreements
shall inure to FINOVA's benefit. Any requirement of reasonable notice shall be
met if such notice is mailed postage prepaid to Borrower at its address set
forth in the heading to this Agreement at least five (5) days before sale or
other disposition. The proceeds of sale shall be applied, first, to all
attorneys fees and other expenses of sale, and second, to the Obligations in
such order as FINOVA shall elect, in its sole discretion. FINOVA shall return
any excess to Borrower and Borrower shall
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<PAGE>
remain liable for any deficiency to the fullest extent permitted by law. Upon
Event of Default only, FINOVA, in its sole discretion, may at any time have the
right to reduce the Total Facility amount, the Revolving Loans Borrowing Base,
the Floorplan Loans Borrowing Base, or any portion of either borrowing base, or
the advance rates or to modify the terms and conditions upon which FINOVA is
willing to consider making advances under the Total Facility or to take
additional reserves in the Revolving Loans Borrowing Base or the Floorplan Loans
Borrowing Base for any reason.
7.3 Standards for Determining Commercial Reasonableness. Borrower and FINOVA
---------------------------------------------------
agree that the following conduct by FINOVA with respect to any disposition of
Collateral shall conclusively be deemed commercially reasonable (but other
conduct by FINOVA, including, but not limited to, FINOVA's use in its sole
discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed unreasonable): Any
public or private disposition as to which on no later than the fifth calendar
day prior thereto written notice thereof is mailed or personally delivered to
Borrower and, with respect to any public disposition, on no later than the fifth
calendar day prior thereto notice thereof describing in general non-specific
terms, the Collateral to be disposed of is published once in a newspaper of
general circulation in the county where the sale is to be conducted. The public
disposition shall be at any place designated by FINOVA, with or without the
Collateral being present, and which commences at any time between 8:00 a.m. and
5:00 p.m. (provided that no notice of any public or private disposition need be
given to the Borrower if the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market).
Without limiting the generality of the foregoing, Borrower expressly agrees
that, with respect to any disposition of accounts, instruments and general
intangibles, it shall be commercially reasonable for FINOVA to direct any
prospective purchaser thereof to ascertain directly from Borrower any and all
information concerning the same, including, but not limited to, the terms of
payment, aging and delinquency, if any, the financial condition of any obligor
or account debtor thereon or guarantor thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES.
8.1 Expenses. Borrower agrees to promptly reimburse FINOVA for all costs, fees
--------
and expenses incurred by FINOVA in connection with the negotiation, preparation,
execution, delivery, administration and enforcement of each of the Loan
Documents, including, but not limited to, the attorneys' and paralegals' fees of
in-house and outside counsel, expert witness fees, lien, title search and
insurance fees, appraisal fees, all charges and expenses incurred in connection
with any and all environmental reports and environmental remediation activities,
and all other costs, expenses, taxes and filing or recording fees payable in
connection with the transactions contemplated by this Agreement, including
without limitation all such costs, fees and expenses as FINOVA shall incur or
for which FINOVA shall become obligated in connection with (i) any inspection or
verification of the Collateral, (ii) any proceeding relating to the Loan
Documents or the Collateral, (iii) actions taken with respect to the Collateral
and FINOVA's security interest therein, including, without limitation, the
defense or prosecution of any action involving FINOVA and Borrower or any third
party, (iv) enforcement of any of FINOVA's rights and remedies with respect to
the Obligations or Collateral, and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving any Loan Party or any Affiliate, whether or not suit is filed.
Borrower shall also pay all FINOVA charges in connection with bank wire
transfers, forwarding of loan proceeds, deposits of checks and other items of
payment, returned checks, establishment and maintenance of lockboxes and other
Blocked Accounts, and all other bank and administrative matters, in accordance
with FINOVA's schedule of bank and administrative fees and charges in effect
from time to time.
8.2 Environmental Matters.
---------------------
(1) Definitions. The following definitions apply to the provisions of this
-----------
Section 8.2:
(a) the term "Applicable Law" shall include, but shall not be limited to, each
statute named or referred to in this Section 8.2(1) and all rules and
regulations thereunder, and any other local, state and/or federal laws, rules,
regulations or ordinances, whether currently in existence or hereafter enacted,
which govern, to the extent applicable to the Property or to Borrower, (i) the
existence, cleanup and/or remedy of contamination on real property; (ii) the
protection of the environment from soil, air or water pollution, or from
spilled, deposited or otherwise emplaced contamination; (iii) the emission or
discharge of hazardous substances into the environment; (iv) the control of
hazardous wastes; or (v) the use, generation, transport, treatment, removal or
recovery of Hazardous Substances; and
(b) The term "Hazardous Substance" shall mean (i) any oil, flammable substance,
explosives, radioactive materials, hazardous wastes or substances, toxic wastes
or substances or any other wastes, materials or pollutants which either pose a
hazard to the Property or to persons on or about the Property or cause the
Property to be in violation of any Applicable Law; (ii) asbestos in any form
which is or could become friable, urea formaldehyde foam insulation,
transformers or other equipment which contain dielectric fluid containing levels
of polychlorinated biphenyls, or radon gas; (iii) any chemical, material or
substance defined as or included in the definition of "hazardous substances,"
"waste," "hazardous wastes," "hazardous materials," "extremely hazardous waste,"
"hazardous wastes," "Hazardous materials," "extremely hazardous waste,"
"restricted hazardous waste," or "toxic substances" or words of similar import
under any Applicable Law, including, but not limited to, the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), 42 USC
(S)(S)9601 et seq.; the Resource Conservation and Recovery Act ("RCRA"), 42
-- ---
USC(S)(S) 6901 et seq.; the Hazardous Materials Transportation Act, 49 USC
-- ---
(S)(S)1801 et seq.; the Federal Water Pollution Control Act, 33 USC (S)(S)1251
et seq.; (iv) any other chemical, material or substance, exposure to which is
- -- ---
prohibited, limited or regulated by any governmental authority which may or
could pose a hazard to the health or safety of the occupants of the Property or
the owners and/or occupants of property adjacent to or surrounding the Property,
or any other person coming upon the Property or adjacent property; and (v) any
other chemical, materials or substance which may or could pose a hazard to the
environment; and (c) the term "Property" shall mean all real property, wherever
located, in which Borrower or any subsidiary of Borrower or any Affiliate of
Borrower has any right, title or interest, whether now existing or hereafter
arising, and including, without limitation, as owner, lessor or lessee.
(2) Covenants and Representations.
-----------------------------
(a) Borrower represents, and warrants that there have not been during the period
of Borrower's possession of any interest in the Property and, to the best of its
knowledge after reasonable inquiry, there have not been at any other times, any
activities on the Property involving, directly or indirectly, the use,
generation, treatment, storage or disposal of any Hazardous Substances except in
compliance with Applicable Law (i) under, on or in the land included in the
Property, whether contained in soil, tanks, sumps, ponds, lagoons, barrels, cans
or other
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<PAGE>
containments, structures or equipment, (ii) incorporated in the buildings,
structures or improvements included in the Property, including any building
material containing asbestos, or (iii) used in connection with any operations on
or in the Property.
(b) Without limiting the generality of the foregoing and to the extent not
included within the scope of this Section 8.2(2), Borrower represents and
warrants that it is in full compliance with Applicable Law and has received no
notice from any person or any governmental agency or other entity of any
violation by Borrower or its Affiliates of any Applicable Law.
(c) Borrower shall be solely responsible for and agrees to indemnify FINOVA,
protect and defend FINOVA with counsel reasonably acceptable to FINOVA, and hold
FINOVA harmless from and against any claims, actions, administrative
proceedings, judgments, damages, punitive damages, penalties, fines, costs,
liabilities (including sums paid in settlement of claims), interest or losses,
attorneys' fees (including any fees and expenses incurred in enforcing this
indemnity), consultant fees, expert fees, and other out-of-pocket costs or
expenses actually incurred by FINOVA (collectively, the "Environmental Costs"),
that may, at any time or from time to time, arise directly or indirectly from or
in connection with: (i) the presence, suspected presence, release or suspected
release of any Hazardous Substance whether into the air, soil, surface water or
groundwater of or at the Property, or any other violation of Applicable Law, or
(ii) any breach of the representations and covenants set forth in paragraph
8.2(a); except to the extent any of the foregoing result from the actions of
FINOVA, its employees, agents and representatives. All Environmental Costs
incurred or advanced by FINOVA shall be deemed to be made by FINOVA in good
faith and shall constitute Obligations hereunder.
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
-------------------------------------------
(a) Examinations. FINOVA shall at all reasonable times have full access to and
------------
the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents, instruments
and agreements relating to the Collateral and the right to check, test and
appraise the Collateral. Borrower shall deliver to FINOVA any instrument
necessary for FINOVA to obtain records from any service bureau maintaining
records for Borrower. All instruments and certificates prepared by Borrower
showing the value of any of the Collateral shall be accompanied, upon FINOVA's
request, by copies of related purchase orders and invoices. FINOVA may, at any
time after the occurrence of an Event of Default, remove from Borrower's
premises Borrower's books and records (or copies thereof) or require Borrower to
deliver such books and records or copies to FINOVA. If originals are removed,
FINOVA shall permit Borrower to make copies prior to such removal. FINOVA may,
without expense to FINOVA, use Borrower's personnel, supplies and premises as
may be reasonable necessary for examining the Collateral or for maintaining or
enforcing FINOVA's security interest. FINOVA shall use its best efforts not to
disrupt Borrower's business operations during any examination, as long as no
Event of Default exists or has occurred since the previous examination.
(b) Reporting Requirements. Borrower shall furnish FINOVA, upon request, such
----------------------
information and statements as FINOVA shall reasonably request from time to time
regarding Borrower's business affairs, financial condition and the results of
its operations. Without limiting the generality of the foregoing. Borrower shall
provide FINOVA with (i) copies of sales journals, cash receipts journals,
deposit slips and FINOVA's standard form collateral and loan report, daily; (ii)
upon FINOVA's request, copies of sales invoices, customer statements and credit
memoranda issued, remittance advises and reports; (iii) copies of shipping and
delivery documents, upon request; (iv) on or prior to the date set forth on the
Schedule, monthly agings and reconciliations of Receivables, payables reports,
inventory reports and unaudited financial statements (certified by an officer of
Borrower acceptable to FINOVA) with respect to the prior month prepared on a
basis consistent with such statements prepared in prior months and otherwise in
accordance with generally accepted accounting principles, consistently applied;
(v) audited annual consolidated and consolidating financial statements, prepared
in accordance with generally accepted accounting principles applied on a basis
consistent with the most recent Prepared Financials provided to FINOVA by
Borrower, including balance sheets, income and cash flow statements, accompanied
by the unqualified report thereon of independent certified public accountants
acceptable to FINOVA, as soon as available, and in any event, within one hundred
and twenty (120) days after the end of each of Borrower's fiscal years; (vi)
such certificates relating to the foregoing as FINOVA may request, including,
without limitation, a monthly certificate from the president and the chief
financial officer of Borrower showing Borrower's compliance with each of the
financial covenants set forth in this Agreement, and stating whether any Event
of Default has occurred or event which, with giving of notice or the passage of
time, or both, would constitute an Event of Default, and if so, the steps being
taken to prevent or cure such Event of Default; and (vii) such other reports
specified in the Schedule.
(c) Confidentiality. All confidential information provided by Borrower or by
---------------
any Loan party to FINOVA shall be kept confidential and shall only be used by
FINOVA and/or its counsel in connection herewith.
9.2 Term; Termination.
-----------------
(a) Term. The initial term of this Agreement shall be as set forth on the
----
Schedule (the "Initial Term") and may be automatically renewed by FINOVA in its
sole discretion for successive periods of one (1) year (each, a "Renewal term"),
unless earlier terminated as provided herein.
(b) Prior Notice. Each party shall have the right to terminate this Agreement
------------
at the end of the Initial term or at the end of any Renewal Term by giving the
other party written notice not less than sixty (60) days prior to the effective
date of such termination, by registered or certified mail, or by recognized
overnight delivery service; provided, however, that FINOVA may terminate the
--------- --------
Floorplan Credit Line at any time, with or without notice to Borrower, as set
forth in Section 2.4 hereof.
(c) Payment in Full. Upon the effective date of termination, the Obligations
---------------
shall become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the procedure set forth
----------------------------------
in Section 9.2(b), Borrower may terminate this Agreement at any time but only
upon ninety (90) days' prior written notice and prepayment of the Obligations.
Upon any such early termination by Borrower or any termination of this Agreement
by FINOVA upon the occurrence of an Event of Default, then, and in any such
event, Borrower shall pay to FINOVA upon the effective date of such termination
a fee (the "Termination Fee") in an amount equal to the amount shown on the
Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be payable by
-------------------------------------
Borrower as provided for herein and, in full, at the termination of this
Agreement; recourse to security shall not be required at any time. Borrower
waives presentment and protest of any instrument and notice thereof, notice of
default and, to the extent
-13-
<PAGE>
permitted by applicable law, all other notices to which Borrower might otherwise
be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any right,
-------------------
remedy or option under this Agreement, any supplement, the Loan Documents or
other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
--------------------------------
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be prohibited or
------------
invalid under applicable law, it shall be ineffective only to such extent,
without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified, altered or
-----------------------
amended, except by an agreement in writing signed by Borrower and FINOVA.
Borrower may not sell, assign or transfer any interest in this Agreement or any
other Loan Document, or any portion thereof, including, without limitation, any
of Borrower's rights, title, interests, remedies, powers and duties hereunder or
thereunder. Borrower hereby consents to FINOVA's participation, sale,
assignment, transfer or other disposition, at any time or times hereafter, of
this Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, FINOVA's rights, title, interests,
remedies, powers and duties hereunder or thereunder. In connection therewith,
FINOVA may disclose all documents and information which FINOVA now or hereafter
may have relating to Borrower or Borrower's business. To the extent that FINOVA
assigns its rights and obligations hereunder to a third party, FINOVA shall
thereafter be released from such assigned obligations to Borrower and such
assignment shall effect a novation between Borrower and such third party.
9.8 Integration. This Agreement, together with the Schedule (which is a part
-----------
hereof) and the other Loan Documents, reflect the entire understanding of the
parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of Borrower contained in
--------
this Agreement shall survive the execution, delivery and acceptance of this
Agreement by the parties. No termination of this Agreement or of any guaranty of
the Obligations shall affect or impair the powers, obligations, duties, rights,
representations, warranties or liabilities of the parties hereto and all shall
survive any such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's discretion, be
-----------------------
evidenced by notes or other instruments issued or made by Borrower to FINOVA. If
not so evidenced, such Obligation shall be evidenced solely by entries upon
FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a loan by any Person who
-------------
purports to be any employee, officer or authorized agent of Borrower shall be
made to FINOVA on or prior to 11:00 a.m., Pennsylvania time, on the Business Day
on which the proceeds thereof are requested to be paid to Borrower and shall be
conclusively presumed to be made by a Person authorized by Borrower to do so and
the crediting of a loan to Borrower's operating account shall conclusively
establish Borrower's obligation repay such loan. Unless and until Borrower
otherwise directs FINOVA in writing, all loans shall be wired to Borrower's
operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in writing and addressed to
-------
the Borrower and FINOVA at their addresses set forth at the beginning of this
Agreement and in the Schedule. Notices hereunder shall be deemed received on the
earlier of receipt, whether by delivery by a reputable overnight delivery
service, personal delivery, or facsimile.
9.13 Brokerage Fees. Borrower represents and warrants to FINOVA that, with
--------------
respect to the financing transaction herein contemplated, no Person is entitled
to any brokerage fee or other commission and Borrower agrees to indemnify and
hold FINOVA harmless against any and all such claims.
9.14 Disclosure. No representation or warranty made by Borrower in this
----------
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrower
or which reasonably should be known to Borrower which Borrower has not disclosed
to FINOVA in writing with respect to the transactions contemplated by this
Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press releases
---------
and to cause a tombstone to be published announcing the consummation of this
transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are without
--------
substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower fails to
-----------------
perform, observe or discharge any of its Obligations under this Agreement, any
remedy at law may prove to be inadequate relief to FINOVA. Therefore, FINOVA,
if it so requests, shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages.
9.18 Counterparts. This Agreement may be executed in one or more counterparts,
------------
each of which taken together shall constitute one and the same instrument.
9.19 Construction. The parties acknowledge that each party and its counsel have
------------
reviewed this Agreement and that the normal rule of construction to the effect
that any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any amendments or exhibits
hereto.
9.20 Time of Essence. Time is of the essence for the performance by Borrower of
---------------
the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim or cause of action by
---------------------
Borrower against FINOVA, or any of FINOVA's directors, officers, employees,
agents, accountants or attorneys, based upon, arising from, or relating to this
Agreement, or any other present or future agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, whether or not relating hereto or thereto,
occurred, done, omitted or suffered to be done by FINOVA, or by FINOVA's
directors, officers, employees, agents, accountants or attorneys, whether
sounding in contract or in tort or otherwise, shall be barred unless asserted by
- 14 -
<PAGE>
Borrower by the commencement of an action of proceeding in a court of competent
jurisdiction by the filing of a complaint within one year after the first act,
occurrence or omission upon which such claim or cause of action, or any part
thereof, is based and service of a summons and complaint on an officer of FINOVA
or any other person authorized to accept service of process on behalf of FINOVA,
within 30 days thereafter. Borrower agrees that such one-year period of time is
a reasonable and sufficient time for Borrower to investigate and act upon any
such claim or cause of action. The one-year period provided herein shall not be
waived, tolled, or extended except by a specific written agreement of FINOVA.
This provision shall survive any termination of this Loan Agreement or any other
agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable for any
---------
indirect, special, incidental or consequential damages in connection with any
breach of contract, tort or other wrong relating to this Agreement or the
Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like) whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the Borrower through the ordinary negligence of FINOVA,
or any FINOVA Affiliate. "FINOVA Affiliate" shall mean FINOVA's directors,
officers, employees, agents, attorneys or other person or entity affiliated with
or representing FINOVA.
9.23 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written notice
--------------------------
of (i) any action or inaction by FINOVA or any attorney of FINOVA in connection
with any Loan Documents that may be actionable against FINOVA or any attorney of
FINOVA or (ii) any defense to the payment of the Obligations for any reason,
including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law. Borrower agrees that unless such notice
is fully given as promptly as possible (and in any event within thirty (30)
days) after Borrower has knowledge, or with the exercise of reasonable diligence
should have had knowledge, of any such action, inaction or defense, Borrower
shall not assert, and Borrower shall be deemed to have waived, any claim or
defense arising therefrom.
9.24 Withholding and Other Tax Liabilities: FINOVA shall have the right to
-------------------------------------
refuse to make any advances from time to me unless Borrower shall, at FINOVA's
request, have given to FINOVA evidence, reasonably satisfactory to FINOVA, that
Borrower has properly deposited or paid, as required by law, all withholding
taxes and all federal, state, city, county or other taxes due up to and
including the date of the advance. Until all of Borrower's liabilities and
obligations to FINOVA have been paid in full (and notwithstanding any
termination or expiration of this Agreement), FINOVA shall be entitled to
continue to hold any and all of the Collateral until Borrower has given to
FINOVA evidence, reasonably satisfactory to FINOVA, that Borrower has properly
deposited or paid, as required by law, all federal withholding taxes due up to
and including the date of such expiration or termination. Copies of validated
deposit slips showing payment shall likewise constitute satisfactory evidence
for such purpose. In the event that any lien, assessment or tax liability
against Borrower shall arise in favor of any taxing authority, whether or
not notice thereof shall be filed or recorded as may be required by law, FINOVA
shall have the right (but shall not be obligated, nor shall FINOVA hereby assume
the duty), upon reasonable prior notice to Borrower to pay any such lien,
assessment or tax liability by virtue of which such charge shall have arisen,
provided however, that FINOVA shall not pay any such tax, assessment or lien if
- ----------------
the amount, applicability or validity thereof is being contested in good faith
and by appropriate proceedings by Borrower and further provided that Borrower's
title to and its right to use, the Collateral are not materially adversely
affected and FINOVA's lien and priority in the Collateral are not affected,
altered or impaired thereby. In order to pay any such lien, assessment or tax
liability, FINOVA shall not be obliged to wait until said lien, assessment or
tax liability is filed before taking such action permitted hereby. Any sum or
sums which FINOVA shall have paid for the discharge of any such lien shall
constitute an Obligation and shall be added to the Revolving Loans and shall be
paid by Borrower to FINOVA with interest thereon, upon demand, and FINOVA shall
be subrogated to all rights of such taxing authority against Borrower. FINOVA
may establish reserves against the Revolving Loans Borrowing Base for any
amounts paid by FINOVA pursuant to this paragraph or for any amounts being
contested in good faith under this paragraph.
9.25 Power of Attorney. Borrower appoints FINOVA and its designees as Borrower's
-----------------
attorney, with the power to endorse Borrower's name on any checks, notes,
acceptances, money orders or other forms of payment or security that come into
FINOVA's possession; after the occurrence of any Event of Default, to sign
Borrower's name on any invoice or bill of lading relating to any Receivable, on
drafts against customers, on assignments of Receivables, on notices of
assignment, financing statements and other public records, on verifications of
accounts and on notices to customers or account debtors; to send requests for
verification of Receivables to customers or account debtors; after the
occurrence of any Event of Default, to notify the post office authorities to
change the address for delivery of Borrower's mail to an address designated by
FINOVA and to open and dispose of all mail addressed to Borrower; and to do all
other things FINOVA deems necessary or desirable to carry out the terms of this
Agreement. Borrower hereby ratifies and approves all acts of such attorney.
Neither FINOVA nor any of its designees shall be liable for any acts or
omissions nor for any error of judgment or mistake of fact or law while acting
as Borrower's attorney. This power, being coupled with an interest, is
irrevocable until the Obligations have been fully satisfied and FINOVA's
obligation to provide loans hereunder shall have terminated.
9.26 GOVERNING LAW; WAIVERS. THIS AGREEMENT SHALL BE INTERPRETED IN ACCORDANCE
----------------------
WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF
ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER
HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED WITHIN THE COUNTY OF MARICOPA, THE STATE OF ARIZONA OR, AT THE SOLE
OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE.
BORROWER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS
THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN SECTION 9.12
HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES ANY RIGHT IT MAY
OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT IN ANY
JURISDICTION OTHER THAN MARICOPA COUNTY.
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND BORROWER EACH HEREBY
------------------------------------
WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY
- 15 -
<PAGE>
WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT
OR AGREEMENT BETWEEN FINOVA AND BORROWER; OR (iii) ANY CONDUCT, ACTS OR
OMISSIONS OF FINOVA OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH FINOVA OR BORROWER; IN
EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
CUMETRIX DATA SYSTEMS CORP.
Tax I.D. No. 95-4574138
----------
By: /s/ James Ung
--------------------
James Ung, President
State of __________
County of _________
The Foregoing instrument was acknowledged before me this 29th day of September,
1998 by Carl Wood of CUMETRIX a corporation duly organized under the State of
California on behalf of the corporation.
/s/ Carl H. Wood
--------------------------------
Carl H. Wood
Title or rank: CFO
------------------
Serial number, if any
----------
FINOVA CAPITAL CORPORATION
By: [ILLEGIBLE]^^^^^
-----------------
Title: Vice President
-16-
<PAGE>
EXHIBIT 10.2
[LOGO OF FINOVA]
Schedule to Loan and Security Agreement
Borrower: Cumetrix Data Systems Corp.
Address: 957 Lawson Street
City of Industry, California 91748
Date: 10/22/98
--------
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
TOTAL FACILITY (Section 2.1):
Twenty-Five Million Dollars ($25,000,000) (the "Total Facility")
LOANS (Section 2.2):
A. Revolving Loans: a revolving line of credit ("Revolving Credit Line")
---------------
consisting of loans against Borrower's Eligible Receivables and
Eligible Inventory ("Revolving Loans") in an aggregate outstanding
principal amount (the "Revolving Loans Borrowing Base") not to exceed
the lesser of:
(a) Five Million Dollars ($5,000,000) (the "Maximum Revolving
Facility Amount"); or
(b) an amount equal to the sum of: (i) eighty-five percent (85%)
of the net amount of Eligible Receivables due from an account
debtor other than FINOVA; and (ii) one hundred percent (100%)
of the net amount of Eligible Receivables due from FINOVA
pursuant to a floor plan financing arrangement with Borrower's
customer.
B. Floorplan Loans: a floorplan line of credit consisting of loans against
---------------
Borrower's Floorplanned Inventory ("Floorplan Loans") in an aggregate
principal amount not to exceed at any time Twenty Million Dollars
($20,000,000) less the amount of any outstanding approvals given by
FINOVA to any manufacturer of Floorplanned Inventory. No individual
Floorplan Loan shall exceed 100% of the manufacturer's invoice price
for Eligible Inventory ("Floorplan Loans Borrowing Base").
In no event may the sum of the Revolving Loans and Floorplan Loans exceed the
Total Facility.
<PAGE>
CONDITIONS PRECEDENT (SECTION 4):
The obligation of FINOVA to make the initial advance hereunder is
subject to the fulfillment, to the satisfaction of FINOVA and its counsel, of
the following conditions, in addition to the conditions set forth in Sections
2.1 and 2.2 above:
(i) There shall have been no material adverse change in the business,
operations,profits or prospects of Borrower, or in the condition of the
assets of Borrower, between April 30, 1998 and the date hereof.
(ii) Receipt by FINOVA of the monthly unaudited financial statement
for the month ending June 30, 1998.
(iii) Receipt by FINOVA of the SEC Form 10-Q for the quarter ending
June 30, 1998.
(iv) Receipt by FINOVA of the Year 2000 Compliant Questionnaire.
INTEREST AND FEES (SECTION 2.6):
Revolving Credit Line Interest Rate: Borrower shall pay FINOVA interest
-----------------------------------
on the daily outstanding balance of all Revolving Loans at a per annum rate
equal to the "Base Rate". The Base Rate shall equal the rate of interest
published in the "Money Rates" section of The Wall Street Journal as the "Prime
Rate". -----------------------
In the event that the Borrower's total debt to tangible capital funds
(Section 6.13 of Schedule) exceeds 3.0:1.0 at any quarter-end, the rate
chargeable hereunder will be increased to the Base Rate plus one-half of one
percentage point (0.5%).
Floorplan Credit Line Interest. Interest free, if paid within the free
------------------------------
period (60 days) extended by FINOVA. Interest on any amount past due under the
Floorplan Credit Line pursuant to Section 2.7 hereof shall accrue from the
due date or any extended due date at a per annum rate of six percentage points
(6.0%) in excess of the Base Rate.
In all applications, the interest rate chargeable hereunder shall be
increased or decreased, as the case may be, without notice or demand of any
kind, upon the announcement of any change in the Base Rate. Each change in the
Base Rate shall be effective immediately. In all applications unless specified
otherwise, interest charges and all other fees and charges herein shall be
computed on the basis of a year of 360 days and actual days elapsed and
shall be payable to FINOVA in arrears on the first day of each month.
Facility Fee. NONE
------------
Transaction Fee. NONE
---------------
Application Fee. None
---------------
Examination Fees. None, as long as no Event of Default shall have
----------------
occurred. After an Event of Default has occurred, Borrower agrees to pay FINOVA
an examination fee in the amount of Five Hundred Dollars ($500) per person per
day plus out-of-pocket expenses in connection with each audit or examination of
Borrower performed by FINOVA.
INSURANCE (Section 3.4): Borrower agrees to maintain insurance in an amount
sufficient to fully cover the cost of all Inventory at all time which amount
shall initially be Five Million Dollars ($5,000,000). In the event that the
amount of Inventory exceeds such amount, FINOVA may require at any time that
Borrower provide to FINOVA evidence of insurance covering all inventory.
2
<PAGE>
REPORTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with collateral and loan reports when
Revolving Loan advances are requested, and at least as of month-end. In the
event that the lockbox is implemented, a Collateral and Loan Report shall be
submitted when revolving loan advances are requested, and at least on a
weekly basis, and as of month-end.
2. Borrower shall provide FINOVA with monthly agings aged by invoice date and
reconciliations of Receivables within ten (10) days after the end of each
month.
3. Borrower shall provide FINOVA with monthly accounts payable agings aged by
invoice date, outstanding or held check registers and inventory certificates
within ten (10) days after the end of each month.
4. Borrower shall provide FINOVA with monthly perpetual inventory reports for
the Inventory (segregating Floorplanned Inventory from Eligible Inventory
and from Ineligible Inventory) valued on a first-in, first-out basis at the
lower of cost or market (in accordance with generally accepted accounting
principles) or such other inventory reports as are reasonably requested by
FINOVA, all weekly reports by Tuesday of each week with respect to reports
for the immediately preceding week. Monthly reports shall be aged and
provided to FINOVA within ten days after the end of each month. Without
limiting the generality of the foregoing, each separate inventory report as
to Floorplanned Inventory shall also set forth the applicable Valid Price
Protection and RMA Credit amounts. Inventory reports will be sorted by
location and further sub-totaled by product line.
5. Borrower shall provide FINOVA with monthly unaudited financial statements
within forty-five (45) days after the end of each month.
6. Borrower shall provide FINOVA with quarterly unaudited financial statements
within forty-five (45) days after the end of each quarter. In addition,
Borrower shall provide FINOVA with its SEC Form 10-Q within forty-five (45)
days after the end of each quarter.
7. Borrower shall provide FINOVA with audited consolidated and consolidating
fiscal financial statements within ninety (90) days after the end of each
fiscal year, as more specifically described in Section 9.1 hereof, and with
an opinion issued by a Certified Public Accountant which is acceptable to
FINOVA. In addition, Borrower shall provide FINOVA with its SEC-Form 10-K
within ninety (90) days after the end of each fiscal year.
8. Borrower shall provide FINOVA with annual operating budgets (including
income statements, balance sheets and cash flow statements, by month) for
the upcoming fiscal year of Borrower within ninety (90) days after the end
of each fiscal year of Borrower.
Credit Memoranda (Section 3.5): $50,000
Business Days for Clearance (Section 2.11): 2 days
Inventory Returns (Section 3.6): $25,000
Events of Default-liens (Section 7.1(h)): $20.000
Events of Default-Judgments (7.1): $100,000
3
<PAGE>
BORROWER INFORMATION:
<TABLE>
<S> <C>
Borrower's State of Incorporation (Section 5.1): California
Fictitious Names/Prior Corporate Names (Section 5.2): Data Net International, Inc.
Cumetrix Computer Systems, Inc.
Borrower Location(s) (Section 5.16): 957 Lawson Street, City of Industry
CA 91748
Permitted Encumbrances (Section 1.1): Sunston Equipment Inc.
</TABLE>
FINANCIAL COVENANTS (Section 6.13):
Borrower shall comply with all of the following covenants. Compliance shall
be determined as of the end of each quarter, except as otherwise specifically
provided below:
<TABLE>
<S> <C>
Working Borrower shall maintain Working Capital of not less than:
- -------
Capital $5,000,000 at the Closing Date and at all times thereafter.
- ------- ----------
Tangible
- --------
Capital Funds. Borrower shall maintain Tangible Capital Funds of not less than;
- -------------
$6,500,000 at the Closing Date and at all times thereafter.
----------
Debt to Tangible
- ----------------
Capital Funds. Borrower shall maintain a ratio of Indebtedness to Tangible Capital Funds of not greater
- ------------- than:
4.0x to 1.0x At the Closing Date and at all times thereafter
------------
</TABLE>
All capitalized terms used in the financial covenants section of the Agreement
not otherwise defined herein shall have the meaning ascribed to such term under
the generally accepted accounting principles, as of the Closing Date, and shall
be calculated on a basis consistent therewith.
NEGATIVE COVENANTS (Section 6):
<TABLE>
<S> <C>
Capital Expenditures: $500,000 beginning with 1999 fiscal year.
- --------------------
Indebtedness: $500,000
- ------------
Year 2000 Compliance: Borrower must implement its new accounting system (Navision) by 12/31/98. This system
- -------------------- must be Year 2000 compliant.
</TABLE>
TERM (Section 9.2):
The initial term of this Agreement shall be Two (2) year(s) from the date
hereof (the "Initial Term"), unless earlier terminated as provided in Section 9
or 7.2 above or elsewhere in this Agreement.
4
<PAGE>
TERMINATION FEE (Section 9.2): (a) 2% of the $5,000,000 Revolving Credit
Facility if terminated in the first year,
And
(b) 1% of the $5,000,000 Revolving Credit
Facility if terminated during the second
year.
DEFINITIONS (Section 1.1):
- -------------------------
"Eligible Inventory" means Inventory which FINOVA, in its sole judgment, deems
------------------
Eligible Inventory, based on such considerations as FINOVA may from time to time
deem appropriate. Without limiting the generality of the foregoing, no Inventory
shall be Eligible Inventory unless, in FINOVA's sole judgment, such Inventory
(i) consists of finished goods, in good, new and salable condition which are not
obsolete or unmerchantable, and unless otherwise provided for in the Schedule
are not comprised of raw materials, parts, work in process, packaging, materials
or supplies; (ii) meets all standards imposed by any governmental agency or
authority; (iii) conforms in all respects to the warranties and representations
set forth herein; (iv) is at all times subject to FINOVA's duly perfected, first
priority security interest; (v) meets all criteria under FINOVA's agreement with
the manufacturer of such Inventory; (vi) is not Floorplanned Inventory and (vii)
is situated at a location in compliance with Section 5.16 hereof.
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services which
FINOVA, in its sole judgment, shall deem eligible based on such considerations
as FINOVA may from time to time deem appropriate. Without limiting the
foregoing, a Receivable shall not be deemed to be an Eligible Receivable if (i)
the account debtor has failed to pay the Receivable within a period of ninety
(90) days after invoice date or, with respect to any Receivable where the
account debtor is the United States or any department, agency or instrumentality
thereof, ninety (90) days after invoice date, to the extent of any amount
remaining unpaid after such period, or, if the Receivable is payable C.O.D., the
Receivable has not been paid within ninety (90) days after the date the goods
were shipped; (ii) the account debtor has failed to pay more than the Cross-age
percentage specified below of all outstanding Receivables owed to it by Borrower
within ninety (90) days after invoice date; (iii) the account debtor is an
Affiliate of Borrower; (iv) the goods relating thereto are placed on
consignment, guaranteed sale or other terms pursuant to which payment by the
account debtor may be conditional; (v) the account debtor is not located in the
United States or Canada, unless the Receivable is supported by a letter of
credit or other form of guaranty or security, in each case in form and substance
satisfactory to FINOVA; (iv) the account debtor is the United States or any
department, agency or instrumentality thereof, which has not acknowledged the
assignment of the contract Receivable to FINOVA in accordance with the Federal
Assignment of Claims Acts (open account Receivables due from the United States
or any department, agency or instrumentality thereof may be excluded from this
provision in FINOVA's sole discretion); (vii) Borrower is or may become liable
to the account debtor for goods sold or services rendered by the account debtor
to Borrower; (viii) the account debtor's total obligations to Borrower exceed
the Concentration limit specified below of all Eligible Receivables, (ix) the
account debtor disputes liability or makes any claim with respect thereto (up to
the amount of such liability or claim), or is subject to any insolvency or
bankruptcy proceeding, or becomes insolvent, fails or goes out of a material
portion of its business; (x) the amount thereof consists of late charges or
finance charges; (xi) the amount thereof consists of a credit balance more than
ninety (90) days past due; or (xii) the face amount thereof exceeds the Proof of
Shipment threshold amount specified below, unless accompanied by evidence of
shipment of the goods relating thereto satisfactory to FINOVA in its sole
discretion.
(ii) Cross-age percentage 25%
(viii) Concentration limit 25%
(xii) Proof of Shipment threshold $50,000
5
<PAGE>
"Prepared Financials" means the balance sheets of Borrower as of the date
------------------- hereof, and as of each subsequent date on which
audited balance sheets are delivered to FINOVA from
time to time hereunder, and the related statements of
operations, changes in stockholder's equity and
changes in cash flow for the periods ended on such
dates in each case prepared in accordance with
Generally Accepted Accounting Principles consistently
applied.
"Guarantors" None.
----------
"Subordinated Creditor" means any individual who may subordinate its
--------------------- indebtedness of FINOVA from time to time. There are no
subordinated creditors as of the date hereunder.
DISBURSEMENT (Section 9.11):
Unless and until Borrower otherwise directs FINOVA in writing, all loans
(other than Floorplan Loans disbursed directly to manufacturers or vendors of
Floorplanned Inventory as contemplated in Section 2.4 of this Agreement) shall
be wired to Borrower's operating bank account:
Account Number: 1463401601
Bank: Bank of America
City, State: City of Industry, CA
ABA#: 121000358
NOTICE (Section 9.12):
Any notices sent to FINOVA should be sent simultaneously to the address
listed in the preamble to the Agreement and to the following:
FINOVA Capital Corporation
1850 Central Avenue
P.O. Box 2209
Phoenix, AZ 85002-2209
Attn: Associate General Counsel
FINOVA Capital Corporation
1060 First Avenue, Suite 100
King of Prussia, PA 19406
Attn: Portfolio Manager
ADDITIONAL PROVISIONS:
1. Field exams to be conducted on a quarterly basis.
2. A lockbox will be required if average outstandings under the Revolving
Credit Facility exceed One Million Five Hundred Thousand Dollars
($1,500,000) for 90 days.
6
<PAGE>
3. Borrower must submit evidence of casualty insurance in the amount of Five
Million Dollars ($5,000,000), with the FINOVA listed as Lender Loss Payee on
the policy. In the event that Borrower's inventory levels exceed $5,000,000,
Borrower must provide FINOVA with evidence of casualty insurance to cover
all inventory.
4. Borrower must provide FINOVA with company-prepared monthly projections by
August 31, 1998 for the Fiscal year ending March 31, 1999.
5. Borrower must complete FINOVA's Year 2000 Questionnaire.
BORROWER: FINOVA:
CUMETRIX DATA SYSTEMS CORP. FINOVA CAPITAL CORPORATION
Tax I.D. No. 95-4574138
------------------------
By: /s/ James Ung By: /s/ [ILLEGIBLE]
-------------------------------- ----------------------
James Ung, President Vice President
By: /s/ Mei Yang
--------------------------------
Mei Yang, Secretary
7
<PAGE>
EXHIBIT 10.3
[LOGO OF FINOVA]
SECURED REVOLVING CREDIT NOTE
$5,000,000 As Of 10/22, 1998
- ---------- -----
FOR VALUE RECEIVED, the undersigned Cumetrix Data Systems Corp. (the
"Borrower"), a California corporation with its principal place of business at
957 Lawson Street, City of Industry, CA 91748, hereby promises to pay to FINOVA
CAPITAL CORPORATION ("Lender"), or order, at 1060 First Avenue, Suite 100, King
of Prussia, Pennsylvania 19406, or at such other address as the holder may
specify in writing, the principal sum of Five Million Dollars ($5,000,000), or
such lesser sum which represents the principal balance outstanding under the
Revolving Loans facility established pursuant to the provisions of that certain
Loan and Security Agreement dated of even date herewith, between Borrower and
Lender (the "Agreement"), plus interest in the manner and upon the terms and
conditions set forth below. This Secured Revolving Credit Note ("Note") is
made pursuant to the Agreement, the provisions of which are incorporated herein
by this reference. Capitalized terms herein, unless otherwise noted, shall
have the meaning set forth in the Agreement. The actual amount due and owing
hereunder shall be evidenced by FINOVA's records of receipts and disbursements
with respect to Revolving Loans, which records shall be conclusive evidence of
such amount due and owing absent manifest error.
1.0 Rate And Payment Of Interest.
The outstanding principal balance of this Note shall bear interest at
a per annum rate of Base Rate. Interest charges and all other fees and charges
herein shall be computed on the basis of a year of 360 days and actual number of
days elapsed and shall be payable to Lender in arrears on the first day of each
month hereafter at its address set forth above. Accrued but unpaid interest
under this Note shall be due and payable on the first day of each month,
commencing , 1998, and at maturity, on which date all interest remaining
------
unpaid shall be due and payable.
2.0 Schedule of Principal Payments.
A final installment of all outstanding principal, accrued and unpaid
interest and all other sums payable pursuant to the Loan Documents on 10/22,
-----
2000 unless due earlier pursuant to the terms of the Loan Agreement.
3.0 Prepayment.
Prepayment may be made under this Note in whole or in part, subject
to the Prepayment Fee, as applicable, as set forth in the Agreement.
<PAGE>
4.0 Holder's Right Of Acceleration
If the Agreement is terminated for any reason whatsoever, or if there
shall occur an Event of Default or if this Note is not paid when due, the entire
remaining principal balance and all accrued and unpaid interest and other fees
and charges with respect to this Note shall, at Lender's option, become
immediately due and payable.
5.0 Holder's Rights Upon Default.
If any Event of Default occurs, then from the date such Event of Default
occurs until it is cured or waived in writing, in addition to any agreed upon
charges, the principal balance of this Note shall thereafter, at Lender's
option, bear interest at three percentage points (3.0%) per annum in excess of
the Base Rate, computed on the basis of a year of three hundred sixty (360)
days and the actual number of days elapsed.
6.0 Additional Rights of Holder.
If any installment of principal or interest hereunder is not paid when
due, the holder shall have, in addition to the rights set forth herein, in the
Agreement under law, the right to compound interest by adding the unpaid
interest to principal, with such amount thereafter bearing interest at the
rate provided in this Note.
7.0 General Provisions.
7.1 If this Note is not paid when due or upon the occurrence of any Event
of Default, the undersigned further promises to pay all costs of
collection, foreclosure fees, reasonable attorneys' fees and expert
witness fees incurred by the holder, whether or not suit is filed hereon,
and the fees, costs and expenses as provided in the Agreement.
7.2 The undersigned hereby consents to any and all renewals, replacements
and/or extensions of time for payment of this Note before, at or after
maturity.
7.3 The Undersigned hereby consents to the acceptance, release or
substitution of security for this Note.
7.4 Presentment for payment, notice of dishonor, protest and notice of
protest are hereby expressly waived.
7.5 The contracted for rate of interest of the loan contemplated hereby,
without limitation, shall consist of the following: (i) the interest rate
set forth on the Schedule to Loan Agreement, calculated and applied to
the principal balance of this Note in accordance with the provisions of
this Note; (ii) interest after an Event of Default, calculated and
applied to the amounts due under this Note in accordance with the
provisions hereof; and (iii) all Additional Sums (as herein defined), if
any. Borrower agrees to pay an effective contracted for rate of interest
which is the sum of the above-referenced elements. All examination fees,
reasonable attorneys' fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, Facility Fees, Anniversary
Fees, Prepayment Fees, minimum interest charges, other charges, goods,
things in action or any other sums or things of value paid or payable
by Borrower
2
<PAGE>
(collectively, the Additional Sums), whether pursuant to this Note, the
Agreement or any other documents or instruments in any way pertaining to this
lending transaction, or otherwise with respect to this lending transaction for
the purpose of any applicable law that may limit the maximum amount of interest
to be charged with respect to this lending transaction, shall be payable by
Borrower as, and shall deemed to be, additional interest and for such purposes
only, the agreed upon and "contracted for rate of interest" of this lending
transaction shall be deemed to be increased by the rate of interest resulting
from the inclusion of the Additional Sums.
It is the intent of the parties to comply with the usury law of the State of
Arizona (the "Applicable Usury Law"). Accordingly, it is agreed that
notwithstanding any provision to the contrary in this Note, or in any of the
documents securing payment hereof or otherwise relating hereto, in no event
shall this Note or such documents require the payment or permit the collection
of interest in excess of the maximum contract rate permitted by the Applicable
Usury Law (the "Maximum Interest Rate"). In the event (a) any such excess of
interest otherwise would be contracted for, charged or received from Borrower or
otherwise in connection with the loan evidenced hereby, (b) the maturity of
indebtedness evidenced by this Note is accelerated in whole or in part, or (c)
all or part of the principal or interest of this Note shall be prepaid, so that
under any of such circumstances the amount of interest contracted for, shared or
received in connection with the loan evidenced hereby, would exceed the Maximum
Interest Rate, then in any such event (1) the provisions of this paragraph shall
govern and control, (2) neither Borrower nor any other person or entity now or
hereafter liable for the payment hereof shall be obligated to pay the amount of
such interest to the extent that it is in excess of the Maximum Interest Rate,
(3) any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount hereof or refunded to Borrower,
at Lender's option, and (4) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law; (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the Maximum Interest
Rate shall be made by amortizing, prorating, allocating and spreading during the
period of the full stated term of the loan evidenced hereby, all interest at any
time contracted for, charged or received from Borrower or otherwise in
connection with such loan; and (y) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to Lender from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, to the extent that interest paid to the date of
calculation does not exceed the Maximum Interest Rate, until the entire amount
of interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full. Borrower further
agrees that should the Maximum Interest Rate be increased at any time hereafter
because of a change in the Applicable Usury Law, then to the extent not
prohibited by the Applicable Usury Law, such increases, if applicable, shall
apply to all indebtedness evidenced hereby regardless of when incurred; but,
again to the extent not prohibited by the Applicable Usury Law, such decreases
shall not apply to the indebtedness evidenced hereby regardless of when
incurred.
3
<PAGE>
7.6 No delay or omission on the part of the holder of this Note in
exercising any right shall operate as a waiver thereof or of
any other right.
7.7 No waiver by the holder of this Note upon any one occasion shall
be effective unless in writing nor shall it be construed as a bar or
waiver of any right or remedy on any future occasion.
7.8 Time is of the essence for the performance by the undersigned of
the obligations set forth in this Note.
7.9 Should any one or more of the provisions of this Note be determined
illegal or unenforceable, all other provisions shall nevertheless remain
effective.
7.10 This Note cannot be changed, modified, amended or terminated
orally.
7.11 This Note shall be governed by, construed and enforced in
accordance with the laws of the State of Arizona, without reference to
the principles of conflicts of laws thereof.
7.12 THE UNDERSIGNED HEREBY WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY
ACTION TO ENFORCE OR DEFEND ANY MATTER ARISING FROM OR RELATED TO THIS
NOTE AND ACKNOWLEDGES THAT LENDER ALSO WAIVES SUCH RIGHT.
8.0 Security For This Note.
This Note is secured pursuant to the Agreement and is subject to all of
the terms and conditions thereof, including, but not limited to, the remedies
specified therein.
IN WITNESS WHEREOF, this Secured Revolving Credit Note has been executed
and delivered as of the date first set forth above.
CUMETRIX DATA SYSTEMS CORP.
BY: /s/ James Ung
------------------------
James Ung
President
Tax I.D. No.: 95-4574138
(CORPORATE SEAL)
4
<PAGE>
EXHIBIT 10.4
ONLINE TRANSACTION TECHNOLOGIES, INC.
PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT (the "Agreement") is entered into
as of December 15, 1998, by and among ONLINE TRANSACTION TECHNOLOGIES, INC., a
California corporation (the "Company"), and CUMETRIX DATA SYSTEMS CORPORATION
(the "Purchaser").
RECITALS
A. WHEREAS, the Company has authorized the sale and issuance of shares of its
unissued and outstanding Series A-1, A-2, and A-3 Preferred Stock
(collectively, the "Series A Preferred Stock");
B. WHEREAS, Purchaser desires to purchase Series A-1 Preferred Stock and the
Company desires to issue and sell the Series A Preferred Stock to the
Purchaser on the terms and conditions set forth herein;
C. WHEREAS, Purchaser shall receive upon issuance of the Series A-1 Preferred
Stock an option (the "First Option") to acquire shares of the Company's
Series A-2 Preferred Stock on the terms described below and as set forth more
fully in the form of First Stock Option Agreement attached hereto as Exhibit
A (the "First Stock Option Agreement"); and
D. WHEREAS, Purchaser shall receive upon exercise of the First Option an
additional option (the "Second Option" and, together with the First Option,
the "Options") to acquire shares of the Company's Series A-3 Preferred Stock
on the terms described below and as set forth more fully in the form of the
Second Stock Option Agreement attached hereto as Exhibit B (the "Second Stock
Option Agreement," and together with the First Stock Option Agreement the
"Option Agreements").
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. AGREEMENT TO SELL AND PURCHASE.
1.1 Purchase of Series A-1 Preferred Stock. At the closing (as defined in
section 2 below), the Company agrees to sell to Purchaser and Purchaser
agrees to purchase from the Company, the number of shares of the Company's
Series A-1 Preferred Stock (the "Purchase Shares") equal to the remainder
of (a) the quotient of (x) the number of shares of the Company's Common
Stock issued and outstanding (including shares issuable upon conversion or
exercise of outstanding options, warrants, rights and convertible debt or
equity securities other than the options granted pursuant to this
agreement) as of the
1
<PAGE>
closing date (as defined in section 2 below) divided by (y) .9714, minus
-----
(b) the number of shares of the Company's Common Stock issued and
outstanding (including shares issuable upon conversion or exercise of
outstanding options, warrants, rights and convertible debt or equity
securities other than the options granted pursuant to this agreement) all
determined on an as-converted basis as of the Closing Date (as defined in
section 2 below). The per share purchase price (the "Per Share Price") of
the shares shall be equal to the quotient of (x) $100,000 divided by (y)
the number of Purchase Shares. The total purchase price (the "Purchase
Price") for the Purchase Shares shall be $100,000. The Purchase Shares
shall be sold at the Closing as hereinafter provided.
1.2 Designation of Rights, Preferences and Privileges of the Series A Preferred
Stock. Attached hereto as Exhibit 1.2 is a true and correct copy of a form
of an Amendment and Restatement of the Articles of Incorporation (the
"Restated Articles") duly authorized and adopted by the Company by all
necessary corporate action and submitted for filing with the Secretary of
State of the State of California. Upon acceptance of the Restated Articles
by the Secretary of State of California, the Series A Preferred Stock and
the Common Stock shall have the rights, preferences, privileges and
restrictions set forth in the Restated Articles.
2. CLOSING, DELIVERY AND PAYMENT AND WARRANT ISSUANCES.
2.1 Closing. The closing (the "Closing") of the sale and purchase of the
Purchase Shares under this Agreement shall occur on a date that is within
three (3) business days of the satisfaction (or waiver) of all conditions
to closing set forth in Section 7; provided, however, that if the Closing
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shall not have occurred by 11:59 p.m. on December 31, 1998 other than as a
result of a breach of this Agreement by the Company, this Agreement shall
terminate, become void ab initio, and be of no force or effect. The date
---------------------------------------
of the occurrence of the Closing shall be referred to herein as the
"Closing Date."
2.2 Delivery. At the Closing, subject to the terms and conditions hereof, the
Company will deliver to the Purchaser certificates representing the number
of Purchase Shares to be purchased at the Closing by Purchaser, against
payment of the Purchase Price therefor by check or wire transfer made
payable to the order of the Company.
2.3 Warrant Issuances.
2.3.1 At the Closing, the Company shall issue to Purchaser the First Option
duly executed on behalf of the Company, substantially in the form of
Exhibit A attached hereto, to acquire such number of shares of the
Company's authorized but unissued Series A-2 Preferred Stock (the "First
Option Shares") equal to the remainder of (A) the quotient of (x) the
number of shares of the Company's Common Stock issued and outstanding
(including shares issuable upon conversion or exercise of outstanding
options, warrants, rights and convertible debt or equity securities other
than options granted pursuant to this Agreement) all determined on an as-
converted basis as of the date the First Option is
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exercised, divided by (y) .7429, minus (B) the number of shares of the
-----
Company's Common Stock issued and outstanding (including shares issuable
upon conversion or exercise of outstanding options, warrants, rights and
convertible debt or equity securities other than options granted pursuant
to this Agreement) as of the date the First Option is exercised.
2.3.2 Upon the exercise of the First Option (the "First Option Exercise Date"),
the Company will issue to Purchaser the Second Option duly executed on
behalf of the Company, substantially in the form of Exhibit B attached
hereto, to acquire such number of shares of the Company's authorized but
unissued Series A-3 Preferred Stock (the "Second Option Shares") equal to
the remainder of (A) the quotient of (x) the number of shares of the
Company's Common Stock issued and outstanding (including shares issuable
upon conversion or exercise of outstanding options, warrants, rights and
convertible debt or equity securities other than options granted pursuant
to this Agreement) as of the date the Second Option is initially
exercised, divided by (y) .7857, minus (B) the number of shares of the
-----
Company's Common Stock issued and outstanding (including shares issuable
upon conversion or exercise of outstanding options, warrants, rights and
convertible debt or equity securities other than options granted pursuant
to this Agreement) all determined on an as-converted basis as of the date
the Second Option is initially exercised. The per share exercise price of
the Second Option Shares shall be equal to the quotient of (x) $8,000,000
divided by (y) the number of Second Option Shares. The total purchase
price of the Second Option Shares shall be $8,000,000.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents
and warrants to the Purchaser as follows:
3.1 Organization and Standing of the Company. The Company is a duly
organized and validly existing corporation in good standing under the
laws of the State of California and has all requisite corporate power and
authority for the ownership and operation of its properties and for the
carrying on of its business as now conducted and as proposed to be
conducted. The Company is duly licensed or qualified and in good standing
as a foreign corporation authorized to do business in California and in
all other jurisdictions in which the failure to be so qualified would
have a material adverse effect upon the business as now conducted.
3.2 Capitalization; Voting Rights. The authorized capital stock of the
Company, immediately prior to the Closing, will consist of (i) 10,000,000
shares of Common Stock, 3,000,000 shares of which are issued and
outstanding and (ii) 2,657,122 shares of preferred stock, designated
Series A Preferred Stock, of which 88,326 shares shall be designated
Series A-1 Preferred Stock none of which will be issued and outstanding,
1,068,796 shares shall be designated as Series A-2 Preferred Stock, none
of which will be issued and outstanding, and 1,500,000 shares shall be
designated as Series A-3 Preferred Stock, none of which will be issued
and outstanding. All issued and outstanding shares of the Company's
Common Stock and Preferred Stock(a) have been duly authorized and (b)
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the Company's Common Stock is validly issued, fully paid and nonassessable.
The First Option Shares and the Second Option Shares have been duly and
validly reserved for issuance and, upon issuance and delivery against
payment therefor, will be validly issued, fully paid and nonassessable.
Except as may be granted pursuant to the Options and the Option Agreements,
there are no outstanding options, warrants, rights (including conversion or
preemptive rights and rights of first refusal), proxy or shareholder
agreements, or agreements of any kind for the purchase or acquisition from
the Company of any of its securities. When issued in compliance with the
provisions of this Agreement and the Option Agreements, the Purchased
Shares, the First Option, the Second Option, the First Option Shares and
the Second Option Shares (collectively, the "Securities") will be validly
issued (and, in the case of the Purchased Shares, the First Option Shares
and the Second Option Shares only), fully paid and nonassessable, and will
be free of any liens or encumbrances; provided, however, that the
Securities may be subject to restrictions on transfer under state and/or
federal securities laws as set forth herein or as otherwise required by
such laws at the time a transfer is proposed.
3.3 Authorization; Binding Obligations. All corporate action on the part of the
Company, its officers, directors and shareholders necessary for the
authorization of this Agreement and the Option Agreements, the performance
of all obligations of the Company hereunder and thereunder at the Closing
and the authorization, sale, issuance and delivery of the Purchased Shares
pursuant hereto and the First Option Shares and the Second Option Shares
pursuant to the Option Agreements has been taken or will be taken prior to
the Closing. The Agreement and the Option Agreements, when executed and
delivered, will be valid and binding obligations of the Company enforceable
in accordance with their terms, except (a) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application affecting enforcement of creditors' rights; (b) general
principles of equity that restrict the availability of equitable remedies;
and (c) to the extent that the enforceability of the indemnification
provisions in Section 6 of the Option Agreements may be limited by
applicable laws. The sale of the Purchased Shares and the subsequent
issuance of shares of the Company's Series A Preferred Stock upon exercise
of the First Option Shares and the Second Option Shares are not and will
not be subject to any preemptive rights or rights of first refusal that
have not been properly waived or complied with.
3.4 Compliance With Contracts. Except as set forth in the Disclosure Letter,
the Company is in compliance in all respects with the terms and provisions
of its Articles of Incorporation and bylaws. The Company is in compliance
in all material respects with the terms and provisions of each mortgage,
indenture, lease, agreement and other instrument relating to obligations of
the Company, and of all judgments, decrees, governmental orders, statutes,
rules or regulations by which it is bound or to which its properties or
assets are subject, in each case or in the aggregate if the failure to
comply would have a material adverse effect on the business, properties, or
condition, financial or otherwise, of the Company. Neither the execution
and delivery of this Agreement or the Option Agreements, nor the
consummation of any transaction contemplated hereby or thereby,
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has constituted or resulted in a default or violation of any term or
provision in any of the foregoing documents or instruments.
3.5 Registration Rights. Except as set forth in this Agreement, no Person has
demand or other rights to cause the Company to file any registration
statement under the Securities Act relating to any securities of the
Company or any right to participate in an offering of shares under any such
registration statement.
3.6 Securities Act of 1933. The Company has complied and will comply with all
applicable federal and state securities laws in connection with the
issuance and sale of the Securities.
3.7 No Brokers or Finders. The Company owes no commission, fee or other
compensation to any Person as a finder or broker as a result of the
transactions contemplated by this Agreement.
3.8 Good Title. The Company has title to, or a valid leasehold interest in,
its properties and assets in each case free and clear of all liens, claims,
security interests, charges and encumbrances, except such liens, claims,
security interests, charges and encumbrances as arise in the ordinary
course of business and do not materially impair the Company's ownership or
use of such property or assets, and has the right to use all the assets it
presently uses in the operation of its business. The properties and assets
of the Company are in all material respects in good operating condition and
repair, normal wear and tear excepted.
3.9 Subsidiaries. The Company does not own, control, directly or indirectly,
any other corporation, association, partnership or other business entity or
own any shares of capital stock or other securities of any other Person.
3.10 Certain Transactions. Except as thoroughly set forth in the Disclosure
Letter and other than the interest arising from a Person's stock ownership
of the Company or for compensation as an employee or director of the
Company, there are no material transactions between the Company, on the one
hand, and any of its officers, directors or shareholders, or their
immediate family members, on the other hand, and no such person is an
interested party to any material contract of the Company or to the best of
the Company's knowledge holds a direct or indirect ownership interest in
any business or corporation which competes with the Company, except that
any such Person may own up to one percent of the stock of a company whose
stock is publicly traded and that does or may compete with the Company.
3.11 Material Contracts and Commitments. All of the material contracts,
agreements and instruments to which the Company is a party, are valid,
binding and in full force and effect in all material respects, subject to
laws of general application relating to bankruptcy, insolvency and the
relief of debtors and rules of law governing specific performance,
injunctive relief or other equitable remedies. A material contract is a
5
<PAGE>
contract reasonably deemed to be material by the Company. A true and
correct copy of each of such material written contracts and a description
of such material oral contracts, together with all amendments, waivers or
other changes thereto has been supplied to the Purchaser and its counsel.
3.12 Patents, Copyrights and Trademarks. To the best knowledge of the Company
and its officers and current shareholders (the "Company's Knowledge"), the
Company has sufficient title to and ownership of, or can obtain on terms
which will not result in any material adverse effect on its businesses, all
necessary patents, licenses, trademarks, service marks, trade names,
copyrights, trade secrets, inventions, franchises, computer software and
other proprietary rights necessary for their businesses as now conducted,
or as presently proposed to be conducted through calendar year 1999,
without, to the Company's Knowledge, any conflict with or infringement of,
the rights of others. To the Company's Knowledge, no employee has
violated, or is currently violating, any intellectual property rights of
any other person or entity. To the Company's Knowledge, no third party is
infringing upon or violating any of the intellectual property rights of the
Company. The Company has not granted any license or option or entered into
any agreement of any kind with respect to the use of its proprietary
information, other than licenses to and uses of its products made in the
ordinary course of its business.
3.13 Employees and Employee Benefit Plans. The Company does not have any
employment contracts with any of its employees not terminable at will (upon
notice as provided in such employee contracts) and does not have any
collective bargaining agreements covering any of its employees. Other than
as disclosed in the Disclosure Letter, there is no pension, health, profit-
sharing, bonus, stock purchase, stock option, hospitalization, insurance,
severance, or other employee benefit or welfare benefit plan with respect
to any officer or employee of the Company.
3.14 Year 2000. All software material to the Company's business, including
without limitation all of the Company's software products, is Year 2000
Compliant, as defined herein. For purposes of this Agreement, "Year 2000
Compliant" shall mean the ability of software to provide all of the
following functions: (a) consistently handle data information before,
during and after January 1, 2000, including but not limited to accepting
date input, providing date output, and performing calculations on dates or
portions of dates; (b) function accurately, in accordance with any and all
published documentation, and without interruption before, during and after
January 1, 2000, without any change in operations associated with the
advent of the new century; (c) respond to two-digit year-date input in a
way that resolves any ambiguity as to century in a disclosed, defined and
predetermined manner; and (d) store and provide output of date information
in ways that are unambiguous as to century.
3.15 Proprietary Information. Each employee, officer and consultant of the
Company is subject to a valid and binding Proprietary Information and
Inventions Agreement in
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substantially the forms provided to counsel to the Purchaser. The Company
is not aware that any of its employees, officers or consultants are in
violation thereof.
3.16 Disclosure. No representation, warranty or statement by the Company in
this Agreement or in any written statement or certificate required by this
Agreement to be furnished to Purchaser or its counsel pursuant to this
Agreement contains or will contain any untrue statement of material fact
or to the Company's Knowledge, omits to state a material fact necessary to
make the statements made herein or therein, in light of the circumstances
under which they were made, not misleading.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. Purchaser hereby represents
and warrants to the Company as follows (such representations and warranties
do not lessen or obviate the representations and warranties of the Company
set forth in this Agreement):
4.1 Requisite Power and Authority. Purchaser has all necessary power and
authority under all applicable provisions of law to execute and deliver
this Agreement and the Option Agreements and to carry out their
provisions. All action on Purchaser's part required for the lawful
execution and delivery of this Agreement and the Option Agreements have
been or will be effectively taken prior to the Closing. Upon their
execution and delivery, this Agreement and the Option Agreements will be
valid and binding obligations of Purchaser, enforceable in accordance with
their terms, except (a) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting
enforcement of creditors' rights, (b) general principles of equity that
restrict the availability of equitable remedies, and (c) to the extent
that the enforceability of the indemnification provisions of Section 6 of
the Option Agreements may be limited by applicable laws
4.2 Investment Representations. Purchaser understands that the Securities have
not been registered under the Securities Act. Purchaser also understands
that the Securities are being offered and sold pursuant to an exemption
from registration contained in the Securities Act based in part upon
Purchaser's representations contained in the Agreement. Purchaser hereby
represents and warrants as follows:
4.2.1 Acquisition for Own Account. Purchaser is acquiring the Securities for
Purchaser's own account for investment only, and not with a view towards
their distribution.
4.2.2 Accredited Investor. Purchaser represents that it is an accredited
investor within the meaning of Regulation D under the Securities Act..
4.2.3 Company Information. Purchaser has had an opportunity to discuss the
Company's business, management and financial affairs with directors,
officers and management of the Company and has had the opportunity to
review the Company's operations and facilities.
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Purchaser has also had the opportunity to ask questions of and receive
answers from the Company and its management regarding the terms and
conditions of this investment.
4.2.4 Rule 144. Purchaser acknowledges and agrees that the Purchased Shares,
the First Option, the Second Option and, if issued, the First Option
Shares and Second Option Shares must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available. Purchaser has been advised or is aware of the
provisions of Rule 144 promulgated under the Securities Act as in effect
from time to time, which permits limited resale of shares purchased in a
private placement subject to the satisfaction of certain conditions,
including, among other things: the availability of certain current public
information about the Company, the resale occurring following the required
holding period under Rule 144 and the number of shares being sold during
any three-month period not exceeding specified limitations.
4.2.5 Residence. The office or offices of the Purchaser in which its investment
decision was made is located at the address or addresses of the Purchaser
set forth on the signature page hereof.
4.3 Transfer Restrictions. Purchaser acknowledges and agrees that the
Purchased Shares, the First Option, the Second Option and, if issued, the
First Option Shares and the Second Option Shares are subject to
restrictions on transfer as set forth in the Option Agreements.
5. COVENANTS OF THE COMPANY
5.1 Affirmative Covenants of the Company Other Than Reporting Requirements.
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that until a Covenant Termination Event (as defined
in Section 9) it will perform and observe the following covenants and
provisions and will cause each Subsidiary to perform and observe such of
the following covenants and provisions as are applicable to such
Subsidiary, and will not, without approval of the Purchaser, amend, revise
or waive any terms of this Section 5.1:
5.1.1 Payment of Taxes and Trade Debt. Pay and discharge, and cause each
Subsidiary to pay and discharge, all taxes, assessments and governmental
charges or levies imposed upon it or upon its income or profits or
business, or upon any properties belonging to it, prior to the date on
which penalties attach thereto, and all lawful claims, which, if unpaid,
might become a lien or charge upon any properties of the Company or any
Subsidiary, provided that neither the Company nor any Subsidiary shall be
required to pay any such tax, assessment, charge, levy or claim (i) that
is being contested in good faith and by appropriate proceedings if the
Company or Subsidiaries concerned shall have set aside on its books
adequate reserves with respect thereto as shall be determined by its Board
of Directors or (ii) if the failure to pay such tax, assessment, charge,
levy or claim would not have a material adverse effect on the business,
properties, or condition,
8
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financial or otherwise, of the Company. Pay, and cause each Subsidiary to
pay, when due, or in conformity with customary trade terms, after any
adjustments agreed upon among the parties thereto, all lease obligations,
all trade debt, and all other Indebtedness incident to the operations of
the Company or its Subsidiaries, except (i) such as are being contested in
good faith and by appropriate proceedings if the Company or Subsidiary
concerned shall have set aside on its books adequate reserves with respect
thereto as shall be determined by its Board of Directors or (ii) if the
failure to pay would not have a material adverse effect on the business,
properties, or condition, financial or otherwise, of the Company.
5.1.2 Maintenance of Insurance. Maintain, and as appropriate and necessary
cause each Subsidiary to maintain, with responsible and reputable
insurance companies or associations insurance in such amounts and covering
such risks as is usually carried by companies of similar size engaged in
similar businesses and owning similar properties in the same general areas
in which the Company or such Subsidiary.
5.1.3 Preservation of Corporate Existence. Preserve and maintain its corporate
existence, rights, franchises and privileges in the jurisdiction of its
incorporation, and qualify and remain qualified, and cause each Subsidiary
to qualify and remain qualified, as a foreign corporation in each
jurisdiction in which such qualification is necessary or desirable in view
of its business and operations or the ownership of its properties, and
where failure to qualify would have a materially adverse effect upon the
Company. Preserve and maintain, and cause each Subsidiary to preserve and
maintain, all material licenses and other material rights to use patents,
processes, licenses, trademarks, trade names, inventions, intellectual
property rights or copyrights owned or possessed by it and necessary to
the conduct of its business, unless fair and reasonable consideration is
received by the Company or such subsidiary in exchange for such licenses
or other rights.
5.1.4 Compliance with Laws. Comply in all material respects with all
applicable laws. rules, regulations and orders of any governmental
authority, noncompliance with which could materially adversely affect its
business or condition, financial or otherwise, except non-compliance being
contested in good faith through appropriate proceedings, so long as the
Company shall have set up sufficient reserves, if any, required under
generally accepted accounting principles with respect to such items.
5.1.5 Keeping of Records and Books of Account. Keep, and cause each Subsidiary
to keep, materially adequate records and books of account, in which
materially complete entries will be made in accordance with generally
accepted accounting principles consistently applied, reflecting all
material financial transactions of the Company and such Subsidiary, and in
which, for each fiscal year, all material proper reserves for
depreciation, depletion, obsolescence, amortization, taxes, bad debts and
other purposes in connection with its business shall be made.
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5.1.6 Maintenance of Properties, etc, Maintain and preserve, and cause each
Subsidiary to maintain and preserve, all of its properties that the Board
of Directors of the Company or such Subsidiary deems necessary in the
proper conduct of its business, in good repair, working order and
condition in all material respects, ordinary, wear and tear excepted, it
being understood that this covenant relates only to the working order and
condition of such properties and shall not be construed as a covenant not
to dispose of properties.
5.1.7 Compensation. Cause aggregate compensation of Colin Kruger, Igor Kogan
and Michael Shirman each to be fixed (i) at amounts not to exceed
$8,333.33 per month during the period from the date of this Agreement
through December 31, 1999, and (ii) thereafter, at amounts not in excess
of the levels set forth in the Company's Budget for the applicable period
established as required by Section 5.1.10 below (the Budget")
5.1.8 New Developments. Cause all material technological or other material
proprietary developments, inventions, discoveries or improvements by the
Company's or any Subsidiary's employees to be fully documented in
accordance with the practice in the industry. Cause all employees and,
all consultants hereafter employed by the Company and each Subsidiary, to
execute appropriate patent and copyright assignment agreements to the
Company and, when the Company so requests, to file and prosecute United
States and foreign patent or copyright applications relating to and
protecting such developments on behalf of the Company or such Subsidiary.
5.1.9 Employee Invention and Non-Disclosure Agreement. Use its best efforts to
cause each employee or consultant and all employees hereafter employed by
the Company or any Subsidiary promptly to execute an agreement
substantially in the form of Attachment 5.1.9 hereto.
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5.1.10 Budgets. Prior to the commencement of each fiscal year, prepare and
submit to, and obtain Purchaser Budget Approval of a budget for the
upcoming fiscal year (including projections or forecasts of capital and
operating expenses, cash flow, and profits and losses, all itemized in
reasonable detail, and setting forth compensation levels for all officers
and the 6 most highly compensated employees and consultants), with the
Purchaser Budget Approval for such budget being obtained no later than
the end of the fiscal year then ending, and thereafter operate the
business of the Company in accordance with such Budget. "Purchaser Budget
Approval" means, (i) with respect to the budget for the fiscal year
ending December 31, 1999, the approval of such Budget by the Purchaser at
or prior to the Closing (or any amendments mutually agreed upon by the
Company and the Purchaser), (ii) with respect to any Budget covering the
first 18 full calendar months following the Closing, the written approval
of such Budget by Purchaser in the exercise of Purchaser's sole
discretion; provided that Purchaser agrees not to unreasonably withhold
--------
approval of Budgets applicable to such period if variances between the
applicable Budget and the budget for such period set forth in the
Business Plan of the Company attached hereto as Attachment 5.1.10 (the
-----------------
"Business Plan") do not exceed 20% in the case of budgeted marketing
expense, and 10% in the case of all other budget items,
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and (iii) with respect to the portion of any Budget covering the period
following the completion of the first 18 full calendar months following
the Closing, the written approval of such Budget by Purchaser in the
exercise of its reasonable business judgment.
5.1.11 Financings. Promptly, fully and in detail, inform the Purchaser in
advance of any material commitments or contracts relating to financing of
any nature in which the Company pledges material corporate assets, other
than under purchase money security interests secured only by the assets
purchased with such financing in the ordinary course of business.
5.1.12 Required Use of Proceeds. Use the proceeds from the issuance and sale
of the Shares hereunder as specified in Attachment 5.1.12.
------------------
5.1.13 Board of Directors; Chief Executive Officer. Provide Purchaser with at
least 2 business days notice of any meeting of the Board of Directors of
the Company or the taking of any action by unanimous written consent of
the Board of Directors; and, from and after such time as the Purchaser
has purchased Equity Securities of the Company with an aggregate purchase
price of at least $1,000,000, (a) cause to be appointed to the Board of
Directors of the Company and each committee thereof, one director
nominated by the Purchaser, and (b) commence a search for a Chief
Executive Officer (who shall have all the duties and responsibilities
customarily given the most senior executive officer of a corporation and
shall report only to the Board of Directors), whose appointment shall be
subject to the approval of the Purchaser, which approval shall not be
unreasonably withheld, and whose removal (and all subsequent appointments
and removals of the Chief Executive Officer) shall be subject to the
approval of the Purchaser, which approval shall not be unreasonably
withheld.
5.1.14 Filing of Amended and Restated Articles of Incorporation. Prepare and
file the Restated Articles, substantially in the form attached hereto as
Exhibit 1.2, and use its best efforts to cause the Restated Articles to
be accepted for filing by the Secretary of State of the State of
California.
5.1.15 Execution and Delivery of Second Option Agreement. If the Purchaser
exercises the First Option, as provided in the First Option Agreement
attached hereto as Exhibit A, execute and deliver the Second Option
Agreement, in the form attached hereto as Exhibit B, to the Purchaser.
5.2 Negative Covenants of the Company. Without limiting any other covenants
and provisions hereof, the Company covenants and agrees that until a
Covenant Termination Event it will not take the actions contained in the
following covenants and provisions, without the approval of the
Purchaser, and will cause each Subsidiary, to not take the actions
contained in the following covenants and provisions as are applicable to
such Subsidiary, and will not, without the approval of the Purchaser
amend, revise or waive any terms of this Section 5.2:
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5.2.1 Issuance of Shares. The Company shall not issue any authorized but
unissued shares of Series A Preferred Stock except to the Purchaser at
the Closing or to the Purchaser in subsequent transactions.
5.2.2 Mergers, Sale of Assets, etc. Merge or consolidate with, or sell, assign,
lease or otherwise dispose of or voluntarily part with the control of
(whether in one transaction or in a series of transactions), all or
substantially all of its assets (whether now owned or hereinafter
acquired) to any Person, or permit any Subsidiary to do any of the
foregoing, except for sales, assignments, leases or other dispositions of
assets in the ordinary course of business. Notwithstanding the foregoing,
this clause shall be effective only (i) if and so long as the aggregate
cash price paid by the Purchaser for Common Stock of the Company is at
least 50% of the aggregate cash price received by the Company for all
outstanding capital stock of the Company, and (ii) for all periods
following exercise of the Second Option.
5.2.3 Maintenance of Ownership of Subsidiaries. Create any Subsidiary (i) that
is not a Wholly-Owned Subsidiary, unless a majority of the Board of
Directors of the Company shall have approved the creation of such
Subsidiary or (ii) any of whose shares of capital stock shall be owned by
any officer, director or shareholder of the Company or affiliate of an
officer, director, or shareholder of the Company; sell or otherwise
dispose of any shares of capital stock of any Subsidiary, except to the
Company or another Subsidiary, or to another Person who is not an
officer, director, or shareholder of the Company, or affiliate of an
officer, director, or shareholder of the Company, if, in the judgment of
a majority of the Board of Directors of the Company, such sale or
disposition is in the best interests of the Company; provided, however,
that nothing herein contained shall prevent any merger, consolidation or
transfer of assets permitted by subsection 4.2(a).
5.2.4 Dealings with Affiliates and Others. Enter into any material
transaction, including, without limitation, any material loans or
extensions of credit or royalty agreements, with any officer or director
of the Company or any Subsidiary or holder of any class of capital stock
of the Company, or any member of their respective immediate families or
any corporation or other entity, directly or indirectly controlled by one
or more of such officers, directors or shareholders or members of their
immediate families (other than any such transactions in the ordinary
course of business which are in an amount not in excess of $5,000) unless
such transaction is approved in advance by the Purchaser.
5.2.5 Change in Nature of Business. Make, or permit any Subsidiary to make,
any material change in the nature of its business as carried on at the
date hereof or as contemplated in the Business Plan.
5.2.6 Dividends. So long as the Purchaser is permitted to cause the Company to
repurchase the Purchase Shares hereunder and if such right is exercised,
until the Purchase Shares have been repurchased by the Company, declare
or pay any cash dividends on any class of the Company's capital stock now
or hereafter outstanding, or purchase, redeem or otherwise
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acquire or retire any of the Company's capital stock of any class now or
hereafter outstanding or otherwise return capital or make distributions
of assets to shareholders as such, except repurchase of the Company's
capital stock pursuant to the terms of Section 6.1 below. The Company
shall not contribute assets in any material amount to any of its
Subsidiaries who are not Wholly Owned Subsidiaries.
5.2.7 Stock Restriction Agreements, Stock Options. Authorize, grant or issue,
upon the exercise of options or otherwise under any plan for the benefit
of employees, officers, directors, or consultants of the Company a number
of shares greater than 450,000 shares, (ii) issue any shares for
consideration less than the fair market value of such shares except for
shares issuable upon exercise of options, (iii) issue any options or
warrants to purchase shares at a price which is less than the fair market
value of the shares issuable upon exercise of such rights or options on
the date such rights or options are issued, or (iv) authorize, grant or
issue to employees, officers, directors of the Company compensatory
options or rights which may be exercised in whole or in part prior to the
completion of one year of continuous service to the Company.
5.3 Reporting Requirements. The Company will furnish the following to the
Purchaser so long as the Company holds any Series A Preferred Stock (or
Common Stock issued upon conversion of Series A Preferred Stock) and so
long as the Options remain exercisable:
5.3.1 as soon as reasonably available, and in any event within thirty (30) days
after the end of each fiscal quarter of the Company, unaudited
Consolidated balance sheets of the Company and its Subsidiaries as of the
end of such quarter and unaudited Consolidated statements of income and
retained earnings and of cash flow of the Company and its Subsidiaries
for the period ending on the last day of such quarter, setting forth in
each case in comparative form the corresponding figures for the
corresponding period of the prior fiscal year, all in reasonable detail
and duly certified (subject to year-end audit adjustments) by the chief
executive officer or chief financial officer of the Company as having
been prepared in all material respects in accordance with generally
accepted accounting principles consistently applied, not including
footnote disclosures;
5.3.2 as soon as reasonably available and in any event within ninety (90) days
after the end of each fiscal year of the Company thereafter, a copy of
the annual audit report for such year for the Company and its
Subsidiaries, including therein Consolidated and consolidating balance
sheets of the Company as of the end of such fiscal year and Consolidated
and consolidating statements of income and retained earnings and of cash
flow of the Company and its Subsidiaries for such fiscal year, setting
forth in each case in comparative form the corresponding figures for the
preceding fiscal year, all duly certified by an a recognized independent
certified public accountant which in the regular conduct of its business
audits the financial statements of at least one company which files
reports under Section 13 or 15(d) of the Exchange Act;
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5.3.3 promptly upon the request of the Purchaser, any written report submitted
to the Company by independent public accountants in connection with an
annual or interim audit of the books of the Company and its Subsidiaries
made by such accountants;
5.3.4 promptly after the commencement thereof, notice of all material actions,
suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality,, domestic or
foreign, materially affecting the Company and any Subsidiary;
5.3.5 at least thirty (30) days prior to the commencement of each fiscal year
of the Company, a copy of the Budget provided for in Section 5.1.10; and
5.3.6 promptly after sending, making available, or filing the same, all reports
and financial statements that the Company or any Subsidiary sends or
makes available to the shareholders of the Company or the Securities and
Exchange Commission.
5.4 Confidentiality. Each Purchaser represents and warrants that any
information obtained by such Purchaser pursuant to Section 5.3 of this
Agreement or otherwise obtained by such Purchaser from the Company if
such information is designated as confidential information or is
otherwise not available to the Purchaser or the public shall be treated
as confidential and, except as may be required by applicable law or the
rules of NASDAQ or any stock exchange applicable to Purchaser, shall not
be disclosed to a third party (except a Purchaser's legal counsel,
accountants or similar advisors) without the consent of the Board of
Directors, except that such information shall not be deemed confidential
for the purpose of enforcement of this Agreement or valuation of the
Securities. At the request of the Board of Directors, any Person, prior
to receiving any information pursuant to this Agreement, shall execute
reasonable confidentiality agreements consistent with this Section 5.4.
6. REPURCHASE OPTION, FINANCING RESTRICTION AND RIGHT OF PARTICIPATION.
6.1 Repurchase Option. In the event that (i) Purchaser elects not to
exercise the First Option by the First Option Expiration Date, and (ii)
the Company secures additional equity financing in an amount not less
than $1,000,000 other than from the Purchaser (together, the "Repurchase
Condition"), Purchaser shall have an irrevocable option (the "Repurchase
Option"), to elect to sell to the Company all of the Purchased Shares and
the Company shall agree to purchase such Purchased Shares under the
conditions contained in this Section 5.1. Upon Purchaser's election of
the Repurchase Option, Purchaser shall deliver notice to the Company (the
"Notice") of the Repurchase Option within thirty (30) days after the
occurrence of the Repurchase Conditions. Within ninety (90) days after
receipt of the Notice, the Company shall repurchase the Purchased Shares
at the Per Share Price for an aggregate purchase price of $100,000 with
no interest. If the Company shall fail to repurchase the Purchased Shares
as required herein, without limitation of
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other remedies available to Purchaser hereunder, the amount due to
Purchaser hereunder shall accrue interest at the rate of the lesser of
1.167% per month or the maximum rare permitted by law. The Company may
satisfy its obligation to repurchase the Purchased Shares upon exercise
by the Purchaser of the Repurchase Option by causing a third party to
purchase the Purchased Shares; provided, that the Company shall remain
liable for payment therefor.
6.2 Financing Restriction. Commencing on the Closing Date and ending on the
earlier of (i) expiration of the First Option, or (ii) the date on which
Purchaser elects to exercise the First Option, neither the Company nor
any of its representatives shall enter into any agreement for a Financing
Proposal (as defined below) unless Purchaser is a party to the relevant
agreement or arrangement or consents in writing to such financing. The
term "Financing Proposal," as used in this section, refers to any plan,
proposal, agreement or understanding or arrangement contemplating any
sale or issuance of any Debt Security or equity security related to the
financing of the Company other than any sale or issuance to the
shareholders of the Company.
6.3 Right of Participation. The Company shall afford the Purchaser with the
following rights of participation:
6.3.1 Until the Company has completed a Qualified Public Offering, the Company
shall not issue, sell or exchange, agree to issue, sell or exchange, or
reserve or set aside for issuance, sale or exchange, for cash or cash
equivalents (i) any shares of Common Stock, (ii) any other equity
security of the Company (other than the Purchased Shares, the First
Option Shares and the Second Option Shares), including, without
limitation, shares of Preferred Stock, (iii) , any option, warrant or
other right to subscribe for, purchase or otherwise acquire any equity
security of the Company (other than the Options), or (iv) any Debt
Securities (collectively, the "Offered Securities"), unless in each such
case the Company shall have offered to sell a portion of the Offered
Securities to the Purchaser as follows: the Company shall offer to sell
to the Purchaser on the same terms and conditions as the Offered
Securities are being sold to other persons, that number of the Offered
Securities so that Purchaser shall retain its then existing equity
percentage of the Company on an as-converted fully diluted basis assuming
for this purpose that the Options had been exercised in their entirety
and all Series A Preferred Stock had been converted into Common Stock of
the Company. For purposes of making this calculation, all outstanding
options and warrants to purchase common stock and common stock issuable
on the conversion of convertible securities of the Company shall be
deemed to be issued and outstanding shares of Common Stock of the
Company. The Company shall offer to sell to the Purchaser that portion of
the Offered Securities as the aggregate number of shares of Series A
Preferred Stock (on an as-converted basis) then held by or issuable to
the Purchaser upon exercise of the Options (but only to the extent such
Options have not expired due to passage of time) or otherwise bears to
the total number of outstanding shares of Common Stock of the Company,
plus all shares of Common Stock issuable upon exercise of then
exercisable warrants or options or upon conversion
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of convertible securities of the Company, at a price and on the other
terms specified by the Company in writing delivered to the Purchaser (the
"Offer"), and the Offer by its terms shall remain open and irrevocable
for a period of thirty (30) days.
6.3.2 Notice of Acceptance. Notice of each Purchaser 's intention to accept,
in whole or in part, an Offer made pursuant to Section 6.3.1 shall be
evidenced by a writing signed by such Purchaser and delivered to the
Company prior to the end of the thirty (30) day period of the Offer,
setting forth the portion of the Offered Securities that the Purchaser
elects to purchase (the "Notice of Acceptance").
6.4 Conditions to Acceptance By Purchaser.
6.4.1 Permitted Sales of Refused Securities. In the event that a Notice of
Acceptance is not given by the Purchaser in respect of all the Offered
Securities to which the Purchaser is entitled, the Company shall have on
hundred and twenty (120) days from the expiration of the period set forth
in Section 6.3 to sell, or to enter into a binding agreement to sell, all
or any part of such Offered Securities as to which a Notice of Acceptance
has not been given by Purchaser (the "Refused Securities") to the Person
or Persons specified in the Offer, but only upon terms and conditions,
including, without limitation, unit price and interest rates, which are
not more favorable, in unit price and interest rates, in the aggregate,
to such other Person or Persons or less favorable to the Company than
those set forth in the Offer.
6.4.2 Reduction in Amount of Offered Securities. In the event the Company
shall propose to sell less than all the Refused Securities, then the
Purchaser may, at its sole option and in its sole discretion, reduce the
number of, or other units of the Offered Securities specified in its
Notice of Acceptance to an amount that shall be not less than the amount
of the Offered Securities that the Purchaser elected to purchase pursuant
to Section 6.3 multiplied by a fraction, (i) the numerator of which shall
be the amount of Offered Securities the Company actually proposes to
sell, and (ii) the denominator of which shall be the amount of all
Offered Securities. In the event that the Purchaser so elects to reduce
the number or amount of Offered Securities specified in its Notice of
Acceptance, the Company may not sell or otherwise dispose of more than
the reduced amount of the Offered Securities until such securities have
again been offered to the Purchasers in accordance with Section 6.3.
6.4.3 Closing. Upon the closing, which shall include full payment to the
Company, of the sale to such other Person or Persons of all or less than
all the Offered Securities not being purchased by Purchaser, the
Purchaser shall purchase from the Company, and the Company shall sell to
Purchaser, the number of Offered Securities specified in the Notice of
Acceptance, as reduced pursuant to Section 6.4.2 if the Purchaser have so
elected, upon the terms and conditions specified in the Offer. The
purchase by Purchaser of any Offered Securities is subject in all cases
to the preparation, execution and delivery by the
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Company and the Purchaser of a purchase agreement relating to such
Offered Securities reasonably satisfactory in form and substance to
Purchaser and its counsel.
6.5 Further Sale. In each case, any Offered Securities not purchased by the
Purchaser or other Persons in accordance with Section 6.4 may not be sold
or otherwise disposed of until they are again offered to the Purchaser
under the procedures specified in Section 6.3, 6.4 and 6.5.
6.6 Exceptions. The rights of the Purchasers under Section 6.3 shall not
apply to:
6.6.1 Common Stock issued as a stock dividend to holders of Common Stock or
upon any subdivision or combination of shares of Common Stock,
6.6.2 Common Stock issued in a Qualified Public Offering,
6.6.3 Common Stock issued upon exercise of the Options,
6.6.4 issuance of shares of Common Stock, or options exercisable therefor to
officers, employees, directors or consultants of the Company and any
Subsidiary pursuant to the Company's Stock Option Plan, or any other
stock option agreement or plan or stock purchase agreement or plan
approved by the Purchaser in an amount not greater than the amount
specified in Section 5.2.6 hereof,
6.6.5 the issuance by the Company of securities in connection with a merger,
consolidation or other acquisition of another corporation, or
6.7 Transfer of Right of Participation. The right of participation held by
Purchaser may not be transferred or assigned to any individual or entity
which is not an accredited investor within the meaning of Regulation D
under the Securities Act.
7. CONDITIONS TO CLOSING.
7.1 Conditions to Purchasers' Obligations at the Closing. The Purchaser's
obligation to purchase the Purchased Shares at the Closing are subject to
the satisfaction (or, waiver by the Purchaser in the exercise of the
Purchaser's sole discretion), at or prior to the Closing Date, of the
following conditions:
7.1.1 Amended and Restated Articles of Incorporation. The Amended and Restated
Articles of Incorporation in the form attached hereto as Exhibit 1.2
shall have been filed with, and accepted for filing by, the office of the
Secretary of State of the State of California, and shall be in full force
and effect.
7.1.2 Representations and Warranties True; Performance of Obligations. The
representations and warranties made by the Company in Section 3 hereof
shall be true and correct in all material respects as of the Closing Date
with the same force and effect as if
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they had been made as of the Closing Date, and the Company shall have
performed all obligations and conditions herein required to be performed
or observed by it on or prior to the Closing.
7.1.3 Legal Investment. On the Closing Date, the sale and issuance of the
Purchase Shares, the First Option and the Second Option and the proposed
issuance of the First Option Shares and the Second Option Shares shall be
legally permitted by all laws and regulations to which Purchaser and the
Company are subject.
7.1.4 Consents, Permits, and Waivers. The Company shall have obtained any and
all consents, permits and waivers necessary or appropriate for
consummation of the transactions contemplated by the Agreement and the
Option Agreements (except for such as may be properly obtained subsequent
to the Closing).
7.1.6 Reservation of Conversion Shares. The First Option Shares and the Second
Option Shares issuable upon exercise of the exercise of the Option
Agreements shall have been duly authorized and reserved for issuance upon
such exercise.
7.1.7 Execution and Delivery of First Stock Option Agreement. Purchaser shall
have received the First Stock Option Agreement, duly executed by the
parties thereto, in the form attached hereto as Exhibit A.
7.1.8 Execution and Delivery of Indemnification Agreement. Purchaser shall
have received the Indemnification Agreement, duly executed by the parties
thereto, in the form attached hereto as Exhibit C.
7.1.9 Approval of Budget for Calendar Year 1999. Purchaser shall have been
presented with, and shall have approved a budget of the Company for the
calendar year ending December 31, 1999 (the "1999 Budget").
7.7 Conditions to Obligations of the Company. The Company's obligation to
issue and sell the Purchase Shares at the Closing is subject to the
satisfaction, on or prior to the Closing Date, of the following
conditions:
7.7.1 Representations and Warranties True. The representations and warranties
made by the Purchaser acquiring Purchase Shares in Section 4 hereof shall
be true and correct in all material respects at the date of the Closing,
with the same force and effect as if they had been made on and as of said
date.
7.7.2 Performance of Obligations. Purchaser shall have performed and complied
with all agreements and conditions herein required to be performed or
complied with by such Purchasers on or before the Closing.
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8. REGISTRATION RIGHTS. The registration rights set forth in this Section 8 are
only applicable after the exercise of the First Option or investment by the
Purchaser of at least $1,000,000 in securities of the Company.
8.1 "Piggy Back" Registration. If at any time after the exercise of the First
Option or investment by the Purchaser of at least $1,000,000 in securities
of the Company, the Company shall determine to register under the
Securities Act (including pursuant to a demand of any shareholder of the
Company exercising registration rights) any of its Common Stock (except (i)
shares to be issued solely in connection with any acquisition of any entity
or business; (ii) shares issuable solely upon exercise of stock options;
(iii) shares issuable solely pursuant to employee benefit plans; or (iv)
shares proposed to be registered on any form that does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of the Registrable Shares), it
shall send to each holder of Registrable Shares, written notice of such
determination and, if within twenty (20) days after receipt of such notice,
such holder shall so request in writing, the Company shall use its best
efforts to include in such registration statement all or any part of the
Registrable Shares that such holder requests to be registered, except that
if, in connection with any offering involving an underwriting of shares of
the Company's Common Stock, the managing underwriter shall impose a
reasonable limitation on the number of shares of Common Stock included in
any such registration statement because, in its judgment, such limitation
is necessary to effect an orderly public distribution or will otherwise
jeopardize the success of the Offering, then such limitation shall be
imposed pro rata among the holders of such Common Stock having an
incidental ("piggy back") right to include such Common Stock in the
registration statement as provided below, and, to the extent any
Registrable Shares remain available for registration after the
underwriter's cut-back, the Company shall be obligated to include in such
registration statement only the product of (i) the number of Registrable
Shares with respect to which such holder has requested inclusion hereunder
and (ii) such holder's Ownership Percentage, as that term is defined in
Section 9.1. For purposes of the apportionment provided for in the
preceding sentence, for any holder of Registrable Shares that is a
partnership or a corporation, the partners, retired partners, and
stockholders of such holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single holder, Notwithstanding
the foregoing, no such reduction shall be made with respect to securities
being offered by the Company for its own. If any holder of Registrable
Shares disapproves of the terms of such underwriting, he may elect to
withdraw therefrom by written notice to the Company and the underwriter
given within three (3) days of the time such holder becomes aware of such
terms. No incidental right under this Section 8.1 shall be construed to
limit any registration required under Section 8.2.
8.2 Required Registration.
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8.2.1 If on any two occasions, following the completion of the Company's
initial public offering (other than an offering relating solely to any
acquisition of any entity or business, or to the sale of securities to
officers, directors, employees, or consultants of the Company pursuant to
a stock option, stock purchase, or similar plan or arrangement), one or
more holders of the Registrable Shares shall notify the Company in
writing that it or they intend to offer or cause to be offered for public
sale at least fifty percent (50%) of the Registrable Shares, the Company
will so notify all holders of Registrable Shares. Upon written request of
any holder given within thirty (30) days after the receipt by such holder
from the Company of such notification, the Company will use its
reasonable best efforts to cause all or any part of the Registrable
Shares that may be requested by any holder thereof (including the holder
or holders giving the initial notice of intent to offer) to be registered
under the Securities Act as expeditiously as reasonably possible. If (i)
the Company determines to include shares to be sold by it in any
registration request under this Section 8.2 pursuant to a registration
statement for which the Company has previously sent written notice of its
determination to register shares to holders of Registrable Shares under
Section 8.1, or (ii) the Company determines to include shares to be sold
by it in any registration request under this Section 8.2 and such
inclusion of shares results in a cut-back or limitation of the number of
shares or other benefits to the holder(s) of the Registrable Shares
submitting the registration request under this Section 8.2, then such
registration shall be deemed to have been a registration under Section
8.1.
8.2.2 If the holders initiating the registration request hereunder ("Initiating
Holders") intend to distribute the Registrable Shares covered by their
request by means of an underwriting, they shall so advise the Company as
a part of their request made pursuant to subsection (a) and the Company
shall include such information in the written notice referred to in
subsection (a). The underwriter will be selected by the Company and shall
be reasonably acceptable to a majority in interest of the Initiating
Holders. In such event, the right of any holder to include its
Registrable Shares in such registration shall be conditioned upon such
holder's participation in such underwriting and the inclusion of such
holder's Registrable Shares in the underwriting (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and
such holder) to the extent provided herein. All holders proposing to
distribute their Securities through such underwriting shall (together
with the Company if required or desired by the Company) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected for such underwriting. Notwithstanding any other
provision of this Section 8.2, if the underwriter advises the Initiating
Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, then the Initiating Holders shall so
advise all holders of Registrable Shares which would otherwise be
underwritten pursuant hereto, and the number of Registrable Shares that
may be included in the underwriting shall be allocated among all holders
thereof, including the Initiating Holders, in proportion (as nearly as
practicable) to the amount of Registrable Shares of the Company owned by
each holder; provided, however, that the number of Registrable Shares to
be included in such
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underwriting shall not be reduced unless all other securities are first
entirely excluded from the underwriting.
8.2.3 Notwithstanding the foregoing, if the Company shall furnish to holders
requesting a registration statement pursuant to this Section 8.2, a
certificate signed by the chief executive officer of the Company
stating that in the good faith judgment of the Board of Directors of
the Company, it would be seriously detrimental to the Company and its
shareholders for such registration statement to be filed and it is
therefore essential to defer the filing of such registration statement,
the Company shall have the right to defer taking action with respect to
such filing for a period of not more than 90 days after receipt of the
request of the Initiating Holders; provided, however, that the Company
may not utilize this right more than once in any twelve-month period.
8.2.4 In addition, the Company shall not be obligated to effect, or to take
any action to effect, any registration pursuant to this Section 8.2:
8.2.4.1 after the Company has effected two registrations pursuant to this
Section 8.2 and such registrations have been declared or ordered
effective; or
8.2.4.2 if the Initiating Holders propose to dispose of shares of Registrable
Shares that may be immediately registered on Form S-3 pursuant to a
request made pursuant to Section 8.3 below: or
8.2.4.3 if the Company has effected a registration pursuant to this Section 8.2
and such registration has been declared or ordered effective within the
previous 12 months.
8.3 Registration on Form S-3. In addition to the rights provided the
holders of Registrable Shares in Section 8.1 and Section 8.2 above,
from and after the date that the registration of Registrable Shares
under the Securities Act can be effected on Form S-3 (or any similar
successor form promulgated by the Securities and Exchange Commission)
through the period ending five years following the Company's first
public offering of its Common Stock in an offering registered under the
Securities Act, the Company will promptly so notify each holder of
Registrable Shares and then will at any time, and from time to time,
during such period, as expeditiously as possible, use its best efforts
to effect registration under the Securities Act on said Form S-3 of all
or such portion of the Registrable Shares as the holder or holders
shall specify. Notwithstanding the above, the Company shall not be
obligated to effect any registration pursuant to this Section 8.3: (i)
if Form S-3 (or any similar successor form promulgated by the
Securities and Exchange Commission) is not available for such offering
by the holders; (ii) if the holders of Registrable Shares, together
with the holders of any other securities of the Company entitled to
inclusion in such registration, propose to sell Registrable Shares and
such other securities (if any) at an aggregate price to the public (net
of any underwriters' discounts or commissions) of less than $500,000:
(iii) if the Company shall furnish the holders a certificate signed by
the chief executive officer of the Company stating that in the good
faith judgment of the
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Board of Directors of the Company, it would be seriously detrimental to the
Company and its shareholders for such Form S-3 Registration to be effected
at such time, in which event the Company shall have the right to defer the
filing of the Form S-3 registration statement for a period of not more than
90 days after receipt of the request of the holder or holders under this
Section 8 3; provided, however, that the Company shall not utilize this
right more than once in any twelve (12) month period; or (iv) if the
Company has, within the twelve (12) month period preceding the date of such
request, already effected two registrations on Form S-3 (or any similar
successor form promulgated by the Securities and Exchange Commission).for
the holders pursuant to this Section 8.3.
8.4 Effectiveness. The Company will use its best efforts to maintain the
effectiveness for up to nine (9) months of any registration statement
pursuant to which any of the Registrable Shares are being offered and will
from time to time amend or supplement such registration statement and the
prospectus contained therein as and to the extent necessary to comply with
the Securities Act and any applicable state securities statute or
regulation.
8.5 Indemnification of Holders of Registrable Shares. In the event that the
Company registers any of the Registrable Shares under the Securities Act,
to the extent permitted by law, the Company will indemnify and hold
harmless each holder and each underwriter of the Registrable Shares so
registered (including any broker or dealer through whom such shares may be
sold) and each person, if any, who controls such holder or any such
underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages, expenses or liabilities, joint
or several, to which they or any of them become subject under the
Securities Act and, except as hereinafter provided, will reimburse each
such holder, each such underwriter and each such controlling person, if
any, for any legal or other expenses reasonably incurred by them or any of
them in connection with investigating or defending any actions whether or
not resulting in any liability, insofar as such losses, claims, damages,
expenses, liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
registration statement, in any preliminary or amended preliminary
prospectus or in the prospectus (or the registration statement or
prospectus as from time to time amended or supplemented by the Company) or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order
to make the statements therein not misleading or any violation by the
Company of any rule or regulation promulgated under the Securities Act
applicable to the Company and relating to action or inaction required of
the Company in connection with such registration, unless such untrue
statement or omission was made in such registration statement, preliminary,
or amended, preliminary prospectus or prospectus in reliance upon and in
conformity with information furnished in writing to the Company in
connection therewith by such holder of Registrable Shares, any such
underwriter or any such controlling person expressly for use therein;
provided that if a registration statement or any prospectus is amended to
correct an untrue or misleading statement or omission, and any person who
would otherwise be entitled to indemnification under this Section 8.5 fails
to read such amendment and that failure results in a claim, loss, damage,
expense or
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liability which would otherwise be covered under this section, then the
indemnification of this section shall not apply; and provided, further that
if any untrue statement or omission is contained in a preliminary, or
amended preliminary prospectus and the final prospectus corrects the untrue
statement or omission and is timely furnished to the holders of Registrable
Shares and any underwriters, then the indemnification of this section shall
not apply. Promptly after receipt, but in any event, not more than 30 days
after receipt, by any holder of Registrable Shares, any underwriter or any
controlling person of notice of the commencement of any action in respect
of which indemnity may be sought against the Company, such holder of
Registrable Shares, or such underwriter or such controlling person, as the
case may be, will notify the Company in writing of the commencement
thereof, and, subject to the provisions hereinafter stated, the Company
shall have the right to participate in, and to the extent it so desires, to
assume the defense and full control of such action (including the
employment of counsel, who shall be counsel reasonably satisfactory to such
holder of Registrable Shares, such underwriter or such controlling person,
as the case may be), and the payment of expenses insofar as such action
shall relate to any alleged liability in respect of which indemnity may be
sought against the Company, except as otherwise provided herein, Such
holder of Registrable Shares, any such underwriter or any such controlling
person shall have the right to employ separate counsel in any such action
and to participate in the defense thereof but the fees and expenses of such
counsel shall not be at the expense of the Company unless the employment of
such counsel and payment of such fees and expenses of such counsel has been
specifically authorized by the Company. The Company shall not be liable to
indemnify any person for any settlement of any such action effected without
the Company's consent. The Company shall not, except with the approval of
each party, being indemnified under this Section 8.5, consent to entry of
any judgment with respect to a matter against an indemnitee or enter into
any settlement of a matter against an indemnitee that does not include as
an unconditional term thereof the giving by the claimant or plaintiff to
the parties being so indemnified of a release from all liability in respect
to such claim or litigation.
8.6 Indemnification of Company. In the event that the Company registers any of
the Registrable Shares under the Securities Act, to the extent permitted by
law, each holder of the Registrable Shares so registered will indemnify and
hold harmless the Company, each of its directors, each of its officers who
have signed the registration statement, each underwriter of the Registrable
Shares so registered (including any broker or dealer through whom such of
the shares may be sold) and each person, if any, who controls the Company
within the meaning of Section 15 of the Securities Act from and against any
and all losses, claims, damages, expenses or liabilities, joint or several,
to which they or any of them may become subject under the Securities Act
and, except as hereinafter provided, will reimburse the Company and each
such director, officer, underwriter or controlling person for any legal or
other expenses reasonably incurred by them or any of them in connection
with investigating or defending any actions whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities
or actions arise out
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of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the registration statement, in any preliminary
or amended preliminary prospectus or in the prospectus (or the registration
statement or prospectus as from time to time amended or supplemented) or
arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary in order
to make the statements therein not misleading, but only insofar as any such
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company in connection therewith by
such holder of Registrable Shares, expressly for use therein; provided,
however, that such holder's obligations hereunder shall be limited to an
amount equal to the proceeds to such holder of the Registrable Shares sold
in such registration, and provided further, that if a registration
statement or any prospectus is amended to correct an untrue or misleading
statement or omission and any person who would otherwise be entitled to
indemnification under this section fails to read such amendment and that
failure results in a claim, loss, damages, expenses or liability which
would otherwise be covered under this section, then the indemnification of
this Section 5.6 shall not apply; and provided, further that if any untrue
statement or omission is contained in a preliminary or amended preliminary
prospectus and the final prospectus corrects the untrue statement or
omission and is timely furnished to the holders of Registrable Shares and
any underwriters, then the indemnification of this section shall not apply,
Promptly after receipt, but in any event not more than 30 days after
receipt of notice of the commencement of any action in respect of which
indemnity may be sought against such holder of Registrable Shares, the
Company will notify such holder of Registrable Shares in writing of the
commencement thereof, and such holder of Registrable Shares shall, subject
to the provisions hereinafter stated, such holder shall have the right to
participate in, and to the extent it so desires, to assume the defense and
full control of such action (including the employment of counsel, who shall
be counsel satisfactory to the Company) and the payment of expenses insofar
as such action shall relate to the alleged liability in respect of which
indemnify may be sought against such holder of Registrable Shares, except
as otherwise provided herein. The Company and each such director, officer,
underwriter or controlling person shall have the right to employ separate
counsel in any such action and to participate in the defense thereof but
the fees and expenses of such counsel shall not be at the expense of such
holder of Registrable Shares unless employment of such counsel and payment
of such fees and expenses of such counsel has been specifically authorized
by such holder of Registrable Shares. Notwithstanding the two preceding
sentences, if the action is one in which the Company may be obligated to
indemnify, any holder of Registrable Shares pursuant to Section 8.5, the
Company shall have the right to assume the defense of such action, subject
to the right of such holders to participate therein as permitted by Section
8.5. Such holder of Registrable Shares shall not be liable to indemnify any
person for any settlement of any such action effected without such holder's
consent. Such holder shall not, except with the approval of the Company,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving
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by the claimant or plaintiff to the party being so indemnified of a
release from all liability in respect to such claim or litigation.
8.7 Exchange Act Registration. At such time as it is required under the
Exchange Act, the Company will use its best efforts to file on a timely
basis with the Securities and Exchange Commission all material
information that the Commission may require under either of Section 13
or Section 15(d) of the Exchange Act and, so long as it is required to
file such information under the Exchange Act, shall use its best
reasonable efforts to take all action that may be required as a
condition to the availability of Rule 144 under the Securities Act (or
any successor exemptive rule hereinafter in effect) with respect to the
Company's Common Stock. From and after the first filings provided
above, the Company shall furnish to any holder of Registrable Shares
forthwith upon request (i) a written statement by the Company as to its
compliance with the reporting requirements of Rule 144, (ii) a copy of
the most recent annual or quarterly report of the Company as filed with
the Securities and Exchange Commission, and (iii) any other reports and
documents that a holder may reasonably request in availing itself of
any rule or regulation of the Securities and Exchange Commission
allowing a holder to sell any such Registrable Securities without
registration.
8.8 Further Obligations of the Company. Whenever under the preceding
Sections of this Section 8 the Company is required hereunder to
register Registrable Shares, it agrees that it shall also do the
following:
8.8.1 Furnish to each selling holder such copies of each preliminary and
final prospectus and any other documents that such holder may
reasonably request to facilitate the public offering of its Registrable
Shares;
8.8.2 Use its best efforts to register or qualify the Registrable Shares to
be registered pursuant to this Article 5 under the applicable
securities or "blue sky" laws of such jurisdictions as any selling
holder may reasonably request; provided, however, that the Company
shall not be obligated to qualify to do business in any jurisdiction
where it is not then so qualified or to take any action that would
subject it to the service of process in suits other than those arising
out of the offer or sale of the securities covered by the registration
statement in any jurisdiction where it is not then so subject;
8.8.3 Furnish to each selling holder a signed counterpart of:
8.8.3.1 an opinion of counsel for the Company, dated the effective date of the
registration statement: and
8.8.3.2 "comfort" letters signed by the Company's independent public
accountants who have examined and reported on the Company's financial
statements included in the registration statement, to the extent
permitted by the standards of the American Institute of Certified
Public Accountants, covering substantially the same matters with
respect to
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the registration statement (and the prospectus included therein) and (in
the case of the accountants' "comfort" letters) with respect to events
subsequent to the date of the financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants' "comfort"
letters delivered to the underwriters in underwritten public offerings of
securities, but only if and to the extent that the Company is required to
deliver or cause the delivery of such opinion or "comfort" letters to the
underwriters in an underwritten public offering of securities: and
8.8.4 Permit each selling holder or its counsel or other representatives to
inspect and copy such corporate documents and records as may reasonably
be requested by it; and
8.8.5 Furnish to each selling holder, upon request, a copy of all documents
filed with and all correspondence from or to the Securities and Exchange
Commission in connection with any such offering unless confidential
treatment of such information has been requested of the Securities and
Exchange Commission.
8.9 Expenses. Except as otherwise provided in this Agreement, in the case of
a registration under Section8.1, 8.2 or 8.3 the Company shall bear all
reasonable costs and expenses of each such registration, including, but
not limited to, printing, legal and accounting expenses, Securities and
Exchange Commission filing fees and "blue sky" fees and expenses;
provided, however, that the Company shall have no obligation to pay or
otherwise bear (i) any portion of the fees or disbursements of more than
one counsel for the selling holders of Registrable Shares in connection
with the registration of their Registrable Shares, (ii) any portion of
the underwriter's commissions or discounts attributable to the
Registrable Shares being offered and sold by the holders of Registrable
Shares, (iii) any of such expenses if the payment of such expenses by the
Company is prohibited by the laws of a state in which such offering is
qualified, but only to the extent so prohibited, or (iv) any of such
expenses in any registration proceeding begun pursuant to Section 5.2 or
5.3 if the registration request is subsequently withdrawn at the request
of the holders of Registrable Shares participating therein unless such
withdrawal is due to a material adverse change in the condition,
business, or prospects of the Company from that known to the holders of
Registrable Shares at the time of their request and the request is
withdrawn with reasonable promptness following disclosure by the Company
of such material adverse change.
8.10 Transfer of Registration Rights. The registration rights of the holders
of Registrable Shares under this Article 8 may be transferred to any
transferee of Registrable Shares that is an accredited investor within
the meaning of Regulation D under the Securities Act; and provided, that
(i) all provisions of this Agreement with respect to the transfer of
Registrable Shares have been complied with: (ii) such transferee or
assignee agrees in writing to be bound by and subject to the terms and
conditions of this Agreement: (iii) such Transferee acquires from the
purchaser at least $100,000 worth of shares of Common Stock; and (iv)
such assignment shall be effective only if immediately following
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such transfer the further disposition of such Securities by the
transferee or assignee is restricted under the Securities Act.
8.11 No Superior Rights. The Company will not grant registration rights to
any Person that are superior to the rights granted hereunder.
9. DEFINITIONS AND ACCOUNTING TERMS
9.1 Certain Defined Terms. As used in this Agreement, the following terms
shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
9.1.1 "Closing" shall have the meaning assigned to that term in Section.2.1.
9.1.2 "Company" means and shall include ONLINE TRANSACTION TECHNOLOGIES, INC.,
a California corporation and its successors and assigns.
9.1.3 "Common Stock" includes (a) the Company's Common Stock, without par
value, as authorized on the date of this Agreement, (b) any other capital
stock of any class or classes (however designated) of the Company,
authorized on or after the date hereof, the holders of which shall have
the right, without limitation as to amount, either to all or to a share
of the balance of current dividends and liquidating dividends after the
payment of dividends and distributions on any shares entitled to
preference, and the holders of which shall ordinarily, in the absence of
contingencies, be entitled to vote for the election of directors of the
Company (even though the right so to vote has been suspended by the
happening of such a contingency), and (c) any other securities into which
or for which any of the securities described in (a) or (b) may be
converted or exchanged pursuant to a plan of recapitalization,
reorganization, merger, sale of assets or otherwise.
9.1.4 "Consolidated" when used with reference to any term defined herein shall
mean that term as applied to the accounts of the Company and its
Subsidiaries consolidated in accordance with generally accepted
accounting principles after eliminating intercompany items and minority
interests.
9.1.5 A "Covenant Termination Event" is (i) the closing of a Qualified Public
Offering, or (ii) the occurrence of the Repurchase Condition and
subsequent expiration without exercise by the Purchaser of the Repurchase
Option, or (iii) the completion of the purchase by the Company of the
Purchased Shares if the Purchaser exercises the Repurchase Option.
9.1.6 "Debt Securities" means and includes (i) any debt security of the Company
that by its terms is convertible into or exchangeable for any equity
security of the Company or (ii) any option, warrant or other right to
subscribe for, purchase or otherwise acquire any such debt security of
the Company.
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9.1.7 "Disclosure Letter" shall mean that certain disclosure letter of even
date herewith certified by the President and the Chairman of the Company
and delivered to the Purchaser on or prior to the date hereof.
9.1.8 "Exchange Act" means the Securities Exchange Act of 1934, or any similar
federal statute, and the rules and regulations of the Securities and
Exchange Commission (or of any other Federal Agency then administering
the Exchange Act) thereunder, all as the same shall be in effect at the
time.
9.1.9 "Indebtedness" means all material obligations, contingent and otherwise,
which should, in accordance with generally accepted accounting principles
consistently applied, be classified upon the obligor's balance sheet as
liabilities, excluding any liabilities in respect of deferred federal or
state income taxes, but in any event including, without limitation,
liabilities secured by any material mortgage on property owned or
acquired subject to such mortgage, whether or not the liability secured
thereby shall have been assumed, and also including, without limitation,
(i)all material guaranties, endorsements and other contingent obligations
in respect of Indebtedness of others, whether or not the same are or
should be so reflected in said balance sheet, except guaranties by
endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business and (ii) the
present value of any material lease payments due under leases in respect
to which the obligor is liable as a lessee, required to be capitalized in
accordance with applicable Statements of Financial Accounting Standards,
determined by discounting all such payments at the interest rate
determined in accordance with applicable Statements of Financial
Accounting Standards.
9.1.10 "Ownership Percentage" means and includes, with respect to each holder
of Registrable Shares requesting inclusion of Registrable Shares in an
offering pursuant to Section 8.1, the number of Registrable Shares held
by such holder divided by the aggregate of (i) all Registrable Shares and
(ii) the total number of all other securities entitled to registration
pursuant to agreement with the Company.
9.1.11 "Person" means an individual, corporation, partnership, joint venture,
trust, or unincorporated organization, or a government or any agency or
political subdivision thereof.
9.1.12 "Qualified Public Offering" means and includes the closing of an
underwritten public offering pursuant to an effective registration
statement under the Securities Act, covering the offer and sale of Common
Stock for the account of the Company from which the aggregate net
proceeds to the Company exceed $15,000,000 and in which the price per
share is at least four times the Per Share Price (such amount to be
equitably adjusted whenever there shall occur a stock split, combination,
reclassification, or other similar event affecting the Common Stock).
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9.1.13 "Registrable Shares" means and includes (i) the Common Stock held by the
Purchaser or its permitted assignees; (ii) any other shares of Common
Stock held by Purchaser; and (iii) any shares of Common Stock issued or
issuable upon conversion of the Purchased Shares, the First Option
Shares and/or the Second Option Shares or conversion of other securities
of the Company held by the Purchaser.
9.1.14 "Securities" shall have the meaning assigned to that term in Section
1.2.
9.1.15 "Securities Act" means the Securities Act of 1933, as mended, or any
similar Federal statute, and the rules and regulations of the Securities
and Exchange Commission (or of any other Federal agency then
administering the Securities Act) thereunder, all as the same shall be
in effect at the time.
9.1.16 "Stock Option Plan" means the Company's Stock Option and Incentive Plan
complying with the provisions of Section 5.2.6 , as hereafter adopted
and amended from time to time.
9.1.17 "Subsidiary." or "Subsidiaries" means any corporation, 50% or more of
the outstanding voting stock of which shall at the time be owned by the
Company or by one or more Subsidiaries, or any other entity or
enterprise, 50% or more of the equity of which shall at the time be
owned by the Company or by one or more Subsidiaries.
9.1.18 "Wholly-Owned Subsidiary" or "Wholly-Owned Subsidiaries" means any
corporation, 100% of the outstanding voting stock of which shall at the
time be owned by the Company or by one or more Wholly-Owned
Subsidiaries, or any other entity or enterprise, 100% of the equity of
which shall at the time be owned by the Company or by one or more
Wholly-Owned Subsidiaries.
9.2 Accounting Terms. All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting
principles, and all other financial data submitted pursuant to this
Agreement shall be prepared and calculated in all material respects in
accordance with such principles.
10. MISCELLANEOUS.
10.1 Survival. The representations, warranties, covenants and agreements of
each party made herein shall survive any investigation made by any party
and the closing of the transactions contemplated hereby.
10.2 Successors and Assigns. Except as otherwise expressly provided herein,
the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of
the parties hereto and shall inure to the benefit of and be enforceable
by each person who shall be a holder of the Series A Preferred Stock,
the First Option or the Second Option from time to time.
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10.3 Entire Agreement. This Agreement, the Exhibits and Schedules hereto, the
Option Agreements and the other documents delivered pursuant hereto
constitute the full and entire understanding and agreement between the
parties with regard to the subjects hereof and supercedes all prior
writings or communications and no party shall be liable or bound to any
other in any manner by any representations, warranties, covenants and
agreements except as specifically set forth herein and therein.
10.4 Severability. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
10.5 Amendment, Waiver and Remedies. This Agreement may be amended or modified
only upon the written consent of the Company and Purchaser. The
obligations of the Company and the rights of the Purchaser under this
Agreement may be waived only with the written consent of the Company and
the Purchaser. No failure or delay on the part of the Purchaser, or any
other holder of the Registrable Shares, in exercising any right, power or
remedy hereunder shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right, power or remedy preclude any other or
further exercise thereof or the exercise of any other right, power or
remedy hereunder. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
10.6 Notices. All notices required or permitted hereunder shall be in writing
and shall be deemed effectively given: (a) upon personal delivery to the
party to be notified; (b) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next
business day; (c) five (5) days after having been sent by registered or
certified mail, return receipt requested, postage prepaid; or (d) one (1)
day after deposit with a nationally recognized overnight courier,
specifying next day delivery, with written verification of receipt. All
communications shall be sent to the Company or the Purchaser at the
addresses as set forth on the signature page hereof or at such other
address as the Company or Purchaser may designate by ten (10) days advance
written notice to the other parties hereto.
10.7 Expenses. From and after the Closing, so long as there remain obligations
due by the Company under this Agreement, the Company agrees to pay the
reasonable fees and out-of-pocket expenses of legal counsel, independent
public accountants and other outside experts reasonably retained by
Purchaser in connection with any amendments, modifications or waivers under
this Agreement, the Option Agreements, the Options and other instruments
and documents to be delivered hereunder or thereunder; provided, however,
that the Company will pay Purchaser's legal fees and expenses resulting
from amendments only if prior to the preparation of documents effectuating
such amendments the Company and Purchaser have mutually agreed in writing
to the proposed amendment and, provided further, that the Company will have
no obligation to pay Purchaser's legal fees and expenses resulting from
amendments, modifications or waivers requested by the Purchaser. Each party
shall pay all costs and expenses that it incurs with respect to the
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negotiation, execution, delivery and performance of this Agreement. If
any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition
to any other relief to which such party may be entitled.
10.8 Titles and Subtitles. The titles of the sections and subsections of the
Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
10.9 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
10.10 Broker's Fees. Each party hereto represents and warrants that no agent,
broker, investment banker, person or firm acting on behalf of or under
the authority of such party hereto is or will be entitled to any broker's
or finder's fee or any other commission directly or indirectly in
connection with the transactions contemplated herein. Each party hereto
further agrees to indemnify each other party for any claims, losses or
expenses incurred by such other party as a result of the representation
in this paragraph being untrue.
10.11 Pronouns. All pronouns contained herein, and any variations thereof,
shall be deemed to refer to the masculine, feminine or neutral, singular
or plural, as to the identity of the parties hereto may
require.Negotiation of Agreement. Each of the parties acknowledges that
it has been represented by independent counsel of its choice throughout
all negotiations that have preceded the execution of this Agreement and
that it has executed the same with consent and upon the advice of said
independent counsel. Each party and its counsel cooperated in the
drafting and preparation of this Agreement and the documents referred to
herein, and any and all drafts relating thereto shall be deemed the work
product of the parties and may not be construed against any party by
reason of its preparation. Accordingly, any rule of law or any legal
decision that would require interpretation of any ambiguities in this
Agreement against the party that drafted it is of no application and is
hereby expressly waived. The provisions of this Agreement shall be
interpreted in a reasonable manner to effect the intentions of the
parties and this Agreement.
10.12 Further Assurances. From and after the date of this Agreement, upon the
reasonable request of Purchasers, or the Company and each Subsidiary, the
other party shall execute and deliver such instruments, documents and
other writings as may be reasonably necessary or desirable to confirm and
carry out and to effectuate fully the intent and purposes of this
Agreement and the Securities.
10.13 California Corporate Securities Law. THE SALE OF THE SECURITIES WHICH ARE
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE
OF SUCH SECURITIES OR THE
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PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION THEREFOR PRIOR TO
SUCH QUALIFICATION OR IN THE ABSENCE OF AN EXEMPTION FROM SUCH
QUALIFICATION IS UNLAWFUL. PRIOR TO ACCEPTANCE OF SUCH CONSIDERATION BY
THE COMPANY, THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED OR AN EXEMPTION FROM
SUCH QUALIFICATION BEING AVAILABLE.
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IN WITNESS WHEREOF, the parties hereto have executed the STOCK PURCHASE
AGREEMENT as of the date set forth in the first paragraph hereof.
COMPANY: PURCHASER:
ONLINE TRANSACTION. CUMETRIX DATA SYSTEMS
TECHNOLOGIES, INC CORP.
By: /s/ IGOR KOGAN By: /s/ MAX TOGHRAIE
--------------------- -----------------------
Igor Kogan, President Max Toghraie
Chief Executive Officer
By: /s/ MICHAEL SHIRMAN
-------------------------
Michael Shirman, Chairman
Address: 909 6th Street, Suite 6 Address: 957 Lawson Street
Santa Monica, California 90403 Industry, California 91748
EXHIBIT A
FIRST STOCK OPTION AGREEMENT
THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
FIRST STOCK OPTION AGREEMENT
THIS FIRST STOCK OPTION AGREEMENT (the "Agreement") is made as of the _____
day of December, 1998, by and among ONLINE TRANSACTION TECHNOLOGIES, INC., a
California corporation (the "Company"), and CUMETRIX DATA SYSTEMS CORPORATION, a
California corporation ("Holder").
RECITALS
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A. The Company and Holder have agreed to enter into a Preferred Stock
Purchase Agreement, dated as of the date hereof (the "Purchase Agreement")
relating to the sale and issuance of shares of the Company's Series A-1
Preferred Stock.
B. The Company desires to grant Holder, pursuant to the Purchase Agreement
and in consideration of Holder's agreement to enter into the Purchase Agreement,
the right to purchase shares of its Series A-2 Preferred Stock.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth below, the parties hereto covenant and agree
as follows:
AGREEMENT
1. OPTIONS.
1.1 Grant of Option. The Holder is hereby granted an option (the "First
Option") to purchase such number of shares (rounded up to the nearest whole
share) of the Company's Series A-2 Preferred Stock (the "First Option Shares")
equal to the remainder of (A) the quotient of (x) the number of shares of the
Company's Common Stock issued and outstanding (including shares issuable
pursuant to outstanding options, warrants, rights and convertible debt or equity
securities other than options granted pursuant to this Agreement) as of the date
the First Option is exercised, divided by (y) .7429 minus (B) the number of
-----
shares of the Company's Common Stock issued and outstanding (including shares
issuable pursuant to outstanding options, warrants, rights and convertible debt
or equity securities other than options granted pursuant to this Agreement) all
determined on an as-converted basis as of the date the First Option is
exercised. The per share exercise price for the First Option Shares (the "First
Option Share Price") shall be equal to the quotient of (x) $900,000 divided by
(y) the number of First Option Shares. The total purchase price (the "Total
Purchase Price") of the First Option Shares shall be $900,000. The number and
purchase price of such shares are subject to adjustment as provided in Section 2
hereof.
1.2 Exercise of Option. The First Option may be exercised at any time,
only as to all of the First Option Shares, commencing on the date hereof and
ending the later of (i) at 5:00 p.m., California Time, on February 1, 1999, and
(ii) seven (7) business days following such time as the Company delivers to the
Holder the Company's interactive software capable of performing in all material
respects the operations and functions set forth on Exhibit B (the "Term"). The
First Option may be exercised prior to the expiration of the Term by the
execution and delivery to the Company of a written notice in the form of Exhibit
"A" attached hereto, duly completed and executed. The written notice shall be
accompanied by payment of the Total Purchase Price in immediately available
funds.
2. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF OPTION SHARES. The First
Option Share Price and number of First Option Shares shall be subject to
adjustment from time to time as follows:
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2.1 In case of any capital reorganization, any reclassification of the
Common Stock (other than a change in par value), or the consolidation of the
Company with, or a sale of substantially all of the assets of the Company to
(which sale is followed by a liquidation or dissolution of the Company), or
merger of the Company with, another person, except in the case of a
consolidation, sale or merger resulting in a Liquidity Event (as defined below),
Holder shall thereafter be entitled upon exercise of the First Option to
purchase the kind and number of shares of stock or other securities or property
of the surviving corporation receivable upon such event by a holder of the
number of shares of the Common Stock which the First Option entitles Holder to
purchase from the Company immediately prior to such event; and in any such case,
appropriate adjustment shall be made in the application of the provisions set
forth in this Agreement with respect to Holder's rights and interests
thereafter, to the end that the provisions set forth in this Agreement
(including the specified changes and other adjustments to the First Option Share
Price and the Total Purchase Price) shall thereafter be applicable in relation
to any other shares or other property thereafter purchasable upon exercise of
the First Option.
2.2 A consolidation of the Company with, or a sale of substantially all of
the assets of the Company to (which sale is followed by a liquidation or
dissolution of the Company), or the merger of the Company with, any other
person, in each case resulting in a Liquidity Event shall cause the First Option
Shares to terminate on the effective date of such consolidation, sale or merger,
provided, however, that Holder shall have the right ending on the fifth day
prior to such consolidation, sale or merger to exercise the First Option Shares
in part or in whole.
2.3 A consolidation, sale or merger of the Company as described in Section
2.1 and 2.2 above shall be deemed to result in a "Liquidity Event" if (i) the
Company is not the "Surviving Corporation" in such consolidation, sale or
merger, and (ii) all of the securities of the Company outstanding immediately
prior to such consolidation, sale or merger are exchanged, sold, redeemed or
otherwise converted into cash or publicly traded securities. The determination
as to whether or not the Company is the "surviving corporation" in any
consolidation, sale or merger shall be made on the basis of the relative equity
interests of the shareholders in the Company existing after such consolidation,
sale or merger as follows: If following any consolidation, sale or merger the
holders of outstanding voting securities of the Company prior to such
consolidation, sale or merger own equity securities possessing more than 50% of
the voting power of the corporation existing after such consolidation, sale or
merger then for purposes of this Agreement, the Company shall be the surviving
corporation. In all other cases, the Company shall not be the surviving
corporation. In making the determination of ownership by the stockholders of a
corporation, immediately after a consolidation, sale or merger, of securities
pursuant to this Section 2.3, securities which they owned immediately prior to
such consolidation, sale or merger as stockholders of another party to the
transaction shall be disregarded.
2.4 In the case the Company, subsequent to the date hereof and prior to
the exercise of this First Option, distributes to any holders of Common Stock,
assets (including cash distributions), then upon the exercise of the First
Option, Holder shall be entitled to receive an
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<PAGE>
amount equal to the greatest per share amount of consideration received by any
holder of the Common Stock times the number of shares of Common Stock into which
the shares purchased upon exercise of the First Option are convertible.
2.5 The grant of the First Option shall not affect in any way the right or
power of the Company to make adjustments, reclassification, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF Holder. Holder makes the
following representations, warranties and covenants:
3.1 Holder is acquiring the First Option Shares for its own account with
the present intention of holding such security for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
securities (other than a distribution in compliance with all applicable federal
and state securities laws); provided, that nothing contained herein will prevent
Holder and its permitted assigns from transferring such securities in compliance
with the provisions of Section 5 of this Agreement.
3.2 Holder is an experienced and sophisticated investor and has such
knowledge and experience in financial and business matters that it is capable of
evaluating the relative merits and the risks of an investment in the First
Option and in the First Option Shares and of protecting its own interests in
connection with this transaction.
3.3 Holder is willing to bear and is capable of bearing the economic risk
of an investment in the First Option and the First Option Shares. In making
this representation, consideration has been given to the fact that there is no
public market for the First Option and the First Option Shares and as to whether
the Holder could afford to hold the First Option and the First Option Shares for
an indefinite period of time and whether, at this time, Holder could afford a
complete loss of its First Option and the First Option Shares. Holder
understands that the restrictions on transfer placed upon Holder pursuant to the
provisions of Section 5 of this Agreement may result in Holder being required to
hold the First Option until the date of expiration thereof or to hold the First
Option Shares for an indefinite period off time.
3.4 The Company has made available, prior to the date of this Agreement,
to Holder the opportunity to ask questions of the Company and its officers, and
to receive from the Company and its officers information concerning the terms
and conditions of the First Option and this Agreement and to obtain any
additional information with respect to the Company, its business, operations and
prospects, as reasonably requested by Holder.
3.5 Holder is an "accredited investor" as that term is defined under
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act") and an "excluded purchaser" as
such term is defined in Section 260.102.13 of the Rules of the California
Corporations Commissioner.
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4. RESERVATION OF STOCK. The Company covenants that it will at all times
reserve and keep (i) available out of its authorized but unissued shares of
Series A-2 Preferred Stock, solely for the purpose of issuance upon exercise of
the First Option, such number of shares of Series A-2 Preferred Stock as shall
at any time be issuable upon the exercise of the First Option and (ii) out of
its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of the shares of Series A-2 Preferred Stock
issuable upon exercise of the First Option, such number of shares of Common
Stock as shall at any time be issuable upon conversion of the Series A-2
Preferred Stock issuable upon exercise of the First Option.
5. RESTRICTIONS ON TRANSFER OR EXERCISE OF THE OPTIONS.
5.1 All certificates representing the First Option Shares and any
certificates representing the Common Stock issuable upon conversion of the First
Option Shares will bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT")
AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF UNLESS
REGISTERED IN ACCORDANCE WITH SAID ACT OR PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION THEREUNDER."
If in the reasonable opinion of counsel for the Company, or the
opinion of counsel for Holder all future dispositions of any of the First Option
or First Option Shares by the contemplated transferee would be exempt from the
registration and prospectus delivery requirements of the Securities Act and the
qualification requirements of the California Corporate Securities Law, then the
restrictions on transfer of such securities contained in this Section 5 shall
not apply to any subsequent transfer thereof and the legend set forth above may
be removed from the certificates representing such securities.
5.2 Holder may not transfer, sell, pledge, assign or hypothecate the First
Option or the First Option Shares to any person or entity and no person other
than Holder may exercise any options unless the transfer of the First Option or
First Option Shares to such person was permitted by this Section 5. Prior to
any exercise of the First Options or any transfer or attempted transfer of any
of the First Options or First Option Shares, Holder shall give the Company
written notice of its intention so to do, describing briefly the manner of any
such proposed exercise, sale or transfer. The Company agrees to permit such
exercise or transfer, provided that such exercise or transfer is not prohibited
by this Section 5 and that the Company is reasonably satisfied that such
exercise or transfer complies with all applicable federal and state securities
laws and regulations, and provided, further, in the case of a sale or transfer
Holder deliver to the Company an assignment form in the form attached to this
Agreement.
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<PAGE>
6. REGISTRATION UNDER THE SECURITIES ACT OF 1933 (the "1933 Act"). The Holder
will have the right to cause the Common Stock into which the First Option Shares
are convertible to be registered under the 1933 Act in accordance with Section 8
of the Purchase Agreement.
7. DISPUTES.
7.1 Arbitration.
7.1.1 Except as otherwise expressly provided for in Section 6(c)
below, all disputes arising in connection with this Agreement shall be finally
settled by arbitration in Los Angeles, California, in accordance with the rules
of the American Arbitration Association (the "Rules of Arbitration") and
judgment on the award rendered by the arbitration panel (the "Arbitration
Panel") may be entered in any court or tribunal of competent jurisdiction.
7.1.2 Any party which desires to initiate arbitration proceedings as
provided in Section 7.1.1 above may do so by delivering written notice to the
other party (the "Arbitration Notice") specifying (A) the nature of the dispute
or controversy to be arbitrated, (B) the name and address of the arbitrator
appointed by the party initiating such arbitration and (C) such other matters as
may be required by the Rules of Arbitration.
7.1.3 The party who receives an Arbitration Notice shall appoint an
arbitrator and notify the initiating party of such arbitrator's name and address
within 30 days after delivery of the Arbitration Notice; otherwise, a second
arbitrator shall be appointed at the request of the party who delivered the
Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators
so appointed shall appoint a third arbitrator who shall be the chairman of the
Arbitration Panel and who shall be of American nationality. Should the
arbitrators appointed by the parties not agree upon the appointment of the third
arbitrator within 30 days of their appointment, the third shall be appointed in
accordance with the Rules of Arbitration.
7.1.4 In any arbitration proceeding conducted pursuant to the
provision of this Section 7, both parties shall have the right to discovery, to
call witnesses and to cross-examine the opposing party's witnesses, either
through legal counsel, expert witnesses or both, and such proceedings shall be
conducted in the English language.
7.2 Finality of Decision. All decisions of the Arbitration Panel shall be
final, conclusive and binding on all parties and shall not be subject to
judicial review. The arbitrator shall divide all costs (other than fees of
counsel) incurred in conducting the arbitration proceeding and the final award
in accordance with what they deem just and equitable under the circumstances.
7.3 Limitations. Notwithstanding anything to the contrary contained in
Sections 6.1 and 6.2 above, any claim by either party for injunctive or other
equitable relief, including specific performance, may be brought in the Superior
Court of the State of California for Los Angeles County, or in the United States
District Court for the Central District of California, and any
6
<PAGE>
judgment, order or decree relating thereto shall have precedence over any
arbitral award or proceeding. The Company and the Executive each consent and
submit in advance to the jurisdiction of the above-mentioned courts and agrees
that venue will be proper in such courts on any such matter.
8. MISCELLANEOUS.
8.1 All notices or demands shall be in writing and shall be delivered
personally, electronically, telegraphically, or by express or certified mail or
registered mail or by private overnight express mail service. Delivery shall be
deemed conclusively made (i) at the time of delivery if personally delivered,
(ii) immediately in the event notice is delivered by transmittal over electronic
or telephonic transmitting devices, such as telex or telecopy, provided, the
party to whom the notice is delivered has a compatible device and electronically
or by other written document confirms receipt thereof, or the party otherwise
confirms actual receipt thereof, (iii) at the time that the telegraphic agency
confirms to the sender delivery thereof to the addressee if served
telegraphically, (iv) twenty-four (24) hours after delivery to the carrier if
served by any private, overnight, express mail service, (v) twenty-four (24)
hours after deposit thereof in the United States mail, properly addressed and
postage prepaid, return receipt requested, if served by express mail, or (vi)
five (5) days after deposit thereof in the United States mail, properly
addressed and postage prepaid, return receipt requested, if served by certified
mail.
Any notice or demand to the Company shall be given to:
Online Transaction Technologies, Inc.
909 6th Street, Suite 6
Santa Monica, California 90403
Attn: Board of Directors
Any notice of demand to the Holder shall be given to:
Cumetrix Data Systems Corp.
957 Lawson Street
Industry, California 9148
Fax: (626) 965-8159
Attn: Max Toghraie
------------
Any party may, by virtue of written notice in compliance with this paragraph,
alter or change the address or the identity of the person to whom any notice, or
copy thereof, is to be delivered.
8.2 Each party shall execute and deliver all such further instruments,
documents and papers, and shall perform any and all acts necessary, to give full
force and effect to all of the terms and provisions of this Agreement.
7
<PAGE>
8.3 No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies.
8.4 This Agreement and the rights evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and assigns of Holder except that the rights contained in Section 6 may not be
transferred to a purchaser the First Option Shares pursuant to a registration
statement under the Act covering such proposed distribution or pursuant to the
limitations contained in Rule 144 of the Act. The provisions of this Agreement
are intended to be for the benefit of all holders from time to time of this
Agreement, and shall be enforceable by any such holder.
8.5 The Company shall not by any action including, without limitation,
amending its articles of incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of the Option above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of the Option, and (c) use its best efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the company to perform its
obligations under this Agreement. Upon the request of Holder, the Company will
at any time during the term of this Agreement acknowledge in writing, in form
reasonably satisfactory to Holder, the continuing validity of this Agreement and
the obligations of the Company hereunder.
8.6 Upon receipt by the Company from Holder of evidence reasonably
satisfactory to the Company of the ownership of any loss, theft, distribution or
mutilation of this Agreement and indemnity reasonably satisfactory to the
Company (it being understood that the written agreement of Holder shall be
sufficient indemnity) and in case of mutilation upon surrender and cancellation
hereof, the Company will execute and deliver in lieu hereof a new Agreement of
like tenor to Holder; provided, in the case of mutilation, no indemnity shall be
required if this Agreement in identifiable form is surrendered to the Company
for cancellation.
8.7 This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts entered into and
fully to be performed therein. In all matters of interpretation, whenever
necessary to give effort to any provision of this Agreement, each gender shall
include the others, the singular shall include the plural, and the plural shall
include the singular. The titles of the paragraphs of this Agreement are for
convenience only and shall not in any way affect the interpretation of any
provision or condition
8
<PAGE>
of this Agreement. All remedies, rights, undertakings, obligations and
agreements contained in this Agreement shall be cumulative and none of them
shall be in limitation of an other remedy, right, undertaking, obligation or
agreement of any party. Each party and its counsel have reviewed and revised
this Agreement. As a result, the normal rule of construction to the effect that
any ambiguities are to be resolved against the drafting party shall not be
employed in the interpretation of this Agreement or any amendments or exhibits
thereto.
8.8 This Agreement may be executed in counterparts which, taken together,
shall constitute the whole of the agreement as between the parties.
8.9 Each party to this Agreement which is a corporation hereby represents
and warrants that all necessary corporate action has been taken, including the
due adoption of a resolution by its board of directors sufficient to enable such
corporation to enter into this Agreement, to be bound thereby and to perform
fully as required hereunder.
8.10 Each person executing this Agreement on behalf of an entity
represents and warrants that he or she has been duly authorized to enter into
this Agreement on behalf of such entity, and that such entity is thereby fully
bound.
8.11 The terms and conditions of this Agreement shall be subject to all
applicable laws and regulations of any governing jurisdictions. If an clause or
provision of this Agreement is illegal, invalid or unenforceable under present
or future laws effective during the term of this Agreement, then and, in that
event, the remainder of this Agreement shall not be affected thereby, and in
lieu of each clause or provision of this Agreement that is illegal, invalid or
unenforceable, there shall be added a clause or provision as similar in terms
and in amount to such illegal, invalid or unenforceable clause or provision as
may be possible and be legal, valid and enforceable, as long as it does not
otherwise frustrate the principal purposes of this Agreement.
8.12 This Agreement may be amended or modified only with the written
agreement of the Company and upon the written consent of a majority of the
Holders.
8.13 In the event that any dispute among the parties to this Agreement
should result in litigation, the prevailing party in such dispute shall be
entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
9
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IN WITNESS WHEREOF, the parties have entered into and executed this Option
Agreement as of the date first above written.
Online Transaction Technologies, Inc.
By:
------------------------------------
Its:
------------------------------------
Cumetrix Data Systems Corporation
By:
------------------------------------
Its:
------------------------------------
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<PAGE>
EXHIBIT "A" TO EXHIBIT A
NOTICE OF EXERCISE
(To be signed only upon exercise of the First Option)
TO: Online Transaction Technologies, Inc.
The undersigned, hereby irrevocably elects to exercise the purchase rights
represented by the First Option granted to the undersigned on ____________, 1998
and to purchase thereunder ___* shares of Series A-2 Preferred Stock of Online
Transaction Technologies, Inc., (the "Company") and herewith encloses payment of
$900,000 in full payment for the First Option Shares.
Dated: ________________, _______
------------------------------------
(Signature must conform in all
respects to name of either holder
as specified on the face of the
Option)
------------------------------------
(Please Print Name)
------------------------------------
(Address)
11
<PAGE>
EXHIBIT B TO EXHIBIT A
SPECIFICATIONS OF SOFTWARE
To be provided Separately to the Holder
EXHIBIT B
SECOND STOCK OPTION AGREEMENT
THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
SECOND STOCK OPTION AGREEMENT
THIS SECOND STOCK OPTION AGREEMENT (the "Agreement") is made as of the
_____ day of _________________, 1998, by and among ONLINE TRANSACTION
TECHNOLOGIES, INC., a California corporation (the "Company"), and CUMETRIX DATA
SYSTEMS CORPORATION, a California corporation ("Holder").
RECITALS
A. The Company and Holder have agreed to enter into a Preferred Stock
Purchase Agreement, dated as of the date hereof (the "Purchase Agreement")
relating to the sale and issuance of shares of the Company's Series A-1
Preferred Stock.
B. Holder received upon entering into the Purchase Agreement an option
(the "First Option") to acquire shares of the Company's Series A-2 Preferred
Stock.
C. Upon exercise of the First Option, the Company desires to grant Holder,
pursuant to the Purchase Agreement and in consideration of Holder's exercise of
the First Option, the right to purchase shares of its Series A-3 Preferred
Stock.
NOW THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth below, the parties hereto covenant and agree
as follows:
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<PAGE>
AGREEMENT
1. OPTIONS.
1.1 Grant of Option. The Holder is hereby granted an option (the "Second
Option") to purchase such number of shares (rounded up to the nearest whole
share) of the Company's Series A-3 Preferred Stock (the "Second Option Shares")
equal to the remainder of (A) the quotient of (x) the number of shares of the
Company's Common Stock issued and outstanding (including shares issuable
pursuant to outstanding options, warrants, rights and convertible debt or equity
securities other than options granted pursuant to this Agreement) as of the date
the Second Option is initially exercised, divided by (y) .7857 minus (B) the
-----
number of shares of the Company's Common Stock issued and outstanding (including
shares issuable pursuant to outstanding options, warrants, rights and
convertible debt or equity securities other than options granted pursuant to
this Agreement) all determind on an as-converted basis as of the date the Second
Option is initially exercised. The per share exercise price for the Second
Option Shares (the "Second Option Share Price") shall be equal to the quotient
of (x) $8,000,000 divided by (y) the number of Second Option Shares. The total
purchase price (the "Total Purchase Price") of the Second Option Shares shall be
$8,000,000. The number and purchase price of such shares are subject to
adjustment as provided in Section 2 hereof.
1.2 Exercise of Option. The Second Option may be exercised at any time,
in whole or in part, provided the Second Option is initially exercised as to at
least $4 million worth of the Second Option Shares, commencing on the date the
First Option is exercised and ending at 5:00 p.m., California Time, on the date
that is the later of (i) nine months after the First Option is exercised or (ii)
November 1, 1999 (the "Term"). Holder shall be entitled to purchase all the
Second Option Shares, but only up to an amount not to exceed, on an as-converted
basis determined as of the date of the exercise of the Second Option, 50% of the
issued and outstanding shares of the Company's Common Stock on a fully diluted
basis as of the date the Second Option is initially exercised. The Second
Option may be exercised prior to the expiration of the Term by the execution and
delivery to the Company of a written notice in the form of Exhibit "A" attached
hereto, duly completed and executed. The written notice shall be accompanied by
payment of the Second Option Share Price for each share for which the Second
Option is exercised in immediately available funds.
2. ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF OPTION SHARES. The Second
Option Share Price and number of Second Option Shares shall be subject to
adjustment from time to time as follows:
2.1 In case of any capital reorganization, any reclassification of the
Common Stock (other than a change in par value), or the consolidation of the
Company with, or a sale of substantially all of the assets of the Company to
(which sale is followed by a liquidation or dissolution of the Company), or
merger of the Company with, another person, except in the case of a
consolidation, sale or merger resulting in a Liquidity Event (as defined below),
Holder shall thereafter be entitled upon exercise of the Second Option to
purchase the kind and number of shares of stock or other securities or property
of the surviving corporation receivable upon such
2.
<PAGE>
event by a holder of the number of shares of the Common Stock which the Second
Option entitles Holder to purchase from the Company immediately prior to such
event; and in any such case, appropriate adjustment shall be made in the
application of the provisions set forth in this Agreement with respect to
Holder's rights and interests thereafter, to the end that the provisions set
forth in this Agreement (including the specified changes and other adjustments
to the Second Option Share Price and the Total Purchase Price) shall thereafter
be applicable in relation to any other shares or other property thereafter
purchasable upon exercise of the Second Option.
2.2 A consolidation of the Company with, or a sale of substantially all of
the assets of the Company to (which sale is followed by a liquidation or
dissolution of the Company), or the merger of the Company with, any other
person, in each case resulting in a Liquidity Event shall cause the Second
Option Shares to terminate on the effective date of such consolidation, sale or
merger, provided, however, that Holder shall have the right ending on the fifth
day prior to such consolidation, sale or merger to exercise the Second Option
Shares in part or in whole.
2.3 A consolidation, sale or merger of the Company as described in Section
2.1 and 2.2 above shall be deemed to result in a "Liquidity Event" if (i) the
Company is not the "Surviving Corporation" in such consolidation, sale or
merger, and (ii) all of the securities of the Company outstanding immediately
prior to such consolidation, sale or merger are exchanged, sold, redeemed or
otherwise converted into cash or publicly traded securities. The determination
as to whether or not the Company is the "surviving corporation" in any
consolidation, sale or merger shall be made on the basis of the relative equity
interests of the shareholders in the Company existing after such consolidation,
sale or merger as follows: If following any consolidation, sale or merger the
holders of outstanding voting securities of the Company prior to such
consolidation, sale or merger own equity securities possessing more than 50% of
the voting power of the corporation existing after such consolidation, sale or
merger then for purposes of this Agreement, the Company shall be the surviving
corporation. In all other cases, the Company shall not be the surviving
corporation. In making the determination of ownership by the stockholders of a
corporation, immediately after a consolidation, sale or merger, of securities
pursuant to this Section 2.3, securities which they owned immediately prior to
such consolidation, sale or merger as stockholders of another party to the
transaction shall be disregarded.
2.4 In the case the Company, subsequent to the date hereof and prior to
the exercise of the Second Option, distributes to any holders of Common Stock,
assets (including cash distributions), then upon the exercise of the Second
Option, Holder shall be entitled to receive an amount equal to the greatest per
share amount of consideration received by any holder of the Common Stock times
the number of shares of Common Stock into which the shares purchased upon
exercise of the Second Option are convertible.
2.5 The grant of the Second Option shall not affect in any way the right
or power of the Company to make adjustments, reclassification, reorganizations
or changes in its capital or business structure, or to merge, consolidate,
dissolve or liquidate, or to sell or transfer all or any part of its business or
assets.
3.
<PAGE>
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF HOLDER. Holder makes the
following representations, warranties and covenants:
3.1 Holder is acquiring the Second Option Shares for its own account with
the present intention of holding such security for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
securities (other than a distribution in compliance with all applicable federal
and state securities laws); provided, that nothing contained herein will prevent
Holder and its permitted assigns from transferring such securities in compliance
with the provisions of Section 5 of this Agreement.
3.2 Holder is an experienced and sophisticated investor and has such
knowledge and experience in financial and business matters that it is capable of
evaluating the relative merits and the risks of an investment in the Second
Option and in the Second Option Shares and of protecting its own interests in
connection with this transaction.
3.3 Holder is willing to bear and is capable of bearing the economic risk
of an investment in the Second Option and the Second Option Shares. In making
this representation, consideration has been given to the fact that there is no
public market for the Second Option and the Second Option Shares and as to
whether the Holder could afford to hold the Second Option and the Second Option
Shares for an indefinite period of time and whether, at this time, Holder could
afford a complete loss of its Second Option and the Second Option Shares.
Holder understands that the restrictions on transfer placed upon Holder pursuant
to the provisions of Section 5 of this Agreement may result in Holder being
required to hold the Second Option until the date of expiration thereof or to
hold the Second Option Shares for an indefinite period off time.
3.4 The Company has made available, prior to the date of this Agreement,
to Holder the opportunity to ask questions of the Company and its officers, and
to receive from the Company and its officers information concerning the terms
and conditions of the Second Option and this Agreement and to obtain any
additional information with respect to the Company, its business, operations and
prospects, as reasonably requested by Holder.
3.5 Holder is an "accredited investor" as that term is defined under
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act") and an "excluded purchaser" as
such term is defined in Section 260.102.13 of the Rues of the California
Corporations Commissioner.
4. RESERVATION OF STOCK. The Company covenants that it will at all times
reserve and keep (i) available out of its authorized but unissued shares of
Series A-3 Preferred Stock, solely for the purpose of issuance upon exercise of
the Second Option, such number of shares of Series A-3 Preferred Stock as shall
at any time be issuable upon the exercise of the Second Option and (ii) out of
its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of the shares of Series A-3 Preferred Stock
issuable upon the exercise of the Second Option, such number of shares of Common
Stock as shall then be issuable upon the conversion of the shares of Series A-3
Preferred Stock issuable upon the exercise of the Second Option.
4.
<PAGE>
5. RESTRICTIONS ON TRANSFER OR EXERCISE OF THE OPTIONS.
5.1 All certificates representing the Second Option Shares and any
certificates representing the Common Stock issuable upon conversion of the
Second Option Shares will bear the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT")
AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF UNLESS
REGISTERED IN ACCORDANCE WITH SAID ACT OR PURSUANT TO AN EXEMPTION
FROM THE REGISTRATION THEREUNDER."
If in the reasonable opinion of counsel for the Company, or the
opinion of counsel for Holder all future dispositions of any of the Second
Option or Second Option Shares by the contemplated transferee would be exempt
from the registration and prospectus delivery requirements of the Securities Act
and the qualification requirements of the California Corporate Securities Law,
then the restrictions on transfer of such securities contained in this Section 5
shall not apply to any subsequent transfer thereof and the legend set forth
above may be removed from the certificates representing such securities.
5.2 Holder may not transfer, sell, pledge, assign or hypothecate the
Second Option or the Second Option Shares to any person or entity and no person
other than Holder may exercise any options unless the transfer of the Second
Option or Second Option Shares to such person was permitted by this Section 5.
Prior to any exercise of the Second Options or any transfer or attempted
transfer of any of the Second Options or Second Option Shares, Holder shall give
the Company written notice of its intention so to do, describing briefly the
manner of any such proposed exercise, sale or transfer. The Company agrees to
permit such exercise or transfer, provided that such exercise or transfer is not
prohibited by this Section 5 and that the Company is reasonably satisfied that
such exercise or transfer complies with all applicable federal and state
securities laws and regulations, and provided, further, in the case of a sale or
transfer Holder deliver to the Company an assignment form in the form attached
to this Agreement.
6. REGISTRATION UNDER THE SECURITIES ACT OF 1933 (the "1933 Act"). The Holder
will have the right to cause the Common Stock into which the Second Option
Shares are convertible to be registered under the 1933 Act in accordance with
Section 8 of the Purchase Agreement.
7. DISPUTES.
7.1 Arbitration.
7.1.1 Except as otherwise expressly provided for in Section 6(c)
below, all disputes arising in connection with this Agreement shall be finally
settled by arbitration in Los Angeles, California, in accordance with the rules
of the American Arbitration Association (the
5.
<PAGE>
"Rules of Arbitration") and judgment on the award rendered by the arbitration
panel (the "Arbitration Panel") may be entered in any court or tribunal of
competent jurisdiction.
7.1.2 Any party which desires to initiate arbitration proceedings as
provided in Section 7.1.1 above may do so by delivering written notice to the
other party (the "Arbitration Notice") specifying (A) the nature of the dispute
or controversy to be arbitrated, (B) the name and address of the arbitrator
appointed by the party initiating such arbitration and (C) such other matters as
may be required by the Rules of Arbitration.
7.1.3 The party who receives an Arbitration Notice shall appoint an
arbitrator and notify the initiating party of such arbitrator's name and address
within 30 days after delivery of the Arbitration Notice; otherwise, a second
arbitrator shall be appointed at the request of the party who delivered the
Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators
so appointed shall appoint a third arbitrator who shall be the chairman of the
Arbitration Panel and who shall be of American nationality. Should the
arbitrators appointed by the parties not agree upon the appointment of the third
arbitrator within 30 days of their appointment, the third shall be appointed in
accordance with the Rules of Arbitration.
7.1.4 In any arbitration proceeding conducted pursuant to the
provision of this Section 7, both parties shall have the right to discovery, to
call witnesses and to cross-examine the opposing party's witnesses, either
through legal counsel, expert witnesses or both, and such proceedings shall be
conducted in the English language.
7.2 Finality of Decision. All decisions of the Arbitration Panel shall be
final, conclusive and binding on all parties and shall not be subject to
judicial review. The arbitrator shall divide all costs (other than fees of
counsel) incurred in conducting the arbitration proceeding and the final award
in accordance with what they deem just and equitable under the circumstances.
7.3 Limitations. Notwithstanding anything to the contrary contained in
Sections 6.1 and 6.2 above, any claim by either party for injunctive or other
equitable relief, including specific performance, may be brought in the Superior
Court of the State of California for Los Angeles County, or in the United States
District Court for the Central District of California, and any judgment, order
or decree relating thereto shall have precedence over any arbitral award or
proceeding. The Company and the Executive each consent and submit in advance to
the jurisdiction of the above-mentioned courts and agrees that venue will be
proper in such courts on any such matter.
8. MISCELLANEOUS.
8.1 All notices or demands shall be in writing and shall be delivered
personally, electronically, telegraphically, or by express or certified mail or
registered mail or by private overnight express mail service. Delivery shall be
deemed conclusively made (i) at the time of delivery if personally delivered,
(ii) immediately in the event notice is delivered by transmittal over electronic
or telephonic transmitting devices, such as telex or telecopy, provided, the
party to whom the notice is delivered has a compatible device and electronically
or by other written
6.
<PAGE>
document confirms receipt thereof, or the party otherwise confirms actual
receipt thereof, (iii) at the time that the telegraphic agency confirms to the
sender delivery thereof to the addressee if served telegraphically, (iv) twenty-
four (24) hours after delivery to the carrier if served by any private,
overnight, express mail service, (v) twenty-four (24) hours after deposit
thereof in the United States mail, properly addressed and postage prepaid,
return receipt requested, if served by express mail, or (vi) five (5) days after
deposit thereof in the United States mail, properly addressed and postage
prepaid, return receipt requested, if served by certified mail.
Any notice or demand to the Company shall be given to:
Online Transaction Technologies, Inc.
909 6th Street, Suite 6
Santa Monica, California 90403
Attn: Board of Directors
Any notice of demand to the Holder shall be given to:
Cumetrix Data Systems Corp.
957 Lawson Street
Industry, CA 91748
Attn: Chairman
Any party may, by virtue of written notice in compliance with this paragraph,
alter or change the address or the identity of the person to whom any notice, or
copy thereof, is to be delivered.
8.2 Each party shall execute and deliver all such further instruments,
documents and papers, and shall perform any and all acts necessary, to give full
force and effect to all of the terms and provisions of this Agreement.
8.3 No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies.
8.4 This Agreement and the rights evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and assigns of Holder except that the rights contained in Section 6 may not be
transferred to a purchaser of the Second Option Shares pursuant to a
registration statement under the Act covering such proposed distribution or
pursuant to the limitations contained in Rule 144 of the Act. The provisions of
this Agreement are intended to be for the benefit of all holders from time to
time of this Agreement, and shall be enforceable by any such holder.
8.5 The Company shall not by any action including, without limitation,
amending its articles of incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement, but will at all times in good
7.
<PAGE>
faith assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of the Option above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of the Option, and (c) use its best efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the company to perform its
obligations under this Agreement. Upon the request of Holder, the Company will
at any time during the term of this Agreement acknowledge in writing, in form
reasonably satisfactory to Holder, the continuing validity of this Agreement and
the obligations of the Company hereunder.
8.6 Upon receipt by the Company from Holder of evidence reasonably
satisfactory to the Company of the ownership of any loss, theft, distribution or
mutilation of this Agreement and indemnity reasonably satisfactory to the
Company (it being understood that the written agreement of Holder shall be
sufficient indemnity) and in case of mutilation upon surrender and cancellation
hereof, the Company will execute and deliver in lieu hereof a new Agreement of
like tenor to Holder; provided, in the case of mutilation, no indemnity shall be
required if this Agreement in identifiable form is surrendered to the Company
for cancellation.
8.7 This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts entered into and
fully to be performed therein. In all matters of interpretation, whenever
necessary to give effort to any provision of this Agreement, each gender shall
include the others, the singular shall include the plural, and the plural shall
include the singular. The titles of the paragraphs of this Agreement are for
convenience only and shall not in any way affect the interpretation of any
provision or condition of this Agreement. All remedies, rights, undertakings,
obligations and agreements contained in this Agreement shall be cumulative and
none of them shall be in limitation of an other remedy, right, undertaking,
obligation or agreement of any party. Each party and its counsel have reviewed
and revised this Agreement. As a result, the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments or
exhibits thereto.
8.8 This Agreement may be executed in counterparts which, taken together,
shall constitute the whole of the agreement as between the parties.
8.9 Each party to this Agreement which is a corporation hereby represents
and warrants that all necessary corporate action has been taken, including the
due adoption of a resolution by its board of directors sufficient to enable such
corporation to enter into this Agreement, to be bound thereby and to perform
fully as required hereunder.
8.10 Each person executing this Agreement on behalf of an entity
represents and warrants that he or she has been duly authorized to enter into
this Agreement on behalf of such entity, and that such entity is thereby fully
bound.
8.
<PAGE>
8.11 The terms and conditions of this Agreement shall be subject to all
applicable laws and regulations of any governing jurisdictions. If an clause or
provision of this Agreement is illegal, invalid or unenforceable under present
or future laws effective during the term of this Agreement, then and, in that
event, the remainder of this Agreement shall not be affected thereby, and in
lieu of each clause or provision of this Agreement that is illegal, invalid or
unenforceable, there shall be added a clause or provision as similar in terms
and in amount to such illegal, invalid or unenforceable clause or provision as
may be possible and be legal, valid and enforceable, as long as it does not
otherwise frustrate the principal purposes of this Agreement.
8.12 This Agreement may be amended or modified only upon the written
agreement of the Company and upon the written consent of a majority of the
Holders.
8.13 In the event that any dispute among the parties to this Agreement
should result in litigation, the prevailing party in such dispute shall be
entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
9.
<PAGE>
IN WITNESS WHEREOF, the parties have entered into and executed this Option
Agreement as of the date first above written.
Online Transaction Technologies, Inc.
By:
------------------------------------
Its:
------------------------------------
Cumetrix Data Systems Corporation
By:
------------------------------------
Its:
------------------------------------
10.
<PAGE>
EXHIBIT "A" TO EXHIBIT B
NOTICE OF EXERCISE
(To be signed only upon exercise of the Second Option)
TO: Online Transaction Technologies, Inc.
The undersigned, hereby irrevocably elects to exercise the purchase rights
represented by the Second Option granted to the undersigned on ____________,
1998 and to purchase thereunder ___* shares of Series A-3 Preferred Stock of
Online Transaction Technologies, Inc., (the "Company") and herewith encloses
payment of $_____________ in full payment of the purchase price of such shares
being purchased.
Dated: ________________, _______
------------------------------------
(Signature must conform in all
respects to name of either holder
as specified on the face of the
Option)
------------------------------------
(Please Print Name)
------------------------------------
(Address)
11.
<PAGE>
EXHIBIT C
INDEMNIFICATION AGREEMENT
-------------------------
THIS INDEMNIFICATION AGREEMENT (this "Agreement") is made and entered into
as of December ___, 1998, by and among Cumetrix Data Systems Corp., a California
corporation ("Cumetrix") on the one hand, and Colin P. Kruger, Igor Kogan,
Michael Shirman (collectively, the "Principal Shareholders"), on the other hand.
R E C I T A L S
- - - - - - - -
A. Cumetrix has, upon the terms and subject to the conditions of that
certain Stock Purchase Agreement, dated as of even date herewith (the "Purchase
Agreement"), entered into with Online Transaction Technologies, Inc., a
California corporation (the "Company"), has agreed to purchase from the Company
88,326 shares (the "Purchased Shares") of the Series A-1 Preferred Stock,
without par value, of the Company (the "Series A-1 Preferred Stock").
B. In consideration of the purchase of the Purchased Shares by Cumetrix,
the Company has granted Cumetrix (i) an option (the "First Option") to purchase
shares of Series A-2 Preferred Stock, without par value, pursuant to that
certain First Stock Option Agreement, dated as of even date herewith (the "First
Option Agreement"), and (ii) an option (the "Second Option") to purchase Series
A-3 Preferred Stock, without par value, pursuant to that certain Second Stock
Option Agreement, dated as of even date herewith (the "Second Option
Agreement").
C. A material and essential inducement for Cumetrix (i) to enter into the
Purchase Agreement, the First Option Agreement and the Second Option Agreement,
and the other agreements contemplated thereby and (ii) to exercise the First
Option and/or the Second Option, if applicable, is that the Principal
Shareholders, who collectively hold all of the outstanding Common Stock of the
Company, enter into this Agreement.
A G R E E M E N T
- - - - - - - - -
NOW, THEREFORE, for good and valuable consideration, the receipt, adequacy
and sufficiency of which is hereby acknowledged by the parties hereto, and as a
material inducement to Cumetrix to enter into the Purchase Agreement, First
Option Agreement and Second Option Agreement, the parties hereto hereby agree as
follows:
1. Indemnification by the Principal Shareholders. The Principal
---------------------------------------------
Shareholders hereby jointly and severally covenant and agree to indemnify,
defend and hold harmless Cumetrix and its respective former and current
directors, officers, shareholders, employees, attorneys and agents, as the case
may be, and each of their successors and assigns (individually, an "Indemnified
Party") and hold them harmless from, against and in respect of any and all
costs, losses (including investment losses), claims, liabilities, damages and
expenses, including court costs and fees and disbursements of counsel,
(collectively, "Losses") incurred by any of them, directly or indirectly, in
connection with:
12.
<PAGE>
(a) any action, proceeding, investigation, inquiry or suit, commenced or
threatened, arising under or in connection with that certain Contract
to Provide Web Site Related Services, dated as of August 7, 1995, by
and between ZAUCTION, a California general partnership and CODA, a
partnership (the "ZAUCTION Agreement"); and
(b) any action, proceeding, investigation, inquiry or suit, commenced or
threatened, by ZAUCTION, its principals or affilates (collectively,
the "Z Group") or any person or entity claiming through, for, or on
behalf of Z Group or its principals or affiliates (by assignment,
subrogation or otherwise), relating to the intellectual property
rights (or alleged rights) of Z Group, including without limitation
infringement (or alleged infringement or other claimed invasion) of
the ZAUCTION Agreement and all claims related thereto.
2. Duty to Defend, Etc. If the facts giving rise to any such indemnification
-------------------
shall involve any actual claim or demand by any third Person (an "Indemnified
Claim") against an Indemnified Party, said Indemnified Party shall as soon as
reasonably practicable notify the Principal Shareholders in writing of such
Indemnified Claim (a "Claim Notice") stating with reasonable specificity the
circumstances giving rise to the Indemnified Party's claim for indemnification;
provided, however, that any failure to give such notice will not waive any
- -------- -------
rights of the Indemnified Party except to the extent that the rights of the
Principal Shareholders are actually and substantially prejudiced. Within ten
(10) days of receipt of a Claim Notice, the Principal Shareholders shall
acknowledge receipt of the Claim Notice and agree to comply with their
obligations under this Agreement and shall assume the defense of the Indemnified
Party. After providing the Principal Shareholders with the Claim Notice, an
Indemnified Party may defend such Indemnified Claim with attorneys of its own
choosing until it shall have received written notice from the Principal
Shareholders agreeing to assume the defense of such Indemnified Claim and
providing a written undertaking of their agreement to assume the defense or
prosecution of such Indemnified Claim at the Principal Shareholders' sole cost
and expense in accordance with this Agreement. The Principal Shareholders then
shall be entitled (without prejudice to the right of any Indemnified Party to
participate at its own expense through counsel of its own choosing) to defend or
prosecute such claim at its expense and through counsel acceptable to such
Indemnified Party; provided, however, that if the defendants in any action shall
-------- -------
include both the Principal Shareholders and the Indemnified Party, and the
Indemnified Party shall have reasonably concluded that counsel selected by the
Principal Shareholders has an actual or potential conflict of interest, the
Indemnified Party shall have the right to separate counsel of its choosing to
participate in the defense of such action on its behalf, at the reasonable
expense of the Principal Shareholders. Each Indemnified Party shall cooperate
fully in the defense of such claim and shall make available to the Principal
Shareholders pertinent information under its control relating thereto, but shall
be entitled to be reimbursed for all actual costs and expenses incurred by it in
connection therewith, including actual loss of earnings of the Indemnified Party
(which, in the case of an individual, shall not be greater than $300 per day),
with prejudgment interest at the prevailing rate.
3. Right to Settle or Compromise Claims. The Principal Shareholders will not,
------------------------------------
without the prior written consent of each affected Indemnified Party, settle or
compromise any pending or
13.
<PAGE>
threatened Indemnified Claim, unless such settlement or compromise includes a
full and unconditional release of each such Indemnified Party from all liability
arising out of such Indemnified Claim, reasonably satisfactory in form and
substance to such Indemnified Party. If the Principal Shareholders assume the
defense of an Indemnified Claim, no Indemnified Party will, without the prior
written consent of each of the Principal Shareholders, settle or compromise any
pending or threatened Indemnified Claim unless such settlement or compromise
includes a full and unconditional release of each Principal Shareholder from all
liability to the Indemnified Parties arising (under this Agreement or otherwise)
out of such claim, action, suit or proceeding, reasonably satisfactory in form
and substance to the Principal Shareholders. If the Principal Shareholders
decline to assume the defense of an Indemnified Claim, the Indemnified Party
shall not, without the prior written consent of each of the Principal
Shareholders, which shall not be unreasonably withheld, settle or compromise the
Indemnified Claim unless such settlement or compromise includes a full and
unconditional release of each Principal Shareholder from all liability to the
Indemnified Parties arising (under this Agreement or otherwise) out of such
claim, action, suit or proceeding, reasonably satisfactory in form and substance
to the Principal Shareholders.
4. Subrogation. If the Indemnified Party receives payment or other
-----------
indemnification from the Principal Shareholders hereunder with respect to any
claim or demand by any third Person against the Indemnified Party, the Principal
Shareholders shall be subrogated to the extent of such payment or
indemnification to all rights in respect of the subject matter of such claim to
which the Indemnified Party may be entitled and to institute appropriate action
for the recovery thereof. The Indemnified Party agrees to provide reasonable
levels of assistance and cooperation to the Principal Shareholders in enforcing
such rights, but shall be entitled to be reimbursed for all actual costs and
expenses incurred by it in connection therewith.
5. Payment; Attorneys' Fees. The Indemnified Parties shall be entitled to
------------------------
recover from the Principal Shareholders all amounts due the Indemnified Parties
pursuant to this Agreement arising out of all matters described in Section 1 and
-------------
Section 2 of this Agreement, including court costs and fees of and disbursements
- ---------
of counsel, in connection with the enforcement of this Agreement. If any
action, suit, or other proceeding is instituted to remedy, prevent or obtain
relief from a default in the performance by either party of its obligations
under this Agreement, the prevailing party shall recover all of such party's
costs and reasonable attorneys' fees incurred in each and every such action,
suit or other proceeding, including any and all appeals or petitions therefrom.
6. Limitations on Liability. Notwithstanding anything to the contrary in this
------------------------
Agreement, with respect to any and all matters described in Section 1 and
Section 2, in no event shall the Principal Shareholders, aggregate
indemnification liability exceed 115% of Cumetrix's total cash investment in the
Company, determined as of the date of the Claim Notice.
7. Time Limit on Indemnification and Duty to Defend. The Principal
------------------------------------------------
Shareholders shall only be liable under this Agreement to provide
indemnification against Losses and/or defense to Cumetrix for any action,
proceeding, investigation, inquiry or suit (as provided in Section 1 and Section
2, above) (a) with respect to which a Claim Notice is received, (b) with
respect to which Cumetrix notifies the Principal Shareholders in writing, or (c)
which
14.
<PAGE>
is asserted in a written claim for indemnification under this Agreement
specifying the basis therefor, within one (1) year from the date hereof.
8. Insurance Proceeds. Notwithstanding any provision of this Agreement to the
------------------
contrary, the Principal Shareholders shall not be obligated to make any payment
or otherwise indemnify the Indemnified Parties for losses, damages and expenses
paid, suffered or incurred by the Indemnified Parties if and to the extent that
the Indemnified Parties have actually received any insurance proceeds under
policies purchased by the Company attributable to such losses, damages or
expenses.
9. Further Assurances re Insurance. The Principal Shareholders will cooperate
-------------------------------
with Cumetrix in its attempt to purchase insurance relating to the claims
covered by this Agreement and will provide all requested representations and
warranties to any insurer selected by Cumetrix; provided, that the Principal
Shareholders shall not by this paragraph be required to incur personal liability
for monetary damages for any breach of representations and warranties to any
insurer (other than for fraud).
10. Waiver of Jury Trial. EACH SIGNATORY TO THIS AGREEMENT FURTHER WAIVES ITS
--------------------
RESPECTIVE RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF
THIS AGREEMENT OR ANY DEALINGS BETWEEN ANY OF THE SIGNATORIES HERETO RELATING TO
THE SUBJECT MATTER OF THIS AGREEMENT. The scope of this waiver is intended to
be all-encompassing of any and all disputes that may be filed in any court and
that relate to the subject matter of this Agreement, including, without
limitation, contract claims, tort claims, and all other common law and statutory
claims. This waiver is irrevocable, meaning that it may not be modified either
orally or in writing, and this waiver shall apply to any subsequent amendments,
supplements or other modifications to this Agreement or to any other document or
agreement relating to the transactions contemplated by this Agreement.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN
-------------
ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS TO
BE EXECUTED AND WHOLLY PERFORMED THEREIN (WITHOUT REGARD TO THE CONFLICT OF LAWS
PROVISIONS THEREOF).
12. Amendments. Amendments may be made to this Agreement from time to time
----------
with the signed written consent of Cumetrix and each of the Principal
Shareholders.
13. Assignment. Neither Cumetrix nor any of the Principal Shareholders may
----------
assign its rights or delegate its obligations under this Agreement without the
written consent of the other parties to this Agreement.
14. Binding Provisions. The covenants and agreements contained herein shall be
------------------
binding upon, and inure to the benefit of, the permitted successors and assigns
of the parties hereto.
15. Notices. All notices, demands or other communications hereunder shall be
-------
in writing and shall be deemed to have been duly given (i) if delivered in
person, on the date actually given, (ii)
15.
<PAGE>
if by United States mail, certified or registered, with return receipt
requested, on the date which is two business days after the date of mailing, or
(iii) if sent by telecopier, on the date transmitted, provided receipt is
confirmed by telephone and United States mail with postage prepaid:
if to Cumetrix:
16.
<PAGE>
Cumetrix Data Systems Corp.
957 Lawson Street
Industry, California 91748
Telecopy No.: (626) 965-8159
Attention: Max Toghraie
if to the Principal Shareholders:
to the addresses set forth opposite their signatures hereto,
or at such other address as may have been furnished by such Person in writing to
the other parties.
16. Counterparts. This Agreement may be executed in two or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same agreement.
17. Negotiation of Agreement. Each of the parties acknowledges that it has
------------------------
been represented by independent counsel of its choice throughout all
negotiations that have preceded the execution of this Agreement and that it has
executed the same with consent and upon the advice of said independent counsel.
Each party and its counsel cooperated in the drafting and preparation of this
Agreement and the documents referred to herein, and any and all drafts relating
thereto shall be deemed the work product of the parties and may not be construed
against any party by reason of its preparation. Accordingly, any rule of law or
any legal decision that would require interpretation of any ambiguities in this
Agreement against the party that drafted it is of no application and is hereby
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intentions of the parties and this Agreement.
18. Severability. If one or more provisions of this Agreement are held to be
------------
unenforceable under applicable law, such provision shall be excluded from this
Agreement and the balance of this Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its terms
to the fullest extent permitted by law.
19. Entire Agreement. This Agreement embodies the entire agreement and
----------------
understanding of the parties hereto in respect of the subject matter of this
Agreement and supersedes all prior agreements, understandings and
representations relating to such subject matter.
17.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement upon the date
first written above.
CUMETRIX DATA SYSTEMS CORP.,
a California corporation
By: ______________________________
Max Toghraie
Chief Executive Officer
PRINCIPAL SHAREHOLDERS:
Address: ___________________________
___________________________
___________________________ ___________________________
Colin P. Kruger
Address: ___________________________
___________________________
___________________________ ___________________________
Igor Kogan
Address: ___________________________
___________________________
___________________________ ___________________________
Michael Shirman
18.
<PAGE>
EXHIBIT 1.2
RESTATED ARTICLES OF INCORPORATION
OF
ONLINE TRANSACTION TECHNOLOGIES, INC.
Igor Kogan and Colin Kruger hereby certify that:
ONE: They are the duly elected and acting President and Secretary,
respectively, of Online Transaction Technologies, Inc., a California corporation
(the "Corporation").
TWO: The Articles of Incorporation of this Corporation are hereby amended
and restated to read as follows:
I.
The name of the Corporation is ONLINE TRANSACTION TECHNOLOGIES, INC.
II.
The purpose of the Corporation is to engage in any lawful act or activity for
which a corporation may be organized under the General Corporation Law of
California other than the banking business, the trust company business or the
practice of a profession permitted to be incorporated by the California
Corporations Code.
III.
A. This Corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total
number of shares which the Corporation is authorized to issue is Twelve Million
Six Hundred Fifty-Seven Thousand One Hundred and Twenty-Two (12,657,122) shares,
Ten Million (10,000,000) shares of which shall be Common Stock (the "Common
Stock") and Two Million Six Hundred Fifty-Seven Thousand One Hundred and Twenty-
Two (2,657,122) shares of which shall be Preferred Stock (the "Preferred
Stock").
B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, within the limitations and
restrictions stated in these Restated Articles of Incorporation, to fix or alter
the dividend rights, dividend rate, conversion rights, voting rights, rights and
terms of redemption (including sinking fund provisions), the redemption price or
prices, the liquidation preferences of any wholly unissued series of Preferred
Stock, and the number of shares constituting any such series and the designation
thereof, or any of them; and to increase or decrease the number of shares of any
series subsequent to the issue of shares of that series, but not below the
number of shares of such series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
19.
<PAGE>
C. Eighty-Eight Thousand Three Hundred and Twenty-Six (88,326) of the
authorized shares of Preferred Stock are hereby designated "Series A-1 Preferred
Stock," One Million Sixty-Eight Thousand Seven Hundred Ninety-Six (1,068,796) of
the authorized shares of Preferred Stock are hereby designated "Series A-2
Preferred Stock," and One Million Five Hundred Thousand (1,500,000) of the
authorized shares of Preferred Stock are hereby designated "Series A-3 Preferred
Stock" (collectively, the "Series A Preferred").
D. The rights, preferences, privileges, restrictions and other matters
relating to the Series A Preferred are as follows:
1. DIVIDEND RIGHTS.
a. So long as any shares of Series A Preferred shall be
outstanding, no dividend, whether in cash or property, shall be paid or
declared, nor shall any other distribution be made, on any other stock of the
Corporation ("Junior Stock"), nor shall any shares of any Junior Stock of the
Corporation be purchased, redeemed, or otherwise acquired for value by the
Corporation (except for acquisitions of Common Stock by the Corporation pursuant
to agreements which permit the Corporation to repurchase such shares upon
termination of services to the Corporation or in exercise of the Corporation's
right of first refusal upon a proposed transfer). The provisions of this Section
1.a. shall not, however, apply to (i) a dividend payable in Common Stock, (ii)
the acquisition of shares of any Junior Stock in exchange for shares of any
other Junior Stock, or (iii) any repurchase of any outstanding securities of the
Corporation that is unanimously approved by the Corporation's Board of
Directors. The holders of the Series A Preferred expressly waive their rights,
if any, as described in California Corporations Code Sections 502, 503 and 506
as they relate to repurchase of shares upon termination of employment.
2. VOTING RIGHTS.
a. General Rights. Except as otherwise provided herein or as
required by law, the Series A Preferred shall be voted equally with the shares
of the Common Stock of the Corporation and not as a separate class, at any
annual or special meeting of shareholders of the Corporation, and may act by
written consent in the same manner as the Common Stock, in either case upon the
following basis: each holder of shares of Series A Preferred shall be entitled
to such number of votes as shall be equal to the number of shares of Common
Stock (rounded up to the nearest whole number) into which such holder's
aggregate number of shares of Series A Preferred are convertible (pursuant to
Section 5 hereof) immediately after the close of business on the record date
fixed for such meeting or the effective date of such written consent.
b. Separate Vote of Series A Preferred. Until the occurrence of a
Covenant Termination Event (as defined in that certain Preferred Stock Purchase
Agreement dated as of December 15, 1998 between the Corporation and Cumetrix
Data Systems, Inc.) and thereafter, for so long as at least One Million One
Hundred Fifty-Seven Thousand One Hundred And Twenty-Two (1,157,122) shares of
Series A Preferred (subject to adjustment for any stock split, reverse stock
split or other similar event affecting the Series A Preferred) remain
outstanding, in addition to any other vote or consent required herein or by law,
the vote or
20.
<PAGE>
written consent of the holders of at least a majority of the outstanding Series
A Preferred shall be necessary for effecting or validating the following
actions:
(i) Any authorization or any designation, whether by
reclassification or otherwise, of any new class or series of stock or any other
securities convertible into equity securities of the Corporation ranking pari
passu or senior to the Series A Preferred in liquidation preference, voting or
dividends or any increase in the authorized or designated number of any such new
class or series; or
(ii) Any redemption, purchase or other acquisition (or payment
into or setting aside for a sinking fund for such purpose) any share or shares
of Common Stock; provided, however, that this restriction shall not apply to the
repurchase of shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for this Corporation or any
subsidiary pursuant to agreements under which this Corporation has the option to
repurchase such shares at cost upon the occurrence of certain events, such as
the termination of services.
c. Additional Series A Preferred Protective Provisions. In
addition to any other vote or consent required herein or by law, the vote or
written consent of the holders of at least a majority of the outstanding Series
A Preferred shall be necessary for effecting or validating the following
actions:
(i) Any amendment, alteration, or repeal of any provision of
the Articles of Incorporation of the Corporation (including any filing of a
Certificate of Determination) that changes the voting powers, preferences, or
other special rights or privileges, or restrictions of the Series A Preferred;
(ii) Any liquidation or dissolution of this corporation or
reclassification of its outstanding capital stock; or
(iii) Any issuance of Series A-3 Preferred Stock other than
pursuant to the terms of that certain "Second Option" (as defined in that
certain Stock Purchase Agreement dated as of December 15, 1998 between the
Corporation and Cumetrix Data Systems, Inc.
d. Election of Board of Directors. For so long as at least One
Million One Hundred Fifty-Seven Thousand One Hundred and Twenty-Two (1,157,122)
shares of Series A Preferred remain outstanding (subject to adjustment for any
stock split, reverse stock split or similar event affecting the Series A
Preferred) and the authorized size of the Corporation's Board of Directors is
three (3) or more, (i) until such time that the Series A Preferred may elect
more than one (1) member of the Corporation's Board of Directors pursuant to the
right to cumulate votes for the election of directors under Section 708 of the
California Corporations Code, the holders of Series A Preferred, voting as a
separate class, shall be entitled to elect one (1) member of the Corporation's
Board of Directors at each meeting or pursuant to each consent of the
Corporation's shareholders for the election of directors, and to remove from
office such director and to fill any vacancy caused by the resignation, death or
removal of such director; and (ii) the holders of Common Stock and Series A
Preferred, voting as a single class, shall be entitled to elect all remaining
members of the Board of Directors at each meeting or
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pursuant to each consent of the Corporation's shareholders for the election of
directors, and to remove from office such directors and to fill any vacancy
caused by the resignation, death or removal of such directors.
3. LIQUIDATION RIGHTS.
a. Upon any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, before any distribution or
payment shall be made to the holders of any Junior Stock, the holders of Series
A Preferred shall be entitled to be paid out of the assets of the Corporation an
amount per share of Series A Preferred equal to the Original Issue Price (as
adjusted for any stock dividends, combinations, splits, recapitalizations and
the like with respect to such shares) for each share of Series A Preferred held
by them. The Original Issue Price of the Series A-1 Preferred Stock shall be
equal to one dollar and thirteen cents ($1.13), the Original Issue Price of the
Series A-2 Preferred Stock shall be equal to eighty four and two tenths cents
($.842), and the Original Issue Price of the Series A-3 Preferred Stock shall be
equal to the total amount paid for the Series A-3 Preferred Stock upon the first
issuance of such shares divided by the total number of Series A-3 Preferred
Stock issued upon the first issuance of such shares. If, upon any liquidation,
distribution, or winding up, the assets of the Corporation shall be insufficient
to make payment in full to all holders of Series A Preferred of the liquidation
preference set forth above, then such assets shall be distributed among the
holders of Series A Preferred at the time outstanding, ratably in proportion to
the full amounts to which they would otherwise be respectively entitled.
b. After the payment of the full liquidation preference of the
Series A Preferred as set forth in Section 3.a. above, the remaining assets of
the Corporation legally available for distribution, if any, shall be distributed
ratably to the holders of the Common Stock.
c. The following events shall be considered a liquidation under
this Section:
(i) a consolidation or merger of the Corporation with or into
any other corporation or other entity or person, or any other corporate
reorganization in which the stockholders of the Corporation immediately prior to
such consolidation, merger or reorganization, own less than fifty percent (50%)
of the Corporation's voting power immediately after such consolidation, merger
or reorganization, or any transaction or series of related transactions to which
the Corporation is a party in which excess of fifty present (50%) of the
Corporation's voting power is transferred; or
(ii) a sale, lease or other disposition of all or substantially
all of the assets of the Corporation.
d. If any of the assets of the corporation are to be distributed
other than in cash under this Section 3 or for any purpose, then the Board of
Directors of the Corporation shall promptly engage independent competent
appraisers to determine the value of the assets to be distributed to the holders
of Series A Preferred or Common Stock. The Corporation shall, upon receipt of
such appraiser's valuation, give prompt written notice to each holder of shares
of Series A Preferred or Common Stock of the appraiser's valuation.
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e. If, upon any liquidation, dissolution, or winding up, the
assets of the Corporation shall be insufficient to make payment in full to all
holders of Series A Preferred of the liquidation preference set forth in Section
3(a), then such assets shall be distributed among the holders of Series A
Preferred at the time outstanding, ratably in proportion to the full amounts to
which they would otherwise be respectively entitled.
4. CONVERSION RIGHTS.
The holders of the Series A Preferred shall have the following rights with
respect to the conversion of the Series A Preferred into shares of Common Stock
(the "Conversion Rights"):
a. Optional Conversion. Subject to and in compliance with the
provisions of this Section 4, any shares of Series A Preferred may, at the
option of the holder, be converted at any time into fully-paid and nonassessable
shares of Common Stock. The number of shares of Common Stock to which a holder
of Series A Preferred shall be entitled upon conversion shall be the product
obtained by multiplying the "Series A Preferred Conversion Rate" then in effect
(determined as provided in Section 4.b.) by the number of shares of Series A
Preferred being converted.
b. Series A Preferred Conversion Rate. The conversion rate in
effect at any time for conversion of the Series A Preferred (the "Series A
Preferred Conversion Rate") shall be the quotient obtained by dividing the
Original Issue Price of the Series A Preferred by the "Series A Preferred
Conversion Price," calculated as provided in Section 4.c.
c. Conversion Price. The conversion price for the Series A
Preferred shall initially be the Original Issue Price of the Series A Preferred
(the "Series A Preferred Conversion Price"). Such initial Series A Preferred
Conversion Price shall be adjusted from time to time in accordance with this
Section 4. All references to the Series A Preferred Conversion Price herein
shall mean the Series A Preferred Conversion Price as so adjusted.
d. Mechanics of Conversion. Each holder of Series A Preferred who
desires to convert the same into shares of Common Stock pursuant to this Section
4 shall surrender the certificate or certificates therefor, duly endorsed, at
the office of the Corporation or any transfer agent for the Series A Preferred,
and shall give written notice to the Corporation at such office that such holder
elects to convert the same. Such notice shall state the number of shares of
Series A Preferred being converted. Thereupon, the Corporation shall promptly
issue and deliver at such office to such holder a certificate or certificates
for the number of shares of Common Stock to which such holder is entitled and
shall promptly pay in cash or, to the extent sufficient funds are not then
legally available therefor, in Common Stock (at the Common Stock's fair market
value determined by the Board of Directors as of the date of such conversion),
any declared and unpaid dividends on the shares of Series A Preferred being
converted. Such conversion shall be deemed to have been made at the close of
business on the date of such surrender of the certificates representing the
shares of Series A Preferred to be converted, and the person entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Common Stock on such date.
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e. Adjustment for Stock Splits and Combinations. If the
Corporation shall at any time or from time to time after the date that the first
share of Series A Preferred is issued (the "Original Issue Date") effect a
subdivision of the outstanding Common Stock without a corresponding subdivision
of the Preferred Stock, the Series A Preferred Conversion Price in effect
immediately before that subdivision shall be proportionately decreased.
Conversely, if the Corporation shall at any time or from time to time after the
Original Issue Date combine the outstanding shares of Common Stock into a
smaller number of shares without a corresponding combination of the Preferred
Stock, the Series A Preferred Conversion Price in effect immediately before the
combination shall be proportionately increased. Any adjustment under this
Section 4.e. shall become effective at the close of business on the date the
subdivision or combination becomes effective.
f. Adjustment for Common Stock Dividends and Distributions. If
the Corporation at any time or from time to time after the Original Issue Date
makes, or fixes a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in additional
shares of Common Stock, in each such event the Series A Preferred Conversion
Price that is then in effect shall be decreased as of the time of such issuance
or, in the event such record date is fixed, as of the close of business on such
record date, by multiplying the Series A Preferred Conversion Price then in
effect by a fraction (i) the numerator of which is the total number of shares of
Common Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (ii) the denominator
of which is the total number of shares of Common Stock issued and outstanding
immediately prior to the time of such issuance or the close of business on such
record date plus the number of shares of Common Stock issuable in payment of
such dividend or distribution; provided, however, that if such record date is
fixed and such dividend is not fully paid or if such distribution is not fully
made on the date fixed therefor, the Series A Preferred Conversion Price shall
be recomputed accordingly as of the close of business on such record date and
thereafter the Series A Preferred Conversion Price shall be adjusted pursuant to
this Section 4.f. to reflect the actual payment of such dividend or
distribution.
g. Adjustment for Reclassification, Exchange and Substitution. If
at any time or from time to time after the Original Issue Date, the Common Stock
issuable upon the conversion of the Series A Preferred is changed into the same
or a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification or otherwise (other than as a result of a
subdivision or combination of shares or stock dividend or a reorganization,
merger or consolidation in which the Corporation is the continuing entity and
which does not result in any change in the Common Stock) in any such event the
Series A Preferred shall be convertible into the kind and amount of stock and
other securities and property receivable upon such recapitalization,
reclassification or other change by holders of the maximum number of shares of
Common Stock into which such shares of Series A Preferred could have been
converted immediately prior to such recapitalization, reclassification or
change, all subject to further adjustment as provided herein or with respect to
such other securities or property by the terms thereof.
h. Reorganizations, Mergers, Consolidations or Sales of Assets.
If at any time or from time to time after the Original Issue Date, there is a
capital reorganization of the Common Stock (other than a recapitalization,
subdivision, combination, reclassification, exchange or substitution of shares),
as a part of such capital reorganization, provision shall be
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made so that the holders of the Series A Preferred shall thereafter be entitled
to receive upon conversion of the Series A Preferred the number of shares of
stock or other securities or property of the Corporation to which a holder of
the number of shares of Common Stock deliverable upon conversion would have been
entitled on such capital reorganization, subject to adjustment in respect of
such stock or securities by the terms thereof. In any such case, appropriate
adjustment shall be made in the application of the provisions of this Section 4
with respect to the rights of the holders of Series A Preferred after the
capital reorganization to the end that the provisions of this Section 4
(including adjustment of the Series A Preferred Conversion Price then in effect
and the number of shares issuable upon conversion of the Series A Preferred)
shall be applicable after that event and be as nearly equivalent as practicable.
i. Sale of Shares Below Series A Preferred Conversion Price.
(i) If at any time or from time to time after the Original
Issue Date, the Corporation issues or sells, or is deemed by the express
provisions of this subsection i to have issued or sold, Additional Shares of
Common Stock (as defined in subsection i.(iv) below)), other than as a dividend
or other distribution on any class of stock as provided in Section 4.f. above,
and other than a subdivision or combination of shares of Common Stock as
provided in Section 4.e. above, for an Effective Price (as defined in subsection
i.(iv) below) less than the then effective Series A Preferred Conversion Price
for any then outstanding sub-series of Series A Preferred, then and in each such
case the then existing Series A Preferred Conversion Price for such sub-series
shall be reduced, as of the opening of business on the date of such issue or
sale, to a price determined by multiplying the Series A Preferred Conversion
Price for such sub-series by a fraction (i) the numerator of which shall be (A)
the number of shares of Common Stock deemed outstanding (as defined below)
immediately prior to such issue or sale, plus (B) the number of shares of Common
Stock which the aggregate consideration received (as defined in subsection
i.(ii)) by the Corporation for the total number of Additional Shares of Common
Stock so issued would purchase at such Series A Preferred Conversion Price, and
(ii) the denominator of which shall be the number of shares of Common Stock
deemed outstanding (as defined below) immediately prior to such issue or sale
plus the total number of Additional Shares of Common Stock so issued. For the
purposes of the preceding sentence, the number of shares of Common Stock deemed
to be outstanding as of a given date shall be the sum of (A) the number of
shares of Common Stock actually outstanding, (B) the number of shares of Common
Stock into which the then outstanding shares of Series A Preferred could be
converted if fully converted on the day immediately preceding the given date,
and (C) the number of shares of Common Stock which could be obtained through the
exercise or conversion of all other rights, options and convertible securities
outstanding or exercisable on the day immediately preceding the given date.
(ii) For the purpose of making any adjustment required under
this Section 4.i., the consideration received by the Corporation for any issue
or sale of securities shall (A) to the extent it consists of cash, be computed
at the net amount of cash received by the Corporation after deduction of any
underwriting or similar commissions, compensation or concessions paid or allowed
by the Corporation in connection with such issue or sale but without deduction
of any expenses payable by the Corporation, (B) to the extent it consists of
property other than cash, be computed at the fair value of that property as
determined in good faith by the Board of Directors, and (C) if Additional Shares
of Common Stock, Convertible Securities (as defined in subsection i.(iii) below)
or rights or options to purchase either Additional Shares of
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Common Stock or Convertible Securities are issued or sold together with other
stock or securities or other assets of the Corporation for a consideration which
covers both, be computed as the portion of the consideration so received that
may be reasonably determined in good faith by the Board of Directors to be
allocable to such Additional Shares of Common Stock, Convertible Securities or
rights or options.
(iii) For the purpose of the adjustment required under this
Section 4.i., if the Corporation issues or sells any (i) stock or other
securities convertible into, Additional Shares of Common Stock (such convertible
stock or securities being herein referred to as "Convertible Securities") or
(ii) rights or options for the purchase of Additional Shares of Common Stock or
Convertible Securities and if the Effective Price of such Additional Shares of
Common Stock is less than the Series A Preferred Conversion Price, in each case
the Corporation shall be deemed to have issued at the time of the issuance of
such rights or options or Convertible Securities the maximum number of
Additional Shares of Common Stock issuable upon exercise or conversion thereof
and to have received as consideration for the issuance of such shares an amount
equal to the total amount of the consideration, if any, received by the
Corporation for the issuance of such rights or options or Convertible
Securities, plus, in the case of such rights or options, the minimum amounts of
consideration, if any, payable to the Corporation upon the exercise of such
rights or options, plus, in the case of Convertible Securities, the minimum
amounts of consideration, if any, payable to the Corporation (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) upon the conversion thereof; provided that if in the case of
Convertible Securities the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
the Corporation shall be deemed to have received the minimum amounts of
consideration without reference to such clauses; provided further that if the
minimum amount of consideration payable to the Corporation upon the exercise or
conversion of rights, options or Convertible Securities is reduced over time or
on the occurrence or non-occurrence of specified events other than by reason of
antidilution adjustments, the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced; provided
further that if the minimum amount of consideration payable to the Corporation
upon the exercise or conversion of such rights, options or Convertible
Securities is subsequently increased, the Effective Price shall be again
recalculated using the increased minimum amount of consideration payable to the
Corporation upon the exercise or conversion of such rights, options or
Convertible Securities. No further adjustment of the Series A Preferred
Conversion Price, as adjusted upon the issuance of such rights, options or
Convertible Securities, shall be made as a result of the actual issuance of
Additional Shares of Common Stock on the exercise of any such rights or options
or the conversion of any such Convertible Securities. If any such rights or
options or the conversion privilege represented by any such Convertible
Securities shall expire without having been exercised, the Series A Preferred
Conversion Price as adjusted upon the issuance of such rights, options or
Convertible Securities shall be readjusted to the Series A Preferred Conversion
Price which would have been in effect had an adjustment been made on the basis
that the only Additional Shares of Common Stock so issued were the Additional
Shares of Common Stock, if any, actually issued or sold on the exercise of such
rights or options or rights of conversion of such Convertible Securities, and
such Additional Shares of Common Stock, if any, were issued or sold for the
consideration actually received by the Corporation upon such exercise, plus the
consideration, if any, actually received by the Corporation for the granting of
all such rights or options, whether or not exercised, plus the consideration
received for issuing or selling the
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Convertible Securities actually converted, plus the consideration, if any,
actually received by the Corporation (other than by cancellation of liabilities
or obligations evidenced by such Convertible Securities) on the conversion of
such Convertible Securities; provided that such readjustment shall not apply to
prior conversions of Series A Preferred.
(iv) "Additional Shares of Common Stock" shall mean all shares
of Common Stock issued by the Corporation or deemed to be issued pursuant to
this Section 4.i., whether or not subsequently reacquired or retired by the
Corporation other than (A) shares of Common Stock issued upon conversion of the
Series A Preferred; (B) shares of Common Stock and/or options, warrants or other
Common Stock purchase rights and the Common Stock issued pursuant to such
options, warrants or other rights (as adjusted for any stock dividends,
combinations, splits, recapitalizations and the like) after the Original Issue
Date to employees, officers or directors of, or consultants or advisors to the
Corporation or any subsidiary pursuant to stock purchase or stock option plans
or other arrangements that are approved by the Board; (C) shares of Common Stock
issued pursuant to the exercise of options, warrants or convertible securities
outstanding as of the Original Issue Date; (D) shares of Common Stock issued for
consideration other than cash pursuant to a merger, consolidation, acquisition
or similar business combination; and (E) shares of Common Stock issued pursuant
to any equipment leasing arrangement, or debt financing from a bank or similar
financial institution. The "Effective Price" of Additional Shares of Common
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold by the Corporation under this Section 4.i., into the aggregate
consideration received, or deemed to have been received by the Corporation for
such issue under this Section 4.i., for such Additional Shares of Common Stock.
j. Certificate of Adjustment. In each case of an adjustment or
readjustment of the Series A Preferred Conversion Price for the number of shares
of Common Stock or other securities issuable upon conversion of the Series A
Preferred, if the Series A Preferred is then convertible pursuant to this
Section 4, the Corporation, at its expense, shall compute such adjustment or
readjustment in accordance with the provisions hereof and prepare a certificate
showing such adjustment or readjustment, and shall mail such certificate, by
first class mail, postage prepaid, to each registered holder of Series A
Preferred at the holder's address as shown in the Corporation's books. The
certificate shall set forth such adjustment or readjustment, showing in detail
the facts upon which such adjustment or readjustment is based, including a
statement of (i) the consideration received or deemed to be received by the
Corporation for any Additional Shares of Common Stock issued or sold or deemed
to have been issued or sold, (ii) the Series A Preferred Conversion Price at the
time in effect, (iii) the number of Additional Shares of Common Stock and (iv)
the type and amount, if any, of other property which at the time would be
received upon conversion of the Series A Preferred.
k. Notices of Record Date. Upon (i) any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or (ii) any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the Corporation,
any merger or consolidation of the Corporation with or into any other
corporation, or any voluntary or involuntary dissolution, liquidation or winding
up of the Corporation, the Corporation shall mail to each holder of Series A
Preferred at least twenty (20) days prior to the record date specified therein a
notice specifying (A) the date on which any such
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record is to be taken for the purpose of such dividend or distribution and a
description of such dividend or distribution, (B) the date on which any such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up is expected to become effective, and (C) the date, if
any, that is to be fixed as to when the holders of record of Common Stock (or
other securities) shall be entitled to exchange their shares of Common Stock (or
other securities) for securities or other property deliverable upon such
reorganization, reclassification, transfer, consolidation, merger, dissolution,
liquidation or winding up.
l. Automatic Conversion.
(i) Each share of Series A Preferred shall automatically be
converted into shares of Common Stock, based on the then-effective Series A
Preferred Conversion Price, (A) at any time upon the affirmative election of the
holders of at least a majority of the outstanding shares of the Series A
Preferred, or (B) immediately upon the closing of a firmly underwritten public
offering pursuant to an effective registration statement under the Securities
Act of 1933, as amended, covering the offer and sale of Common Stock for the
account of the Corporation in which (i) the per share price is at least $3.00
(as adjusted for stock splits, dividends, recapitalizations and the like), and
(ii) the gross cash proceeds to the Corporation (before underwriting discounts,
commissions and fees) are at least $15,000,000. Upon such automatic conversion,
any declared and unpaid dividends shall be paid in accordance with the
provisions of Section 4.d.
(ii) Upon the occurrence of the event specified in paragraph
(i) above, the outstanding shares of Series A Preferred shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the Corporation shall
not be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such shares of
Series A Preferred are either delivered to the Corporation or its transfer agent
as provided below, or the holder notifies the Corporation or its transfer agent
that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Corporation to indemnify the Corporation from any
loss incurred by it in connection with such certificates. Upon the occurrence of
such automatic conversion of the Series A Preferred, the holders of Series A
Preferred shall surrender the certificates representing such shares at the
office of the Corporation or any transfer agent for the Series A Preferred.
Thereupon, there shall be issued and delivered to such holder promptly at such
office and in its name as shown on such surrendered certificate or certificates,
a certificate or certificates for the number of shares of Common Stock into
which the shares of Series A Preferred surrendered were convertible on the date
on which such automatic conversion occurred, and any declared and unpaid
dividends shall be paid in accordance with the provisions of Section 4.d.
m. Fractional Shares. No fractional shares of Common Stock shall
be issued upon conversion of Series A Preferred. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one share of
Series A Preferred by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of any
fractional share. If, after the aforementioned aggregation, the conversion would
result in the issuance of any fractional share, the Corporation shall, in lieu
of issuing any fractional share, pay cash equal to the product of such fraction
multiplied by the
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Common Stock's fair market value (as determined by the Board of Directors) on
the date of conversion.
n. Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred, such number of its shares of Common Stock
as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series A Preferred. If at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Series A Preferred, the
Corporation will take such corporate action as may, in the opinion of its
counsel, be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
o. Notices. Any notice required by the provisions of this Section
4 shall be in writing and shall be deemed effectively given: (i) upon personal
delivery to the party to be notified, (ii) when sent by confirmed telex or
facsimile if sent during normal business hours of the recipient; if not, then on
the next business day, (iii) five (5) days after having been sent by registered
or certified mail, return receipt requested, postage prepaid, or (iv) one (1)
day after deposit with a nationally recognized overnight courier, specifying
next day delivery, with written verification of receipt. All notices shall be
addressed to each holder of record at the address of such holder appearing on
the books of the Corporation.
p. Payment of Taxes. The Corporation will pay all taxes (other
than taxes based upon income) and other governmental charges that may be imposed
with respect to the issue or delivery of shares of Common Stock upon conversion
of shares of Series A Preferred, excluding any tax or other charge imposed in
connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Series A Preferred
so converted were registered.
q. No Dilution or Impairment. Without the consent of the holders
of the then outstanding Series A Preferred, as required under Section 2.b., the
Corporation shall not amend its Restated Articles of Incorporation or
participate in any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or take any other voluntary action, for
the purpose of avoiding or seeking to avoid the observance or performance of any
of the terms to be observed or performed hereunder by the Corporation, but shall
at all times in good faith assist in carrying out all such action as may be
reasonably necessary or appropriate in order to protect the conversion rights of
the holders of the Series A Preferred against dilution or other impairment.
5. NO REISSUANCE OF SERIES A PREFERRED.
No share or shares of Series A Preferred acquired by the
Corporation by reason of redemption, purchase, conversion or otherwise shall be
reissued.
6. NO PREEMPTIVE RIGHTS.
Shareholders shall have no preemptive rights except as granted by
the Corporation pursuant to written agreements.
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IV.
A. The liability of the directors of the Corporation for monetary damages
shall be eliminated to the fullest extent permissible under California law.
B. The Corporation is authorized to provide indemnification of agents (as
defined in Section 317 of the General Corporation Law of California) for breach
of duty to the Corporation and its shareholders through bylaw provisions or
through agreements with agents, or both, in excess of the indemnification
otherwise permitted by Section 317 of the General Corporation Law of California,
subject to the limits on such excess indemnification set forth in Section 204 of
the General Corporation Law of California. If, after the effective date of this
Article, California law is amended in a manner which permits a corporation to
limit the monetary or other liability of its directors or to authorize
indemnification of, or advancement of such defense expenses to, its directors or
other persons, in any such case to a greater extent than is permitted on such
effective date, the references in this Article to "California law" shall to that
extent be deemed to refer to California law as so amended.
C. Any repeal or modification of this Article shall only be prospective
and shall not effect the rights under this Article in effect at the time of the
alleged occurrence of any action or omission to act giving rise to liability."
THREE: The foregoing amendment and restatement of the Articles of Incorporation
has been duly approved by the Board of Directors of this Corporation.
FOUR: The foregoing amendment and restatement of the Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with
Section 902 of the California Corporations Code. The Corporation has one class
of stock outstanding and such class of stock is entitled to vote with respect to
the amendment herein set forth. The total number of outstanding shares of
Common Stock of the Corporation is 3,000,000. The number of shares voting in
favor of the amendment equaled or exceeded the vote required. The percentage
vote required was more than fifty percent (50%) of the outstanding Common Stock
voting as a class.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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The undersigned, Igor Kogan and Colin Kruger, the President and Secretary,
respectively, of ONLINE TRANSACTION TECHNOLOGIES, INC., declares under penalty
of perjury under the laws of the State of California that the matters set out in
the foregoing Certificate are true of his own knowledge.
Executed at San Diego, California on __________________, 1998.
-----------------------------------------
Igor Kogan, President
Attest:
- ----------------------------------
Colin Kruger, Secretary
31.
<PAGE>
ATTACHMENT 5.1.9
EMPLOYEE INVENTION AND NON-DISCLOSURE AGREEMENT
[Original Document Appears in Dual Column Format]
ONLINE TRANSACTION TECHNOLOGIES, INC.
EMPLOYEE AND CONSULTANT PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
In consideration of my employment with or continued employment by or
engagement as a consultant to perform services for or for the benefit of ONLINE
TRANSACTION TECHNOLOGIES, INC. (the "Company"), and the compensation now and
hereafter paid to me for such services, I hereby agree as follows:
1. Nondisclosure
1.1 Recognition of Company's Rights; Nondisclosure. At all times during
my employment or engagement as a consultant and thereafter, I will hold in
strictest confidence and will not disclose, use, lecture upon or publish any of
the Company's Proprietary Information (defined below), except as such
disclosure, use or publication may be required in connection with my work for
the Company, or unless an officer of the Company expressly authorizes such in
writing. I will obtain the Company's written approval before publishing or
submitting for publication any material (written, verbal, or otherwise) that
relates to my work at Company and/or incorporates any Proprietary Information. I
hereby assign to the Company any rights I may have or acquire in such
Proprietary Information and recognize that all Proprietary Information shall be
the sole property of the Company and its assigns.
1.2 Proprietary Information. The term "Proprietary Information" shall
mean any and all confidential and/or proprietary knowledge, data or information
of the Company. By way of illustration but not limitation, "Proprietary
Information" includes (a) trade secrets, inventions, mask works, ideas,
processes, formulas, source and object codes, data, programs, other works of
authorship, know-how, improvements, discoveries, developments, designs and
techniques (hereinafter collectively referred to as "Inventions"); and (b)
information regarding plans for research, development, new products, marketing
and selling, business plans, budgets and unpublished financial statements,
licenses, prices and costs, suppliers and customers; and (c) information
regarding the skills and compensation of other employees of the Company.
Notwithstanding the foregoing, it is understood that, at all such times, I am
free to use information which is generally known in the trade or industry, which
is not gained as result of a breach of this Agreement, and my own, skill,
knowledge, know-how and experience to whatever extent and in whichever way I
wish.
1.3 Third Party Information. I understand, in addition, that the Company
has received and in the future will receive from third parties confidential or
proprietary information ("Third Party Information") subject to a duty on the
Company's part to maintain the confidentiality of such information and to use it
only for certain limited purposes. During the
33
<PAGE>
term of my employment and thereafter, I will hold Third Party Information in the
strictest confidence and will not disclose to anyone (other than Company
personnel who need to know such information in connection with their work for
the Company) or use, except in connection with my work for the Company, Third
Party Information unless expressly authorized by an officer of the Company in
writing.
1.4 No Improper Use of Information of Prior Employers and Others. During
my employment by or engagement as a consultant to the Company I will not
improperly use or disclose any confidential information or trade secrets, if
any, of any current or former employer or any other person to whom I have an
obligation of confidentiality, and I will not bring onto the premises of the
Company any unpublished documents or any property belonging to any current or
former employer or any other person to whom I have an obligation of
confidentiality unless consented to in writing by that current or former
employer or other person. I will use in the performance of my duties only
information which is generally known and used by persons with training and
experience comparable to my own, which is common knowledge in the industry or
otherwise legally in the public domain, or which is otherwise provided or
developed by the Company.
2. Assignment of Inventions.
2.1 Proprietary Rights. The term "Proprietary Rights" shall mean all trade
secret, patent, copyright, mask work and other intellectual property rights
throughout the world.
2.2 Prior Inventions. Inventions, if any, patented or unpatented, which I
made prior to the commencement of my employment with or engagement as a
consultant to the Company are excluded from the scope of this Agreement. To
preclude any possible uncertainty, I have set forth on Exhibit B (Previous
Inventions) attached hereto a complete list of all Inventions that I have, alone
or jointly with others, conceived, developed or reduced to practice or caused to
be conceived, developed or reduced to practice prior to the commencement of my
employment with or engagement as a consultant to the Company, that I consider to
be my property or the property of third parties and that I wish to have excluded
from the scope of this Agreement (collectively referred to as "Prior
Inventions"). If disclosure of any such Prior Invention would cause me to
violate any prior confidentiality agreement, I understand that I am not to list
such Prior Inventions in Exhibit B but am only to disclose a cursory name for
each such invention, a listing of the party(ies) to whom it belongs and the fact
that full disclosure as to such inventions has not been made for that reason. A
space is provided on Exhibit B for such purpose. If no such disclosure is
attached, I represent that there are no Prior Inventions. If, in the course of
my employment with or engagement as a consultant to the Company, I incorporate a
Prior Invention into a Company product, process or machine, the Company is
hereby granted and shall have a nonexclusive, royalty-free, irrevocable,
perpetual, worldwide license (with rights to sublicense through multiple tiers
of sublicensees) to make, have made, modify, use and sell such Prior Invention.
Notwithstanding the foregoing, I agree that I will not incorporate, or permit to
be incorporated, Prior Inventions in any Company Inventions without the
Company's prior written consent.
34
<PAGE>
2.3 Assignment of Inventions. Subject to Sections 2.4, and 2.6, I hereby
assign and agree to assign in the future (when any such Inventions or
Proprietary Rights are first reduced to practice or first fixed in a tangible
medium, as applicable) to the Company all my right, title and interest in and to
any and all Inventions (and all Proprietary Rights with respect thereto) whether
or not patentable or registrable under copyright or similar statutes, made or
conceived or reduced to practice or learned by me, either alone or jointly with
others, during the period of my employment with or as a result of services
performed by me as a consultant to the Company. Inventions assigned to the
Company, or to a third party as directed by the Company pursuant to this Section
2, are hereinafter referred to as "Company Inventions."
2.4 Nonassignable Inventions. This Agreement does not apply to an
Invention which qualifies fully as a nonassignable Invention under Section 2870
of the California Labor Code (hereinafter "Section 2870"). I have reviewed the
notification on Exhibit A (Limited Exclusion Notification) and agree that my
signature acknowledges receipt of the notification.
2.5 Obligation to Keep Company Informed. During the period of my
employment or engagement as a consultant and for six (6) months after
termination of my employment with or engagement as a consultant to the Company,
I will promptly disclose to the Company fully and in writing all Inventions
authored, conceived or reduced to practice by me, either alone or jointly with
others. In addition, I will promptly disclose to the Company all patent
applications filed by me or on my behalf within a year after termination of
employment or my engagement as a consultant to the Company. At the time of each
such disclosure, I will advise the Company in writing of any Inventions that I
believe fully qualify for protection under Section 2870; and I will at that time
provide to the Company in writing all evidence necessary to substantiate that
belief. The Company will keep in confidence and will not use for any purpose or
disclose to third parties without my consent any confidential information
disclosed in writing to the Company pursuant to this Agreement relating to
Inventions that qualify fully for protection under the provisions of Section
2870. I will preserve the confidentiality of any Invention that does not fully
qualify for protection under Section 2870.
2.6 Government or Third Party. I also agree to assign all my right, title
and interest in and to any particular Company Invention to a third party,
including without limitation the United States, as directed by the Company.
2.7 Works for Hire. I acknowledge that all original works of authorship
which are made by me (solely or jointly with others) within the scope of my
employment or engagement as a consultant to and which are protectable by
copyright are "works made for hire," pursuant to United States Copyright Act (17
U.S.C., Section 101).
2.8 Enforcement of Proprietary Rights. I will assist the Company in every
proper way to obtain, and from time to time enforce, United States and foreign
Proprietary Rights relating to Company Inventions in any and all countries. To
that end I will execute, verify and deliver such documents and perform such
other acts (including appearances as a witness) as the Company may reasonably
request for use in applying for, obtaining, perfecting, evidencing, sustaining
and enforcing such Proprietary Rights and the assignment thereof. In addition, I
will execute, verify and deliver assignments of such Proprietary Rights to the
Company or its
35
<PAGE>
designee. My obligation to assist the Company with respect to Proprietary Rights
relating to such Company Inventions in any and all countries shall continue
beyond the termination of my employment or engagement as a consultant, but the
Company shall compensate me at a reasonable rate after my termination for the
time actually spent by me at the Company's request on such assistance.
In the event the Company is unable for any reason, after reasonable effort, to
secure my signature on any document needed in connection with the actions
specified in the preceding paragraph, I hereby irrevocably designate and appoint
the Company and its duly authorized officers and agents as my agent and attorney
in fact, which appointment is coupled with an interest, to act for and in my
behalf to execute, verify and file any such documents and to do all other
lawfully permitted acts to further the purposes of the preceding paragraph with
the same legal force and effect as if executed by me. I hereby waive and
quitclaim to the Company any and all claims, of any nature whatsoever, which I
now or may hereafter have for infringement of any Proprietary Rights assigned
hereunder to the Company.
3. RECORDS. I agree to keep and maintain adequate and current records (in the
form of notes, sketches, drawings and in any other form that may be required by
the Company) of all Proprietary Information developed by me and all Inventions
made by me during the period of my employment with or engagement as a consultant
to the Company, which records shall be available to and remain the sole property
of the Company at all times.
4. ADDITIONAL ACTIVITIES. I agree that during the period of my employment by
or engagement as a consultant to the Company I will not, without the Company's
express written consent, engage in any employment or business activity which is
competitive with, or would otherwise conflict with, my employment by or
engagement as a consultant to the Company. I agree further that for the period
of my employment by or engagement as a consultant to the Company and for one (l)
year after the date of termination of my employment by or engagement as a
consultant to the Company I will not induce any employee of or engagement as a
consultant to the Company to leave the employ of the Company.
5. NO CONFLICTING OBLIGATION. I represent that my performance of all the terms
of this Agreement and as an employee of or a consultant to the Company does not
and will not breach any agreement to keep in confidence information acquired by
me in confidence or in trust prior to my employment by the Company. I have not
entered into, and I agree I will not enter into, any agreement either written or
oral in conflict herewith.
6. RETURN OF COMPANY DOCUMENTS. When I leave the employ of or upon the
termination of my services as a consultant to the Company, I will deliver to the
Company any and all drawings, notes, memoranda, specifications, devices,
formulas, and documents, together with all copies thereof, and any other
material containing or disclosing any Company Inventions, Third Party
Information or Proprietary Information of the Company. I further agree that any
property situated on the Company's premises and owned by the Company, including
disks and other storage media, filing cabinets or other work areas, is subject
to inspection by Company personnel at any time with or without notice. Prior to
leaving, I will cooperate with the Company in completing and signing the
Company's termination statement.
36
<PAGE>
7. LEGAL AND EQUITABLE REMEDIES. Because my services are personal and unique
and because I may have access to and become acquainted with the Proprietary
Information of the Company, the Company shall have the right to enforce this
Agreement and any of its provisions by injunction, specific performance or other
equitable relief, without bond and without prejudice to any other rights and
remedies that the Company may have for a breach of this Agreement.
8. NOTICES. Any notices required or permitted hereunder shall be given to the
appropriate party at the address specified below or at such other address as the
party shall specify in writing. Such notice shall be deemed given upon personal
delivery to the appropriate address or if sent by certified or registered mail,
three (3) days after the date of mailing.
9. NOTIFICATION OF NEW EMPLOYER OR CURRENT EMPLOYER. As an employee, in the
event that I leave the employ of the Company, I hereby consent to the
notification of my new employer of my rights and obligations under this
Agreement. As a consultant, in connection with my services as a consultant to
the Company, I hereby consent to the notification of my employer and any third
party to whom I may provide consulting services of my rights and obligations
under this Agreement.
10. General Provisions.
10.1 Governing Law; Consent to Personal Jurisdiction. This Agreement will
be governed by and construed according to the laws of the State of California,
as such laws are applied to agreements entered into and to be performed entirely
within California between California residents. I hereby expressly consent to
the personal jurisdiction of the state and federal courts located in San Diego
County, California for any lawsuit filed there against me by Company arising
from or related to this Agreement.
10.2 Severability. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect the other provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein. If moreover, any one or more of the provisions
contained in this Agreement shall for any reason be held to be excessively broad
as to duration, geographical scope, activity or subject, it shall be construed
by limiting and reducing it, so as to be enforceable to the extent compatible
with the applicable law as it shall then appear.
10.3 Successors and Assigns. This Agreement will be binding upon my heirs,
executors, administrators and other legal representatives and will be for the
benefit of the Company, its successors, and its assigns.
10.4 Survival. The provisions of this Agreement shall survive the
termination of my employment or engagement as a consultant and the assignment of
this Agreement by the Company to any successor in interest or other assignee.
37
<PAGE>
10.5 Employment or Engagement as a Consultant. I agree and understand that
nothing in this Agreement shall confer any right with respect to continuation of
employment by or engagement as a consultant to the Company, nor shall it
interfere in any way with my right or the Company's right to terminate my
employment or engagement as a consultant at any time, with or without cause.
10.6 Waiver. No waiver by the Company of any breach of this Agreement
shall be a waiver of any preceding or succeeding breach. No waiver by the
Company of any right under this Agreement shall be construed as a waiver of any
other right. The Company shall not be required to give notice to enforce strict
adherence to all terms of this Agreement.
10.7 Entire Agreement. The obligations pursuant to Sections 1 and 2 of
this Agreement shall apply to any time during which I was previously employed,
or am in the future employed, by the Company. This Agreement is the final,
complete and exclusive agreement of the parties with respect to the subject
matter hereof and supersedes and merges all prior discussions between us. No
modification of or amendment to this Agreement, nor any waiver of any rights
under this Agreement, will be effective unless in writing and signed by the
party to be charged. Any subsequent change or changes in my duties, salary or
compensation will not affect the validity or scope of this Agreement.
Dated: ___________
I HAVE READ THIS AGREEMENT CAREFULLY AND UNDERSTAND ITS TERMS. I HAVE
COMPLETELY FILLED OUT EXHIBIT B TO THIS AGREEMENT.
- -----------------------------------
(Signature)
- -----------------------------------
(Printed Name)
ACCEPTED AND AGREED TO:
ONLINE TRANSACTION TECHNOLOGIES, INC.
By:
-------------------------------
Title:
-----------------------------
- -----------------------------------
(Address)
- -----------------------------------
Dated:
-------
38
<PAGE>
EXHIBIT A TO ATTACHMENT 5.1.9
LIMITED EXCLUSION NOTIFICATION
THIS IS TO NOTIFY you in accordance with Section 2872 of the California
Labor Code that the foregoing Agreement between you and the Company does not
require you to assign or offer to assign to the Company any invention that you
developed entirely on your own time without using the Company's equipment,
supplies, facilities or trade secret information except for those inventions
that either:
1. Relate at the time of conception or reduction to practice of the
invention to the Company's business, or actual or demonstrably anticipated
research or development of the Company;
2. Result from any work performed by you for the Company.
To the extent a provision in the foregoing Agreement purports to require
you to assign an invention otherwise excluded from the preceding paragraph, the
provision is against the public policy of this state and is unenforceable.
This limited exclusion does not apply to any patent or invention covered by
a contract between the Company and the United States or any of its agencies
requiring full title to such patent or invention to be in the United States.
I ACKNOWLEDGE RECEIPT of a copy of this notification.
By:
(PRINTED NAME OF EMPLOYEE)
Date:
-----------------------------------
WITNESSED BY:
- -----------------------------------
(PRINTED NAME OF REPRESENTATIVE)
A-1.
<PAGE>
EXHIBIT B TO ATTACHMENT 5.1.9
TO: ONLINE TRANSACTION TECHNOLOGIES, INC.
FROM: ____________________
DATE: ____________________
SUBJECT: Previous Inventions
1. Except as listed in Section 2 below, the following is a complete list of
all inventions or improvements relevent to the subject matter of my employment
by or engagement as a consultant to Online Transaction Technologies, Inc. (the
"Company") that have been made or conceived or first reduced to practice by me
alone or jointly with others prior to my engagement by the Company:
[_] No inventions or improvements.
[_] See below:
---------------------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
[_] Additional sheets attached.
2. Due to a prior confidentiality agreement, I cannot complete the
disclosure under Section 1 above with respect to inventions or improvements
generally listed below, the proprietary rights and duty of confidentiality with
respect to which I owe to the following party(ies):
Invention or Improvement Party(ies) Relationship
1.
---------------------------- ----------------- ------------------------
2.
---------------------------- ----------------- ------------------------
3.
---------------------------- ----------------- ------------------------
[_] Additional sheets attached.
<PAGE>
ATTACHMENT 5.1.10
BUSINESS PLAN
To be provided separately to the Purchaser
<PAGE>
ATTACHMENT 5.1.12
USE OF PROCEEDS
The proceeds from the sale of the Purchase Shares pursuant to this Agreement
will be used by the Company for the development of the software system, purchase
of related hardware, licenses, and general infrastructure and working capital.
<PAGE>
EXHIBIT 10.5
THE SECURITIES EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, HAVE BEEN TAKEN FOR INVESTMENT AND MAY
NOT BE SOLD, TRANSFERRED, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE
DISPOSED OF EXCEPT IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT.
First Stock Option Agreement
This First Stock Option Agreement (the "Agreement") is made as of the 30th
day of December, 1998, by and among Online Transaction Technologies, Inc., a
California corporation (the "Company"), and Cumetrix Data Systems Corporation, a
California corporation ("Holder").
Recitals
A. The Company and Holder have agreed to enter into a Preferred Stock
Purchase Agreement, dated as of the date hereof (the "Purchase Agreement")
relating to the sale and issuance of shares of the Company's Series A-1
Preferred Stock.
B. The Company desires to grant Holder, pursuant to the Purchase Agreement
and in consideration of Holder's agreement to enter into the Purchase Agreement,
the right to purchase shares of its Series A-2 Preferred Stock.
Now therefore, in consideration of the foregoing and of the mutual
covenants and agreements set forth below, the parties hereto covenant and agree
as follows:
Agreement
1. Options.
1.1 Grant of Option. The Holder is hereby granted an option (the "First
Option") to purchase such number of shares (rounded up to the nearest whole
share) of the Company's Series A-2 Preferred Stock (the "First Option Shares")
equal to the remainder of (A) the quotient of (x) the number of shares of the
Company's Common Stock issued and outstanding (including shares issuable
pursuant to outstanding options, warrants, rights and convertible debt or equity
securities other than options granted pursuant to this Agreement) as of the date
the First Option is exercised, divided by (y) .7429 minus (B) the number of
-----
shares of the Company's Common Stock issued and outstanding (including shares
issuable pursuant to outstanding options, warrants, rights and convertible debt
or equity securities other than options granted pursuant to this Agreement) all
determined on an as-converted basis as of the date the First Option is
exercised. The per share exercise price for the First Option Shares (the "First
Option Share Price") shall be equal to the quotient of (x) $900,000 divided by
(y) the number of First Option
<PAGE>
Shares. The total purchase price (the "Total Purchase Price") of the First
Option Shares shall be $900,000. The number and purchase price of such shares
are subject to adjustment as provided in Section 2 hereof.
1.2 Exercise of Option. The First Option may be exercised at any time,
only as to all of the First Option Shares, commencing on the date hereof and
ending the later of (i) at 5:00 p.m., California Time, on February 1, 1999, and
(ii) seven (7) business days following such time as the Company delivers to the
Holder the Company's interactive software capable of performing in all material
respects the operations and functions set forth on Exhibit B (the "Term"). The
First Option may be exercised prior to the expiration of the Term by the
execution and delivery to the Company of a written notice in the form of Exhibit
"A" attached hereto, duly completed and executed. The written notice shall be
accompanied by payment of the Total Purchase Price in immediately available
funds.
2. Adjustments to Exercise Price and Number of Option Shares. The First
Option Share Price and number of First Option Shares shall be subject to
adjustment from time to time as follows:
2.1 In case of any capital reorganization, any reclassification of the
Common Stock (other than a change in par value), or the consolidation of the
Company with, or a sale of substantially all of the assets of the Company to
(which sale is followed by a liquidation or dissolution of the Company), or
merger of the Company with, another person, except in the case of a
consolidation, sale or merger resulting in a Liquidity Event (as defined below),
Holder shall thereafter be entitled upon exercise of the First Option to
purchase the kind and number of shares of stock or other securities or property
of the surviving corporation receivable upon such event by a holder of the
number of shares of the Common Stock which the First Option entitles Holder to
purchase from the Company immediately prior to such event; and in any such case,
appropriate adjustment shall be made in the application of the provisions set
forth in this Agreement with respect to Holder's rights and interests
thereafter, to the end that the provisions set forth in this Agreement
(including the specified changes and other adjustments to the First Option Share
Price and the Total Purchase Price) shall thereafter be applicable in relation
to any other shares or other property thereafter purchasable upon exercise of
the First Option.
2.2 A consolidation of the Company with, or a sale of substantially all of
the assets of the Company to (which sale is followed by a liquidation or
dissolution of the Company), or the merger of the Company with, any other
person, in each case resulting in a Liquidity Event shall cause the First Option
Shares to terminate on the effective date of such consolidation, sale or merger,
provided, however, that Holder shall have the right ending on the fifth day
prior to such consolidation, sale or merger to exercise the First Option Shares
in part or in whole.
2.3 A consolidation, sale or merger of the Company as described in Section
2.1 and 2.2 above shall be deemed to result in a "Liquidity Event" if (i) the
Company is not the "Surviving Corporation" in such consolidation, sale or
merger, and (ii) all of the securities of the
2
<PAGE>
Company outstanding immediately prior to such consolidation, sale or merger are
exchanged, sold, redeemed or otherwise converted into cash or publicly traded
securities. The determination as to whether or not the Company is the "surviving
corporation" in any consolidation, sale or merger shall be made on the basis of
the relative equity interests of the shareholders in the Company existing after
such consolidation, sale or merger as follows: If following any consolidation,
sale or merger the holders of outstanding voting securities of the Company prior
to such consolidation, sale or merger own equity securities possessing more than
50% of the voting power of the corporation existing after such consolidation,
sale or merger then for purposes of this Agreement, the Company shall be the
surviving corporation. In all other cases, the Company shall not be the
surviving corporation. In making the determination of ownership by the
stockholders of a corporation, immediately after a consolidation, sale or
merger, of securities pursuant to this Section 2.3, securities which they owned
immediately prior to such consolidation, sale or merger as stockholders of
another party to the transaction shall be disregarded.
2.4 In the case the Company, subsequent to the date hereof and prior to
the exercise of this First Option, distributes to any holders of Common Stock,
assets (including cash distributions), then upon the exercise of the First
Option, Holder shall be entitled to receive an amount equal to the greatest per
share amount of consideration received by any holder of the Common Stock times
the number of shares of Common Stock into which the shares purchased upon
exercise of the First Option are convertible.
2.5 The grant of the First Option shall not affect in any way the right or
power of the Company to make adjustments, reclassification, reorganizations or
changes in its capital or business structure, or to merge, consolidate, dissolve
or liquidate, or to sell or transfer all or any part of its business or assets.
3. Representations, Warranties and Covenants of Holder. Holder makes the
following representations, warranties and covenants:
3.1 Holder is acquiring the First Option Shares for its own account with
the present intention of holding such security for investment purposes only and
not with a view to, or for sale in connection with, any distribution of such
securities (other than a distribution in compliance with all applicable federal
and state securities laws); provided, that nothing contained herein will prevent
Holder and its permitted assigns from transferring such securities in compliance
with the provisions of Section 5 of this Agreement.
3.2 Holder is an experienced and sophisticated investor and has such
knowledge and experience in financial and business matters that it is capable of
evaluating the relative merits and the risks of an investment in the First
Option and in the First Option Shares and of protecting its own interests in
connection with this transaction.
3.3 Holder is willing to bear and is capable of bearing the economic risk
of an investment in the First Option and the First Option Shares. In making
this representation,
3
<PAGE>
consideration has been given to the fact that there is no public market for the
First Option and the First Option Shares and as to whether the Holder could
afford to hold the First Option and the First Option Shares for an indefinite
period of time and whether, at this time, Holder could afford a complete loss of
its First Option and the First Option Shares. Holder understands that the
restrictions on transfer placed upon Holder pursuant to the provisions of
Section 5 of this Agreement may result in Holder being required to hold the
First Option until the date of expiration thereof or to hold the First Option
Shares for an indefinite period off time.
3.4 The Company has made available, prior to the date of this Agreement,
to Holder the opportunity to ask questions of the Company and its officers, and
to receive from the Company and its officers information concerning the terms
and conditions of the First Option and this Agreement and to obtain any
additional information with respect to the Company, its business, operations and
prospects, as reasonably requested by Holder.
3.5 Holder is an "accredited investor" as that term is defined under
Regulation D promulgated by the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Act") and an "excluded purchaser" as
such term is defined in Section 260.102.13 of the Rules of the California
Corporations Commissioner.
4. Reservation of Stock. The Company covenants that it will at all times
reserve and keep (i) available out of its authorized but unissued shares of
Series A-2 Preferred Stock, solely for the purpose of issuance upon exercise of
the First Option, such number of shares of Series A-2 Preferred Stock as shall
at any time be issuable upon the exercise of the First Option and (ii) out of
its authorized but unissued shares of Common Stock, solely for the purpose of
issuance upon the conversion of the shares of Series A-2 Preferred Stock
issuable upon exercise of the First Option, such number of shares of Common
Stock as shall at any time be issuable upon conversion of the Series A-2
Preferred Stock issuable upon exercise of the First Option.
5. Restrictions On Transfer Or Exercise Of The Options.
5.1 All certificates representing the First Option Shares and any
certificates representing the Common Stock issuable upon conversion of the First
Option Shares will bear the following legend:
"The Securities represented by this Certificate have not been
registered under the Securities Act of 1933, as amended, (the "Act")
and may not be sold, transferred, or otherwise disposed of unless
registered in accordance with said Act or pursuant to an exemption
from the registration thereunder."
If in the reasonable opinion of counsel for the Company, or the
opinion of counsel for Holder all future dispositions of any of the First Option
or First Option Shares by the contemplated transferee would be exempt from the
registration and prospectus delivery
4
<PAGE>
requirements of the Securities Act and the qualification requirements of the
California Corporate Securities Law, then the restrictions on transfer of such
securities contained in this Section 5 shall not apply to any subsequent
transfer thereof and the legend set forth above may be removed from the
certificates representing such securities.
5.2 Holder may not transfer, sell, pledge, assign or hypothecate the First
Option or the First Option Shares to any person or entity and no person other
than Holder may exercise any options unless the transfer of the First Option or
First Option Shares to such person was permitted by this Section 5. Prior to
any exercise of the First Options or any transfer or attempted transfer of any
of the First Options or First Option Shares, Holder shall give the Company
written notice of its intention so to do, describing briefly the manner of any
such proposed exercise, sale or transfer. The Company agrees to permit such
exercise or transfer, provided that such exercise or transfer is not prohibited
by this Section 5 and that the Company is reasonably satisfied that such
exercise or transfer complies with all applicable federal and state securities
laws and regulations, and provided, further, in the case of a sale or transfer
Holder deliver to the Company an assignment form in the form attached to this
Agreement.
6. Registration Under The Securities Act Of 1933 (the "1933 Act"). The Holder
will have the right to cause the Common Stock into which the First Option Shares
are convertible to be registered under the 1933 Act in accordance with Section 8
of the Purchase Agreement.
7. Disputes.
7.1 Arbitration.
7.1.1 Except as otherwise expressly provided for in Section 6(c)
below, all disputes arising in connection with this Agreement shall be finally
settled by arbitration in Los Angeles, California, in accordance with the rules
of the American Arbitration Association (the "Rules of Arbitration") and
judgment on the award rendered by the arbitration panel (the "Arbitration
Panel") may be entered in any court or tribunal of competent jurisdiction.
7.1.2 Any party which desires to initiate arbitration proceedings as
provided in Section 7.1.1 above may do so by delivering written notice to the
other party (the "Arbitration Notice") specifying (A) the nature of the dispute
or controversy to be arbitrated, (B) the name and address of the arbitrator
appointed by the party initiating such arbitration and (C) such other matters as
may be required by the Rules of Arbitration.
7.1.3 The party who receives an Arbitration Notice shall appoint an
arbitrator and notify the initiating party of such arbitrator's name and address
within 30 days after delivery of the Arbitration Notice; otherwise, a second
arbitrator shall be appointed at the request of the party who delivered the
Arbitration Notice as provided in the Rules of Arbitration. The two arbitrators
so appointed shall appoint a third arbitrator who shall be the chairman of the
Arbitration Panel and who shall be of American nationality. Should the
arbitrators appointed by
5
<PAGE>
the parties not agree upon the appointment of the third arbitrator within 30
days of their appointment, the third shall be appointed in accordance with the
Rules of Arbitration.
7.1.4 In any arbitration proceeding conducted pursuant to the
provision of this Section 7, both parties shall have the right to discovery, to
call witnesses and to cross-examine the opposing party's witnesses, either
through legal counsel, expert witnesses or both, and such proceedings shall be
conducted in the English language.
7.2 Finality of Decision. All decisions of the Arbitration Panel shall be
final, conclusive and binding on all parties and shall not be subject to
judicial review. The arbitrator shall divide all costs (other than fees of
counsel) incurred in conducting the arbitration proceeding and the final award
in accordance with what they deem just and equitable under the circumstances.
7.3 Limitations. Notwithstanding anything to the contrary contained in
Sections 6.1 and 6.2 above, any claim by either party for injunctive or other
equitable relief, including specific performance, may be brought in the Superior
Court of the State of California for Los Angeles County, or in the United States
District Court for the Central District of California, and any judgment, order
or decree relating thereto shall have precedence over any arbitral award or
proceeding. The Company and the Executive each consent and submit in advance to
the jurisdiction of the above-mentioned courts and agrees that venue will be
proper in such courts on any such matter.
8. Miscellaneous.
8.1 All notices or demands shall be in writing and shall be delivered
personally, electronically, telegraphically, or by express or certified mail or
registered mail or by private overnight express mail service. Delivery shall be
deemed conclusively made (i) at the time of delivery if personally delivered,
(ii) immediately in the event notice is delivered by transmittal over electronic
or telephonic transmitting devices, such as telex or telecopy, provided, the
party to whom the notice is delivered has a compatible device and electronically
or by other written document confirms receipt thereof, or the party otherwise
confirms actual receipt thereof, (iii) at the time that the telegraphic agency
confirms to the sender delivery thereof to the addressee if served
telegraphically, (iv) twenty-four (24) hours after delivery to the carrier if
served by any private, overnight, express mail service, (v) twenty-four (24)
hours after deposit thereof in the United States mail, properly addressed and
postage prepaid, return receipt requested, if served by express mail, or (vi)
five (5) days after deposit thereof in the United States mail, properly
addressed and postage prepaid, return receipt requested, if served by certified
mail.
Any notice or demand to the Company shall be given to:
Online Transaction Technologies, Inc.
909 6th Street, Suite 6
Santa Monica, California 90403
6
<PAGE>
Attn: Board of Directors
Any notice of demand to the Holder shall be given to:
Cumetrix Data Systems Corp.
957 Lawson Street
Industry, California 9148
Fax: (626) 965-8159
Attn: Max Toghraie
------------
Any party may, by virtue of written notice in compliance with this paragraph,
alter or change the address or the identity of the person to whom any notice, or
copy thereof, is to be delivered.
8.2 Each party shall execute and deliver all such further instruments,
documents and papers, and shall perform any and all acts necessary, to give full
force and effect to all of the terms and provisions of this Agreement.
8.3 No course of dealing or any delay or failure to exercise any right
hereunder on the part of Holder shall operate as a waiver of such right or
otherwise prejudice Holder's rights, powers or remedies.
8.4 This Agreement and the rights evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and assigns of Holder except that the rights contained in Section 6 may not be
transferred to a purchaser the First Option Shares pursuant to a registration
statement under the Act covering such proposed distribution or pursuant to the
limitations contained in Rule 144 of the Act. The provisions of this Agreement
are intended to be for the benefit of all holders from time to time of this
Agreement, and shall be enforceable by any such holder.
8.5 The Company shall not by any action including, without limitation,
amending its articles of incorporation or through any reorganization, transfer
of assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Agreement, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate to protect the rights of Holder
against impairment. Without limiting the generality of the foregoing, the
Company will (a) not increase the par value of any shares of Common Stock
receivable upon the exercise of the Option above the amount payable therefor
upon such exercise immediately prior to such increase in par value, (b) take all
such action as may be necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable shares of Common Stock
upon the exercise of the Option, and (c) use its best efforts to obtain all such
authorizations, exemptions or consents from any public regulatory body having
jurisdiction thereof as may be necessary to enable the company to perform its
obligations under this Agreement. Upon the request of Holder, the Company will
at any time
7
<PAGE>
during the term of this Agreement acknowledge in writing, in form reasonably
satisfactory to Holder, the continuing validity of this Agreement and the
obligations of the Company hereunder.
8.6 Upon receipt by the Company from Holder of evidence reasonably
satisfactory to the Company of the ownership of any loss, theft, distribution or
mutilation of this Agreement and indemnity reasonably satisfactory to the
Company (it being understood that the written agreement of Holder shall be
sufficient indemnity) and in case of mutilation upon surrender and cancellation
hereof, the Company will execute and deliver in lieu hereof a new Agreement of
like tenor to Holder; provided, in the case of mutilation, no indemnity shall be
required if this Agreement in identifiable form is surrendered to the Company
for cancellation.
8.7 This Agreement shall be governed by and construed in accordance with
the laws of the State of California applicable to contracts entered into and
fully to be performed therein. In all matters of interpretation, whenever
necessary to give effort to any provision of this Agreement, each gender shall
include the others, the singular shall include the plural, and the plural shall
include the singular. The titles of the paragraphs of this Agreement are for
convenience only and shall not in any way affect the interpretation of any
provision or condition of this Agreement. All remedies, rights, undertakings,
obligations and agreements contained in this Agreement shall be cumulative and
none of them shall be in limitation of an other remedy, right, undertaking,
obligation or agreement of any party. Each party and its counsel have reviewed
and revised this Agreement. As a result, the normal rule of construction to the
effect that any ambiguities are to be resolved against the drafting party shall
not be employed in the interpretation of this Agreement or any amendments or
exhibits thereto.
8.8 This Agreement may be executed in counterparts which, taken together,
shall constitute the whole of the agreement as between the parties.
8.9 Each party to this Agreement which is a corporation hereby represents
and warrants that all necessary corporate action has been taken, including the
due adoption of a resolution by its board of directors sufficient to enable such
corporation to enter into this Agreement, to be bound thereby and to perform
fully as required hereunder.
8.10 Each person executing this Agreement on behalf of an entity
represents and warrants that he or she has been duly authorized to enter into
this Agreement on behalf of such entity, and that such entity is thereby fully
bound.
8.11 The terms and conditions of this Agreement shall be subject to all
applicable laws and regulations of any governing jurisdictions. If an clause or
provision of this Agreement is illegal, invalid or unenforceable under present
or future laws effective during the term of this Agreement, then and, in that
event, the remainder of this Agreement shall not be affected thereby, and in
lieu of each clause or provision of this Agreement that is illegal, invalid or
unenforceable, there shall be added a clause or provision as similar in terms
and in amount to such illegal, invalid or unenforceable clause or provision as
may be possible and be legal, valid
8
<PAGE>
and enforceable, as long as it does not otherwise frustrate the principal
purposes of this Agreement.
8.12 This Agreement may be amended or modified only with the written
agreement of the Company and upon the written consent of a majority of the
Holders.
8.13 In the event that any dispute among the parties to this Agreement
should result in litigation, the prevailing party in such dispute shall be
entitled to recover from the losing party all fees, costs and expenses of
enforcing any right of such prevailing party under or with respect to this
Agreement, including without limitation, such reasonable fees and expenses of
attorneys and accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
9
<PAGE>
In Witness Whereof, the parties have entered into and executed this Option
Agreement as of the date first above written.
Online Transaction Technologies, Inc.
By: /s/ COLIN KRUGER
----------------
Its: Chief Executive Officer
-----------------------
Cumetrix Data Systems Corporation
By: /s/ MAX TOGHRAIE
----------------
Its: Chief Executive Officer
-------------------------
10
<PAGE>
EXHIBIT "A"
Notice of Exercise
(To be signed only upon exercise of the First Option)
TO: Online Transaction Technologies, Inc.
The undersigned, hereby irrevocably elects to exercise the purchase rights
represented by the First Option granted to the undersigned on ____________, 1998
and to purchase thereunde ___* shares of Series A-2 Preferred Stock of Online
Transaction Technologies, Inc., (the "Company") and herewith encloses payment of
$900,000 in full payment for the First Option Shares .
Dated: ________________, _______
-----------------------------
(Signature must conform in all
respects to name of either holder
as specified on the face of the
Option)
-------------------------------
(Please Print Name)
-------------------------------
(Address)
1
<PAGE>
EXHIBIT B
SPECIFICATIONS OF SOFTWARE
To be provided separately to the Holder
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-Q AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-START> APR-01-1998 OCT-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 9,439,425 0
<SECURITIES> 0 0
<RECEIVABLES> 3,951,435 0
<ALLOWANCES> (137,000) 0
<INVENTORY> 3,580,356 0
<CURRENT-ASSETS> 17,316,913 0
<PP&E> 347,623 0
<DEPRECIATION> (37,468) 0
<TOTAL-ASSETS> 18,864,536 0
<CURRENT-LIABILITIES> 6,137,963 0
<BONDS> 0 0
0 0
0 0
<COMMON> 11,967,061 0
<OTHER-SE> 753,652 0
<TOTAL-LIABILITY-AND-EQUITY> 12,720,713 0
<SALES> 54,084,126 16,251,491
<TOTAL-REVENUES> 54,084,126 16,251,491
<CGS> 52,592,335 15,740,845
<TOTAL-COSTS> 1,898,243 796,548
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,098 1,894
<INCOME-PRETAX> 11,188 (186,725)
<INCOME-TAX> 6,052 (76,719)
<INCOME-CONTINUING> 5,136 (110,006)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,136 (110,006)
<EPS-PRIMARY> .00 (.01)
<EPS-DILUTED> .00 (.01)
</TABLE>
