QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS
SUBJECT TO THE 1934 ACT REPORTING REQUIREMENTS
FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
Commission File Number: 001-14005
FRISBY TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 62-1411534
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
77 East Main Street
Suite 2000
Bay Shore, New York 11706
(Address of Principal Executive Offices and Zip Code)
(516) 969-8570
(Registrant's telephone number, including area code)
417 South Main Street
Freeport, New York 11520
(Former Address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 past 90 days.
Yes X No ________
Number of shares outstanding of the issuer's Common Stock, par value $.001
per share, as of April 30, 1998: 4,880,613 shares.
<PAGE>
FRISBY TECHNOLOGIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Part I Financial Information 3
Item 1. Financial Statements 3
Balance Sheets - March 31, 1998 (unaudited) and
December 31, 1997 3
Statements of Operations - Three Month Period Ended
March 31, 1998 (unaudited) and March 31, 1997
(unaudited) 4
Statement of Stockholders' Equity - Three Month Period
Ended March 31, 1998 (unaudited) 5
Statements of Cash Flows - Three Month Period Ended
March 31, 1998 (unaudited) and March 31, 1997
(unaudited) 6
Notes to Financial Statements - March 31, 1998 (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II Other Information 13
Signatures 17
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Frisby Technologies, Inc.
Balance Sheets
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
<S> <C> <C>
(unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,827,060 $ 375,222
Accounts receivable - billed 333,597 358,452
Accounts receivable - unbilled 91,546 52,150
Inventory 290,188 247,686
Recoverable and prepaid income taxes 26,902 26,902
Other current assets 25,266 7,192
----------- --------
Total current assets 2,594,559 1,067,604
Property and equipment, net 57,978 61,323
Deferred transaction costs 366,172 138,908
----------- --------
Total assets $ 3,018,709 $1,267,835
================ ===============
Liabilities and stockholders' equity Current liabilities:
Accounts payable $ 209,475 $ 353,427
Accrued expenses and other current liabilities 121,777 63,143
License fees payable 83,679 184,640
Deferred license revenues 47,500 50,000
---------- ---------
Total current liabilities 462,431 651,210
Accrued license agreement costs 101,250 101,250
Deferred license revenues 30,000 40,000
---------- ----------
Total liabilities 593,681 792,460
Commitments
Stockholders' equity:
Preferred Stock, 1,000,000 shares authorized; shares issued and
outstanding: 587,500 in 1998 and none in 1997 2,500,000 --
Common Stock, $.001 par value; 10,000,000 shares authorized;
3,280,613 shares issued and outstanding in 1998 and 1997 3,281 3,281
Additional paid-in capital 1,519,575 1,540,575
Accumulated deficit (1,597,828) (1,068,481)
-- -----------
Total stockholders' equity 2,425,028 475,375
----- -----------
Total liabilities and stockholders' equity $ 3,018,709 $ 1,267,835
============= ===========
</TABLE>
See accompanying notes.
<PAGE>
Frisby Technologies, Inc.
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three month period ended
March 31,
---------------------------------------------
1998 1997
---------- -----------
<S> <C> <C>
Revenues:
Product sales $ 271,375 $ 14,826
Research and development projects 49,271 138,613
Licenses and royalties 26,618 9,000
----------- -----------
Total revenues 347,264 162,439
Cost of sales:
Product sales 221,813 66,881
Research and development projects 34,776 89,433
Licenses and royalties 1,765 3,600
---------- ----------
Total cost of sales 258,354 159,914
Gross profit 88,910 2,525
Selling and marketing expense 220,148 59,841
General and administrative expense 400,993 170,545
Loss from operations (532,231) (227,861)
Interest income (expense) 2,884 (5,251)
---------- ----------
Loss before income taxes (529,347) (233,112)
Income tax provision - 44,792
---------- ----------
Net loss $ (529,347) $ (277,904)
=========== ----------
Net loss per common share - basic and diluted $ (.16) $ (.10)
=========== ==========
</TABLE>
See accompanying notes.
5
<PAGE>
Frisby Technologies, Inc.
Statement of Stockholder's Equity
(Unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Shares Amount Shares Amount Paid-In Accumulated
Capital (Deficit) Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1997 -- -- 3,280,613 $ 3,281 $1,540,575 $(1,068,481) $ 475,375
Exercise of preferred stock
option, net of related costs 587,500 2,500,000 -- -- (21,000) -- 2,479,000
Net loss -- -- -- -- -- (529,347) (529,347)
-------- --------- ---------- -------- ---------- ---------- ----------
Balance at
March 31, 1998 587,500 $2,500,000 3,280,613 3,281 $1,519,575 $(1,597,828) $ 2,425,028
======== ========= ========== ======== ========== ========== ==========
</TABLE>
See accompanying notes.
<PAGE>
6
Frisby Technologies, Inc.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three month period ended
March 31,
1998 1997
---- ----
<S> <C> <C>
Operating activities
Net loss $ (529,347) $ (277,904)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 3,345 3,783
Deferred income tax provision -- 44,792
Changes in assets and liabilities:
Accounts receivable (14,541) (127,012)
Inventory (42,502) (45,882)
Other current assets (18,074) (68,941)
Accrued license agreement costs -- 3,335
Accounts payable (143,952) 113,567
Accrued expenses and other current liabilities 58,634 (21,157)
Licenses fees payable (100,961) 63,000
Deferred licenses revenues (12,500) 216,000
Payments to related party -- (10,500)
------- --------
Net cash used in operating activities (799,898) (106,919)
--------- ---------
Financing activities
Net proceeds from exercise of convertible preferred stock option 2,479,000 --
Borrowings from related party -- 58,000
Payment of transaction costs (227,264) --
Net cash provided by financing activities 2,251,736 58,000
Net increase in cash 1,451,838 (48,919)
Cash and cash equivalents - beginning of period 375,222 52,677
--------- --------
Cash and cash equivalents -end of period $ 1,827,060 $ 3,758
--------- --------
Supplemental information
Interest paid $ 1,189 $ 5,479
========= ========
</TABLE>
See accompanying notes.
<PAGE>
Frisby Technologies, Inc.
Notes to Financial Statements
March 31, 1998 (Unaudited)
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
conformity with generally accepted accounting principles and reflect all
adjustments consisting of normal recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the results for the periods
shown. The results of operations for such periods are not necessarily indicative
of the results expected for the full fiscal year or for any future period. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates and assumptions.
The accompanying financial statements should be read in conjunction with
the audited financial statements of Frisby Technologies, Inc. (the "Company")
for the year ended December 31, 1997 and the notes thereto contained in the
Company's Registration Statement on Form SB-2, Registration No. 333-45121, filed
with the Securities and Exchange Commission on March 30, 1998, as amended.
2. Stockholders' Equity
On December 29, 1997, the Company sold 441,327 shares of its common stock,
$.001 par value (the "Common Stock") and an option (the "Convertible Preferred
Stock Option") to purchase 587,500 shares of the Company's convertible preferred
stock, $.001 par value (the "Convertible Preferred Stock") at an exercise price
of $4.26 per share expiring on February 27, 1998 in a private placement (the
"Private Placement") to a foreign investor for an aggregate purchase price of
$2,500,000. On February 27, 1998, the foreign investor exercised the Convertible
Preferred Stock Option. This transaction resulted in net proceeds to the Company
of $2,479,000, after the payment of related expenses.
On April 1, 1998, the Company consummated an Initial Public Offering (the
"IPO") of 1,600,000 shares of Common Stock at a price of $7.00 per share. The
net proceeds to the Company amounted to approximately $9,100,000 after the
underwriters' discount and related expenses. The net proceeds of the IPO have
been invested in cash deposit accounts and cash equivalents, institutional U.S.
Government Money Market Funds and commercial paper of selected U.S. companies
Upon consummation of the overallotment option, the net proceeds to the Company
will be approximately $1,400,000 after deducting the Underwriter's discounts and
commissions and related expenses.
On or about May 15, 1998, the Company received notice from Barington
Capital Group, L.P., the underwriter in connection with the IPO (the
"Underwriter"), that the Underwriter intended to exercise its over-allotment
option to purchase an additional 240,000 shares of the Common Stock at a price
of $7.00 per share.
<PAGE>
3. Summary of Significant Accounting Policies
Net Loss Per Share
Net loss per share for the three-month periods ended March 31, 1998 and
1997 are based on the weighted average number of common shares outstanding
during the period in accordance with the Statement of Financial Accounting
Standard ("SFAS") No. 128 "Earnings Per Share."
Shares used in the computation of net loss per share for the three month
periods ended March 31, 1998 and 1997 were 3,280,613 and 2,839,286,
respectively, representing the weighted-average common shares outstanding for
the period. The number of shares used in the calculation of net loss per share
on a basic and diluted basis are the same. The 587,500 shares of Convertible
Preferred Stock represent potential common stock that was not included in the
computation of diluted net loss per share for the three month period ended March
31, 1998 due to their anti-dilutive nature.
Inclusion of the shares issuable in connection with the IPO (described
above in Note 2) and 126,500 options granted in April 1998 to employees,
directors and consultants under the Company's Stock Option Plan adopted in March
1998, would have had an effect on the number of Common Shares
outstanding.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130
"Reporting Comprehensive Income" and SFAS No. 131 "Disclosures about Segments of
an Enterprise and Related Information." These standards are effective for fiscal
years beginning after December 15, 1997. The adoption of these standards had no
impact on the Company's statements of operations, cash flows or balance sheets.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations for the Three month period ended March 31, 1998
compared with the three month period ended March 31, 1997
Revenues. The Company generates revenue from three primary sources: (i)
sales of its Thermasorb(R) additives and ComforTemp(R) foam products for use in
its strategic partners' products; (ii) revenue from research and development
contracts related to the United States government and private companies; and
(iii) license fees and royalties from the use of the Thermasorb(R) and
ComforTemp(R) trademarks by strategic partners in end-use products, as well as
other fees earned in connection with its agreements with strategic partners.
Total revenues for the three month period ended March 31, 1998 increased by
$185,000 to $347,000 from $162,000 for the three month period ended March 31,
1997.
Product sales. Product sales for the three month period ended March 31,
1998 increased by $256,000 to $271,000 from $15,000 for the three month period
ended March 31, 1997. The increase was primarily the result of the Company
bringing its ComforTemp(R) foams to market commencing in the second quarter of
1997. Product sales for the first quarter 1998 have primarily been to five
strategic partners in the apparel and footwear industry.
Research and development projects. Revenues from research and development
projects for the three month period ended March 31, 1998 decreased by $90,000 to
$49,000 from $139,000 for the three month period ended March 31, 1997. This
decrease resulted primarily from the shift in the Company's focus away from
obtaining and performing funded research and development contracts to the
commercialization of its thermal management products.
Licenses and royalties. Revenues from license fees and royalties for the
three month period ended March 31, 1998 increased by $18,000 to $27,000 from
$9,000 for the three month period ended March 31, 1997. This increase reflects
the recognition of fees received from strategic partners for license agreements
entered into after the first quarter 1997. License fees are recognized as
revenue ratably over the life of the license agreement. Additionally, royalty
fees increased to $14,000 from zero during the comparable period in 1997.
Cost of Sales. The Company's cost of sales consists of: (i) direct and
indirect costs incurred in connection with product sales; (ii) direct and
indirect costs incurred in connection with revenue from research and development
contracts relating to the United States government programs; and (iii) royalty
payments required to be made to the inventor of the thermal management
technology or another party licensed by the inventor. Total gross profit for the
three month period ended March 31, 1998 increased by $86,000 to $89,000 from
$3,000 for the three month period ended March 31, 1997.
<PAGE>
Cost of sales -- Products. The cost of sales related to products for the
three month period ended March 31, 1998 increased by $155,000 to $222,000 from
$67,000 for the three month period ended March 31, 1997. This increase reflects
the higher volume of product sales and the corresponding costs related to such
product sales in the three month period ended March 31, 1998 as compared to the
corresponding period in the prior year. Unit costs decreased in the quarter
ended March 31, 1998 as compared to the corresponding period of 1997 resulting
from improved pricing from suppliers for larger quantities.
Cost of sales -- Research and development projects. The cost of sales
related to research and development projects for the three month period ended
March 31, 1998 decreased by $54,000 to $35,000 from $89,000 for the three month
period ended March 31, 1997. This decrease is consistent with the shift in the
Company's focus away from obtaining and performing funded research and
development contracts and to the commercialization of its thermal management
products.
Cost of Sales -- Licenses and royalties. The cost of sales related to
licenses and royalties for the three month period ended March 31, 1998 decreased
by $1,800 to $1,800 from $3,600 for the three month period ended March 31, 1997
primarily due to the expensing in a prior period of a royalty fee paid to the
inventor of the Company's licensed technology.
Selling and marketing expense. Selling and marketing expense for the three
month period ended March 31, 1998 increased by $160,000 to $220,000 from $60,000
for the three month period ended March 31, 1997. The increase was primarily the
result of the Company increasing its marketing and advertising activity in order
to build brand name recognition of its Thermasorb(R) and ComforTemp(R) products
and trademarks.
General and administrative expense. General and administrative expense for
the three month period ended March 31, 1998 increased by $230,000 to $401,000
from $171,000 for the three month period ended March 31, 1997. The increase
reflects the increase in personnel and personnel-related expenses, including
travel, and recruiting costs of new employees. Additionally, fees and expenses
paid to consultants have also increased over the comparable period for the prior
year. These increases are in connection with the expansion of the Company's
operations and commercialization of its thermal management products.
Net interest income/expense. The Company earned net interest income of
$3,000 for the three month period ended March 31, 1998 as compared to net
interest expense of $5,000 for the three month period ended March 31, 1997. This
change is due to the receipt of net proceeds from the Private Placement in
December 1997 and the exercise of the Convertible Preferred Stock Option in
February 1998 and the interest earned on the proceeds thereof.
Income tax provision. The Company recorded no income tax provision for the
three month period ended March 31, 1998 as compared to an income tax provision
of $45,000 for the three month period ended March 31, 1997. For the three month
period ended March 31, 1998, the Company recorded a valuation allowance equal to
the net deferred tax asset recorded in the period. For the three month period
ended March 31, 1997, the Company recorded a provision of $45,000 which arose
from providing a valuation allowance against all deferred tax assets recorded as
of March 31, 1997. The net deferred tax asset as of both March 31, 1998 and 1997
arise principally from a net operating loss carryforward. The valuation
allowances recorded are due to uncertainties relating to expected future taxable
income that would have to be generated to realize such assets.
<PAGE>
Net loss. As a result of the foregoing, the net loss for the three month
period ended March 31, 1998 increased to $530,000 from $278,000 for the three
month period ended March 31, 1997.
Liquidity and capital resources. At March 31, 1998, the Company had working
capital of $2,133,000, including accounts receivable billed of $334,000 and
inventory of $290,000, offset by accounts payable of $209,000 and license fees
payable of $84,000.
Cash used by operating activities was $800,000 and $107,000, respectively,
for the three month period ended March 31, 1998 and 1997. The principle factor
contributing to the cash used in operating activities for the three month period
ended March 31, 1998 and 1997 was the net loss for each of the respective
periods. Cash provided by financing activities was $2,252,000 and $58,000,
receptively, for the three month period ended March 31, 1998 and 1997. The
principle financing activity for the three month period ended March 31, 1998 was
the receipt of the net proceeds of $2,479,000 from the exercise of the
Convertible Referred Stock Option. The Company is relocating its North Carolina
operations to a newly renovated facility located in Winston Salem, North
Carolina during the second half of fiscal 1998. The cash requirement with
respect to that relocation will be expended in the second and third quarters of
1998 and are not expected to exceed $500,000.
Based on the Company's current operating plan, the Company believes that
the proceeds from the IPO, together with its existing resources and revenues
from continuing operations, will be sufficient to satisfy its capital
requirements for at least 24 months following the IPO. Such belief is based upon
certain current assumptions, and there can be no assurance that such assumptions
are correct. Further, depending on the Company's progress related to marketing
its product line, gaining market acceptance of its thermal management technology
and its other products and services in the business community, and capitalizing
upon potential acquisition opportunities, the Company may determine that it is
advisable to raise additional capital sooner than anticipated.
The Company has a $500,000 line of credit with a bank. The line of credit
bears interest at 0.5% above the bank's prime rate and expires on June 30, 1998.
It is the Company's intent to renew the line of credit in order to accommodate
possible future funding requirements. The full amount of the existing line is
currently available.
<PAGE>
Forward-Looking Statements
Certain information contained in this Quarterly Report on Form 10-QSB,
including, without limitation, information appearing under Part I, Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," are forward-looking statements (within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934). Factors set forth in the Company's Prospectus filed April 1, 1998, or in
the Company's other Securities and Exchange Commission filings, could affect the
Company's actual results and could cause the Company's actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company in this Quarterly Report on Form 10-QSB.
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
On April 1, 1998, the Company completed an initial public offering (the
"Offering") of 1,600,000 shares of its Common Stock, $.001 par value per share.
The Company's Registration Statement on Form SB-2 (Registration Number
333-45121) was declared effective by the Securities and Exchange Commission on
April 1, 1998.
The managing underwriter for the Offering was Barington Capital Group, L.P.
(the "Underwriter").
The aggregate offering price of the 1,600,000 shares of Common Stock sold
in the Offering to the public was $11,200,000. The Company realized net proceeds
of approximately $9,100,000 after deduction of underwriting discounts and
commissions in the amount of $1,428,000 and Offering expenses payable by the
Company in the amount of approximately $672,000.
The Company received notice from the Underwriter, on or about May 15, 1998,
that the Underwriter intended to exercise its over-allotment option to purchase
an additional 240,000 shares of Common Stock at the Offering price. Upon
consummation of the overallotment option, the Company will realize approximately
$1,400,000 in net proceeds after deducting approximately $280,000 for
underwriting discounts and commissions and other related expenses.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Pursuant to Unanimous Written Consent on March 3, 1998, the stockholders of
the Company approved: (i) the adoption of an amended stockholder agreement by
and among the Company, Jeffry D. Frisby, Gregory S. Frisby and MUSI Investments
S.A. (the "Amended MUSI Shareholder Agreement"); (ii) the filing of the
Company's amended and restated certificate of incorporation with the Secretary
of State of the State of Delaware (the "Amended and Restated Certificate of
Incorporation"); (iii) the adoption of the Company's By-Laws (the "By-Laws");
and (iv) the adoption of the Company's 1998 stock option plan.
Item 5. Other Information
None.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Certificate of Incorporation
*3.2 By-Laws
*4.1 Form of Common Stock Certificate
*4.2 Form of Representative's Option
10.1 Amended MUSI Stockholder Agreement
*10.2 Stock Option Plan
*10.3 Amended Employment Agreement dated as of December 8, 1997 between the
Company and Gregory S. Frisby
*10.4 Employment Agreement dated December 6, 1997 between the Company and
Douglas J. McCrosson
*10.5 Shareholder Agreement dated December 10, 1997 between the Company,
Gregory S. Frisby and Jeffrey D. Frisby
*10.6 Line of Credit Agreement with European American Bank
*10.7.1 License Agreement dated May 1, 1995 between the Company and
Triangle Research and Development Corp. ("TRDC")
*10.7.2 Assignment of License Agreement effective January 3, 1997 from TRDC
to Delta Thermal Systems, Inc.
*10.8 License Agreement effective January 1, 1998 between the Company and
Outlast Technologies, Inc.
*10.9 License Agreement dated March 31, 1997 between the Company and Fly
Technologies, Inc.
*10.10 License Agreement dated January 23, 1997 between the Company and
Wells Lamont Division, Marmon Holdings, Inc.
<PAGE>
*10.11 License Agreement dated February 1, 1997 between the Company and
Cove Shoe Company, Inc.
*10.12.1 License Agreement dated May 22, 1996 between the Company and
Thermo Solutions, Inc. (f/k/a Temptop Container Systems, Inc.) ("Thermo
Solutions")
*10.12.3 Memorandum of Understanding dated January 22, 1998 between the
Company and Thermo Solutions
*10.13 License Agreement dated February 10, 1997 between the Company and
Genfoot, Inc. and Genfoot America, Inc.
*10.14 Contract No. 00178-96-C-3014 between the Company and the United
States of America (Naval Surface Warfare Division)
*10.15 Contract No. F08637-97-C-6017 between the Company and the United
States of America (325th Contracting Squadron/LGCX)
*10.16 Arrangement dated January 21, 1998 between the Company and Minnesota
Mining & Manufacturing, Inc.
*10.17 Memorandum of Understanding dated October 23, 1997 between the
Company and Lendell Manufacturing, Inc.
*10.18 Memorandum of Understanding dated April 14, 1997 between the Company
and Bell Sports Corp.
*10.19 Memorandum of Understanding dated July 9, 1997 between the Company
and CamelBak/FasTrak Systems, Inc.
*10.20 Memorandum of Understanding dated December 11, 1997 between the
Company and Foamex International, Inc.
*10.21 Memorandum of Understanding dated January 15, 1998 between the
Company and LaCrosse Footwear, Inc.
*10.22 Lease dated March 2, 1998 between Piedmont Institute for Research &
Technology II,LLC, as landlord, and the Company, as tenant
*10.23 Lease dated June 1, 1993 between Frisby Aerospace, Inc. as landlord,
and the Company, as tenant
*10.24 Lease dated September 1, 1994 between Charles Winburn, as landlord,
and the Company, as tenant
11.1 Statement Re: Computation of Per Share Earnings
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
----------------------------
* Incorporated by reference from the Registrant's Registration Statement on
Form SB-2, Registration No. 333-45121 filed with the Securities and Exchange
Commission on March 30, 1998.
<PAGE>
Signatures
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 thereunto duly authorized.
Dated: May 15, 1998
FRISBY TECHNOLOGIES, INC.
By:/s/Gregory S. Frisby
-------------------------------------
Gregory S. Frisby
President and Chief Executive Officer
By:/s/Stephen P. Villa
-------------------------------------
Stephen P. Villa
Chief Financial Officer
AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION OF FRISBY TECHNOLOGIES, INC.
Under Sections 242 and 245 of the Delaware General Corporation Law
The undersigned, Gregory S Frisby and Douglas J. McCrosson, being the
President and Secretary, respectively, of FRISBY TECHNOLOGIES, INC. (the
"Corporation") hereby certifies that the original Certificate of Incorporation
was filed by the Department of State of the State of Delaware on February 6,
1998 and the text of the Certificate of Incorporation is hereby amended and
restated as follows:
ARTICLE FIRST: The name of the corporation is FRISBY TECHNOLOGIES, INC.
ARTICLE SECOND: The address of the Corporation's registered office in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle and the name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE THIRD: The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
ARTICLE FOURTH: The total number of shares which the Corporation shall have
authority to issue is Eleven Million (11,000,000), consisting of Ten Million
(10,000,000) shares of common stock, par value $.001 per share (the "Common
Stock"), and One Million (1,000,000) shares of preferred stock, par value $.001
per share (the "Preferred Stock"), issuable as provided hereinbelow.
A. Preferred Stock
1. The Preferred Stock of the Corporation may be issued from time to time
in one or more series of any number of shares, provided that the aggregate
number of shares issued and not cancelled in any and all such series shall not
exceed the total number of shares of Preferred Stock hereinabove authorized.
2. Authority is hereby vested in the Board of Directors from time to time
to authorize the issuance of one or more series of Preferred Stock and, in
connection with the creation of such series, to fix by resolution or resolutions
providing for the issuance of shares thereof the rights, preferences,
designations and characteristics of each such series including, without
limitation, the following:
(a) the maximum number of shares to constitute such series, which may
subsequently be increased or decreased (but not below the number of shares of
that series then outstanding) by resolution of the Board of Directors, the
distinctive designation and the stated value thereof if different than the par
value thereof;
<PAGE>
(b) whether the shares of such series shall have voting power, full or
limited, or no voting power, and if any, the terms of such voting power;
(c) the dividend rate, if any, with respect to the shares of such series,
the conditions and dates upon which such dividends shall be payable, the
preference or relation which such dividends shall bear to the dividends payable
on any other class or classes or on any other series of capital stock and
whether such dividend shall be cumulative or noncumulative;
(d) whether the shares of such series shall be subject to redemption by the
Corporation, and, if made subject to redemption, the times, prices and other
terms, limitations, restrictions or conditions of such redemption;
(e) the relative amounts, if any, of payment and the relative rights or
preferences to receive such payments in respect of shares of such series, which
the holders of shares of such series shall be entitled to receive upon the
liquidation, dissolution or winding-up of the Corporation;
(f) whether or not the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and manner
in which any such retirement or sinking fund shall be applied to the purchase or
redemption of the shares of such series for retirement or to other corporate
purposes and the terms and provisions relative to the operation thereof;
(g) whether or not the shares of such series shall be convertible into, or
exchangeable for, shares of any other class, classes or series, or other
securities, whether or not issued by the Corporation, and if so convertible or
exchangeable, the price or prices or the rate or rates of conversion or exchange
and the method, if any, of adjusting same;
(h) the limitations and restrictions, if any, to be effective while any
shares of such series are outstanding upon the payment of dividends or the
making of other distributions on, and upon the purchase, redemption or other
acquisition by the Corporation of, the Common Stock or any other class or
classes of stock of the Corporation ranking junior to the shares of such series
either as to dividends or upon liquidation, dissolution or winding-up;
(i) the conditions and restrictions, if any, upon the creation of
indebtedness of the Corporation or upon the issuance of any additional stock
(including additional shares of such series or of any other series or of any
other class) ranking on a parity with or prior to the shares of such series as
to dividends or distributions of assets upon liquidation, dissolution or
winding-up; and
(j) any other preference and relative, participating, optional or other
special rights, and the qualifications, limitations or restrictions thereof, as
shall not be inconsistent with law, this ARTICLE FOURTH or any resolution of the
Board of Directors pursuant hereto.
<PAGE>
B. Common Stock
1. The Common Stock of the Corporation may be issued from time to time in
any number of shares, provided that the aggregate number of shares issued and
not cancelled shall not exceed the total number of shares of Common Stock
hereinabove authorized.
2. Unless expressly provided by the Board of Directors of the Corporation
in fixing the voting rights of any series of Preferred Stock, the holders of the
outstanding shares of Common Stock shall exclusively possess all voting power
for the election of directors and for all other purposes, each holder of record
of shares of Common Stock being entitled to one vote for each share of such
stock standing in his name on the books of the Corporation.
3. Subject to the prior rights of the holders of Preferred Stock now or
hereafter granted pursuant to this ARTICLE FOURTH, the holders of Common Stock
shall be entitled to receive, as and when declared by the Board of Directors,
out of funds legally available for that purpose, dividends payable either in
cash, stock or otherwise.
4. In the event of any liquidation, dissolution or winding-up of the
Corporation, either voluntary or involuntary, after payment shall have been made
in full to the holders of Preferred Stock of any amounts to which they may be
entitled, the holders of Common Stock shall be entitled, with or without the
holders of one or more classes or series of Preferred Stock in accordance with
the rights granted to the class or series of Preferred Stock held by them, to
share, ratably with the holders of Preferred Stock entitled to participate in
such distribution, if any, in all remaining assets of the Corporation available
for distribution to its stockholders.
ARTICLE FIFTH: The Corporation is to have perpetual existence.
ARTICLE SIXTH: The name and mailing address of the incorporator is Kim K.
Schutz, c/o Ruskin, Moscou, Evans & Faltischek, P.C., 170 Old Country Road,
Mineola, New York 11501.
<PAGE>
ARTICLE SEVENTH: Whenever a compromise or arrangement is proposed between
the Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for the Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of the Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of the Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of the Corporation, as the case may be,
and also on the Corporation.
ARTICLE EIGHTH: For the management of the business and for the conduct of
the affairs of the Corporation, and in further definition, limitation, and
regulation of the powers of the corporation and of its directors and of its
stockholders or any class or series thereof, as the case may be, it is further
provided:
A. 1. The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors consisting of such number of
directors as is determined from time to time by resolution adopted by
affirmative vote of a majority of the entire Board of Directors; provided,
however, that in no event shall the number of directors be less than three;
2. Any director, or the entire Board of Directors, may be removed from
office for cause by the Board of Directors, or by the affirmative vote of a
majority of the votes entitled to be cast by the then holders of all of the then
outstanding shares of Voting Stock, with or without cause.
3. Except as otherwise required by law, vacancies in the Board of Directors
may be filled only by the then remaining directors;
4. All nominations for candidates for election as directors, other than
nominations by or at the discretion of the Board of Directors, or a committee of
the Board of Directors, and all stockholder proposals to be considered at annual
meetings of the stockholders shall be presented to the Corporation pursuant to
the advance notice procedure set forth in this Article VIII Section D
(Nominations) or Article IX Section B (Proposals).
<PAGE>
B. In furtherance and not limitation of the powers conferred by statute,
the Board of Directors is expressly authorized:
1. To make, alter, amend or repeal the By-Laws of the Corporation. The
holders of shares of Voting Stock, to the extent such power is at the time
conferred upon them by applicable law, also shall have the power to make, alter,
amend or repeal the By-Laws of the Corporation.
2. By a majority of the whole Board of Directors, to designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. The By-Laws may provide that in the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, or in the By-Laws of the Corporation,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation (except that a committee may, to
the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the Board of Directors as provided in
ARTICLE FOURTH hereof, fix the designations and any of the preferences or rights
of such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the same
or any other class or classes of stock of the Corporation or fix the number of
shares of any series of stock or authorize the increase or decrease of the
shares of any series), adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the By-Laws of the Corporation; and, unless the resolution or
By-Laws expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of the State of Delaware.
3. When and as authorized by the stockholders in accordance with statute,
to sell, lease or exchange all or substantially all of the property and assets
of the Corporation, including its goodwill and its corporate franchises, upon
such terms and conditions and for such consideration, which may consist in whole
or in part of money or property including shares of stock in, and/or other
securities of, any other corporation or corporations, as the Board of Directors
shall deem expedient and for the best interests of the Corporation.
C. In addition to any other considerations which the Board of Directors may
lawfully take into account, in determining whether to take or to refrain from
taking corporate action on any matter, including proposing any matter to the
stockholders of the Corporation, the Board of Directors may take into account
the long-term as well as the short-term interests of the Corporation and its
stockholders (including the possibility that these interests may be best served
by the continued independence of the Corporation), customers, employees and
other constituencies of the Corporation and its subsidiaries, including the
effect upon communities in which the Corporation and its subsidiaries do
business. In so evaluating any such determination, the Board of Directors shall
be deemed to be performing their duties and acting in good faith and in the best
interests of the Corporation within the meaning of Section 145 of the General
Corporation Law of the State of Delaware, or any successor provision.
<PAGE>
D. Subject to the rights of holders of any class or series of stock having
a preference over the Common Stock as to dividends or upon liquidation,
dissolution or winding-up, nominations for the election of directors may be made
by the Board of Directors or by any holder of Voting Stock. However, any holder
of Voting Stock may nominate one or more persons for election as directors at an
annual meeting only pursuant to the Corporation's notice of such meeting or if
written notice of such stockholder's intent to make such nomination or
nominations has been received by the Secretary of the Corporation not less than
sixty (60) nor more than ninety (90) days prior to the first anniversary of the
preceding year's annual meeting. Each such notice shall set forth: (a) the name
and address of the stockholder who intends to make the nomination and of the
person or person to be nominated; (b) a representation that the stockholder is a
holder of record of Voting Stock and intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
relating to the nomination or nominations; (d) the class and number of shares of
the Corporation which are beneficially owned by such stockholder and the person
to be nominated as of the date of such stockholder's notice and by any other
stockholders known by such stockholder to be supporting such nominees as of the
date of such stockholder's notice; (e) such other information regarding each
nominee proposed by such stockholder as would be required to be included in a
proxy statement filed pursuant to the proxy rules of the Securities and Exchange
Commission; and (f) the consent of each nominee to serve as a director of the
Corporation if so elected.
In addition, in the event the Corporation calls a special meeting of
stockholders for the purpose of electing one or more directors, any holder of
Voting Stock may nominate one or more persons for election as directors at a
special meeting only pursuant to the Corporation's notice of meeting or if
written notice of such stockholder's intent to make such nomination or
nominations, setting forth the information and complying with the form described
in the immediately preceding paragraph, has been received by the Secretary of
the Corporation not earlier than the ninetieth (90th) day prior to such special
meeting and not later than the close of business on the later of the sixtieth
(60th) day prior to such meeting.
No person shall be eligible for election as a director of the Corporation
unless nominated in accordance with the procedures set forth in this ARTICLE
EIGHTH, Section D. The presiding officer of the meeting shall, if the facts
warrant, determine and declare to the meeting that the nomination was not made
in accordance with the procedures prescribed by this ARTICLE EIGHTH, Section D,
and if he or she should so determine, the defective nomination shall be
disregarded.
Elections of directors need not be by written ballot unless the By-Laws of
the Corporation shall so provide.
<PAGE>
ARTICLE NINTH:
A. Meetings of the stockholders may be held within or without the State of
Delaware, as the By-Laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
Except as otherwise required by law or by this Certificate of
Incorporation, the holders of not less than a majority of the Voting Stock
entitled to vote at any meeting of stockholders, present in person or by proxy,
shall constitute a quorum, and the act of the holders of a majority in voting
power of the shares present in person or by proxy and entitled to vote on the
subject matter shall be deemed the act of the stockholders. If a quorum shall
fail to attend any meeting, the presiding officer or the stockholders present in
person or represented by proxy may adjourn the meeting to another place, date or
time. If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
one-third in voting power of the shares entitled to vote thereat constituting a
quorum, then except as otherwise required by law, one-third in voting power of
the shares entitled to vote at such adjourned meeting, present in person or by
proxy, shall constitute a quorum, and, except as otherwise required by law or
this Certificate of Incorporation, all matters shall be determined by the
holders of a majority in voting power of the shares present in person or by
proxy and entitled to vote on the subject matter, except that directors shall be
elected by a plurality of the votes cast at a meeting of stockholders by the
stockholders entitled to vote in the election.
B. At any meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before such meeting. To be
properly bought before an annual meeting, business must be (1) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors; (2) otherwise properly brought before the meeting by or
at the direction of the Board of Directors; or (3) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholders must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be received not less than sixty (60) days nor more
than ninety (90) days prior to the anniversary of the prior year's annual
meeting. Each such notice shall set forth as to each matter the stockholder
proposes to bring before the annual meeting: (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the meeting; (b) the name and address, as they
appear on the Corporation's books, of the stockholder proposing such business;
(c) the class, series and number of shares of the Corporation which are
beneficially owned by the stockholder; and (d) any material interest of the
stockholder in such business.
No business shall be conducted at any meeting of the stockholders except in
accordance with the procedures set forth in this ARTICLE NINTH, Section B. The
presiding officer of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly bought before the meeting
and in accordance with the provisions of this ARTICLE NINTH, Section B, and if
he or she should so determine, any such business not properly brought before the
meeting shall not be transacted. Nothing herein shall be deemed to affect the
Corporation's proxy statement pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
ARTICLE TENTH: The personal liability of the directors of the corporation
is hereby eliminated to the fullest extent permitted by the provisions of
paragraph (7) of subsection (b) of ss. 102 of the General Corporation Law of the
State of Delaware, as the same may be amended and supplemented.
<PAGE>
ARTICLE ELEVENTH: The Corporation shall, to the fullest extent permitted by
the provisions of ss. 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities, or other matters referred to
in or covered by said section, and the indemnification provided for herein shall
not be deemed exclusive of any other rights to which those indemnified may be
entitled under any By-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director, officer, employee, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
ARTICLE TWELFTH: The Corporation reserves the right to amend, alter, change
or repeal any provisions contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ARTICLE THIRTEENTH: The Amended and Restated Certificate of Incorporation
has been duly adopted in accordance with the provisions of the General
Corporation Law of the State of Delaware by the unanimous written consent of the
Board of Directors of the Corporation, all in accordance with ss.242 and ss.245
of the General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, the undersigned have executed this Amended and Restated
Certificate of Incorporation and hereby affirm that the statements made herein
are true under the penalties of perjury, this 25th day of March, 1998.
/s/Gregory S. Frisby
----------------------------
GREGORY S. FRISBY, President
/s/Douglas J. McCrosson
---------------------------
DOUGLAS J. MCCROSSON, Secretary
AMENDED AND RESTATED STOCKHOLDERS AGREEMENT
THIS AMENDED AND RESTATED STOCKHOLDERS AGREEMENT among FRISBY TECHNOLOGIES,
INC., a Delaware corporation (the "Company"), JEFFRY D. FRISBY ("J. Frisby"),
GREGORY S. FRISBY ("G. Frisby")(each of J. Frisby and G. Frisby, a "Frisby
Stockholder" and, collectively, the "Frisby Stockholders"), and MUSI INVESTMENTS
S.A., a Luxemburg societe anonyme ("MUSI") (each of the Frisby Stockholders and
MUSI, a "Stockholder" and, collectively, the "Stockholders"), is made as of the
31st day of March, 1998, for the purpose of amending and restating the
Stockholders Agreement among the Company and the Stockholders dated December 29,
1997 (the "Original Agreement").
RECITALS
A. J. Frisby owns 1,419,643 shares of Common Stock, G. Frisby owns
1,419,643 shares of Common Stock and MUSI owns 441,327 shares of Common Stock
and 587,500 shares of Convertible Preferred Stock, which shares, collectively,
constitute 100% percent of the outstanding capital stock of the Company
immediately prior to the Initial Public Offering (as hereinafter defined).
B. The Company and the Stockholders believe it would be in their mutual
best interest to ensure a degree of continuity of management and ownership of
and certain rights in respect of the Company by imposing certain restrictions
and obligations on the ownership, retention and disposition of the capital stock
of the Company.
C. The parties hereby fully amend and restate the Original Agreement, and
confirm that the reference to the Stockholders Agreement in the restricted
legend in Section 2.2 is deemed to be a reference to the Original Agreement.
<PAGE>
NOW, THEREFORE, the parties hereto agree as follows:
I. DEFINITIONS
1.1. Definitions.
(a) Capitalized terms used herein which are not otherwise defined herein
shall have the meaning ascribed to them in the Purchase Agreement. In addition
to the terms defined elsewhere herein, the following terms have the following
meanings when used herein with initial capital letters:
"Agreement" means this agreement, as the same may be amended from time to
time.
"Board of Directors" means the Board of Directors of the Company.
"Closing Date" means December 29, 1997.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $0.001 per share, of the
Company.
"Convertible Preferred Stock" means the convertible preferred stock of the
Company as more particularly described in that certain Certificate of
Designation, attached as Exhibit A hereto.
"Director" means a member of the Board of Directors.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Frisby Permitted Transferee" means, with respect to any Frisby
Stockholder, (i) any spouse or lineal descendant of such Frisby Stockholder,
(ii) any trust (or equivalent estate planning entity) where all of the
beneficial interest is held by such Frisby Stockholder and/or his spouse and/or
lineal descendants, or (iii) any other Frisby Stockholder; provided, however,
that each such transferee will be a Frisby Permitted Transferee for purposes of
this Agreement only if such transferee shall have executed and delivered to each
of MUSI and the Company an instrument reasonably satisfactory to MUSI pursuant
to which such transferee will have agreed to be bound by all of the terms of
this Agreement applicable to its transferor.
"Frisby Stockholder Group" means each of the Frisby Stockholders or any
Frisby Permitted Transferee.
"Initial Public Offering" means the first Public Offering of equity
securities of the Company.
<PAGE>
"Public Offering" means any primary or secondary public offering of equity
securities of the Company pursuant to an effective registration statement under
the Securities Act, other than pursuant to a registration on Form S-4 or Form
S-8 or any successor or similar form.
"Pro Rata" means, with respect to any offer including Securities, an offer
based on the relative percentages of Securities then held by all of the holders
of Securities to whom offer is made.
"Purchase Agreement" means the Purchase Agreement dated as of the Closing
Date between the Company and MUSI.
"Registrable Securities" means shares of Common Stock; provided that such
securities will cease to be Registrable Securities when and to the extent that
(i) a registration statement relating to such securities shall have been
declared effective by the Commission and such securities shall have been
disposed of pursuant to such effective registration statement, (ii) such
Registrable Securities have been transferred to a party in violation of this
Agreement,(iii) such Registrable Securities have ceased to be outstanding, or
(iv) such Registrable Securities are sold without registration pursuant to Rule
144.
"Registration Expenses" means all (i) registration and filing fees with the
Commission, (ii) fees and expenses of compliance with state securities or blue
sky laws (including reasonable fees and disbursements of a qualified independent
underwriter, if any, counsel in connection therewith and the reasonable fees and
disbursements of counsel in connection with blue sky qualifications of the
Registrable Securities), (iii) printing expenses, (iv) internal expenses of the
Company (including, without limitation, all salaries and expenses of officers
and employees performing legal or accounting duties), (v) fees and expenses of
counsel and independent public accountants for the Company, (vi) fees and
expenses of any additional experts retained by the Company in connection with
such registration, (vii) fees and expenses of listing the Registrable
Securities, if any, (viii) rating agency fees, (ix) transfer taxes, and (x)
reasonable fees and expenses of one counsel for the selling Stockholders.
"Rule 144" means Rule 144 under the Securities Act, as such rule may be
amended from time to time.
"Securities" means the Common Stock and Convertible Preferred Stock.
"Third Party" means a prospective purchaser of the Securities in an
arm's-length transaction where such purchaser is not the Company, an Affiliate
of the Company or an Affiliate of any Stockholder or a Frisby Permitted
Transferee.
<PAGE>
"Transferee" means any Person to whom any Stockholder Transfers any
Securities (other than in a sale pursuant to an effective registration statement
or without registration pursuant to Rule 144) in accordance with this Agreement
and who agrees to be bound by and to comply with all applicable provisions of
this Agreement.
"Underwriter" means a securities dealer who purchases any Registrable
Securities as a principal in connection with a distribution of such Registrable
Securities and not as part of such dealer's market-making activities.
(b) Except as otherwise provided herein, any right or action that may be
taken at the election of the Frisby Stockholder Group will be taken by a
representative of the Frisby Stockholder Group (the "Frisby Group
Representative") on behalf thereof. The initial Frisby Group Representative will
be G. Frisby. Upon the death or permanent disability of G. Frisby, the Frisby
Stockholder Group may designate a successor Frisby Group Representative upon
vote of the members thereof holding a majority of the Common Stock not held by
G. Frisby or his estate; provided, however, that (i) if no such successor is so
designated within 30 calendar days from such death or permanent disability, such
successor will be a member of the Frisby Stockholder Group designated by MUSI
and (ii) in the event that no Person is acting as the Frisby Group
Representative as of the time any action is otherwise to be taken hereunder by
the Frisby Group Representative or the Frisby Stockholder Group, such action may
be taken on behalf of the entire Frisby Stockholder Group by written action or
consent of the holders of a majority of shares of Common Stock then held by the
members of the Frisby Stockholder Group. Any change in the Frisby Group
Representative will become effective upon notice in accordance with Section 6.3.
(c) For purposes of this Agreement, any action or consent contemplated to
be taken or given by MUSI and its permitted Transferees will be effective if
taken or given, as the case may be, by MUSI or its permitted Transferees which
own the largest portion of the Securities owned by MUSI and all of its permitted
Transferees as of the relevant time.
<PAGE>
II. RIGHTS AND OBLIGATIONS WITH
RESPECT TO TRANSFER
2.1. Transfers. Until the fifth anniversary of the Closing Date, no Frisby
Stockholder may offer, sell, assign, grant a participation in, pledge or
otherwise transfer ("Transfer") any interest in any of its Common Stock without
the prior written consent of MUSI, other than (i) to any Frisby Permitted
Transferee, (ii) as provided in Articles II or III of this Agreement, or (iii)
in sales made pursuant to an effective registration statement or without
registration pursuant to Rule 144 after the Initial Public Offering.
2.2. Restrictive Legend. (a) Each certificate representing Securities owned
by any Stockholder will include the following legend (in addition to such
legends as may be appropriate under applicable securities laws):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER AS SET FORTH IN THE STOCKHOLDERS AGREEMENT, DATED AS OF
DECEMBER 29, 1997, AS FROM TIME TO TIME AMENDED, A COPY OF WHICH MAY BE OBTAINED
FROM FRISBY TECHNOLOGIES, INC.
(b) Each certificate representing Securities owned by any Stockholder or
any Transferee thereof (other than shares that have been sold pursuant to an
effective registration statement under the Securities Act or in accordance with
Rule 144 under the Securities Act) will (unless otherwise permitted by the
provisions of Section 2.2(c)) include a legend substantially as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THE
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM.
(c) Any Stockholder may, upon providing evidence (which, if required by the
Company, may include an opinion of counsel) reasonably satisfactory to the
Company, that such Securities either are not "restricted securities" (as defined
in Rule 144) or may be sold pursuant to Rule 144(k), exchange the certificate
representing such Securities for a new certificate that does not bear a legend
relating to restrictions under the securities laws.
2.3. Third Party Transfers. (a) If any Stockholder desires to Transfer any
of its Securities (other than pursuant to a Public Offering) to a Third Party (a
"Selling Stockholder"), such Selling Stockholder may not effect such Transfer of
such Securities (the "Offered Stock") to a Third Party (a "Third Party Sale")
unless such Stockholder complies with this Section 2.3.
(b) Prior to consummating a Third Party Sale, the Selling Stockholder will
deliver to each other Stockholder (the "Non-Offering Stockholders") a written
notice (an "ROFO Offer Notice") specifying (i) the aggregate amount of cash
consideration (the "Offer Price") for which the Selling Stockholder proposed to
sell the Offered Stock in such proposed Third Party Sale, (ii) the identity and
name of the purchaser, and if applicable, such purchaser's ultimate beneficial
owner(s), in such Third Party Sale, and (iii) all other material terms of such
proposed Third Party Sale. If a Non-Offering Stockholder delivers to the Selling
Stockholder a written notice (an "Acceptance Notice") within 20 Business Days
following the delivery of the ROFO Offer Notice (such 20 Business Day period
being referred to herein as the "ROFO Acceptance Period") stating that the
Non-Offering Stockholder is willing to purchase all of the Offered Stock for the
Offer Price and on the other terms set forth in the Offer Notice, the Selling
Stockholder will sell all (but not less than all) of the Offered Stock to such
Non-Offering Stockholder and such Non-Offering Stockholder will purchase such
Offered Stock from the Selling Stockholder, on the terms and subject to the
conditions set forth below; provided, however, that if more than one
Non-Offering Stockholder so notifies the Selling Stockholder within the ROFO
Acceptance Period that it is willing to purchase all of the Offered Stock for
the Offer Price and on the terms set forth in the Offer Notice, the Offered
Stock and the Offer Price will be allocated among such Non-Offered Stockholders
(each, a "Purchasing Stockholder") proportionately based upon their respective
percentage ownership interest in the Company or as may otherwise be specified by
such Purchasing Stockholders.
<PAGE>
(c) The consummation of any purchase of any Offered Stock by a Purchasing
Stockholder pursuant to this Section 2.3 (the "ROFO Closing") will occur not
earlier than 10 calendar days nor later than 120 calendar days following the
delivery of the Acceptance Notice (the intervening period being referred to
herein as the "ROFO Closing Period") at the principal executive offices of the
Company. At the ROFO Closing, (i) the Selling Stockholder will deliver to the
Purchasing Stockholder one or more certificates evidencing all of the Offered
Stock duly endorsed for transfer to the Purchasing Stockholder, together with
such other duly executed instruments or documents as may reasonably be required
to permit the Purchasing Stockholder to acquire the Offered Stock free and clear
of any claims, liens, pledges, options, encumbrances, security interests,
commitments and other restrictions of any kind (collectively, "Encumbrances"),
except for Encumbrances created by this Agreement, federal or state securities
laws, the Purchasing Stockholder or specified in the Offer Notice, and (ii) the
Purchasing Stockholder will deliver to the Selling Stockholder by wire transfer
to an account designated by the Selling Stockholder an amount in immediately
available funds equal to the Offer Price. In the event that any Third Party Sale
provides that a portion of the Offer Price is to be paid over time, as a
condition to the obligation of the Selling Stockholder to sell the Offered
Stock, the Purchasing Stockholder will provide the Selling Stockholder with
suitable collateral as security for such future payment obligations.
(d) If no Acceptance Notice relating to a proposed Third Party Sale shall
have been delivered to the Selling Stockholder prior to the expiration of the
ROFO Acceptance Period, if the Non-Offering Stockholders shall not have
delivered to the Selling Stockholder, prior to the expiration of the ROFO
Acceptance Period, written confirmation of the Non-Offering Stockholder's intent
not to purchase the Offered Shares ("Stockholder Rejection Notice"), or if the
ROFO Closing fails to occur prior to the expiration of the ROFO Closing Period
(unless the Purchasing Stockholder was ready, willing and able prior to the
expiration of the ROFO Closing Period to consummate the transaction to be
consummated by the Purchasing Stockholder at the ROFO Closing or the Purchasing
Stockholder was not so ready, willing and able to consummate the transaction to
be so consummated by the Purchasing Stockholder at the ROFO Closing as a result
of the Selling Stockholder's failure reasonably to cooperate in good faith with
the efforts of the Purchasing Stockholder to consummate such transaction), the
Selling Stockholder may consummate the proposed Third Party Sale in accordance
with this Section 2.3(d).
(e) The Selling Stockholder may consummate a Third Party Sale that it is
otherwise entitled to consummate pursuant to this Section 2.3(d) only:
(i) during the 60 calendar day period immediately following the sooner to
occur of (x) the expiration of the ROFO Acceptance Period (in the event that no
Acceptance Notice was timely delivered to the Selling Stockholder), or (y) the
Selling Stockholder's receipt of the Stockholder Rejection Notice from the
Non-Offering Stockholder, or the 60 calendar day period immediately following
the expiration of the ROFO Closing Period (in the event that an Acceptance
Notice was timely delivered to the Selling Stockholder but the ROFO Closing
failed to timely occur),
(ii) at a price at least equal to the Offer Price, and
(iii) upon non-price terms no less favorable to the Selling Stockholder
than those set forth in the Offer Notice.
(f) This Section 2.3 shall, with respect to MUSI, terminate and be of no
further force and effect upon expiration of the "lock-up" period to which the
Stockholders agree to be bound in connection with the Initial Public Offering
and, with respect to the Frisby Stockholder Group, continue in effect after the
expiration of such "lock-up" until the fifth anniversary of the date hereof.
<PAGE>
(g) Shares of Securities acquired by a Third Party pursuant to a Third
Party Sale shall no longer subject to the restrictions contained in this Section
2.3.
2.4. Improper Transfer. (a) Any attempt to Transfer any Securities not in
compliance with this Agreement will be null and void and neither the Company nor
any transfer agent of the Company will register, or otherwise recognize in the
Company's records, any such improper Transfer. Any cost or loss incurred as a
result of any such attempt to transfer shall be borne by the Stockholder who
attempted such improper Transfer.
(b) No Stockholder will enter into any transaction or series of
transactions for the purpose or with the effect of, directly or indirectly,
denying or impairing the rights or obligations of any Person under this
Agreement, and any such transaction will be null and void and, to the extent
that such transaction requires any action by the Company, it will not be
registered or otherwise recognized in the Company's records or otherwise.
2.5. Transferees. Except as otherwise specifically provided herein, any and
all provisions of this Agreement which apply to the Stockholders will apply with
equal force to any Transferee.
III. REGISTRATION RIGHTS
3.1. MUSI Demand Registrations. (a) At any time and from time to time
following the eighteen month anniversary of the Initial Public Offering, MUSI
may make written requests for registration under the Securities Act of all or
part of MUSI's Registrable Securities (a "MUSI Demand Registration"); provided,
however, that the Company will not be obliged to effect a MUSI Demand
Registration on more than two (2) occasions. Such request will specify the
number of shares of Registrable Securities proposed to be sold and will also
specify the intended method of disposition thereof.
(b) If MUSI so elects, the offering of the MUSI Registrable Securities
pursuant to such MUSI Demand Registration will be in the form of an underwritten
offering. MUSI will select the managing Underwriter(s) and any additional
participants in connection with the offering.
(c) If, in connection with any MUSI Demand Registration, the Company or any
other Stockholder also proposes to sell securities and the managing Underwriter
of an offering described in this Section 3.1 advises the Company, MUSI and the
other Stockholders in writing that the success or pricing of the offering would
be materially and adversely affected by the inclusion of all of the securities
requested to be included, then the Company will include in such registration (i)
first, the Registrable Securities MUSI proposes to offer for sale, which number
of securities will be reduced to the extent necessary to reduce the total amount
of securities to be included in the offering to the amount recommended by such
managing Underwriter, (ii) second, the securities the Company proposes to offer
for sale, which number of securities will be reduced to the extent necessary to
reduce the total amount of securities to be included in the offering to the
amount recommended by such managing Underwriter and (iii) third, the Registrable
Securities the other Stockholders propose to offer for sale and the managing
Underwriter recommends be included in such offering, allocated pro rata among
such Stockholders.
<PAGE>
(d) Notwithstanding the foregoing provisions of this Section 3.1, in the
event the Company receives notice of a MUSI Demand Registration, the Company may
elect once, and only once, by written notice to MUSI within 20 days after
receipt of such notice, to proceed with a registration of Common Stock for the
Company's account in lieu of proceeding with the MUSI Demand Registration, in
which case the provisions of Section 3.2 (and not this Section 3.1) will apply.
If the Company exercises the right described in the preceding sentence, MUSI
will not be deemed (for purposes of determining the number of future MUSI Demand
Registrations that may be demanded under the terms of this Agreement) to have
exercised the right to request a MUSI Demand Registration unless at least 50% of
the Registrable Securities that MUSI desired to include in such registration
were included pursuant to Section 3.2.
(e) Notwithstanding any other provision hereof, MUSI will not initiate a
demand registration unless it proposes to include therein Registrable Securities
which it believes in good faith to have a value of at least $500,000.
3.2. Piggy-Back Registration. (a) If the Company proposes to file a
registration statement under the Securities Act with respect to an offering of
any shares of Common Stock (i) for its own account (other than a registration
statement on Form S-4 or S-8 (or any substitute form that may be adopted by the
Commission)) or (ii) for the account of any holders of its securities, then the
Company will give written notice of such proposed filing to the holders of
Registrable Securities as soon as practicable (provided that holders of
Registrable Securities will be given such notice not less than 20 calendar days
prior to the deadline set by the Company for electing to include Registrable
Securities in such offering), and such notice will offer such holders the
opportunity, subject to the limitations provided in Section 3.2(b), to register
such number of shares of Registrable Securities as such Stockholders may request
on the same terms and conditions as the registration of the Company's or such
other holders' securities.
(b) Notwithstanding anything contained herein, if the managing Underwriter
of an underwritten offering under this Section 3.3 advises the Company in
writing that the success or pricing of the offering would be materially and
adversely affected by the inclusion of all of the securities requested to be
included, then the Company will include in such registration (i) first, the
securities the Company proposes to offer for sale and (ii) second, the number of
other securities of the Company (including, without limitation, Registrable
Securities) so requested to be included which in the opinion of the managing
Underwriter can be sold, allocated pro rata among the Stockholders proposing to
offer Registrable Securities for sale.
(c) A request by MUSI or the Frisby Stockholder Group to include
Registrable Securities in a proposed underwritten offering pursuant to this
Section 3.2 will not be deemed to be a request for a demand registration
pursuant to Section 3.1.
<PAGE>
IV. REGISTRATION PROCEDURES
4.1. Filings; Information. Whenever MUSI or the Frisby Stockholder
Representative (the "Registering Stockholder") request that any Registrable
Securities be registered pursuant to Article III, the Company will use its best
efforts to effect the registration of such Registrable Securities as promptly as
is practicable, and in connection with any such request:
(a) The Company will as expeditiously as possible prepare and file with the
Commission a registration statement on any form for which the Company then
qualifies and which counsel for the Company deems appropriate and available for
the sale of the Registrable Securities to be registered thereunder in accordance
with the intended method of distribution thereof, and use its best efforts to
cause such filed registration statement to become and remain effective for a
period of not less than 90 days; provided, however, that if the Company
furnishes to the Registering Stockholder a certificate signed by the Company's
Chief Executive Officer, President or any Vice-President stating that in his
good faith judgment it would be detrimental or otherwise disadvantageous to the
Company or its stockholders for such a registration statement to be filed as
expeditiously as possible, the Company will have a period of not more than 90
calendar days within which to file such registration statement measured from the
date of the Company's receipt of the Registering Stockholder's request for
registration in accordance with Article III.
(b) The Company will, if requested, prior to filing such registration
statement or any amendment or supplement thereto, furnish to the Registering
Stockholder and each applicable managing Underwriter, if any, copies thereof,
and thereafter furnish to the Registering Stockholder and each such Underwriter,
if any, such number of copies of such registration statement, amendment and
supplement thereto (in each case including all exhibits thereto and documents
incorporated by reference therein) and the prospectus included in such
registration statement (including each preliminary prospectus) as the
Registering Stockholder or each such Underwriter may reasonably request in order
to facilitate the sale of the Registrable Securities.
(c) After the filing of the registration statement, the Company will
promptly notify the Registering Stockholder of any stop order issued or, to the
Company's knowledge, threatened to be issued by the Commission and take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered.
(d) The Company will endeavor to qualify the Registrable Securities for
offer and sale under such other securities or blue sky laws of such
jurisdictions in the United States as the Registering Stockholder reasonably
requests; provided, however, that the Company will not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subsection (d), (ii) subject
itself to taxation in any such jurisdiction, or (iii) consent to general service
of process in any such jurisdiction.
(e) The Company will as promptly as is practicable notify the Registering
Stockholder at any time when a prospectus relating to the sale of the
Registrable Securities is required by law to be delivered in connection with
sales by an Underwriter or dealer, of the occurrence of any event requiring the
preparation of a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading and promptly make available to the Registering Stockholder
and to the Underwriters any such supplement or amendment. The Registering
Stockholder agrees that, upon receipt of any notice from the Company of the
occurrence of any event of the kind described in the preceding sentence, the
Registering Stockholder will forthwith discontinue the offer and sale of
Registrable Securities pursuant to the registration statement covering such
Registrable Securities until receipt by the Registering Stockholder and the
Underwriters of the copies of such supplemented or amended prospectus and, if so
directed by the Company, the Registering Stockholder will deliver to the Company
all copies, other than permanent file copies then in the Registering
Stockholder's possession, of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice. In the event the
Company gives such notice, the Company will extend the period during which such
registration statement will be contained effective as provided in Section 4.1(a)
by the number of days during the period from and including the date of the
giving of such notice to the date when the Company will make available to the
Registering Stockholder such supplemented or amended prospectus.
<PAGE>
(f) The Company will enter into customary agreements (including an
underwriting agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the sale of such
Registrable Securities.
(g) The Company will furnish to the Registering Stockholder and to each
Underwriter a signed counterpart, addressed to the Registering Stockholder or
such Underwriter, of (i) an opinion or opinions of counsel to the Company and
(ii) a comfort letter or comfort letters from the Company's independent public
accountants, each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters, as the case may be, as the
Registering Stockholder or the managing Underwriter may reasonably request.
(h) The Company will make generally available to its security holders, as
soon as reasonably practicable, an earnings statement covering a period of 12
months, beginning within three months after the effective date of the
registration statement, which earnings statement will satisfy the provisions of
Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(i) The Company will use its reasonable efforts to cause all such
Registrable Securities to be listed on each securities exchange on which similar
securities issued by the Company are then listed or, if not so listed, on a
national securities exchange.
The Company may require the Registering Stockholder promptly to furnish in
writing to the Company such information regarding the Registering Stockholder,
the plan of distribution of the Registrable Securities and other information as
the Company may from time to time reasonably request or as may be legally
required in connection with such registration.
4.2. Registration Expenses. Registration Expenses incurred in connection
with any registration made or requested to be made pursuant to Article III will
be borne by the Company, whether or not any such registration statement becomes
effective, to the extent permitted by applicable law. The Registering
Stockholder will pay, on a pro rata basis, any underwriting fees, discounts or
commissions attributable to the sale of the Registrable Securities.
<PAGE>
4.3. Indemnification by the Company. The Company agrees to indemnify and
hold harmless each Stockholder registering shares pursuant to Article III, its
officers and directors, and each Person, if any, who controls each such
Stockholder within the meaning of Section 15 of the Securities Act or Section 20
of the Exchange Act from and against any and all losses, claims, damages,
liabilities and expenses caused by any untrue statement or alleged untrue
statement of a material fact contained in any registration statement or
prospectus relating to the Registrable Securities (as amended or supplemented if
the Company will have furnished any amendments or supplements thereto) or any
preliminary prospectus, or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information
furnished in writing to the Company by or on behalf of such Stockholder
expressly for use therein; provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus will not inure to the
benefit of any Stockholder if a copy of the current prospectus was not provided
to the applicable purchaser by such Stockholder and such current copy of the
prospectus would have cured the defect giving rise to such loss, claim, damage,
liability or expense. The Company also agrees to indemnify any Underwriters of
the Registrable Securities, their officers and directors and each Person who
controls such underwriters on substantially the same basis as that of the
indemnification of the Stockholders provided in this Section 4.3.
4.4. Indemnification by Stockholders. Any Stockholder registering shares
pursuant to Article III agrees, severally but not jointly, to indemnify and hold
harmless the Company, its officers and Directors and each Person, if any, who
controls the Company within the meaning of either Section 15 of the Securities
Act or Section 20 of the Exchange Act to the same extent as the foregoing
indemnity from the Company to such Stockholder, but only with reference to
information related to such Stockholder furnished in writing by or on behalf of
such Stockholder expressly for use in any registration statement or prospectus
relating to the Registrable Securities, or any amendment or supplement thereto
or any preliminary prospectus; provided, however, that in no event will the
liability of any Stockholder under this Section 4.4 be greater in amount than
the dollar amount of the proceeds received by such Stockholder upon the sale of
the Registrable Securities giving rise to such indemnification obligation. Each
such Stockholder also agrees to indemnify and hold harmless any Underwriters of
the Registrable Securities, their officers and directors and each Person who
controls such Underwriters on substantially the same basis as provided for in
the underwriting agreement relating to such offering.
4.5. Conduct of Indemnification Proceedings. In case any proceeding
(including any governmental investigation) is instituted involving any Person in
respect of which indemnity may be sought pursuant to Section 4.3 or Section 4.4,
such Person will promptly notify the Person against whom such indemnity may be
sought in writing and the indemnifying party upon request of the indemnified
party will retain counsel reasonably satisfactory to the indemnified party to
represent the indemnified party and any others the indemnifying party may
designate in such proceeding and will pay the fees and disbursements of such
counsel related to the proceeding; provided, however, that the failure to so
notify the indemnifying party shall not relieve the indemnifying party from any
liability that it may otherwise have to such indemnified person, except to the
extent the indemnifying person shall have been materially prejudiced by such
failure. In any such proceeding, any indemnified party will have the right to
retain its own counsel, but the fees and expenses of such counsel will be at the
expense of such indemnified party unless (a) the indemnifying party and the
indemnified party have mutually agreed to the retention of such counsel or (b)
the named parties to any such proceeding (including any impleaded parties)
include both the indemnified party and the indemnifying party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them, in which case the fees and expenses
of such counsel will be paid by the Company. It is understood that the
indemnifying party will not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (in addition to any local
counsel) at any time for all such indemnified parties, and that all such fees
and expenses will be reimbursed as they are incurred. In the case of the
retention of any such separate firm for the indemnified parties, such firm will
be designated in writing by the indemnified parties. The indemnifying party will
not be liable for any settlement of any proceeding effected without its consent,
but if settled with such consent, or if there be a final judgment for the
plaintiff, the indemnifying party will indemnify and hold harmless such
indemnified parties from and against any loss or liability (to the extent stated
above) by reason of such settlement or judgment.
<PAGE>
4.6. Contribution. (a) If the indemnification provided for herein is for
any reason unavailable to the indemnified parties in respect of any losses,
claims, damages or liabilities referred to herein, then each such indemnifying
party, in lieu of indemnifying such indemnified party, will contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities in such proportion as is appropriate to reflect
the relative fault of the Company, the Stockholders and any Underwriter in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company, Stockholders registering
shares pursuant to Article III and the Underwriter will be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by such party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
(b) The Company and each Stockholder registering shares of Common Stock
pursuant to Article III agree that it would not be just and equitable if
contribution pursuant to this Section 4.6 were determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding subsection. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the immediately preceding subsection will
be deemed to include, subject to the limitations set forth above, any legal or
other expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 4.6, no Underwriter will be required to contribute
any amount in excess of the amount by which the total price at which the
Registrable Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and no Stockholder registering shares
pursuant to Article III will be required to contribute any amount in excess of
the amount by which the total price at which the Registrable Securities of such
Stockholder were offered to the public (less underwriters' discounts and
commissions) exceeds the amount of any damages which such Stockholder has
otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
4.7. Participation in Underwritten Registrations. No Person may participate
in any underwritten registration hereunder unless such Person (a) agrees to sell
such Person's securities on the basis provided in any underwriting arrangements
approved by the Persons entitled hereunder to approve such arrangements and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements, lock-up agreements and other documents reasonably
required under the terms of such underwriting arrangements and these
registration rights.
4.8. Rule 144. The Company will file any reports required to be filed by it
under the Securities Act and the Exchange Act and will take such further action
as any Stockholder may reasonably request to the extent required from time to
time to enable the Stockholders to sell Registrable Securities without
registration under the Securities Act within the limitation of the exemptions
provided by Rule 144, as such Rule may be amended from time to time, or other
appropriate rule or regulation adopted by the Commission. Upon the request of
any Stockholder, the Company will deliver to the Stockholder a written statement
as to whether the Company has complied with such reporting requirements.
<PAGE>
4.9. Restrictions on Public Sale by Holders of Registrable Securities. If
and to the extent requested by the Company, in the case of a non-underwritten
Public Offering, and if and to the extent requested by the managing Underwriter
or Underwriters, in the case of an underwritten Public Offering, each of the
Stockholders agree not to effect, except as part of such registration, any sale
of the shares of Securities or a similar security of the Company, or any
securities convertible into or exchangeable or exercisable for such Securities
during such time period to which the Company agrees not to effect any sale of
securities in connection therewith, or to which the Registering Stockholder
agrees if the Company does not include any securities therein. In addition, each
of the Stockholders agrees to execute any customary lock-up agreement reasonably
requested by the managing Underwriter to confirm its agreement in accordance
with the preceding sentence, but only if identical lock-up agreements are
required of all principal Stockholders. Without limiting the generality of the
foregoing, MUSI agrees that it and any of its transferees will, in connection
with the Initial Public Offering, enter into a lock-up agreement for a period of
up to eighteen months or, if MUSI does not exercise its option and acquire the
Option Shares, twenty-four months.
V. CERTAIN ARRANGEMENTS
5.1. Board of Directors. (a) The Stockholders acknowledge and agree that
upon the Initial Public Offering, the Board of Directors of the Company will
consist of five members, designated as follows: (i) one person designated from
time to time by MUSI, (ii) three persons designated from time to time by the
Frisby Group Representative, and (iii) one person to be designated in accordance
with the terms of the Underwriting Agreement between the Company and Barington
Capital Group, L.P.
(b) Each of the Stockholders further agrees to vote all the shares of
Securities with respect to which it has voting rights, and to cause all persons
designated by it as Directors to vote (i) in favor of the removal from the Board
of Directors, upon notice to the other Stockholders, of any person or persons
designated by MUSI or the Frisby Group Representative, as the case may be, and
to elect to the unexpired term of each Director so removed another person
designated by MUSI or the Frisby Group Representative, as the case may be, and
(ii) in the event of any vacancy on the Board of Directors by reason of death or
resignation, to elect to such unexpired term another person designated in
accordance with Section 5.1(a) by the Stockholder that designated the deceased
or resigned Director.
5.2. Certain Board Actions. The parties agree that without the prior
unanimous approval of the Directors designated by MUSI and the Frisby Group
Representative, the Company will not:
(a) adopt, during the first twelve months after the Initial Public
Offering, any employee stock option plan, or any stock appreciation, phantom
stock, profit participation or similar agreement or arrangement other than the
1998 Stock Option Plan, attached as Exhibit B hereto;
(b) dissolve, liquidate, recapitalize or reorganize the Company; or
(c) commence any case, proceeding or other action relating to bankruptcy or
reorganization of the Company.
5.3. Financial Information. From and after the date hereof, the Company
will transmit to MUSI copies of all financial information and other information
concerning the Company's operations at the same time such financial and other
information is given to the Directors. Without limiting the foregoing, the
Company will provide MUSI by facsimile monthly financial statements and other
financial information prepared for management on a regular basis, material
business transaction information and such other information concerning the
Company as may be reasonably requested by MUSI from time to time. In the event
the Company informs MUSI that the information provided pursuant to this Section
5.3 constitutes material non-public information, MUSI agrees that it will not
disclose such information in violation of applicable securities laws. MUSI
acknowledges that it is required to comply with applicable securities laws which
restrict the transfer of Securities while it is in possession of any such
material non-public information.
<PAGE>
5.4. Key Man Insurance. The Company agrees to acquire and maintain a "Key
Man" insurance policy in the amount of at least $2,500,000 (the "Insurance
Amount") in respect of G. Frisby with the Company to be named as beneficiary
under such policy. The Insurance Amount shall be adjusted from time to time as
the Board of Directors shall deem necessary or desirable.
5.5. Confidentiality Obligation. MUSI agrees that the provisions of that
certain Confidentiality Agreement dated November 14, 1997 (the "Confidentiality
Agreement") between Dott. Luca Bassani Antivari and Ernst & Young LLP shall
apply to MUSI with respect to all information provided to it pursuant to Section
5.3 of this Agreement as though MUSI were a party to such Confidentiality
Agreement. In addition, prior to the disclosure to MUSI of any trade secrets,
know-how or other confidentiality and proprietary intellectual property rights
of the Company, MUSI will enter into an appropriate confidentiality and
non-disclosure agreement with the Company.
VI. MISCELLANEOUS
6.1. Headings. The headings in this Agreement are for convenience of
reference only and will not control or affect the meaning or construction of any
provisions hereof.
6.2. Entire Agreement. This Agreement, the Purchase Agreement and the
Option Agreement constitute the entire agreement between the parties with
respect to the subject matter of this Agreement. This Agreement, the Purchase
Agreement and the Option Agreement supersede all prior agreements and
understandings, both oral and written, between the parties with respect to the
subject matter of this Agreement, the Purchase Agreement and the Option
Agreement. None of this Agreement, the Purchase Agreement or any Option
Agreement is intended to confer upon any Person other than the parties hereto
and thereto any rights or remedies hereunder or thereunder. In the event of any
conflict between the provisions of this Agreement and that certain Shareholder
Agreement dated as of December 10, 1997 by and among the Company, J. Frisby, and
G. Frisby, the applicable provisions of this Agreement will prevail.
6.3. Notices. Any notice, request, instruction or other document required
or permitted to be given hereunder by any party hereto to another party hereto
will be in writing and will be given to such party at its address set forth in
Annex I attached hereto, with, in the case of the Company, a copy sent to
Secretary, Frisby Technologies, Inc. at its principal executive offices or, in
the case of a Transfer permitted hereunder, to the address of the Transferee
specified by it upon notice given in accordance with the terms hereof, or to
such other address as the party to whom notice is to be given may provide in a
written notice to the party giving such notice, a copy of which written notice
will be on file with the Secretary of the Company. Each such notice, request or
other communication will be effective (i) if given by certified mail, 72 hours
after such communication is deposited in the mails with certified postage
prepaid addressed as aforesaid, (ii) one Business Day after being furnished to a
nationally recognized overnight courier for next Business Day delivery, and
(iii) on the date sent if sent by electronic facsimile transmission, receipt
confirmed.
<PAGE>
6.4. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York, without regard to the
conflict of laws rules of such state.
6.5. Severability. The invalidity or unenforceability of any provisions of
this Agreement in any jurisdiction will not affect the validity, legality or
enforceability of the remainder of this Agreement in such jurisdiction or the
validity, legality or enforceability of this Agreement, including any such
provision, in any other jurisdiction, it being intended that all rights and
obligations of the parties hereunder will be enforceable to the fullest extent
permitted by law.
6.6. Entire Agreement. This Agreement constitutes the entire agreement and
understanding among the parties concerning the subject matter of this Agreement
and supersedes all prior agreements or understandings between the parties.
6.7. Termination; Termination of Rights. This Agreement may be terminated
at any time by an instrument in writing signed by the Company and Stockholders
owning at least 90% of the Securities. At such time as any Stockholder owns 25%
or less of the Securities owned by such Stockholder on the date hereof, all of
such Stockholder's rights hereunder, including without limitation such
Stockholder's rights under Articles II and III, will terminate; provided,
however, that all of such Stockholder's obligations hereunder will remain in
full force and effect. 6.8. Successors, Assigns and Transferees. The provisions
of this Agreement will be binding upon and inure to the benefit of the parties
hereto and their respective heirs, successors and permitted assigns. Except as
expressly contemplated hereby, neither this Agreement nor any provision hereof
will be construed so as to confer any right or benefit upon any Person other
than the parties to this Agreement and their respective successors and permitted
assigns.
6.9. Amendments; Waivers. (a) No failure or delay on the part of any party
in exercising any right, power or privilege hereunder will operate as a waiver
thereof, nor will any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights and remedies herein provided will be cumulative and not exclusive of
any rights or remedies provided by law.
(b) Neither this Agreement nor any term or provision hereof may be amended
or waived except by an instrument in writing signed, in the case of an amendment
or waiver, by the Company and Stockholders owning at least 90% of the
Securities.
6.10. Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original with the same effect as if the
signatures thereto and hereto were upon the same instrument.
<PAGE>
6.11. Remedies. The parties hereby acknowledge that money damages would not
be adequate compensation for the damages that a party would suffer by reason of
a failure of any other party to perform any of the obligations under this
Agreement. Therefore, each party hereto agrees that specific performance is the
only appropriate remedy under this Agreement and hereby waives the claim or
defense that any other party has an adequate remedy at law.
6.12. Consent to Jurisdiction. Each of the Stockholders and the Company
irrevocably submits to the non-exclusive jurisdiction of any court located in
the Borough of Manhattan or the United States Federal Court sitting in the
Southern District of New York over any suit, action or proceeding arising out of
or relating to this Agreement. Each of the Stockholders and the Company consents
to process being served in any such suit, action or proceeding by serving a copy
thereof upon the agent for service of process, provided that to the extent
lawful and possible, written notice of such service will also be mailed to such
Stockholders or the Company, as the case may be. Each of the Stockholders and
the Company agrees that such service will be deemed in every respect effective
service of process upon such Stockholders or the Company, as the case may be, in
any such suit, action or proceeding and will be taken and held to be valid
personal service upon such Stockholder or the Company, as the case may be.
Nothing in this subsection will affect or limit any right to serve process in
any manner permitted by law, to bring proceedings in the courts of any
jurisdiction or to enforce in any lawful manner a judgment obtained in one
jurisdiction in any other jurisdiction. Each of the Stockholders and the Company
waives any right it may have to assert the doctrine of forum non conveniens or
to object to venue to the extent any proceeding is brought in accordance with
this Section 6.11.
6.13. Termination of Certain Right. MUSI's right to designate Directors
pursuant to Section 5.1 and MUSI's rights under Section 2.3 shall terminate if
(a) Dott. Luca Bassani Antivari ceases to own, directly or indirectly, a
majority of the voting securities of MUSI, or (b) MUSI transfers fifty percent
(50%) or more of its Securities to one or more Permitted Transferees.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
FRISBY TECHNOLOGIES, INC.
By: /s/Gregory S. Frisby
--------------------------------
Name: Gregory S.Frisby
Title: President
STOCKHOLDERS:
/s/Gregory S. Frisby
---------------------------------
Gregory S. Frisby
/s/Jeffry D. Frisby
---------------------------------
Jeffry D. Frisby
MUSI INVESTMENTS S.A.
By:/s/Dott. Luca Bassani Antivari
----------------------------------
Name: Dott. Luca Bassani Antivari
Title: President
<PAGE>
EXHIBIT A
Certificate of Designation of Convertible Preferred Stock
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF THE CONVERTIBLE PREFERRED STOCK
OF FRISBY TECHNOLOGIES, INC.
FRISBY TECHNOLOGIES, INC., a corporation organized and exiting under the
General Corporation Law of the State of Delaware (the "Corporation"), DOES
HEREBY CERTIFY:
That, pursuant to authority conferred upon the Board of Directors by the
Certificate of Incorporation (as amended) of said corporation, and pursuant to
the provisions of Section 151 of Title 8 of the Delaware code of 1953, said
Board of Directors, adopted a resolution providing for which resolution is as
follows:
BE IT RESOLVED, that the Corporation be, and it hereby is, authorized to
create and issue 1,000,000 shares of preferred stock, par value $.001,
designated Convertible Preferred Stock ("Convertible Preferred Stock"), with the
powers, designations, preferences and rights and the qualifications, limitations
or restrictions thereof hereinafter set forth in this resolution:
1. Dividends. The shares of Convertible Preferred Stock shall only be
entitled to dividends (whether in cash or property or securities, other than
dividends which are paid or intended to be paid in connection with distributions
of the Corporation's assets upon the voluntary or involuntary liquidation,
dissolution or winding up of the Corporation) when declared by the Corporation's
Board of Directors. Each share of Convertible Preferred Stock with respect to
dividend payments shall be equal in every respect to every other share of
Convertible Preferred Stock. Prior to any payment of any dividend with respect
to any share of Common Stock, each share of Convertible Preferred Stock shall be
entitled to receive, when declared by the Corporation's Board of Directors, a
dividend or dividends which aggregate $1.00 per share of Convertible Preferred
Stock (the "Dividend Preference"). Upon payment of the Dividend Preference, each
share of Convertible Preferred Stock shall thereafter share equally with all
shares of Common Stock, whether now or hereafter authorized, with respect to any
dividend which may, from time to time, be declared by the Corporation's Board of
Directors. All dividends or distributions which are paid or intended to be paid
in connection with a liquidation, dissolution or winding up of the Corporation
shall be preferred, as provided in Sections 3(a) and 3(b) hereof.
2. Voting Rights; No Preemptive Rights. The holders of Convertible
Preferred Stock shall, by virtue of their ownership thereof, be entitled to cast
one vote per share thereof on each matter submitted to the Corporation's
shareholders for voting. Such votes shall be cast together with those cast by
the holders of Common Stock as one class, except as required by law. The
Convertible Preferred Stock shall not have cumulative voting rights. The holders
of Convertible Preferred Stock shall not have any preemptive rights upon the
issuance or sale of any securities.
<PAGE>
3. Liquidation Rights.
(a) If the Corporation shall be voluntarily or involuntarily liquidated,
dissolved or wound up at any time when any of the Convertible Preferred Stock
shall be outstanding, the holders of the then outstanding Convertible Preferred
Stock shall have a preference against the assets (including cash, securities and
property) of the Corporation available for distribution to the holders of the
Common Stock equal to the sum of (i) $4.26 per share and (ii) an amount equal to
all declared but unpaid dividends (the "Preference Amount"); provided, however,
that any reduction of the authorized or issued shares of the stock of the
Corporation of any class, whether now or hereafter authorized, shall not be
deemed to be a liquidation of the Corporation within the meaning of any of the
provisions of this Section 3; and provided, further, however, that a liquidation
for the purposes of this Section shall not be deemed to occur if: (a) the
consolidation or merger of the Corporation into or with any corporation or
corporations wherein the holders of the Convertible Preferred Stock are to
receive preferred securities of the merged or consolidated entity having
substantially similar rights, preferences and protections as those of the
Convertible Preferred Stock (as contemplated herein); (b) the merger of the
Corporation with another corporation in which the Corporation is the surviving
corporation and which does not result in any reclassification or change -- other
than a change in par value, or from par value to no par value or from no par
value to par value, or as a result of a subdivision or combination -- of
outstanding shares of the Corporation's Common Stock; or (c) the transfer,
assignment or contribution of the Corporation's assets in connection with, or
the creation of, any joint venture or limited liability entity in exchange for
an equity interest shall not be deemed to be a liquidation for the purposes of
this Section.
(b) All of the Preference Amount to be paid to the holders of Convertible
Preferred Stock as provided in this Section 3 shall be paid or set apart for
payment before the payment or setting apart for payment of any amount for, or
the distribution of any property of the Corporation to, the holders of any
Common Stock, whether now or hereafter authorized, in connection with such
liquidation, dissolution or winding up.
(c) Following the full payment of the Preference Amount, the holders of the
Convertible Preferred Stock shall thereafter receive, upon the liquidation or
dissolution of the Corporation, at the same time and on the same terms as the
holders of the Common Stock receive, a portion of the remaining assets of the
Corporation which are distributable to the holders of the Common Stock equal to
an amount which would have been distributed if the Convertible Preferred Stock
had been converted into Common Stock immediately prior to the date of such
liquidation or dissolution.
4. Redemption. The Corporation shall not redeem, purchase or otherwise
acquire, directly or indirectly through a subsidiary or otherwise, any of the
Convertible Preferred Stock without the consent of all of the then holders of
the Convertible Preferred Stock. No shares of Convertible Preferred Stock
redeemed or purchased by the Corporation pursuant to this Section 4 shall be
reissued by the Corporation.
<PAGE>
5. Conversion.
(a) Optional Conversion. The holder of any shares of Convertible Preferred
Stock may (1) during the sixty day period commencing after the 370th day
following the closing of the Corporation's Initial Public Offering, or (2) at
any time following the 270th day following the issuance of the shares of
Convertible Preferred Stock, if the Initial Public Offering has not occurred
prior to such date, convert, at such holder's option, all or any portion of such
shares of Convertible Preferred Stock into Common Stock at the then applicable
Conversion Ratio. At the time of conversion, the Corporation shall pay in cash
to each holder of Convertible Preferred Stock so converted an amount equal to
all unpaid dividends, accrued thereon to the date of conversion, if such
dividend was declared by the Board of Directors of the Corporation. In the event
of conversion, the Corporation shall forthwith transmit to each holder of
Convertible Preferred Stock a certificate or certificates for the shares of
Common Stock issued as a result thereof dated the date of conversion against
delivery of the certificate or certificates representing the Convertible
Preferred Stock to be converted at the principal office of the Corporation (or
at such other place as the Corporation may designate in a written notice sent to
the holder by first-class mail, postage prepaid, at its address shown on the
books of the Corporation), and such holders shall be deemed for all purposes to
be the holders of such Common Stock as of the date of conversion.
(b) Stock Fully Paid; Reservation of Shares. All shares of Common Stock
which may be issued upon conversion of Convertible Preferred Stock will, upon
issuance, be duly issued, fully paid and non-assessable and free from all taxes,
liens and charges with respect to the issue thereof. At all times that any
Convertible Preferred Stock is outstanding, the Corporation shall have
authorized, and shall have reserved for the purpose of issuance upon such
conversion, a sufficient number of shares Common Stock.
(c) Reclassification, Consolidation or Merger. In the case of any
reclassification or change (a "Reclassification") of outstanding Common Stock
issuable upon conversion of Convertible Preferred Stock (other than a change in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a subdivision or combination), including any Reclassification
in the case of any consolidation or merger of the Corporation with or into
another corporation which does not constitute a liquidation under Section 3, the
Convertible Preferred Stock shall, without payment of additional consideration
therefor, be deemed modified so as to provide that upon the Optional Conversion
provided herein, each share of the Convertible Preferred Stock shall procure, at
the time of the Optional Conversion, in lieu of each share of Common Stock
theretofore issuable upon such conversion, the kind and amount of shares of
stock, other securities, options, rights, warrants, money and property
receivable upon such Reclassification, by the holder of one share of Common
Stock. The provisions of this subsection shall similarly apply to successive
Reclassifications.
<PAGE>
(d) Subdivision or Combination of Shares. If the Corporation, at any time
or times while any of the Convertible Preferred Stock is outstanding, shall
subdivide or combine its Common Stock, the Conversion Ratio of the Convertible
Preferred Stock (i.e., one share of Convertible Preferred Stock to one share of
Common Stock) shall be proportionately reduced or increased, as of the effective
date of such subdivision or combination.
6. No Reissuance of Convertible Preferred Stock. No shares of Convertible
Preferred Stock which have been converted into Common Stock shall be reissued by
the Corporation; provided, however, that each such share, after being retired
and cancelled, shall be restored to the status of an authorized but unissued
share of preferred stock without designation as to series and may thereafter be
issued as a share of preferred stock not designated Convertible Preferred Stock
upon proper corporate and shareholder authorization.
7. Protective Provisions. So long as any shares of Convertible Preferred
Stock shall be outstanding, the Corporation shall not, without the approval by
the vote or written consent of the holders of at least 75% (or more if required
by law) of the shares of Convertible Preferred Stock outstanding at the time:
(a) Amend or repeal any provision of, or add any provision to, the
Corporation's Certificate of Incorporation (including, without limitation, any
resolution of the Board comprising a portion thereof fixing and determining the
terms of any series of preferred, whether now or hereafter authorized) or the
Corporation's By-Laws, if such action would alter or change the Convertible
Preferred Stock or any right or preference thereof;
(b) Enter into any agreement, indenture or other instrument which contains
any provision (i) restricting the payment of dividends by the Corporation on the
Convertible Preferred Stock; or (ii) restricting the conversion of the
Convertible Preferred Stock to the full extent permitted by Section 5 hereof;
8. Parity. If at any time any payment is required to be made on or with
respect to Convertible Preferred Stock and the Corporation does not have funds
sufficient to make all payments then required to be made on or with respect to
the Convertible Preferred Stock in full, the Corporation shall make payments on
or with respect to the Convertible Preferred Stock such that the payment made
with respect to each is a substantially identical proportion of the full payment
then due with respect to each.
9. Definitions. As used herein, the following terms have the following
meanings:
(a) "Common Stock" shall mean the Corporation's Common Stock, $.001 par
value, and any stock into which such Common Stock may hereafter be changed.
(b) "Conversion Ratio" shall mean, initially, one share of Common Stock for
each share of Convertible Preferred Stock (1:1), which Conversion Ratio shall be
subject to adjustment in accordance with Section 5 hereof.
(c) "Initial Public Offering" shall mean an underwritten public offering of
equity Securities registered under the Securities Act of 1933, as amended (i) in
which the per share price of the Common Stock to the public is equal to at least
$5.00 and (ii) in which the Company receives proceeds net of all costs, expenses
and underwriting discounts and commissions of not less than $5,000,000
(including proceeds received by the Company upon exercise of any over-allotment
option by the underwriters), in each case as determined by the amounts set forth
on the cover page of the prospectus for such offering.
(d) "Person" shall mean an individual, a corporation, a partnership, a
limited liability entity, a trust, an unincorporated organization or a
government organization or an agency or political subdivision thereof.
(e) "Securities" shall mean any debt or equity securities of the
Corporation, whether now or hereafter authorized, and any instrument convertible
into or exchangeable for Securities or a Security. The term "Security" shall
mean one of the Securities.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be
signed by Gregory S. Frisby, President, this 9th day of March, 1998.
FRISBY TECHNOLOGIES, INC.
BY: /s/Gregory S. Frisby
----------------------------------
Gregory S.Frisby, President
EXHIBIT B
1998 Stock Option Plan
FRISBY TECHNOLOGIES, INC.
1998 STOCK OPTION PLAN
1. Plan; Purpose; General. The purpose of this Stock Option Plan (the
"Plan") is to advance the interests of Frisby Technologies, Inc. and any present
and future subsidiaries (as defined below) of Frisby Technologies, Inc.
(hereinafter inclusively referred to as the "Company") by enhancing the ability
of the Company to attract and retain selected employees, consultants, advisors
and directors (collectively the "Participants") by creating for such
Participants incentives and rewards for their contributions to the success of
the Company, and by encouraging such Participants to become owners of shares of
the Company's Common Stock, par value $.001 per share, as the title or par value
may be amended (the "Shares").
2. Effective Date of Plan. The Plan will become effective upon approval by
the Board of Directors of the Company (the "Board"), and shall be subject to the
approval by the shareholders of the Company as provided under the Securities Act
of 1933, as amended (the "Act").
3. Administration of the Plan. (a) The Plan will be administered by the
Board, subject to Paragraph 3(b). The Board will have authority, not
inconsistent with the express provisions of the Plan, to take all action
necessary or appropriate thereunder, to interpret its provisions, and to decide
all questions and resolve all disputes which may arise in connection therewith.
Such determinations of the Board shall be conclusive and shall bind all parties.
(b) The Board may, in its discretion, delegate its powers with respect to the
Plan to an employee benefit plan committee or any other committee (the
"Committee"), in which event all references to "the Board" hereunder, including
without limitation the references in Section 9, but excluding the references in
Section 2, shall be deemed to refer to the Committee. The Committee shall
consist of not fewer than two (2) members of the Board; provided, however, that
if, at any time the awards under the Plan are granted, the Company is subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), each of the members of the Committee must be a
"non-employee director" as that term is defined in Rule 16b-3 as promulgated and
amended from time to time by the Securities and Exchange Commission under the
Exchange Act, or any successor thereto ("Rule 16b-3"). In addition, at any time
the Company is subject to Section 162(m) of the Code, each member of the
Committee shall be an "outside director" within the meaning of such Section. A
majority of the members of the Committee shall constitute a quorum, and all
determinations of the Committee (including determinations of eligibility, the
number of Options granted to a Participant and the exercise price of Options)
shall be made by the majority of its members present at a meeting. Any
determination of the Committee under the Plan may be made without notice or
meeting of the Committee by a writing signed by all of the Committee members.
4. Eligibility. The Participants in the Plan shall be all employees,
consultants, advisors and directors of the Company who are selected by the Board
whether or not they are also officers of the Company; provided, however, that
Incentive Options shall only be granted to employees of the Company, and
provided further, however, that Gregory S. Frisby and Jeffry D. Frisby shall not
be eligible Participants.
5. Grant of Options.
(a) The Board shall grant Options to Participants that it, in its sole
discretion, selects. Options shall be granted in accordance with the terms and
conditions set forth in Section 6 hereof and on such other terms and conditions
as the Board shall determine. Such terms and conditions may include a
requirement that a Participant sell to the Company any Shares acquired upon
exercise of Options upon the Participant's termination of employment upon such
terms and conditions as the Board may determine. Incentive Options shall be
granted on terms that comply with the Code and Regulations thereunder.
(b) Options granted pursuant to the Plan (the "Options") may be (i)
incentive stock options ("Incentive Options") that are intended to qualify under
the Internal Revenue Code of 1986, as amended (the "Code"), or, (ii) options
that are not intended to so qualify, or, (iii) both. The proceeds received from
the sale of Shares pursuant to the Plan shall be used for general corporate
purposes.
(c) No Options shall be granted after December 31, 2007 but Options
previously granted may be exercised after that date until the expiration of the
Option.
6. Terms and Conditions of Options
(a) Exercise Price. The purchase price per share for Shares issuable upon
exercise of Options shall be a minimum of one hundred (100%) percent of fair
market value on the date of grant as determined by the Board. For this purpose,
"fair market value" will be determined as set forth in Section 8 hereof.
Notwithstanding the foregoing, if any person to whom an Option is to be granted
owns in excess of ten (10%) percent of the combined voting power of all classes
of outstanding capital stock of the Company (a "Principal Shareholder"), then no
Option may be granted to such person for less than one hundred ten (110%)
percent of the fair market value on the date of grant as determined by the
Board.
(b) Period of Options. The expiration of each Option shall be fixed by the
Board, in its discretion, at the time such Option is granted. No Option shall be
exercisable after the expiration of five (5) years from the date of its grant
and each Option shall be subject to earlier termination as expressly provided in
this Section 6 hereof or as determined by the Board, in its discretion, on the
date such Option is granted.
(c) Payment for Delivery of Shares. Shares which are subject to Options
shall be issued only upon receipt by the Company of full payment of the purchase
price for the Shares as to which the Option is exercised. Payment for Shares may
be made (as determined by the Board at the time the Option is granted) (i) in
cash; (ii) by certified or bank check payable to the order of the Company in the
amount of the purchase price; (iii) by delivery of Shares owned by the
Participant having a fair market value equal to the purchase price; or (iv) by
any combination of the methods of payment described in (i) through (iii) above,
as determined by the Board at the time the Option is granted.
In addition, any grant of a nonqualified Option may provide that payment of
the purchase price for the Option may also be made in whole or in part in the
form of Shares that are subject to risk of forfeiture or restrictions of
transfer. Unless otherwise determined by the Board on or after the date of
grant, whenever any purchase price for an Option is paid in whole or in part by
means of any of the forms of consideration specified in this Section 6(c), the
Shares received by the Participant upon the exercise of the nonqualified Option
shall be subject to the same risk of forfeiture or restrictions on transfer as
those that applied to the consideration surrendered by the Participant;
provided, however, that such risks of forfeiture and restrictions on transfer
shall apply only to the same number of Shares received by the Participant as
applied to the forfeitable or restricted Shares surrendered by the Participant.
Any grant may, if there is then a public market for the Shares, provide for
deferred payment of the purchase price for the Option from the proceeds of sale
through a broker of some or all of the Shares to which the exercise relates.
The Company shall not be obligated to deliver any Shares unless and until,
in the opinion of the Company's counsel, all applicable federal and state laws
and regulations have been complied with and until all other legal matters in
connection with the issuance and delivery of Shares have been approved by the
Company's counsel. Without limiting the generality of the foregoing, the Company
may require from the person exercising an Option such investment representation
or such agreement, if any, as counsel for the Company may consider necessary in
order to comply with the Act and applicable state securities laws.
(d) Legend on Certificates. The stock certificates representing the Shares
shall carry such appropriate legends, and such written instructions shall be
given to the Company's transfer agent, as may be deemed necessary or advisable
by counsel to the Company in order to comply with the requirements of the Act or
any state securities laws.
(e) Rights as Shareholder. A Participant or a transferee of an Option shall
have no rights as a Shareholder with respect to any Shares covered by the Option
until the date of the issuance of a stock certificate to him for such Shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution of other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 7 hereof. Each grant of Options shall be evidenced by an
agreement, which shall be executed on behalf of the Company and delivered to and
accepted by the Participant and shall contain such terms and provisions as the
Board may determine consistent with the Plan.
(f) Vesting. Options granted shall vest in the Participant and become
immediately exercisable by the Participant on the fourth (4th) anniversary of
the date of grant or such earlier date as the Board of Directors, at its sole
discretion, may determine, provided, however, for every option granted for more
than 50,000 Shares, no more than one-third (1/3) of such shares shall become
vested and exercisable earlier than twelve (12) months following the date of the
grant, and no more than a total of two-thirds (2/3) of such Shares shall become
vested and exercisable earlier than thirty (30) months following the date of the
grant.
(g) Non-Transferability of Options. Except as provided in Sections 6(h)(ii)
and (iii), Options granted under this Plan may not be exercised during a
Participant's lifetime except by the Participant, other than by will or the laws
of descent and distribution. Options may not be sold, assigned or otherwise
transferred or disposed of in any manner whatsoever except as provided in
Section 6(h) hereof. Notwithstanding the foregoing, the Board, in its sole
discretion, may provide for the transferability of particular awards under this
Plan so long as such provisions would not disqualify the exemption for other
awards under Rule 16b-3, if then applicable to awards under the Plan. Moreover,
any grand made under this Plan may provide that all or any part of the Shares
issued or transferred by the Company upon exercise of Options shall be subject
to further restrictions on transfer.
(h) Termination of Relationship. Except as otherwise provided in an Option
or other agreement between the Company and a Participant, upon the termination
of a Participant's status as an employee, consultant, advisor or director, for
any reason other than as set forth in subsections (ii) and (iii) below, at a
time when the Shares are then Publicly Traded (as defined below), then the
following provisions shall apply:
(i) Such Participant may exercise Options to the extent exercisable on the
date of termination not later than three (3) months (or such shorter time as may
be specified in the grant), after the date of such termination. To the extent
that the Participant was not entitled to exercise the Option at the date of such
termination, or does not exercise such Option within the time specified herein,
such Option shall expire and terminate. Notwithstanding anything else herein, if
the employment or other relationship of any Participant shall be terminated
voluntarily by the Participant and without the consent of the Company, or for
"Cause" (as hereinafter defined), then any Option granted to such Participant
(whether or not then vested in the Participant) to the extent not previously
exercised shall expire immediately on the date of termination. For purposes of
the Plan, "Cause" shall mean "Cause" as defined in any employment agreement
between any employee Participant and the Company ("Employment Agreement"), and
in the absence of an Employment Agreement or in the absence of a definition of
"Cause" in such Employment Agreement, "Cause" shall mean: (i) any continued
failure by the employee Participant to obey the reasonable instructions of the
president or any member of the Board; (ii) continued neglect by the Participant
of his duties and obligations as an employee of the Company or a failure to
perform such duties and obligations to the reasonable satisfaction of the
president or the Board; (iii) willful misconduct of the Participant or other
actions in bad faith by the Participant which are to the detriment of the
Company, including, without limitation, commission of a felony, embezzlement or
misappropriation of funds or of confidential information or commission of any
act of fraud; or (iv) a breach of any material provision of any Employment
Agreement not cured within ten (10) days after written notice thereof.
(ii) Notwithstanding the provisions of subsection (i) above, in the event
of termination of a Participant's status as an employee as a result of
"permanent disability" (as such term is defined in any contract of employment
between the Company and the Participant or, if not defined, then such term shall
mean the inability to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment which can be expected
to result in death or which has lasted or can be expected to last for a
continuous period of twelve (12) months), the Participant (or, in the case of
the Participant's legal incapacity, such Participant's guardian or legal
representative acting in a fiduciary capacity on behalf of the Participant under
state law and court supervision) may exercise the Option, but only to the extent
such Option was exercisable on the date the Participant ceased working as the
result of the permanent disability. Such exercise must occur within six (6)
months (or such shorter time as is specified in the grant) from the date on
which the Participant ceased working as a result of the permanent disability. To
the extent that the Participant was not entitled to exercise such Option on the
date the Participant ceased working, or does not exercise such Option within the
time specified herein, such Option shall terminate.
(iii) Notwithstanding the provisions of subsection (i) above, in the event
of the death of a Participant, the Option may be exercised, at any time within
six (6) months following the date of death (or such shorter time as may be
specified in the grant), by the Participant's estate or by a person who acquired
the right to exercise the Option by will or the applicable laws of descent and
distribution, but only to the extent such Option was exercisable on the date of
the Participant's death. To the extent that the Participant was not entitled to
exercise such Option on the date of death, or the Option is not exercised within
the time specified herein, such Option shall terminate.
(iv) Notwithstanding subsections (i), (ii), and (iii) above, the Board
shall have the authority to extend the expiration date of any outstanding Option
in circumstances in which it deems such action to be appropriate (provided that
no such extension shall extend the term of an Option beyond the date on which
the Option would have expired if no termination of the Participant's
relationship's with the Company had occurred).
(h) Financial Assistance. The Company is vested with authority under this
Plan to assist any employee to whom an Option is granted hereunder (including,
to the extent permitted by law, any director or officer of the Company who is
also an employee of the Company) in the payment of the purchase price payable on
exercise of that Option, by lending the amount of such purchase price to such
employee on such terms and at such rates of interest and upon such security (or
unsecured) as shall have been authorized by or under authority of the Board.
(i) Withholding Taxes. To the extent required by applicable federal, state,
local or foreign law, a Participant shall make arrangements satisfactory to the
Company for the satisfaction of any withholding tax obligations that arise by
reason of an Option exercise or any sale of Shares. The Company shall not be
required to issue Shares until such obligations are satisfied. The Board may
permit these obligations to be satisfied by having the Company withhold a
portion of the Shares that otherwise would be issued to the Participant upon
exercise of the Option, or to the extent permitted, by tendering Shares
previously acquired.
<PAGE>
7. Shares Subject to Plan.
(a) Number of Shares and Stock to be Delivered. Shares delivered pursuant
to this Plan shall in the discretion of the Board be authorized but unissued
Shares or previously issued Shares acquired by the Company. The unexercised
portion of any expired, terminated or cancelled Option shall again be available
for the grant of Options under the Plan. Subject to adjustment as described
below, the aggregate number of Shares which may be delivered under this Plan
shall not exceed two hundred fifty thousand (250,000) Shares.
(b) Changes in Stock. In the event of a stock dividend, stock split,
combination of Shares, recapitalization or similar change in the capital
structure of the Company, merger in which the Company is the surviving Company,
consolidation, spin-off, split up, reorganization, partial or complete
liquidation or other distribution of assets, issuance of warrants or other
rights to purchase securities or any other corporate transaction or event having
any effect similar to any of the foregoing, the number and kind of Shares of
stock or securities of the Company to be subject to the Plan and to Options then
outstanding or to be granted thereunder, the maximum number of Shares or
securities which may be delivered under the Plan, the Option price and other
relevant provisions may be appropriately adjusted by the Board, whose
determination shall be binding on all persons. In the event of a consolidation,
merger or tender offer in which the Company is not the surviving Company or
which results in the acquisition of substantially all the Company's outstanding
stock by a single person or entity, or in the event of the sale or transfer of
substantially all the Company's assets, all outstanding Options, whether or not
then exercisable, shall immediately become exercisable. In such event, the Board
shall notify the Participants that all outstanding Options shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option will terminate upon the expiration of such period.
The Board may also adjust the number of Shares subject to outstanding
Options, the exercise price of outstanding Options and the terms of outstanding
Options to take into consideration material changes in accounting practices or
principles, consolidations or mergers (except those described in the immediately
preceding paragraph), acquisitions or dispositions of stock or property or any
other event if it is determined by the Board that such adjustment is appropriate
to avoid distortion in the operation of the Plan.
8. Certain Definitions.
Certain terms used in the Plan have been defined above. In addition, as
used in the Plan, the following terms shall have the following meanings:
(a) A "subsidiary" is any company (i) in which the Company owns, directly
or indirectly, stock possessing fifty (50%) percent or more of the total
combined voting power of all classes of stock or (ii) over which the Company has
effective operating control.
(b) The "fair market value" of the Shares shall mean:
(i) If the Shares are then Publicly Traded: The closing price of the Shares
as of the day in question (or, if such day is not a trading day in the principal
securities market or markets for such Shares, on the nearest preceding trading
day), as reported with respect to the market (or the composite of markets, if
more than one) in which Shares are then traded, or, if no such closing prices
are reported, on the basis of the mean between the high bid and low asked prices
that day on the principal market or quotation system on which Shares are then
quoted, or, if not so quoted, as furnished by a professional securities dealer
making a market in such Shares selected by the Board; or
(ii) If the Shares are then not Publicly Traded: The price at which one
could reasonably expect such Shares to be sold in an arm's length transaction,
for cash, other than on an installment basis, to a person not employed by,
controlled by, in control of or under common control with the issuer of such
Shares. Such fair market value shall be that which has concurrently or most
recently been determined for this purpose by the Board, or at the discretion of
the Board by an independent appraiser or appraisers selected by the Board, in
either case giving due consideration to recent transactions involving Shares, if
any, the issuer's net worth, prospective earning power and dividend-paying
capacity, the goodwill of the issuer's business, the issuer's industry position
and its management, that industry's economic outlook, the value of securities of
issuers whose Shares are Publicly Traded and which are engaged in similar
businesses, the effect of transfer restrictions to which such Shares may be
subject under law and under the applicable terms of any contract governing such
Shares, the absence of a public market for such Shares and other matters as the
Board or its appraiser or appraisers deem pertinent. The determination by the
Board or its appraiser or appraisers of the fair market value shall, if not
unreasonable, be conclusive and binding notwithstanding the possibility that
other persons might make a different, and also reasonable, determination. If the
fair market value to be used was thus fixed more than twelve (12) months prior
to the day as of which fair market value is being determined, it shall in any
event be no less than the book value of the Shares being valued at the end of
the most recent period for which financial statements of the Company are
available; or
(iii) Shares are "Publicly Traded" if stock of that class is listed or
admitted to unlisted trading privileges on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. ("NASD") or if
sales or bid and offer quotations are reported for that class of stock in the
automated quotation system ("NASDAQ") operated by the NASD.
9. Indemnification of Board. In addition to and without affecting such
other rights of indemnification as they may have as members of the Board or
otherwise, each member of the Board shall be indemnified by the Company to the
extent legally possible against expenses, including reasonable attorney's fees,
actually and reasonably incurred in connection with any appeal therein, to which
he may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any Option granted thereunder, and against all
judgments, fines and amounts paid by him in settlement thereof; provided that
such payment of amounts so indemnified is first approved by a majority of the
members of the Board who are not parties to such action, suit or proceedings, or
by independent legal counsel selected by the Company, in either case on the
basis of a determination that such member acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company; and except that no indemnification shall be made in relation to matters
as to which it shall be adjudged in such action, suit or proceeding that such
Board member is liable for a breach of the duty of loyalty, bad faith or
intentional misconduct in his duties; and provided further, that the Board
member shall in writing offer the Company the opportunity, at its own expense,
to handle and defend same.
10. Amendments. The Board may at any time discontinue granting Options
under the Plan. The Board may at any time or times amend the Plan or amend any
outstanding Option or Options for the purpose of satisfying the requirements of
any changes in applicable laws or regulations or for any other purpose which may
at the time be permitted by law, provided that (except to the extent explicitly
required or permitted hereinabove) no such amendment will, without the approval
of the shareholders of the Company: (a) increase the maximum number of Shares
available under the Plan; (b) reduce the Option price of outstanding Options or
reduce the price at which Options may be granted; (c) extend the time within
which Options may be granted, however, this period shall not exceed the term
provided in Section 5(c) hereof; (d) amend the provisions of this Section 10 of
the Plan; (e) adversely affect the rights of any Participant (without his
consent) under any Options theretofore granted; (f) cause any award under the
Plan to cease to qualify for any applicable exceptions to Section 162(m) of the
Code, or (g) be effective if shareholder approval is required by applicable
statute, rule or regulation.
11. Miscellaneous Provisions.
(a) Rule 16b-3. With respect to Participants subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable provisions of Rule 16b-3. To the extent any provision of the Plan or
action by the Plan administrators fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Board.
(b) Underscored References. The underscored references contained in the
Plan and in any Option agreement are included only for convenience, and they
shall not be construed as a part of the Plan or Option agreement or in any
respect affecting or modifying its provisions.
(c) Number and Gender. The masculine, feminine and neuter, wherever used in
the Plan or in any Option agreement, shall refer to either the masculine,
feminine or neuter and, unless the context otherwise requires, the singular
shall include the plural and the plural the singular.
(d) Governing Law. The place of administration of the Plan and each Option
agreement shall be in the State of New York. The corporate law of the Company's
state of incorporation shall govern issues related to the validity and issuance
of Shares. Otherwise, this Plan and each Agreement shall be construed and
administered in accordance with the laws of the State of New York, without
giving effect to principles relating to conflict of laws.
(e) No Employment Contract. Neither the adoption of the Plan nor any
benefit granted hereunder shall confer upon any Participant any right to
continued employment or other service with the Company, nor shall the Plan or
any benefit interfere in any way with the right of the Company to terminate any
Participant's employment or other service at any time.
11.1 - Statement Re: Computation of Per Share Earnings
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three month period ended March 31,
1998 1997
<S> <C> <C>
Weighted average shares outstanding
Common stock 3,280,613 2,839,286
Net loss $ (529,347) $ (277,904)
Net loss per share (1) ($0.16) ($0.10)
</TABLE>
(1) There is no difference between basic and diluted net loss per share.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001051904
<NAME> FRISBY TECHNOLOGIES INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,827,060
<SECURITIES> 0
<RECEIVABLES> 425,143
<ALLOWANCES> 0
<INVENTORY> 290,188
<CURRENT-ASSETS> 2,594,559
<PP&E> 106,923
<DEPRECIATION> (48,945)
<TOTAL-ASSETS> 3,018,709
<CURRENT-LIABILITIES> 462,431
<BONDS> 0
0
2,500,000
<COMMON> 3,281
<OTHER-SE> (78,253)
<TOTAL-LIABILITY-AND-EQUITY> 3,018,709
<SALES> 271,375
<TOTAL-REVENUES> 347,264
<CGS> 221,813
<TOTAL-COSTS> 258,354
<OTHER-EXPENSES> 621,141
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,884)
<INCOME-PRETAX> (529,347)
<INCOME-TAX> (0)
<INCOME-CONTINUING> (529,347)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (529,347)
<EPS-PRIMARY> (.16)
<EPS-DILUTED> (.16)
</TABLE>
