U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to __________________
Commission file number: 0-29624
SCNV ACQUISITION CORP.
(Name of small business issuer in its charter)
Delaware 90-0194786
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Omer Industrial Park, P.O.B. 3026, Omer, Israel 84965
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (972) 7-690-0950
Securities registered under Section 12 (b) of the Exchange Act:
Title of each class: Name of each exchange on which registered:
None Not Applicable
Securities registered under Section 12 (g) of the Act:
Units, each consisting of one share of Common Stock and one Class A Redeemable
Warrant
(Title of class)
Common Stock
(Title of class)
Class A Redeemable Warrants
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_].
The Issuer's revenues for the fiscal year ended June 30, 1999 were $67,693.
The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates was approximately $650,652 as at the close of business on October
12, 1999.
The number of shares of Common Stock outstanding as at October 12, 1999, was
2,082,088.
Documents incorporated by reference: None
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SCV Acquisition Corp.
Form 10-KSB
Table of Contents
<TABLE>
<S> <C>
Part I
ITEM 1. Description of the Business ............................................ 3
ITEM 2. Description of Property ................................................ 11
ITEM 3. Legal Proceedings ...................................................... 11
ITEM 4. Submissions of Matters to a Vote of Security Holders ................... 11
Part II
ITEM 5. Market for Common Equity and Related Stockholder Matters ............... 11
ITEM 6. Management's Discussion and Analysis or Plan of Operation .............. 12
ITEM 7. Financial Statements ................................................... 16
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ................................................... 16
Part III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act ................................. 17
ITEM 10. Executive Compensation ................................................ 18
ITEM 11. Security Ownership of Certain Beneficial Owners and Management ......... 21
ITEM 12. Certain Relationships and Related Transactions ......................... 22
ITEM 13. Exhibits, Lists and Reports on Form 8-K ............................... 22
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Part I.
ITEM 1. Description of the Business
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
Report contains statements that are forward-looking, such as statements relating
to plans for future activities. Such forward-looking information involves known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements made by or on the behalf of the Company. These
risks, uncertainties and factors include, but are not limited to, those relating
to the uncertainty regarding the Company's ability to continue as a going
concern and the qualification of the auditor's report on the Company's financial
statements to that effect, uncertainties regarding the Company's growth
strategy, uncertainty of the availability of additional financing, uncertainties
regarding the Company's ability to fulfill its commitments under the acquisition
agreements relating to a subsidiary and to commercialize the technology of such
subsidiary, the ability to hire and retain key personnel, uncertainty of
feasibility of the Company's technologies and product development, uncertainty
of market acceptance of the Company's technologies, relationships with and
dependence on third-party equipment manufacturers and suppliers, uncertainties
relating to government and regulatory policies and other political risks and
other risks detailed in the Company's filings with the Securities and Exchange
Commission. The words "believe", "expect", "anticipate", "intend" and "plan" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date the statement was made.
General
SCNV Acquisition Corp., a Delaware corporation (the "Company") incorporated
on May 19, 1997, was organized to select, develop and commercially exploit
proprietary technologies, in various stages of development, invented primarily
by scientists who have recently immigrated to Israel from, and by scientists and
institutions in, Russia and other countries that formerly comprised the Soviet
Union. Since its inception the Company has been engaged principally in
organizational activities, including developing a business plan, matters
directly related to the initial public offering of its securities and the
acquisition of an Israel based company (as described below) and the acquisition
of identified technologies or manufacturing facilities for certain technologies
for further development, production and commercialization. The Company intends
to continue to identify, select and develop technologies invented by scientists
from the former Soviet Union as well as from other countries with potential for
commercialization.
Initial Public Offering and Acquisition of Solmecs Corporation N.V.
On July 8, 1998, the Company consummated an initial public offering (the
"Public Offering") of 1,041,044 units (the "Units") each Unit consisting of one
share of common stock, $.01 par value per share, of the Company (the "Common
Stock") and one Class A redeemable Common Stock purchase warrant (the
"Warrants") for net proceeds to the Company of approximately $4,600,000.
Contemporaneous with the consummation of the Public Offering, the Company
acquired, in a tax free stock-for-stock transaction (the "Acquisition"), all of
the issued and outstanding capital stock of Solmecs Corporation, N.V.
("Solmecs"), a Netherlands Antilles company, and its wholly-owned subsidiary
Solmecs (Israel) Ltd. ("SIL"), the operations of which are located in Israel.
(Unless the context otherwise requires, Solmecs and SIL shall be referred to
herein as the "Company" or "SCNV").
Solmecs was organized in 1980 to engage in the research, development and
commercialization of high energy, low pollution products in the energy
conversion and conservation fields. From 1980 until the mid-1990's Solmecs was
primarily engaged in the development of Liquid Metal Magnetohydrodynamics
("LMMHD") energy conversion technology, a process developed approximately 20
years ago by Professor Herman Branover, a Soviet emigre to Israel who is the
President and a director of the Company.
Solmecs owns certain technologies identified for future commercial
exploitation which have been developed by scientists in and scientists that have
emigrated from the former Soviet Union. The technologies identified by Solmecs
for exploitation are in various stages of development and include technologies
that have begun to be commercialized as well as technologies that the Company
believes may be ready for commercialization in the near future.
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Strategy
The Company's strategy is to commercially exploit those technologies
identified by Solmecs to be viable for development and to identify and develop
innovative technologies which represent advances over existing products and
technologies with potential commercial viability.
The strategy employed by the Company in commercially developing proprietary
technologies varies depending on the state of the identified technology. In some
cases the third-party technology identified by the Company may have already
reached an advanced stage, such as the manufacture of prototypes or production
of testing samples. In such cases the Company would forego the early analysis
and development processes and acquire the production facilities or third-party
distribution rights. Generally, however, the Company will implement a four-step
process with respect to the identification, development and commercialization of
early-stage proprietary technologies. Initially the Company, through its
scientific, engineering and administrative personnel, will seek to identify and
analyze a number of proposed advanced technologies with potential commercial
viability. The Company will then assess the costs of further research and
development (including the building and testing of prototypes, if required) and
seek to obtain intellectual property rights in viable technologies. Upon the
establishment of the commercial viability of certain technologies, the Company
will develop a business plan detailing the exploitation of such technologies
from the research and development phase through product commercialization,
develop and, in some instances, implement financing strategies to further such
business plan, and suggest and, in some cases, assemble a team of scientists and
engineers most suitable for implementation of such business plan. Upon
completion of the business development plan for each project, the Company may
seek to manufacture (directly or through contractors) and market (directly or
through distributors) the project itself, enter into strategic alliances for
such commercialization, or sell or license the proprietary information and
know-how to a third party in consideration of technology transfer or license
fees.
The Company's capital requirements will be significant. The Company is
dependent upon the remaining proceeds of the Public Offering to finance the
operations of the Company, including the costs of market research and marketing
activities, continued research and development efforts, establishing
manufacturing capabilities and the acquisition of intellectual property rights.
Completion of the commercialization of the Company's technologies or any
potential application of such technologies, including, without limitation, the
technology of Elecmatec, in which the Company acquired a 90.4% interest in May
1999, will require significant additional effort, resources and time, including
funding substantially greater than the remaining proceeds of the Public Offering
or otherwise currently available to the Company. Moreover, the remaining
proceeds of the Public Offering will be insufficient to satisfy the scheduled
projects, requiring the Company to seek additional financing. The Company has no
current arrangements with respect to, or sources of, additional financing, and
it is not anticipated that existing shareholders will provide any portion of the
Company's future financing requirements. There can be no assurance that
additional financing will be available to the Company when needed, on
commercially reasonable terms, or at all.
The Company has incurred substantial operating losses and at June 30, 1999,
has an accumulated deficit of approximately $5,740,000. The Company is not
generating sufficient revenues from its operations to fund its activities and
anticipates that it will continue to incur losses for some time. The Company is
continuing its efforts in research and development which will require
substantial additional expenditures. As such, the Company is dependent upon its
ability to raise resources to finance its operations. This fact raises
substantial doubt about the Company's ability to continue as a going concern.
The Company plans to finance its operations and capital expenditure by
receiving additional credit lines and bank loans. The Company is also
negotiating with potential investors/partners who would provide bridge financing
until the Company will begin to produce and sell its products. There is no
assurance that such credit lines, bank loans or bridge financing will be
available to the Company when needed, on commercially reasonable terms or at
all.
Products and Technologies Commercially Distributed by the Company
The Company is presently engaged in limited commercial distribution of the
products set forth below. In addition, the Company is involved in the further
development or enhancement of each of the following technologies through a joint
venture with a third party manufacturer or through direct ownership of the
development and production process.
o Advanced Bi-Facial Photovoltaic Panels. Advanced bi-facial
photovoltaic panels were developed by Solmecs in conjunction with
Russian scientists working in the space and military industries of the
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former Soviet Union and are considered by the Company to be more
reliable and more efficient than one-sided photovoltaic panels
currently available in the market. These panels are made of bi-facial
cells which allow more surface area to absorb solar energy, including
solar energy that is reflected back from the ground, resulting in
approximately 30% more power. Each unit occupies less space and
requires fewer panels than currently available technology. Pursuant to
an arrangement with a Russian manufacturer, the Company, through
Solmecs, acts as the distributor of such manufacturer's one-sided and
advanced bi-facial photovoltaic panels.
In September 1998, Solmecs acquired the rights to photovoltaic
technology developed by the Association for the Development of
International Energy Projects (the "Association"), located in
Beersheba, Israel. Pursuant to the acquisition, Solmecs agreed to pay
certain royalties to the Association from revenues generated by
Solmecs from sales of photovoltaic panels manufactured by Solmecs or
from licensing of the photovoltaic technology. In November, 1998,
Solmecs acquired materials, equipment and engineering services from
the Russian entity in order to establish its own manufacturing
facilities for the production of both one-sided and advanced bi-facial
photovoltaic panels. The Company is establishing a manufacturing
facility for photovoltaic panels at its principal office location in
Omer, Israel, and expects to have the facility completed by late 1999.
The Company will require additional funds, not currently available to
the Company, to commence and maintain production of photovoltaic
panels from these facilities. Provided that the Company is able to
obtain, on a timely basis, the additional funds necessary, the Company
anticipates production of commercial panels during the 2000 fiscal
year. The Company further expects to continue to act as distributor of
the Russian entity's photovoltaic panels. Moreover, the Company,
through a joint effort with the Russian entity, has developed a patent
for the bi-facial panel technology and expects to file the patent
initially in Israel by late 1999. The patent will name Solmecs as the
sole owner of the technology addressed therein.
Solmecs had limited sales of photovoltaic panels, based solely on its
distribution arrangement with the Russian entity, during the fiscal
year ended June 30, 1999.
o Electronic Pocket Dictionaries. Pursuant to an agreement dated
February 4, 1999, Solmecs acquired the worldwide rights (exclusive of
Israel) to develop, produce, market and distribute an advanced
electronic pocket dictionary developed by Text-On Ltd., an Israeli
company. The electronic dictionary is a hand-held battery-powered
device roughly the size of a calculator, that enables the user to
quickly and accurately obtain translations of words from one language
into another language and vice versa as well as obtain definitions,
synonyms and related information for each word. The Company is
currently engaged in marketing and distribution of the Hebrew/English
and Russian/English pocket dictionaries in the United States. Solmecs
recently completed development of a Spanish/English pocket dictionary
which incorporates the electronically formatted data of a recognized
Spanish/English Dictionary and expects to complete manufacturing of
the first 2,000 commercial units in November, 1999. Solmecs is
negotiating promotional and marketing arrangements with two entities
including one of the largest catalogue marketing and promotions
companies associated with the worldwide airline industry, for
marketing of the Spanish/English electronic dictionary. Depending on
the success of the Spanish/English dictionary, the Company may pursue
development of alternative language dictionaries or enhanced models
capable of being programmed for multiple languages.
In accordance with the terms of the acquisition agreement, Solmecs has
entered into an employment arrangement with the founder of the pocket
dictionary technology to oversee the marketing and distribution of
existing electronic dictionaries and the development and production of
new electronic dictionaries such as the Spanish/English dictionary.
Additionally, Solmecs has agreed to pay royalties from sales of the
electronic dictionaries to Text-On Ltd., for a period of fifteen years
from the date of the agreement. See "Royalties and Licensing Fee
Obligations."
During the fiscal year ended June 30, 1999, the Company had limited
sales of Hebrew/English and Russian/English electronic dictionaries in
the United States.
There can be no assurance that the Company's efforts will result in the
successful commercialization of any of the Company's current technologies.
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Product and Technologies Developed by the Company for Commercial Production
The Company intends to concentrate on the further development of a number
of technologies identified or acquired by the Company for commercial
exploitation, including: (i) micro-gravity production of metal alloys for the
manufacture of bearings and other metal-based parts for use by the automotive
industry, (ii) enhanced silicon monocrystals for use in the electronic chip and
photovoltaics industries, and (iii) carbon dioxide absorption plants for use by
industrial energy generation facilities.
o Micro Gravity Produced Metal Alloys. In May, 1999, the Company
acquired a 90.4% interest in Elecmatec Electro-Magnetic Technologies,
Ltd. ("Elecmatec"), an Israeli company engaged in advanced
engineering, testing and production of metal alloys under conditions
that simulate zero gravity. "Micro-gravity" production of alloys
provides for better control of the amount, combination and
distribution of various metal and non-metal components in the alloy,
which might not be possible through standard means of production.
These combinations have been shown to produce more durable alloys for
production of engine bearings for use by the automotive industry.
The Company has completed the development of the "micro-gravity"
manufacturing process and has produced limited quantities of test
alloys which have been used in preliminary tests performed by a major
automobile manufacturer. A third party is proceeding with the
construction of a manufacturing facility in Kiryat Gat, Israel, which
it will lease to Elecmatec for commercial production of metal alloys.
Construction of such facility is dependent upon Elecmatec meeting its
obligation to provide certain financing which, in turn, is dependent
on the Company providing certain financing to Elecmatec. If such
financing is obtained, on a timely basis, it is anticipated that the
production facility will be completed and operational by the end of
2000.
o Monocrystals. Solmecs, in cooperation with a scientist in Russia, has
identified a potential use of LMMHD phenomena in the growth of
monocrystals, which are among the critical components of the
electronic chip and photovoltaic industries. The Company believes that
the application of LMMHD methods in the production of these
monocrystals will result in monocrystals of larger size with fewer
imperfections, and thus a greater yield of usable material than
standard monocrystals. It is believed that this will substantially
increase the commercial value of such monocrystals. The Company
intends to apply this method initially to monocrystals of silicon and
subsequently to monocrystals of gallium-arsenide and
cadmium-telluride, which the Company believes may serve as
alternatives to silicon chips (chips based on monocrystals of silicon)
in the computer and electronics industries.
In November, 1998, the Company acquired equipment to be used in three
production facilities currently being set up for growing silicon
monocrystals. Two of these facilities will be dedicated to the
production of standard size silicon monocrystals with the quality
necessary for use in both sophisticated electronics and photovoltaics.
The Company anticipates that each of these facilities will be
completed by early 2000. Provided that the Company is able to obtain,
on a timely basis, the additional funds necessary to commence
production, the Company anticipates production of commercial silicon
monocrystals by mid-2000. The Company further anticipates that when
these facilities are fully operational, they will have a production
capacity of approximately 6,000 kilograms of silicon monocrystals per
year.
The Company intends to utilize the third facility for experimental
application of its proprietary LMMHD technology in the growth of
larger silicon monocrystals. The Company, in coordination with the
Russian scientist noted above developed a patent for the application
of LMMHD technology in monocrystal growth which was filed in Israel,
earlier this year. The patent names Solmecs as the owner of the
technology covered thereby. The application of LMMHD technology to the
growth of monocrystals is still in the early experimental stage and
will not be ready for testing of prototypes for at least one year and
for production of commercial silicon monocrystals utilizing LMMHD
technology for at least two years. With respect to monocrystals of
gallium-arsenide and cadmium-telluride, the Company does not
anticipate that a development process utilizing LMMHD will be ready
for industrial application, if at all, for at least three years.
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o Carbon Dioxide Absorption. The Company is proceeding with preliminary
development of two separate but related technologies for the capture
and removal of environmentally hazardous carbon dioxide emissions
primarily from fuel burning power stations. Currently existing
technologies for such emission removal are costly and consume a large
percentage of energy produced by the power station. The technologies
being developed by the Company, which involve a patent-pending
material with certain absorption properties, have been shown through
preliminary tests performed by the Company to be more cost efficient
and consume substantially smaller percentages of a power station's
energy production. Solmecs acquired the rights to these technologies
from the Association in September 1998, and, pursuant to the
acquisition, has agreed to pay royalties to the Association from
revenues generated from sales of the product or licensing of the
technology.
The Company has performed a preliminary feasibility study of its
absorption technology for a large Norwegian oil production entity and
is pursuing negotiations with such entity for the construction of a
semi-industrial pilot prototype. While the Company believes that this
technology has potential commercial viability, it does not expect to
have a commercially operating plant or facility completed before the
end of 2001.
The Company will require additional funds, not currently available to the
Company, to (i) facilitate the construction of the Kiryat Gat facility, (ii)
commence and maintain production of commercialized silicon monocrystals, and
(iii) continue the development of LMMHD enhanced monocrystals and a carbon
dioxide absorption plant. There is no assurance that such funds will be
available to the Company when needed, on commercially reasonable terms or at
all.
With respect to the solar/electrical hot water tank control/display system
developed by Solmecs, which was previously reported on, the Company has
determined to delay commercial production of this system indefinitely.
Consequently, there have been no sales of the system through June 30, 1999.
LMMHD Energy Conversion Technology
Since the early 1980's, Solmecs has been involved in further advancement
and perfection of LMMHD energy conversion technology. This technology is
distinctive from conventional energy producing steam turbo-generator technology
in which steam, produced in a boiler, propels a turbine which in turn forces the
rotation of an electrical generator. Although the LMMHD process also employs the
use of steam, in LMMHD power technology the steam is used to accelerate a stream
of molten metal across a magnetic field which leads to the generation of
electricity. This process does not require the use of moving or rotating
mechanical machinery but utilizes an assembly of hermetically sealed pipes in
which the energy conversion process occurs. The Company believes the process and
technology to be reliable and require only a marginal amount of maintenance, and
anticipates commercially developed systems to have a long life span.
Solmecs has constructed and completed several pilot plants utilizing the
LMMHD energy conversion technology and has developed an engineering design and a
universal computer code for the calculation, design and optimization for each
specific application of the LMMHD energy conversion system.
Although the LMMHD power technology has been in development since the early
1980's it has not yet reached commercialization. In order to achieve
commercialization of such technology, the Company will be required to build a
commercial scale demonstration plant, which will involve a significant capital
expenditure. The Company will only be able to commence building such a plant if
it is able to obtain the necessary funds for such project. There is no assurance
that such funds will be available to the Company when needed, on commercially
reasonable terms or at all. The Company is not currently engaged in further
development of the LMMHD power technology.
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Proprietary information and processes developed from LMMHD technology,
however, are currently being applied to evolving technologies such as metal
alloy production to be commercialized by Elecmatec and novel methods of silicon
monocrystal growth. Moreover, the Company believes that LMMHD technology can be
utilized in the nuclear energy industry in methods being developed for cooling
of nuclear reactors and converting thermal energy generated by such reactors
into electricity. There is a growing trend in the nuclear energy industry to
develop safer and more advanced processes for cooling nuclear reactors while at
the same time efficiently utilizing the thermal energy produced by the reactor.
The Company has conducted early stage research related to a process involving
the introduction of molten lead or lead bismuth alloy into the reactor cooling
process whereby the lead based product would act as a medium for the absorption
of thermal energy of the reactor while providing a higher degree of safety
during the cooling process. The Company believes that the absorbed thermal
energy may be converted into electricity through the application of LMMHD
technology. Substantial additional research and development is required with
respect to this process.
Solmecs recently developed a pumping system based on a conductive
magnetohydrodynamic pump for use in magnesium handling for the Israeli Dead Sea
Works Industry ("Dead Sea Works"). The system is currently installed at Dead Sea
Works as a demonstration system and is currently in advanced stages of operation
tests. Early tests have shown the systems to operate effectively the Company may
provide additional systems to Dead Sea Works and use the current system as a
demonstration site for marketing the system to other companies.
Future Technologies
The Company has identified various Solmecs and non-Solmecs technologies,
some of which involve LMMHD technology, for potential acquisition and
development in the future. These technologies include, among others, new types
of energy efficient centrifugal pumps for chemical and other industries; new
methods of prediction of dispersion of contaminants in the atmosphere; and
treatment of fertilizer to remove infectious bacteria.
There can be no assurance that the Company will be able to obtain the
necessary rights to exploit the foregoing technologies or that any such
technologies will prove technologically or commercially viable.
Consulting Services
In February 1998, Solmecs was approached by an entity affiliated with the
Nuclear Center of United Europe ("CERN") to provide its expertise in molten lead
energy conversion in connection with the development by CERN of a safe nuclear
power plant which will generate power from the burning of nuclear waste. The
method developed by CERN employs a process by which nuclear waste is destroyed,
thereby avoiding the necessity of disposal, and electricity is generated. The
CERN system entails a flux of accelerated protons hitting a molten lead target
and causing neutron emission directed on rods made from highly radioactive
nuclear waste. Ultimately, the generated thermal energy is absorbed by the
molten lead and converted to electricity. Solmecs and such affiliate entered
into an agreement whereby Solmecs engaged in early stage research on such
absorption and conversion processes and provided CERN with data on LMMHD related
technology for possible use in connection with the proposed power plant. The
Company has had limited discussions with the affiliate of CERN for the next
stage of research and development.
Intellectual Property
Solmecs currently owns four Israeli patents relating to the LMMHD
technology. All of such patents have corresponding patents registered in the
United States (one in the name of Ben-Gurion University of the Negev Research
and Development Authority), and a number of such patents have corresponding
patents registered in one or more other countries, including Australia, Canada,
France, Germany, Great Britain, Italy and Japan. In addition, Solmecs owns a
United States patent, not registered elsewhere, relating to the LMMHD
technology, and an Israeli patent, not registered elsewhere, relating to a
device for voltage conversion which can be used in conjunction with the LMMHD
technology. One of Solmecs' patents expired in April 1999 and two of the
existing patents will expire over the next four years. The Company does not
believe that the expiration of such patents will have a material adverse effect
on the Company's business; however, no assurance can be given in that regard.
Solmecs currently has two patent applications pending in Israel for (i) the
application LMMHD phenomena in the growth of larger and cleaner silicon
monocrystals and (ii) utilizing absorption phenomena for the removal of carbon
dioxide from combustion gases.
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Solmecs, in conjunction with certain Russian scientists has developed a
patent with respect to advanced bi-facial photovoltaics panels. The Company
anticipates that the patent will be filed, initially in Israel, by late 1999.
Thereafter, the Company may file for patent protection in other countries.
Elecmatec currently owns one patent registered in Israel, the United States
and a number of other countries, as well as a patent application in Israel. Both
the patent and patent application were assigned to Elecmatec in connection with
the Company's acquisition of Elecmatec and relate to micro-gravity alloy
production.
Royalties and Licensing Fee Obligations
Pursuant to an agreement dated November 5, 1981, between Solmecs,
Ben-Gurion University and B.G. Negev Technology and Applications Ltd. ("BGU"),
Solmecs conducted research and development projects related to LMMHD power
generation on the campus of Ben-Gurion University in consideration for a fee for
the use of the facilities. Solmecs owns the patents connected with these
projects and agreed to pay royalties to BGU at the rate of 1.725% on sales of
products and at the rate of 11.5% on income from licensing fees. Solmecs also
agreed to assume the obligation of BGU to pay royalties to the Ministry of
National Infrastructure of the State of Israel on products developed from these
research and development projects for its participation in the research and
development costs of BGU. The royalties are to be paid at the rate of 1% on
sales of products and at the rate of 5% on income from licensing fees. As of
June 30, 1999, this liability amounted to approximately $324,000 (including
linkage to the Consumer Price Index and interest at 4% per annum). Subsequent to
the repayment of the liability, Solmecs is required to pay royalties to the
Ministry of National Infrastructure at a reduced rate of .3% on sales of
products and at the rate of 2% on income from licensing fees. As of June 30,
1999, there were no sales or income on which royalties were payable to BGU or
the Ministry of National Infrastructure.
From 1981 to 1991, Solmecs received from the Office of the Chief Scientist
of the Ministry of Industry and Commerce of the Government of Israel (the
"OCS"), $2,274,420 in grants towards the cost of a research and development
project relating to LMMHD energy conversion technology. Under the terms of
Israeli Government participation, a royalty of 2% to 3% of the net sales of, or
licensing revenues from, products developed from a project funded by the OCS
must be paid, beginning with commencement of sales of products developed with
grant funds and ending when 100% to 150% of the grant is repaid. The terms of
Israeli Government participation also require that the manufacturing of products
developed with Government grants be performed in Israel, unless a special
approval has been granted. Such approval, if given, is generally made subject to
an increase in the maximum amount of royalties that must be repaid. Separate
Israeli Government consent is required to transfer to third parties technologies
developed through projects in which the Government participates. Such
restrictions do not apply to exports from Israel of products developed with such
technologies. Solmecs has not yet commenced marketing of products developed
through funds granted by the OCS. Accordingly, no royalties have been paid
through June 30, 1999.
In March 1991, Solmecs entered into an agreement with International Lead
Zinc Research Organization, Inc. ("ILZRO") pursuant to which ILZRO funded
certain research of Solmecs and Solmecs agreed to pay a fee to ILZRO with
respect to any lead used in future production by Solmecs, up to a maximum of
$1,864,000. As of June 30, 1999, Solmecs has not used any lead with respect to
which it is required to pay such fee.
In connection with the acquisition of the rights to the advanced electronic
pocket dictionary in February 1999, Solmecs has agreed to pay royalties to
Text-On Ltd., as follows: (i) 10% of sales of electronic dictionaries produced
and developed by Solmecs after February 1999, up to aggregate sales of $2.5
million, (ii) thereafter, 3% of sales by Solmecs up to aggregate sales of $3
million, and (iii) 1% of sales thereafter. The royalty payment period expires in
February 2014 regardless of the amount of royalties paid by Solmecs. To date the
Company has paid royalties to Text-On Ltd. from the limited sales of the
Hebrew/English and Russian/English dictionaries in the United States.
In connection with the acquisition by Solmecs from the Association in
September 1998 of the rights to the photovoltaic panel and carbon dioxide
absorption technologies, Solmecs has agreed to pay to the Association royalties
of .25% of revenues generated from the sales of products or licensing of the
technologies. The maximum amount of royalties to be paid by the Company under
the Agreement is $35,000 per technology. The Company has not yet begun
commercial distribution of products manufactured based upon either of these
technologies. Consequently, no royalties have been paid by the Company to the
Association.
Elecmatec obtained the approval from the office of the Chief Scientist to
purchase from a third party all rights and interest in the metal alloy research
and development project. Elecmatec has undertaken to pay royalties, at the rate
of 3% of sales derived from the project, up to the amount of the participations
($459,000) received by the third party.
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Competition
The products that are and will be based on the Company's technologies
including, but not limited to, photovoltaic cells, metal alloys for engine
bearings, silicon monocrystals and carbon dioxide absorption, as well as the
Company's electronic dictionaries, will likely be used in highly competitive
industries. Numerous domestic and foreign companies are seeking to research,
develop and commercialize technologies similar to those of the Company, many of
which have greater name recognition and financial, technical, marketing,
personnel and research capabilities than the Company. There can be no assurance
that the Company's competitors will not succeed in developing technologies and
applications that are more cost effective, or have fewer limitations than, or
have other advantages as compared to, the Company's technologies. The markets
for the technologies and products to be developed or acquired by the Company are
characterized by rapid changes and evolving industry standards often resulting
in product obsolescence or short product lifecycles. Accordingly, the ability of
the Company to compete will depend on its ability to complete development and
introduce to the marketplace, directly or through strategic partners, in a
timely manner its proposed products and technologies, to continually enhance and
improve such products and technology, to adapt its proposed products to be
compatible with specific products manufactured by others, and to successfully
develop and market new products and technologies. There can be no assurance that
the Company will be able to compete successfully, that its competitors or future
competitors will not develop technologies or products that render the Company's
products and technologies obsolete or less marketable or that the Company will
be able to successfully enhance its proposed products or technologies or adapt
them satisfactorily.
There can be no assurance that other companies are not dedicated to
identifying, obtaining and developing technologies of Russian scientists and
engineers currently residing in Israel. Any such competitors may have greater
financial, technical, marketing, personnel and other resources than the Company.
Employees
As of June 30, 1999, the Company had seventeen full-time employees and
eight part-time employees, including six administrative and executive personnel,
three of whom are part-time, twelve senior scientists and engineers, three of
whom are part-time, and seven technicians, two of whom are part-time. Elecmatec
currently has six employees, two of whom are part-time. The Company believes
that it has satisfactory labor relations with its employees and has never
experienced work stoppage.
Certain provisions of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (including the Industrialists' Associations) are
applicable to Solmecs' employees by order of the Israeli Ministry of Labor.
These provisions concern principally the length of the work day, minimum daily
wages for professional workers, insurance for work-related accidents, procedures
for dismissing employees, determination of severance pay, and other conditions
of employment. Solmecs generally provides its employees with benefits and
working conditions beyond the required minimums.
Israeli law generally requires severance pay, which may be funded by
Managers' Insurance described below, upon the retirement or death of an employee
or termination of employment without cause (as defined in the law). The payments
pursuant thereto amount to approximately 8.33% of wages. Furthermore, Israeli
employees and employers are required to pay predetermined sums to the National
Insurance Institute, which is similar to the United states Social Security
Administration. Such amounts also include payments by the employee for national
health insurance. The total payments to the National Insurance Institute are
equal to approximately 14.6% of the wages (up to a specified amount), of which
the employee contributes approximately 66% and the employer contributes
approximately 34%.
A general practice followed by the Company, although not legally required,
is the contribution of funds on behalf of most of its employees to a fund known
as "Managers' Insurance." This fund provides a combination of savings plan,
insurance and severance pay benefits to the employee, giving the employee
payments upon retirement or death and securing the severance pay, if legally
entitled,
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upon termination of employment. The employer decides whether each employee is
entitled to participate in the plan, and each employee who agrees to participate
contributes 5% of his salary and the employer contributes an amount equal to
between 13.3% and 15.8% of the employee's salary.
The Company's success will be dependent to a large degree on its ability to
retain the services of key personnel and to attract additional qualified
personnel in the future. Competition for such personnel is intense. There can be
no assurance that the Company will be able to attract, assimilate or retain key
personnel in the future and the failure of the Company to do so would have a
material adverse affect on the Company's business, financial condition and
results of operations.
ITEM 2. Description of Property
Solmecs no longer maintains office space on the campus of Ben Gurion
University. Solmecs, however, has been permitted to utilize the laboratory
facilities and to access the LMMHD pilot plants, which are maintained on the
campus of Ben Gurion University, for a marginal charge.
Solmecs occupies space in Omer Industrial Park, Israel (near Beer-Sheva).
Solmecs expects to exercise its option to extend the term of its current lease
of approximately 500 square meters of laboratory and office space through
November 2002. This extended lease will provide for a renewal option of three
years upon expiration of the extended lease period. In April, 1999, Solmecs
entered into a lease for approximately 500 square meters of space adjacent to
its current premises. The lease term is through April 2001 with a renewal option
for an additional four years. The annual rent for the premises currently
reoccupied by Solmecs is approximately $80,000.
ITEM 3. Legal Proceedings
No legal proceedings are currently pending against the Company.
ITEM 4. Submissions of Matters to a Vote of Security Holders.
No matters were submitted to a vote of the Company's security holders
during the quarter ended June 30, 1999.
Part II
ITEM 5. Market for Common Equity and Related Stockholder Matters
The Company's Units, Common Stock and Warrants are traded on the OTC
Electronic Bulletin Board under the symbols SAQCU, SAQC and SAQCW, respectively.
Trading in the Units commenced on June 30, 1998, the final day of the Company's
1998 fiscal year. The Common Stock and Warrants were detached from the Units and
became separately transferrable on September 29, 1998. The Units were offered
and sold to the public in the Public Offering at $5.75 per Unit. The following
table sets forth the high and low closing bid prices for the Company's Units for
the one day (June 30, 1998) on which trading in the Units took place during the
Company's 1998 fiscal year. As noted above, trading in the Common Stock as a
separate security was not possible until the Common Stock was detached from the
Units in September 29, 1998. Therefore, the following table presents the high
and low high (ask) and low (bid) prices for the Units comprised of the Common
Stock and Warrants during the periods in the 1999 fiscal year and thereafter,
the high and low bid prices for the Common Stock for the periods in which the
Common Stock was separately tradeable and for which information is available.
The following constitutes quotations among dealers and does not reflect retail
mark-ups, markdowns, or commissions, and may not represent actual retail
transactions:
Fiscal Year Ended June 30, 1998 Units
- ------------------------------- -----
High Low
---- ---
Fourth Quarter $6.00 $6.00
Fiscal Year Ended June 30, 1999 Units
- ------------------------------- -----
High Low
---- ---
First Quarter $6.50 $5.75
Second Quarter $6.50 $.63
Common Stock
------------
Third Quarter $.31 $.06
Fourth Quarter $.63 $.19
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As of September 30, 1999 there were 2,082,088 shares of Common Stock
outstanding and held of record by approximately 13 stockholders. The Company
believes that there are many beneficial owners of its Common Stock whose shares
are held in "street name."
The payment of dividends on the Company's common stock is within the
discretion of the Company's Board of Directors. To date, the Company has not
paid any dividends on its common stock, and does not expect to pay any dividends
in the foreseeable future. The Company intends to retain all earnings for use in
the Company's operations.
The securities (1,041,044 Units, each Unit consisting of one share of
Common Stock and one Warrant exercisable to purchase one share of Common Stock)
registered in the Public Offering were offered and sold on behalf of the Company
by Patterson Travis, Inc., the underwriter ("Underwriter") of the Public
Offering, resulting in gross proceeds to the Company of approximately
$5,986,000. The Company incurred the following expenses in connection with the
Public Offering: (i) underwriting discounts and commissions of approximately
$598,600; (ii) non-accountable expenses to the Underwriter of approximately
$179,600; and (iii) other expenses including, but not limited to, legal,
accounting and printing expenses of approximately $640,000.
On July 8, 1998 (the closing date of the Public Offering) the Company
applied approximately $391,000 of net proceeds toward the repayment of
indebtedness of Solmecs to a stockholder of the Company. The Company also repaid
approximately $110,000 owed to such stockholder for monies advanced for
pre-offering expenses. As of June 30, 1999 the Company has applied the balance
of net proceeds from the Public Offering as follows: (i) approximately $190,000
to market research and marketing activities; (ii) approximately $715,000 to
research and development; (iii) approximately $60,000 to repayment of a short
term, non interest-bearing loan incurred after March 31, 1998; (iv)
approximately $182,000 to repayment of an existing credit line facility,
approximately $90,000 of which was incurred after March 31, 1998, and which
allows for future borrowing by the Company; (v) approximately $812,000 for the
purchase of equipment and machinery; and (vi) approximately $900,000 to working
capital and general corporate purposes.
On July 8, 1998, contemporaneous with the closing of the Public Offering,
the Company acquired in a tax free stock-for-stock transaction, all of the
issued and outstanding capital stock of Solmecs and its subsidiary SIL from
Bayou International Ltd. ("Bayou") and issued to Bayou 499,701 shares of
unregistered Common Stock of the Company. Other than the foregoing transaction,
the Company did not issue or sell any unregistered shares of Common Stock during
the fiscal year ended June 30, 1999.
ITEM 6. Management's Discussion and Analysis or Plan of Operation
General
The Company was organized in May 1997 to select, develop and commercially
exploit proprietary technologies, in various stages of development, invented
primarily by scientists who have recently immigrated to Israel from, and by
scientists and institutions in, Russia and other countries that formerly
comprised the Soviet Union. Since its inception, the Company has been engaged
principally in organizational activities, including developing a business plan,
matters directly related to the Public Offering and the acquisition of Solmecs
and its wholly owned subsidiary SIL and the acquisition of identified
technologies or manufacturing facilities for certain technologies for further
development, production and commercialization.
The Company is actively engaged in the commercial development of two
technologies previously identified by Solmecs, namely (i) advanced bi-facial
photovoltaic panels and (ii) monocrystals of silicon. In November 1998, Solmecs
acquired materials, equipment and engineering services in order to establish a
manufacturing facility in Israel for both one-sided and advanced bi-facial
photovoltaic panels. The Company anticipates that a commercial production
facility will be completed by late 1999. The Company, however, will require
additional funds, not currently available to the Company, to operate the
production facility and acquire raw materials for the production of commercial
quantities. If the Company is able to obtain such additional funds, on a timely
basis, it anticipates commercial production of photovoltaic panels during the
2000 fiscal year. During the 1999 fiscal year, the Company received limited
purchase orders for photovoltaic panels, which were filled by the Company
through its distribution arrangement with a Russian manufacturer.
Also in November, 1998, Solmecs acquired equipment to be used in three
production facilities currently being set up for growing silicon monocrystals.
Two of the facilities are nearing completion and will be dedicated to
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production of standard size silicon monocrystals with the qualities necessary
for use in both sophisticated electronics and photovoltaics. The third facility
will be modified for experimental production of silicon monocrystals utilizing
LMMHD technology. The Company did not produce any commercial silicon
monocrystals during the 1999 fiscal year. The Company expects to have the two
production facilities completed by early 2000. The Company, however, will
require additional funds, not currently available to the Company, to operate the
production facilities and acquire the raw materials necessary to produce
commercial quantities. If the Company is able to obtain additional funds, on a
timely basis, it anticipates commercial production of standard size silicon
monocrystals by mid-2000. Development of LMMHD enhanced silicon monocrystals,
however, is still in the preliminary testing stage and the Company does not
anticipate that this technology will be ready for production of prototypes for
at least one year, and for production of commercial monocrystals for at least
two years. Further development of this technology will also require additional
funds not currently available to the Company.
In February, 1999, the Company acquired world-wide rights (except for
Israel) to develop, produce, market and distribute advanced electronic pocket
dictionaries manufactured by an Israeli company. During fiscal 1999, the Company
had limited sales of the Hebrew/English and Russian/English dictionaries in the
United States. The Company is now focusing on the development of a
Spanish/English dictionary which is expected to be ready for commercial
production in November, 1999. The Company is negotiating promotional and
marketing arrangements with two marketing and distribution companies for
promotion and distribution of the dictionaries.
In May 1999, the Company acquired a 90.4% interest in Elecmatec, which
employs "micro-gravity" conditions to the production of alloys for use in
production of metal based products such as engine bearings for the automotive
industry. Elecmatec has completed the development and preliminary testing of its
manufacturing process. A third party has commenced construction of a facility in
Kiryat Gat, Israel, which it will lease to Elecmatec for the production of metal
alloys. Construction of such facility is dependent upon Elecmatec meeting its
obligation to provide certain financing which, in turn, is dependent on the
Company providing certain financing to Elecmatec. If such financing is obtained
on a timely basis, it is anticipated that the production facility will be
completed and operational for production of commercial quantities of alloy by
the end of 2000.
The Company further intends to offer its engineering services to industry
and research institutions in the fields of LMMHD power technology and liquid
metal engineering. Although the LMMHD power technology has been in development
since 1980's, it has not yet reached commercialization. In order to achieve
commercialization of such technology, the Company will be required to build a
commercial scale demonstration plant, which will require a significant capital
expenditure. The Company is not currently engaged in further development of the
LMMHD power technology.
Completion of the research, development and commercialization of the
Company's technologies or any potential application of such technologies will
require significant additional effort, resources and time, including funding
substantially greater than the proceeds otherwise currently available to the
Company. Such research and development efforts remain subject to all of the
risks associated with the development of new products based on emerging and
innovative technologies, including, without limitation, unanticipated technical
or other problems and the possible insufficiency of the funds allocated to
complete such development, which could result in delay of research or
development or substantial change or abandonment of research and development
activities.
To date, the Company has not generated significant revenues from its
marketable products. The Company does not expect to generate any meaningful
revenues until such time, if ever, as it successfully produces, markets and
distributes its commercial products on a broad scale or until it successfully
commercializes or sells proprietary rights relating to one or more of Solmecs'
technologies currently in development.
The Company has incurred substantial operating losses and at June 30, 1999,
has an accumulated deficit of approximately $5,740,000. The Company is not
generating sufficient revenues from its operations to fund its activities and
anticipates that it will continue to incur losses for some time. The Company is
continuing its efforts in research and development which will require
substantial additional expenditures. As such, the Company is dependent upon its
ability to raise resources to finance operations. This fact raises substantial
doubt that the Company's ability to continue as a going concern.
The Company plans to finance its operations and capital expenditures by
receiving additional credit lines and bank loans. The Company is also
negotiating with potential investors/partners who would provide bridge
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<PAGE>
financing until the Company will begin to produce and sell its products. There
is no assurance that additional financing will be available to the Company when
needed, on commercially reasonable terms or at all.
Results of Operations of the Company
The consolidated statements of income and other financial and operating
data contained elsewhere herein and the consolidated balance sheet and financial
results have been reflected in U.S. dollars unless otherwise stated. The
unaudited pro forma consolidated statement of operations for the fiscal year
ended June 30, 1998, contained in the notes to the Company's consolidated
financial statements included herein, represents the adjustments made to present
the combined financial position of the Company and Solmecs as if the Acquisition
had been effective as of July 1, 1997. Such pro forma information gives effect
to (i) the forgiveness by Bayou International, Ltd. ("Bayou"), the then parent
company of Solmecs, of a loan of $5,082,897 owed by Solmecs to Bayou, in
connection with the Acquisition, and (ii) the payment of approximately $120,000
to officers in accordance with employment agreements during the fiscal year
ended June 30, 1998. The pro forma consolidated statement of operations does not
include the one-time charge of $3,772,054 of excess purchase price over fair
value of the assets acquired in connection with the Acquisition.
Fiscal Year Ended June 30, 1999 Compared with Pro Forma Fiscal Year Ended June
30, 1998
Sales. Sales increased by $42,711, to $49,282 for the fiscal year ended
June 30, 1999 ("fiscal 1999"), as compared to $6,571 for the fiscal year ended
June 30, 1998 ("fiscal 1998"). The increase was attributable to sales of
photovoltaic panels and, to a lesser extent, sales of electronic pocket
dictionaries in the United States.
Contract Services. Contract services decreased by $32,928, to $18,411 for
fiscal 1999 as compared to $51,339 for fiscal 1998. This decrease was primarily
attributable to the completion of work related to the Dead Sea Works project in
the first quarter of fiscal 1999.
Research and Development Costs. Research and development and costs
increased by $446,410, to $715,334 for fiscal 1999, as compared to $268,924 for
fiscal 1998. the increase is primarily due to (i) the increase in salaries due
to the employment of additional scientific personnel, (ii) the hiring of
additional consultants for new projects feasibility testing, (iii) the increase
in rent fees associated with the leasing of new facilities in Omer Industrial
Park , (iv) the acquisition of Elecmatec and (v) the acquisition of certain
proprietary technologies from a third party.
Cost of Merchandise Purchased. Costs of merchandise purchased increased by
$40,584, to $48,774 for fiscal 1999, as compared to $8,190 for fiscal 1998. The
increase is attributable to the increase in sales of photovoltaic panels and, to
a lesser extent, sales of electronic pocket dictionaries.
Cost of Services Provided by Subcontractors. Cost of services provided by
subcontractors decreased by $7,625, to $19,172 for fiscal 1999 from $26,797 for
fiscal 1998. The decrease is attributable to reduced services resulting from the
completion of the "Dead Sea Works" project.
Marketing Expenses. Marketing expenses increased by $103,570, to $189,828
for fiscal 1999, as compared to $86,258 for fiscal 1998. This increase is
primarily attributable to (i) salaries and related expenses resulting from the
hiring of additional marketing personnel, (ii) foreign travel related to the
marketing, promotion and implementation of new technologies and (iii) the
acquisition of Elecmatec.
General and Administrative Expenses. General and administrative expenses
increased by $434,219, to $871,999 for fiscal 1999, as compared to $437,780 for
fiscal 1998. This increase is primarily attributable to (i) salaries and related
expenses resulting from the hiring of additional personnel, (ii) professional
fees associated with services rendered to the Company and Solmecs, (iii) the
increase in rent fees associated with the Company's principal office space and
(iv) costs and expenses related to the acquisition of Elecmatec by the Company.
One-Time Charge of Acquired Research and Development In-Process. The
acquisition of Solmecs by the Company in July 1998 and the acquisition of
Elecmatec by the Company in May 1999, have each been accounted for as a purchase
and the excess purchase price over fair value of assets acquired of each of the
acquired companies, an aggregate of $4,060,111, has been reflected in the
Company's consolidated statement of operations for fiscal 1999 as acquired
research and development in process. The Company recorded, as of the date of
each acquisition, a one-time charge for the write-off in full of such research
and development in process of $3,772,054 for the acquisition of Solmecs and
$288,057 for the acquisition of Elecmatec.
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<PAGE>
Operating Loss. Operating Loss increased by $5,067,486, to $5,837,525 for
fiscal 1999, as compared to $770,039 for fiscal 1998. The increase in operating
loss is attributable to (i) the one-time charge of $4,060,111 reflecting the
write-off of acquired research and development in process, and (ii) an increase
in expenses as set forth above.
Financing Income, Net. Financing income was $97,263 for fiscal 1999, as
compared to financing expenses of $15,093 for fiscal 1998, primarily as a result
of interest earned by the Company on deposits of net proceeds of the Public
Offering not immediately used in the operation of the Company.
Net Loss and Net Loss Per Share. As a result of the foregoing, net loss
increased to $5,740,262 ($2.76 per share) for fiscal 1999 from $785,132 ($.75
per share) for fiscal 1998.
Liquidity and Capital Resources
As of June 30, 1999, Solmecs had working capital of $1,034,318,
stockholders' equity of $1,797,892 and an accumulated deficit of $5,740,262.
During the period from inception through June 30, 1998, Batei Sefer
Limlacha, a principal stockholder of the Company, loaned to the Company $110,108
for working capital purposes and agreed that such loans were to become due and
payable on the earlier of December 31, 1998 or the consummation of certain types
of transactions, including the Public Offering. Such loans were unsecured and
were interest free except in the event of default by Solmecs.
During the period from September 1997 through June 30, 1998, Batei Sefer
Limlacha loaned to Solmecs $375,000 for working capital purposes and agreed with
Solmecs that such loans were to become due and payable on earlier of June 30,
1998 or the consummation of certain types of transactions, including the
Acquisition. Such loans were unsecured and bore interest at the rate of 8% per
annum. On June 23, 1998 Batei Sefer Limlacha agreed to extend the term of the
loans through the earlier of July 31, 1998 or the consummation of certain types
of transactions, including the Public Offering.
The loans from Batei Sefer Limlacha were repaid in full by the Company on
July 8, 1998.
In April, 1998, SIL obtained a line of credit facility of approximately
$270,000 from an Israeli bank allowing for overdraft for working capital
purposes of which approximately $182,000 had been drawn by SIL under such
facility as of June 30, 1998. The Company repaid the line of credit facility in
full on July 9, 1998.
In April, 1998, Solmecs obtained a loan of $60,000 from an unrelated third
party. The loan did not bear interest and was repaid on the consummation of the
Public Offering.
On July 8, 1998 the Company consummated the Public Offering of 1,041,044
Units consisting of Common Stock and Warrants for net proceeds to the Company of
approximately $4,600,000 after expenses of the offering.
In May 1998, the Company acquired a 90.4% interest in Elecmatec. In
addition to the initial acquisition price of $150,000, the Company has agreed to
loan to, or guarantee loans taken by, Elecmatec, of up to $1,000,000, of which
approximately $322,000 has been loaned by the Company to Elecmatec as of June
30, 1999, and approximately $162,000 is available to Elecmatec by way of such
guarantee. In addition, the Company has agreed to pay $150,000 to current
shareholders of Elecmatec, on a sliding-scale basis, in the event Elecmatec
obtains third-party debt or equity financing of at least $500,000. The Company
is also required, under certain cicumstances, to pay former shareholders of
Elecmatec an amount equal to 10% of Elecmatec's net income, up to an aggregate
payment of $360,000.
The Company's capital requirements will be significant. The Company is
dependent upon the remaining proceeds of the Public Offering to finance the
operations of the Company, including the costs of market research and marketing
activities, continued research and development efforts, establishing
manufacturing capabilities and the acquisition of intellectual property rights.
Completion of the commercialization of the Company's technologies or any
potential application of such technologies including, without limitation, the
technology of Elecmatec, in which the Company acquired a 90.4% interest in May
1999, will require significant additional effort, resources and time including
funding substantially greater than the remaining proceeds of the Public Offering
or otherwise currently available to the Company.
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<PAGE>
Moreover, the remaining proceeds of the Public Offering will be insufficient to
satisfy the scheduled projects, requiring the Company to seek additional
financing. The Company has no current arrangements with respect to, or sources
of, additional financing, and it is not anticipated that existing shareholders
will provide any portion of the Company's future financing requirements. There
can be no assurance that additional financing will be available to the Company
when needed, on commercially reasonable terms, or at all.
Inflation
In recent years, until 1997, inflation in Israel has exceed the devaluation
of the NIS against the dollar. The rate of inflation in Israel for the years
1995 and 1996, was 8.1% and 10.6%, respectively, while the devaluation of the
NIS against the dollar was 3.9% and 3.7%, respectively. This trend was reversed
during the years 1997 and 1998, as the rate of inflation in Israel was 7.0% and
8.6%, respectively, while the rate of devaluation of the NIS against the dollar
was 8.8% and 17.6%, respectively. In the first six months of 1999, Israel
experienced deflation at the rate of .37% as well as a devaluation of the dollar
against the NIS at the rate of 2%.
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980's, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. In response to these problems, the Israeli Government has
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates. The Israeli
Government frequently has changed its policies in all these areas.
Year 2000
The Company has evaluated and updated its Information Technology ("IT")
systems to ensure that it will have the capability to manage and manipulate data
in the year 2000 and beyond. The Company has performed "Year 2000" functionality
tests of its computer and IT systems and such tests have been successful. The
Company believes that its IT systems are substantially compliant with Year 2000
requirements. Costs incurred by the Company to date to implement its plans have
not been material and are not expected to have a material effect on the
Company's financial condition or results of operations.
As the Company enters into commercial relationships it addresses year 2000
compliance with key business partners and sub-contractors and anticipates that
such key business partners and sub-contractors who are not yet compliant will be
prior to year end.
ITEM 7. Financial Statements
The Consolidated Financial Statements of the Company appear herein
following Item 13 below.
ITEM 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
There were no changes in and/or disagreements with accountants on
accounting and financial disclosure during the fiscal year ended June 30, 1999.
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Part III.
ITEM 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The table below sets forth the name, age and certain information as to the
Directors and executive officers of the Company.
Name Age Position
- ---- --- --------
Emmanuel Althaus 53 Chairman of the Board of Directors
Professor Herman Branover 67 President, Chief Executive Officer and Director
Dr. Shaul Lesin 45 Executive Vice President and Secretary
Jacline Bavli 45 Chief Financial Officer
Joshua Levine 35 Director
Mr. Althaus has served as Chairman of the Board of Directors of the Company
since May 1997. He was Vice President and Director of Bayou from March 1990
through November 1996, and is a Director of Solmecs. Since 1986, Mr. Althaus has
been principally employed as Executive Director of National Diversified
Industries (Australia) Pty Ltd., a company that provides administrative services
to public companies. He serves on the board of directors of Golden Triangle
Resources N.L. (of which he is Chairman and Managing Director) and Allegiance
Mining N.L., each of which is a company engaged in mineral exploration the stock
of which is listed on the Australian Stock Exchange.
Professor Branover has served as President, Chief Executive and a director
of the Company since May 1997 and as Scientific Director of Solmecs (Israel)
Ltd. since 1980. He served as Executive Vice President and Director of Bayou
from May 1989 until 1993. He has been principally employed as head of the Center
for MHD Studies of Ben Gurion University since 1981 and as the Lady Davis
Professor of Magnetohydrodynamics at Ben Gurion University since 1978. Professor
Branover received a Ph.D in Technical Sciences from Moscow Aviation Institute in
1962 and a Doctor of Sciences Degree in Physics and Mathematics from Leningrad
Polytechnical Institute in 1969. He was also, for a number of years, an Adjunct
Professor of applied sciences at New York University and served as a visiting
researcher at Argonne National Laboratory in Chicago. Professor Branover has
also served as a director of the Joint Israeli Russian Laboratory for Energy
Research since 1991. He currently serves as an Advisor to Israel's Prime
Minister on immigrant employment and on the use of Russian technologies in
Israel. Professor Branover founded two Israeli high-tech companies, Ontec, Inc.,
in 1991, located in Beer Sheva, and Satec, Inc., in 1987, located in Jerusalem,
both of which have developed commercially viable products for sale in several
foreign countries. Professor Branover is no longer affiliated with either of
those companies. Professor Branover is an officer, director and shareholder of
Elecmatec, which was acquired by the Company in May 1999.
Dr. Lesin has served as Executive Vice President of the Company since May
1997. Dr. Lesin has held various positions with Solmecs (Israel) Ltd. since
1980, most recently serving as Chief Executive Manager. Dr. Lesin also served as
the Deputy Director of the Joint Israeli Russian Laboratory for Energy Research
since 1991, and as a member of the Board of the Center for MHD Studies of Ben
Gurion University since 1986. He received his Ph.D in Mechanical Engineering
from Ben Gurion University in 1993.
Ms. Bavli has served as Chief Financial Officer of the Company since May
1997. Prior thereto since 1996, she served as Financial and Marketing Manager of
Solmecs (Israel) Ltd. From 1995 to 1996, Ms. Bavli engaged in the private
practice of accounting. From 1990 until 1995, Ms. Bavli held various positions
with Kibbutz Magen, Israel, most recently serving as its Deputy Treasurer.
Mr. Levine has served as a director of the Company since November 1998.
Since November 1995, Mr. Levine has been the head of corporate finance at
Patterson Travis Operating Account which makes proprietary
-17-
<PAGE>
investments and which is an affiliate of Patterson Travis, Inc., the underwriter
of the Company's Public Offering. Prior thereto, from October 1988 through
November 1995, Mr. Levine was an associate at the law firm of Willkie Farr &
Gallagher in New York.
The Company's directors are elected at the annual meeting of stockholders
to hold office until the annual meeting of stockholders for the ensuing year or
until their successors have been duly elected and qualified.
Officers are elected annually by the Board of Directors and serve at the
discretion of the Board.
Pursuant to the Underwriting Agreement between the Company and Patterson
Travis, Inc., as the underwriter of the Company's securities (the "Underwriter")
in the Public Offering, the Underwriter was granted the right to designate one
member to the Company's board of directors for a period ending June 29, 2001. In
November 1998, the Underwriter designated Joshua Levine to the Company's board
of directors. Mr. Levine was elected to the Company's board, by the board of
directors, in November 1998. The acquisition agreement executed in connection
with the acquisition of Solmecs (the "Acquisition") provided that the initial
directors of the Company after the Acquisition would consist of five directors
including Professor Branover and Mr. Althaus as well as a designee of Batei
Sefer Limlacha, one of the Company's principal stockholders, and a designee of
the Underwriter as described immediately above. The fifth director would be
appointed by the Company's board of directors. Batei Sefer Limlacha did not
indicate a designee.
Compliance with Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"), requires the Company's officers and directors, and
persons who own more than 10 percent of a registered class of the Company's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission ("SEC"). Officers, directors, and greater
than 10 percent shareholders are required by SEC regulation to furnish the
Company with copies of all Section 16(a) forms they file.
Based solely on the Company's review of the copies of such forms received
by the Company, the Company believes that, during the year ended June 30, 1999,
all filing requirements applicable to its officers, directors, and greater than
10 percent beneficial owners were complied with except that a Form 4 and Form 5
for each of Dr. Shaul Lesin and Jacline Bavli are late.
ITEM 10. Executive Compensation
Officers Salaries
The following table sets forth the cost of compensation paid to Professor
Herman Branover, the Company's President, Chief Executive Officer, by Solmecs,
in his capacity as Scientific Director of Solmecs, and the compensation paid to
Dr. Shaul Lesin, the Company's Executive Vice President, by Solmecs, in his
capacity as Chief Executive Officer of Solmecs, for the fiscal years ended June
30, 1997, 1998 and 1999. No other executive officer of the Company received
aggregate compensation and bonuses which exceeded $100,000 during such years.
-18-
<PAGE>
Cost of Compensation Summary Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards($)(1)
----------------------------------------------- -------------------------
Restricted Securities
Name and Principal Position Fiscal Salary Other Annual Stock Underlying
- --------------------------- Year ($)(2) Bonus($) Compensation ($) Award Options/SARs(#)
---- ------ -------- ---------------- ----- ---------------
<S> <C> <C> <C> <C> <C> <C>
Professor Herman Branover,
Chief Executive Officer ......... 1997 $62,361 $ -- $ -- -- --
1998 57,780
1999 125,000
Dr. Shaul Lesin
Executive Vice 1997 $90,000
President ....................... 1998 $92,998 -- --
1999 $130,000(3) $ 30,000 60,000
</TABLE>
- ----------
(1) The Company did not have any long-term incentive or option plans during the
fiscal year ended June 30, 1997. The Company adopted its 1997 Stock Option
Plan in December 1997.
(2) During the fiscal years ended June 30, 1997, 1998 and 1999, the Company
paid an automobile allowance to Professor Branover in the amount of
approximately $8,200, $6,900 and $6,000, respectively. During the fiscal
years ended June 30, 1997, 1998 and 1999, the Company paid an automobile
allowance to Dr. Lesin in the amount of approximately $3,400, $2,800 and
$6,000, respectively.
(3) Includes approximately $5,000 of salary paid by Elecmatec pursuant to our
employment agreement.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Number of Percent of Total Options/
Securities Underlying SARS Granted To Exercise or
Name Options/SARS Granted Employees in Fiscal Year Base Price Expiration Date
---- -------------------- ------------------------ ---------- ---------------
<S> <C> <C> <C> <C>
Dr. Shaul Lesin 60,000(1) 84.5% $1.00 12/30/08
Jacline Bavli 6,000(1) 8.5% $1.00 12/30/08
</TABLE>
- ----------
(1) The options vest as to one-third of the total amount granted on each of the
six-month, first year and second year anniversaries of the date of grant
Employment Agreements
On July 8, 1998 Solmecs entered into employment agreements with Professor
Herman Branover, Dr. Shaul Lesin and Jacline Bavli, the Company's President and
Chief Executive Officer, Executive Vice President and Chief Financial Officer,
which provide for annual base compensation of $98,400, $98,400 and $39,600,
respectively, payable in NIS in accordance with the rate of exchange into U.S.
dollars in effect on the date of payment. The base compensation may be increased
from time to time by the Board of Directors in its sole discretion. In addition,
Solmecs will contribute on behalf of each employee an amount equal to 15.8% of
such employee's salary to a fund known as "Manager's Insurance" and 7.5% of such
employee's salary to a fund known as "Education Fund." See Item 1. - Description
of Business.
Solmecs has agreed to provide Messrs. Branover and Lesin with an automobile
and a cellular phone during the term of their employment for which Solmecs shall
pay all expenses. Solmecs has also agreed to pay the costs associated with
maintaining a telephone line in their homes during the course of their
employment with the Company.
-19-
<PAGE>
Each of the employment agreements contains a confidentiality provision
preventing the employees from disclosing, during the terms of their respective
employment agreements and at any time following the termination of their
employment, any proprietary information of the Company without the Company's
consent. Further, each of the employment agreements contains a provision that
such employee will not directly or indirectly compete or engage in a business
competitive with the Company or solicit the employees or consultants of the
Company for employment in a business in competition with the Company, during the
term of the employment agreement and for a period of one year thereafter.
Pursuant to the terms of the employment agreements the Company has agreed
to indemnify the employee for any claim or liability arising from such
employee's good faith fulfillment of his employment obligations provided that
the employee: (i) provides the Company with timely written notice of the claim
or liability; (ii) cooperates with the Company in the defense of the claim and
(iii) allows the Company to control defense of the claim.
The employment agreements for Messrs. Branover and Lesin provide that in
the event of termination other than "for cause" or as a result of a continuing
disability (as defined in the employment agreements) the employee shall be
entitled to: (i) an adjustment grant equal to three months base salary payable
in three equal monthly installments beginning on the first day of the month
following the date of termination; (ii) an additional payment of one month's
base salary for each year in which employee was employed; and (iii) the use of
an automobile and cellular phone for a period of three months following
termination. The Company may not terminate an employee "for cause" unless it has
given the employee (i) written notice of the basis for termination, and (ii) at
least 30 days to cure the basis for such cause.
Liability Insurance
The Company maintains a policy of insurance under which the directors and
officers of the Company will be insured, subject to the limits of the policy,
against certain losses arising from claims made against such directors and
officers by reason of any acts or omissions covered under such policy in their
respective capacities as directors or officers, including liabilities under the
Securities Act.
1997 Stock Option Plan
In December 1997, the Board of Directors and stockholders of the Company
adopted the 1997 Stock Option Plan (the "Option Plan"), pursuant to which
200,000 shares of Common Stock are reserved for issuance upon exercise of
options. The Option Plan is designed to serve as an incentive for retaining
qualified and competent employees, directors and consultants.
The Company's Board of Directors, or a committee thereof, administers the
Option Plan and is authorized, in its discretion, to grant options thereunder to
all eligible employees of the Company, including officers and directors (whether
or not employees) of, and consultants to, the Company. The Option Plan provides
for the granting of both "incentive stock options" (as defined in Section 422 of
the Internal Revenue Code of 1986, as amended) and non-qualified stock options.
Options can be granted under the Option Plan on such terms and at such prices as
determined by the Board of Directors, or a committee thereof, except that the
per share exercise price of options will not be less than the fair market value
of the Common Stock on the date of grant. In the case of an incentive stock
option granted to a stockholder who owns stock of the Company possessing more
than 10% of the total combined voting power of all classes of stock ("10%
stockholder"), the per share exercise price will not be less than 110% of such
fair market value. The aggregate fair market value (determined on the date of
grant) of the shares covered by incentive stock options granted under the Option
Plan that become exercisable by a grantee for the first time in any calendar
year is subject to a $100,000 limit.
Options granted under the Option Plan will be exercisable during the period
or periods specified in each option agreement. Options granted under the Option
Plan are not exercisable after the expiration of ten years from the date of
grant (five years in the case of incentive stock options granted to a 10%
stockholder) and are not transferable other than by will or by the laws of
descent and distribution.
As of June 30, 1999, the Company has granted an aggregate of 86,000
non-qualified options under its Option Plan, of which an aggregate of 66,000
were granted to executive officers of the Company. The options are exercisable
at $1.00 per share and vest in increments of one-third of the amount of the
grant on each of the six-month, one year and
-20-
<PAGE>
two year anniversaries of the date of grant.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of September 30, 1999, the number of
shares of the Company's outstanding Common Stock beneficially owned by (i) each
director of the Company; (ii) each person who is known by the Company to
beneficially own 5% or more of the outstanding Common Stock; (iii) each of the
persons named in the Summary Compensation Table (the "Named Executives"); and
(iv) all of the Company's directors and executive officers as a group (based on
information furnished by such persons). Unless otherwise indicated, the
beneficial owners exercise sole voting and/or investment power over their
shares.
Amount and Nature of Percentage of
Beneficial Outstanding
Name and Address of Beneficial Owner(1) Ownership(2) Shares
- --------------------------------------- ------------ ------
Bayou International, Ltd. 499,701 24%
Level 8
580 St. Kilda Road
Melbourne, Victoria, 3004 Australia
Batei Sefer Limlacha(3) 312,313 15%
766 Montgomery Street
Brooklyn, New York 11213
H.B. Capital Ltd.(4) 145,746 7%
Emmanuel Althaus(5) 83,284 4%
All executive officers and directors as a
group (five persons) 251,030(6) 12%
- ----------
(1) The address of HB Capital Ltd. and Mr. Althaus is c/o SCNV Acquisition
Corp., Omer Industrial Park, P.O.B. 3026, Omer, Israel 84965.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person within
60 days from the date of this Report upon the exercise of options or
warrants. Each beneficial owner's percentage ownership is determined by
assuming that options that are held by such person (but not those held by
any other person) and that are exercisable within 60 days from the date of
this Report have been exercised. Except as otherwise indicated, the Company
believes that each of the persons named has sole voting and investment
power with respect to the shares shown as beneficially owned by him.
(3) Batei Sefer Limlacha is a religious corporation organized under the New
York Religious Corporation Law. David Laine is President and trustee and
Joseph Kazin and Benzion Raskin are the remaining trustees. Batei Sefer
Limlacha may be deemed to be a "promoter" of the Company as such term is
defined under the Federal Securities Laws.
(4) Professor Herman Branover is the sole shareholder of H.B. Capital Ltd., an
Irish corporation. Professor Branover and Shmuel Gurfinkel are the
directors. H.B. Capital Ltd. may be deemed to be a "promoter" of the
Company, as such term is defined under the federal securities laws.
(5) Mr. Althaus may be deemed to be a "promoter" of the Company, as such term
is defined under the federal securities laws.
(6) Includes 22,000 shares of Common Stock issuable upon exercisable of options
granted to two executive officers, which are currently exercisable. Does
not include 44,000 shares of Common Stock issuable upon exercise of options
granted to such executive officers, which are not currently exercisable.
-21-
<PAGE>
ITEM 12. Certain Relationships and Related Transactions
In May 1997, the Company issued 145,746 shares of Common Stock, 83,284
shares of Common Stock and 312,313 shares of Common Stock to H.B. Capital Ltd.,
Emmanuel Althaus and Batei Sefer Limlacha, respectively, for nominal
consideration. Emmanuel Althaus, the Chairman of the Board of Directors of the
Company, is a Director of Solmecs and was the Vice President and Director of
Bayou from March 1990 through November 1996.
Simultaneously with the consummation of the Public Offering, the Company
acquired all of the issued and outstanding capital stock of Solmecs. Bayou, the
current parent of Solmecs, received 499,701 shares of the Company's Common Stock
in connection with the Acquisition. In connection with the Acquisition, Bayou
forgave indebtedness of Solmecs in the amount, as of June 30, 1998, of
$5,082,897 as a capital contribution. The 499,701 shares issued to Bayou were
not registered in the Offering but are subject to certain registration rights to
be granted by the Company.
During the period from inception through June 30, 1998, Batei Sefer
Limlacha, a principal stockholder of the Company, loaned to the Company $110,108
for working capital purposes and agreed that such loans were to become due and
payable on the earlier of December 31, 1998 or the consummation of certain types
of transactions, including the Public Offering. Such loans were unsecured and
were interest free except in an event of default.
During the period from September 1997 through June 30, 1998, Batei Sefer
Limlacha loaned to Solmecs $375,000 for working capital purposes and agreed with
Solmecs that such loans were to become due and payable on the earlier of June
30, 1998 or the consummation of certain types of transactions, including the
Acquisition. Such loans were unsecured and bore interest at the rate of 8% per
annum. On June 23, 1998, Batei Sefer Limlacha agreed to extend the term of the
loans through the earlier of July 31, 1998 or the consummation of certain types
of transactions, including the Public Offering.
The loans from Batei Sefer Limlacha were repaid in full by the Company on
July 8, 1998.
In May 1999, the Company acquired Elecmatec. Professor Branover, the
President, Chief Executive Officer and a director of the Company is also an
officer, director and shareholder of Elecmatec. Pursuant to the terms of the
acquisition, the Company is required to pay shareholders of Elecmatec, including
Professor Branover, an aggregate of $150,000 upon the completion by Elecmatec of
third-party debt or equity financing of at least $500,000. In connection with
the acquisition, Professor Branover entered into an employment agreement with
Elecmatec with a base salary of approximately $30,000 per year and bonuses equal
to 5% of Elecmatec's net income up to an aggregate bonus amount of $180,000.
ITEM 13. Exhibits, Lists and Reports on Form 8-K
(a) Exhibits
See Exhibit List below.
(b) Reports on Forms 8-K and 8-K/A
The Company did not file any reports with the Securities and Exchange
Commission on Form 8-K for the quarter ended June 30, 1999.
(c) Exhibits
3.1 Certificate of Incorporation of the Registrant.(1)
3.3 Bylaws of the Registrant.(1)
4.1 Form of Registrant's Common Stock Certificate.(1)
4.3 Form of Registrant's Public Warrant Certificate.(1)
4.4 Form of Registrants Unit Certificate.(1)
10.1 Form of Stock Purchase Agreement between SCNV Acquisition Corp.,
Solmecs Corporation, N.V. and Bayou International Ltd.(1)
10.2 Agreement, dated as of June 4, 1980 by and between Advanced Products
Beer Sheva Ltd. (AP) and the Ben Gurion University of the Negar (The
Research and Development Authority) and Solmecs Corporation N.V.(1)
10.3 Agreement, dated as of March 31, 1981, by and between the Government
of Israel Ministry of Energy and Infrastructure, the Ben Gurion
University of the Negev (The Research and Development
-22-
<PAGE>
Authority - RDA) and Advanced Products Beer Sheva Ltd. and Solmecs
(Israel) Ltd. and Solmecs Corporation N.V.(1)
10.4 Agreement, dated as of November 5, 1981 by and between Advanced
Products Beer Sheva Ltd. (AP) and the Ben Gurion University of the
Negev (The Research and Development Authority) (RDA), Solmecs
Corporation N.V. and Solmecs Corporation (U.K) Limited.(1)
10.5 Agreement, dated as of January 25, 1990 by and between International
Lead Zinc Research Organization, Inc. and Solmecs (Israel) Ltd.(1)
10.6 Agreement, dated as of March 7, 1991 by and between International
Lead Zinc Research Organization, Inc. and Solmecs (Israel) Ltd.(1)
10.7 Agreement, dated as of June 9, 1997 by and between the Institute of
Physics in Riga, Latvia and Solmecs (Israel) Ltd.(1)
10.8 Agreement, effective as of September 30, 1997, by and between
Solmecs Corporation N.V. and Batei Sefer Limlacha.(1)
10.9 Agreement, effective as of September 30, 1997, by and between
Registrant and Batei Sefer Limlacha.(1)
10.10 Agreement, dated as of January 1, 1998 by and between Solmecs
(Israel) Ltd. and Leon Aprimov.(1)
10.11 Lease by and between Tefen Entrepreneurship Ltd. and Solmecs
(Israel) Ltd. dated October 14, 1997.(1)
10.12 Form of Employment Agreement between Registrant and Professor Herman
Branover.(1)
10.13 Form of Employment Agreement between Registrant and Dr. Shaul
Lesin.(1)
10.14 Form of Employment Agreement between Registrant and Jacline
Bavli.(1)
10.15 1997 Stock Option Plan.(1)
10.16 Agreement between Solmecs (Israel) Ltd., Text-On, Ltd. and Boris
Wettelmacher, dated February 4, 1999.
10.17 Loan Agreement between the Company and Elecmatec Electro-Magnetic
Technologies Ltd. ("Elecmatec"), dated December 30, 1998.
10.18 Pledge Agreement between the Company and Elecmatec, dated December
30, 1998.
10.19 Share Purchase Agreement between the Company and Elecmatic, dated
May 18, 1999.
10.20 Shareholders Agreement among the Company, Professor Herman Branover,
Dr. Arik El-Boher and Dr. Yuri Gelfgat, dated May 18, 1999.
10.21 Share Purchase Agreement among the Company, Elecmatec, Ariel Shemer
and Dr. Israel Weinbom, dated May 18, 1999
10.22 Amended Loan Agreement between the Company and Elecmatec, dated May
18, 1999.
10.23 Amended Pledge Agreement between the Company and Elecmatec, dated
May 18, 1999.
10.24 Agreement between Solmecs (Israel) Ltd. and the Association for the
Development of International Energy Projects, dated September 8,
1998. 21. Subsidiaries of the Registrant
21. Subsidiaries of the Registrant
27. Financial Data Schedule.
- ----------
(1) Incorporated by reference to the comparable exhibit filed with the
Company's Registration Statement on Form SB-2, File No. 333-43955.
-23-
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) 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.
SCNV ACQUISITION CORP.
By: /s/ Herman Branover
-----------------------------------
Herman Branover
President, Chief Executive Officer
and Director
Dated: October 12, 1999
In accordance with the requirements of the Securities Exchange Act of 1934,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(s) Date
---------- -------- ----
<S> <C> <C>
/s/ Emmanuel Althaus Chairman of the Board of Directors October 12, 1999
- -----------------------
Emmanuel Althaus
/s/ Herman Branover President, Chief Executive Officer and October 12, 1999
- ----------------------- Director
Herman Branover
/s/ Shaul Lesin Executive Vice President October 12, 1999
- -----------------------
Shaul Lesin
/s/ Jacline Bavli Chief Financial Officer October 12, 1999
- -----------------------
Jacline Bavli
/s/ Joshua Levine Director October 12, 1999
- -----------------------
Joshua Levine
</TABLE>
-24-
<PAGE>
INDEX
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of June 30, 1999 F-3
Consolidated Statement of Operations for the Year Ended June 30, 1999 F-4
Consolidated Statement of Changes in Stockholders' Equity for the
Year Ended June 30, 1999 F-5
Consolidated Statement of Cash Flows for the Year Ended June 30, 1999 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7-
F-16
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SCNV Acquisition Corp.:
We have audited the accompanying consolidated balance sheet of SCNV Acquisition
Corp. (a Delaware corporation) and subsidiaries as of June 30, 1999, and the
related consolidated statement of operations, changes in stockholders' equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SCNV Acquisition Corp. and
subsidiaries as of June 30, 1999, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's ability to continue as a going concern is
dependent upon the ability to raise resources to finance its operations. This
fact raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regards to this matter are also discussed in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Arthur Andersen LLP
New York, New York
September 30 , 1999
F-2
<PAGE>
SCNV ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 525,162
Short-term investments 1,127,166
Trade receivables 10,931
Inventory 30,595
Other receivables and prepaid expenses 113,288
-----------
Total current assets 1,807,142
PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization of $160,609 1,052,903
OTHER ASSETS, net of amortization of $5,000 25,000
-----------
Total assets $ 2,885,045
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 151,898
Trade payables 332,029
Sundry payables and accrued expenses 288,897
-----------
Total current liabilities 772,824
-----------
NONCURRENT LIABILITIES:
Long-term loan 200,000
Accrued severance pay 114,329
-----------
Total noncurrent liabilities 314,329
-----------
Total liabilities 1,087,153
-----------
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par value, 1,000,000 shares authorized;
none issued and outstanding --
Common stock $.01 par value, 10,000,000 shares authorized; 2,082,088 shares issued and
outstanding 20,821
Additional paid-in capital 7,517,333
Accumulated deficit (5,740,262)
-----------
Total stockholders' equity 1,797,892
-----------
Total liabilities and stockholders' equity $ 2,885,045
===========
</TABLE>
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
SCNV ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<S> <C>
REVENUES:
Sales $ 49,282
Contract services 18,411
-----------
Total revenues 67,693
-----------
COSTS AND EXPENSES:
Research and development costs 715,334
Cost of merchandise purchased 48,774
Cost of contract services performed by subcontractors 19,172
Marketing expenses 189,828
General and administrative expenses 871,999
-----------
Total costs and expenses 1,845,107
-----------
Loss before one-time charge (1,777,414)
ONE-TIME CHARGE OF ACQUIRED RESEARCH AND DEVELOPMENT IN PROCESS (4,060,111)
-----------
Operating loss (5,837,525)
FINANCING INCOME, net 97,263
MINORITY INTEREST --
-----------
Net loss $(5,740,262)
===========
NET LOSS PER COMMON SHARE, basic and diluted $ (2.76)
===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, basic and diluted 2,082,088
===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-4
<PAGE>
SCNV ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Number Additional Accumulated
of Shares Share Capital Paid-in Capital Deficit Total
----------- ------------- --------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, July 1, 1998 541,343 $ 5,413 $ 2,179 $ -- $ 7,592
Shares issued in connection
with initial public
offering, net of offering
costs of $1,328,721 1,041,044 10,411 4,646,871 -- 4,657,282
Shares issued to Bayou in
connection with the
acquisition of subsidiary 499,701 4,997 2,868,283 -- 2,873,280
Net loss for the year ended
June 30, 1999 -- -- -- (5,740,262) (5,740,262)
----------- ----------- ----------- ----------- -----------
BALANCE, June 30, 1999 2,082,088 $ 20,821 $ 7,517,333 $(5,740,262) $ 1,797,892
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-5
<PAGE>
SCNV ACQUISITION CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1999
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(5,740,262)
Adjustments to reconcile net loss to net cash used in operating activities 4,168,342
-----------
Net cash used in operating activities (1,571,920)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of subsidiary, net of cash acquired (102,824)
Purchase of fixed assets (693,027)
Purchase of other assets (15,000)
Short-term investments, net (1,127,166)
Proceeds from sale of fixed assets 5,708
-----------
Net cash used in investing activities (1,932,309)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings, net (627,891)
Proceeds from initial public offering, net 4,657,282
Net cash provided by financing activities 4,029,391
Increase in cash and cash equivalents 525,162
CASH AND CASH EQUIVALENTS, beginning of year --
-----------
CASH AND CASH EQUIVALENTS, end of year $ 525,162
===========
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
Items not involving cash flows-
Depreciation and amortization $ 41,149
Loss on sale of equipment 836
Severance pay 90,316
Acquired research and development in process 4,060,111
Changes in operating assets and liabilities-
Decrease in trade receivables 28,599
Increase in inventory (30,595)
Decrease in other receivables and prepaid expenses 574,105
Increase in trade payables 99,177
Decrease in sundry payables and accrued expenses (695,355)
-----------
$ 4,168,342
===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
A. Acquisition of subsidiary
Fair value of acquired assets and research and development in process $ 4,311,437
Less-
Liabilities assumed (1,331,032)
Shares issued as consideration for acquisition of subsidiary (2,873,280)
-----------
Cash paid 107,125
Less- Cash acquired (4,301)
-----------
$ 102,824
===========
B. Purchase of fixed and other assets on credit $ 287,526
===========
</TABLE>
The accompanying notes are an integral part of this consolidated statement.
F-6
<PAGE>
SCNV ACQUISITION CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
1. BUSINESS
SCNV Acquisition Corp. (the "Company") was organized under the laws of the State
of Delaware on May 19, 1997, to acquire Solmecs Corporation N.V. and its wholly
owned subsidiary Solmecs (Israel) Ltd. ("Solmecs") and to select, develop and
commercially exploit proprietary technologies in various stages of development,
invented primarily by scientists who have recently immigrated to Israel from,
and by scientists and institutions in, Russia and other countries that formerly
comprised the Soviet Union.
Initial Public Offering
On July 8, 1998, the Company consummated an Initial Public Offering (the "IPO")
in which 1,041,044 Units, composed of 1,041,044 shares of Common Stock and
1,041,044 redeemable Common Stock purchase warrants ("Warrants"), were sold to
the public at $5.75 per Unit. Each Warrant entitles the holder to purchase one
share of Common Stock at a price of $7.50, subject to adjustment in certain
circumstances, at any time during the four-year period commencing June 29, 1999.
The net proceeds from the IPO were approximately $4,600,000.
In addition, the Company sold to the underwriter for an aggregate of $104,
warrants to purchase an additional 104,104 Units at an exercise price of 120% of
the IPO price per unit ($6.90) ("Underwriter's Warrants"). The Underwriter's
Warrants are exercisable at any time during the four-year period commencing June
29, 1999.
Acquisition of Solmecs
Simultaneously with the consummation of the IPO, the Company acquired all of the
issued and outstanding capital stock of Solmecs in consideration for 499,701
shares of the Company's Common Stock issued to Bayou International, Ltd.
("Bayou"), the parent of Solmecs. The acquisition has been accounted for as a
purchase. The excess of purchase price over fair value of assets acquired of
$3,772,054 was reflected as acquired research and development in process and
fully expensed at the date of the acquisition. Solmecs, the operations of which
are located in Israel, owns certain technologies developed by it in the past.
The technologies of Solmecs and certain offshoots of such technologies are in
various stages of development and include technologies that have begun to be
commercialized as well as technologies that the Company believes will be ready
for commercialization in the near future.
F-7
<PAGE>
Acquisition of Elecmatec
On May 18, 1999, the Company acquired approximately 90%, of which 35% was
purchased from a related party, of Elecmatec Electro-Magnetic Technologies Ltd.
("Elecmatec"), an Israeli company, for approximately $150,000, of which $50,000
was paid to existing stockholders and $100,000 was invested in Elecmatec equity.
In addition, the Company may pay up to $150,000 under certain circumstances. The
acquisition has been accounted for as a purchase. The excess of purchase price
over fair value of assets acquired of approximately $288,000 is reflected as
acquired research and development in process and fully expensed at the date of
the acquisition. The results of operations are included for the period from the
date of acquisition until year-end. The operations of Elecmatec are immaterial,
therefore, pro-forma information has not been presented. Elecmatec develops,
manufactures and markets metal alloys for the auto industry, mainly for export.
Going Concern
The Company has incurred substantial operating losses and at June 30, 1999, has
an accumulated deficit of approximately $5,740,000. The Company is not
generating sufficient revenues from its operations to fund its activities and
anticipates that it will continue to incur losses for some time. The Company is
continuing its efforts in research and development which will require
substantial additional expenditures. As such, the Company's ability to continue
as a going concern is dependent upon its ability to raise resources to finance
its operations. This fact raises substantial doubt about the Company's ability
to continue as a going concern.
The Company plans to finance its operations and capital expenditure by receiving
additional credit lines and bank loans. The Company is also negotiating with
potential investors/partners who would provide bridge financing until the
Company will begin to produce and sell its products.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its subsidiaries, Solmecs and Elecmatec. Material intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. Investments with an original
maturity over three months are classified as short-term investments. Short-term
investments at June 30, 1999, contain mainly short-term deposits in banks.
Inventory
Inventory is valued at lower of cost or market, cost being determined on a
specific basis.
F-8
<PAGE>
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives ranging between three to fifteen years.
Leasehold improvements and equipment held under capital leases are amortized
utilizing the straight-line method over the lesser of the estimated useful lives
of the assets or the lease term.
Other Assets
Other assets are stated at cost less accumulated amortization. Amortization is
computed using the straight-line method over five years, the estimated useful
lives of the assets.
Accounting for Long-Lived Assets
The Company accounts for long-lived assets in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of."
This statement establishes financial accounting and reporting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles to be disposed of. Management has performed a
review of all long-lived assets and has determined that no impairment of the
respective carrying value has occurred as of June 30, 1999.
Revenue Recognition
Revenues from sales of merchandise are recognized upon shipment.
Revenues from contract services are recognized as the work is performed,
according to contract benchmarks.
At the end of each period presented, the balance of trade receivables is
comprised mainly of a few customers and, accordingly, no allowance for doubtful
accounts is considered necessary.
Research and Development Costs
Research and development costs are charged to operations as incurred.
Stock-Based Compensation
The Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," and elected to continue the accounting set forth in Accounting
Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees," and
to provide the necessary pro forma disclosures as if the fair value method had
been applied.
Net Loss per Common Share
The Company computes net loss per share in accordance with SFAS No. 128,
"Earnings Per Share." Under the provisions of SFAS No. 128, basic net income
(loss) per common share ("Basic EPS") is computed by dividing net income (loss)
by the weighted average number of common shares outstanding. Diluted net income
(loss) per common share ("Diluted EPS") is computed by dividing net income
(loss) by the weighted average number of common shares and dilutive common share
equivalents then outstanding.
F-9
<PAGE>
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
short-term borrowings and sundry payable and accrued expenses approximate their
fair value due to the short-term maturity of these instruments.
Business Concentrations and Credit Risks
Financial instruments, which subject the Company to concentrations of credit
risk, consist primarily of cash and cash equivalents. The Company maintains cash
and cash equivalents with various financial institutions. The Company performs
periodic evaluations of the relative credit standing of these institutions.
Foreign Currency Translation
Transactions and balances in other currencies are translated into U.S. dollars
in accordance with the principles set forth in SFAS No. 52, "Foreign Currency
Translation." Accordingly, items have been translated as follows:
Monetary items - at the exchange rate in effect on the balance sheet date.
Nonmonetary items - at historical exchange rates.
Revenue and expense items - at the exchange rates in effect as of date of
recognition of those items (excluding depreciation and other items derived
from nonmonetary items).
All exchange gains and losses from the translation mentioned above are
reflected in the statement of operations.
Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards of derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement is effective for all quarters of fiscal years
beginning June 15, 1999. The Company does not expect the adoption of this
standard to have a material effect on the Company's results of consolidated
operations, financial position or cash flows.
3. PRO FORMA FINANCIAL STATEMENT (Unaudited)
The following unaudited pro forma consolidated statement of operations for the
year ended June 30, 1998 has been prepared to reflect the combined results of
the Company and Solmecs as if the combination, described in Note 1, had been
effective as of July 1, 1997. Such pro forma information gives effect to:
a. The acquisition of Solmecs in consideration for 499,701 shares of the
Company's common stock issued to Bayou.
b. The payment of approximately $120,000 to officers in accordance with
employment agreement.
c. The elimination of imputed interest on the forgiven Bayou loan.
In management's opinion, all material
F-10
<PAGE>
adjustments necessary to reflect the effects of the Combination have been made.
The pro forma financial statement is unaudited and not necessarily indicative of
the consolidated results which actually would have occurred if the Combination
had been consummated at the beginning of the period presented, nor does it
purport to represent the future financial position and results of operations for
future periods.
Pro Forma Consolidated Statement of Operations
For the Year Ended June 30, 1998
(Unaudited)
Revenues:
Sales $ 6,571
Contract services 51,339
-----------
Total revenues 57,910
-----------
Costs and expenses(1):
Research and development costs 268,924
Cost of merchandise purchased 8,190
Cost of contract services performed by subcontractors 26,797
Marketing expenses 86,258
General and administrative expenses 437,780
-----------
Total costs and expenses 827,949
-----------
Operating loss (770,039)
Financing expenses, net (15,093)
-----------
Net loss $ (785,132)
===========
Pro forma net loss per share $ (0.75)
===========
Weighted average number of common shares outstanding 1,041,044
===========
(1) The pro forma condensed consolidated statement of operations does not
include the one-time charge of $3,772,054 of excess purchase price over
fair value of the assets acquired. This charge was reflected in the
consolidated statement of operations for the year ended June 30, 1999, as a
one time charge of "acquired research and development in-process."
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Year Ended Annual
June 30, Rates of
1999 Depreciation
---------- ------------
Plants under construction $ 799,385 --
Machinery and equipment 12,304 15%
Office furniture and equipment 195,954 6-33%
Motor vehicles 111,107 15%
Leasehold improvements 94,762 10-20%
----------
Total property and equipment 1,213,512
Less- Accumulated depreciation and amortization 160,609
----------
Property and equipment, net $1,052,903
==========
F-11
<PAGE>
5. SHORT-TERM BORROWINGS
Interest June 30,
Rate 1999
-------- -------
Banks in New Israeli Shekels unlinked 16.5% $ 16,499
Banks in U.S. dollars 7.0 135,399
--------
$151,898
========
6. SUNDRY PAYABLES AND ACCRUED EXPENSES
June 30,
1999
--------
Ben-Gurion University for services rendered $ 83,501
Payroll and related expenses 98,330
Other payables and accrued expenses 107,066
--------
$288,897
========
7. LONG-TERM LOAN
The long-term loan is interest free. The date of repayment has not yet been
determined.
8. SEVERANCE PAY
The Company's obligation in respect of severance pay to its Israeli subsidiaries
employees is covered by insurance policies. The amounts on deposit with the
insurance companies are not under the control or management of the subsidiaries
and, therefore, such amounts and the related liability are not reflected in the
balance sheet.
The accrual on the balance sheet represents the unfunded portion of the
severance obligation.
9. CAPITAL STOCK
Preferred Stock
The Board of Directors has the authority, without further action by the
stockholders, to issue up to one million shares of preferred stock in one or
more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series.
1997 Stock Option Plan
In December 1997, the Board of Directors and stockholders of the Company adopted
the 1997 Stock Option Plan (the "Plan"), pursuant to which 200,000 shares of
Common Stock are reserved for issuance upon exercise of options. The Plan is
designed to serve as an incentive for retaining qualified and competent
employees, directors and consultants. Options granted under the Plan will be
exercisable during the period or periods specified in each option agreement.
Options granted under the Plan are not exercisable after the expiration of ten
years from the date of grant (five years in the case of incentive stock options
granted to a 10% stockholder) and are not transferable other than by will or by
the laws of descent and distribution.
The Company accounts for the Stock Option Plan under APB Opinion No. 25 and,
accordingly, compensation expense has not been recognized in the accompanying
consolidated financial statements as
F-12
<PAGE>
exercise price of the stock options granted was not exceeding fair market value
on the date of grant. Had compensation cost for the 1997 Stock Option Plan been
determined consistent with the provisions of SFAS No. 123, the effect on the
Company's net loss and net loss per share would have been changed to the
following pro forma amounts:
Year Ended
June 30, 1999
-------------
Net loss, as reported $ (5,740,262)
Net loss, pro forma (5,784,338)
Loss per share, as reported (2.76)
Loss per share, pro forma (2.78)
A summary of the stock options as of and for the year ended June 30, 1999 is as
follows:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding, beginning of year -- $--
Options granted 101,000 1.00
Options exercised -- --
------- -----
Options outstanding, end of year 101,000 $1.00
======= =====
Options exercisable at end of year 23,667 $1.00
======= =====
The weighted average fair value of options granted in fiscal year 1999 is $0.44
and the weighted average remaining contractual life is 9.3 years.
The fair market value of each option grant has been estimated on the date of
grant using the Black-Scholes Option Pricing Model with the following
assumptions for the year ended June 30, 1999:
Expected options lives 5 years
Risk-free interest rate 5.30%
Expected volatility 240%
Dividend yield --
10. COMMITMENTS AND CONTINGENCIES
Royalties - BGU
In accordance with an agreement dated November 5, 1981, between Solmecs,
Ben-Gurion University and B.G. Negev Technology and Applications Ltd. ("BGU"),
the subsidiary in Israel is conducting research and development projects on the
campus of Ben-Gurion University in consideration for a fee for the use of the
facilities. The Company owns the patents connected with these projects (related
to L.M.M.H.D. power generation) and has agreed to pay royalties to BGU at the
rate of 1.725% on sales of products and at the rate of 11.5% on income from
licensing fees.
The Company also agreed to assume the obligation of BGU to pay royalties to the
Ministry of National Infrastructure on products developed from these R&D
projects for its participation in the research and development costs of BGU.
The royalties are to be paid at the rate of 1% on sales of products and at the
rate of 5% on income from licensing fees. As of June 30, 1999, the maximum
future royalties commitment amounted to approximately
F-13
<PAGE>
$324,000 (including linkage to the Israeli Consumer Price Index and interest at
4% per annum). Subsequent to the repayment of the $324,000, the Company is to
pay royalties to the Ministry of National Infrastructure at a reduced rate of
0.3% on future sales of products and at the rate of 2% on all future income from
licensing fees.
Through June 30, 1999, there were no sales or income on which royalties were
payable to BGU and the Ministry of National Infrastructure.
International Lead Zinc Research Organization (ILZRO)
In connection with a research contract with ILZRO, Solmecs agreed to pay ILZRO a
fee for any lead to be used in future production by the subsidiary. The total
fee commitment is limited to $1,864,000. Through June 30, 1999, Solmecs has not
used any lead for which it is required to pay fees.
Chief Scientist of the Government of Israel
Elecmatec obtained the approval from the office of the Chief Scientist to
purchase from a third party all rights and interests in the metal alloy research
and development project. Elecmatec has undertaken to pay royalties, at the rate
of 3% of sales derived from the project, up to the amount of the participations
($459,000) received by the third party.
For the period from 1981 to 1991, Solmecs received participations from the Chief
Scientist of approximately $2.3 million towards the cost of a research and
development project. In return, Solmecs is required to pay royalties at the rate
of 2% of sales of know-how or products derived from the project. Through June
30, 1999, there were no sales on which royalties were payable.
Royalties and Licensing Fees
In January 1998, an agreement was signed between Solmecs and a party which had
participated in the development of a certain product. In this agreement, Solmecs
undertook to pay royalties as a certain percentage of sales and a certain
percentage of revenues from licensing fees. As of June 30, 1999, no sales had
been made for which royalties would be payable.
Lease Agreement
The Company leases certain office spaces for its operations through the period
ending December 2001.
Future minimum payments for operating leases at June 30, 1999 are as follows:
Year ending June 30:
2000 $ 80,000
2001 80,000
2002 100,000
Purchased Technology
Solmecs purchased certain know-how and technologies for which Solmecs is
obligated to pay royalties of 0.25% on sales of products developed using these
technologies, up to a maximum amount of $70,000.
F-14
<PAGE>
Letter of Intent
In September 1997, Solmecs signed a letter of intent in which it agreed to
cooperate with another party in establishing a jointly owned entity for the
development of certain technology. The other party will be responsible for
providing financing of the jointly owned entity. As of June 30, 1999, Solmecs
had received $15,505 from the other party as participation in the costs of
technology development.
Fixed Assets
At June 30, 1999, commitments to acquire fixed assets amounted to approximately
$377,000.
King Metal Strips Ltd. Agreement
Subsequent to balance sheet date, Elecmatec signed an agreement with King Metal
Strips Ltd. ("King") to provide metal alloy and rolling services. According to
the above-mentioned agreement, Elecmatec has committed to provide loans to or
invest in equity of King in the amount of $400,000 pursuant to conditions to be
agreed upon between the parties.
11. REVENUES
For the Year Ended June
30, 1999
-----------------------
Revenues by geographic areas:
Greece 57%
Israel 28%
Other 15%
Sales to single customers exceeding 10%:
Customer A 57%
Customer B 19%
Customer C 12%
Customer D 12%
12. TAXES ON INCOME
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," which requires recognition of deferred tax liabilities and assets for
the estimated future tax effects of events that have been recognized in the
financial statements or income tax returns. Under this method, deferred tax
liabilities and assets are determined based on (1) differences between the
financial accounting and income tax bases of assets and liabilities, and (2) net
operating loss carryforwards, using enacted tax rates in effect for the years in
which the differences and carryforwards are expected to reverse and be utilized,
respectively.
F-15
<PAGE>
Tax loss carryforward at June 30, 1999 is approximately $3,790,000, as follows:
Expiration
Country Amount Year
------- ------ ----
United States $ 20,000 2019
Israel 1,370,000 Unlimited
Dutch Antilles 2,400,000 1999 - 2003
--------------
$ 3,790,000
==============
In addition, research and development costs incurred by Solmecs in the
approximate amount of $830,000 will be deductible for tax purposes upon
recognition of income derived from research and development. Due to the
uncertainty as to realization, a full valuation allowance has been recorded.
F-16
Contract
drawn up and signed on Thursday, February 4, 1999
Between: Solmecs (Israel) Ltd.
POB 3026, Omer Industrial Park, (hereinafter: of the
one part "Solmecs"),
And: 1. Text-On Ltd. (hereinafter: "Text-On"
2. Boris Wettelmacher (hereinafter: "Boris")
both, jointly and severally, of 67 Haamakim Street, Ganei Tikva
of the other part
Whereas: Text-On has declared that it owns all the rights and
technological know-how required to produce an advanced electronic
dictionary in various languages based on the
English-Hebrew-English Oxford model DEH 111 (hereinafter: the
"Product"), continue the development and marketing, including,
but not only - algorithms, chips, modules, design and assembly of
the casing and any other component required for the production of
units which are complete and ready to be sold, including the
connections it has created in respect of production and marketing
of the Product (hereinafter: the "Rights"),
Whereas: Boris has declared that the above Rights are fully owned by
Text-On only,
Whereas: Text-On has declared that it is the exclusive owner of the above
Rights in respect of the area comprising the entire world, with
the exception of the area of the State of Israel (hereinafter:
the "Territory"), which are free of any lien and/or rights
whatsoever to any third party whatsoever, with the exception of a
lien on the rights stemming from the existence of this Contract
in favor of Bank Hapoalim B.M. Pardess Katz branch (hereinafter:
the "Lien"), and with the exception of the rights in the
Netherlands and Belgium stemming from a contract between it and
between Romtech Electronics Ltd. of January 14, 1996, and that it
is authorized, entitled and qualified to transfer the Rights to
Solmecs, pursuant to the conditions of this Contract,
1
<PAGE>
Whereas: Text-On and Boris have declared that they are aware that Solmecs
is entering into this Contract only on the basis of their
above-mentioned declarations, and that in the absence of the
above-mentioned declarations Solmecs would not have entered into
this Contract,
Whereas: Text-On has proposed that Solmecs purchase from it the Rights
pursuant to this Contract and Solmecs has consented to purchase
them from Text-On pursuant to the conditions of this Contract,
Wherefore the parties have declared, agreed and stipulated as follows:
1. The Preamble to this Agreement, including the declarations of the parties
which are included therein, constitutes an integral part thereof.
2. Subject to the fulfillment by Solmecs of all its obligations pursuant to
this Contract, Text-On hereby transfers the Rights to the complete and
exclusive ownership of Solmecs which, for the duration of the Contract,
shall be able to act in all matters pertaining to the Rights as though they
were the owners thereof.
3. Text-On and Boris hereby undertake, jointly and severally, that for the
duration of the Agreement, including the Waiting Period as defined in this
Contract, they shall not engage, in any manner whatsoever, directly or
indirectly, themselves or by means of others, either as self-employed or as
employees, including by a corporation or partnership and/or holding,
themselves or by means of others, shares or management rights in any
corporations whatsoever, in the production and/or development and/or
marketing and/or distribution and/or sale of electronic dictionaries of any
type and kind in the Territory.
In order to remove doubt, it is hereby clarified that the rights to the
development, production and marketing of the Product in the area of Israel
(hereinafter: the "Israeli Rights"), shall also remain the entire property
of Text-On for the duration of the period of this Contract and thereafter,
and therefore both it and Boris are also entitled to handle the Israeli
Rights during the existence of this Contract, and this shall not be deemed
a breach of contract by either party.
In order to remove doubt, it is hereby clarified that the undertakings of
Boris pursuant to this section shall remain valid throughout the entire
period of the Agreement, including the Waiting Period, whether he continues
to be employed by Solmecs, or whether his employment is terminated.
4. It is agreed by the parties that Boris shall be employed by Solmecs as a
department head responsible for project production, development and
marketing of the Product, throughout the period of his employment, subject
to the employment
2
<PAGE>
agreement which shall be signed with him, which is attached to this
Contract as Appendix A, and constitutes an integral part thereof. In order
to remove doubt, it is clarified that this undertaking is one of the
principal points of the Contract, and a breach thereof by Text-On and/or by
Boris shall constitute a fundamental breach of the entire Contract and
Text-On shall not entertain the argument that the activities of Boris are
not under its control and it even renounces this or any similar argument in
advance.
5. Boris undertakes to act industriously, diligently and faithfully in order
to implement the assignments in accordance with the stages listed in this
Contract and he also undertakes to make every effort, to the best of his
ability, to promote the project which is the subject of this Contract.
Solmecs undertakes to act zealously, diligently and industriously to
promote the project pursuant to this Contract, and to make every effort
for this purpose, including investing all the funds required according to
the budget framework of the project appearing in Appendix B, and also
making additional reasonable investments in accordance with its
commercial considerations, and with the success of the project.
6. It is agreed by the parties that this Contract shall be valid from the date
of its signature onward (hereinafter and above: the "Contract Period"),
subject to the following provisions:
A. Solmecs shall be authorized and entitled, pursuant to its exclusive
discretion, to terminate the Contract at the end of six months from
the date of its signature or upon completion of Stages A and B as set
forth below, the later of the two, by giving the other party written
notice of 30 days. In order to remove doubt it is clarified that said
notice of contract termination shall also constitute notice of the
termination of Boris' employment in Solmecs, and Boris renounces any
argument in this matter.
B. In the event that Solmecs terminates the Contract pursuant to that
stated in subparagraph A. above, it shall be authorized and entitled,
but not required, at its exclusive discretion, to renew the Contract,
including all the provisions contained therein, within a period which
shall not exceed six months from the date of contract termination, as
aforesaid (hereinafter: the "Waiting Period"), by giving the other
party written notice.
C. In the above-mentioned Waiting Period, Text-On and Boris, and or
persons acting on their behalf, shall be barred from transferring the
Rights or part thereof and/or using the Rights or part thereof,
themselves and/or by means of any third party whatsoever, directly or
indirectly, unless they have received written consent to this effect
from Solmecs.
Notwithstanding the aforementioned, it is agreed that in the Waiting
Period Boris shall be authorized to perform acts to promote the
project, provided that these acts are fully coordinated with Solmecs.
3
<PAGE>
D. In order to remove doubt it is clarified that Boris shall not be
entitled to any salary and/or payment or reimbursement of expenses
whatsoever during the Waiting Period.
Notwithstanding the aforesaid, it is agreed that during the Waiting
Period Solmecs shall transfer to Text-On any amount received from the
overseas sales of electronic dictionaries in the Hebrew-English
version, from the American company Sifrotech Ltd., and shall also
transfer to it the royalties pursuant to this Contract for overseas
sales during the Waiting Period.
E. In any case of cessation and/or termination of contract as aforesaid,
no party shall be entitled to any compensation and/or payment
whatsoever, including royalties and/or commissions and/or
reimbursement of expenses and/or any other payment of any type and
kind, excluding a salary and/or additional payments stemming from the
employment agreement of Boris, until the end of the Contract Period as
aforesaid, also including the period of notice pursuant to any law,
with the exception of payments and royalties to which Text-On and/or
Boris shall be entitled for the period in which the Contract was still
valid.
F. A fundamental breach of the Contract by Solmecs shall be the only
cause - after a written warning issued fourteen days in advance -
which affords to Boris and/or Text-On the right to terminate the
Contract.
G. Complete termination by Solmecs of the Contract in the Waiting Period
or at the conclusion thereof, shall lead to a restitution to Text-On
of all the Rights pursuant to this Contract, without any consideration
whatsoever on its part.
7. It is agreed by the parties that Boris is responsible for management of the
project for the production and marketing of the Product (hereinafter: the
"Project"), which shall be implemented in accordance with the stages and
objectives as follows, subject to the compliance of Solmecs with the
investment plan incumbent upon it pursuant to Appendix B:
A. Stage A shall apply upon signature of the Contract, shall conclude at
the end of four months from its signature, and shall include the
complete achievement of the following objectives.
(1) Selection and purchase of the rights to the
English-Spanish-English dictionary at the highest level for use
in the Product.
(2) Selection of the best and cheapest producer to produce the
Product, management of negotiations with said producer, and
signature of a binding agreement by Solmecs and said producer.
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(3) Creation of preliminary contacts with possible distributors of
the Product, such as national chain stores in the United States
and Spain, including the commencement of negotiations with them.
(4) Production and sale of the Product in the English-Hebrew-English
and English-Russian-English versions, which have already been
developed, shall begin in the United States, subject to the
location of and agreement with a suitable dealer.
B. Stage B shall begin upon the conclusion of Stage A, or earlier if so
decided by Solmecs, shall conclude within six months from date of
signature of this Contract, and shall contain the complete achievement
of the following objectives:
(1) Completion of development and beginning of production of at least
an English-Spanish-English version, subject to the fact that the
unit cost of production, including cost of royalties therefor,
does not exceed $ 32.
(2) Upon completion of negotiations with the distributors as
aforesaid in Stage A actual sales shall begin.
(3) It is agreed by the parties that the desired objective is a cost
to the distributor at the end of Stage B of $ 55 per unit.
C. It is agreed by the parties that the budget framework for
implementation of the objectives contained in Stage A, including
Boris' salary, shall not exceed US$ 39,000 (thirty nine thousand).
D. It is agreed by the parties that the budget framework for
implementation of the objectives contained in Stage B, including the
salary of Boris, shall not exceed US$ 20,000 (twenty thousand), and in
any event, the total cost of the two above-mentioned stages together
shall not exceed US$ 59,000 (fifty nine thousand) (hereinafter: the
"Total Cost").
E. Text-On and Boris hereby declare that it is possible, and that they
shall make every effort, to implement and complete the objectives in
the two stages in the Total Cost framework and that in any event,
Boris is not authorized to commit vis-a-vis any third party whatsoever
to amounts deviating from the Total Cost and/or which are liable to
cause such a deviation and/or deviate from the cost budgeted for any
objective unless prior written consent thereto has been received from
Solmecs. The budget for the Project investments is attached herewith
as Appendix B and constitutes an integral part of this Contract.
F. Notwithstanding the aforementioned, it is agreed that with the
conclusion of Stage A Solmecs shall be authorized to perform a
situation assessment in relation to the status of each of the
objectives determined for
5
<PAGE>
implementation in Stage A and to decide whether it wishes to continue
with Stage B, both in terms of implementation of the Stage B
objectives, and in terms of its investments in the implementation of
Stage B. Should the situation assessment indicate that implementation
of the objectives was lower than required pursuant to this Contract,
Solmecs shall be authorized to terminate the Contract with written
notice of 30 days, and in such a case, all the provisions set forth in
Section 6 above shall apply to the termination of the Contract, as
though the Contract had been terminated at the conclusion of Stage B.
G. Solmecs shall make the amounts set forth in the budget framework for
Stage A and Stage B available to the Project and shall make
investments at its expense, until the complete conclusion of the
stages, subject to the provisions set forth above, and in accordance
with the payment dates as shall be required, pursuant to actual
implementation of the operations linked to the achievement of the
objectives.
H. All the amounts cited in this Contract in US dollars shall be paid in
NIS or foreign currency, pursuant to the representative rate of the US
dollar in Israel, or according to the exchange rate known in Israel of
the US dollar and the currency in which payment is made, all according
to the knowledge available when payment is actually made, and do not
include VAT.
I. Notwithstanding the aforesaid, it is clarified that Boris' salary
shall not be linked to the rate of the dollar but shall be paid in NIS
and linked to the cost of living increments as set forth below.
8. It is agreed by the parties that the work of Boris in Solmecs and the
personal implementation by him of Stage A and Stage B in the Contract
Period constitutes a basic undertaking pursuant to this Contract and it
constitutes an undertaking of personal service on his part, an undertaking
which may not be transferred and/or assigned and/or implemented by any
third party whatsoever, unless with the prior written consent of Solmecs.
9. It is hereby agreed that should Boris fail to fulfill his undertaking
pursuant to the employment agreement and/or pursuant to this Contract
and/or in the event that he is barred from fulfilling his above
undertaking, both for reasons dependent on him and for reasons which are
not dependent on him, whether on a permanent basis or whether for an
allotted period exceeding 30 days, Solmecs shall be authorized to take any
measures it deems necessary to continue and promote the Project, without
prejudicing the rights of Text-On to royalties pursuant to this Contract.
10. It is agreed that the employment by Solmecs of Boris shall be pursuant to
the employment contract in Appendix A, the principal points of which are:
A. A monthly salary deriving from the employer's cost of NIS 17,000
(seventeen thousand) including all the social benefits pursuant to any
law, including severance pay if entitled thereto. Boris' salary shall
be linked to
6
<PAGE>
the cost of living increments which shall be paid during the period of
his employment. It is agreed that the parties shall discuss the
above-mentioned salary of Boris once a year.
B. A company car, of a private or commercial type, with a 1600 cc engine,
which shall be owned by Solmecs, or a rented car, all as shall be
decided by Solmecs, including all the expenses linked to the use
thereof, with the exception of income tax applicable to an employee
receiving a car from his employer.
C. Complete reimbursement of telephone expenses in Boris' house up to a
ceiling of NIS 800 per month, including VAT. Income tax which shall be
due from Boris for this payment, if applicable, shall be paid by him
and deducted from his salary.
D. Solmecs shall provide Boris with a cellular telephone on its account
and shall pay all its operating expenses.
E. Solmecs undertakes to employ Boris as aforementioned for a period of
not less than 24 months from date of commencement of his employment,
and Solmecs shall be authorized, from this date, at its discretion,
not to continue his employment. In order to remove doubt it is
clarified that cessation of the work of Boris as aforesaid shall not
prejudice the rights of Solmecs pursuant to this Contract and shall
not prejudice the right of Text-On to royalties pursuant to this
Contract.
11. It is agreed by the parties that the programming work entailed by the
Project shall be performed by the programmers of Solmecs and/or of Text-On,
and the cost of the work, as it appears in Appendix B, shall be covered by
investments of Solmecs in the Project.
12. Text-On shall be entitled to royalties from sales of the Product pursuant
to this Contract, subject to the full implementation of its undertakings,
and subject to the realization of the declarations of Boris pursuant to
this Contract, (hereinafter: the "Royalties"), as follows:
A. 5 (five) percent of the sales made during the first six months of
Product sales. It is agreed by the parties that in this subsection
exclusively, only sales of products developed or whose development was
completed after signature of this Contract, shall be considered as
"sales".
B. 10 (ten) percent of the sales made from the seventh month after the
commencement of sales and until the date on which total Royalties paid
to Text-On reach US$ 250,000 (two hundred and fifty thousand).
C. After Text-On has been paid royalties amounting to the above-mentioned
US$ 250,000, Solmecs shall continue to pay it royalties at a rate of 3
(three)
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<PAGE>
percent of the volume of sales cumulative until a sales ceiling of US$
3 million, and royalties at a rate of one percent for sales above US$
3 million.
D. Notwithstanding the aforementioned, it is agreed by the parties that
royalties as aforementioned in this Section 12, including all its
subsections, shall be paid to Text-On only until fifteen years have
elapsed from date of signature of this Contract (hereinafter: the
"Royalties Period") and any sale which is made after the end of the
Royalties Period shall not entitle Text-On to royalties and/or any
other payment.
E. In order to remove doubt it is hereby clarified that after the end of
the Royalties Period Solmecs shall also have exclusive ownership of
the rights without this being cause to make any payment whatsoever to
Text-On or any person acting on its behalf, and Text-On renounces any
argument in this matter.
F. Notwithstanding the aforementioned, it is agreed by the parties that
since Text-On has invested time and resources in the development and
marketing in Italy of an English-Italian version of the product, in
the event that the Product is sold in Italy, the first profits from
these sales shall be used to reimburse the expenses of Text-On as
aforesaid, in a definitive, agreed and absolute amount of US$ 11,330
(eleven thousand three hundred and thirty).
G. The Royalties shall be calculated on the basis of sales, before VAT -
including the VAT applicable by the local authority and national tax
authorities to sales - and they shall be paid to Text-On in Israel
plus VAT, pursuant to the law and against a tax invoice.
H. It is agreed by the parties that Solmecs retains the right to offset
against any amount which it is supposed to pay to Text-On as royalties
pursuant to this section, any amount to which it is entitled and/or
shall be entitled in the agreement period for agreed compensation
and/or for a lawful charge stemming from a breach of this Contract by
Text-On and/or Boris and/or expenses and/or damages incurred by
Solmecs as a result of the requirement for it to act to remove any
kind of impediment whatsoever relating to the use of the Rights
pursuant to this Contract.
13. Text-On undertakes, further to its above declarations, that there is no
impediment whatsoever to the transfer to Solmecs of the Rights in full
without any restriction, to remove, within 10 days at the most, any
impediment to the full use by Solmecs of the Rights which have been
transferred to it pursuant to this Contract, including cancellation of
injunctions and/or any other injunction, if issued, including removal of
any lien, if imposed, with the exception of a lien stemming from the
obligation assumed by Solmecs toward the holder of the lien. Text-On shall
bear any expense required to remove any impediment as aforesaid, if any,
and it undertakes to compensate Solmecs, upon its first demand, for any
amount billed to Solmecs according to the law or that it shall incur if it
initiates removal of said impediment.
8
<PAGE>
The parties declare that they are aware that Bank Hapoalim B.M. has
consented to remove the lien encumbering the Rights against a lien on this
Contract in its favor, as set forth in the letter of the Bank attached
herewith as Appendix C of this Contract, and that the lien on the rights of
Text-On pursuant to this Contract should not be viewed as any kind of
impediment to the transfer to Solmecs of the Rights and/or to the use by
Solmecs of the Rights which have been transferred to it, unless otherwise
stated in this Contract.
14. Without derogating from all the aforementioned, it is hereby agreed that
Text-On shall be responsible for any damage incurred by Solmecs following
any impediment whatsoever, linked directly and/or indirectly to Text-On
and/or Boris, regarding the possibility of making full use of the Rights
without any restriction whatsoever, upon the first written demand of
Solmecs.
15. It is agreed that Solmecs is entitled to receive the payments which Text-On
shall owe by virtue of that stated in Sections 13 and 14 above, only by
offsetting against the Royalties which will be to the credit of Text-On,
and not in any other manner.
16. After the end of Stage A and Stage B or at the end of six months from date
of signature of this Contract, the later of the two, Solmecs shall be
authorized to implement the Project, but shall not be required to do so,
all subject to that stated in Section 6 above. It is further agreed that
Solmecs is entitled to implement the Project and/or part thereof, either
itself or by means of a third party and/or by means of another corporation
which it shall set up, and it is authorized to assign its rights pursuant
to this Contract, in full or in part, to any third party whatsoever and/or
to the corporation as aforesaid, including its right to the services of
Boris as aforementioned in this Contract, and in the contract of employment
which shall be signed with him by Solmecs prior to signature of this
Contract, provided that the rights of Boris and/or of Text-On pursuant to
this Contract are not prejudiced.
Cancellation of the Contract by Solmecs, whether by means of a fundamental
breach, or whether in keeping with its right pursuant to this Contract,
shall lead to the mutual and simultaneous cancellation of the undertakings
of Text-On and Boris pursuant to this Contract.
Notwithstanding the aforementioned it is agreed that as long as Text-On has
a lien on this Contract in favor of Bank Hapoalim B.M., Pardess Katz
branch, Solmecs shall be barred from assigning or transferring its rights
in any manner whatsoever pursuant to the Contract to any third party
whatsoever, excluding the restitution thereof to Text-On, unless written
approval thereto is received from Bank Hapoalim B.M.
17. It is agreed by the parties that should Boris be transferred for
employment, pursuant to this Contract, to another employer as
aforementioned in Section 16 above, this shall not be deemed an exchange of
employers and shall not afford Boris any right afforded, pursuant to this
Contract and/or pursuant to any law, to an employee as the result of an
exchange of employers, provided that the
9
<PAGE>
conditions of his employment pursuant to his employment contract are not
prejudiced.
18. It is agreed by the parties that should Solmecs wish to sell its rights
pursuant to this Contract and/or part thereof, to any third party
whatsoever, Text-On shall have a preferential right to purchase the rights
from Solmecs provided that its proposal is not inferior to the best
proposal received by Solmecs in regard to this matter.
19. It is agreed by the parties that a breach of a fundamental undertaking in
this Contract, whether by Solmecs or whether by Text-On (hereinafter: the
"Breaching Party"), shall oblige the Breaching Party to pay the other party
(hereinafter: the "Injured Party"), compensation in a definitive, decided
and agreed amount without the need for proof of any damage whatsoever from
the Injured Party, an amount equal in NIS to US$ 60,000 (sixty thousand)
(hereinafter: the "Agreed Compensation"), all subject to the following two
provisions:
(1) That the fundamental breach of the contract by Boris is regarded as a
fundamental breach of the contract by Text-On.
(2) That collection of the Agreed Compensation from Text-On, insofar as it
shall be due, shall be made only by offsetting of the royalties which
shall be ascribed to its credit pursuant to this Contract.
The undertakings of the parties as stipulated in this Contract shall be
determined as fundamental undertakings in the matter of this section, as
follows: declarations of the parties in the Preamble of the Contract, the
undertakings in Sections 2, 3, 4, 6, 7, 12, 13.
20. It is agreed and clarified that the right to the Agreed Compensation as
aforementioned, contains nothing to prejudice the right of any party
injured by a breach of this Contract, to compensation for damage it incurs,
over and above the Agreed Compensation, in accordance with its rights
pursuant to the Contract and pursuant to any law.
21. It is agreed by the parties that the ledgers of Solmecs and/or of any third
party or other corporation to which the rights of Solmecs pursuant to this
Contract shall be assigned, approved by an auditor of Solmecs or of a third
party and/or of said corporation, shall constitute evidence in the matter
of calculation of the Royalties pursuant to this Contract, subject to the
right of Text-On to have the relevant ledgers examined by an examiner
acting on its behalf.
22. It is agreed by the parties that any conflict which shall arise in the
matter of execution of this Contract and/or any of the conditions contained
therein, shall be brought for resolution by a single arbitrator to be
appointed with the consent of both parties. The arbitrator shall not be
subject to the laws of evidence but shall be subject to substantive law and
his decision shall be binding. The arbitrator shall
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<PAGE>
determine his salary and which party shall pay it. This section constitutes
an arbitration agreement pursuant to the Arbitration Law, 5728 - 1968.
23. In the absence of agreement to the appointment of said arbitrator,
jurisdiction shall be awarded to the competent Beersheba Court.
24. Any notice sent by one party to the other shall be sent in writing and
shall be considered as having been received by the second party within 48
hours from dispatch by registered mail, and if delivered by hand - upon
delivery.
In witness whereof the parties have set their hands:
Signed: (-) Solmecs Signed (-) Text-On
/s/[ILLEGIBLE] /s/ Boris Wettelmacher
---------------------------- ----------------------
Stamp: Solmecs (Israel) Ltd. Stamp: Text-On Ltd.
Telephone: 07-6900950
Signed Boris
/s/ Boris Wettelmacher
----------------------
Boris Wettelmacher
11
LOAN AGREEMENT
This Loan Agreement is made and entered into as of this 30 day of December,
1998 by and between SCNV Acquisition Corp., a corporation organized under the
laws of the State of Delaware ( the "Lender"); and Elecmatec Electro-Magnetic
Technologies Ltd., a company organized under the laws of the State of Israel
("Borrower").
WHEREAS Borrower has borrowed $42,000 (the "Original Amount") from Lender;
and
WHEREAS Borrower desires to (i) borrow an additional amount of $68,000 (the
"Additional Amount") from Lender for the purposes specified in Section 3 below
and (ii) have Lender provide it with a guarantee in the amount of $162,000 for
the purposes specified in Section 4, all in contemplation of a proposed
investment in the Borrower by Lender; and
WHEREAS Lender is willing to lend Additional Amount and to provide such
guarantee to Borrower, subject to the terms and conditions of this Loan
Agreement.
NOW, THEREFORE, the parties agree as follows:
1. Preamble. The Preamble to this Agreement constitutes an integral part
hereof.
2. Loan.
2.01 The Lender shall lend to Borrower and Borrower shall borrow from
Lender the Additional Amount in a single advance, within two business days of
the signing of this Agreement.
2.02 The Borrower hereby (i) represents that the proceeds of the Original
Amount were used to pay day-to-day expenses of the Borrower during the months of
August to December and (ii) undertakes that the proceeds of the Additional
Amount shall be used to cover the day-to-day expenses of the Borrower for the
months' of December 1998 and January 1999, including the payment of salaries to
the Borrowers' current employees and the payment of fees for the registration of
the Borrower's patents. The Additional Amount and the Original Amount shall
hereinafter be referred to together as the "Loan".
2.03 The Loan shall be linked to the US dollar and bear interest at the
rate of 8% per year.
2.04 If there shall be a closing, on or prior to February 1, 1999, of a
private offering of shares of the Borrower as contemplated by the term sheet
among the Lender, the Borrower and Messrs. Herman Branover, Arie El-Boher, Yuri
Gelfgat, Israel Weinbaum and Ariel Shemer, dated December 28, 1998, a copy of
which is attached hereto as Exhibit A, (the "Term Sheet"), then the principal of
the Loan and
<PAGE>
2
any interest thereon shall be converted into a portion of the loan described in
the Term Sheet under the heading "Loan".
3. Guarantee. The Lender shall provide a guarantee (the "Guarantee") on
behalf of the Borrower in the amount of $162,000 (one-hundred and sixty-two
thousand US Dollars) in order to enable Borrower to obtain a letter of credit
from Bank Leumi Le'Israel for the purpose of acquiring the following components
for the Borrower's production line: an edge trimmer, shears, a coiler, a roll
table, a milling machine, an emulsion system and a hydrolic station.
4. Representations, Warranties, And Agreements Of The Borrower. Except as
disclosed in writing to the Lender, the Borrower represents and warrants to, and
agrees with, the Lender as of the date hereof, as follows:
4.01 Information. To the best of the Borrower's knowledge, information and
belief, all oral and written information which has been given by the Borrower in
the course of the negotiations leading to this Agreement was when given, and is
at the date hereof, true and accurate in all material respects, and all facts
and information concerning the Borrower which the Borrower believes to be
material for disclosure to a creditor of the Borrower have been disclosed to the
Lender.
4.02 Bankruptcy Proceedings. No officer or director of the Borrower is or
has been subject to any bankruptcy proceedings or is or has been the officer of
any entity which has been the subject of liquidation or insolvency proceedings.
4.03 Contracts. The Borrower is not in fundamental breach of any deed,
agreement or transaction to which it is a party, and to the best of its
knowledge, no third party that has transacted business with the Borrower is in
breach of any of its material obligations under any deed, agreement, or
transaction to which it is a party with the Borrower. The Borrower has not given
any guarantee, indemnity or security for or otherwise agreed to become directly
or contingently liable for any obligation of any other person and no person has
given any guarantee of or security for any obligation of the Borrower.
4.04 Litigation. The Borrower is not involved in any civil, criminal or
arbitration proceedings, and to the best of the Borrower's knowledge,
information and belief, no such proceedings and no claims of any nature are
pending or threatened by or against the Borrower or the directors of the
Borrower and there are no facts likely to give rise to any such proceedings. The
Borrower shall promptly notify the Lender of any legal proceedings that arise in
which the Borrower is involved, and shall provide Lender with all relevant
documents concerning such proceedings.
4.05 Debts and Loan Facilities. There are no debts owing by or to the
Borrower, except as has been disclosed to Lender in writing, nor has the
Borrower lent any money which has not yet been repaid. Full and accurate details
of all overdrafts, loans or other financial facilities outstanding or available
to the Borrower have been provided in writing to Lender.
<PAGE>
3
4.06 Licenses, Patents, Trademarks
(a) For purposes of this Agreement, "Intellectual Property" means patents,
copyrights, trademarks, inventions, research records, trade secrets,
confidential information, product designs, engineering specifications and
drawings, technical information, formulae, computer programs, and related
flow-charts, programmer notes, updates and data, whether in object source code
form.
(b) To the best of the Borrower's knowledge, the Borrower either owns or
has sufficient rights by license or other grant of permission with respect to
all Intellectual Property necessary for its business as now conducted and as
proposed to be conducted. The Borrower's use of the Intellectual Property in its
business as now conducted and as proposed to be conducted does not infringe the
rights of any third party. The Borrower has not received any communication
alleging that it has violated, or that by conducting its business as proposed it
would violate, any Intellectual Property. The Borrower has taken reasonable
security measures, including measures against unauthorized disclosure, to
protect the secrecy, confidentiality, and value of its trade secrets and other
technical information and is in the process of entering into agreements with its
employees to protect all existing and future Intellectual Property of the
Borrower. No employee, director or Shareholder of the Borrower or employer of
any such employee of the Borrower has any rights to processes, systems and
techniques used or contemplated to be used by the Borrower.
(c) To the best of the Borrower's knowledge, no Intellectual Property used
or proposed to be used in the business of the Borrower, as currently conducted
or contemplated, has infringed or will infringe upon any intellectual property
rights of others and the use of such Intellectual Property in the business of
the Borrower, as currently conducted or contemplated, will not constitute an
infringement, misappropriation or misuse of any intellectual property rights of
any third party. To the best of the Borrower's knowledge, no person has the
right to assert any claim regarding the use of, or challenging or questioning
the Borrower's right or title in, any of the Intellectual Property of the
Borrower.
4.07 Validity of Transaction. The Borrower has all requisite power and
authority to execute, deliver, and perform this Agreement. All necessary
corporate proceedings of the Borrower have been duly taken to authorize the
execution, delivery, and performance of this Agreement by the Borrower. This
Agreement is the legal, valid, and binding obligation of the Borrower, and is
enforceable as to the Borrower in accordance with its terms.
5. Repayment of the Loan. In the event that the Borrower and Lender do not
close the transactions contemplated by the Term Sheet as set forth in Section
2.03 (the "Private Placement") by February 1, 1999, the Borrower shall repay the
principal amount of the Loan and any interest thereon in full, and shall cause
the Guarantee to be terminated, by no later than February 15, 1999.
<PAGE>
4
6. Negative Covenants. So long as any principal of the Loan or any interest
thereon remains outstanding, or until the Private Placement as defined in
Section 2 above, Borrower will not, without receipt of the Lender's prior
written approval:
6.01 Debt. Create, incur, assume, or suffer to exist any debt beyond
existing debt, except debt of Borrower under this Agreement or the Loan, and
debt reasonably incurred in the ordinary course of business.
6.02 Mergers, Etc. Wind up, liquidate or dissolve itself, reorganize, merge
or consolidate with or into, or convey, sell, assign, transfer, lease, or
otherwise dispose of (whether in one transaction or in a series of transactions)
all or substantially all of its assets (whether now owned or hereafter acquired)
to any person or entity.
6.03 Dividends. Declare or pay any dividends; or make any distribution of
assets to Borrower's shareholders as such whether in cash, assets, or
obligations of Borrower; or make any other distribution by reduction of capital
or otherwise in respect of any shares of Borrower's capital shares.
6.04 Sale of Assets. Sell, lease, assign, transfer, or otherwise dispose of
any of its now owned or hereafter acquired assets (including, without
limitation, receivables, and leasehold interests).
6.05 Subsidiaries. Incorporate, register, establish or invest in any
subsidiary company or corporation.
6.06 Guaranties, Etc. Assume, guaranty, endorse, or otherwise be or become
directly or contingently responsible or liable for obligations of any person or
entity.
6.07 Transactions with Affiliates. Enter into any transaction, including,
without limitation, the purchase, sale, or exchange of property or the rendering
of any service, with any Affiliate, except the Lender. For purposes of this
Section, the term "Affiliate" shall mean a shareholder, director or employee of
the Borrower.
7. Security. As security for the Borrower's obligations hereunder, the
Borrower hereby pledges to the Lender all rights that it holds to all
Intellectual Property and all its physical assets, and grants to the Lender a
lien thereto and security interest therein. In this connection, as a condition
of obtaining the proceeds of the Loan, the Borrower shall sign a pledge
agreement in the form attached as Exhibit B hereto.
8. Default. Any principal outstanding will immediately become due and
payable upon any Event of Default as defined herein. The occurrence of any of
the following shall be an Event of Default:
8.01 any material breach by Borrower of any of its obligations or
representations under this Agreement;
8.02 the commencement by Borrower of any liquidation proceedings or the
adoption of a winding up resolution by the Borrower, or the appointment of a
receiver
<PAGE>
5
or trustee over the whole or any part or Borrower's assets, or the calling by
Borrower of a meeting of creditors for the purpose of entering into a scheme or
arrangement with them;
8.03 the levy of an attachment or the institution of execution proceedings
against the whole or a substantial part of Borrower's assets. The Borrower shall
notify Lender within 72 hours of any such attachment or proceeding.
9. Heiter Iska. The terms of this Agreement shall be subject to a Heiter
Iska according to the opinion of Maharam.
10. Entire Agreement. This Agreement constitutes the entire understanding
of the parties with respect to the subject matter hereof. This Agreement may not
be modified or amended except by a written agreement signed by the parties
hereto.
11. Governing Law. This agreement shall be governed by the laws of the
State of Israel. Any dispute arising under or in connection with this Agreement
shall be settled exclusively before the courts of the State of Israel.
IN WITNESS WHEREOF, the parties have executed this Loan Agreement as of the
date first above written.
SCNV Acquisition Corp. Elecmatec Electro-Magnetic
Technologies Ltd.
By: /s/ Shaul Lesin By: /s/ Arik El-Boher
----------------------- ---------------------
Name: Shaul Lesin Name: Arik El-Boher
Title: E.V.P. Title: CFO
PLEDGE AGREEMENT
This Pledge Agreement, dated as of December 30, 1998, is entered into by
and between SCNV Acquisition Corp., a corporation incorporated under the laws of
the State of Delaware, (together, the "Lender"); and Elecmatec Electro-Magnetic
Technologies Ltd., a company organized under the laws of the State of Israel
("Pledgor").
WHEREAS: The parties have entered into a Loan Agreement (the "Loan
Agreement"), whereby (I) the Lender and Pledgor acknowledged the advancement of
$42,000 to Pledgor by Lender and (ii) the Lender has agreed to advance to the
Pledgor the sum of $68,000 and to provide a guarantee on behalf of Pledgor in
the amount of $162,000.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. The Preamble and Appendices to this Pledge Agreement constitute an
integral part thereof.
2. To secure the performance of its obligations under the Loan Agreement
and the Future Loan Agreements, Pledgor hereby grants to the Lender a security
interest in all of its right, title and interest in all assets listed on the
Schedule to this Pledge Agreement (the "Collateral").
3. Pledgor shall use its best efforts to preserve the Collateral and shall
permit the Lender to inspect the Collateral at all reasonable times.
4. Pledgor shall not grant, create or suffer to exist any other pledge,
lien, encumbrance, or charge of any kind upon, or grant any security interest
in, any of its right, title and interest in the Collateral to any party without
the prior written consent of the Lender thereto.
5. The Lender shall be entitled to enforce the pledge against Pledgor and
the Collateral immediately upon the occurrence of any of the following events:
(a) Pledgor breaches any of its material obligations under the Loan
Agreement, or this Agreement;
(b) Pledgor begins any liquidation proceedings or if a winding up
resolution is issued against Pledgor by any court, or a receiver or trustee
is appointed over the whole or any part of Pledgor's assets, or if Pledgor
calls a meeting of creditors for the purpose of entering into a scheme or
arrangement with them, and any of the aforementioned actions or proceedings
is not canceled within 30 days of its initiation;
(c) an attachment is levied or execution proceedings are instituted
against the whole or a substantial part of Pledgor's assets and such
attachment or execution proceeding is not discharged within 30 days;
(d) a motion for execution and/or sale and/or any other action against
the Collateral or any part of them is instituted and is not discharged
within 30 days.
<PAGE>
2
6. The Pledgor shall cooperate with the Lender and execute all documents
as may be reasonably necessary to register this Pledge with the Registry of
Companies and/or Registry of Pledges. Pledgor shall pay upon demand, all
reasonable expenses, including reasonable attorney's fees, of enforcing the
Lender's rights and remedies hereunder in the event of a breach by Pledgor.
7. The pledge shall become void, and the Lender shall promptly execute all
documents necessary to release the pledge upon (i) repayment of the full
principal amount of the Loan and any interest thereon pursuant to the Loan
Agreement and the termination of the Guarantee, or (ii) upon the closing of a
private offering of shares of the Pledgor to the Lender as contemplated by the
term sheet among the Lender, the Pledgor and Messrs. Herman Branover, Arie
El-Boher, Yuri Gelfgat, Israel Weinbaum and Ariel Shemer, dated December 28,
1998.
8. This Pledge Agreement shall be governed by and construed in accordance
with the laws of the State of Israel.
IN WITNESS WHEREOF this Pledge Agreement has been executed by the parties
hereto as of the date first above written.
Elecmatec Electro-Magnetic Technologies SCNV Acquisition Corp.
Ltd.
By: /s/ Arik El-Boher By: /s/ Shaul Lesin
------------------------ -------------------------
Name: Arik El-Boher Name: Shaul Lesin
Title: E.V.P.
Title: CFO
<PAGE>
Schedule of Assets
1. All Intellectual Property of the Pledgor. For these purposes "Intellectual
Property" means patents (including applications therefor), copyrights
(whether or not registered), trademarks, inventions, research records,
trade secrets, confidential information, product designs, engineering
specifications and drawings, technical information, formulae, computer
programs, and related flow-charts, programmer notes, updates and data,
whether in object source code form.
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this "Agreement") is made as of the 18th day
of May, 1999, by and among ELECMATEC ELECTRO-MAGNETIC TECHNOLOGIES LTD., an
Israeli company registered under company number 51-265897-2 (the "Company");
SCNV ACQUISITION CORP., a Delaware corporation (the "Purchaser"); Professor
Herman Branover, Israeli ID Number 014609900; Dr. Arie El-Boher, Israeli ID
Number 050923268; and Professor Yuri Gelfgat, Latvian Passport Number (each a
"Founder" and together, the "Founders").
WITNESSETH:
WHEREAS, the Board of Directors of the Company has determined that it is in
the best interests of the Company to raise capital by means of the issuance of
19,688 of the Company's Ordinary A Shares, nominal value NIS 0.01 each,
constituting 49.6% of the Company's outstanding shares on a fully-diluted basis,
to the Purchaser for an aggregate purchase price of $96,906 (ninety-six
thousand, nine-hundred and six U.S. Dollars), plus certain loans as described
below, all on the terms and conditions more fully set forth in this Agreement;
and
WHEREAS, the Founders desire to sell an aggregate of 12,190 Ordinary
Shares, nominal value NIS 0.01 each (the "Founder Shares") for an aggregate
purchase price of $40,000 (forty thousand US Dollars); and
WHEREAS, the Purchaser desires to purchase the Shares and the Founders
Shares pursuant to the terms and conditions more fully set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereby agree as follows:
1. Issuance of Shares; Consideration.
1.1 Issuance and Purchase of Shares. Subject to the terms and conditions
hereof, at the Closing, the Company shall issue and allot to the Purchaser, and
the Purchaser shall purchase from the Company, an aggregate of19,688 of the
Company's Ordinary A Shares (the "Shares"), for an aggregate purchase price of
$96,906 (ninety-six thousand, nine-hundred and six U.S. Dollars) (the "Purchase
Price").
1.2 Additional Consideration. The Purchaser shall lend the Company certain
sums pursuant to the terms of the Loan Agreement attached hereto as Exhibit D
(the "Loan Agreement").
2. Sale of Founders Shares; Consideration.
2.1 Sale and Purchase of Founders Shares. Subject to the terms and
conditions hereof, at the Closing, the Founders shall sell and transfer to the
Purchaser, an aggregate of 12,190 of the Company's Ordinary Shares (the
"Founders Shares"), for an aggregate purchase
<PAGE>
2
price of $40,000 (forty thousand US Dollars) (the "Founders Purchase Price").
The number of Founder Shares to be sold by each Founder and the aggregate
purchase price for such Founder Shares shall be as follows: (i) Professor
Branover shall sell 6,095 Ordinary Shares for an aggregate purchase price of
$20,000 (twenty thousand US Dollars); (ii) Dr. El-Boher shall sell 4,876
Ordinary Shares for an aggregate purchase price of $16,000 (sixteen thousand US
Dollars); and (iii) Professor Gelfgat shall sell 1,219 Ordinary Shares for an
aggregate purchase price of $4,000 (four thousand US Dollars).
2.2 Additional Consideration. In the event the Company will be successful
in obtaining a Qualified Investment, as defined below, the Purchaser shall pay
the Founders additional sums, as follows:
2.2.1 for every dollar raised in the Qualified Investment, the Purchaser
shall pay Professor Branover an additional sum of $0.0267 (two cents and
sixty-seven hundredths of a cent) up to an aggregate additional sum of $40,000
(forty thousand US Dollars);
2.2.2 for every dollar raised in the Qualified Investment, the Purchaser
shall pay Dr. El-Boher an additional sum of $0.0213 (two cents and thirteen
hundredths of a cent) up to an aggregate additional sum of $32,000 (thirty-two
thousand US Dollars); and
2.2.3 for every dollar raised in the Qualified Investment, the Purchaser
shall pay Professor Gelfgat an additional sum of $0.0053 (fifty-three hundredths
of a cent) up to an aggregate additional sum of $8,000 (eight thousand US
Dollars).
For purposes of this Agreement, the term "Qualified Investment" shall mean
the raising by the Company of an aggregate sum of at least $500,000
(five-hundred thousand US dollars) in debt or equity financing from person(s)
other than the Purchaser or an Affiliate of the Purchaser; provided however that
in the event of debt financing, an investment shall not be deemed a Qualifies
Investment if (i) the Purchaser or an Affiliate of the Purchaser is required to
provide a guarantee in order for the Company to obtain such financing or (ii) as
a result of such debt financing, the pledge of the Company's assets in favor of
the Purchaser pursuant to the Pledge Agreement between the Company and the
Purchaser (a copy of which is attached hereto as Exhibit E) is made inferior to
a pledge in favor of such third party lender. For purposes of this Agreement,
"Affiliate" shall mean an entity controlled by, controlling, or under common
control with another entity where control is the power to elect or appoint more
than 50% of the board of directors or other governing body of such entity or the
power to vote more than 50% of the shares of such entity.
3. Closing of Issue and Purchase.
3.1 Closing. The issuance and allotment of the Shares, the sale of the
Founders Shares, the purchase by the Purchaser of the Shares and the Founders
Shares and the registration of the Shares and the Founders Shares in the name of
the Purchaser in the share transfer register of the Company, shall take place at
a closing (the "Closing") to be held on the date of this Agreement.
3.2 Transactions at Closing. At the Closing, the following transactions
shall occur, which transactions shall be deemed to take place simultaneously and
no transactions shall be deemed to have been completed or any document delivered
until all such transactions have been completed and all required documents
delivered:
<PAGE>
3
3.2.1 The Company shall deliver to the Purchaser the following documents:
(a) Resolutions of the Company's shareholders by which the Articles of
Association of the Company were replaced with the Amended Articles of
Association attached hereto as Exhibit A (the "Amended Articles");
(b) True and correct copies of resolutions of the Company's Board of
Directors issuing and allotting the Shares to the Purchaser against payment
of the Purchase Price and of the shareholders of the Company ratifying such
resolutions, together with a duly completed notice of such issuance to the
Israeli Registrar of Companies and a check in full payment of the stamp
duty on the issuance of the Shares, all of the foregoing in form and
substance acceptable for immediate filing with the Israeli Registrar of
Companies to be filed by the Company promptly after the Closing;
(c) True and correct copies of resolutions of the Company's Board of
Directors and of the shareholders of the Company approving the sale and
transfer of the Founders Shares to the Purchaser; and
(d) An opinion of Yossi Gitai, counsel to the Company, in the form
attached hereto as Schedule 3.2.1(d), dated as of the date of the Closing.
(e) An Opinion of Wolff, Bregman and Goller, patent counsel to the
Company, in the form attached hereto as Schedule 3.2.1(e), dated as of the
date of the Closing.
3.2.2 The Founders shall deliver to the Company the certificates
representing the Founders Shares, together with duly executed share transfer
deeds.
3.2.3 The Company shall register the issuance of the Shares and the
transfer of the Founders Shares to the Purchaser in the share transfer register
of the Company.
3.2.4 The Purchaser shall deliver to the Company the following documents:
(a) A true and correct copy of a resolution of the Purchaser's Board
of Directors authorizing the execution of this Agreement and the
performance of the obligations of the Purchaser contained herein; and
(b) An opinion of Tenzer Greenblatt LLP, United States counsel to the
Purchaser, in the form attached hereto as Schedule 3.2.4(b), dated as of
the date of Closing.
3.2.5 The Purchaser shall cause the transfer to the Company of the Purchase
Price for the Shares, and of the Founders Purchase Price to the Founders by wire
transfer, banker's check, or such other form of payment as is mutually agreed to
by the parties.
4. Representations and Warranties of the Company and the Founders. The
Company and the Founders hereby represent and warrant to the Purchaser, and
acknowledge that the Purchaser is entering into this Agreement in reliance
thereon, as follows:
<PAGE>
4
4.1 Organization. The Company is duly organized, validly existing and in
good standing under the laws of the State of Israel, and has full corporate
power and authority to own, lease and operate its properties and assets and to
conduct its business as now being conducted. The Company has all requisite power
and authority to execute and deliver this Agreement, and other agreements
contemplated hereby or which are ancillary hereto, and to consummate the
transactions contemplated hereby and thereby. Copies of the Memorandum and
Articles of Association of the Company as in effect on the date hereof have been
provided to Israeli counsel for the Purchaser, and as will be in effect at the
Closing are attached hereto as Exhibit A. The Company has all franchises,
permits, licenses, and any similar authority necessary for the conduct of its
business as now being conducted, the lack of which could materially adversely
affect the business, properties, prospects, or financial condition of the
Company. The Company is not in default under any of such franchises, permits,
licenses, or other similar authority.
4.2 Share Capital. The registered share capital of the Company immediately
prior to the Closing shall be NIS 35,700 divided into: (i) 3,550,312 Ordinary
Shares of a nominal value of NIS 0.01 each (the "Ordinary Shares"), of which
20,000 are issued and outstanding; and (ii) 19,688 Series A Ordinary Shares of a
nominal value of NIS 0.01 each (the "Ordinary A Shares"), none of which are
issued and outstanding. Except for the transactions contemplated by this
Agreement, there are no other share capital, preemptive rights, convertible
securities, outstanding warrants, options or other rights to subscribe for,
purchase or acquire from the Company any share capital of the Company and there
are not any contracts or binding commitments providing for the issuance of, or
the granting of rights to acquire, any share capital of the Company or under
which the Company is, or may become, obligated to issue any of its securities.
All issued and outstanding share capital of the Company were duly authorized,
and are validly issued and outstanding and fully paid and non-assessable. The
Shares, when issued and allotted in accordance with this Agreement, will be duly
authorized, validly issued, fully paid, non-assessable, and free of any
preemptive rights, and will have the rights, preferences, privileges, and
restrictions set forth in the Amended Articles, and will be free and clear of
any liens, claims, encumbrances or third party rights of any kind and duly
registered in the name of each Purchaser in the Company's share transfer
register.
4.3 Ownership of Outstanding Shares. A complete and correct list of the
shareholding of the Company's share capital immediately prior to the Closing is
set forth in Schedule 4.3 attached hereto. The individuals identified in
Schedule 4.3 as the shareholders of the Company immediately prior to the Closing
are the lawful owners, beneficially and of record, of all of the issued and
outstanding share capital of the Company and of all rights thereto, free and
clear of all liens, claims, charges, encumbrances, restrictions, rights, options
to purchase, proxies, voting trust and other voting agreements, calls or
commitments of every kind, and none of the said individuals or companies owns
any other shares, options or other rights to subscribe for, purchase or acquire
any equity securities of the Company from the Company or from any other
shareholder.
4.4 Business Plan and Information. The description of the current and
intended business of the Company contained in the Business Plan attached hereto
as Schedule 4.4 (the "Business Plan") is accurate in all material respects, and
the financial projections set out in the Business Plan have been prepared based
on management's good faith estimates, and there
<PAGE>
5
are no other substantial facts or matters of which the Company or the Founders
are aware which would render any such descriptions, assessments or projections
misleading.
4.5 Subsidiaries. The Company does not own any of the issued and
outstanding share capital of any other company, and is not a participant in any
partnership or joint venture.
4.6 Directors, Officers. The directors of the Company are: Professor
Branover and Dr. El-Boher. The Company has no agreement, obligation or
commitment with respect to the election of any individual or individuals to the
Board and there is no voting agreement or other arrangement among the Company's
shareholders, except for the agreement attached hereto as Exhibit B to be
entered into among the Purchaser and the Founders. All agreements, commitments
and understandings, whether written or oral, with respect to any compensation to
be provided to any of the Company's directors or officers have been fully
disclosed in writing to the Purchaser.
4.7 Outstanding Obligations. The Company was formed and acquired all of the
Metal Alloy-related assets of Ontec Ltd. ("Ontec") in November 1998. Schedule
4.7 sets forth all of the material outstanding obligations either acquired by
the Company from Ontec or incurred by the Company from inception until the date
of this Agreement. Schedule 4.7 is true and correct in all material respects,
fairly and accurately presents in all material respects the financial and other
obligations of the Company as of the date hereof. The Company has no material
liabilities, debts or obligations, whether accrued, absolute or contingent other
than liabilities reflected in Schedule 4.7. Other than as set forth in Schedule
4.7, neither the Company nor the Founders know of any other event or condition
related to the Company that would materially adversely affect the assets,
properties, condition (financial or otherwise), operating results or business of
the Company.
4.8 Authorization; Approvals. All corporate action on the part of the
Company necessary for (i) the authorization, execution, delivery, and
performance of all the of Company's obligations under this Agreement (ii) the
authorization, issuance, and allotment of the Shares being sold under this
Agreement and (iii) the transfer of the Founders Shares to the Purchaser, have
been (or will be) taken prior to the Closing. This Agreement, when executed and
delivered by or on behalf of the Company, shall constitute the valid and legally
binding obligations of the Company and the Founders, legally enforceable against
the Company and the Founders in accordance with its terms. No consent, approval,
order, license, permit or action by any governmental authority on the part of
the Company is required that has not been, or will not have been, obtained by
the Company prior to the Closing in connection with the valid execution,
delivery and performance of this Agreement or the offer, sale, or issuance of
the Shares and the sale of the Founders Shares.
4.9 Compliance with Other Instruments. The Company is not in default (a)
under its Memorandum or Articles of Association or other formative documents, or
under any material note, indenture, mortgage, lease, agreement, contract,
purchase order or other instrument, document or agreement to which the Company
is a party or by which it is bound or (b) with respect to any existing Israeli
law, statute, ordinance or regulation, or any order, writ, injunction, decree,
or judgment of any domestic court or any governmental department, commission,
board, bureau, agency or instrumentality, which default, in any such case, would
materially adversely affect or in the future is reasonably likely to materially
adversely affect the Company's business, condition (financial or otherwise),
affairs, operations or assets. No
<PAGE>
6
third party is in default under any material agreement, contract or other
instrument, document or agreement to which the Company is a party or by which it
is bound. The Company is a party to an agreement with the Office of the Chief
Scientist of the Ministry of Industry and Trade (the "OCS"). Other than the
terms of its agreement with the OCS, the Company is not a party to or bound by
any order, judgment, decree or award of any governmental authority, agency,
court, tribunal or arbitrator.
4.10 No Breach. Neither the execution and delivery of this Agreement nor
compliance by the Company and the Founders with the terms and provisions hereof,
will conflict with, or result in a breach or violation of, any of the terms,
conditions and provisions of: (i) the Company's Memorandum of Association or the
Articles of Association, or other governing instruments of the Company, (ii) any
judgment, order, injunction, decree, or ruling of any domestic court or
governmental authority, to which the Company or the any of the Founders is
subject, (iii) any agreement, contract, lease, license or commitment to which
the Company or any of the Founders is a party and which would impair the ability
of the Company to execute, deliver or perform this Agreement, or (iv) applicable
law. Such execution, delivery and compliance will not give to others any rights,
including rights of termination, cancellation or acceleration, in or with
respect to any agreement, contract or commitment referred to in this paragraph,
or to any of the properties of the Company.
4.11 Records. The minute book of the Company which has been provided to the
Purchaser contains accurate and complete copies of the minutes of every meeting
of the Company's shareholders and Board of Directors (and any committee
thereof). No resolutions have been passed, enacted, consented to or adopted by
the directors (or any committee thereof) or shareholders of the Company, except
for those contained in such minute books. The corporate records of the Company
are complete and accurate in all material respects.
4.12 Ownership of Assets. The Company does not own or lease any real
property, except as set forth in Schedule 4.12 hereto. Complete and accurate
copies of leases of property leased to the Company have been furnished to
Israeli counsel for the Purchaser. The Company's machinery, equipment,
furniture, supplies and all other tangible personal property are set forth in
Schedule 4.12. Except as set forth on Schedule 4.12 hereto, (i) the Company has
good and marketable title to all of the tangible properties and assets, both
real and personal, that it purports to own, and they are not subject to any
mortgage, pledge, lien, security interest, conditional sale agreement,
encumbrance or charge; and (ii) the Company is not in default or breach of any
material provision of its leases and holds a valid leasehold in the property it
leases. The Company's shareholders do not own, hold or posses, in their
individual, corporate or any other capacities, any property that the Company
purports to own.
4.13 Intellectual Property and Other Intangible Assets.
(a) The Company (i) owns or has the right to use, free and clear of
all liens, claims and restrictions, other than obligations to the OCS and a
pledge to the Purchaser, all patents, trademarks, service marks, mask
works, trade names and copyrights, and applications, licenses and rights
with respect to the foregoing, and all trade secrets, including know-how,
inventions, designs, processes, works of authorship, computer programs and
technical data and information (collectively herein "Intellectual
Property") set forth in Schedule 4.13 (a), and (ii) to the best knowledge
of the Company and the Founders, such Intellectual Property does not
infringe upon or violate any right, lien, or claim of others, including
without limitation of the Founders, other employees of the Company, Messrs.
Ariel
<PAGE>
7
Shemer and Israel Weinbaum, Ontec, former employees of the Founders or
Ontec and former employers of the Founders or other employees of the
Company. Other than its obligations towards the OCS, the Company is not
currently obligated or under any liability whatsoever to make any payments
by way of royalties, fees or otherwise to any owner or licensee of, or
other claimant to, any patent, trademark, service mark, trade name,
copyright or other intangible asset, with respect to the use thereof or in
connection with the conduct of its business or otherwise
(b) Any and all Intellectual Property of any kind currently being
developed by any employee of the Company in connection with his employment
by the Company, shall be the property solely of the Company. The Company
has taken security measures to protect the secrecy, confidentiality and
value of all the Intellectual Property, which measures are reasonable and
customary in the industry in which the Company operates. Each of the
Founders and the Company's employees and other persons who, either alone or
in concert with others, developed, invented, discovered, derived,
programmed or designed the Intellectual Property, or who has knowledge of
or access to information about the Intellectual Property, has entered into
a written employment agreement with the Company in form and substance
satisfactory to the Purchaser, which includes provisions regarding
ownership and treatment of the Intellectual Property. True and correct
copies of all such employment agreements have been provided to the
Purchaser.
(c) Neither the Company nor the Founders have received, nor to the
best knowledge of the Company and the Founders has Ontec received, any
communications alleging that the Company (or previously Ontec with respect
to the assets transferred by Ontec to the Company) has violated or that the
Company by conducting its business as currently conducted, would violate,
any of the patents, trademarks, service marks, trade names, copyrights or
trade secrets or other proprietary rights of any other person or entity.
Except as set forth in Schedule 4.13(c), none of the Founders nor, to the
best knowledge of the Company and the Founders, any of the Company's
employees are obligated under any contract (including licenses, covenants
or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of the Founders' or such employee's best efforts to
promote the interests of the Company or that would conflict with the
Company's business as conducted and as proposed to be conducted. Neither
the execution nor delivery of this Agreement, nor the carrying on of the
Company's business by the employees of the Company, nor the conduct of the
Company's business as proposed to be conducted, will conflict with or
result in a breach of the terms, conditions or provisions of, or constitute
a default under, any contract, covenant or instrument under which the
Founders are now obligated. It is not, and will not become, necessary, in
order to conduct the Company's business as currently contemplated, to
utilize any inventions of any of the Founders or of any of the Company's
employees (or people the Company currently intends to hire) made prior to
their employment by the Company or Ontec other than those that have been
assigned to the Company.
4.14 Contracts. Schedule 4.14 contains a true and complete list of all
material contracts and agreements, including agreements and correspondence with
the Investment Center and the Office of the Chief Scientist of the Ministry of
Industry and Trade, to which the Company is a party. Each of the contracts and
agreements set forth in Schedule 4.14 is in full force and effect, and neither
the Company nor any other party thereto is in breach thereof. True and correct
copies of all such contracts have been delivered to the Purchaser. Except as
<PAGE>
8
set forth on Schedule 4.14 hereto, the Company has no employment or consulting
contracts, deferred compensation agreements or bonus, incentive, profit-sharing,
or pension plans currently in force and effect, or any understanding with
respect to any of the foregoing.
4.15 Litigation. To the best knowledge of the Company and the Founders, no
action, proceeding or governmental inquiry or investigation is pending or
threatened against the Company or any of its officers, directors, or employees
(in their capacity as such), or against the Founders, or against any of the
Company's properties, before any court, arbitration board or tribunal or
administrative or other governmental agency, nor is there any material basis for
the foregoing. The foregoing includes, without limiting its generality, actions
pending or threatened involving the prior employment of the Founders or any of
the Company's employees or use by any of them in connection with the Company's
business of any information, property or techniques allegedly proprietary to any
of their former employers. Neither the Company nor the Founders are a party to
or subject to the provisions of any order, writ, injunction, judgment or decree
of any court or governmental agency or instrumentality. There is no action,
suit, proceeding or investigation by the Company currently pending or that the
Company intends to initiate. Except as set forth in Schedule 4.15, none of the
Founders has been subject to any bankruptcy proceedings or is or has been the
officer of any company which has been the subject of liquidation or insolvency
proceedings.
4.16 Offers. Schedule 4.16 contains a true and complete list of all persons
and entities which have received a copy of the Company's business plan. Except
as set forth in Schedule 4.16, neither the Company nor any of the Founders has
offered to sell any equity securities of the Company to any person or entity.
4.17 Interested Party Transactions. None of the Founders nor any officer,
director or shareholder of the Company or, to the best knowledge of the Company
and the Founders, of Ontec, or any Affiliate of any such person or entity or the
Company, has or has had, either directly or indirectly, (a) an interest in any
person or entity which (i) furnishes or sells services or products which are
furnished or sold or are proposed to be furnished or sold by the Company, or
(ii) purchases from or sells or furnishes to the Company any goods or services,
or (b) except as set forth in Schedule 4.17, holds a beneficial interest in any
contract or agreement to which the Company is a party or by which it is bound.
There are no existing material arrangements or proposed material transactions
between the Company and any of the Founders or any officer, director, or holder
of more than 5% of the capital stock of the Company, or any affiliate of any
such person. Except as set forth in Schedule 4.17, none of the Founders, nor any
employee, shareholder, officer, or director of the Company is indebted to the
Company, nor is the Company indebted (or committed to make loans or extend or
guarantee credit) to any of them.
4.18 Employees. As of the date hereof, the Company has no deferred
compensation or stock option plans covering any of its officers or employees.
The Company has complied in all material respects with all applicable employment
laws. Schedule 4.18 hereto lists all employment, non-competition and
confidentiality agreements between the Company and any employee or consultant of
the Company or any other entity. True and correct copies of such agreements have
been delivered to the Purchaser.
4.19 Brokers. No agent, broker, investment banker, person or firm acting in
a similar capacity on behalf of or under the authority of the Company are or
will be entitled to
<PAGE>
9
any broker's or finder's fee or any other commission or similar fee, directly or
indirectly, on account of any action taken by the Company in connection with any
of the transactions contemplated under the Agreement. Except as set forth in
Schedule 4.19, the Company is not party to any agreement, whether in writing or
oral, pursuant to which it may be required to pay finder's, brokerage or other
fees in connection with any present or future transaction involving the sale of
products, or purchase of supplies or machinery, by the Company.
4.20 Full Disclosure. Neither this Agreement nor any certificates made or
delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading, in view of the circumstances in which they were made.
4.21 Effectiveness; Survival; Indemnification. Each representation and
warranty herein is deemed to be made on the date of this Agreement and at the
Closing, and shall survive and remain in full force and effect after the
Closing. In the event of any material breach or misrepresentation of any
covenant, warranty or representation made by the Company or the Founders under
this Agreement, the Company and the Founders shall indemnify the Purchaser and
hold the Purchaser harmless from any and all loss, damage (including, without
limitation, any decrease in the value of the Shares), liability and expense
(including reasonable legal fees and costs) sustained or incurred by the
Purchaser as a result of or in connection with said breach or misrepresentation
for a period of two years; provided that:
(i) the aggregate amount of the loss, damage, liability and/or expense
sustained by the Purchaser exceeds $25,000 (twenty-five thousand US
Dollars); and
(ii) the aggregate liability of the Founders together shall not exceed
$90,000 and the personal liability of each of the Founders shall be limited
as follows:
(A) Prior to the Company obtaining a Qualified Investment,
Professor Branover's personal liability hereunder will be limited to
$15, 000 (fifteen thousand US Dollars). In the event the Company is
successful in obtaining a Qualified Investment, the limit of Professor
Branover's personal liability hereunder shall be increased by an
additional $0.02 (two US Cents) for every US Dollar raised in the
Qualified Investment up to an aggregate addition of $30,000 (thirty
thousand US Dollars) to the liability limit, for an aggregate
liability limit of $45,000 (forty-five thousand US Dollars).
(B) Prior to the Company obtaining a Qualified Investment, Dr.
El-Boher's personal liability hereunder will be limited to $12, 000
(twelve thousand US Dollars). In the event the Company is successful
in obtaining a Qualified Investment, the limit of Dr. El-Boher's
personal liability hereunder shall be increased by an additional
$0.016 (one US Cent and six tenths of a USCent) for every US Dollar
raised in the Qualified Investment up to an aggregate addition of
$24,000 (twenty-four thousand US Dollars) to the liability limit, for
an aggregate liability limit of $36,000 (thirty-six thousand US
Dollars).
(C) Prior to the Company obtaining a Qualified Investment,
Professor Gelfgat's personal liability hereunder will be limited to
$3, 000 (three thousand US Dollars). In the event the Company is
successful in obtaining a Qualified Investment, the limit of Professor
Gelfgat's personal liability hereunder shall be increased by an
additional $0.004 (four tenths of a USCent) for every US Dollar raised
in the Qualified Investment up to
<PAGE>
10
an aggregate addition of $6,000 (six thousand US Dollars) to the
liability limit, for an aggregate liability limit of $9,000 (nine
thousand US Dollars).
5. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Company and the Founders, and acknowledges that
the Company and the Founders are entering into this Agreement in reliance
thereon, as follows:
5.1 Organization. The Purchaser is duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has full corporate
power and authority to own, lease and operate its properties and assets and to
conduct its business as now being conducted. The Purchaser has all requisite
power and authority to execute and deliver this Agreement, and other agreements
contemplated hereby or which are ancillary hereto, and to consummate the
transactions contemplated hereby and thereby.
5.2 Enforceability. Neither the execution and delivery of this Agreement
nor compliance by the Purchaser with the terms and provisions hereof, will
conflict with, or result in a breach or violation of, any of the terms,
conditions and provisions of: (i) the Purchaser's charter documents or other
governing instruments of the Purchaser, (ii) any judgment, order, injunction,
decree, or ruling of any domestic court or governmental authority, to which the
Purchaser is subject, (iii) any agreement, contract, lease, license or
commitment to which the Purchaser is a party and which would impair the ability
of the Purchaser to execute, deliver or perform this Agreement, or (iv)
applicable law. This Agreement, when executed and delivered by the Purchaser,
will constitute the valid, legally binding and enforceable obligation of the
Purchaser.
5.3 Authorization. All corporate action on the part of the Purchaser
necessary for the authorization, execution, delivery, and performance of all of
the Purchaser's obligations under this Agreement has been (or will be) taken
prior to the Closing. No consent, approval, order, license, permit or action by
any governmental authority on the part of the Purchaser is required that has not
been, or will not have been, obtained by the Purchaser prior to the Closing in
connection with the valid execution, delivery and performance of this Agreement.
5.4 Brokers. No agent, broker, investment banker, person or firm acting in
a similar capacity on behalf of or under the authority of the Purchaser are or
will be entitled to any broker's or finder's fee or any other commission or
similar fee, directly or indirectly, on account of any action taken by the
Purchaser in connection with any of the transactions contemplated under this
Agreement.
5.5 Experience; Receipt of Information. The Purchaser confirms that: (i) it
understands and is aware that the purchase of the Shares involves substantial
business risk which it shall bear for an indefinite period, should be regarded
as highly speculative and may cause it substantial or total loss of its
investment; (ii) it had an opportunity to examine the Company, its proposed
business and prospects and the related technology; (iii) it understands and is
aware that the Company is party to an agreement with the OCS (iv) it has
received information it requested from the Company and the Founders and
independently reached its decision to invest in the Company; (v) it has the
financial ability to enter into this Agreement and perform its obligations
hereunder; and (vi) it is acquiring the Shares for its own account for
investment and not with a view to sale or distribution of the Shares. The
foregoing, however, does not limit or modify the representations and warranties
of the Company and the Founders set forth in Section 4 hereof or the right of
Purchaser to rely thereon.
<PAGE>
11
5.6 Full Disclosure. Neither this Agreement nor any certificates made or
delivered in connection herewith contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements herein
or therein not misleading, in view of the circumstances in which they were made.
5.7 Effectiveness; Survival; Indemnification. Each representation and
warranty herein is deemed to be made on the date of this Agreement and at the
Closing, and shall survive and remain in full force and effect after the
Closing. In the event of any material breach or misrepresentation of any
covenant, warranty or representation made by the Purchaser under this Agreement,
the Purchaser shall indemnify the Company and the Founders and hold them
harmless from any and all loss, damage, liability and expense (including
reasonable legal fees and costs) sustained or incurred by the Company or the
Founders as a result of or in connection with said breach or misrepresentation
for a period of two years; provided that the aggregate amount of the loss,
damage, liability and/or expense sustained by the Company exceeds $25,000
(twenty-five thousand US Dollars).
6. Conditions of Closing of the Purchaser. The obligations of the Purchaser
to purchase the Shares and the Founders Shares and transfer the Purchase Price
and the Founders Purchase Price at the Closing are subject to the fulfillment at
or before the Closing of the following conditions precedent, any one or more of
which may be waived in whole or in part by the Purchaser, which waiver shall be
at the sole discretion of the Purchaser:
6.1 Representations and Warranties. The representations and warranties made
by the Company and the Founders in this Agreement shall have been true and
correct when made, and shall be true and correct as of the Closing as if made on
the date of the Closing.
6.2 Covenants. All covenants, agreements, and conditions contained in this
Agreement to be performed or complied with by the Company and the Founders prior
to the Closing shall have been performed or complied with by the Company prior
to or at the Closing.
6.3 Consents, etc. The Company shall have secured all permits, consents and
authorizations, including approval of the Office of Chief Scientist, that shall
be necessary or required lawfully to consummate this Agreement and to issue the
Shares to be purchased by the Purchaser at the Closing.
6.4 Delivery of Documents. All of the documents to be delivered by the
Company pursuant to Section 3.2.1 shall have been delivered to the Purchaser.
The Share Purchase Agreement among the Purchaser and Messrs. Ariel Shemer and
Israel Weinbaum, attached hereto as Exhibit C, shall have been executed by each
of Messrs. Shemer and Weinbaum and shall have been delivered to the Purchaser
along with all documents required therein.
6.5 Proceedings and Documents. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchaser and its Israeli counsel, and
the Purchaser and its Israeli counsel shall have received all such counterpart
originals or certified or other copies of such documents as the Purchaser or its
Israeli counsel may reasonably request.
<PAGE>
12
6.6 Due Diligence Review. The Purchaser's technical, legal and financial
due diligence review shall have been completed to the sole and complete
satisfaction of the Purchaser.
6.7 Absence of Adverse Changes. From the date hereof until the Closing,
there will have been no material adverse change in the financial or business
condition of the Company, in the reasonable judgment of the Purchaser.
7. Conditions of Closing of the Company and the Founders. The Company's
obligations to sell and issue the Shares at the Closing are subject to the
fulfillment at or before the Closing of the following conditions, which may be
waived in whole or in part by the Company, and which waiver shall be at the sole
discretion of the Company:
7.1 Representations and Warranties. The representations and warranties made
by the Purchaser in this Agreement shall have been true and correct when made,
and shall be true and correct as of the date of the Closing.
7.2 Covenants. All covenants, agreements and conditions contained in this
Agreement to be performed, or complied with, by the Purchaser prior to the
Closing shall have been performed or complied with by the Purchaser prior to or
at the Closing.
7.3 Consents, etc. The Purchaser shall have secured all permits, consents
and authorizations, that shall be necessary or required to enable it to lawfully
consummate this Agreement and fulfill its obligations hereunder.
7.4 Purchase Price. The Purchaser shall have transferred to the Company the
Purchase Price for the Shares in full.
7.5 Delivery of Documents. All of the documents to be delivered by the
Purchaser pursuant to Section 3.2.3 shall have been delivered to the Company.
The Loan Agreement between the Company and the Purchaser, attached hereto as
Exhibit D, shall have been executed by the Purchaser and shall have been
delivered to the Company. The Shareholders Agreement between the Founders and
the Purchaser, attached hereto as Exhibit B, shall have been executed by the
Purchaser and shall have been delivered to the Company.
8. Affirmative Covenants.
8.1 Stamp Tax. The Company will pay the stamp duty on the issuance of the
Shares.
8.2 Legal Fees. The Company will pay 50% (fifty percent) of the reasonable
and customary fees of counsel for the Purchaser in connection with the
transactions contemplated in this Agreement, including all documents related
thereto.
8.3 Share Option Plan. The Board of Directors of the Company shall adopt a
share option plan for the purpose of providing incentives to employees of the
Company. The amount of shares to be reserved for issuance, and the grants to be
made, under such plan shall be determined by the Board of Directors.
<PAGE>
8.4 Insurance. The Company shall obtain fire and casualty insurance
policies with coverage sufficient in amount to allow it to replace any of its
material properties which may be damaged or destroyed.
8.5 OCS Obligations. SCNV hereby undertakes, as a shareholder of the
Company, to take all measures in its power to ensure that the Company (i)
observes all the requirements of The Encouragement of Research and Development
in Industry Law 5744-1984 (the "Law") and the regulations promulgated
thereunder, including without limitation the requirements under Section 19 of
the Law relating to the prohibition on the transfer of know-how and/or
production rights, and (ii) acts in accordance with the directions of the
Research Committee of the Office of Chief Scientist of the Ministry of Industry
and Trade.
9. Miscellaneous
9.1 Further Assurances. Each of the parties hereto shall perform such
further acts and execute such further documents as may reasonably be necessary
to carry out and give full effect to the provisions of this Agreement and the
intentions of the parties as reflected thereby.
9.2 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed according to the laws of the State of Israel, without regard to the
conflict of laws provisions thereof.
9.3 Successors and Assigns; Assignment. Except as otherwise expressly
limited herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors, and administrators of
the parties hereto. None of the rights, privileges, or obligations set forth in,
arising under, or created by this Agreement may be assigned or transferred
without the prior consent in writing of each party to this Agreement, with the
exception of assignments and transfers from the Purchaser to any other entity
which controls, is controlled by or is under common control with, the Purchaser;
provided in each case that each such transferee or assignee agrees in writing to
be bound by the terms of this Agreement.
9.4 Entire Agreement; Amendment and Waiver. This Agreement and the
Schedules hereto constitute the full and entire understanding and agreement
between the parties with regard to the subject matters hereof and thereof. Any
term of this Agreement may be amended and the observance of any term hereof may
be waived (either prospectively or retroactively and either generally or in a
particular instance) only with the written consent of all of the Company and the
Purchaser.
9.5 Notices, etc. All notices and other communications required or
permitted hereunder to be given to a party to this Agreement shall be in writing
and shall be telecopied or mailed by registered or certified mail, postage
prepaid, or otherwise delivered by hand or by messenger, addressed to such
party's address as set forth below or at such other address as the party shall
have furnished to each other party in writing in accordance with this provision:
if to the Purchaser: SCNV Acquisition Corp.
c/o Solmecs (Israel) Ltd.
Attn.: Chief Executive Officer
Omer Industrial Park
Omer, Israel
<PAGE>
14
if to the Company: Elecmatec Electro-Magnetic Technologies Ltd.
Attn.: Chief Executive Officer
Omer Industrial Park
Omer, Israel
if to the Founders c/o the Company
or such other address with respect to a party as such party shall notify each
other party in writing as above provided. Any notice sent in accordance with
this Section 9.5 shall be effective (i) if mailed, seven (7) business days after
mailing, (ii) if sent by messenger, upon delivery, and (iii) if sent via
facsimile, upon transmission and electronic confirmation of receipt or (if
transmitted and received on a non-business day) on the first business day
following transmission and electronic confirmation of receipt.
9.6 Delays or Omissions. No delay or omission to exercise any right, power,
or remedy accruing to any party upon any breach or default under this Agreement,
shall be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent, or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any of the parties, shall be
cumulative and not alternative.
9.7 Severability. If any provision of this Agreement is held by a court of
competent jurisdiction to be unenforceable under applicable law, then such
provision shall be excluded from this Agreement and the remainder of this
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms; provided, however, that in such
event this Agreement shall be interpreted so as to give effect, to the greatest
extent consistent with and permitted by applicable law, to the meaning and
intention of the excluded provision as determined by such court of competent
jurisdiction.
9.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one and the same instrument.
<PAGE>
15
IN WITNESS WHEREOF the parties have signed this Agreement as of the date
first hereinabove set forth.
Elecmatec Electro-Magnetic Technologies Ltd. SCNV Acquisition Corp.
By: /s/ Dr. Arik El-Boher By: /s/ Shaul Lesin
------------------------- ---------------------
Name: Dr. Arik El-Boher Name: Shaul Lesin
Title: CEO Title: E.V.P.
/s/ H. Branover /s/ Arik El-Boher
- ------------------------- -------------------------
Professor Herman Branover Dr. Arik El-Boher
/s/ Y. Gelfgat
- -------------------------
Professor Yuri Gelfgat
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT (this "Agreement") is made as of the 18th day
of May, 1999, among SCNV Acquisition Corp. ("SCNV") and Messrs. Herman Branover,
Arik El-Boher and Yuri Gelfgat (together, the "Founders").
WITNESSETH :
WHEREAS, the parties are shareholders in Elecmatec Electro-Magnetic
Technologies Ltd. (the "Company"); and
WHEREAS, the parties wish to coordinate their voting with respect to the
election of directors and formalize certain obligations of SCNV towards
Founders, all in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereby agree as follows:
1. Voting Agreement. Until the earlier of: (i) the date on which the
aggregate shareholdings of the Founders in the Company drops below 5%, and (ii)
May 18, 2002, SCNV will vote all of the shares of the Company held by it for the
appointment of a designee of the Founders to the Board of Directors of the
Company. Prior to each general meeting of the shareholders of the Company in
which directors are to be elected, the Founders shall inform SCNV of their
designee.
2. Notice of Intention to Sell Shares. SCNV hereby undertakes that in the
event the Board of Directors of SCNV makes a general decision to offer its
shares in the Company for sale to one or more third parties, it (i) shall
immediately inform the Founders of such decision and (ii) shall not enter into a
definitive agreement for the sale of its shares in the Company for a period of
forty-five (45) days following such Board of Directors decision without the
prior consent of the Founders. Nothing in this Section 2 shall be interpreted or
deemed to (A) prevent SCNV from entering into a letter of intent with a third
party for the sale of SCNV's shares in the Company and submitting a notice to
the Company pursuant to Article 20(c)(i) during such forty-five (45) day period
or (B) require SCNV to comply with clauses (i) and (ii) above in the event an
unsolicited third party approaches SCNV and offers to acquire SCNV's shares in
the Company.
3. Term. This Agreement shall terminate and be of no further force or
effect upon the initial public offering of any of the Company's securities.
4. Miscellaneous.
4.1 Governing Law. This Agreement shall be governed by and construed
according to the laws of the State of Israel, without regard to the conflict of
laws provisions thereof.
<PAGE>
4.2 Entire Agreement; Amendment and Waiver. This Agreement constitutes the
full and entire understanding and agreement between the parties with regard to
the subject matters hereof and thereof. Any term of this Agreement may be
amended and the observance of any term hereof may be waived (either
prospectively or retroactively and either generally or in a particular instance)
only with the written consent of all parties hereto.
4.3 Notices, etc. All notices and other communications required or
permitted hereunder to be given to a party to this Agreement shall be in writing
and shall be telecopied or mailed by registered or certified mail, postage
prepaid, or otherwise delivered by hand or by messenger, addressed to such
party's address as the party shall have furnished to each other party in writing
in accordance with this provision.
IN WITNESS WHEREOF the parties have signed this Voting Agreement as of the
date first hereinabove set forth.
SCNV Acquisition Corp.
By: /s/ Shaul Lesin
------------------------
Name: Shaul Lesin /s/ H. Branover
Title: E.V.P. ------------------------------
Professor Herman Branover
/s/ Y. Gelfgat /s/ Arik El-Boher
- ----------------------------- ------------------------
Professor Yuri Gelfgat Dr. Arik El-Boher
2
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this "Agreement") is made as of the 18th day
of May, 1999, by and among SCNV ACQUISITION CORP., a Delaware corporation (the
"Purchaser"); Elecmatec Electro-Magnetic Technologies Ltd., and Israeli Company
(the "Company"); and Mr. Ariel Shemer, Israeli ID Number 0-0749007-1; and Dr.
Israel Weinbaum, Israeli ID Number 0-5070058-2 (each a "Selling Shareholder" and
together, the "Selling Shareholders").
WITNESSETH:
WHEREAS, the Selling Shareholders own and desire to sell four thousand
(4,000) Ordinary Shares, nominal value NIS 0.01 each (the "Shares") of the
Company; and
WHEREAS, the Purchaser desires to purchase the Shares on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereby agree as follows:
1. Sale and Purchase. Subject to the terms and conditions hereof, at the
Closing, the Selling Shareholders shall sell and transfer to the Purchaser, and
the Purchaser shall purchase from the Selling Shareholders, for an aggregate
purchase price of thirteen thousand, one-hundred and twenty-five US Dollars
($13,125) (the "Purchase Price"), 4,000 Ordinary Shares of the Company, nominal
value NIS 0.01 each.
2. Additional Consideration.
2.1 Qualified Investment. In the event the Company will be successful in
obtaining a Qualified Investment, as defined below, the Purchaser shall pay the
Selling Shareholders an additional sum, as follows: for every dollar raised in
the Qualified Investment, the Purchaser shall pay the Selling Shareholders an
additional sum of $0.0467 (four cents and sixty-seven hundredths of a cent) up
to an aggregate additional sum of $70,000 (seventy thousand US Dollars). For
purposes of this Agreement, the term "Qualified Investment" shall mean the
raising by the Company of an aggregate sum of at least $500,000 (five-hundred
thousand US dollars) in debt or equity financing from person(s) other than the
Purchaser or an Affiliate of the Purchaser; provided however that in the event
of debt financing, an investment shall not be deemed a Qualified Investment if
(i) the Purchaser or an Affiliate of the Purchaser is required to provide a
guarantee in order for the Company to obtain such financing or (ii) as a result
of such debt financing, the pledge of the Company's assets in favor of the
Purchaser pursuant to the Pledge Agreement between the Company and the
Purchaser, dated as of December 30, 1998, as amended, (a copy of which is
attached hereto as Exhibit A), is made inferior to a pledge in favor of such
third party lender, unless the full amount of the Loans, as defined below, is
repaid as a result of such debt financing. For purposes of this Agreement,
"Affiliate" shall mean an entity controlled by, controlling, or under common
control with another entity where control is the power to elect or appoint more
than 50% of the board of directors or other governing body of such entity or the
power to vote more than 50% of the shares of such entity.
<PAGE>
2
2.2 Earn-Up. Following the full repayment by the Company of the loans
(including profits thereon pursuant to the terms of the Heiterei Iska) obtained,
and to be obtained, by the Company from SCNV pursuant to that certain loan
agreement dated May 18, 1999, between the Company and the Purchaser (a copy of
which is attached hereto as Exhibit B) (the "Loans"), in each calendar quarter
in which the Company (A) obtains positive net income and (B) has overall
retained earnings which would permit the Company to distribute dividends under
the law, SCNV shall pay the Selling Shareholders an amount equal in the
aggregate to 10% of such net income as further consideration for the Shares,
until the total amount of consideration paid by SCNV to the Selling Shareholders
under this Section 2.2 reaches $360,000; provided however, that SCNV shall in no
event be required to pay more than $180,000 to the Selling Shareholders in any
single calendar year.
3. Closing of Sale and Purchase.
3.1 Closing. The sale of the Shares, the purchase thereof by the Purchaser
and the registration of the Shares in the names of the Purchaser in the share
transfer register of the Company, shall take place on the date hereof.
3.2 Transactions at Closing. At the Closing, the following transactions
shall occur, which transactions shall be deemed to take place simultaneously and
no transactions shall be deemed to have been completed or any document delivered
until all such transactions have been completed and all required documents
delivered:
3.2.1 The Selling Shareholders shall deliver to the Purchaser the following
documents:
(a) duly executed share transfer deeds, against payment of the
purchase price therefor in US dollars, and
(b) True and correct copies of resolutions of the Company's Board of
Directors approving the transfer of the Shares from the Selling
Shareholders to the Purchaser;
3.2.2 The Purchaser shall cause the transfer to the Selling Shareholders of
the Purchase Price for the Shares by wire transfer, banker's check, or such
other form of payment as is mutually agreed by the Company and the Purchaser.
4. Representations and Warranties of the Selling Shareholders. Each Selling
Shareholder hereby represents and warrants to the Purchaser as follows:
4.1 Title. Selling Shareholder has good and valid title to the Shares to be
transferred by Selling Shareholder hereunder, free and clear of all liens,
encumbrances, equities or claims, and third party rights of whatever nature, and
upon delivery of such Shares, good and valid title to such shares, free and
clear of all liens, encumbrances, equities or claims, will pass to the
Purchaser.
4.2 Due Issuance. The Shares to be transferred by Selling Shareholder
hereunder have been duly authorized, are validly issued, fully paid and
non-assessable.
<PAGE>
3
4.3 Authority. The Selling Shareholder has full right, power and authority
to enter into this Agreement; the execution, delivery and performance of this
Agreement by Selling Shareholder and the consummation by Selling Shareholder of
the transactions contemplated hereby will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which Selling Shareholder is a party or by which
Selling Shareholder is bound or to which any of the property or assets of
Selling Shareholder is subject, nor will such actions result in any violation of
any statute or any order, rule or regulation of any court or governmental agency
or body having jurisdiction over Selling Shareholder; and no consent, approval,
authorization or order of, or filing or registration with any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement by Selling Shareholder and the consummation by
Selling Shareholder of the transactions contemplated hereby.
4.4 Effectiveness; Survival; Indemnification. Each representation and
warranty herein is deemed to be made on the date of this Agreement and at the
Closing, and shall survive and remain in full force and effect after the
Closing. In the event of any material breach or misrepresentation of any
covenant, warranty or representation made by Selling Shareholder under this
Agreement, the Selling Shareholder shall indemnify the Purchaser and hold it
harmless from any and all loss, damage, liability and expense (including
reasonable legal fees and costs) sustained or incurred by the Purchaser as a
result of or in connection with said breach or misrepresentation for an
indefinite period.
5. Representations and Warranties of the Purchaser. The Purchaser hereby
represents and warrants to the Selling Shareholders as follows:
5.1 Organization. The Purchaser is duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has full corporate
power and authority to own, lease and operate its properties and assets and to
conduct its business as now being conducted. The Purchaser has all requisite
power and authority to execute and deliver this Agreement, and other agreements
contemplated hereby or which are ancillary hereto, and to consummate the
transactions contemplated hereby and thereby.
5.2 Enforceability. Neither the execution and delivery of this Agreement
nor compliance by the Purchaser with the terms and provisions hereof and
thereof, will conflict with, or result in a breach or violation of, any of the
terms, conditions and provisions of: (i) the Purchaser's charter documents, (ii)
any judgment, order, injunction, decree, or ruling of any domestic court or
governmental authority, to which the Purchaser is subject, or (iii) any
agreement, contract, lease, license or commitment to which the Purchaser is a
party. This Agreement, when executed and delivered by the Purchaser, will
constitute the valid, binding and enforceable obligations of the Purchaser.
5.3 Authorization. All corporate action on the part of the Purchaser
necessary for the authorization, execution, delivery, and performance of all of
the Purchaser's obligations under this Agreement has been (or will be) taken
prior to the Closing.
5.4 Loan Agreement. The Purchaser acknowledges that the Selling
Shareholders are in no way guarantors for the repayment of the Loans by the
Company and that the Loans were not made, and will not be made, to the Company
based on any representations or warranties made by the Selling Shareholders.
<PAGE>
4
5.5 Effectiveness; Survival; Indemnification. Each representation and
warranty herein is deemed to be made on the date of this Agreement and at the
Closing, and shall survive and remain in full force and effect after the
Closing. In the event of any material breach or misrepresentation of any
covenant, warranty or representation made by the Purchaser under this Agreement,
the Purchaser shall indemnify the Selling Shareholders and hold them harmless
from any and all loss, damage, liability and expense (including reasonable legal
fees and costs) sustained or incurred by the Selling Shareholders as a result of
or in connection with said breach or misrepresentation for an indefinite period.
6. Conditions of Closing of the Purchaser. The obligations of the Purchaser
to purchase the Shares and transfer the Purchase Price at the Closing are
subject to the fulfillment at or before the Closing of the following conditions
precedent, any one or more of which may be waived in whole or in part by the
Purchaser, which waiver shall be at the sole discretion of the Purchaser:
6.1 Representations and Warranties. The representations and warranties made
by the Selling Shareholders in this Agreement shall have been true and correct
when made, and shall be true and correct as of the Closing as if made on the
date of the Closing.
6.2 Legal Investment. On the Closing Date, the sale of the Shares shall be
legally permitted by all laws and regulations to which the Company is subject.
6.3 Delivery of Documents. All of the documents to be delivered by the
Selling Shareholders pursuant to Section 3.2.1 shall have been delivered to the
Purchaser.
7. Conditions of Closing of the Selling Shareholders. The Selling
Shareholders' obligations to sell the Shares at the Closing are subject to the
fulfillment at or before the Closing of the following conditions, which may be
waived in whole or in part by the Selling Shareholders, and which waiver shall
be at the sole discretion of the Selling Shareholders:
7.1 Representations and Warranties. The representations and warranties made
by the Purchaser in this Agreement shall have been true and correct when made,
and shall be true and correct as of the date of the Closing.
7.2 Purchase Price. The Purchaser shall have transferred to the Selling
Shareholders the Purchase Price in full.
7.3 Delivery of Documents. The Legal Fees Agreement between the Company and
the Selling Shareholders, attached hereto as Exhibit C, shall have been executed
by the Company and shall have been delivered to the Selling Shareholders. The
Option Grant Letters between the Purchaser and each of the Selling Shareholders,
attached hereto as Exhibits D-1 and D-2, shall have been executed by the
Purchaser and shall have been delivered to the Selling Shareholders.
8. Financial Statements. Until full payment of the amounts set forth in
Section 2.1 and 2.2 above, the Company shall provide the Selling Shareholders on
an annual basis with a copy of its audited financial statements; provided
however, that the failure to provide such financials shall not be deemed a
breach by the Company of this Agreement unless with respect to the final audited
financial statements of any given calendar year the Selling Shareholders notify
the Company that they have not received such financials and the
<PAGE>
5
Company fails to provide the Selling Shareholders with such financial within the
later of (i) 30 days following the approval of such financial statements by the
Board of Directors of the Company and (ii) 30 days following the receipt of such
notice.
9. Miscellaneous
9.1 Further Assurances. Each of the parties hereto shall perform such
further acts and execute such further documents as may reasonably be necessary
to carry out and give full effect to the provisions of this Agreement and the
intentions of the parties as reflected thereby.
9.2 Governing Law; Jurisdiction. This Agreement shall be governed by and
construed according to the laws of the State of Israel, without regard to the
conflict of laws provisions thereof.
9.3 Successors and Assigns; Assignment. Except as otherwise expressly
limited herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors, and administrators of
the parties hereto. None of the rights, privileges, or obligations set forth in,
arising under, or created by this Agreement may be assigned or transferred
without the prior consent in writing of each party to this Agreement, with the
exception of assignments and transfers from the Purchaser to any other entity
which controls, is controlled by or is under common control with, the Purchaser;
provided in each case that each such transferee or assignee agrees in writing to
be bound by the terms of this Agreement.
9.4 Entire Agreement; Amendment and Waiver. This Agreement and the
Schedules hereto constitute the full and entire understanding and agreement
between the parties with regard to the subject matters hereof and thereof. Any
term of this Agreement may be amended and the observance of any term hereof may
be waived (either prospectively or retroactively and either generally or in a
particular instance) only with the written consent of all of the Company and the
Purchaser.
9.5 Notices, etc. All notices and other communications required or
permitted hereunder to be given to a party to this Agreement shall be in writing
and shall be telecopied or mailed by registered or certified mail, postage
prepaid, or otherwise delivered by hand or by messenger, addressed to such
party's address as set forth below or at such other address as the party shall
have furnished to each other party in writing in accordance with this provision:
if to the Purchaser: SCNV Acquisition Corp.
c/o Solmecs (Israel) Ltd.
Attn.: Chief Executive Officer
Omer Industrial Park
Omer, Israel
if to the Company: Elecmatec Electro-Magnetic Technologies Ltd.
Attn: Chief Executive Officer
Omer Industrial Park
Omer, Israel
<PAGE>
6
if to Mr. Ariel Shemer: Shemer Rosen Laufer &
Glaser Law Offices
3 Daniel Frisch St.
Tel Aviv 64731
Israel
if to Dr. Israel Weinbaum Dr. Israel Weinbaum, Law
Office & Notary
4 Marmorek St.
Tel Aviv
Israel
or such other address with respect to a party as such party shall notify each
other party in writing as above provided. Any notice sent in accordance with
this Section 9.5 shall be effective (i) if mailed, seven (7) business days after
mailing, (ii) if sent by messenger, upon delivery, and (iii) if sent via
facsimile, upon transmission and electronic confirmation of receipt or (if
transmitted and received on a non-business day) on the first business day
following transmission and electronic confirmation of receipt.
9.6 Delays or Omissions. No delay or omission to exercise any right, power,
or remedy accruing to any party upon any breach or default under this Agreement,
shall be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent, or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies, either under
this Agreement or by law or otherwise afforded to any of the parties, shall be
cumulative and not alternative.
9.7 Severability. If any provision of this Agreement is held by a court of
competent jurisdiction to be unenforceable under applicable law, then such
provision shall be excluded from this Agreement and the remainder of this
Agreement shall be interpreted as if such provision were so excluded and shall
be enforceable in accordance with its terms; provided, however, that in such
event this Agreement shall be interpreted so as to give effect, to the greatest
extent consistent with and permitted by applicable law, to the meaning and
intention of the excluded provision as determined by such court of competent
jurisdiction.
9.8 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and enforceable against
the parties actually executing such counterpart, and all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF the parties have signed this Agreement as of the date
first hereinabove set forth.
<PAGE>
7
SCNV Acquisition Corp. Elecmatec Electro-Magnetic Technologies Ltd.
By: /s/ Shaul Lesin By: /s/ Arik El-Boher
--------------------- -------------------------
Name: Shaul Lesin Name: Arik El-Boher
Title: E.V.P. Title: CEO
/s/ Ariel Shemer /s/ Israel Weinbaum
- ------------------------- -------------------------
Ariel Shemer Israel Weinbaum
LOAN AGREEMENT
This Loan Agreement is made and entered into as of this 18th day of May,
1999 by and between SCNV Acquisition Corp., a corporation organized under the
laws of the State of Delaware ( the "Lender"); and Elecmatec Electro-Magnetic
Technologies Ltd., a company organized under the laws of the State of Israel
("Borrower").
WHEREAS, pursuant to the term sheet dated December 28, 1998, among the
Lender, the Borrower, and Messrs. Herman Branover, Arie El-Boher, Yuri Gelfgat,
Israel Weinbaum and Ariel Shemer (the "Term Sheet"), the Lender agreed, subject
to the closing of the transactions contemplated by the Term Sheet, to lend the
Borrower, from time to time, up to an aggregate of $1,000,000 (one million US
Dollars), as needed by the Borrower to finance its activities (including the
payment of salaries and the purchase of equipment); and
WHEREAS, the parties agreed that such amount shall also include guarantees
provided prior to the date of this Agreement, and to be provided in the future,
by the Lender to the Borrower; and
WHEREAS, the parties entered into a loan agreement dated as of December 30,
1998, a copy of which is attached hereto as Exhibit A (the "Original Loan
Agreement"), pursuant to which the Lender (i) lent the Borrower an aggregate sum
of $110,000 (one hundred and ten thousand US Dollars) (the "Original Loan") and
(ii) provided the Borrower with a guarantee in the amount of $162,000 (one
hundred and sixty-two thousand US Dollars) (the "Original Guarantee"); and
WHEREAS, pursuant to the Original Loan Agreement, upon the closing of the
transaction contemplated by the Term Sheet, the Original Loan is to become part
of the loans to be provided under this Agreement and to be subject to the terms
of this Agreement; and
WHEREAS, in addition to the amounts lent to the Borrower under the Original
Loan Agreement, the Lender has lent the Borrower, including amounts being lent
on the date hereof, an aggregate amount of $116,917 (one-hundred and eight
thousand, nine-hundred and seventeen US Dollars) (the "Interim Amount"); and
WHEREAS, the parties have agreed that upon the closing of the transaction
contemplated by the Term Sheet, the Interim Amount and the Original Guarantee
shall become part of the loans to be provided under this Agreement and shall be
subject to the terms of this Agreement; and
WHEREAS, the transactions contemplated by the Term Sheet are being closed
simultaneously with the execution of this Agreement. NOW, THEREFORE, the parties
agree as follows:
1. Preamble. The Preamble to this Agreement constitutes an integral part
hereof.
<PAGE>
2
2. Loan and Guarantees.
2.01 The Lender hereby agrees to lend the Borrower and/or provide
Guarantees (as defined below) of up to an additional aggregate amount of
$619,083 (six-hundred and nineteen thousand, eighty-three US Dollars) in several
installments (each, an "Installment") and/or Guarantees, as the case may be,
based on the actual needs of the Borrower. All amounts transferred to the
Borrower by the Lender pursuant to this Section 2.01 together with the Original
Loan and the Additional Amount shall hereinafter be referred to as the "Loan."
The term "Guarantee" shall mean a guarantee to be provided by the Lender to
third parties at the request of the Borrower, including a guarantee in favor of
King ___________ Ltd.
2.02 Each Installment or Guarantee shall be made by the Lender following
the receipt of a written request from the Chief Executive Officer of the
Borrower certifying that the Borrower is in need of such financing or Guarantee
and setting forth the use to be made of such funds or Guarantee, as the case may
be.
2.03 Each Installment shall be made pursuant to a Heiter Iska in the form
attached hereto as Exhibit B (the "Form"), which shall govern the amounts of
money in excess of the principal to be paid back by the Borrower. Each Heiter
Iska shall be drafted in a manner to ensure that the amount of "additional
profit" as set forth in Section 4 of the Heiter Iska shall be reduced (as
compared to the amount set forth in Section 4 of the Form) in the same
proportion as the reduction in the amount of the money loaned pursuant to the
Heiter Iska (as compared to the amount set forth in the opening paragraph of the
Form).
2.04 Upon the payment by the Lender of any Installment or the provision of
any Guarantee pursuant to this Section 2, the parties shall update the loan
schedule set forth in Exhibit C to this Agreement to include such Installment or
Guarantee.
3. Representations and Warranties of Borrower.
3.01 Accuracy of Representations and Warranties. The Borrower hereby
represents and warrants that the representations and warranties made by the
Borrower in the Share Purchase Agreement between the Borrower and the Lender,
dated as of May 18, 1999, (attached hereto as Exhibit D) (the "Share Purchase
Agreement") are true and correct as of the date hereof.
3.02 Validity of Transaction. The Borrower has all requisite power and
authority to execute, deliver, and perform this Agreement. All necessary
corporate proceedings of the Borrower have been duly taken to authorize the
execution, delivery, and performance of this Agreement by the Borrower. This
Agreement is the legal, valid, and binding obligation of the Borrower, and is
enforceable as to the Borrower in accordance with its terms.
4. Representations and Warranties of Lender.
<PAGE>
3
4.01 Accuracy of Representations and Warranties. The Lender hereby
represents and warrants that the representations and warranties made by the
Lender in the Share Purchase Agreement were true and correct when made, and are
true and correct as of the date hereof as if made on the date hereof.
4.02 Validity of Transaction. The Lender has all requisite power and
authority to execute, deliver, and perform this Agreement. All necessary
corporate proceedings of the Lender have been duly taken to authorize the
execution, delivery, and performance of this Agreement by the Lender. This
Agreement is the legal, valid, and binding obligation of the Lender, and is
enforceable as to the Lender in accordance with its terms.
5. Repayment of the Loan and Removal of Guarantee. Unless agreed to
otherwise in writing by the Lender, any amounts received by the Borrower in any
equity or debt financing and any net profit obtained by the Borrower from its
operations shall first be used, before any use of such funds for any other
purpose, to: (i) repay any outstanding balance of the principal of the Loan and
all other amounts owing pursuant to the Heiterei Iska entered into pursuant to
Section 2.03 above until the full repayment of the principal of the Loan and all
such other amounts, and (ii) cause the full removal of all of the Guarantees,
including the Original Guarantee.
6. Security. As security for the Borrower's obligations hereunder, the
Borrower pledged to the Lender all rights that it holds to all Intellectual
Property and all its physical assets, and granted to the Lender a lien thereto
and security interest therein. A copy of the pledge agreement is attached hereto
as Exhibit E.
7. Default. Any outstanding balance of the Loan, including all amounts
accumulated pursuant to the terms of the Heiterei Iska, will immediately become
due and payable upon any Event of Default as defined herein. The occurrence of
any of the following shall be an Event of Default:
7.01 any material breach by Borrower of any of its obligations or
representations under this Agreement;
7.02 the commencement by Borrower of any liquidation proceedings or the
adoption of a winding up resolution by the Borrower, or the appointment of a
receiver or trustee over the whole or any part or Borrower's assets, or the
calling by Borrower of a meeting of creditors for the purpose of entering into a
scheme or arrangement with them;
7.03 the levy of an attachment or the institution of execution proceedings
against the whole or a substantial part of Borrower's assets. The Borrower shall
notify Lender within 72 hours of any such attachment or proceeding.
8. Entire Agreement. This Agreement constitutes the entire understanding of
the parties with respect to the subject matter hereof. This Agreement supersedes
any provisions of the Original Loan Agreement relating to the Original Loan and
the
<PAGE>
4
Original Guarantee. This Agreement may not be modified or amended except by a
written agreement signed by the parties hereto.
9. Governing Law. This agreement shall be governed by the laws of the State
of Israel. Any dispute arising under or in connection with this Agreement shall
be settled exclusively before the courts of the State of Israel.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Loan Agreement as of the date
first above written.
SCNV Acquisition Corp. Elecmatec Electro-Magnetic Technologies Ltd.
By: /s/ Shaul Lesin By: /s/ Arik El-Boher
--------------------- -------------------------
Name: Shaul Lesin Name: Arik El-Boher
Title: E.V.P. Title: CEO
AMENDMENT TO PLEDGE AGREEMENT
This Amendment to Pledge Agreement, dated as of May 18, 1999, is entered into by
and between SCNV Acquisition Corp., a corporation incorporated under the laws of
the State of Delaware, (the "Lender"); and Elecmatec Electro-Magnetic
Technologies Ltd., a company organized under the laws of the State of Israel
("Pledgor").
WHEREAS: The parties have entered into a Pledge Agreement, dated as of December
30, 1998, a copy of which is attached hereto as Exhibit A (the "Pledge
Agreement"); and
WHEREAS: The parties wish to amend the Pledge Agreement.
NOW THEREFORE, the parties hereby agree as follows:
1. Section 7 of the Pledge Agreement shall be deleted in its entirety and
replaced with the following:
"7. The pledge shall become void, and the Lender shall promptly execute all
documents necessary to release the pledge upon repayment of all amounts pursuant
to the terms of the Loan Agreement and the Future Loan Agreements and
termination of all guarantees made by the Lender pursuant to the Loan Agreement
and the Future Loan Agreements."
2. All other sections of the Pledge Agreement shall remain unchanged.
IN WITNESS WHEREOF this Pledge Agreement has been executed by the parties hereto
as of the date first above written.
Elecmatec Electro-Magnetic Technologies Ltd. SCNV Acquisition Corp.
By: /s/ Arik El-Boher By: /s/ Shaul Lesin
------------------------- ---------------------
Name: Arik El-Boher Name: Shaul Lesin
Title: CEO Title: E.V.P.
Agreement
drawn up and signed in Beersheba on September 8, 1998
Between: The Association for the Development of International Energy
Projects, association no. 580167419, POB 653, Beersheba,
(hereinafter: the "Association",
of the one part
And Solmecs (Israel) Ltd. P.C. 51-08555D-1, Omer Industrial Park,
Building D3, (hereinafter: the Company"),
of the other part
Whereas the Association possesses applicable ideas and/or technological
and/or scientific knowledge in all matters pertaining to a
technology for the reduction of levels of CO2 emissions into the
atmosphere by means of a deep cooling system, (hereinafter: the "CO2
Technology"), and a technology for the direct conversion of solar
energy into electricity by means of photovoltaic cells,
(hereinafter: the "Conversion Technology"),
Whereas the Association has invested work and budgets in the development of
the above-mentioned technologies, (hereinafter: the "Technologies"),
and it wishes to sell and transfer all its rights thereto to the
Company, and enable the Company to make unlimited commercial use of
the Technologies, all in accordance with the terms of this
agreement,
Whereas the Association has presented to the Company an estimate of its
expenses in respect of each of the two technologies, as set forth in
Appendix A of this contract (hereinafter: the "Expenses"),
Whereas the Company has agreed to purchase from the Association all its
rights to the Technologies, taking into account the Expenses as set
forth above, all in accordance with the terms of this contract,
Wherefore the parties have declared, agreed and stipulated as follows:
1. The preamble to this agreement, including the declarations of the parties
which are included therein, constitutes an integral part thereof.
1
<PAGE>
2. The Association is selling and transferring to the Company, and the Company
is buying and receiving from the Association, all its rights to the
Technologies from the date of signature of this contract by the two
parties, subject to the fulfillment by the Company of all its obligations
pursuant to this contract.
3. The Company undertakes to pay to the Association, as reimbursement for the
expenses it has incurred in the development of the Technologies, the
following consideration:
a. A one-off payment shall be made in NIS for the CO2 Technology,
equivalent to US$ 30,000 (thirty thousand US dollars), in accordance
with the representative rate which shall be known on the actual date
of payment. This amount shall be paid to the Association in two equal
installments as follows:
(1) First installment of $ 15,000 shall be paid 30 days after
signature of this contract.
(2) Second installment of $ 15,000 shall be paid 30 days from the
date on which the Company records the first profit resulting from
a transaction for the application and/or sale of this technology.
(3) VAT, to be paid by the Company, shall be added to the
aforementioned amounts in accordance with the law, if the
transaction is subject to VAT.
b. A one-off payment shall be made in NIS for the Conversion Technology,
equivalent to US$ 30,000 (thirty thousand US dollars), in accordance
with the representative rate which shall be known on the actual date
of payment. This amount shall be paid to the Association in two equal
installments as follows
(1) First installment of $ 15,000 shall be paid 30 days after
signature of this contract.
(2) Second installment of $ 15,000 shall be paid 30 days from the
date on which the Company records the first profit resulting from
a transaction for the application and/or sale of this technology.
(3) VAT, to be paid by the Company, shall be added to the
aforementioned amounts in accordance with the law, if the
transaction is subject to VAT.
c. In addition to the one-off payment, the Company shall pay to the
Association royalties from sales of developments and/or applications
and/or any products based on either one of the two aforementioned
technologies, which it shall sell and/or hand over in return for a
2
<PAGE>
consideration in any other manner, at a rate of 0.25% (one quarter of
one percent) of any consideration received (hereinafter: the
"Royalties").
d. Said Royalties shall be paid to the Association by the Company
according to the rate at which it receives the consideration from the
sales and/or transactions which it shall effect in connection with the
Technologies, but, in any event, the Company shall be obliged to
transfer the Royalties within 30 days from the date on which it
receives the consideration which is the basis for these Royalties.
e. Notwithstanding the aforesaid, it is agreed by the parties that the
maximum amount that the Company shall pay to the Association in the
form of royalties shall not exceed US$ 50,000 (fifty thousand US
dollars) for each one of the two above-mentioned technologies.
f. VAT, to be paid by the Company, shall be added to the Royalties in
accordance with the law, if the tax authorities determine that they
are subject to VAT.
4. It is agreed by the parties that, upon transfer of the rights to the
Technologies pursuant to this contact, the Association shall be prevented
from engaging in the implementation and/or application of the Technologies,
and it undertakes to hand over to the Company, shortly after signature of
this contract, all materials in its possession which pertain to the
Technologies.
5. For the removal of doubt, it is clarified that the Association is handing
over solely to the Company all its rights to the Technologies on a
completely exclusive basis, and upon signature of this contract and
fulfillment by the Company of its obligations pursuant thereto, waives any
right whatsoever to the Technologies and to all matters in respect thereof.
6. The Company shall be entitled to handle the rights transferred to it
pursuant to this contract as though it is the sole owner, including
registration of the rights in its name in any place which registers rights
as aforesaid. However, the Company declares that it knows that the
Association has not undertaken and has not even declared in any manner
whatsoever that the Technologies being handed over are copyrights and/or
patents protected in accordance with any kind of law, and/or that its
rights to the Technologies are protected in any manner, and the Company
renounces any argument and/or claim in this matter.
7. Notwithstanding the aforementioned in Section 6 above, the Association
undertakes to assist the Company, to the best of its ability, to register
the rights to the Technologies in its name in any place which engages in
the registration of such rights, provided that all its expenses in this
matter are borne by the Company.
3
<PAGE>
8. The Company declares that it has inspected the Technologies and the rights
of the Association thereto, and has found them to be satisfactory and
suitable, and it renounces any argument and/or claim with respect to this
matter.
9. It is agreed by the parties that, notwithstanding the aforementioned in
this contract, should the Association enter liquidation proceedings or
cease operations, including reporting to the Registrar of Associations, the
following provisions shall apply:
a. Subject to payment in full of the consideration stipulated in Section
3a and Section 3b above, the Technologies shall be fully and
unconditionally owned by the Company.
b. The Company shall be exempt from payment of the royalties stipulated
in Section 3c above or any other payment to the Association and/or to
whomever may come in its stead, and/or is appointed to conduct the
transaction and/or is appointed to liquidate the Association and/or to
any third party which has purchased and/or received in the form of a
transfer and/or in any other manner, the assets of the Association
and/or its rights and/or its liabilities of any type or kind.
c. The right of the Association and/or of any of the entities listed in
sub-paragraph b. above to restore to its possession and ownership the
rights to the Technologies by virtue of Section 11 below - shall
expire.
10. It is agreed by the parties, that in any event, the Association shall not
be permitted to assign its rights pursuant to this contract, in full or in
part, to any third party, unless with the prior written consent of the
Company, at its exclusive discretion, and without being under any
obligation to consent to said request.
11. It is agreed by the parties that if the Company does not actually begin the
commercial application and implementation of any of the technologies
pursuant to this contract within seven years from date of signature of this
contract, the Association shall be entitled - but not obliged - to restore
to its possession and ownership the rights to said technology, subject to
the reimbursement of all the amounts it received from the Company pursuant
to this contract, at their value in NIS, in accordance with the
representative rate known on the date of reimbursement.
12. The Association undertakes toward the Company that it and/or any of its
employees and/or persons working on its behalf shall not make any use of
the Technologies and/or the information connected thereto, and shall not
transfer this information to any third party, in full and/or in part, and
that it undertakes to have all its employees and/or persons working on its
behalf sign a confidentiality agreement with respect to all the information
acquired by them in connection with these Technologies. Should the
Association violate its obligations according to this clause, the
Association shall pay to the Company compensation which has been agreed and
estimated in advance, without any requirement for proof of
4
<PAGE>
actual damage, at a rate of fifty percent of the payments actually received
by the Association from the Company, pursuant to this contract, up to the
date on which said violation was discovered (hereinafter: the "Agreed
Compensation"), without derogating from the rights of the Company to bring
suit for full damages in accordance with any law. Notwithstanding the
aforesaid, it is agreed by the parties that the Association shall not be
obliged to pay said Agreed Compensation if it proves that it took all
reasonable steps to prevent a violation, and that the violation was
committed without its consent and/or was contrary to its instructions.
13. Any modification of this agreement shall not be valid unless made in
writing and signed by both parties.
14. Any notice sent by one party to the other shall be considered as having
been received by the second party within 72 hours from dispatch, and if
delivered by hand - upon delivery.
In witness whereof the parties have set their hands:
The Association for the Development of
International
Energy Projects
/s/ [ILLEGIBLE] /s/ Y. Unger
---------------- ------------
The Association The Company
Signed: ( - )
5
<PAGE>
Appendix A - Estimate of the Association's Expenses
a. CO2 Technology
(1) Cost of employing Mr. Gennady Sachsonov, on the
assumption that he devoted 50% of his work time to this
technology, based on the total cost of his employment
by the Association amounting to NIS 305,408, totaled
NIS 152,704, the equivalent of: $ 42,000
(2) Journeys to Russian in connection with this technology:
$ 6,000
(3) Communications expenses (fax, telephone, etc.) $ 6,000
(4) 20% overhead (for current expenses, management,
structure, $ 14,000 etc.).
(5) Total: $ 68,000
b. Conversion Technology
(1) Cost of employing Mr. Yuri Kisselman, on the assumption
that 60% of his work time was devoted to this
technology, based on the total cost of his employment
by the Association amounting to NIS 365,579, totaled
NIS 219,347, the equivalent of: $ 60,000
(2) Cost of six journeys to Russia in connection with this
technology: $ 9,000
(3) Communications expenses, including fax, post and
telephone: $ 6,000
(4) 20% overhead (current expenses, management, structure,
etc.). $ 15,000
(5) Total: $ 90,000
6
1. Solmecs Corporation N.V.
2. Solmecs (Israel) Ltd.
3. Elecmatec Electro-Magnetic Technologies Ltd.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS IN THIS REPORT ON FORM 10-KSB AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<CASH> 525,162
<SECURITIES> 0
<RECEIVABLES> 10,931
<ALLOWANCES> 0
<INVENTORY> 30,595
<CURRENT-ASSETS> 1,807,142
<PP&E> 1,213,512
<DEPRECIATION> 160,609
<TOTAL-ASSETS> 2,885,045
<CURRENT-LIABILITIES> 772,824
<BONDS> 0
0
0
<COMMON> 20,821
<OTHER-SE> 1,777,071
<TOTAL-LIABILITY-AND-EQUITY> 2,885,045
<SALES> 49,282
<TOTAL-REVENUES> 67,693
<CGS> 0
<TOTAL-COSTS> 1,845,107
<OTHER-EXPENSES> (4,060,111)
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<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (5,740,262)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,740,262)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,740,262)
<EPS-BASIC> (2.76)
<EPS-DILUTED> (2.76)
</TABLE>
