SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS
ISSUERS UNDER SECTION 12(b) OR 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
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(Name of Small Business Issuer in its Charter)
Nevada 86-0850090
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1207 N. Miller Road, Tempe, Arizona 85281
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(Address of Principal Executive Offices) (Zip Code)
(602) 967-5990
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(Issuer's Telephone Number)
Securities to be registered under Section 12(b) of the Act:
None
Securities to be registered under Section 12(g) of the Act:
Common Stock, $.001 par value
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(Title of Class)
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KLEIN ENGINES & COMPETITION COMPONENTS, INC.
FORM 10-SB
TABLE OF CONTENTS
Page
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PART I
ITEM 1. DESCRIPTION OF BUSINESS..................................... 1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS........................ 18
ITEM 3. DESCRIPTION OF PROPERTY..................................... 23
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT....................................... 24
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS......................................... 25
ITEM 6. EXECUTIVE COMPENSATION...................................... 26
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 27
ITEM 8. DESCRIPTION OF SECURITIES................................... 27
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS................. 30
ITEM 2. LEGAL PROCEEDINGS........................................... 31
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS............... 31
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES..................... 31
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS................... 32
PART F/S..................................................................... 32
PART III
ITEM 1. INDEX TO EXHIBITS........................................... 33
ITEM 2. DESCRIPTION OF EXHIBITS..................................... 33
SIGNATURES................................................................... 34
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Klein Engines & Competition Components, Inc. (the "Company") designs,
develops, manufactures, assembles, sells, and reconditions a wide variety of
high-performance engines and specialty components for use in high-performance
engines that are utilized in automobile, marine, and airplane racing
applications. The Company currently supplies complete racing engines for
American Sprint Car Series ("ASCS") and World of Outlaws sprint cars, the Indy
Racing League ("IRL"), American IndyCar Series, National Hot Rod Association
("NHRA") drag racing, United States Automobile Club ("USAC") midget cars,
Bonneville salt flat speed records, the Bob Bondurant School of High Performance
Driving in Phoenix, Arizona, and Frank Hawley's Drag Racing School in Pomona,
California, among others. The Company estimates that more than 2,000 of its
engines compete each week-end in racing events throughout the United States.
The Company recently entered into an agreement with Feuling Advanced
Technologies, Inc. ("Feuling") to produce a line of cylinder heads utilizing
patented design features for use on large-block Chevrolet ("Chevy") truck,
marine, and industrial engines. The Company also intends to expand its capacity
to manufacture or modify specialty engine components to include pistons,
connecting rods, and other critical engines parts. The Company engages in
on-going research and development efforts, adheres to strict manufacturing and
assembly quality standards, and strives to deliver superior service in order to
provide high-quality, high-performance engines and engine components at
reasonable prices.
In September 1997, the Company, Thomas G. Klein (the Company's Chairman
of the Board, President, and Chief Executive Officer), and International Motor
Sports Group, Inc. ("IMSG") entered into a loan and option agreement (the "IMSG
Option"). Pursuant to the IMSG Option, IMSG has loaned the Company approximately
$617,500 as of January 31, 1998, and Mr. Klein has granted to IMSG the option to
acquire all of Mr. Klein's shares of the Company's Common Stock, which currently
represent approximately 52.6% of the outstanding Common Stock. IMSG, however,
has advised the Company and Mr. Klein that it currently does not intend to
exercise the IMSG Option. The Company and IMSG currently are engaged in
discussions regarding a potential acquisition or merger transaction between the
two companies, although there can be no assurance that any such transaction will
be consummated. See Part I, Item 7, "Certain Relationships and Related
Transactions" and Part I, Item 1, "Special Considerations - Control by
Management; IMSG Option; Conflicts of Interest."
Industry Overview
Motorsports racing in the United States consists of several distinct
segments, each with its own organizing bodies and events. The largest segment,
in terms of attendance and media exposure, is stock car racing, which is
dominated by the National Association for Stock Car Auto Racing ("NASCAR"). The
other principal segments are drag racing, with NHRA the most important
organizing body, and Indy car racing, controlled by the IRL and Championship
Auto Racing Teams ("CART"). ASCS and World of Outlaws are the principal
sanctioning bodies for sprint car racing in the United States.
According to USA Today, motorsports racing is the fastest growing
spectator sport in the United States. Approximately 15.4 million people attended
motorsports' premier events in 1996, almost three times the 1981 attendance.
Approximately 5.6 million fans attended the 31 races in the NASCAR Winston Cup
series in 1996, representing attendance of approximately 180,000 per event, more
than double the 75,643 attendance per NASCAR Winston Cup event in 1985.
Published reports estimate that attendance at NASCAR Winston Cup events in 1997
exceeded 6.0 million fans. NHRA attendance also has grown significantly in
recent years, reaching total attendance of almost 1.9 million in 1996.
Motorsports events have also achieved significant success on television, with
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coverage of NASCAR and NHRA races provided by broadcast and cable television
networks, such as ABC, CBS, ESPN, TBS, and TNN, in addition to regional sports
networks. Television coverage of sprint car racing also has increased
substantially in recent years, with more than 50 races scheduled for broadcast
in 1998. Several leading cable companies have joined forces recently to launch
Speedvision, a motorsports cable network. USA Today reports that TV ratings are
growing even faster than attendance, with more than 100 million people tuning in
to NASCAR's televised events in 1996. The Company believes that the recent
construction of new superspeedways in Los Angeles, California, Ft. Worth, Texas,
Las Vegas, Nevada, and other major cities will stimulate continued growth in the
motorsports industry through increased exposure to new racing enthusiasts and
markets.
The growing popularity of motorsports also has been recognized by
corporate America. According to NASCAR, more than 70 of the Fortune 500
companies utilize motorsports sponsorship or other activities as part of their
marketing strategies.
Strategy
The Company's strategy is to strengthen its position as a leading
manufacturer of high-performance, reliable racing engines and engine components
by (i) capitalizing on its established reputation for producing high-quality,
durable engines and components at reasonable prices; (ii) developing and
expanding key business lines; (iii) developing its in-house component
manufacturing capacity; (iv) promoting customer awareness and brand name
recognition; (v) emphasizing research and development efforts; and (vi)
developing strategic alliances and joint development efforts.
Capitalizing on Established Reputation for Producing High-Quality, Durable
Engines and Components
Racing is an extremely expensive endeavor, and high-performance engines
represent a significant portion of the costs involved in a successful racing
effort. The Company believes that race car owners are willing to pay more for a
high-quality engine that delivers maximum performance with less frequent
rebuilding or repairs. The Company adheres to strict quality manufacturing
standards in order to develop and foster a reputation for building engines that
deliver competitive power as well as reliability at reasonable prices. The
Company intends to capitalize on this reputation in order to increase sales of
its engines and to expand into manufacturing and sales of high-performance
components. The Company's objective is to enable as many racing enthusiasts who
wish to participate in motorsports to do so competitively and affordably for as
long as possible.
Developing and Expanding Key Business Lines
The Company intends to develop and expand its core business lines. In
particular, the Company has recently made significant investments in machinery
and tooling necessary to expand its traditional lines of small-block and
large-block Chevy engines and to acquire equipment that will be utilized to
build Feuling cylinder heads as well as engines for the IRL.
Developing In-House Component Manufacturing Capacity
The Company has initiated a long-range program to develop the in-house
capacity to design and manufacture all of the components that make up the
"rotating mass" of a high-performance engine, which includes crankshafts,
pistons, and connecting rods. The Company believes that developing the ability
to design and manufacture certain critical engine components in-house, instead
of purchasing those items from independent suppliers, will enable the Company to
increase the quality and availability of those components for use in the
Company's engines. In addition, the capacity to manufacture certain engine
components will provide the Company with an inventory of parts for sale to
outside customers. The Company intends to develop its in-house capacity to
design and manufacture critical engine components through a planned program of
acquisitions of specialized
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equipment and engagement of skilled personnel, as well as strategic alliances
and acquisitions of complementary businesses when those opportunities arise.
Promoting Customer Awareness and Brand Name Recognition
The Company continually develops and implements programs designed to
(i) promote customer awareness of the Company's products and their specialty
application capabilities and (ii) increase customer recognition of the "Klein"
and "Diatron" brand names. These efforts include advertising and promotional
programs; coordinated press releases and articles that feature the Company's
engines in major high-performance trade publications that are targeted to race
car owners, builders, mechanics, and high-performance engine shops; sponsorship
of race car teams; and participation at industry trade shows. The Company
believes that these coordinated efforts enhance its customers' perception of the
Company's products as high-quality, durable racing equipment.
Emphasizing on Research and Development Efforts
The Company maintains an active research and development program to
enable it to improve the performance and durability of its existing engines and
components; to develop new materials, parts, and techniques that will enable its
engines to produce more power with improved fuel efficiency and reliability; to
improve manufacturing procedures, increase manufacturing efficiency, and reduce
costs; and to develop and utilize new technological developments. The Company
performs extensive engine testing on its computerized dynamometers to determine
whether each new product is meeting the Company's expectations and performing
according to the Company's standards. The Company also provides engines to two
racing teams, which enables the Company to test new products under actual racing
conditions and to obtain critical evaluations from the drivers, car owners, and
mechanics. The Company currently is conducting research and testing of composite
materials, including carbon fibers, graphites, and multi-dimensional silicones,
that may be used to manufacture certain engine components. The Company believes
that parts made from these materials will be lighter and more durable than parts
currently made from cast iron, steel, or aluminum.
Developing Strategic Alliances and Joint Development Efforts
The Company historically has utilized strategic alliances and joint
development efforts as a cost-effective means of developing and producing
innovative new engines and components. The Company recently entered into an
arrangement under which it will provide engines to Motorsports Promotions, Inc.
("MPI") for use in trucks that MPI sells to participants in MPI's "American Race
Trucks" series. The Company also has an arrangement to produce and sell a
Feuling-patented cylinder head, which provides increased horsepower and torque
as well as improved fuel mileage. Although the Company currently is not a party
to any joint development efforts, it continually explores opportunities to
develop new engine technologies or manufacturing techniques with major
automobile manufacturers, race car owners, and others.
Products and Services
The Company designs, develops, manufactures, assembles, sells, and
reconditions a wide variety of high-performance engines and specialty components
for use in high-performance engines that are utilized in automobile, marine, and
airplane racing applications. The Company currently supplies partial and
complete racing engines for a variety of racing and other high-performance
vehicles. The Company intends to expand its capacity to manufacture or modify
specialty engine components to include cylinder heads, pistons, connecting rods,
and other critical engines parts.
Complete Racing Engines
The Company builds and rebuilds, or "freshens," complete
high-performance racing engines. The Company currently supplies complete racing
engines for ASCS and World of Outlaws sprint cars, USAC midget
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cars, the Indy Racing League, American IndyCar Series, NHRA drag racing,
Bonneville salt flat speed records, the Bob Bondurant School of High Performance
Driving, and Frank Hawley's Drag Racing School, among others. The Company has
developed and refined each engine to deliver optimal performance capabilities
while conforming to applicable rules of the sanctioning body for a particular
class of racing. The Company currently specializes in small-block and
large-block Chevy engines for sprint car racing applications.
The following table sets forth information with respect to certain of
the Company's racing engines.
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Horsepower/
Typical Application Size and Type of Engine ft. lbs. Torque List Price
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Sprint Cars World of Outlaws 410 800/640 $28,500 - 32,500
Sprint
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Sprint Cars ASCS 358 Sprint 635/540 $19,600
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Sportsman Stock Cars 358 Sportsman 550/450 $11,350 - 14,635
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Drag "Killer" 706 1,000/800 $28,900
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Drag "Killer" 572 900/750 $14,985
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Drag "Killer" 540 850/710 $12,485
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Drag / Marine "Killer" 509 805/690 $11,485 - 14,850
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Drag "Killer" 434 705/625 $13,950
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Drag "Killer" 421 688/570 $12,750
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Drag GM 502 Generation 5 545/535 $11,850
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The Company designs its engines to deliver peak performance at a
reasonable price. For example, the Company's "small block" 358 cubic inch
displacement ("c.i.d.") ASCS engine, which the Company sells for approximately
$19,600, delivers performance comparable to a "large block" engine that sells
for approximately $28,500. The Company believes that its small-block ASCS
engines also are more economical to race, maintain, and rebuild than the
large-block engines.
The Company builds and sells its racing engines as either "short
block," "long block," or complete engine assemblies. A short block consists of a
tested, machined, and balanced engine block that has been fitted with a
high-performance crankshaft and bearings, pistons, connecting rods, camshaft,
timing chain, and oil pan. A long block consists of the short block fitted with
high-performance cylinder heads, valves, valve springs, and valve covers. The
Company assembles and balances each of the short block and long block assemblies
that it sells. A complete engine consists of a long block fitted with the
appropriate fuel injection system or carburetor, ignition system and wires,
water pump, and other parts. The Company tests each of its complete racing
engines on computerized dynamometer equipment. See Part I, Item 1, "Description
of Business - Engine Assembly and Freshening; Component Manufacturing" and
"Quality Control."
Engine Freshening
The Company rebuilds, or "freshens," the engines that it builds, as
well as similar engines built by others, after those engines have been raced for
a given number of times. See Part I, Item 1, "Description of Business Engine
Assembly and Freshening; Component Manufacturing."
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High-Performance Engine Components
The Company designs and develops a line of high-performance engine
components that it markets directly to customers under the "Diatron" brand name.
These components include crankshafts, connecting rods, pistons, push rods, valve
springs, roller rocker arms, and camshafts. The Company currently purchases most
of its Diatron components from third parties that manufacture the components
according to the Company's specifications and tolerances. In addition to its
Diatron components, the Company stocks a full line of other vendors'
high-performance components for use in assembling the Company's racing engines
or for resale to the Company's customers. Sales of high-performance components
totaled approximately $500,000 during fiscal 1997. The Company maintains a
warehouse with a complete inventory of high-performance parts required to build,
service, and upgrade the engines that it sells.
The Company's long-term plans include development of the in-house
capacity to manufacture all of the components that make up the "rotating mass"
of a high-performance racing engine, including the crankshaft, pistons, and
connecting rods. The Company plans to concentrate its efforts on utilizing
computerized equipment that will enable it to work to much more precise
tolerances than those typically used by other high-performance component
manufacturers. Components that are machined to closer tolerances generally
provide increased horsepower and reliability. The development of the in-house
capacity to manufacture engine components will require substantial investments
in the equipment needed to produce and finish those components as well as the
skilled personnel required to operate such equipment. There can be no assurance
that the Company will have the financial resources necessary to obtain such
equipment and personnel or that the Company will be able to achieve meaningful
sales of internally produced engine components. Commencement of a program to
produce engine components internally could result in the diversion of
significant amounts of financial resources and management time and attention
from the Company's existing business operations, which could have a material
adverse effect on the Company's operations. See Part I, Item 1, "Special
Considerations -- Need for Additional Capital" and "Special Considerations -- No
Assurance of Successful Acquisitions or Product Line Expansions."
Feuling Cylinder Heads
The Company recently entered into an agreement with Jim Feuling (the
"Feuling Agreement") under which the Company has the rights to manufacture,
assemble, and market patented cylinder heads designed by Feuling for use with
454 c.i.d. Chevy truck engines. These heads include several revolutionary
features that provide performance increases of up to 100 horsepower and 100
foot/pounds of torque, as well as improved fuel mileage. The Company outsources
the casting and initial machining of these heads to third parties. The Company
then performs the final machining and assembly necessary to produce a finished,
ready-to-install cylinder head. The Feuling Agreement permits the Company to
sell the Feuling cylinder heads as an "aftermarket" product for use by
individual owners of automobiles, trucks, recreational vehicles, and static or
stationary engines. In addition, the Feuling Agreement permits the Company to
sell Feuling cylinder heads to NORDSKOG Marine for marine applications. The
Feuling Agreement also grants the Company a right of first refusal with respect
to any new Feuling cylinder head products developed in conjunction with the
licensed technology. Under the Feuling Agreement, the Company has agreed to pay
Feuling an initial fee of $400,000 for the purchase of inventory and a two-year
lease of equipment utilized in producing Feuling cylinder heads, with an option
to purchase the equipment at the end of the two-year period. In addition, the
Company will pay Feuling royalties on all sales of licensed products, subject to
minimum monthly royalties.
Machine Shop Services
In addition to sales of racing engine assemblies and high-performance
engine components, the Company provides complete machine shop services for
engine building and repair. These services include cleaning, magnafluxing,
honing, boring, milling, and modifying engine blocks and repairing damaged
aluminum or cast iron engine blocks; cylinder head surfacing, porting, and
repairs; repairing, polishing, and hard chroming crankshafts; and precision
balancing engine rotating assemblies.
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Sales and Marketing
The Company currently promotes its products and services primarily
through advertisements placed in major industry publications that are targeted
to race car owners, builders, and mechanics. These publications include Open
Wheel, Stock Car Racing, Popular Hot Rodding, Performance Racing Engine
Magazine, SEMA News (published by the Specialty Equipment Manufacturers
Association), and Engine Rebuilders Trader. The Company reinforces its
advertising efforts through periodic press releases and articles published in
the magazines in which it advertises. Employees of the Company attend several
racing industry trade shows each year in an effort to attract new customers and
to enable them to become familiar with the Company's products and services. The
Company targets its advertising and promotional efforts primarily to individual
race car owners and mechanics and local high-performance engine building and
supply shops. The Company utilizes an in-house sales force and independent
representatives to take customer orders via toll-free telephone calls and to
assist customers in determining the specific engine configurations or components
required for their particular needs. Because high performance engines are
relatively perishable by nature, the Company generally requires customers to
deposit 50% of the purchase price for each engine before beginning assembly. The
Company then requires the customer to pay the remaining 50% of the purchase
price before it ships the completed engine to the customer.
Engine Assembly and Freshening; Component Manufacturing
Engine Assembly and Freshening
The Company maintains an inventory of standard engine blocks and a
variety of high-performance components that can be assembled in a variety of
combinations to produce a complete, ready-to-install engine tailored to the
intended racing category, applicable racing rules and restrictions, and the
customer's budget. Upon receipt of an order for a specific high-performance
engine, the Company's technicians conduct a rigorous, multi-step testing and
inspection procedure on each engine block to ensure that the block is of
sufficient quality to deliver optimal performance and reliability under rigorous
racing conditions.
A team of skilled workers then precisely machine, configure, balance,
and assemble the engine block and its components to the Company's exacting
specifications. This process includes boring, honing, and configuring the
standard block to more precise tolerances in order to reduce vibrations;
machining the cylinders to increase the size of the bore; "porting," or
grinding, portions of the cylinder head to increase the flow of the fuel/air
mixture to the combustion chamber; and grinding, polishing, and installing the
specialized crankshaft, camshafts, pistons, connecting rods, valves and valve
springs, carburetor or fuel injection system, fuel and water pumps, exhaust
manifolds, and magneto.
Following assembly in a state-of-the-art "clean room," the Company's
technicians attach each engine to a computerized dynamometer testing machine.
After a 30-minute warm-up and break-in period, the technicians drain and check
the engine to ensure that there are no internal oil or water leaks. The
technicians then refill the engine with fluids and cycle the engine through a
series of "power pulls" on the dynamometer, which measures performance in terms
of horsepower, revolutions per minute, and foot/pounds of torque. After testing,
the technicians once again drain the engine, inspect all filters for residue,
and make final adjustments before crating the ready-to-install engine for
shipping to the customer.
When an engine is returned for "freshening," the Company's technicians
disassemble and inspect the engine for wear, check tolerances, and determine
which components are damaged or worn out. The technicians then repair,
recondition, or replace the various components and re-assemble them into a
complete engine. The Company then tests the freshened engine and returns it to
the customer.
The Company provides to each customer a detailed manual describing the
installation procedures and maintenance recommendations for its engines. The
Company recommends that its engines be freshened at periodic
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intervals, and routinely performs these services for its customers. The Company
works closely with its customers to answer questions, make recommendations, and
otherwise assist them in maintaining their engines in peak operating condition.
The Company believes that these efforts promote a loyal base of customers that
will purchase additional Klein engines and recommend the Company's products to
other racers.
Component Manufacturing
The Company recently began producing Feuling-patented cylinder heads as
aftermarket products for various applications. The Company outsources the
casting and initial machining operations for these cylinder heads to third
parties. The Company performs all finish machining, honing to size, calculation
of head chamber volume, assembly, and guide installation operations at its
facility in Tempe, Arizona. The Company then packages the ready-to-install
cylinder head for shipment to customers.
The Company recently developed plans and specifications for
manufacturing its own line of specially designed "billet" crankshafts. The
Company's process will utilize sophisticated computer-operated equipment to
machine the crankshafts from a single piece of high-quality steel. The Company
believes that racing crankshafts manufactured in this manner will provide
performance and durability superior to traditional "forged" crankshafts
currently used in most racing engines. The implementation of any program to
manufacture engine components will require substantial capital investments in
the equipment and materials necessary to produce such components, as well as the
expenses associated with hiring and training the personnel needed to operate the
equipment. There can be no assurance that the Company will have access to
sufficient capital needed to successfully implement any in-house component
manufacturing program. See Part I, Item 1, "Special Considerations -- Need for
Additional Capital."
Quality Control
The Company has developed detailed specifications that set forth the
parts, components, procedures, tolerances, and torque settings required to build
each type of racing engine that it sells. The Company strives to obtain all of
the parts and components used to build its racing engines from established
suppliers that it believes provide consistently high-quality products. The
Company keeps detailed records of each engine that it builds or freshens in
order to assist in future maintenance and freshening. These records also enable
the Company to accurately track the performance and reliability of each type of
engine in order to continually develop improvements to its products. The Company
inspects each engine that it disassembles or repairs to determine whether and
where any unusual or unacceptable wear patterns have developed, which enables
the Company to incorporate improvements into future engine designs.
The Company's in-house engineers thoroughly check and test each
complete racing engine on the Company's computerized dynamometers prior to
shipment in order to insure that each engine has been properly assembled and is
capable of delivering peak performance. See Item 1, Part 1, "Description of
Business - Products and Services - Engine Assembly and Freshening; Component
Manufacturing."
Raw Materials
The principal raw materials used in producing the high-performance
engine components utilized and sold by the Company consist of cast iron, forged
steel, aluminum, magnesium, and titanium. The Company utilizes a variety of
components to assemble its complete racing engines, including cast iron or
aluminum engine blocks, crankshafts, pistons, connecting rods, cam shafts,
engine heads, valves and valve springs, carburetors, exhaust manifolds, and fuel
and water pumps. The Company believes that there are alternative sources of
supplies for most of these raw materials and finished components. The Company's
suppliers are adequately meeting the current requirements of the Company. The
Company does not, however, maintain an inventory of sufficient size to provide
protection in the event that it or one of its suppliers is unable to obtain the
raw materials or finished components that the Company utilizes. See Item 1, Part
I, "Special Considerations - Dependence on Third Parties for Raw Materials and
Manufacturing."
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Customers
Individual race car team owners and drivers and local high-performance
engine building and repair shops represent the primary customers for the
Company's high performance engines and components. The Company estimates that
approximately 70% of the race car team owners and drivers that buy its racing
engines are hobbyist racers, with full-time professional racers making up the
remaining 30%. The Company markets its Feuling cylinder heads as a bolt-on
application to owners of automobiles, trucks, recreational vehicles, and static
or stationary engines and to NORDSKOG for marine applications.
Patents and Trademarks
Although the Company's business historically has not depended on
trademark or patent protection, the Company recognizes the increasing value of
its various trade names, trademarks, and technical innovations. The Company has
applied for federal trademark registration of the names "Klein Engines" and
"Diatron." In addition, the Company may seek patents on its inventions in the
future. The Company's ability to compete may be enhanced by its ability to
protect its proprietary information, including the issuance of patents and
trademarks. The process of seeking patent protection can be expensive and can
consume significant management resources. The Company believes that patents may
strengthen its negotiating position with respect to future disputes that may
arise regarding its technology or processes. However, the Company believes that
its continued success depends primarily on such factors as the technological
skills and innovative abilities of its personnel rather than on any patents that
it may obtain. In addition, there can be no assurance that patents will issue
from pending or future applications or that any patents that are issued will
provide meaningful protection or other commercial advantage to the Company.
Competition
The high-performance engine and engine components markets are extremely
competitive. The Company competes with a number of large and small domestic and
international companies, some of which have greater market recognition and
substantially greater financial, technical, marketing, distribution, and other
resources than the Company possesses. The Company believes that Katech, Inc.,
Gaerte Engines, Shaver Engines, and Jack Rousch Engines represent its primary
competitors for partially assembled and complete racing engines. In addition,
many "do-it-yourself" engine builders and racers who cannot afford the prices
that the Company charges for its engines build their own racing engines.
The Company currently competes principally on the basis of the
performance, dependability, and prices of its products and its ability to
deliver finished products to its customers on a timely basis. The Company
believes that its reputation for producing high-quality, dependable, and
competitive racing engines and components represents a significant advantage
over its competitors in the high-performance engine and engine components
industry. The Company strives to develop and strengthen this reputation as a
barrier to entry by existing or potential competitors. The ability of the
Company to compete successfully depends on a number of factors both within and
outside its control, including the quality, features, prices, and performance of
its products; the quality of its customer services; its ability to recognize
industry trends and anticipate shifts in consumer demands; its success in
identifying technological advances and designing and marketing new products that
successfully incorporate these improvements; the availability of adequate
sources of manufacturing capacity and the ability of its third-party
manufacturers to meet delivery schedules; its efficiency in filling customer
orders; the continued popularity of motorsports generally; its ability to
develop and maintain effective marketing programs that enable it to sell its
products to motorsports participants; product introductions by the Company's
competitors; the number, nature, and success of its competitors in a given
market; and general market and economic conditions.
Backlog
The Company generally requires full payment for its products prior to
shipping. As a result, the Company does not maintain a significant backlog of
orders for its products.
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Government Regulation
The Company is subject to various federal, state, and local
governmental regulations that directly or indirectly affect its business
operations. See Part I, Item 1, "Special Considerations -- Regulatory
Compliance."
Insurance
The Company maintains a $2.0 million commercial liability insurance
policy. The Company currently does not, however, maintain a product liability
insurance policy to cover the sale of its complete racing engines and
high-performance components. There can be no assurance that the Company's
insurance will be adequate to cover future product liability claims or that the
Company will be able to maintain adequate liability insurance at commercially
reasonable rates. See Part I, Item 1, "Special Considerations -- Risk of Product
Liability Claims; Warranty Claims."
Product Returns and Warranties
The Company generally sells its products with a limited 30-day warranty
from the date of purchase. The Company's warranties generally provide that in
the case of defects in material or workmanship, the Company will, at its option,
either repair or replace the defective product without charge. The Company's
warranties include provisions intended to limit the Company's liability under
such warranties. Although the Company has not experienced any material warranty
claims on its products to date, there can be no assurance that the Company will
not be subjected to significant warranty claims on one or more of its products
in the future. A successful warranty claim or series of claims, if sufficiently
large, could have a material adverse effect on the Company.
Employees
As of December 31, 1997, the Company employed a total of 28 persons,
including 26 full-time employees, at its headquarters in Tempe, Arizona. Of
these employees, 19 are involved in operations, 4 in marketing and sales and 5
in corporate and general administration. The Company has experienced no work
stoppages and is not a party to a collective bargaining agreement. The Company
believes that it maintains good relations with its employees.
Development of the Company
The Company was originally incorporated in the state of Utah on
September 7, 1983 under the name "Jamaica Surgical Products Corporation" for the
purpose of acquiring and operating businesses. The Company's name was
subsequently changed to "Jamaica Marble Company, Inc." on October 19, 1993 and
"Jamaica Holding Company, Inc." on August 11, 1994 (collectively, "Jamaica").
The Company conducted a variety of business operations at various times between
September 7, 1983 and May 21, 1996, but was not actively engaged in any business
operations as of May 21, 1996. On May 21, 1996, the Company acquired K-Way, Inc.
("K-Way"), a privately held Nevada corporation, by issuing 4,250,000 shares of
Common Stock in exchange for all of the issued and outstanding common stock of
K-Way (the "Reverse Acquisition"). As a result, the four stockholders of K-Way
became the owners of shares representing approximately 81% of the outstanding
voting power of the Company immediately after the Reverse Acquisition; the
executive officers of K-Way assumed the management of the Company; the Company's
name was changed to "Klein Engineered Competition Components, Inc.;" and K-Way
became a wholly owned subsidiary of the Company. K-Way, which was incorporated
on December 22, 1992, and its predecessors have conducted the Company's current
business operations of developing, manufacturing, and selling high-performance
engines at various times since 1974. On April 1, 1997, the Company changed its
domicile to the State of Nevada by merging with Klein Engines & Competition
Components, Inc., a Nevada corporation formed for the purpose of changing the
Company's domicile. The Company maintains its principal executive offices at
1207 N. Miller Road, Tempe, Arizona 85281, and its telephone number is
602-967-5990. As used in this Report, the term "Company" refers to Klein Engines
& Competition Components, Inc., and its subsidiaries, predecessors, and acquired
entities.
9
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SPECIAL CONSIDERATIONS
The following factors, in addition to those discussed elsewhere in this
Report, should be carefully considered in evaluating the Company and its
business.
Losses; Report of Independent Public Accountants
Although the Company had revenue of approximately $2.2 million for the
year ended September 30, 1997, an increase of approximately 17.7% over revenue
of approximately $1.9 million for the year ended September 30, 1996, the Company
reported a net loss of approximately $1.4 million for the year ended September
30, 1997. As of September 30, 1997, the Company had an accumulated deficit of
approximately $1.2 million. Losses incurred during fiscal 1997 are attributable
primarily to costs associated with financing activities; increases in general
and administrative expenses; research and development costs; and depreciation
expenses associated with increased investments in plant, equipment, and
infrastructure. There can be no assurance that the Company will generate
sufficient operating revenue, expand sales of its products, or control its costs
sufficiently to achieve or sustain profitability. The Company's financial
statements for the year ended September 30, 1997, have been prepared assuming
that the Company will continue as a going concern. The report by the Company's
independent public accountants on the Company's financial statements for the
year ended September 30, 1997 states that the operating loss described above,
the significant amount of debt outstanding that will be due on demand after
January 31, 1998, and the Company's projections of insufficient cash flow from
operations to meet its debt service requirements raise substantial doubt about
the Company's ability to continue as a going concern. The Company's financial
statements for the year ended September 30, 1997 do not include any adjustments
relating to the recoverability and classifications of asset carrying amounts or
the amount and classification of liabilities that might result in the event that
the Company becomes unable to continue on a going concern. The Company currently
is taking steps intended to address the factors described above, including
seeking additional sources of debt or equity financing. There can be no
assurance, however, that additional financing will be available to the Company
on terms that are acceptable to the Company. See Part I, Item 1, "Special
Considerations -- Need for Additional Capital" and Part I, Item 2, "Managements
Discussion and Analysis."
Need For Additional Capital
The Company historically has secured financing for operations and the
acquisition of additional inventory and equipment through private placements of
equity securities and from commercial and other loans secured by the Company's
assets. As of December 31, 1997, the Company had outstanding long-term and
short-term notes payable and capital lease obligations totalling approximately
$2.5 million, which included $560,000 owed to IMSG pursuant to notes payable on
demand at any time on or after January 31, 1998. See Part I, Item 1, "Special
Considerations -- Control by Management; IMSG Option; Conflicts of Interest."
IMSG has advised the Company and Mr. Klein that it currently does not intend to
exercise the IMSG Option. The Company and IMSG currently are engaged in
discussions regarding a potential transaction in which either of the Company or
IMSG may acquire the other entity or in which the Company and IMSG will merge.
There can be no assurance that IMSG will exercise its option and acquire a
controlling interest in the Company or that any acquisition or merger
transaction between the Company and IMSG will be consummated. In the event that
the Company and IMSG fail to consummate an acquisition or merger transaction and
IMSG fails to exercise its option and demands payment of the amounts owed by the
Company, the Company's existing capital resources, commitments for additional
financing, and cash flow from operations may not be sufficient to satisfy the
amounts owed to IMSG and the Company's other capital requirements. The Company
also will be required to seek additional equity or debt financing to finance
future acquisitions or development of new product lines, to obtain equipment and
inventory necessary to expand its in-house component manufacturing capabilities
or to produce additional lines of racing engines, or to provide funds to take
advantage of other business opportunities. The timing and amount of any such
capital requirements cannot be predicted at this time. The Company has from time
to time encountered difficulties in obtaining adequate financing on acceptable
terms and there can be no assurance that such financing will be available on
acceptable
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terms in the future. If such financing is not available on satisfactory terms,
the Company may be unable to repay outstanding indebtedness to IMSG and other
creditors or to expand its business at the rate desired and its operating
results may be adversely affected. Debt financing increases expenses and must be
repaid regardless of operating results. Equity financing could result in
additional dilution to existing stockholders.
Control by Management; IMSG Option; Conflicts of Interest
Thomas G. Klein, the Company's Chairman of the Board, President, and
Chief Executive Officer, currently owns approximately 52.6% of the Company's
outstanding Common Stock. As a result, Mr. Klein possesses sufficient voting
power to control the business and policies of the Company. In September 1997,
the Company, Mr. Klein, and IMSG entered into the IMSG Option. See Part I, Item
7, "Certain Relationships and Related Transactions." Pursuant to the IMSG
Option, IMSG has loaned the Company approximately $617,500 as of January 31,
1998. These loans are due on demand at any time on or after January 31, 1998 and
are secured by the Company's real property and substantially all of the
Company's fixtures, tooling, and equipment. In addition, pursuant to the IMSG
Option, Mr. Klein granted to IMSG the option to exchange all of his shares of
the Company's Common Stock for shares of IMSG common stock. The IMSG Option is
exercisable at any time on or before March 31, 1998. As a result of IMSG's
ability to obtain control of the Company and to direct the policies of the
Company in the event that IMSG exercises the IMSG Option, an inherent conflict
of interest may arise in connection with decisions regarding the timing of and
the allocation of the assets of the Company for the purposes of making payments
of principal and interest on the amounts owed to IMSG. Actions taken by IMSG
with respect to the exercise of the IMSG Option, corporate transactions
following the exercise of the IMSG Option, and repayment of amounts owed to IMSG
by the Company could have a material adverse effect on the Company and could
result in significant dilution of the interests of the holders of the Company's
Common Stock. IMSG has advised the Company and Mr. Klein that it currently does
not intend to exercise the IMSG Option, and the Company and IMSG currently are
engaged in discussions regarding a potential transaction in which either of the
Company or IMSG may acquire the other entity or in which the Company and IMSG
will merge. There can be no assurance that any acquisition or merger transaction
between the Company and IMSG will be consummated.
Certain Factors That Could Adversely Affect Operating Results
The Company's operating results are affected by a wide variety of
factors that could adversely impact its net sales and operating results. These
factors, many of which are beyond the control of the Company, include the
Company's ability to identify trends and technological developments in the
motorsports industry and to design, develop, and produce new high-performance
engines and components that take advantage of those trends and developments; the
availability and cost of raw materials, parts, and components used to
manufacture or assemble its products; its ability to design and arrange for
timely production and delivery of its products and components used in assembling
finished engines; market acceptance of the Company's products; the level and
timing of orders placed by customers; seasonality; the performance,
dependability, and life cycles of and customer satisfaction with products
designed, produced, and marketed by the Company; the timing of expenditures in
anticipation of orders; the cyclical nature of the markets served by the
Company; and competition and competitive pressures on prices. The Company's
ability to increase its sales and marketing efforts to stimulate customer demand
and its ability to monitor third-party manufacturing arrangements in order to
maintain satisfactory delivery schedules are important factors in its long-term
prospects. A slowdown in demand for the Company's products as a result of new
products introduced by competitors, general economic conditions, or other
broad-based factors could adversely affect the Company's operating results.
No Assurance of Successful Acquisitions or Product Line Expansions
The Company intends to pursue a program of growth through (i)
acquisitions of and alliances with other companies that could complement the
Company's existing business, including acquisitions of complementary product
lines, and (ii) internal development of new product lines, such as the in-house
production of engine components. There can be no assurance that suitable
acquisition or joint venture candidates or new product lines can be identified
11
<PAGE>
or that, if identified, adequate and acceptable financing sources will be
available to the Company that would enable it to consummate such transactions or
expansions. Furthermore, there can be no assurance that the Company will be able
to integrate successfully such acquired or internally developed companies or
product lines into its existing operations, to manage effectively the expanded
operations, or to obtain increased revenue opportunities and cost reductions
that are expected to occur as a result of anticipated synergies, all of which
could increase the Company's operating expenses in the short-term and materially
and adversely affect the Company's results of operations. Moreover, any
acquisition or product development program by the Company may result in
potentially dilutive issuances of equity securities, the incurrence of
additional debt, and amortization of expenses related to goodwill and intangible
assets, all of which could adversely affect the Company's profitability.
Acquisitions and new product lines involve numerous risks, such as the diversion
of the attention of the Company's management from other business concerns, the
entrance of the Company into markets in which it has had limited or no prior
experience, unforeseen liabilities that may arise in connection with the
operation of acquired businesses, and the potential loss of key employees of the
acquired company, all of which could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Potential Regulation of Corporate Sponsorship of Motorsports
Tobacco and alcohol companies provide a significant amount of
advertising and promotional support of racing events, drivers, and car owners.
In August 1996, the U.S. Food and Drug Administration (the "FDA") published
final regulations that will substantially restrict tobacco industry sponsorship
of sporting events, including motorsports, beginning in 1998. In April 1997, a
federal district judge ruled that the FDA did not have the authority to regulate
tobacco marketing. That ruling, if upheld on appeal, would have the effect of
overturning the FDA regulations. In addition to the FDA regulations, however,
certain major manufacturers of tobacco products have reached a proposed
settlement with attorneys general of a number of states that have filed lawsuits
against such tobacco product manufacturers. The terms of those settlements
include potential voluntary restrictions on advertising by the tobacco industry.
The final terms of some or all of those settlements will be subject to approval
by the United States Congress and the President of the United States. The FDA
regulations, if ultimately approved, and any other legislation, regulations, or
other initiatives, including the pending settlement negotiations, that limit or
prohibit advertisements of tobacco and alcohol products at sporting events,
including racing events, could ultimately affect the popularity of motorsports,
which could have a material adverse effect on the Company. The Company believes,
however, that other major consumer products companies would quickly replace
tobacco and alcohol companies as sponsors of motorsports in the event that
advertisement of those products declines.
Weaknesses in Internal Controls
The Company's independent public accountants have reported to the
Company that, in the course of their audit of the Company's financial statements
for the fiscal year ended September 30, 1997, they discovered various conditions
that they believe constitute material weaknesses in the Company's internal
controls but which did not require them to modify their report on such financial
statements. These conditions consist of (i) inadequate policies and procedures
with respect to corporate governance, including absence of an Audit Committee of
the Board of Directors, and (ii) weaknesses in the Company's financial reporting
infrastructure, including lack of personnel with the requisite
accounting-related skills and inadequate accounting-related processes and
systems. The Company has been taking various steps intended to strengthen its
internal controls, including the appointment of an Audit Committee of the Board
of Directors; engaging more experienced personnel in both operational and
financial positions; implementing accounting policies, procedures, and systems;
and working more closely with its independent public accountants to identify
weaknesses and take corrective measures. The Company also has requested its
independent public accountants to perform quarterly reviews of its financial
statements.
Potential Liabilities With Respect to Recent Stock Issuances
Between February and August 1997, the Company completed a private
placement of 403,500 shares of Common Stock for total consideration of $403,500.
Subsequent to the completion of the private placement, the
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<PAGE>
Company determined that the financial statements disclosed to investors in
connection with the private placement required certain revisions to properly
account for the Reserve Acquisition. There can be no assurance that purchasers
of those shares or any governmental agency will not institute proceedings
against the Company for recision or for damages based on alleged omissions or
misrepresentations of material information in connection with the sale of such
shares. The institution of legal action against the Company arising out of the
offering and sale of such shares could result in substantial defense costs to
the Company, the diversion of efforts by the Company's management, and the
imposition of liabilities against the Company for the amount of the purchasers'
investments, plus penalties and interest. The imposition of liabilities against
the Company could have a material adverse effect on the Company's financial
condition and its results of operations.
Competition
The high-performance engine and engine components markets are extremely
competitive. The Company competes with a number of large and small domestic and
international companies, some of which have greater market recognition and
substantially greater financial, technical, marketing, distribution, and other
resources than the Company possesses. The Company currently competes principally
on the basis of the performance, dependability, and prices of its products and
its ability to deliver finished products to its customers on a timely basis. The
Company believes that its reputation for producing high-quality, dependable, and
competitive racing engines and components represents a significant advantage
over its competitors in the high-performance engine and engine components
industry. The Company strives to develop and strengthen this reputation as a
barrier to entry by existing or potential competitors. The ability of the
Company to compete successfully depends on a number of factors both within and
outside its control, including the quality, features, prices, and performance of
its products; the quality of its customer services; its ability to recognize
industry trends and anticipate shifts in consumer demands; its success in
identifying technological advances and designing and marketing new products that
successfully incorporate these improvements; the availability of adequate
sources of manufacturing capacity and the ability of its third-party
manufacturers to meet delivery schedules; its efficiency in filling customer
orders; the continued popularity of motorsports generally; its ability to
develop and maintain effective marketing programs that enable it to sell its
products to motorsports participants; product introductions by the Company's
competitors; the number, nature, and success of its competitors in a given
market; and general market and economic conditions. There can be no assurance
that the Company will continue to be able to compete successfully in the future.
Rapid Market Changes
The markets for the Company's products are subject to rapidly changing
customer requirements, a high level of competition, seasonality, and a constant
need to create and market new products. Demand for high-performance engines and
components is influenced by technological developments; prices, performance, and
availability of competing products; rule changes by sanctioning bodies;
increased or decreased availability of sponsorship monies to racing teams;
marketing and advertising expenditures; and general economic conditions. Because
these factors can change rapidly, customer demand also can shift quickly. New
high-performance engines and components frequently can be successfully marketed
for only a limited time. The Company may not always be able to respond to
changes in customer requirements and demand because of the amount of time and
financial resources that may be required to bring new products to market. The
inability to respond quickly to market changes could have an adverse impact on
the Company's operations. See Part I, Item 1, "Description of Business -
Products and Services."
Fluctuations in Sales
Sales of high-performance engines and components are lowest in the
fourth calendar quarter of each year, corresponding with the end of the racing
season. Seasonal fluctuations in quarterly sales may require the Company to take
temporary measures, including increased or decreased personnel, additional
borrowings, and other operational changes, and could result in unfavorable
quarterly earnings comparisons.
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Dependence on Third Parties for Raw Materials and Manufacturing
The Company depends upon third parties to manufacture the engine blocks
and most of the components used to assemble its racing engines or sold directly
to customers. Although the third-party manufacturers produce many of those
products according to the Company's specifications, the Company has limited
control over the manufacturing processes themselves. In addition, although the
Company believes that all raw materials, component parts, and other suppliers
that it requires are currently available in adequate amounts, there can be no
assurance that shortages will not develop in the future. Certain of the raw
materials and component parts for the Company's products are purchased from a
single supplier or a limited number of suppliers. The Company does not have
long-term written agreements with its suppliers. The inability of the Company or
its suppliers to obtain the raw materials or components used in making the
Company's products and any difficulties encountered by the third-party
manufacturers that result in product defects, production delays, cost overruns,
or the inability to fulfill orders on a timely basis could have a material
adverse effect on the Company. The Company obtains parts and components on a
purchase order basis and does not have long-term contracts with any of its
third-party manufacturers. Most of the manufacturers of these products are
located in the United States, and the Company believes that a number of
alternative sources for each of these products is readily available in the event
that the Company is unable to obtain products from any particular manufacturer.
Although the Company believes it would be able to secure other third-party
manufacturers that could produce products for the Company on relatively short
notice, the Company's operations would be adversely affected if it lost its
relationship with any of its current suppliers or if its current suppliers'
operations were disrupted or terminated even for a relatively short period of
time. The Company does not maintain an inventory of sufficient size to provide
protection for any significant period against an interruption of supply,
particularly if it were required to utilize an alternative source of supply.
Dependence on New Products and Product Improvements
The Company's operating results depend to a significant extent on its
ability to continue to develop and introduce on a timely basis new products and
product improvements that compete effectively on the basis of price and which
address customer requirements. The success of new product introductions or
improvements depends on various factors, including proper new product selection,
research and development of new product improvements or enhancements, successful
sales and marketing efforts, timely production and delivery of new products, and
customer acceptance of new products. There can be no assurance that any new
products or product improvements will receive or maintain substantial market
acceptance. If the Company were unable to design, develop, and introduce
competitive products on a timely basis, its future operating results would be
adversely affected. See Part I, Item 1, "Description of Business - Products and
Services."
Management of Growth
Since 1995, the Company's business operations have undergone
significant changes and growth, including emphasis on and expansion of its
racing engine lines and significant investments in equipment and tooling. The
Company's ability to manage effectively any significant future growth, however,
will require it to further enhance its operational, financial, and management
systems; to expand its facilities and equipment; to receive raw materials and
finished products from third-party manufacturers on a timely basis; and to
successfully hire, train, and motivate additional employees. The failure of the
Company to manage its growth on an effective basis could have a material adverse
effect on the Company's operations. The Company may be required to increase
staffing and other expenses as well as make expenditures on capital equipment
and manufacturing sources in order to meet the anticipated demand of its
customers. Sales of the Company's racing engines and high-performance components
are subject to changing customer demands, and customers for the Company's
products generally do not commit to firm orders for more than a short time in
advance. The Company's profitability would be adversely affected if the Company
increases its expenditures in anticipation of future orders that do not
materialize. Certain customers also may increase orders for the Company's
products on short notice, which would place an excessive short-term burden on
the Company's resources.
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Regulatory Compliance
The Company is subject to various federal and state governmental
regulations related to occupational safety and health, labor, and wage practices
as well as federal, state, and local governmental regulations relating to the
use, storage, discharge, handling, emission, generation, manufacture, and
disposal of toxic, volatile, or other hazardous substances used to produce the
Company's products. The Company has completed certain renovations of its
facilities and believes that it currently is in material compliance with such
regulations. In the ordinary course of its business, the Company uses metals,
oils, and similar materials, which are stored on site. The waste created by use
of these materials is transported off-site on a regular basis by a
state-registered waste hauler. Although the Company is not aware of any material
claim or investigation with respect to these activities, there can be no
assurance that such a claim will not arise in the future or that the cost of
complying with governmental regulations in the future will not have a material
adverse effect on the Company. The Company also will be required to comply with
recently issued, more stringent regulations governing the storage of petroleum
products by December 1998. Failure to comply with current or future
environmental regulations could result in the imposition of substantial fines on
the Company, suspension of production, alteration of its production processes,
cessation of operations, or other actions that could materially and adversely
affect the Company's business, financial condition, and results of operations.
Risk of Product Liability Claims; Warranty Claims
The nature of the Company's business exposes it to risk from product
liability claims. The Company currently does not carry product liability
insurance. Although the Company is evaluating the cost and availability of
product liability insurance, such coverage is becoming increasingly expensive
and difficult to obtain. There can be no assurance that the Company will be able
to maintain adequate product liability insurance at commercially reasonable
rates or that the Company's insurance will be adequate to cover future product
liability claims. Any losses that the Company may suffer as a result of product
liability claims could have a material adverse effect on the Company's business,
financial condition, and results of operations. In addition, product liability
litigation could adversely affect the reputation and marketability of the
Company's products.
The Company maintains a warranty return policy that allows customers to
return certain defective products that are covered under the Company's limited
warranty. There can be no assurance that future warranty claims will not be
materially greater than anticipated and have a material adverse effect on the
Company's business, financial condition, and results of operations. See Part I,
Item 1, "Product Returns and Warranties."
Dependence on Key Personnel
The Company's development and operations to date have been, and its
proposed operations will be, substantially dependent upon the efforts and
abilities of its senior management, including Thomas G. Klein, the Company's
Chairman of the Board, President, and Chief Executive Officer. The Company's
success will depend upon its ability to attract, retain, and motivate qualified
personnel. The loss of services of one or more of its key employees,
particularly Mr. Klein, could have a material adverse affect on the Company. The
Company currently does not maintain key person insurance on the life of Mr.
Klein or any other key employees or officers.
Thin Trading Market; Possible Volatility of Stock Price; Penny Stock Rules
The trading volume of the Company's Common Stock historically has been
limited, and there can be no assurance that an active public market for the
Company's Common Stock will be developed or sustained. The trading price of the
Company's Common Stock in the past has been and in the future could be subject
to wide fluctuations in response to quarterly variations in operating results of
the Company, actual or anticipated announcements of new products by the Company
or its competitors, changes in analysts' estimates of the Company's financial
performance, general conditions in the markets in which the Company competes,
worldwide economic and financial conditions, and other events or factors. The
stock market also has experienced extreme price and volume
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fluctuations that have particularly affected the market prices for many rapidly
expanding companies and often have been unrelated to the operating performance
of such companies. These broad market fluctuations and other factors may
adversely affect the market price of the Company's Common Stock. See Part II,
Item 1, "Market Price of and Dividends on the Registrant's Common Equity and
Other Stockholder Matters."
The Company's Common Stock may from time to time be subject to the
"penny stock" rules as promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). In the event that no exclusion from the definition
of a "penny stock" under the Exchange Act is available, then any broker engaging
in a transaction in the Company's Common Stock will be required to provide any
customer with a risk disclosure document, disclosure of market quotations, if
any, disclosure of the compensation of the broker-dealer and its salesperson in
the transaction, and monthly account statements showing the market values of the
Company's securities held in the customer's accounts. The bid and offer
quotation and compensation information must be provided prior to effecting the
transaction and must be contained on the customer's confirmation. Certain
brokers are less willing to engage in transactions involving "penny stocks" as a
result of the additional disclosure requirements described above, which may make
it more difficult for holders of the Company's Common Stock to dispose of their
shares.
Shares Eligible for Future Sale; Potential Depressive Effect on Stock Price
Of the 7,833,902 shares of Common Stock currently outstanding,
approximately 2,306,000 shares are eligible for resale in the public market
without restriction unless held by an "affiliate" of the Company, as that term
is defined under the Securities Act of 1933, as amended (the "Securities Act").
The approximately remaining 5,528,000 shares of Common Stock currently
outstanding are "restricted securities," as that term is defined in Rule 144,
and may be sold only in compliance with Rule 144, pursuant to registration under
the Securities Act, or pursuant to an exemption therefrom. Affiliates also are
subject to certain of the resale limitations of Rule 144 as promulgated under
the Securities Act. Generally, under Rule 144, each person who beneficially owns
restricted securities with respect to which at least one year has elapsed since
the later of the date the shares were acquired from the Company or an affiliate
of the Company may, every three months, sell in ordinary brokerage transactions
or to market makers an amount of shares equal to the greater of one percent of
the Company's then-outstanding Common Stock or, if the shares are quoted on
Nasdaq or a stock exchange, the average weekly trading volume for the four weeks
prior to the proposed sale of such shares. Sales under Rule 144 also are subject
to certain manner-of-sale provisions and notice requirements and to the
availability of current public information about the Company. A person who is
not an affiliate, who has not been an affiliate within three months prior to
sale, and who beneficially owns restricted securities with respect to which at
least two years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company, is entitled to
sell such shares under Rule 144(k) without regard to any of the volume
limitations or other requirements described above. Sales of substantial amounts
of Common Stock by stockholders of the Company, or even the potential for such
sales, are likely to have a depressive effect on the market price of the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
Lack of Dividends
The Company has never paid any cash dividends on its Common Stock and
does not currently anticipate that it will pay dividends in the foreseeable
future. Instead, the Company intends to apply earnings to the expansion and
development of its business.
Change in Control Provisions
The Company's Articles of Incorporation, Bylaws, and Nevada law contain
provisions that may have the effect of making more difficult or delaying
attempts by others to obtain control of the Company, even when those attempts
may be in the best interests of stockholders. See Part I, Item 8, "Description
of Securities."
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Cautionary Statement Regarding Forward-Looking Statements
Certain statements and information contained in this Report under the
headings "Business," "Special Considerations," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," concerning future,
proposed, and anticipated activities of the Company, certain trends with respect
to the Company's revenue, operating results, capital resources, and liquidity or
with respect to the markets in which the Company competes or the motorsports
industry in general, and other statements contained in this Report regarding
matters that are not historical facts are forward-looking statements, as such
term is defined in the Securities Act. Forward-looking statements, by their very
nature, include risks and uncertainties, many of which are beyond the Company's
control. Accordingly, actual results may differ, perhaps materially, from those
expressed in or implied by such forward-looking statements. Factors that could
cause actual results to differ materially include those discussed elsewhere
under this Part I, Item 1, "Description of Business - Special Considerations."
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Selected Financial Data
The following table summarizes certain selected consolidated financial
data of the Company and is qualified in its entirety by the more detailed
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
The data has been derived from the consolidated financial statements of the
Company audited by Arthur Andersen LLP, independent public accountants.
Nine Months
Ended Year Ended
September 30, September 30,
------------- -------------
1996 1997
---- ----
Consolidated Statements of Operations: (in thousands,
except per share amounts)
Sales ....................................... $ 1,522 $ 2,202
Cost of sales ............................... 1,160 1,728
------- -------
Gross profit ............................ 362 474
------- -------
Operating expenses:
General and administrative ............... 195 707
Research and development ................. -- 199
Depreciation ............................. 47 123
Acquisition and financing related expenses 23 796
------- -------
265 1,825
------- -------
Operating income (loss) ................. 97 (1,352)
------- -------
Other expenses (income):
Interest expense ......................... 15 103
Other (income) ........................... -- (45)
------- -------
15 57
------- -------
Income (loss) before income taxes ........... 82 (1,409)
Provision for income taxes .................. (19) --
------- -------
Net income (loss) ........................... $ 63 $(1,409)
======= =======
Earnings (loss) per common share ............ $ 0.01 $ (0.20)
======= =======
Weighted average common shares outstanding... 5,186 6,953
Sept. 30, Sept. 30,
1996 1997
-------- --------
Consolidated Balance Sheet Data (in thousands)
(at end of period):
Working capital.............................. $ 818 $ 407
Total assets................................. 1,500 3,854
Notes payable and capital lease obligations.. 182 1,700
Shareholders' equity......................... 1,073 1,372
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Basis of Presentation
On May 21, 1996, the Company acquired K-Way by issuing 4,250,000 shares
of Common Stock for all of the issued and outstanding common stock of K-Way. See
Part I, Item 1, "Business -- Development of the Company." Immediately following
the Reverse Acquisition, the former stockholders of K-Way owned an aggregate of
approximately 81% of the outstanding shares of the Company's Common Stock.
Accordingly, for accounting purposes, the Reverse Acquisition has been treated
as a recapitalization of K-Way, with K-Way considered to be the acquiring entity
and Jamaica the acquired entity, even though the Company is the surviving legal
entity. As a result, (i) the historical financial statements of Jamaica for the
periods prior to the date of the Reverse Acquisition are no longer the
historical financial statements of the Company and therefor are not presented;
(ii) the historical financial statements of the Company for periods prior to the
Reverse Acquisition are those of K-Way; and (iii) all references to the
financial statements of the "Company" apply to the historical financial
statements of K-Way prior to and subsequent to the Reverse Acquisition.
Upon consummation of the Reverse Acquisition, the Company changed its
fiscal year end from a calendar year basis to a fiscal year ending September 30.
Accordingly, the Company's Consolidated Financial Statements include a
transition period for the nine months ended September 30, 1996, instead of a
full year. For comparison purposes, the Company's unaudited condensed financial
information for the year ended September 30, 1996, as set forth in "Results of
Operations," below, includes unaudited results for the three months ended
December 31, 1995 and audited results for the nine months ended September 30,
1996.
Overview
The Company designs, develops, manufactures, assembles, sells, and
reconditions a wide variety of high-performance engines and specialty components
for use in high-performance engines that are utilized in automobile, marine, and
airplane racing applications. The Company currently supplies complete racing
engines for use in the American Sprint Car Series, World of Outlaws sprint cars,
Indy Racing League, American Indy Car Series, National Hot Rod Association,
United States Automobile Club, the Bob Bondurant School of High Performance
Driving, and Frank Hawley's Drag Racing Schools, among others.
The Company's revenue consists primarily of sales of engines and engine
parts for high-performance engines. Costs of sales consists of the cost of
engine blocks and the various components (cylinder heads, crankshafts, pistons,
rings, and other components) that make up the finished product, plus direct
labor and other miscellaneous costs. Operating expenses include general
corporate expenses, sales salaries, taxes, fringe benefits, as well as the cost
of support services to the engine building operations.
Results of Operations
The following table sets forth, for the periods indicated, the
condensed operating results of the Company. The condensed financial information
set forth below includes unaudited results for the three months ended December
31, 1995; audited results for the nine months ended September 30, 1996; and
audited results for the year ended September 30, 1997.
19
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended Nine Months Year Ended
December 31, 1995 Ended September 30, 1996 Year Ended
(unaudited) September 30, 1996 (unaudited) September 30, 1997
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Sales ..................... $ 348,518 $ 1,521,561 $ 1,870,079 $ 2,201,582
Cost of sales ............. 265,525 1,159,912 1,425,437 1,727,942
Gross profit .............. 82,993 361,649 444,642 473,640
Operating expenses ........ 164,063 264,953 429,016 1,825,430
Net operating income (loss) (81,070) 96,696 15,626 (1,351,790)
Net income (loss) ......... $ (65,390) $ 62,632 $ (2,758) $(1,409,204)
</TABLE>
The following table sets forth, for the periods indicated, the
percentage of total sales represented by certain financial statement items.
Year Ended
September 30, 1996 Year Ended
(unaudited) September 30, 1997
------------------ ------------------
Sales ................................. 100.0% 100.0%
Cost of sales ......................... 76.2 78.5
Gross profit .......................... 23.8 21.5
Operating expenses .................... 22.9 82.9
Net operating income (loss) ........... 0.8 (61.4)
Net income (loss) ..................... 0.1% (64.0)%
Year Ended September 30, 1997 Compared with Year Ended September 30, 1996
Sales increased 18% to approximately $2.2 million for the year ended
September 30, 1997 from approximately $1.9 million for the year ended September
30, 1996. The approximately $332,000 increase in sales resulted primarily from
(i) sales of Nissan Infiniti IRL engines during 1997, for which there were no
corresponding sales during 1996, and (ii) increased demand for the Company's
high performance engines and components parts.
Gross profit increased to approximately $474,000 in 1997 from
approximately $445,000 in 1996, representing 21.5% and 23.8% of sales,
respectively. The decrease in gross profit as a percentage of sales resulted
primarily from the high level of direct fixed costs associated with the
production of Nissan Infiniti IRL engines compared with fewer than anticipated
sales of such engines. The Company expects that this situation will continue
until such time that sales of Nissan Infiniti IRL engines increase to a
sufficient level to leverage its direct fixed costs. Gross profit as a
percentage of sales of the Company's other high performance engines and
component parts remained relatively constant year over year.
Operating expenses increased to approximately $1.8 million during 1997
from approximately $429,000 during 1996, an increase of $1,396,000. The Company
attributes the increase in operating expenses to (i) a charge of approximately
$796,000 for acquisition and financing related expenses during 1997, compared
with a charge of $22,500 during 1996; (ii) approximately $200,000 of research
and development expenses in 1997 for which there were no corresponding amounts
in 1996; (iii) increased depreciation expense associated with significant
additions of property and equipment during 1997; and (iv) an increase in general
and administrative expenses, including payroll and professional fees associated
with the Company's efforts to expand its business and to become a reporting
entity under the Exchange Act. Approximately $700,000 of the fiscal 1997 charge
for acquisition and financing related expenses described above was related to
non-cash capital stock transactions. See additional information in the Company's
Consolidated Financial Statements and Notes thereto appearing elsewhere herein.
20
<PAGE>
Excluding the effects of the non-recurring charge of $700,000 included
in acquisition and financing related expenses associated with non-cash capital
stock transactions as described above, the Company generated a net loss of
approximately $(709,200), or $(0.10) per share, during fiscal 1997 compared with
a net loss of approximately $(2,800), or $(0.00) per share, during 1996.
Including the $700,000 non-recurring charge, the Company generated a net loss of
approximately $(1,409,000), or $(0.20) per share, during fiscal 1997.
As indicated in the results of operations, the Company incurred a
significant loss from operations during 1997 and recorded near breakeven results
for 1996. The Company currently is taking steps intended to lower its operating
costs. These steps include evaluating the marketability of certain non-earning
assets and actively managing non-revenue related activities such as research and
development costs. The Company anticipates, however, that it will incur
substantial costs related to accounting, legal, and other professional fees
associated with financing related activities, acquisitions, and becoming a
reporting entity under the Exchange Act. In order to improve its operating
results, the Company also intends to strengthen its position as a leading
manufacturer of high-performance, reliable racing engine components by (i)
capitalizing on its established reputation for producing high-quality, durable
engines and components at reasonable prices; (ii) developing and expanding key
business lines; (iii) developing its in-house component manufacturing capacity;
(iv) promoting customer awareness and brand name recognition; (v) emphasizing
research and development efforts; and (vi) developing strategic alliances and
joint development efforts. See Item I, Part 1, "Description of Business --
Strategy."
Seasonality
Because the bulk of the auto racing season is concentrated between the
months of February and November, sales historically have been higher during that
period. The Company believes, however, that with the addition of its program to
sell engines for MPI's "American Race Trucks" series, the Feuling cylinder head
program, and other engine component sales, its seasonal fluctuations of sales
volume will decline beginning in fiscal year 1998.
Liquidity and Capital Resources
The Company has funded its operations to date through the private sale
of equity securities, debt, and cash flow from operations. At September 30,
1997, the Company had cash and cash equivalents of approximately $86,000,
representing a decrease of approximately $296,000 from the total of
approximately $382,000 at September 30, 1996. See Notes 1, 2, and 3 of Notes to
Consolidated Financial Statements.
The Company's net cash used in operating activities was approximately
$857,000 and $256,000 for the fiscal year ended September 30, 1997 and for the
nine months ended September 30, 1996, respectively. Net cash used in operations
during the year ended September 30, 1997 and the nine months ended September 30,
1996 consisted primarily of increases in inventory. The Company carries a large
inventory of parts and work in process. This enables the Company to deliver
quality engines and engine components in a timely manner. The Company believes
that improved inventory turnover will result following the installation of a
recently purchased computerized management information system.
The Company's investing activities used cash of approximately $1.9
million in fiscal 1997 and approximately $25,000 in the nine months ended
September 30, 1996. In fiscal 1997, the Company used cash to purchase buildings
and real estate, to acquire machinery and equipment, and to a lesser extent to
acquire royalty rights to produce and market new products. See Note 5 to the
Consolidated Financial Statements. In the nine months ended September 30, 1996,
the Company used cash to acquire machinery and equipment and as an earnest money
deposit for a pending real estate acquisition that was completed during fiscal
1997.
The Company's financing activities provided cash of approximately $2.5
million in fiscal 1997 and approximately $662,000 in the nine months ended
September 30, 1996. In fiscal 1997, approximately $953,000 was provided from the
issuance of Common Stock and approximately $1.7 million was provided by the
issuance of short-term and long-term debt.
21
<PAGE>
On September 16, 1997, the Company, Thomas G. Klein, and IMSG entered
into the IMSG Option. Under the terms of that agreement, IMSG has loaned the
Company $617,500, at 12% interest, due on demand after January 31, 1998, secured
by the Company's real property and substantially all of the equipment and
fixtures of the Company presently owned or newly acquired. IMSG or its assignees
also have an option to acquire all the shares of the Company owned by Thomas G.
Klein, the Company's Chairman of the Board, President, and Chief Executive
Officer, in exchange for an equivalent number of shares of IMSG. Mr. Klein
currently owns approximately 52.6% of the Company's outstanding Common Stock. As
of September 30, 1997, $125,000 had been advanced to the Company under the IMSG
Option. IMSG advanced the remainder of the funds during the first and second
quarters of fiscal 1998 to enable the Company to meet general working capital
requirements. IMSG has advised the Company and Mr. Klein that it currently does
not intend to exercise the IMSG Option, and the Company and IMSG currently are
engaged in discussions regarding a potential acquisition or merger transaction
between the two companies. There can be no assurance, however, that any such
transaction will be consummated. See Part I, Item 7, "Certain Relationships and
Related Transactions" and Part I, Item 1, "Special Considerations - Control by
Management; IMSG Option; Conflicts of Interest."
The Company's financial statements for the year ended September 30,
1997, have been prepared assuming that the Company will continue as a going
concern. The report by the Company's independent public accountants on the
Company's financial statements for the year ended September 30, 1997 states that
the Company's operating losses during fiscal 1997, the acquisition of a
significant amount of equipment through the issuance of notes payable, and the
Company's projections of insufficient cash flow from operations to meet its debt
service requirements raise substantial doubt about the Company's ability to
continue as a going concern. See Part I, Item 1, "Special Considerations --
Losses; Report of Independent Public Accountants" and "Special Considerations --
Need for Additional Capital." The Company's financial statements for the year
ended September 30, 1997, do not include any adjustments relating to the
recoverability and classifications of asset carrying amounts or the amount and
classification of liabilities that might result in the event that the Company
becomes unable to continue on a going concern. In the event that the Company and
IMSG fail to complete a merger or acquisition transaction and IMSG fails to
exercise the IMSG Option, the Company's existing capital resources, commitments
for additional financing, and cash flow from operations may not be sufficient to
satisfy the amounts owed to IMSG and the Company's other capital requirements.
Should the Company and IMSG fail to complete a merger or acquisition transaction
and IMSG fails to exercise the IMSG Option, the Company intends to refinance the
notes payable to IMSG and other current obligations through the sale and
leaseback of its real property assets and through the issuance of short-term or
long-term debt and/or equity securities. There can be no assurance, however,
that adequate amounts of financing will be available on acceptable terms.
22
<PAGE>
ITEM 3. DESCRIPTION OF PROPERTY
The Company owns a facility in Tempe, Arizona, consisting of an
approximately 16,700 square foot building on a 1.4 acre site. The Company uses
approximately 14,300 square feet for its engine assembly, component
manufacturing, machine shop, and engine testing operations; approximately 1,500
square feet for warehouse space; and approximately 900 square feet for corporate
offices. The Company currently is investigating the feasibility of entering into
a sale and leaseback transaction with respect to this property.
In June 1997, the Company purchased a facility consisting of an
approximately 13,500 square foot building on a 45,145 square foot lot adjacent
to its existing facility for future expansion purposes. This facility currently
is leased to a third party through December 15, 1998. The Company has determined
that it currently does not intend to utilize this facility for expansion and has
listed the property for sale.
23
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of January 31, 1998 by (i)
each director and executive officer of the Company, (ii) all directors and
executive officers of the Company as a group, and (iii) each other person known
by the Company to be the beneficial owner of more than five percent of the
Common Stock.
Shares Beneficially Owned (1)(2)
--------------------------------
Name and Address of Beneficial Owner Number Percent
- ------------------------------------ ------ -------
Directors and Executive Officers
- --------------------------------
Thomas G. Klein .............................. 4,118,200 52.4%
Stephen E. Stapleton ......................... 150 *
William H. Tempero ........................... 20,000 *
Robert P. Griffin ............................ 10,000 *
Terry E. Nish ................................ 15,000 *
James R. Medley .............................. 0 *
All directors and officers as
a group (six persons) ..................... 4,163,350 53.2%
Non-Management 5% Stockholders
- ------------------------------
International Motor Sports Group, Inc.(3) .... 4,118,200 52.4%
State Mutual Insurance Company(4) ............ 400,000 5.1%
- ---------------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Except as indicated, and subject to community property laws when
applicable, the persons named in the table have sole voting and investing
power with respect to all shares of Common Stock shown as beneficially
owned by them. Except as otherwise indicated, each of such persons may be
reached through the Company at 1207 N. Miller Road, Tempe, Arizona 85281.
(2) The numbers and percentages shown include shares of Common Stock issuable
to the identified person pursuant to stock options or warrants that may be
exercised within 60 days after January 31, 1998. In calculating the
percentage of ownership, such shares are deemed to be outstanding for the
purpose of computing the percentage of shares of Common Stock owned by such
person, but are not deemed to be outstanding for the purpose of computing
the percentage of shares of Common Stock owned by any other persons.
(3) Represents an option to acquire all of the shares of Common Stock owned by
Thomas G. Klein. See Part I, Item 1, "Certain Relationships and Related
Transactions." The address of IMSG is 15302 25th Drive SE, Mill Creek,
Washington 98012.
(4) The address of State Mutual Insurance Company is 28 Margo Trail, Rome,
Georgia 30161.
24
<PAGE>
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors and Executive Officers
The following table sets forth certain information regarding the
Company's directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position Held
---- --- -------------
<S> <C> <C>
Thomas G. Klein 55 Chairman of the Board, President, and Chief
Executive Officer
Stephen E. Stapleton 49 Secretary, Treasurer, and Chief Financial Officer
Robert P. Griffin 64 Director
Terry E. Nish 60 Director
William H. Tempero 54 Director
James R. Medley 57 Director
</TABLE>
Thomas G. Klein has served as the Company's Chairman of the Board,
President, and Chief Executive Officer since May 1996. Mr. Klein served as the
Chairman of the Board, President, and Chief Executive Officer of K-Way from
December 1992 until the Reverse Acquisition in May 1996. Mr. Klein has been
involved in the motorsports industry as a race car driver, owner, and builder
since 1960, and as a builder of high-performance engines since 1965.
Stephen E. Stapleton has served as the Company's Secretary, Treasurer,
and Chief Financial Officer since January 1998. Mr. Stapleton served as the
Company's finance director from October 1997 to January 1998. Mr. Stapleton was
engaged in international financial consulting services from November 1993 to
October 1997. During this period, Mr. Stapleton performed a variety of financial
accounting functions for several publicly and privately held companies,
including AMT International, US West Long Distance, STN Ltd., and Energis
Communications. From February 1992 to September 1993, Mr. Stapleton served as
Vice President -Finance, Chief Financial Officer, Secretary, and Treasurer of
Yellowstone Environmental Services, a publicly held environmental engineering
company. From December 1986 to January 1992, Mr. Stapleton was employed at Chase
Bank of Arizona, most recently as Senior Vice President and Chief Financial
Officer. Mr. Stapleton is a Certified Public Accountant in the state of Ohio.
Robert P. Griffin has served as the director of the Company since May
1996. Mr. Griffin recently retired after serving as President and General
Manager of wholesale and retail propane gas and refined fuels companies in
western New Mexico and eastern Arizona for 30 years. Mr. Griffin currently
serves as a consultant to propane companies in New Mexico and Arizona.
Terry E. Nish has served as a director of the Company since May 1996.
Mr. Nish currently serves as President of Servi-Tech, Inc., a manufacturer and
supplier of machinery and parts to the beverage industry that Mr. Nish founded
in 1969. Mr. Nish also is an owner and driver of the VESCO/NISH Streamliner
which, powered by a 480 cubic inch small block Chevy engine built by the
Company, currently holds the world record for its category of 344.561 miles per
hour.
William H. Tempero has served as a director of the Company since May
1996. Mr. Tempero owns and operates Bill Tempero's High Performance Center in
Fort Collins, Colorado. Mr. Tempero also is a founder and President of the
American Indy Car Series and a four-time champion of the American Indy Car
Series. Mr. Tempero also was one of the original founders of the Championship
Auto Racing Teams.
James R. Medley has served as a director of the Company since December
1997. Since March 1976, Mr. Medley has served as President of Laux Medley
Norris, Inc., which serves as investment advisors and business
25
<PAGE>
counselors and which currently has approximately $120 million in assets under
management. Mr. Medley also currently serves as Treasurer and Chief Financial
Officer of Leading-Edge Earth Products, Inc., a publicly traded development
stage company engaged in developing and manufacturing building construction
components.
ITEM 6. EXECUTIVE COMPENSATION
Summary of Cash and Other Compensation
The following table sets forth all compensation for the fiscal years
ended September 30, 1994, 1995, and 1996 earned by the Company's Chief Executive
Officer for services rendered to the Company. No other executive officer of the
Company earned more than $100,000 during such fiscal years.
SUMMARY COMPENSATION TABLE
Annual Compensation
------------------------------- All Other
Name and Principal Position Year Salary($)(1) Bonus($) Compensation(2)
- --------------------------- ---- ------------ -------- ---------------
Thomas G. Klein, 1996 $78,161 -- $ 840
Chairman of the Board, 1995 65,320 -- --
President, and Chief 1994 53,298 -- --
Executive Officer
- --------------
(1) Mr. Klein received certain perquisites, the value of which did not exceed
10% of his salary and bonus.
(2) Amounts shown for fiscal 1997 represent matching contributions made by the
Company to the Company's 401(k) Plan.
The Company offers medical insurance benefits to its employees,
including executive officers and directors who also are employees of the
Company. The Company currently does not have a stock option plan, long-term
incentive plan, or defined benefit or actuarial plan.
401(k) Profit Sharing Plan
In January 1997, the Company adopted a defined contribution plan (the
"401(k) Plan") that qualifies as a cash or deferred profit sharing plan under
Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended (the
"Internal Revenue Code"). Under the 401(k) Plan, participating employees may
defer from 1% to 15% of their pre-tax compensation, subject to the maximum
annual dollar amount permitted under the Internal Revenue Code. The Company will
contribute $0.10 for each dollar contributed by the employee. In addition, the
401(k) Plan provides that the Company may make an employer profit sharing
contribution in such amounts as may be determined by the Board of Directors.
Directors' Compensation
The Company historically has not compensated its directors for their
services to the Company. Directors may be reimbursed for certain expenses in
connection with attendance at board and committee meetings.
Board Committees
The Compensation Committee currently consists of Messrs. Klein and
Medley. The Compensation Committee establishes salaries, incentive and other
forms of compensation for officers and other employees, administers incentive
compensation and benefit plans, and recommends policies relating to such plans.
The Audit Committee consists of Messrs. Nish, Tempero, Griffin and Medley. The
Audit Committee meets periodically with management
26
<PAGE>
and the Company's independent auditors and reviews the results and scope of the
audit and other services provided by the Company's independent auditors, and the
adequacy of internal controls.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Thomas G. Klein, the Company's Chairman of the Board, President, and
Chief Executive Officer, has personally guaranteed repayment of certain of the
Company's obligations. As of September 30, 1997, Mr. Klein had personally
guaranteed loans and capital lease obligations of the Company totalling
approximately $1.3 million.
During fiscal 1997, Thomas G. Klein loaned the Company $50,000 on an
interest-free basis. The Company repaid the loan to Mr. Klein in October 1997.
In September 1997, the Company, Thomas G. Klein, and IMSG entered into
the IMSG Option. IMSG engages in a variety of motorsports-related businesses,
including owning IRL and NHRA race car teams and owning the rights to
high-performance lubricants marketed under the "Royal Purple" brand name.
Pursuant to the IMSG Option, IMSG has loaned the Company approximately $617,500
as of January 31, 1998. These loans are due on demand at any time on or after
January 31, 1998 and are secured by the Company's real property and
substantially all of the Company's fixtures, tooling, and equipment. In
addition, pursuant to the IMSG Option, Mr. Klein granted to IMSG the option to
exchange all of his shares of the Company's Common Stock (approximately 52.6% of
the outstanding Common Stock) for shares of IMSG common stock. The IMSG Option
is exercisable at any time on or before March 31, 1998. In the event that IMSG
exercises the IMSG Option, IMSG and Mr. Klein have agreed to enter into an
employment contract pursuant to which Mr. Klein will remain as President of the
Company at a salary of $125,000 per year. Also in connection with the IMSG
Option, the Company and Mr. Klein have entered into a registration rights
agreement. See Part I, Item 8 "Description of Securities - Registration Rights."
IMSG has advised the Company and Mr. Klein that it currently does not intend to
exercise the IMSG Option and the Company and IMSG currently are engaged in
discussions regarding a potential transaction in which either of the Company or
IMSG may acquire the other entity or in which the Company and IMSG will merge.
See Part I, Item 1, "Special Considerations - Need for Additional Capital" and
Part I, Item 1, "Special Considerations -Control by Management; IMSG Option;
Conflicts of Interest."
ITEM 8. DESCRIPTION OF SECURITIES
General
The Company's authorized capital stock currently consists of
100,000,000 shares of Common Stock, par value $0.01 per share (the "Common
Stock") and 10,000,000 shares of serial preferred stock, par value $.001 per
share (the "Serial Preferred Stock"). As of January 31, 1998, there were
7,833,902 shares of Common Stock and no shares of Serial Preferred Stock issued
and outstanding.
Common Stock
The holders of Common Stock are entitled to one vote for each share on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. Accordingly, the holders of a majority of the stock entitled to
vote in any election of directors may elect all of the directors standing for
election. The holders of Common Stock will be entitled to receive such
dividends, if any, as may be declared by the Board from time to time out of
legally available funds. Upon the liquidation, dissolution, or winding up of the
Company, the holders of Common Stock will be entitled to share ratably in all
assets of the Company that are legally available for distribution, after payment
of all debts and other liabilities. The holders of Common Stock have no
preemptive, subscription, redemption, or conversion rights.
27
<PAGE>
Serial Preferred Stock
The Board of Directors is authorized, subject to any limitations
prescribed by the laws of the state of Nevada, but without further action by the
Company's stockholders, to provide for the issuance of Serial Preferred Stock in
one or more series, to establish from time to time the number of shares to be
included in such series, to fix the designations, powers, preferences and rights
of the shares of each such series (including dividend, redemption, sinking fund,
conversion, voting and liquidation rights) and any qualifications, limitations,
or restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the Company's stockholders. The Board of
Directors may authorize and issue Serial Preferred Stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of Common Stock. In addition, the issuance of Serial Preferred
Stock may have the effect of delaying, deterring, or preventing a change in
control of the Company. The Company has no current plan to issue any shares of
Serial Preferred Stock.
Registration Rights
In connection with the IMSG Option, the Company and Thomas G. Klein
have entered into a registration rights agreement pursuant to which Mr. Klein
has certain "demand" and "piggy-back" registration rights. In particular, in the
event that the Company registers securities for an initial public offering, Mr.
Klein will have the right to cause the Company to include in such initial public
offering a portion of his shares of the Company's Common Stock representing up
to $1.0 million in value based on the initial public offering price. Mr. Klein's
rights to have his shares of Common Stock included in the Company's initial
public offering will be subject to cutbacks by the underwriters of that
offering.
Certain Provisions of Nevada General Corporation Law
The provisions of the Company's Amended and Restated Articles of
Incorporation (the "Restated Articles") and Amended and Restated Bylaws (the
"Restated Bylaws") and the Nevada General Corporation Law (the "Nevada GCL")
summarized below may have the effect of discouraging, delaying, or preventing
hostile takeovers, including those that might result in a premium over the
market price, and discouraging, delaying, or preventing changes in control or
management of the Company.
Combinations with Interested Stockholders under the Nevada GCL. The
Company is subject to the provisions of Sections 78.411 through 78.445 of the
Nevada GCL. In general, these statutes prohibit a publicly held Nevada
corporation from engaging, under certain circumstances, in a "combination" with
an "interested stockholder" for a period of three years after the interested
stockholder's date of acquiring shares, unless the combination or the purchase
of shares made by the interested stockholder on the interested stockholder's
date of acquiring shares is approved by the Board of Directors of the
corporation before that date. In addition, these statutes generally prohibit a
publicly held corporation from engaging in a combination with an interested
stockholder after the expiration of three years after the interested
stockholder's date of acquiring shares, other than a combination meeting one of
the following requirements: (i) a combination approved by the Board of Directors
of the corporation before the interested stockholder's date of acquiring shares,
or as to which the purchase of shares made by the interested stockholder on that
date has been approved by the Board of Directors of the corporation before that
date; (ii) a combination approved by the affirmative vote of the holders of
stock representing a majority of the outstanding voting power not beneficially
owned by the interested stockholder proposing the combination, or any affiliate
or associate of the interested stockholder proposing the combination; (iii) a
combination in which the aggregate amount of the cash and the market value, as
of the date of consummation, of consideration other than cash to be received per
share by the holders of outstanding common stock of the corporation not
beneficially owned by the interested stockholder immediately before that date is
at least equal to the higher of (a) subject to certain adjustments, the highest
price per share paid by the interested stockholder, at a time when such
stockholder was the beneficial owner, directly or indirectly, of five percent or
more of the outstanding voting stock of the corporation, for any common
28
<PAGE>
stock of the same class or series acquired by such stockholder within three
years immediately before the date of announcement with respect to the
combination or within three years immediately before, or in, the transaction in
which such stockholder became an interested stockholder, whichever is higher,
and (b) subject to certain adjustments, the market value per common share on the
date of announcement with respect to the combination or on the interested
stockholder's date of acquiring shares, whichever is higher; or (iv) a
combination in which the aggregate amount of the cash and the market value, as
of the date of consummation, of consideration other than cash to be received per
share by the holders of outstanding shares of any class or series of stock,
other than common stock, not beneficially owned by the interested stockholder
immediately before that date is at least equal to the highest of the following,
whether or not the interested stockholder has previously acquired any shares of
the class or series of stock: (x) subject to certain adjustments, the highest
price per share paid by the interested stockholder, at a time when such
stockholder was the beneficial owner, directly or indirectly, of five percent or
more of the outstanding voting stock of the corporation, for any shares of that
class or series of stock acquired by such stockholder within three years
immediately before the date of announcement with respect to the combination or
within three years immediately before, or in, the transaction in which such
stockholder became an interested stockholder, whichever is higher; (y) subject
to certain adjustments, the highest preferential amount per share to which the
holders of shares of the class or series of stock are entitled in the event of
any voluntary liquidation, dissolution or winding up of the corporation, plus
the aggregate amount of any dividends declared or due to which the holders are
entitled before payment of the dividends on some other class or series of stock;
and (z) the market value per share of the class or series of stock on the date
of announcement with respect to the combination or on the interested
stockholder's date of acquiring shares, whichever is higher. An "interested
stockholder" is generally defined in the statutes as a person who is (i) the
beneficial owner, directly or indirectly, of 10 percent or more of the voting
power of the outstanding voting shares of the corporation; or (ii) an affiliate
or associate of the corporation and at any time within three years immediately
before the date in question was the beneficial owner, directly or indirectly, of
10 percent or more of the voting power of the then outstanding shares of the
corporation. The statutes define a "combination" to include mergers,
consolidations, stock sales and asset based transactions, and other transactions
resulting in a financial benefit to the interested stockholder.
Acquisition of a Controlling Interest under Nevada GCL. The Company is
also subject to the provisions of Sections 78.378 through 78.3793 of the Nevada
GCL. These sections generally provide that any "control shares" acquired by a
person in the direct or indirect acquisition of a "controlling interest" in a
Nevada corporation, greater than a level of "controlling interest" previously
authorized by the corporation's stockholders, (i) shall be divested of all
voting rights, except to the extent that the retention of voting rights is
authorized by the stockholders of the corporation other than the acquiring
person and associated persons, and (ii) may be redeemed, in whole but not in
part, by the corporation at the average price paid for the control shares. These
sections define "control shares" as those voting shares which an acquiring
person and associated persons acquire in the acquisition of a "controlling
interest," greater than a level of controlling interest previously authorized by
the corporation's stockholders, or within 90 days immediately preceding the date
the acquiring person acquired such greater controlling interest. A "controlling
interest" is defined in the statutes as the ownership of voting shares
sufficient, but for the provisions of Sections 78.378 through 78.3793, to enable
a person, directly or indirectly and individually or in association with others,
to exercise (i) one-fifth or more but less than one-third, (ii) one-third or
more but less than a majority, or (iii) a majority or more, of all of the voting
power of the corporation in the election of directors.
Certain Charter Provisions. The Company's Restated Articles and
Restated Bylaws contain a number of other provisions relating to corporate
governance and to the rights of stockholders. These provisions include the
authority of the Board to fill vacancies on the Board, and the authority of the
Board of Directors to issue Serial Preferred Stock in series with such voting
rights and other powers as the Board of Directors may determine. Among other
things, these provisions could have the result of delaying or preventing an
acquiror from being able to elect a majority of the Board of Directors, or
otherwise obtain control of the Company.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Colonial Stock
Transfer in Salt Lake City, Utah.
29
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq OTC Bulletin Board
under the symbol RACG. The following table sets forth the high and low closing
bid information for the Company's Common Stock during the calendar periods
indicated.
High Low
---- ---
1996:
Third Quarter ................... $ 2.75 $ 2.46
Fourth Quarter .................. 3.63 1.75
1997:
First Quarter ................... $ 2.63 $ 1.50
Second Quarter .................. 2.50 1.50
Third Quarter ................... 1.94 0.50
Fourth Quarter .................. 1.63 0.50
Such quotations reflect inter-dealer bids, without retail mark-up,
mark-down or commissions, and may not reflect actual transactions.
On December 31, 1997 the bid and asked prices of the Company's Common
Stock were $0.375 and $0.50 per share, respectively. As of December 31, 1997
there were approximately 425 holders of record of the Company's Common Stock.
The Company has not declared or paid any cash dividends on its Common
Stock and does not intend to declare or pay any cash dividends in the
foreseeable future. The payment of dividends, if any, is within the discretion
of the Board of Directors and will depend on the Company's earnings, if any, its
capital requirements and financial condition, and such other factors as the
Board of Directors may consider.
30
<PAGE>
ITEM 2. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company is a party or to
which any of its properties are subject, other than routine litigation incident
to the Company's business which is covered by insurance or an indemnity or which
is not expected to have a material adverse effect on the Company.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Effective September 5, 1997, the Company dismissed Anderson Anderson &
Strong, L.C. ("AAS") and engaged Arthur Andersen L.L.P. ("Arthur Andersen") as
its independent public accountants. The change in independent public accountants
was approved by the Board of Directors of the Company. AAS's report on the
financial statements of the Company for the year ended September 30, 1996, did
not contain an adverse opinion or a disclaimer of opinion and was not qualified
or modified as to uncertainty, audit scope, or accounting principles. During the
term of AAS' engagement, there were no disagreements on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which, if not resolved to the satisfaction of AAS, would have caused
it to make reference to the subject matter of the disagreement in connection
with its report. Prior to retaining Arthur Andersen, the Company had not
consulted with Arthur Andersen regarding the application of accounting
principles or the type of opinion that might be rendered on the Company's
financial statements. The Company has authorized AAS to respond fully to
inquiries from Arthur Andersen.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
From April through June 1996, the Company issued an aggregate of
1,782,667 shares of Common Stock to Oxford & Bond Company, Helby Trading
Company, and Elizabeth Clutter for a total subscription price of $990,000, or
$.56 per share. The shares were issued pursuant to the exemption provided by
Rule 504 of Regulation D under the Securities Act.
In May 1996, the Company issued an aggregate of 4,250,000 shares to
Thomas G. Klein and the other three stockholders of K-Way, Inc. in exchange for
all of such persons' shares of K-Way.
In June 1996, the Company issued an aggregate of 233,000 shares of
Common Stock to the 15 stockholders of Klein Competition Components, Inc.
("KCC") in exchange for all of such persons' shares of KCC.
In October 1996, the Company issued 26,400 shares of Common Stock to
Accurate Air Conditioning, Inc. as partial payment for the land and building
where the Company conducts its business operations.
From October 1996 through September 1997, the Company issued an
aggregate of 38,536 shares of Common Stock valued at $1.00 per share to six
individuals for various services rendered by them to the Company. In May 1997,
the Company issued 4,000 shares of Common Stock valued at $1.00 per share to one
individual as a portion of the purchase price for equipment acquired by the
Company.
From February through August 1997, the Company issued an aggregate of
403,000 shares of Common Stock to 56 persons for a total purchase price of
$403,000, or $1.00 per share. The Company issued these shares pursuant to the
exemption provided by Rule 506 of Regulation D under the Securities Act. See
Part I, Item 1, "Special Considerations - Potential Liabilities with Respect to
Recent Stock Issuances."
In April 1996, the Company issued 400,000 shares of Common Stock to
State Mutual Insurance Company of Georgia for a total offering price of
$200,000, or $.50 per share.
In May 1997, the Company issued an aggregate of 500,000 shares to five
individuals in connection with a failed offering of the Company's securities.
31
<PAGE>
In December 1997, the Company issued an aggregate of 3,900 shares of
Common Stock valued at $.375 per share to 26 employees.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Articles require the Company to indemnify and
advance expenses to any person who incurs liability or expense by reason of such
person acting as a director of the Corporation, to the fullest extent allowed by
the Nevada GCL. This indemnification is mandatory with respect to directors in
all circumstances in which indemnification is permitted by the Nevada GCL,
subject to the requirements of the Nevada GCL. In addition, the Company may, in
its sole discretion, indemnify and advance expenses, to the fullest extent
allowed by the Nevada GCL, to any person who incurs liability or expense by
reason of such person acting as an officer, employee or agent of the Company,
except where indemnification is mandatory pursuant to the Nevada GCL, in which
case the Company is required to indemnify such person to the fullest extent
required by the Nevada GCL.
Section 78.751 of the Nevada GCL provides that a corporation may
indemnify its directors and officers against expenses, including attorneys'
fees, judgments, fines and amounts paid in settlement actually and reasonably
incurred by the director or officer in connection with an action, suit or
proceeding in which the director or officer has been made or is threatened to be
made a party, if the director or officer acted in good faith and in a manner
which the director or officer reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal proceeding,
had no reason to believe the director's or officer's conduct was unlawful. Any
such indemnification may be made by the corporation only as ordered by a court
or as authorized by the Company's stockholders or Board of Directors in a
specific case upon a determination made in accordance with the Nevada GCL that
such indemnification is proper in the circumstances. Indemnification may not be
made under the Nevada GCL for any claim, issue or matter as to which the
director or officer has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable to the corporation or
for amounts paid in settlement to the corporation, unless and only to the extent
that the court in which the action or suit was brought or other court of
competent jurisdiction determines that in view of all the circumstances of the
case, the director or officer is fairly and reasonably entitled to indemnity for
such expenses as the court deems proper. To the extent that a director or
officer of a corporation has been successful on the merits or otherwise in
defense of any action, suit or proceeding or in defense of any claim, issue or
matter therein, the director or officer must be indemnified under the Nevada GCL
by the corporation against expenses, including attorneys' fees, actually and
reasonably incurred by the director or officer in connection with the defense.
The Company's Restated Articles provide that no director or officer of
the Company shall be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty by such person as a director
or officer, except that a director or officer shall be liable, to the extent
provided by applicable law, (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, or (ii) for the payment of
dividends in violation of restrictions imposed by Section 78.300 of the Nevada
GCL. The effect of this provision in the Restated Articles is to eliminate the
rights of the Company and its stockholders, either directly or through
stockholders' derivative suits brought on behalf of the Company, to recover
monetary damages from a director or officer for breach of the fiduciary duty of
care as a director or officer except in those instances provided under the
Nevada GCL.
PART F/S
The Financial Statements required by this Part F/S are set forth in
pages F-1 through F-17 of this Registration Statement. No supplementary
financial information is required.
32
<PAGE>
PART III
ITEM 1. INDEX TO EXHIBITS
3.1 First Amended and Restated Articles of Incorporation
3.2 First Amended and Restated Bylaws
4.1 Form of Certificate evidencing shares of Common Stock
4.2 Common Stock Purchase Warrant
10.1 Loan and Option Agreement dated as of September 16, 1997, among
International Motor Sports Group, Inc., Andrew L. Evans, Klein Engines
& Competition Components, Inc., and Thomas G. Klein*
10.2 Form of Promissory Note to International Motor Sports Group, Inc.
10.3 Registration Rights Agreement dated as of ____________, 1998, between
Klein Engines & Competition Components, Inc. and Thomas G. Klein*
10.4 Deed of Trust dated November 29, 1996 between Klein Engineered
Competition Components, Inc. and Bank of Arizona
10.5 Note dated November 29, 1996, from Klein Engineered Competition
Components, Inc., as borrower, to Bank of Arizona, as lender
10.6 Commercial Security Agreement dated November 29, 1996 between Klein
Engineered Competition Components, Inc. and Bank of Arizona
10.7 Guaranty of Thomas G. Klein dated November 29, 1996
10.8 Deed of Trust dated June 30, 1997 between Klein Engines & Competition
Components, Inc. and Century Bank
10.9 Promissory Note dated June 30, 1997, from Klein Engines & Competition
Components, Inc., as borrower, to Century Bank, as lender
10.10 Business Loan Agreement dated June 30, 1997, between Klein Engines &
Competition Components, Inc. and Century Bank
10.11 Commercial Guaranty of Thomas G. Klein dated June 30, 1997
10.12 License Agreement dated July 29, 1997, between Feuling Advanced
Technologies, Inc. and Klein Engines & Competition Components, Inc.
16 Letter Re: change in certifying accountant
21 Subsidiaries of the Company
27 Financial Data Schedule
- ----------------------
* To be filed by amendment.
ITEM 2. DESCRIPTION OF EXHIBITS
The information required by this Item is contained in Part III, Item 1,
"Index to Exhibits".
33
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
KLEIN ENGINES & COMPETITION
COMPONENTS, INC.
Date: January 31, 1998 By: /s/Thomas G. Klein
-------------------------------------------
Thomas G. Klein
President and Chief Executive Officer
34
<PAGE>
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
Index to Consolidated Financial Statements
Page
----
Report of Independent Public Accountants............................... F-2
Consolidated Balance Sheet as of September 30, 1997.................... F-3
Consolidated Statements of Operations for the Year
Ended September 30, 1997 and for the Nine Months
Ended September 30, 1996.......................................... F-4
Consolidated Statements of Stockholders' Equity for the Year
Ended September 30, 1997 and for the Nine Months
Ended September 30, 1996.......................................... F-5
Consolidated Statements of Cash Flows for the Year
Ended September 30, 1997 and for the Nine Months
Ended September 30, 1996.......................................... F-6
Notes to Consolidated Financial Statements............................. F-7
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Klein Engines & Competition Components, Inc.:
We have audited the accompanying consolidated balance sheet of Klein Engines &
Competition Components, Inc. (a Nevada corporation) and subsidiaries at
September 30, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended September 30, 1997, and
for the nine months ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and 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 consolidated financial position of Klein Engines &
Competition Components, Inc. and subsidiaries at September 30, 1997, and the
results of their operations and their cash flows for the year ended September
30, 1997, and for the nine months ended September 30, 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred a significant operating loss in
fiscal 1997, has a credit facility outstanding that is due on demand after
January 31, 1998, and projects insufficient cash flow from operations to meet
its debt service requirements, all of which raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters also are described in Note 1. The financial statements do not
include any adjustments relating to the recoverability and classification of
asset carrying amounts or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
/s/ Arthur Andersen LLP
Phoenix, Arizona,
February 2, 1998.
F-2
<PAGE>
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
CURRENT ASSETS:
Cash $ 86,183
Accounts receivable, net of allowance
for doubtful accounts of $10,520 115,052
Inventory 938,493
Prepaid expenses 48,397
-----------
Total current assets 1,188,125
PROPERTY AND EQUIPMENT, net 2,375,845
OTHER ASSET 290,000
-----------
$ 3,853,970
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of notes payable and capital lease obligations $ 274,515
Related party notes payable 54,972
Credit facility 125,000
Accounts payable 200,397
Income taxes payable 77,759
Other accrued liabilities 48,930
-----------
Total current liabilities 781,573
-----------
NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS,
NET OF CURRENT PORTION 1,699,701
-----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $0.001 par value, 50,000,000 shares authorized,
7,835,693 shares issued and outstanding 7,836
Capital in excess of par value 2,541,211
Warrants 10,000
Accumulated deficit (1,186,351)
-----------
Total stockholders' equity 1,372,696
-----------
$ 3,853,970
===========
The accompanying notes are an integral part of this consolidated balance sheet.
F-3
<PAGE>
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months
Year Ended Ended
September 30, September 30,
1997 1996
----------- -----------
SALES $ 2,201,582 $ 1,521,561
COST OF SALES 1,727,942 1,159,912
----------- -----------
Gross profit 473,640 361,649
----------- -----------
OPERATING EXPENSES:
General and administrative 706,907 195,048
Research and development 199,257 --
Depreciation 122,900 47,405
Acquisition and financing related expenses 796,366 22,500
----------- -----------
1,825,430 264,953
----------- -----------
Operating income (loss) (1,351,790) 96,696
----------- -----------
OTHER EXPENSES (INCOME):
Interest expense 102,500 14,582
Other (income) (45,086) --
----------- -----------
57,414 14,582
----------- -----------
Income (loss) before provision for income taxes (1,409,204) 82,114
Provision for income taxes -- 19,482
----------- -----------
Net income (loss) $(1,409,204) $ 62,632
=========== ===========
Earnings (loss) per common share $ (.20) $ .01
=========== ===========
Weighted average common shares outstanding 6,952,643 5,186,332
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1997
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
Capital in
Common Stock Excess of
Shares Amount Par Value Warrants
----------- -------- ------------ -----------
<S> <C> <C> <C> <C>
Balance, January 1, 1996 4,250,000 $ 4,250 $ 210,857 $ -
Issuance of common stock for all of the outstanding
stock of Jamaica Holding Company, Inc. 1,000,257 1,000 (1,000) -
Expenses of merger - (122,596) -
Issuance of common stock for subscription receivable 980,000 980 979,020 -
Expenses of common stock issuance - - (90,950) -
Payments on stock subscriptions receivable - - - -
Issuance of common stock for all of the outstanding
stock of Klein Competition Components Inc. 233,000 233 232,767 -
Net income - - - -
----------- --------- ------------ -----------
Balance, September 30, 1996 6,463,257 6,463 1,208,098 -
Issuance of common stock to purchase real estate 26,400 26 26,374 -
Issuance of common stock to purchase equipment 4,000 4 3,996 -
Issuance of common stock for services 38,536 39 38,497 -
Issuance of common stock in private placement
offerings 803,500 804 764,746 -
Payments on stock subscriptions receivable - - - -
Forgiveness of stock subscription receivable in
exchange for the extinguishment of a note payable - - - -
Issuance of common stock related to a failed private
placement 500,000 500 499,500 -
Issuance of warrants - - - 10,000
Net loss - - - -
----------- --------- ------------ -----------
Balance, September 30, 1997 7,835,693 $ 7,836 $ 2,541,211 $ 10,000
=========== ========= ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Stock
Subscriptions Accumulated
Receivable Deficit Total
-------------- --------------- ----------
<S> <C> <C> <C>
Balance, January 1, 1996
Issuance of common stock for all of the outstanding $ - $ 160,221 $ 375,328
stock of Jamaica Holding Company, Inc.
Expenses of merger - - -
Issuance of common stock for subscription receivable - - (122,596)
Expenses of common stock issuance (980,000) - -
Payments on stock subscriptions receivable 90,950 - -
Issuance of common stock for all of the outstanding 525,000 - 525,000
stock of Klein Competition Components Inc.
Net income - - 233,000
- 62,632 62,632
------------ ------------- -------------
Balance, September 30, 1996 (364,050) 222,853 1,073,364
Issuance of common stock to purchase real estate - - 26,400
Issuance of common stock to purchase equipment - - 4,000
Issuance of common stock for services - - 38,536
Issuance of common stock in private placement
offerings - - 765,550
Payments on stock subscriptions receivable 339,050 - 339,050
Forgiveness of stock subscription receivable in
exchange for the extinguishment of a note payable 25,000 - 25,000
Issuance of common stock related to a failed private
placement - - 500,000
Issuance of warrants - - 10,000
Net loss - (1,409,204) (1,409,204)
------------ ------------- -------------
Balance, September 30, 1997 $ - $ (1,186,351) $ 1,372,696
============ ============= =============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-5
<PAGE>
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
September 30, September 30,
1997 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,409,204) $ 62,632
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 122,900 47,405
Common stock issued for acquisition and financing
related expenses 700,000 -
Common stock issued for services 38,536 -
Changes in assets and liabilities-
Accounts receivable 74,661 (93,179)
Inventory (448,682) (301,365)
Prepaid expenses (23,337) (24,230)
Accounts payable 85,345 33,061
Other accrued liabilities 28,489 -
Income taxes payable - 19,482
----------------- ---------------
Net cash used in operations (831,292) (256,194)
----------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,615,552) (15,295)
Earnest money deposit - (10,000)
----------------- ---------------
Net cash used in investing activities (1,615,552) (25,295)
----------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,125,015 -
Proceeds from related party notes payable - 29,722
Proceeds from credit facility 125,000 -
Proceeds from issuance of warrants 10,000 -
Payments on notes payable and capital lease obligations (55,031) (27,794)
Payments on related party notes payable (9,000) -
Proceeds from issuance of common stock 603,500 233,000
Proceeds from stock subscriptions receivable 339,050 525,000
Payments for offering related expenses (37,950) -
Payments for merger related expenses - (97,596)
----------------- ----------------
Net cash provided by financing activities 2,150,584 662,332
----------------- ---------------
NET INCREASE (DECREASE) IN CASH (296,260) 380,843
CASH AT BEGINNING OF PERIOD 382,443 1,600
----------------- ---------------
CASH AT END OF PERIOD $ 86,183 $ 382,443
================= ===============
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements.
F-6
<PAGE>
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(1) ORGANIZATION AND BASIS OF PRESENTATION:
The Business
Klein Engines & Competition Components, Inc. (the Company) and subsidiaries
design, develop, manufacture and recondition a wide variety of high-performance
engines and specialty components for use in high-performance engines that are
utilized in automobile, marine and airplane racing applications. The Company
currently supplies complete racing engines for use in the American Sprint Car
Series, World of Outlaws sprint cars, Indy Racing League (IRL), American IndyCar
Series, National Hot Rod Association, United States Automobile Club, the Bob
Bondurant School of High Performance Driving, and Frank Hawley's Drag Racing
School, among others.
The accompanying consolidated financial statements include the accounts of Klein
Engines & Competition Components, Inc. and its wholly-owned subsidiaries K-Way,
Inc. and Klein Competition Components, Inc. All significant intercompany
accounts and transactions have been eliminated.
Formation of the Company
The Company was originally incorporated in the state of Utah on September 7,
1983 for the purpose of acquiring and operating businesses. On May 21, 1996, the
Company acquired K-Way, Inc. (K-Way), a privately-held Nevada corporation, by
issuing 4,250,000 shares of common stock for all of the issued and outstanding
stock of K-Way. Immediately following the business combination, the stockholders
of K-Way held approximately 81% of the outstanding shares of common stock of the
Company. For accounting purposes, the acquisition has been treated as a
recapitalization of K-Way with K-Way as the acquirer (the "Reverse
Acquisition"). Accordingly, the historical financial statements prior to May 21,
1996, are those of K-Way. The Reverse Acquisition is treated as an issuance of
shares for cash by K-Way and not as a business combination. As a result, no pro
forma information is presented for the Reverse Acquisition. In addition, K-Way
changed its year-end from a calendar year basis to a fiscal year ending
September 30. Accordingly, the accompanying financial statements include a
transition period for the nine months ended September 30, 1996, instead of a
full year.
F-7
<PAGE>
The following table sets forth the unaudited condensed financial information for
the year ended September 30, 1996, compared to the audited condensed financial
information for the year ended September 30, 1997:
Year Ended September 30,
1997 1996
------------- -------------
(Unaudited)
Sales $ 2,201,582 $ 1,870,079
Net income (loss) (1,409,204) (2,758)
Earnings (loss) per share (0.20) (0.00)
Contemporaneously with the Reverse Acquisition, the Company changed its name
from Jamaica Holding Company, Inc. to Klein Engineered Competition Components,
Inc. In April 1997, the Company changed its domicile to the state of Nevada by
merging with Klein Engines & Competition Components, Inc., a Nevada corporation
formed for the purpose of changing the Company's domicile and name.
Management's Plans
During fiscal 1997, the Company incurred a significant operating loss and has a
credit facility outstanding that is due on demand after January 31, 1998. The
Company also projects insufficient cash flow from operations to meet its debt
service requirements. All of these factors raise substantial doubt about the
Company's ability to continue as a going concern. The following are management's
plans regarding these matters.
On September 16, 1997, the Company entered into a loan and option agreement with
International Motor Sports Group, Inc. (IMSG). Under the terms of that
agreement, IMSG will loan the Company up to $560,000, at 12% interest, due on
demand after January 31, 1998, secured by all of the fixtures and equipment of
the Company presently owned or newly acquired but subordinated to all existing
liens. Management of IMSG has represented to the Company that it is not its
intent to exercise any demand rights or otherwise demand payment of any or all
of the amounts advanced pursuant to the credit facility in the immediate future
or during the period while IMSG and the Company are in negotiations to arrive at
a definitive agreement of merger or other business combination as described
below. As of September 30, 1997, $125,000 had been advanced to the Company under
the credit facility. The remainder of the funds available under this agreement
were advanced during the first quarter of fiscal 1998 to meet projected
equipment purchase obligations and for general working capital requirements. In
addition, IMSG has advanced the Company funds for general working capital
requirements under separate arrangements. IMSG or its assignees also have an
option to acquire all the shares of the Company owned by its president and chief
executive officer, Thomas G. Klein, in exchange for an equivalent number of
shares of IMSG. Mr. Klein owns approximately 52.6% of the outstanding common
stock of the Company. The option expires on March 31, 1998.
IMSG has advised the Company and Mr. Klein that it currently does not intend to
execute the IMSG Option, however, the Company and IMSG are currently engaged in
discussions regarding a potential transaction in which either the Company or
IMSG may acquire the other entity or in which the Company and IMSG will merge.
There can be no assurance that any acquisition or merger transaction between the
Company and IMSG will be consummated or that IMSG will not exercise its option,
and acquire a controlling interest in the Company. In the event that the Company
and IMSG fail to consummate an acquisition or merger transaction and IMSG fails
to exercise its option and demands payment of the amounts owed by the Company,
the Company's existing capital resources, commitments for additional financing,
and cash flow from operations may not be sufficient to satisfy the amounts owed
to IMSG and the Company's other capital
F-8
<PAGE>
requirements. The Company also will be required to seek additional equity or
debt financing to fund its ongoing operations, finance future acquisitions or to
develop new product lines, to obtain equipment and inventory necessary to expand
its in-house component manufacturing capabilities or to produce additional lines
of racing engines, or to take advantage of other business opportunities. The
timing and amount of any such capital requirements cannot be predicted at this
time. The Company has from time to time encountered difficulties in obtaining
adequate financing on acceptable terms and there can be no assurance that such
financing will be available on acceptable terms in the future.
From an operations perspective, the Company's strategy is to strengthen its
position as a leading manufacturer of high-performance, reliable racing engines
and engine components by (i) capitalizing on its established reputation for
producing high-quality, durable engines and components at reasonable prices;
(ii) developing and expanding key business lines; (iii) developing its in-house
component manufacturing capacity; (iv) emphasizing research and development
efforts; and (v) developing strategic alliances and joint development efforts.
The Company believes that race car owners are willing to pay more for a
high-quality engine that delivers maximum performance with less frequent
rebuilding or repairs. The Company adheres to strict quality manufacturing
standards in order to develop engines that deliver competitive power as well as
reliability. The Company intends to capitalize on this to increase sales of its
engines and to expand into manufacturing and sales of high-performance
components.
The Company intends to develop and expand its core business lines. In
particular, the Company has recently made significant investments in machinery
and tooling necessary to expand its traditional lines of small block and large
block Chevrolet engines and to acquire equipment that will be utilized to build
Feuling-patented cylinder heads as well as engines for the IRL.
The Company is engaged in a program to develop the in-house capacity to design
and manufacture all of the components that make up the "rotating mass" of a
high-performance engine, which includes crankshafts, pistons, and connecting
rods. The Company believes that developing the ability to design and manufacture
certain critical engine components in-house, instead of purchasing those items
from independent suppliers, will enable the Company to increase the quality and
availability of those components for use in the Company's engines. The Company
intends to develop its in-house capacity to design and manufacture critical
engine components through a planned program of acquisitions of specialized
equipment and engagement of skilled personnel, as well as strategic alliances
and acquisitions of complementary businesses when those opportunities arise.
The Company maintains an active research and development program to enable it to
improve the performance and durability of its existing engines and components;
to develop new materials, parts, and techniques that will enable its engines to
produce more power with improved fuel efficiency and reliability; to improve
manufacturing procedures, increase manufacturing efficiency, and reduce costs;
and to develop and utilize new technological developments.
The Company historically has utilized strategic alliances and joint development
efforts as a cost-effective means of developing and producing innovative new
engines and components. The Company also has an arrangement to produce and sell
a patented cylinder head that provides increased horsepower and torque as well
as improved fuel mileage.
F-9
<PAGE>
The Company's operating results are affected by a wide variety of factors that
could adversely impact its net sales and operating results. These factors, many
of which are beyond the control of the Company, include the Company's ability to
identify trends and technological developments in the motorsports industry and
to design, develop, and produce new high performance engines and components that
take advantage of those trends and developments; the availability and cost of
raw materials, parts, and components used to manufacture or assemble its
products; its ability to design and arrange for timely production and delivery
of products and components used by customers; seasonality; the performance,
dependability, and life cycles of and customer satisfaction with products
designed, produced, and marketed by the Company; the timing of expenditures in
anticipation of orders; the cyclical nature of the markets served by the
Company; and competition and competitive pressures on prices. The Company's
ability to increase its sales and marketing efforts to stimulate customer demand
and its ability to monitor third-party manufacturing arrangements in order to
maintain satisfactory delivery schedules are important factors in its long-term
prospects. A slowdown in demand for the Company's products as a result of new
products introduced by competitors, general economic conditions, or other
broad-based factors could adversely affect the Company's operating results.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Revenue Recognition
The Company recognizes revenue upon shipment. Customer deposits received in
advance of delivery are deferred and recognized when the related product is
shipped.
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.
Estimates also affect the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, and accounts payable
approximate fair value because of the short maturity of these financial
instruments. The terms of the Company's notes payable are representative of
current market conditions. Therefore, the carrying value of notes payable
approximate fair value. Fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with a maturity of
less than three months at the time of purchase to be cash equivalents.
F-10
<PAGE>
Allowance for Uncollectible Accounts
The Company provides an allowance for accounts receivable which are doubtful of
collection. The allowance is based upon management's periodic analysis of
receivables, evaluation of current economic conditions, and other pertinent
factors. Ultimate losses may vary from the current estimates and, as additions
to the allowance become necessary, they are charged against operations in the
period in which they become known. Losses are charged and recoveries are
credited to the allowance.
Inventory
Inventory is stated at the lower of cost (first-in, first-out method) or market,
and at September 30, 1997, consists of the following:
Component parts $ 648,584
Work in process 104,696
Finished goods 185,213
-------------
$ 938,493
=============
Property and Equipment
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
which range from five to thirty-nine years. Included in property and equipment
are assets held under capital lease. The operating results for the year ended
September 30, 1997 and the nine months ended September 30, 1996 include
depreciation expense of $41,690 and $15,191 for assets held under capital lease,
respectively. Accumulated depreciation for such assets total $112,403 at
September 30, 1997.
1997
-------------
Land $ 369,626
Building and improvements 1,291,400
Assets held under capital lease 385,077
Equipment 608,342
-------------
Less- accumulated depreciation (278,600)
-------------
$ 2,375,845
=============
Income Taxes
The Company provides for income taxes under Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. SFAS No. 109 requires the
use of an asset and liability approach in accounting for income taxes. Deferred
tax assets and liabilities are recorded based on the differences between the
financial statement and tax bases of assets and liabilities and the tax rates in
effect when these differences are expected to reverse. The principal differences
arise as a result of the use of accelerated depreciation methods for federal
income tax reporting purposes, certain reserves expensed currently for financial
reporting purposes, and compensation not yet deductible for tax purposes.
F-11
<PAGE>
Product Returns and Warranties
The Company generally sells its products with a limited 30-day warranty from the
date of purchase. The Company's warranties generally provide that in the case of
defects in material or workmanship, the Company will, at its option, either
repair or replace the defective product without charge. The Company's warranties
include provisions intended to limit the Company's liability under such
warranties. The Company has not experienced any material warranty claims on its
products to date. No provision has been made in the accompanying financial
statements for potential warranty claims.
Earnings (Loss) Per Share
Earnings (loss) per share amounts are computed based on the weighted average
number of common shares and common equivalent shares outstanding during the
period using the treasury stock method, except that the outstanding shares have
been restated to reflect the equivalent number of shares received by the
stockholders of K-Way resulting from the Reverse Acquisition described in Note
1.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, issued in October 1995, establishes financial accounting and
reporting standards for stock-based employee compensation plans. SFAS No. 123
requires either the recognition of compensation cost in the financial statements
for those companies that adopt the new fair value based method or expanded
disclosure of pro forma net income (loss) and earnings (loss) per share
information for those companies that retain the current method set forth in APB
Opinion No. 25, Accounting for Stock Issued to Employees. The Company has not
adopted the expense recognition provisions of SFAS No. 123; therefore, the new
standard has no effect on the Company's financial condition or results of
operations. No pro forma information is presented as the Company does not have a
stock-based employee compensation plan.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share, which supersedes APB
Opinion No. 15, the existing authoritative guidance. SFAS No. 128 is effective
for financial statements for both interim and annual periods ending after
December 15, 1997 and requires restatement of all prior-period earnings per
share (EPS) data presented. The new statement modifies the calculations of
primary and fully diluted EPS and replaces them with basic and diluted EPS. Had
the Company adopted SFAS No. 128 for the periods covered by the accompanying
financial statements, the "as reported" earnings (loss) per share would not have
been any different.
(3) SUPPLEMENTAL CASH FLOW INFORMATION:
The Company made cash payments of $102,500 and $14,582 for interest during the
year ended September 30, 1997 and the nine months ended September 30, 1996.
F-12
<PAGE>
During the nine months ended September 30, 1996 and the year ended September 30,
1997, the Company acquired $11,537 and $206,365 of equipment through capital
leases, respectively. During 1997, the Company restructured certain debt that
was secured by approximately $137,595 of property and equipment in the form of a
capital lease. See Notes 2 and 7.
On June 18, 1996, the Company issued 980,000 shares of restricted common stock
for subscriptions receivable of $980,000. See Note 8.
On December 2, 1996, the Company issued 26,400 shares of the Company's common
stock valued at $1.00 per share as partial payment for the purchase of its
principal business location. See Note 10.
During 1997, the Company issued 38,536 shares of restricted common stock for
services rendered on its behalf and 4,000 shares as partial payment for
equipment. See Note 8.
In May 1997, 500,000 shares of restricted common stock were issued for no cash
consideration. See Note 8.
During 1997, 400,000 shares of restricted common stock were issued to an
insurance company for an amount equal to 50% below the fair market value on the
date of issuance. The consolidated financial statements include a noncash charge
of $200,000, which represents the difference between the issuance price and the
fair value on the date of issuance. See Note 8.
During 1997, the Company forgave a $25,000 stock subscription receivable in
exchange for the extinguishment of a note payable.
(4) ACQUISITION OF KLEIN COMPETITION COMPONENTS, INC.:
Klein Competition Components, Inc. (KCC, Inc.) was organized on March 26, 1996,
in the state of Nevada for the purpose of establishing information seminars on
the operation of high performance engines and to raise the capital necessary to
effect the Reverse Acquisition discussed in Note 1. On June 25, 1996, the
Company acquired all of the issued and outstanding common stock of KCC, Inc. in
exchange for 233,000 shares of the Company's common stock. All of the assets and
liabilities of KCC, Inc., consisting primarily of cash and accounts receivable,
were then transferred to the Company. For financial reporting purposes, the
historical financial statements of KCC, Inc. have been combined with those of
the Company from the inception of KCC, Inc. because both companies were under
common control prior to the acquisition. KCC, Inc. remains a wholly-owned
subsidiary of the Company.
(5) OTHER ASSET:
On July 29, 1997, the Company entered into a licensing agreement with Feuling
Advanced Technologies, Inc. which grants the Company the right to manufacture
and sell (the Right) Center Fire Two Valve Cylinder Head Kits and accessories
for Chevrolet big block engines for aftermarket sale worldwide in perpetuity.
The agreement specifically precludes sales to any original equipment
manufacturers such as Ford Motor Company, General Motors, and Chrysler
Corporation. The agreement also grants the Company a right of first refusal to
any new products related to Center Fire Two Valve Cylinder Head Kits and
accessories. As part of the agreement,
F-13
<PAGE>
the Company agreed to pay $400,000 for the Right plus inventory and tooling with
an estimated fair value of $110,000. Accordingly, the purchase price is
allocated between inventory and property and equipment ($110,000) and other
asset ($290,000). The other asset will be amortized on a straight-line basis
over a twenty-four month period. Of the total purchase price, $50,000 was paid
on September 16, 1997, with the remaining balance to be remitted in 24 equal
monthly payments plus 8% interest beginning December 1, 1997. Royalties of 5% of
revenue generated from all products sold (except marine) which utilize any of
the technology related to the Center Fire Two Valve Cylinder Head Kits and
accessories are payable on a quarterly basis beginning August 1, 1998, subject
to a minimum royalty payment of $5,000 per month beginning October 1, 1998.
Additional royalties of 10% are due on sales of all marine applications and are
payable quarterly.
(6) INCOME TAXES:
During fiscal 1997, the Company generated a net operating loss for income tax
reporting purposes, which, together with other basis differences in assets and
liabilities (primarily differences related to accelerated depreciation),
resulted in a net deferred tax asset. SFAS No. 109 requires the reduction of
deferred tax assets by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax asset will not be realized. The ultimate realization of this deferred tax
asset depends on the Company's ability to generate sufficient taxable income in
the future. Based on this uncertainty, a valuation allowance has been applied to
the entire balance of the deferred tax asset.
The components of the provision for income taxes are as follows:
1997 1996
------------- -------------
Current tax expense
Federal $ - $ 8,112
State - 4,867
Deferred tax expense - 6,503
------------- -------------
Total tax expense $ - $ 19,482
============= =============
(7) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS:
Notes payable and capital lease obligations at September 30, 1997, were as
follows:
Note payable - secured by a building, due December 2021,
monthly payments of $6,931 including interest at 10%. $ 757,276
Note payable - secured by a building, due July 2017,
monthly payments of $4,101 including interest at 9.5%. 438,780
Note payable - secured by shop equipment and licensed
technology (see Note 9), due November 1999, monthly
payments of $15,830 including interest at 8%. 350,000
F-14
<PAGE>
Notes payable - secured by shop equipment, maturity
dates range from February 2000 to February 2002,
monthly payments range from $340 to $1,929, including
interest ranging from 10.75% to 16%. 138,910
Note payable - unsecured, interest at 12%, principal of
$40,000 and interest accrued thereon due on demand after
December 31, 1997. In connection with this note, the
Company issued to the lender warrants to purchase up
to 10,000 shares of common stock for $.01 per share through
August 27, 2002. For financial reporting purposes, the
$40,000 in gross proceeds received from the lender are
allocated between the note ($30,000) and the warrants
($10,000) based on their respective estimated fair values.
The initial carrying amount of the note will be increased by
periodic accretion to interest expense so that the carrying
amount will equal $40,000 on January 1, 1998. 30,000
Capital lease of shop equipment, maturity dates range from
January 2000 to March 2002, monthly payments range
from $710 to $2,302, including interest ranging from 8.5%
to 16%. 212,395
Capital lease of office equipment, maturity dates range from
August 2000 to October 2001, monthly payments range
from $710 to $858, including interest ranging from 18.7%
to 24.5%. 46,855
Note payable - related party, non interest bearing, due on
demand, unsecured. 4,972
Note payable - related party, non interest bearing, due on
demand, unsecured. 50,000
------------
2,029,188
Current portion (329,487)
------------
Notes payable and capital lease
obligations, net of current portion $ 1,699,701
=============
Substantially all of the Company's assets are pledged as collateral as security
for its debt.
F-15
<PAGE>
Maturities of notes payable, capital lease obligations, and related party notes
payable for the next five years, net of interest on capital leases, are as
follows:
Year Ended
September 30, Total
-------------
1998 $ 329,487
1999 299,290
2000 157,002
2001 101,248
2002 45,498
Thereafter 1,096,663
-------------
Total $ 2,029,188
=============
(8) STOCKHOLDER'S EQUITY:
On June 18, 1996, the Company completed a private placement offering of 980,000
shares of its restricted common stock for subscriptions receivable totaling
$889,050, after deducting offering related expenses of $90,950 that were
withheld from amounts due under the stock subscriptions receivable. As of
September 30, 1996, the Company had received $525,000 of the subscriptions
receivable. During fiscal 1997, the Company received an additional $339,050 and
forgave $25,000 of the subscriptions receivable for the extinguishment of a note
payable for the equivalent amount.
During 1997, the Company issued 38,536 shares of its restricted common stock for
services rendered on its behalf by certain employees and vendors and 4,000
shares as partial payment for equipment. For financial reporting purposes, the
shares were issued at $1.00 per share, which approximates the fair value. The
accompanying financial statements include a charge of $38,536 for the services.
During 1997, the Company completed a private placement offering of 803,500
shares of its restricted common stock. Of the total offering, 400,000 shares
were sold to an insurance company for $.50 per share and 403,500 shares were
sold for $1.00 per share. The total proceeds to the Company aggregated $565,550,
after deducting offering related expenses of $37,950. Included in acquisition
and financing related expenses is a charge of $200,000 for the issuance of
shares for consideration that was less than fair market value on the date of
issuance (see Note 3).
In May 1997, the Company issued 500,000 shares of its restricted common stock to
five individuals in anticipation of completing a $2.0 million private placement
offering through the efforts of one or more of those individuals. The private
placement never came to fruition. As of September 30, 1997, the Company has been
unable to reacquire or cancel the stock certificates representing the 500,000
shares because the holders had already transferred a substantial portion of the
shares to third parties. The Company is pursuing this matter vigorously. There
are no assurances, however, that the Company will be successful in its efforts
to reacquire the shares. Accordingly, based on the available facts and
circumstances surrounding the issuance of these shares, the Company has taken a
charge of $500,000, which is included in acquisition and financing related
expenses, for the fair market value of the shares issued.
F-16
<PAGE>
(9) RELATED PARTY TRANSACTIONS:
From time to time the Company issues notes payable to related parties to fulfill
working capital requirements (see Note 7). In addition, the Company's president
and chief executive officer has personally guaranteed notes payable totaling
$1,346,610.
(10) COMMITMENTS AND CONTINGENCIES:
Private Placement Offering
Between February and August 1997, the Company completed a private placement of
403,500 shares of Common Stock for total consideration of $403,500. Subsequent
to the completion of the private placement, the Company determined that the
financial statements disclosed to investors in connection with the private
placement required certain revisions to properly account for the Reverse
Acquisition. There can be no assurance that purchasers of those shares or any
governmental agency will not institute proceedings against the Company for
recision or for damages based on alleged omissions or misrepresentations of
material information in connection with the sale of such shares. The institution
of legal action against the Company arising out of the offering and sale of such
shares could result in substantial defense costs to the Company, the diversion
of efforts by the Company's management, and the imposition of liabilities
against the Company for the amount of the purchasers' investments, plus
penalties and interest. The imposition of liabilities against the Company could
have a material adverse effect on the Company's financial condition and its
results of operations. No amounts have been recorded in the accompanying
financial statements in accordance with SFAS No. 5, Accounting for
Contingencies, as the likelihood of an unfavorable outcome and the amount of the
contingency is unknown.
Operating Leases
The Company leased its principal business location under a noncancelable
operating lease for approximately $3,000 per month. On December 2, 1996, the
Company purchased the property for approximately $854,400, consisting of $65,000
cash, a note of $762,000, and 26,400 shares of the Company's common stock valued
at $1.00 per share (see Note 3).
Product Liability Self Insurance
The Company currently does not carry product liability insurance. Although the
Company is evaluating the cost and availability of product liability insurance,
such coverage is becoming increasingly expensive and difficult to obtain. In
addition, the Company has not experienced any product liability claims since its
inception. However, any losses that the Company may suffer as a result of
product liability claims could have a material adverse effect on the Company's
business financial condition and results of operations. The accompanying
financial statements do not include any provision for potential product
liability claims.
F-17
EXHIBIT 3.1
-----------
FILED
IN THE OFFICE OF THE
SECRETARY OF STATE OF THE
STATE OF NEVADA
JAN 22 1996
NO. C2695C-96
------------
Dean Heller
DEAN HELLER, SECRETARY OF STATE
FIRST AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
These First Amended and Restated Articles of Incorporation of Klein
Engines & Competition Components, Inc., attached hereto as Exhibit A, are being
filed in accordance with Section 78.403 of the Nevada General Corporation Law.
IN WITNESS WHEREOF, the undersigned president and secretary of Klein
Engines & Competition Components, Inc. verify that they have been authorized to
execute these First Amended and Restated Articles of Incorporation of Klein
Engines & Competition Components, Inc. by resolution of the board of directors
dated October 28, 1997, and that the First Amended and Restated Articles of
Incorporation of Klein Engines & Competition Components, Inc. were approved by
the stockholders of the Company as of January 21, 1998.
DATED: January 21, 1998.
KLEIN ENGINES & COMPETITION
COMPONENTS, INC.,
a Nevada corporation
By: /s/ Thomas G. Klein
-----------------------------
Name: Thomas G. Klein
Title: President
By: /s/ Stephen E. Stapleton
-----------------------------
Name: Stephen E. Stapleton
Title: Secretary
<PAGE>
STATE OF ARIZONA )
) ss.
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this _____ day of
January , 1998, by Thomas G. Klein, the president of Klein Engines & Competition
Components, Inc., a Nevada corporation, on behalf of the corporation.
------------------------------------------
Notary Public
My commission expires:
- ----------------------
STATE OF ARIZONA )
) ss.
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this _____ day of
January , 1998, by Stephen E. Stapleton, the secretary of Klein Engines &
Competition Components, Inc., a Nevada corporation, on behalf of the
corporation.
------------------------------------------
Notary Public
My commission expires:
- ----------------------
<PAGE>
EXHIBIT A
FIRST AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
ARTICLE I. NAME OF CORPORATION
The name of the corporation is Klein Engines & Competition Components,
Inc. (the "Corporation").
ARTICLE II. RESIDENT AGENT
The name and address of the resident agent for the Corporation are:
Resident Agency National, 377 South Nevada Street, Carson City, Nevada
89703-4290.
ARTICLE III. SHARES
The aggregate number of shares of stock that the Corporation shall have
authority to issue is 110,000,000 at $.001 par value per share, consisting of
10,000,000 shares of preferred stock, $.001 par value per share ("Preferred
Stock"), and 100,000,000 shares of common stock, $.001 par value per share.
The shares of Preferred Stock may be issued from time to time in one or
more series. The Board of Directors is hereby authorized, by filing a
certificate pursuant to the applicable law of the State of Nevada, to establish
from time to time the number of shares to be included in each series, and to fix
the designation, powers, preferences and rights of the shares of each such
series and the qualifications, limitations, or restrictions thereof, including,
but not limited to, the fixing or alteration of the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences of any wholly unissued series of shares of Preferred
Stock, or any of them; and to increase or decrease the number of shares of any
series subsequent to the issue of the shares of that series, but not below the
number of shares of that series then outstanding. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of that series.
A-1
<PAGE>
ARTICLE IV. GOVERNING BOARD
The number of directors constituting the Board of Directors of the
Corporation is five (5). The names and addresses of the persons who are to serve
as Directors until the next annual meeting of stockholders or until their
successors are elected are:
Thomas G. Klein 1207 North Miller Road
Tempe, AZ 85281
Robert A. Griffin P.O. Box 2737
Silver City, NM 88062
Terry E. Nish 764 W. South Temple
Salt Lake City, UT 84104
William H. Tempero 915 Turman
Ft. Collins, CO 80525
James R. Medley 10002 Aurora Avenue N., #3345
Seattle, WA 98133
ARTICLE V - OFFICERS' AND DIRECTORS' CONTRACTS
No contract or other transaction between the Corporation and any one or
more of its directors or any other corporation, firm, association, or entity in
which one or more of its directors or officers are financially interested, shall
be either void or voidable because of such relationship or interest, or because
such director or directors are present at the meeting of the Board of Directors,
or a committee thereof, which authorizes, approves, or ratifies such contract or
transaction, or because his or their votes are counted for such purpose if: (a)
the fact of such relationship or interest is disclosed or known to the Board of
Directors or committee which authorizes, approves, or ratifies the contract or
transaction by vote or consent sufficient for the purpose without counting the
votes or consents of such interested director; or (b) the fact of such
relationship or interest is disclosed or known to the stockholders entitled to
vote and they authorize, approve, or ratify such contract or transaction by vote
or written consent, or (c) the contract or transaction is fair and reasonable to
the Corporation.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or committee thereof
which authorizes, approves, or ratifies such contract or transaction.
A-2
<PAGE>
ARTICLE VI -
LIABILITY OF DIRECTORS AND OFFICERS
No director or officer shall be personally liable to the Corporation or
its stockholders for monetary damages for any breach of fiduciary duty by such
person as a director or officer. Notwithstanding the foregoing sentence, a
director or officer shall be liable to the extent provided by applicable law,
(i) for acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law, or (ii) for the payment of dividends in violation of
Section 78.300 of the Nevada General Corporation Law ("NGCL").
The provisions hereof shall not apply to or have any effect on the
liability or alleged liability of any officer or director of the Corporation for
or with respect to any acts or omissions of such person occurring prior to the
effective date of this amendment.
ARTICLE VII -
INDEMNIFICATION
The Corporation shall indemnify, and advance expenses to, to the
fullest extent allowed by the NGCL, any person who incurs liability or expense
by reason of such person acting as a director of the Corporation. This
indemnification with respect to directors shall be mandatory, subject to the
requirements of the NGCL, in all circumstances in which indemnification is
permitted by the NGCL. In addition, the Corporation may, in its sole discretion,
indemnify, and advance expenses to, to the fullest extent allowed by the NGCL,
any person who incurs liability or expense by reason of such person acting as an
officer, employee or agent of the Corporation, except where indemnification is
mandatory pursuant to the NGCL, in which case the Corporation shall indemnify to
the fullest extent required by the NGCL.
A-3
EXHIBIT 3.2
-----------
FIRST AMENDED AND RESTATED
BYLAWS
OF
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office shall be located at
1207 N. Miller Road, Tempe, Arizona 85281, in Maricopa County, Arizona or at
such other location or as may be established by the board of directors.
Section 2. Other Offices. The Corporation also may have offices at such
other places as designated by the board of directors.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of the stockholders shall be
held at such time and place within or without the State of Arizona as shall be
designated from time to time by the board of directors.
Section 2. Annual Meetings. Annual meetings of stockholders shall be
held on the second Thursday in November of each calendar year, if not a legal
holiday, and if a legal holiday, then on the next secular day following, at
10:00 a.m., at which the stockholders shall elect by a plurality vote a board of
directors, and transact such other business as may properly be brought before
the meeting.
Section 3. Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
articles of incorporation, may be called by the president and shall be called by
the president or secretary at the request in writing of a majority of the board
of directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
Section 4. Notice of Meetings. Notices of meetings shall be in writing
and signed by the president or a vice president, or the secretary, or an
assistant secretary, or by such other person or persons as the directors shall
designate. Such notice shall state the purpose or purposes for which the meeting
is called and the time and place where it is to be held, which may be within or
without the State of Nevada. A copy of such notice shall be either delivered
personally or shall be mailed, postage prepaid, to each stockholder of record
entitled to vote at such meeting not less than ten (10) nor more than sixty (60)
days before such meeting. If mailed, it shall be directed to a stockholder at
his address
1
<PAGE>
as it appears upon the records of the Corporation and upon such mailing of any
such notice, the service thereof shall be complete, and the time of the notice
shall begin to run from the date upon which such notice is deposited in the mail
for transmission to such stockholder. In the event of the transfer of stock
after delivery or mailing of the notice of, and before the holding of, the
meeting, it shall not be necessary to deliver or mail notice of the meeting to
the transferee.
Section 5. Purpose of Meetings. Business transacted at any special
meeting of stockholders shall be limited to the purposes stated in the notice.
Section 6. Quorum. Stockholders holding at least a majority of the
voting power, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the articles of incorporation. If,
however, such quorum shall not be present or represented at any meeting of the
stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have power to adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented any business may be transacted which might have been
transacted at the meeting as originally notified.
Section 7. Record Date. The board of directors may prescribe a period
not exceeding sixty (60) days before any meeting of the stockholders during
which no transfer of stock on the books of the Corporation may be made, or may
fix a day not more than sixty (60) days before the holding of any such meeting
as the day as of which stockholders entitled to notice of and to vote at such
meetings must be determined. Only stockholders of record on that day are
entitled to notice or to vote at such meeting.
Section 8. Voting.
(a) An act of stockholders who hold at least a majority of the
voting power and are present at a meeting at which a quorum is present is the
act of the stockholders unless the statutes or articles of incorporation provide
for different proportions.
(b) Every stockholder of record of the Corporation shall be
entitled at each meeting of stockholders to one vote for each share of stock
standing in his name on the books of the Corporation subject, however, to any
provision respecting voting rights as may be contained in the articles of
incorporation or any amendments thereto or in any certificate setting forth the
rights and preferences of any series of preferred stock as filed by the
Corporation with the State of Nevada.
(c) At any meeting of the stockholders, any stockholder may
designate another person or persons to act as a proxy or proxies as provided by
law. If any stockholder designates two or more persons to act as proxies, a
majority of those persons present at the meeting, or, if only one shall be
present, then that one shall have and may exercise all of the powers conferred
by such stockholder upon all of the persons so designated unless the stockholder
shall otherwise provide. No such proxy shall be valid after the expiration of
six (6) months from the date of its creation, unless it is coupled with an
interest, or unless the stockholder specifies in it the length of time for which
it is to continue in force, which may not exceed seven (7) years from the date
of its creation. Subject to the above, any proxy properly created is not revoked
and continues in full force and effect until another instrument or transmission
revoking it or a properly created proxy bearing a later date is filed with or
transmitted to the secretary of the Corporation or another person or persons
appointed by the Corporation to count the votes of stockholders and determine
the validity of proxies and ballots.
2
<PAGE>
Section 9. Consent of Stockholders in Lieu of Meeting. Any action
required or permitted to be taken at a meeting may be taken without a meeting if
a written consent thereto is signed by stockholders holding at least a majority
of the voting power, unless the provisions of the statutes or of the articles of
incorporation require a greater proportion of voting power to authorize such
action, in which case, such greater proportion of written consents shall be
required.
ARTICLE III
DIRECTORS
Section 1. Powers. The business of the Corporation shall be managed by
its board of directors, which may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by statute, by the articles of
incorporation, or by these bylaws directed or required to be exercised or done
by the stockholders.
Section 2. Number and Term of Office.
(a) The number of directors shall be not less than one (1) nor
more than nine (9). The number of directors may be increased or decreased from
time to time by resolution of the board of directors, but no decrease in the
number shall change the term of any director in office at the time thereof. The
directors shall be elected at the annual meeting of the stockholders, and except
as provided in Section 2(b) of this article, each director elected shall hold
office until his or her successor is elected and qualified. Directors need not
be stockholders.
(b) Vacancies, including those caused by an increase in the
number of directors, may be filled by a majority of the remaining directors
though less than a quorum. When one or more directors shall give notice of his,
her, or their resignation to the board of directors, effective at a future date,
the board of directors shall have power to fill such vacancy or vacancies to
take effect when such resignation or resignations shall become effective, each
director so appointed to hold office during the remainder of the term of office
of the resigning director or directors.
(c) Any director may be removed from office by the vote of
stockholders representing not less than two-thirds (2/3) of the voting power of
the issued and outstanding stock entitled to voting power, except that (i) if
the articles of incorporation provide for the election of directors by
cumulative voting, no director may be removed from office under the provisions
of this section except upon the vote of stockholders owning sufficient shares to
have prevented his election to office in the first instance, and (ii) the
articles of incorporation may require the concurrence of a larger percentage of
stock entitled to voting power in order to remove a director.
Section 3. Place of Meetings. The board of directors of the Corporation
may hold meetings, both regular and special, at such places as designated by the
board of directors.
Section 4. Annual Organizational Meeting. The first meeting of each
newly elected board of directors shall be held within thirty (30) days after the
adjournment of the annual meeting of stockholders. No notice of such meeting
shall be necessary to be given to the newly elected directors in order to
legally constitute the meeting, provided a quorum shall be present. In the event
such meeting is not held, the meeting may be held at such time and place as
shall be specified in a notice given as hereinafter provided for special
meetings of the board of directors, or as shall be specified in a written waiver
signed by all of the directors.
3
<PAGE>
Section 5. Regular Meetings. Meetings of the board of directors may be
held without notice at such time and place as shall from time to time be
determined by the board of directors.
Section 6. Special Meetings. Special meetings of the board of directors
may be called by the president or secretary on the written request of two
directors. Written notice of special meetings of the board of directors shall be
given to each director by telephone or in writing at least twenty-four (24)
hours (in the case of notice by telephone) or forty-eight (48) hours (in the
case of notice by facsimile or telegram) or three (3) days (in the case of
notice by mail) before the time at which the meeting is to be held. Every such
notice shall state the date, time and place of the meeting, but need not
describe the purpose of the meeting unless required by the articles of
incorporation, these bylaws or provided by law.
Section 7. Quorum. A majority of the persons serving as directors of
the Corporation, at a meeting duly assembled, shall be necessary to constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which a quorum is present shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by the articles of incorporation.
Section 8. Committees.
(a) The board of directors may, by resolution passed by the
board of directors, designate one or more committees, which, to the extent
provided in the resolution, shall have and may exercise the powers of the board
of directors in the management of the business and affairs of the Corporation,
and may have power to authorize the seal of the Corporation to be affixed to all
papers which may require it. Such committee or committees shall have such name
or names as may be determined from time to time by resolution adopted by the
board of directors. Each committee must include at least one of the directors of
the Corporation. The board of directors may appoint natural persons who are not
directors to serve on committees.
(b) The committees shall keep regular minutes of their
proceedings and report the same to the board of directors when required.
Section 9. Action of Directors in Lieu of Meeting. Any action required
or permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting if, before or after the action,
a written consent thereto is signed by all the members of the board of directors
or of the committee, as the case may be, and the written consent is filed with
the minutes of proceedings of the board of directors or committee.
Section 10. Compensation. The directors may be paid their expenses, if
any, of attendance at each meeting of the board of directors and may be paid a
fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
4
<PAGE>
ARTICLE IV
NOTICES
Section 1. Notice, What Constitutes. Notices to directors and
stockholders shall be in writing and delivered personally or mailed to the
directors or stockholders at their addresses appearing on the books of the
Corporation. Notice by mail shall be deemed to be given at the time when the
same shall be mailed. Notice to directors may also be given by telegram,
facsimile or telephone.
Section 2. Waiver of Notice.
(a) Whenever all parties entitled to vote at a meeting,
whether of directors or stockholders, consent, either by a writing on the
records of the meeting or filed with the secretary, or by presence at such
meeting and oral consent entered on the minutes, or by taking part in the
deliberations at such meeting without objection, the doings of such meetings
shall be as valid as if had at a meeting regularly called and noticed, and at
such meeting any business may be transacted which is not excepted from the
written consent or to the consideration of which no objection for want of notice
is made at the time, and if any meeting be irregular for want of notice or of
such consent, provided a quorum was present at such meeting, the proceedings of
said meeting may be ratified and approved and rendered likewise valid and the
irregularity or defect therein waived by a writing signed by all parties having
the right to vote at such meetings; and such consent or approval of stockholders
may be by proxy or attorney, but all such proxies and powers of attorney must be
in writing.
(b) Whenever any notice whatever is required to be given under
the provisions of the statutes, the articles of incorporation or these bylaws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
Section 1. Number and Qualifications. The officers of the Corporation
shall be chosen by the board of directors at its first meeting and thereafter
after each annual meeting of stockholders. The officers to be elected shall
include a president, a secretary and a treasurer. Any person may hold two or
more offices. The board of directors may also appoint vice presidents and
additional officers or assistant officers as it shall deem necessary.
Section 2. Compensation. The salaries of all officers and agents of the
Corporation shall be fixed by the board of directors.
Section 3. Term of Office. The officers of the Corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the board of directors may be removed at any time by the
affirmative vote of a majority of the board of directors. Any vacancy occurring
in any office of the Corporation by death, resignation, removal or otherwise
shall be filled by the board of directors.
5
<PAGE>
Section 4. Subordinate Officers, Committees and Agents. The board of
directors may elect any other officers and appoint any committees, employees or
other agents as it desires who shall hold their offices for the terms and shall
exercise the powers and perform the duties as shall be determined from time to
time by the board of directors to be required by the business of the
Corporation. The directors may delegate to any officer or committee the power to
elect subordinate officers and retain or appoint employees or other agents.
Section 5. The President. The president shall be the chief executive
officer of the Corporation, shall preside at all meetings of the stockholders
and the board of directors, shall have general and active management of the
business of the Corporation, and shall see that all orders and resolutions of
the board of directors are carried into effect. The president is authorized to
execute bonds, mortgages and other contracts requiring a seal, under the seal of
the Corporation, except where required or permitted by law to be otherwise
signed and executed and except where the signing and execution thereof shall be
expressly delegated by the board of directors to some other officer or agent of
the Corporation.
Section 6. The Vice President. The vice president shall, in the absence
or disability of the president, perform the duties and exercise the powers of
the president and shall perform such other duties as the board of directors may
from time to time prescribe.
Section 7. The Secretary. The secretary shall attend all meetings of
the board of directors and all meetings of the stockholders and record all the
proceedings of the meetings of the Corporation and of the board of directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. The secretary shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
board of directors, and shall perform such other duties as may be prescribed by
the board of directors or president, under whose supervision he or she shall be.
The secretary shall keep in safe custody the seal of the Corporation and, when
authorized by the board of directors, affix the same to any instrument requiring
it and, when so affixed, it shall be attested by his or her signature or by the
signature of the treasurer or an assistant secretary.
Section 8. The Treasurer. The treasurer shall have the custody of the
corporate funds and securities and shall keep in full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the board of
directors. The treasurer shall disburse the funds of the Corporation as may be
ordered by the board of directors taking proper vouchers for such disbursements,
and shall render to the president and the board of directors, at the regular
meetings of the board of directors, or when the board of directors so requires,
an account of all his or her transactions as treasurer and of the financial
condition of the Corporation. If required by the board of directors, the
treasurer shall give the Corporation a bond in such sum and with such surety or
sureties as shall be satisfactory to the board of directors for the faithful
performance of the duties of his or her office and for the restoration to the
Corporation, in case of his or her death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his or her possession or under his control belonging to the
Corporation.
6
<PAGE>
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Issuance. Every stockholder shall be entitled to have a
certificate, signed by the president or a vice president and the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
Corporation, certifying the number of shares owned by him in the Corporation.
When the Corporation is authorized to issue shares of more than one class or
more than one series of any class, there shall be set forth upon the face or
back of the certificate, or the certificate shall have a statement that the
Corporation will furnish to any stockholder upon request and without charge, a
full or summary statement of the voting powers, designations, preferences,
limitations, restrictions and relative rights of the various classes of stock or
series thereof. If any officer or officers who shall have signed, or whose
facsimile signature or signatures shall have been used on, any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates shall have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate or
certificates, or whose facsimile signature or signatures shall have been used
thereon, had not ceased to be the officer or officers of such Corporation.
Section 2. Transfer Agent and Registrar. Whenever any certificate is
countersigned or otherwise by a transfer agent or transfer clerk, and by a
registrar, then a facsimile of the signatures of the officers or agents of the
Corporation may be printed or lithographed upon such certificate in lieu of the
actual signatures.
Section 3. Lost Certificates. The board of directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the board of directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost or destroyed.
Section 4. Transfer of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
Section 5. Closing of Transfer Books. The directors may prescribe a
period not exceeding sixty (60) days before any meeting of the stockholders
during which no transfer of stock on the books of the Corporation may be made,
or may fix a day not more than sixty (60) days before the holding of any such
meeting as the day as of which stockholders entitled to notice of and to vote at
such meeting shall be determined; and only stockholders of record on such day
shall be entitled to notice or to vote at such meeting.
Section 6. Registered Stockholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of
7
<PAGE>
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Nevada.
ARTICLE VII
GENERAL PROVISIONS
Section 1. Dividends. Dividends upon the capital stock of the
Corporation, subject to the provisions of the articles of incorporation, if any,
may be declared by the board of directors at any regular or special meeting
pursuant to law. Dividends may be paid in cash, in property, or in shares of the
capital stock, subject to the provisions of the articles of incorporation.
Section 2. Reserves. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall think conducive to the interest of
the Corporation, and the directors may modify or abolish any such reserves in
the manner in which it was created.
Section 3. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
Section 4. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the board of directors.
Section 5. Seal. The Corporation may have a corporate seal in the form
of a circle containing the name of the Corporation, the year of incorporation
and such other details as may be approved by the board of directors. Nothing in
these bylaws shall require the impression of a corporate seal to establish the
validity of any document executed on behalf of the Corporation.
ARTICLE VIII
AMENDMENTS
These bylaws may be altered or repealed at any regular or special
meeting of the stockholders or of the board of directors of the Corporation.
8
NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
CUSIP NO. 498521 10 3
NUMBER SHARES
2745
KLEIN ENGINES & COMPETITION
COMPONENTS, INC.
AUTHORIZED COMMON STOCK: 50,000,000 SHARES
PAR VALUE: $.001
THIS CERTIFIES THAT
[SAMPLE ONLY]
IS THE RECORD HOLDER OF
-- Shares of KLEIN ENGINES & COMPETITION COMPONENTS, INC. common stock --
transferable on the books of the Corporation in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid until countersigned by the Transfer Agent and registered by the
Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Merlin Gunderson /s/ Thomas G. Klein
- ---------------------------- ---------------------------
Secretary President
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
CORPORATE
SEAL
NEVADA
TRANSFER AGENT AND REGISTRAR
COLONIAL STOCK TRANSFER
SALT LAKE CITY, UTAH 84111
NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT
COUNTERSIGNED AND REGISTERED
BY:
AUTHORIZED SIGNATURE
<PAGE>
<TABLE>
<CAPTION>
NOTICE: Signature must be guaranteed by a firm which is a member of a registered national stock exchange, or
by a bank (other than a saving bank), or a trust company. The following abbreviations, when used in
the inscription on the face of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ..........Custodian..........
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act .........................
in common (State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
For Value Received, ____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
| |
|_____________________________________|
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the capital stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated________________________________
_________________________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER
NEITHER THIS WARRANT, NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE
HEREOF, HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES"), OR ANY APPLICABLE STATE SECURITIES LAW. SUCH SECURITIES MAY NOT
BE SOLD OR OTHERWISE TRANSFERRED UNLESS (i) A REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND SUCH APPLICABLE STATE SECURITIES LAWS SHALL HAVE BECOME
EFFECTIVE WITH REGARD THERETO OR (ii) IN THE OPINION OF COUNSEL REASONABLY
ACCEPTABLE TO THE COMPANY, REGISTRATION UNDER THE SECURITIES ACT AND SUCH
APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED IN CONNECTION WITH A PROPOSED
SALE OR TRANSFER.
COMMON STOCK
PURCHASE WARRANT
For the Purchase of Shares of
Common Stock of
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
(Par Value $0.01 Per Share)
(Incorporated under the Laws of the State of Nevada)
VOID AFTER 5:00 P.M. PST ON August 27, 2002
Date of Original Issuance: August 27, 1997
This is to certify that, for value received, DOMINION INCOME MANAGEMENT
CO. or assigns (the "Warrantholder"), is entitled, subject to the terms and
conditions hereinafter set forth, at any time after August 27, 1997 and on or
before 5:00 P.M., Pacific Standard Time, on August 27, 2002, but not thereafter,
to purchase 10,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), of KLEIN ENGINES & COMPETITION COMPONENTS, INC. (the "Company")
for the Warrant Price (as defined below), and to receive a certificate or
certificates for the shares of Common Stock so purchased.
1. Terms And Exercise Of Warrants.
(a) Exercise Period. Subject to the terms of this Warrant, the
Warrantholder shall have the right, at any time during the period (the "Exercise
Period") commencing on August 27, 1997 and ending at 5:00 P.M., Pacific Standard
Time, on August 27, 2002 (the "Termination Date"), or if such date is a day on
which banking institutions are authorized by law to close, then on the next
succeeding day which shall not be such a day, to purchase from the Company up to
the number of fully paid and nonassessable shares of Common Stock which the
Warrantholder may at the time be entitled to purchase pursuant to this Warrant.
Such shares of Common Stock and any other securities that the
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Company may be required by the operation of Section 3 to issue upon the exercise
hereof are referred to hereinafter as the "Warrant Shares."
(b) Method of Exercise. This Warrant shall be exercised by
surrender of this Warrant to the Company at its principal office in Tempe,
Arizona, or at such other address as the Company may designate by notice in
writing to the Warrantholder at the address of the Warrantholder appearing on
the books of the Company or such other address as the Warrantholder may
designate in writing, together with the form of Election to Purchase included as
Exhibit "A" hereto, duly completed and signed, and upon payment to the Company
of the Warrant Price (as defined in Section 2) multiplied by the number of
Warrant Shares being purchased upon such exercise (the "Aggregate Warrant
Price"), together with all taxes applicable upon such exercise. Payment of the
Aggregate Warrant Price shall be made in cash or by certified check or cashier's
check, payable to the order of the Company.
(c) Partial Exercise. This Warrant shall be exercisable, at
the election of the Warrantholder, either in full or from time to time in part,
during the Exercise Period.
(d) Share Issuance Upon Exercise. Upon the exercise and
surrender of this Warrant certificate and payment of such Warrant Price, the
Company shall issue and cause to be delivered with all reasonable dispatch to
the Warrantholder, in such name or names as the Warrantholder may designate in
writing, a certificate or certificates for the number of full Warrant Shares so
purchased upon the exercise of the Warrant, together with cash, as provided in
Section 4 hereof, with respect to any fractional Warrant Shares otherwise
issuable upon such surrender and, if applicable, the Company shall issue and
deliver a new Warrant to the Warrantholder for the number of shares not so
exercised. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of such Warrant Shares as of the close of business on the date of the
surrender of the Warrant and payment of the Warrant Price, notwithstanding that
the certificates representing such Warrant Shares shall not actually have been
delivered or that the stock transfer books of the Company shall then be closed.
2. Warrant Price.
The price per share at which Warrant Shares shall be purchasable on the
exercise of this Warrant shall be $0.01 per share, subject to adjustment
pursuant to Section 3 hereof (originally and as adjusted, the "Warrant Price").
3. Adjustment Of Warrant Price And Number Of Shares.
The Company agrees to reserve and shall keep reserved for issuance the
number of shares of Common Stock issuable upon exercise of this Warrant. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Warrant Price shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
(a) In case the Company shall (1) pay a dividend or make a
distribution in shares of its Common Stock, (2) subdivide its outstanding Common
Stock into a greater number of shares, (3) combine its outstanding Common Stock
into a smaller number of shares, or (4) issue by reclassification of its Common
Stock any shares of capital stock of the Company (other than a change in par
value, or from par value to no par value, or from no par value to par value),
the Warrant Price and the number
2
<PAGE>
of shares of Common Stock or other securities issuable upon exercise of this
Warrant in effect immediately prior thereto shall be adjusted so that the
Warrantholder, by operation of Section 3(d) hereof, shall be entitled to receive
the number of shares which it would have owned or have been entitled to receive
immediately following the happening of any of the events described above, had
this Warrant been exercised immediately prior to the record or effective date
thereof.
An adjustment made pursuant to Sections 3(a)(1)-(4) above shall become
effective immediately after the record date in the case of a dividend or
distribution (provided, however, that such adjustments shall be reversed if such
dividends or distributions are not actually paid) and shall become effective
immediately after the effective date in the case of a subdivision, combination
or reclassification. If, as a result of an adjustment made pursuant to this
paragraph, the Warrantholder shall become entitled to receive shares of two or
more classes of capital stock of the Company, the Board of Directors (whose
determination shall be conclusive and shall be evidenced by a resolution) shall
determine the allocation of the adjusted Warrant Price between or among the
shares of such classes of capital stock.
(b) In case of any reclassification of the outstanding Common
Stock (other than a change in par value, or from par value to no par value, or
from no par value to par value, or as a result of a subdivision, combination or
stock dividend), or in case of any consolidation of the Company with, or merger
of the Company into, another corporation wherein the Company is not the
surviving entity, or in case of any sale of all, or substantially all, of the
property, assets, business and goodwill of the Company, the Company, or such
successor or purchasing corporation, as the case may be, shall provide, by a
written instrument delivered to the Warrantholder, that the Warrantholder shall
thereafter be entitled, upon exercise of this Warrant, to the kind and amount of
shares of stock or other equity securities, or other property or assets that
would have been receivable by such Warrantholder upon such reclassification,
consolidation, merger or sale, if this Warrant had been exercised immediately
prior thereto. Such corporation, which thereafter shall be deemed to be the
"Company" for purposes of this Warrant, shall provide in such written instrument
for adjustments to the Warrant Price that shall be as nearly equivalent as may
be practicable to the adjustments provided for in this Section 3.
(c) No adjustment in the number of securities purchasable
hereunder shall be required unless such adjustment would require an increase or
decrease of at least five percent (5%) in the number of securities (calculated
to the nearest full share or unit thereof) then purchasable upon the exercise of
this Warrant; provided, however, that any adjustment which by reason of this
Section 3(c) is not required to be made immediately shall be carried forward and
taken into account in any subsequent adjustment.
(d) Whenever the Warrant Price is adjusted as provided in this
Section 3, the number of shares of Common Stock or other securities issuable
upon exercise of this Warrant shall be adjusted simultaneously, by multiplying
the number of shares previously issuable by a fraction, of which the numerator
shall be the Warrant Price in effect immediately prior to such adjustment, and
of which the denominator shall be the Warrant Price as so adjusted.
(e) For the purpose of this Section 3, the term "Common Stock"
shall mean (i) the class of stock designated as Common Stock of the Company at
August 27, 1997, or (ii) any other class of stock resulting from successive
changes or reclassifications of such Common Stock consisting solely of changes
in par value, or from par value to no par value, or from no par value to par
value. In the event that at any time, as a result of an adjustment made pursuant
to this Section 3, the Warrantholder shall become entitled to purchase any
shares of the Company's capital stock other than Common Stock,
3
<PAGE>
thereafter the number of such other shares so purchasable upon the exercise of
this Warrant and the Warrant Price of such shares shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the shares contained in this Section 3.
(f) Whenever the number of shares of Common Stock and/or other
securities purchasable upon the exercise of this Warrant or the Warrant Price is
adjusted as herein provided, the Company shall cause to be promptly mailed to
the Warrantholder by first class mail, postage prepaid, notice of such
adjustment and a certificate of the Company's chief financial officer setting
forth the number of shares of Common Stock and/or other securities purchasable
upon the exercise of this Warrant, the Warrant Price after such adjustment, a
brief statement of the facts requiring such adjustment, and the computation by
which such adjustment was made.
(g) Irrespective of any adjustments in the Warrant Price or
the number or kind of securities purchasable upon the exercise of this Warrant,
the Warrant certificate or certificates theretofore or thereafter issued may
continue to express the same price or number or kind of securities stated in
this Warrant initially issuable hereunder.
4. Fractional Interest.
The Company shall not be required to issue fractional shares upon
exercise of this Warrant but shall pay an amount in cash equal to the closing
price of the Company's Common Stock on a national securities exchange or the
Nasdaq National Market on the day preceding the date of the surrender of the
Warrant pursuant to Section 1(b) hereof, or if there is no public market, cash
equal to the then fair market value of the shares as reasonably determined by
the Board of Directors of the Company, in its sole discretion, multiplied by
such fraction.
5. Transfer of Warrant.
Subject to the transfer conditions referred to in the legend endorsed
hereon, this Warrant and all rights hereunder are transferable, in whole or in
part, without charge to the Warrantholder, upon surrender of this Warrant with a
properly executed Assignment (in the form of Exhibit "B" hereto) at the
principal office of the Company in Tempe, Arizona.
6. No Rights As Shareholder; Notices To Warrantholder.
Nothing contained in this Warrant shall be construed as conferring upon
the Warrantholder or its transferee any rights as a shareholder of the Company,
either at law or in equity, including the right to vote, receive dividends,
consent or receive notices as a shareholder with respect to any meeting of
shareholders for the election of directors of the Company or for any other
matter.
7. Notices.
Any notice given pursuant to this Warrant by the Company or by the
Warrantholder shall be in writing and shall be deemed to have been duly given
upon (a) transmitter's confirmation of the receipt of a facsimile transmission,
(b) confirmed delivery by a standard overnight carrier, or (c) the expiration
4
<PAGE>
of three business days after the day when mailed by United States Postal Service
by certified or registered mail, return receipt requested, postage prepaid at
the following addresses:
If to the Company:
Klein Engines & Competition Components, Inc.
1207 N. Miller Road
Tempe, AZ 85281
If to the Warrantholder, then to the address of the Warrantholder in
the Company's books and records.
Each party hereto may, from time to time, change the address to which
notices to it are to be transmitted, delivered or mailed hereunder by notice in
accordance herewith to the other party.
8. General Provisions.
(a) Successors. All covenants and provisions of this Warrant
shall bind and inure to the benefit of the respective executors, administrators,
successors and assigns of the parties hereto.
(b) Choice Of Law. This Warrant and the rights of the parties
hereunder shall be governed by and construed in accordance with the laws of the
State of Arizona, including all matters of construction, validity, performance,
and enforcement, and without giving effect to the principles of conflict of
laws.
(c) Entire Agreement. Except as provided herein, this Warrant,
including exhibits, contains the entire agreement of the parties, and supersedes
all existing negotiations, representations or agreements and all other oral,
written, or other communications between them concerning the subject matter of
this Warrant.
(d) Severability. If any provision of this Warrant is
unenforceable, invalid, or violates applicable law, such provision shall be
deemed stricken and shall not affect the enforceability of any other provisions
of this Warrant.
(e) Captions. The captions in this Warrant are inserted only
as a matter of convenience and for reference and shall not be deemed to define,
limit, enlarge, or describe the scope of this Warrant or the relationship of the
parties, and shall not affect this Warrant or the construction of any provisions
herein.
5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed as of the date first above written.
KLEIN ENGINES & COMPETITION
COMPONENTS, INC., a Nevada corporation
By: /s/ Thomas G. Klein
-----------------------------------
Its: President
----------------------------------
6
<PAGE>
Exhibit A
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
ELECTION TO PURCHASE
Klein Engines & Competition Components, Inc.
1207 N. Miller Road
Tempe, AZ 85281
The undersigned hereby irrevocably elects to exercise the
right of purchase set forth in the attached Warrant to purchase thereunder _____
shares of the Common Stock (the "Shares") provided for therein and requests that
the Shares be issued in the name of
Name: _________________________
Address: _________________________
_________________________
Social Security Number or Employer Identification Number: ______________________
Dated: _________________________
Name of Warrantholder or Assignee: _____________________________
(Please Print)
Signature:______________________________________________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant.)
Method of payment: _____________________________________________
(Please Print)
_____________________________________________________________
Medallion Signature Guarantee (required if an assignment
of Shares acquired on exercise, or an assignment of Warrants
remaining after exercise, is made upon exercise.)
7
<PAGE>
Exhibit B
ASSIGNMENT
FOR VALUE RECEIVED, ___________________________________ hereby
sells, assigns and transfers all of the rights of the undersigned under the
attached Warrant with respect to the number of shares of Common Stock covered
thereby set forth below, unto:
Name of Assignee Address No. of Shares
- ---------------- ------- -------------
and does hereby irrevocably constitute and appoint __________________________,
Attorney, to transfer the attached Warrant on the books of the Company, with
full power of substitution.
Dated: ____________ Signature:__________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant.)
__________________________________________
(SSN or EIN of Warrantholder)
____________________________________________________________
Medallion Signature Guarantee (required if an assignment
of Shares acquired on exercise, or an assignment of Warrants
remaining after exercise, is made upon exercise.)
8
EXHIBIT 10.2
------------
FORM OF PROMISSORY NOTE
AND SECURITY AGREEMENT
U.S. $__________ Tempe, Arizona
_____________, 1997
FOR VALUE RECEIVED, KLEIN ENGINES & COMPETITION COMPONENTS, INC., a
Nevada corporation ("Maker") hereby promises to pay to INTERNATIONAL MOTOR
SPORTS GROUP, INC. ("Payee") the principal amount of ____________________ and
no/100 Dollars ($____________), together with simple interest thereon from and
including the date of this Promissory Note (the "Note") until, but not
including, the date of full and final payment, at the Interest Rate as
hereinafter defined.
1. Interest. Interest shall accrue on the principal amount
then outstanding hereunder at the rate of 12% per annum (the "Interest Rate")
based on the number of days elapsed in a 360-day year. Notwithstanding the
foregoing, if at any time implementation of any provision hereof shall cause the
interest contracted for or charged herein and collectible hereunder to exceed
the applicable lawful maximum rate, then the Interest Rate shall be limited to
such lawful maximum.
2. Payments. Accrued interest on the outstanding principal sum
of this Note shall be due and payable on the first day of each month, commencing
on _______________, 1997. The outstanding principal sum of this Note, together
with all accrued but unpaid interest due hereunder, shall be due and payable at
any time on or after February 1, 1998, upon not less than 15 days' written
notice from Payee to Maker. Payment of the principal of and interest on this
Note is to be made at the offices of Payee or such other place as Payee shall
designate in writing to Maker.
3. Waivers. Except as otherwise expressly provided herein,
Maker hereby waives diligence, demand, grace, presentment for payment, notice of
nonpayment, protest and notice of protest, notice of extension and notice of
default. No delay or omission on the part of Payee in exercising any right
hereunder shall constitute a waiver of any such right or of any other right
hereunder. A waiver on any one occasion shall not be construed to bar the
exercise, or to constitute a waiver of, any such right on any future occasion.
4. Prepayment. Maker may prepay all or any portion of the
interest and the unpaid principal balance of this Note at any time, or from time
to time, without penalty or premium. Any prepayment shall first be credited to
interest and then to principal.
5. Events of Default; Acceleration. The occurrence of any one
or more of the following events shall constitute an "Event of Default"
hereunder, and upon such Event of Default, the entire principal balance
outstanding hereunder, together with all accrued interest and other amounts
payable hereunder, at the election of Payee, shall become immediately due and
payable, without any notice to Maker, presentment, demand, protest or any other
notice of any kind, all of which are hereby expressly waived by Maker:
(a) Nonpayment of principal, interest, or other
amounts when the same shall become due and payable hereunder, and Maker does not
cure such failure to pay within three days after the date such payment is due;
or
(b) Use of the proceeds of this Note for purposes
other than as set forth in Schedule 2.2 of that certain agreement by and among
Maker, Payee, and Thomas G. Klein ("Klein") pursuant to which this Note has been
executed and delivered by Maker ("Loan Agreement and Option"); or
1
<PAGE>
(c) The insolvency of Maker or the making by Maker of
an assignment for the benefit of its creditors; or
(d) The appointment of a receiver for Maker or the
involuntary filing against Maker, which is not stayed or dismissed within 30
days of filing, or the voluntary filing by Maker of a petition or application
for relief under federal bankruptcy law or any similar state or federal law; or
(e) Fraud or material misrepresentation with respect
to Maker and in connection with the Loan Agreement and Option by any of Maker's
employees who are authorized to make statements to Payee in connection with the
Loan Agreement and Option; or
(f) Any failure by Maker or Klein to honor all of the
conditions and obligations of Maker or Klein, respectively, under the Loan
Agreement and Option.
6. Subordination. The indebtedness evidenced by this Note,
including the principal hereof and interest hereon, is expressly subordinate and
subject in right of payment to the prior payment in full of all present and
future indebtedness of Payee or any of its affiliated companies to banks or
other institutional lenders.
7. Collateral and Security. As security for Maker's
obligations under this Note, Maker hereby grants to Payee a security interest in
all of Maker's equipment and fixtures. The security interest granted hereunder
shall be subordinate to (i) all security interests in the same collateral
granted to secure other debt obligations of Maker existing on the date hereof,
and (ii) all purchase money financing with respect to such collateral existing
on the date hereof or granted by Maker in the future. Upon the occurrence of an
Event of Default under this Note, Payee shall have all rights and remedies
available to it under Article 9 of the Uniform Commercial Code in the state of
Arizona. Upon payment in full of Maker's obligations under this Note, Payee
shall release the security interest granted hereby and shall execute and deliver
to Maker all such termination statements as Maker shall reasonably request.
8. Amendment. This Note may not be changed, modified or
terminated, nor may any provision of this Note be waived except by an agreement
in writing signed by the party to be charged.
9. Binding Nature of Agreement; Assignment. The provisions of
this Note shall be binding upon Maker, and shall inure to the benefit of and
bind the respective successors and assigns of Payee and Maker. Neither Payee nor
Maker may assign or transfer this Note or assign or delegate any of his, her, or
its respective rights or obligations hereunder without the prior written consent
of the other party in each instance.
10. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF ARIZONA, NOTWITHSTANDING ANY
ARIZONA OR OTHER CONFLICTS-OF-LAWS PROVISIONS TO THE CONTRARY.
11. Collection Costs and Expenses. If this Note shall be
placed in the hands of an attorney for collection, by suit or otherwise, then
Maker's obligations hereunder shall include the payment of all reasonable
collection costs and expenses incurred by Payee in connection therewith,
including, without limitation, reasonable attorneys' fees and costs.
12. Time of Essence. Time is of the essence of this Note and
each and every provision hereof.
2
<PAGE>
13. Notices. All notices, requests, demands and other
communications required or permitted under this Note shall be in writing and
shall be deemed to have been duly given, made and received when delivered
against receipt or three days after deposited in the United States mails by
registered or certified mail, postage prepaid, return receipt requested,
addressed as set forth below:
(i) If to Payee:
International Motor Sports Group, Inc.
15302 25th Drive, S.E.
Mill Creek, Washington 98012
Attention: Andrew Evans
(ii) If to Maker:
Klein Engines & Competition Components, Inc.
1207 N. Miller Road
Tempe, Arizona 85281
Attention: Thomas Klein
Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Section for the giving of notice.
IN WITNESS WHEREOF, Maker and Payee executed this Note as of the date
first set forth above.
KLEIN ENGINES & COMPETITION COMPONENTS, INC.,
a Nevada corporation
By:__________________________________________
Its:_________________________________________
INTERNATIONAL MOTOR SPORTS GROUP, INC.,
a Delaware corporation
By:__________________________________________
Its:_________________________________________
3
EXHIBIT 10.4
RECORDATION REQUESTED BY: |
BANK OF ARIZONA |
12221 North Tatum Blvd. |
Phoenix, AZ 85032 |
|
WHEN RECORDED MAIL TO: |
BANK OF ARIZONA |
12221 North Tatum Blvd. |
Phoenix, AZ 85032 |
|
|
| FOR RECORDER'S USE ONLY
- --------------------------------------------------------------------------------
COVER SHEET
DEED OF TRUST
(Participation)
DATE: November 29, 1996
GRANTOR: Klein Engineered Competition Components, Inc., A Utah Corporation,
whose address is 1205 and 1207 N. Miller Road, Tempe, AZ 85281
TRUSTEE: BANK OF ARIZONA, Attn. Loan Admin., whose address is P.O. Box
9928, Scottsdale, AZ 88252
BENEFICIARY: BANK OF ARIZONA, whose address is 12221 North Tatum Blvd.,
Phoenix, AZ 85032
<PAGE>
DEED OF TRUST
(Participation)
THIS DEED OF TRUST, made this November 29, 1996
by and between
Klein Engineered Competition Components, Inc., A Utah Corporation, whose address
is 1205 and 1207 N. Miller Road, Tempe, AZ 85281
hereinafter referred to as "Grantor,"
BANK OF ARIZONA, Attn. Loan Admin., whose address is P.O. Box 9928, Scottsdale,
AZ 88252,
hereinafter referred to as "Trustee,"
BANK OF ARIZONA, whose address is 12221 North Tatum Blvd., Phoenix, AZ 85032,
hereinafter referred to as "Beneficiary,"
in participation with the Small Business Administration, an agency of the United
States.
WITNESSETH, that for and in consideration of $1.00 and other good and
valuable consideration, receipt of which is hereby acknowledged, the Grantor
does hereby bargain, sell, grant, assign, and convey unto the Trustee, his
successors and assigns, all of the following described property situated and
being in Maricopa County, State of Arizona:
Parcel 1:
The North 225 feet of the South 775 feet of the West half of the West
half of the West half of the Northwest quarter of the Southeast quarter
of Section Eleven (11), Township One (1) North, Range Four (4) East of
the Gila and Salt River Base and Meridian, Maricopa County, Arizona;
EXCEPT the West 33 feet thereof conveyed to United States of America by
instrument recorded in Book 334 of Deeds, page 68, records of Maricopa
County, Arizona; and
EXCEPT an undivided one-half (1/2) interest in and to all oil, gas, and
mineral rights as reserved in Deed recorded in Docket 324, page 137,
records of Maricopa County, Arizona.
Parcel 2:
The South 775 feet of the East half of the West half of the West half
of the West half of the North half of the Southeast quarter Section
Eleven (11), Township One (1) North, Range Four (4) East of the Gila
and Salt River Base and Meridian, Maricopa County, Arizona;
EXCEPT the South 580 feet; and
EXCEPT an undivided one-half (1/2) interest in and to all oil, gas, and
mineral rights as reserved in Deed recorded in Docket 324 page 137
records of Maricopa County, Arizona.
Together with and including all buildings, all fixtures, including but not
limited to all plumbing, heating, lighting, ventilating, refrigerating,
incinerating, air conditioning apparatus, and elevators (the Trustor hereby
declaring that it is intended that the items herein enumerated shall be deemed
to have been permanently installed as part of the realty), and all improvements
now or hereafter existing thereon; the hereditaments and appurtenances and all
other rights thereunto belonging, or in anywise appertaining, and the reversion
and reversions, remainder and remainders, and the rents, issues, and profits of
the above described property. To have and to hold the same unto the Trustee, and
the successors in interest of the Trustee, forever, in fee simple or such other
estate, if any, as is stated herein trust, to secure the payment of the
promissory note of this date, in the principal sum of $762,720.00 signed by one
or more authorized officers in behalf of Klein Engineered Competition
Components, Inc..
(1)
<PAGE>
1. This conveyance is made upon and subject to the further trust that
the said Grantor shall remain in quiet and peaceable possession of the above
granted and described premises and take the profits thereof to his own use until
default be made in any payment of an installment due on said note or in the
performance of any of the covenants or conditions contained therein or in this
Deed of Trust; and, also to secure the reimbursement of the Beneficiary or any
other holder of said note, the Trustee or any substitute trustee of any and all
costs and expenses incurred, including reasonable attorney's fees, on account of
any litigation which may arise with respect to this Trust or with respect to the
indebtedness evidenced by said note, the protection and maintenance of the
property hereinabove described or in obtaining possession of said property after
any sale which may be made as hereinafter provided.
2. Upon the full payment of the indebtedness evidenced by said note and
the interest thereon, the payment of all other sums herein provided for, the
repayment of all monies advanced or expended pursuant to said note or this
instrument, and upon the payment of all other proper costs, charges,
commissions, and expenses, the above described property shall be released and
reconveyed to and at the cost of the Grantor.
3. Upon default in any of the covenants or conditions of this
instrument or of the note or loan agreement secured hereby, the Beneficiary or
his assigns may without notice and without regard to the adequacy of security
for the indebtedness secured, either personally or by attorney or agent without
bringing any action or proceeding, or by a receiver to be appointed by the
court, enter upon and take possession of said property or any part thereof, and
do any acts which Beneficiary deems proper to protect the security hereof, and
either with or without taking possession of said property, collect and receive
the rents, royalties, issues, and profits thereof, including rents accrued and
unpaid, and apply the same, less costs of operation and collection, upon the
indebtedness secured by this Deed of Trust, said rents, royalties, issues, and
profits, being hereby assigned to the Beneficiary as further security for the
payment of such indebtedness. Exercise of rights under this paragraph shall not
cure or waive any default or notice of default hereunder or invalidate any act
done pursuant to such notice but shall be cumulative to any right and remedy to
declare a default and to cause notice of default to be recorded as hereinafter
provided, and cumulative to any other right and/or remedy hereunder, or provided
by law, and may be exercised concurrently or independently. Expenses incurred by
Beneficiary hereunder including reasonable attorney's fees shall be secured
hereby.
4. The Grantor covenants and agrees that if he shall fail to pay said
indebtedness, or any part thereof, when due, or shall fail to perform any
covenant or agreement of this instrument or of the promissory note secured
hereby, the entire indebtedness hereby secured shall immediately become due,
payable, and collectible without notice, at the option of the Beneficiary or
assigns, regardless of maturity, and the Beneficiary or assigns may enter upon
said property and collect the rent and profits thereof. Upon such default in
payment or performance, and before or after such entry, the Trustee, acting in
the execution of this Trust, shall have the power to sell said property, and it
shall be the Trustee's duty to sell said property (and in case of any default of
any purchaser, to resell) at public auction, to the highest bidder, first giving
four weeks' notice of the time, terms, and place of such sale, by advertisement
not less than once during each of said four weeks in a newspaper published or
distributed in the county or political subdivision in which said property is
situated, all other notice being hereby waived by the Grantor (and the
Beneficiary or any person on behalf of the Beneficiary may bid and purchase at
such sale). Such sale will be held at a suitable place to be selected by the
Beneficiary within said county or political subdivision. The Trustee is hereby
authorized to execute and deliver to the purchaser at such sale a sufficient
conveyance of said property, which conveyance shall contain recitals as to the
happening of default upon which the execution of the power of sale herein
granted depends; and the said Grantor hereby constitutes and appoints the
Trustee as his agent and attorney in fact to make such recitals and to execute
said conveyance and hereby covenants and agrees that the recitals so made shall
be binding and conclusive upon the Grantor, and said conveyance shall be
effectual to bar all equity or right of redemption, homestead, dower, right of
appraisement, and all other rights and exemptions of the Grantor, all of which
are hereby expressly waived and conveyed to the Trustee. In the event of a sale
as hereinabove provided, the Grantor, or any person in possession
(2)
<PAGE>
under the Grantor, shall then become and be tenants holding over and shall
forthwith deliver possession to the purchaser at such sale or be summarily
dispossessed, in accordance with the provisions of law applicable to tenants
holding over. The power and agency hereby granted are coupled with an interest
and are irrevocable by death or otherwise, and are granted as cumulative to all
other remedies for the collection of said indebtedness. The Beneficiary or
Assigns may take any other appropriate action pursuant to state or Federal
statute either in state or Federal court or otherwise for the disposition of the
property.
5. In the event of a sale as provided in paragraph 4, the Trustee shall
be paid a fee by the Beneficiary in an amount not in excess of
___________________percent of the gross amount of said sale or sales, provided,
however, that the amount of such fee shall be reasonable and shall be approved
by the Beneficiary as to reasonableness. Said fee shall be in addition to the
costs and expenses incurred by the trustee in conducting such sale. The amount
of such costs and expenses shall be deducted and paid from the sale's proceeds.
It is further agreed that if said property shall be advertised for sale as
herein provided and not sold, the Trustee shall be entitled to a reasonable fee,
in an amount acceptable to the Beneficiary for the services rendered. The
Trustee shall also be reimbursed by the Beneficiary for all costs and expenses
incurred in connection with the advertising of said property for sale if the
sale is not consummated.
6. The proceeds of any sale of said property in accordance with
paragraph 4 shall be applied first to payments of fees, costs, and expenses of
said sale, the expenses incurred by the Beneficiary for the purpose of
protecting or maintaining said property and reasonable attorneys' fees;
secondly, to payment of the indebtedness secured hereby; and thirdly, to pay any
surplus or excess to the person or persons legally entitled thereto.
7. In the event said property is sold pursuant to the authorization
contained in this instrument or at a judicial foreclosure sale and the proceeds
are not sufficient to pay the total indebtedness secured by this instrument and
evidenced by said promissory note, the Beneficiary will be entitled to a
deficiency judgment for the amount of the deficiency without regard to
appraisement, the Grantor having waived and assigned all rights of appraisement
to the Trustee.
8. The Grantor covenants and agrees as follows:
a. He will promptly pay the indebtedness evidenced by said
promissory note at the times and in the manner therein provided.
b. He will pay all taxes, assessments, water rates, and other
governmental or municipal charges, fines or impositions, for which has
not been made hereinbefore, and will promptly deliver the official
receipts therefor to the Beneficiary.
c. He will pay such expenses and fees as may be incurred in
the protection and maintenance of said property, including the fees of
any attorney employed by the Beneficiary for the collection of any or
all of the indebtedness hereby secured, or such expenses and fees as
may be incurred in any foreclosure sale by the Trustee, or court
proceedings or in any other litigation or proceeding affecting said
property, and attorney's fees reasonably incurred in any other way.
d. The rights created by this conveyance shall remain in full
force and effect during any postponement or extension of the time of
the payment of the indebtedness evidenced by said note or any part
thereof secured hereby.
e. He will continuously maintain hazard insurance of such type
or types and in such amounts as the Beneficiary may from time to time
require, on the improvements now or hereafter on said property, and
will pay promptly when due any premiums therefor. All insurance shall
be carried in companies acceptable to Beneficiary and the policies and
renewals thereof shall be held by
(3)
<PAGE>
Beneficiary and have attached thereto loss payable clauses in favor of
and in form acceptable to the Beneficiary. In the event of loss,
Grantor will give immediate notice in writing to Beneficiary and
Beneficiary may make proof of loss if not made promptly by Grantor, and
each insurance company concerned is hereby authorized and directed to
make payment for such loss directly to Beneficiary instead of to
Grantor and Beneficiary jointly, and the insurance proceeds, or any
part thereof, may be applied by Beneficiary at its option either to the
reduction of the indebtedness hereby secured or to the restoration or
repair of the property damaged. In the event of a Trustee's sale or
other transfer of titled to said property in extinguishment of the
indebtedness secured hereby, all right, title, and interest of the
Grantor in and to any insurance policies than in force shall pass at
the option of the Beneficiary to the purchaser or Beneficiary.
f. He will keep the said premises in as good order and
condition as they are now and will not commit or permit any waste
thereof, reasonable wear and tear excepted, and in the event of the
failure of the Grantor to keep the buildings on said premises and those
to be erected on said premises, or improvements thereon, in good
repair, the Beneficiary may make such repairs as in the Beneficiary's
discretion it may deem necessary for the proper preservation thereof,
and any sums paid for such repairs shall bear interest from the date of
payment at the rate specified in the note, shall be due and payable on
demand and shall be fully secured by this Deed of Trust.
g. He will not without the prior written consent of the
Beneficiary voluntarily create or permit to be created against the
property subject to this Deed of Trust any liens inferior or superior
to the lien of this Deed of Trust and further that he will keep and
maintain the same free from the claim of all persons supplying labor or
materials which will enter into the construction of any and all
buildings now being erected or to be erected on said premises.
h. He will not rent or assign any part of the rent of said
property or demolish, remove, or substantially alter any building
without the written consent of the Beneficiary.
9. In the event the Grantor fails to pay any Federal, state, or local
tax assessment, income tax or other tax lien charge, fee, or other expense
charged to the property hereinabove described, the Beneficiary is hereby
authorized to pay the same and any sum so paid by the Beneficiary shall be added
to and become a part of the principal amount of the indebtedness evidenced by
said promissory note. If the Grantor shall pay and discharge the indebtedness
evidenced by said promissory note, and shall pay such sums and shall discharge
all taxes and liens and the costs, fees, and expenses of making, enforcing and
executing this Deed of Trust, then this Deed of Trust shall be canceled and
surrendered.
10. The Grantor covenants that he is lawfully seized and possessed of
and has the right to sell and convey said property; that the same is free from
all encumbrances except as hereinabove recited; and that he hereby binds himself
and his successors in interest to warrant and defend the title aforesaid thereto
and every part thereof against the lawful claims of all persons whomsoever.
11. For better security of the indebtedness hereby secured the Grantor,
upon the request of the Beneficiary, its successors or assigns, shall execute
and deliver a supplemental mortgage or mortgages covering any additions,
improvements, or betterments made to the property hereinabove described and all
property acquired after the date hereof (all in form satisfactory to Grantee).
Furthermore, should Grantor fail to cure any default in the payment of a prior
or inferior encumbrance on the property described by this instrument, Grantor
hereby agrees to permit Beneficiary to cure such default, but Beneficiary is not
obligated to do so; and such advances shall become part of the indebtedness
secured by this instrument, subject to the same terms and conditions.
12. That all awards of damages in connection with any condemnation for
public use of or injury to any of said property are hereby assigned and shall be
paid to Beneficiary, who may apply the same to payment of the installments last
due under said note, and the Beneficiary is hereby authorized, in the
(4)
<PAGE>
name of the name of the Grantor, to execute and deliver valid acquittances
thereof and to appeal from any such award.
13. The irrevocable right to appoint a substitute trustee or trustees
is hereby expressly granted to the Beneficiary, his successors or assigns, to be
exercised at any time hereafter without notice and without specifying any reason
therefor, by filing for record in the office where this instrument is recorded
an instrument of appointment. The Grantor and the Trustee herein named or that
may hereinafter be substituted hereunder expressly waive notice of the exercise
of this right as well as any requirement or application to any court for the
removal, appointment or substitution of any trustee hereunder.
14. Notice of the exercise of any option granted herein to the
Beneficiary or to the holder of the note secured hereby is not required to be
given the Grantor, the Grantor having hereby waived such notice.
15. If more than one person joins in the execution of this instrument
as Grantor or if anyone so joined be of the feminine sex, the pronouns and
relative words used herein shall be read as if written in the plural or
feminine, respectively, and the term "Beneficiary" shall include any payee of
the indebtedness hereby secured or any assignee or transferee thereof whether by
operation of law of otherwise. The covenants herein contained shall bind and the
rights herein granted or conveyed shall inure to the respective heirs,
executors, administrators, successors, and assigns of the parties hereto.
16. In compliance with section 101.1(d) of the Rules and Regulations of
the Small Business Administration [13 C.F.R. 101.1(d)], this instrument is to be
construed and enforced in accordance with applicable Federal law.
17. A judicial decree, order, or judgment holding any provision or
portion of this instrument invalid or unenforceable shall not in any way impair
or preclude the enforcement of the remaining provisions or portions of this
instrument.
(5)
<PAGE>
IN WITNESS WHEREOF, the Grantor has executed this instrument and the Trustee and
Beneficiary have accepted the delivery of this instrument as of the day and year
aforesaid.
Klein Engineered Competition Components, Inc.
By: /s/ Thomas G Klein
-----------------------------------
Thomas G Klein, President/Treasurer
(6)
<PAGE>
CORPORATE ACKNOWLEDGMENT
STATE OF AZ )
)ss
COUNTY OF MARICOPA )
On this 29 day of November, 1996, before me, the undersigned Notary Public,
personally appeared Thomas G Klein, President/Treasurer of Klein Engineered
Competition Components, Inc., and known to me to be an authorized agent of the
corporation that executed the Deed of Trust and acknowledged the Deed of Trust
to be the free and voluntary act and deed of the corporation, by authority of
its Bylaws or by resolution of its board of directors, for the uses and purposes
therein mentioned, and on oath stated that he or she is authorized to execute
this Deed of Trust and in fact executed the Deed of Trust on behalf of the
corporation.
By THOMAS G. KLEIN Residing at
---------------------------------------------------
- ---------------------------------------------------
Notary Public in My and commission the expires
/s/ Crystal L. Melby
- -----------------------------------------------------------------------------
OFFICIAL SEAL
CRYSTAL L. MELBY
Notary Public - State of Arizona
MARICOPA COUNTY
My Comm. Expires Aug. 16, 1997
REQUEST FOR FULL RECONVEYANCE
(To be used only when obligations have been paid in full)
To:___________________________________, Trustee
The undersigned is the legal owner and holder of all Indebtedness secured by
this Deed of Trust. All sums secured by this Deed of Trust have been fully paid
and satisfied. You are hereby directed, upon payment to you of any sums owing to
you under the terms of this Deed of Trust or pursuant to any applicable statute,
to cancel the secured by this Deed of Trust (which is delivered to you together
with this Deed of Trust), and to reconvey, without warranty, to the parties
designated by the terms of this Deed of Trust, the estate now held by you under
this Deed of Trust. Please mail the reconveyance and Related Documents to:
- -------------------------------------------------------------.
Date: _____________________________Beneficiary: ________________________________
By: ________________________________
Its: ________________________________
<PAGE>
EXHIBIT "B"
ADDITIONAL STIPULATIONS
(a) Grantor represents, warrants and agrees that: (i) neither Grantor
nor any other person has used or installed any Hazardous Material (as
hereinafter defined) onto, from or affecting the Premises; (ii) neither Grantor
nor any other person has violated any applicable Environmental Laws (as
hereinafter defined) relating to or affecting the Premises or any other property
owned by Grantor; (iii) the Premises are presently in compliance with all
Environmental Laws, and there are no facts or circumstances presently existing
upon or under the Premises, or relating to the Premises, which may violate any
applicable Environmental Laws, and there is not now pending or, to the best
knowledge of the Grantor, any threatened action, suit, investigation or
proceeding against Grantor or the Premises (or against any other party relating
to the Premises) seeking to enforce any right or remedy under any of the
Environmental Laws; (iv) the premises shall be kept free of Hazardous Materials,
and shall not be used to generate, manufacture, refine, transport, treat, store,
handle, dispose, transfer, produce, or process Hazardous Materials; (v) Grantor
shall not cause or permit the installation of Hazardous Materials in, on, over
or under the Premises or a release (as hereinafter under the Premises or a
release (as hereinafter defined) of Hazardous Materials onto or from the
Premises or suffer the presence of Hazardous Materials in, on, over or under the
Premises; (vi) Grantor has obtained and will at all times continue to obtain
and/or maintain all licenses, permits and/or other governmental or regulatory
actions necessary to comply with Environmental Laws (the "Permits") and the
Grantor is and will continue to be and at all times remain in full compliance
with the terms and provisions of the permits; (vii) there has been no Release of
any Hazardous Materials onto or from the Premises, whether or not such Release
emanated from the premises or any contiguous real estate; and (viii) Grantor
shall immediately give the Grantee oral and written notice in the event that
Grantor receives any notice from any governmental agency, entity, or any other
party with regard to Hazardous Materials, on, from or affecting the Premises,
and Grantor shall conduct and complete all investigations, studies, sampling and
testing, and all remedial, removal, and other actions necessary to clean up and
remove all Hazardous Materials on, from or affecting the Premises in accordance
with all applicable Environmental Laws.
(b) Grantor hereby agrees to indemnify the Grantee and hold the Grantee
harmless from and against any and all liens, demands, defenses, suits,
proceedings, disbursements, liabilities, losses, litigation, damages, judgments,
obligations, penalties, injuries, costs, expenses (including, without
limitation, attorneys' and experts' fees) and claims of any and every kind
whatsoever paid, incurred, suffered by, or asserted against Grantee and/or the
Premises for, with respect to, or as a direct or indirect result of: (i) the
presence in, on, over or under, or the escape, seepage, leakage, spillage,
discharge, emission or release onto or from the Premises of any Hazardous
Materials regardless of whether or not caused by or within the control of
Grantor; (ii) the violation of any Environmental Laws relating to or affecting
the premises or Grantor, whether or not caused by or within the control of
Grantor; (iii) the failure by Grantor to comply fully with the terms and
provisions hereof; (iv) the violation of any of the Environmental Laws in
connection with any other property owned by Grantor, or (v) any warranty or
representation made by Grantor in this paragraph which is or becomes false or
untrue in any material respect.
(c) In the event Grantee suspects Grantor has violated any of the
covenants, warranties, or representations contained herein, or that the Premises
are not in compliance with the Environmental Laws for any reason, Grantor shall
take such steps as Grantee requires by written notice to Grantor in order to
confirm or deny such occurrences, including, without limitation, the preparation
of environmental studies, surveys or reports. In the event that Grantor fails to
take such action, Grantee may take such action as Grantee deems necessary, and
the costs and expense of all such actions taken by Grantee, including, without
limitation, Grantee's attorney's fees, shall be added to the indebtedness
secured hereby.
(d) For the purposes of this Deed: (i) "Hazardous Material" or
"Hazardous Materials" means and includes petroleum products, flammable
explosives, radioactive materials, asbestos or any material containing asbestos,
polychlorinated biphenyls, and/or any hazardous, toxic or dangerous waste,
substance or material defined as such, or as a Hazardous Substance or any
similar term by, in or for the purposes of the Environmental Laws, including
without limitation, Section 101(22) of CERCLA; and (ii) "Environmental Law" or
"Environmental Laws" shall mean any "Super Fund" or "Super Lien" law, or any
<PAGE>
other federal, state or local statute, law, ordinance, code, rule, regulation,
order or decree, regulating, relating to or imposing liability or standards of
conduct concerning any Hazardous Materials as may now or at any time hereafter
be in effect, including, without limitation, the following, as same may be
amended or replaced from time to time, and all regulations promulgated
thereunder or in connection therewith: The Super Fund Amendments and
Reauthorization Act of 1986 ("SARA"); The Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA"); The Hazardous Waste
Management System; and the Occupational Safety and Health Act of 1970 ("OSHA").
The obligations and liabilities of Grantor under this paragraph shall survive
the exercise of any power of sale under or foreclosure of the Deed, the delivery
of a Deed in lieu of foreclosure of this Deed, the cancellation or release of
record of this Deed, and/or the payment and cancellation of the indebtedness
secured hereby.
U.S. Small Business Administration
SBA LOAN NUMBER
PLP 972-505-3001
NOTE
PHOENIX, AZ
----------------
(City and State)
(Date): November 29, 1996
$762,720.00
For value received, the undersigned promises to pay to the order of BANK OF
ARIZONA at its office in the city of Phoenix, state of Arizona, or at holder's
option, at such other place as may be designated from time to time by the holder
Seven Hundred Sixty Two Thousand Seven Hundred Twenty & 00/100 Dollars, with
interest on unpaid principal computed from the date of each advance to the
undersigned at the rate of (initial) 10.000 per cent per annum, payment to be
made in installments as follows:
One interest installment, payable monthly, commencing on the first day of the
month from date of Note followed by installments, including principal and
interest, each in the amount of Six Thousand Nine Hundred Thirty One Dollars and
No/100 Dollars ($6,931.00), commencing on the first day of the second month from
date of Note and continuing due and payable monthly thereafter until Twenty Five
(25) years from date of Note when the full unpaid balance of principal and
interest shall become due and payable. Each installment shall be applied to
interest accrued as of the date of receipt and the balance, if any, to
principal.
THIS IS A VARIABLE INTEREST RATE NOTE. Interest on unpaid principal shall accrue
at the initial rate of Ten percent (10.00%) per annum. Commencing on the first
calendar day of the calendar month following the Note date, and monthly
thereafter, the interest rate shall increase or decrease to One and Three
Quarters percent (1.75%) above the lowest Prime Rate in effect on the first
business day of the month, as published in the Money Rate Section of The Wall
Street Journal published each business day.
NOTE: The amount of the monthly payment shown above is based upon the Prime
Interest Rate as of the date of the receipt of the loan application by SBA of
Eight and One Quarter percent (8.25%) plus a spread of One and Three Quarters
percent (1.75%).
The amount of monthly installments of principal and interest require herein
shall be increased or decreased, as appropriate, to an amount necessary to
amortize principal remaining unpaid as of the date of the change in the interest
rate over the remaining term of this Note.
The Lender shall give the Borrower written notice of any change (either an
increase or decrease) in the amount of the principal and interest installments
required herein within thirty (30) days after the effective date of any such
change.
If the Borrower shall be in default in payment due on the indebtedness herein
and the Small Business Administration (SBA) purchases its guaranteed portion of
said indebtedness, the rate of interest on both the guaranteed and unguaranteed
portion herein shall become fixed at the rate in effect as of the first date of
uncured default. If the Borrower shall not be in default in payment when SBA
purchases its guaranteed portion, the rate of interest on both the guaranteed
and unguaranteed portion herein shall be fixed at the rate in effect as of the
date of purchase by SBA.
LATE CHARGE: Borrower agrees to pay a late charge equal to Five Percent (5.00%)
of the payment amount due if such payment is not received within Ten (10) days
of the due date. Funds received from the Borrower will be applied first to
interest to the date of receipt, then to principal and then to the late fee.
Upon any breach of the Note, the balance shall continue to accrue interest at
the rate specified herein.
If this Note contains a fluctuating interest rate, the notice provision is not a
precondition for fluctuation (which shall take place regardless of notice).
Payment of any installment of principal or interest owing on this Note may be
made prior to the maturity date thereof without penalty.
Borrower shall provide lender with written notice of intent to prepay part or
all of this loan at least three (3) weeks prior to the anticipated prepayment
date. A prepayment is any payment made ahead of schedule that exceeds twenty
(20) percent of the then outstanding principal balance. If borrower makes a
prepayment and fails to give at least three weeks advance notice of intent to
prepay, then, notwithstanding any other provision to the contrary in this Note
or any other document, borrower shall be required to pay lender three weeks
interest on the unpaid principal as of the date preceding such prepayment.
The term "Indebtedness" as used herein shall mean the Indebtedness evidenced by
this Note, including principal, interest, and expenses, whether contingent, now
due, or hereafter to become due, and whether heretofore or contemporaneously
herewith or hereafter contracted. The term "Collateral" as used in this Note
shall mean any funds, guaranties, or other property or rights therein of any
nature whatsoever or the proceeds thereof which may have been, are, or hereafter
may be, hypothecated, directly or indirectly by the undersigned or others, in
connection with, or as security for, the Indebtedness or any part thereof. The
Collateral, and each part thereof, shall secure the Indebtedness and each part
thereof. The covenants and conditions set forth or referred to in any and all
instruments of hypothecation constituting the Collateral are hereby incorporated
in this Note as covenants and conditions of the undersigned with the same force
and effect as though such covenants and conditions were fully set forth herein.
<PAGE>
11-29-1996 PROMISSORY NOTE Page 2
Loan No. 10024 (Continued)
================================================================================
The Indebtedness shall immediately become due and payable, without notice or
demand, upon the appointment of a receiver or liquidator, whether voluntary or
involuntary, for the undersigned or for any of its property, or upon the filing
of a petition by or against the undersigned under the provisions of any state
insolvency law or under the provisions of the Bankruptcy Reform Act of 1978, as
amended, or upon the making by the undersigned of an assignment for the benefit
of its creditors. Holder is authorized to declare all or any part of the
Indebtedness immediately due and payable upon the happening of any of the
following events: (1) Failure to pay any part of the Indebtedness when due; (2)
nonperformance by the undersigned of any agreement with, or any condition
imposed by, Holder or Small Business Administration (hereinafter called "SBA"),
with respect to the Indebtedness; (3) Holder's discovery of the undersigned's
failure in any application of the undersigned to Holder or SBA to disclose any
fact deemed by Holder to be material or of the making therein or in any of the
said agreements, or in any affidavit or other documents submitted in connection
with said application or the Indebtedness, of any misrepresentation by, on
behalf of, or for the benefit of the undersigned; (4) the reorganization (other
than a reorganization pursuant to any of the provisions of the Bankruptcy Reform
Act of 1978, as amended) or merger or consolidation of the undersigned (or the
making of any agreement therefor) without the prior written consent of Holder;
(5) the undersigned's failure duly to account, to Holder's satisfaction, at such
time or times as Holder may require, for any of the Collateral, or proceeds
thereof, coming into the control of the undersigned; or (6) the institution of
any suit affecting the undersigned deemed by Holder to affect adversely its
interest hereunder in the Collateral or otherwise. Holder's failure to exercise
its rights under this paragraph shall not constitute a waiver thereof.
Upon the nonpayment of the Indebtedness, or any part thereof, when due, whether
by acceleration or otherwise, Holder is empowered to sell, assign, and deliver
the whole or any part of the Collateral at public or private sale, without
demand, advertisement, or notice of the time or place of sale or of any
adjournment thereof, which are hereby expressly waived. After deducting all
expenses incidental to or arising from such sale or sales, Holder may apply the
residue of the proceeds thereof to the payment of the Indebtedness, as it shall
deem proper, returning the excess, if any, to the undersigned. The undersigned
hereby waives all right of redemption or appraisement whether before or after
the sale.
Holder is further empowered to collect or cause to be collected or otherwise to
be converted into money all or any part of the Collateral, by suit or otherwise,
and to surrender, compromise, release, renew, extend, exchange, or substitute
any item of the Collateral in transactions with the undersigned or any third
party, irrespective of any assignment thereof by the undersigned, and without
prior notice to or consent of the undersigned or any assignee. Whenever any item
of the Collateral shall not be paid when due, or otherwise shall be in default,
whether or not the Indebtedness, or any part thereof, has become due, Holder
shall have the same rights and powers with respect to such item of the
Collateral as are granted in this paragraph in case of nonpayment of the
Indebtedness, or any part thereof, when due. None of the rights, remedies,
privileges, or powers of Holder expressly provided for herein shall be
exclusive, but each of them shall be cumulative with and in addition to every
other right, remedy, privilege, and power now or hereafter existing in favor of
Holder, whether at law or equity, by statute or otherwise.
The undersigned agrees to take all necessary steps to administer, supervise,
preserve, and protect the Collateral; and regardless of any action taken by
Holder, there shall be no duty upon Holder in this respect. The undersigned
shall pay all expenses of any nature, whether incurred in or out of court, and
whether incurred before or after this Note shall become due at its maturity date
or otherwise, including but not limited to reasonable attorney's fees and costs,
which Holder may deem necessary or proper in connection with the satisfaction of
the Indebtedness or the administration, supervision, preservation, protection of
(including, but not limited to, the maintenance of adequate insurance) or the
realization upon the Collateral. Holder is authorized to pay at any time and
from time to time any or all of such expenses, add the amount of such payment to
the amount of the Indebtedness, and charge interest thereon at the rate
specified herein with respect to the principal amount of this Note.
The security rights of Holder and its assigns hereunder shall not be impaired by
Holder's sale, hypothecation, or rehypothecation of any note of the undersigned
or any item of the Collateral, or by any indulgence, including but not limited
to (a) any renewal, extension, or modification which Holder may grant with
respect to the Indebtedness or any part thereof, or (b) any surrender,
compromise, release, renewal, extension, exchange, or substitution which Holder
may grant in respect of the Collateral, or (c) any indulgence granted in respect
of any endorser, guarantor, or surety. The purchaser, assignee, transferee, or
pledgee of this Note, the Collateral, and guaranty, and any other document (or
any of them), sold, assigned, transferred, pledged, or repledged, shall
forthwith become vested with and entitled to exercise all the powers and rights
given by this Note and all applications of the undersigned to Holder or SBA, as
if said purchaser, assignee, transferee, or pledgee were originally named as
Payee in this Note and in said application or applications.
This promissory note is given to secure a loan which SBA is making or in which
it is participating and, pursuant to Part 101 of the Rules and Regulation of SBA
(13 C.F.R. 101.1(d)), this instrument is to be construed and (when SBA is the
Holder or a party in interest)enforced in accordance with applicable federal
law.
BORROWER:
Klein Engineered Competition Components, Inc.
By: /s/ Thomas G Klein
-------------------------------------
Thomas G Klein, President/Treasurer
<PAGE>
11-29-1996 PROMISSORY NOTE Page 2
Loan No. 10024 (Continued)
================================================================================
Note -- Corporate applicants must execute Note, in corporate name, by duly
authorized officer, and seal must be affixed and duly attested; partnership
applicants must execute Note in firmname, together with signature of a general
partner.
EXHIBIT 10.6
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$762,720.00 11-29-1996 11-01-2021 10024 6 55 10024 004
- -------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
Borrower: Klein Engineered Competition Components, Inc. Lender: BANK OF ARIZONA
1205 and 1207 N. Miller Road Attn: SBA Department
Tempe, AZ 85281 12221 North Tatum Blvd.
Phoenix, AZ 85032
======================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT is entered into between Klein Engineered
Competition Components, Inc. (referred to below as "Grantor"); and BANK OF
ARIZONA (referred to below as "Lender"). For valuable consideration, Grantor
grants to Lender a security interest in the Collateral to secure the
Indebtedness and agrees that Lender shall have the rights stated in this
Agreement with respect to the Collateral, in addition to all other rights which
Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
Collateral. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
All fixtures
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
Fixtures are and will be located on the following described real estate:
Parcel 1:
North 225 feet of the South 775 feet of the West half of the West half
of the West half of the Northwest quarter of the Southeast quarter of
Section Eleven (11), Township One (1) North, Range Four (4) East of
the Gila and Salt River Base and Meridian, Maricopa County, Arizona;
EXCEPT the West 33 feet thereof conveyed to United States of America
by instrument recorded in Book 334 of Deeds, page 68, records of
Maricopa County, Arizona; and
EXCEPT an undivided one-half (1/2) interest in and to all oil, gas,
and mineral rights as reserved in Deed recorded in Docket 324, page
137, records of Maricopa County, Arizona.
Parcel 2:
<PAGE>
11-29-1996 COMMERCIAL SECURITY AGREEMENT Page 2
Loan No 10024 (Continued)
================================================================================
The South 775 feet of the East half of the West half of the West half
of the West half of the North half of the Southeast quarter Section
Eleven (11) Township One (1) North, Range Four (4) East of the Gila
and Salt River Base and Meridian, Maricopa County, Arizona;
EXCEPT the South 580 feet; and
EXCEPT an undivided one-half (1/2) interest in and to all oil, gas,
and mineral rights as reserved in Deed recorded in Docket 324, page
137, records of Maricopa County, Arizona.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
Grantor. The word "Grantor" means Klein Engineered Competition Components,
Inc., its successors and assigns
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents.
Lender. The word "Lender" means BANK OF ARIZONA, its successors and
assigns.
Note. The word "Note" means the note or credit agreement dated November 29,
1996, in the principal amount of $762,720.00 from Klein Engineered
Competition Components, Inc. to Lender, together with all renewals of,
extensions of, modifications of, refinancings of, consolidations of and
substitutions for the note or credit agreement.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Organization. Grantor is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Utah and is
qualified to do business in the State of Arizona as a foreign corporation.
Authorization. The execution, delivery, and performance of this Agreement
by Grantor have been duly authorized by all necessary action by Grantor and
do not conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or organization,
or bylaws, or any agreement or other instrument binding upon Grantor or (b)
any law, governmental regulation, court decree, or order applicable to
Grantor.
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor.
No Violation. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Some or all of the
Collateral may be located at the real property described above. Except in
the ordinary course of its business, including the sales of inventory,
Grantor shall not remove the Collateral from its existing locations without
the prior written consent of Lender.
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11-29-1996 COMMERCIAL SECURITY AGREEMENT Page 3
Loan No 10024 (Continued)
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To the extent that the Collateral consists of vehicles, or other titled
property, Grantor shall not take or permit any action which would require
application for certificates of title for the vehicles outside the State of
Arizona, without the prior written consent of Lender.
Transactions Involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
Grantor shall not pledge, mortgage, encumber or otherwise permit the
Collateral to be subject to any lien, security interest, encumbrance, or
charge, other than the security interest provided for in this Agreement,
without the prior written consent of Lender. This includes security
interests even if junior in right to the security interests granted under
this Agreement. Unless waived by Lender, all proceeds from any disposition
of the Collateral (for whatever reason) shall be held in trust for Lender
and shall not be commingled with any other funds; provided however, this
requirement shall not constitute consent by Lender to any sale or other
disposition. Upon receipt, Grantor shall immediately deliver any such
proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least thirty (30) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
If Grantor at any time fails to obtain or maintain any insurance as
required under this Agreement, Lender may (but shall not be obligated to)
obtain such insurance as Lender deems appropriate, including if it so
chooses "single interest insurance,"
<PAGE>
11-29-1996 COMMERCIAL SECURITY AGREEMENT Page 4
Loan No 10024 (Continued)
================================================================================
which will cover only Lender's interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor of the proceeds for the reasonable cost of repair or restoration.
If lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt which Grantor
has not committed to the repair or restoration of the Collateral shall be
used to prepay the Indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (C) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f)) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION. Until default, Grantor may have possession of the
tangible personal property and beneficial use of all the Collateral and may use
it in any lawful manner not inconsistent with this Agreement or the Related
Documents, provided that Grantor's right to possession and beneficial use shall
not apply to any Collateral where possession of the Collateral by Lender is
required by law to perfect Lender's security interest in such Collateral. If
Lender at any time has possession of any Collateral, whether before or after an
Event of Default, Lender shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral if Lender takes such action for
that purpose as Grantor shall request or as Lender, in Lender's sole discretion,
shall deem appropriate under the circumstances, but failure to honor any request
by Grantor shall not of itself be deemed to be a failure to exercise reasonable
care. Lender shall not be required to take any steps necessary to preserve any
rights in the Collateral against prior parties, not to protect, preserve or
maintain any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due
on the Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by
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11-29-1996 COMMERCIAL SECURITY AGREEMENT Page 5
Loan No 10024 (Continued)
================================================================================
judicial proceeding, self-help, repossession or any other method, by any
creditor of Grantor or by any governmental agency against the Collateral or
any other collateral security the Indebtedness. This includes a garnishment
of any of Grantor's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Grantor as to
the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Grantor gives Lender written
notice of the creditor or forfeiture proceeding and deposits with Lender
monies or a surety bond for the creditor or forfeiture proceeding, in an
amount determined by Lender, in its sole discretion, as being an adequate
reserve or bond for the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b) if the cure requires more than fifteen (15) days, immediately initiates
steps which Lender deems in Lender's sole discretion to be sufficient to
cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Arizona Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) fees of the receiver and his or her attorney shall become part of
the Indebtedness secured by this Agreement and shall be payable on demand,
with interest at the Note rate from date of expenditure until repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of
a secured creditor under the
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11-29-1996 COMMERCIAL SECURITY AGREEMENT Page 6
Loan No 10024 (Continued)
================================================================================
provisions of the Uniform Commercial Code, as may be amended from time to
time. In addition, Lender shall have and may exercise any or all other
rights and remedies it may have available at law, in equity, or otherwise.
Cumulative Remedies. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of Arizona. If these is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of MARICOPA
County, the State of Arizona. Lender and Grantor hereby waive the right to
any jury trial in any action, proceeding, or counterclaim brought by either
Lender or Grantor against the other. Subject to the provisions on
arbitration, this Agreement shall be governed by and construed in
accordance with the laws of the State of Arizona.
Arbitration. Lender and Grantor agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of
the American Arbitration Association, upon request of either party. No act
to take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any
party. Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Agreement shall preclude any
party from seeking equitable relief from a court of competent jurisdiction.
The statute of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall
be applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the
construction, interpretation, and enforcement of this arbitration
provision.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the Borrowers
signing below is responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to all Grantors. For
notice purposes, Grantor will keep Lender informed at all times of
Grantor's current address(es).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may not or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to
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================================================================================
be necessary or advisable. This power is given as security for the
Indebtedness, and the authority hereby conferred is and shall be
irrevocable and shall remain in full force and effect until renounced by
Lender.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
Time is of the essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS.
THIS AGREEMENT IS DATED NOVEMBER 29, 1996.
GRANTOR:
Klein Engineered Competition Components, Inc.
By /s/ Thomas G Klein
-----------------------------------
Thomas G Klein, President/Treasurer
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SBA LOAN NUMBER
PLP 972-505-3001
EXHIBIT 10.7
SMALL BUSINESS ADMINISTRATION (SBA)
GUARANTY
November 29, 1996
In order to induce BANK OF ARIZONA, (hereinafter called "Lender") to
make a loan or loans, or renewal or extension thereof, to Klein Engineered
Competition Components, Inc. (Hereinafter called "Debtor"), the Undersigned
hereby unconditionally guarantees to Lender, its successors and assigns, the due
and punctual payment when due, whether by acceleration or otherwise, in
accordance with the terms thereof, of the principal of and interest on and all
other sums payable, or stated to be payable, with respect to the note of the
Debtor, made by the Debtor to Lender, dated November 29, 1996 in the principal
amount of $762,720.00, with interest at the rate of (initial) 10.000 percent per
annum. Such note, and the interest thereon and all other sums payable with
respect thereto are hereinafter collectively called "Liabilities." As security
for the performance of this guaranty the Undersigned hereby mortgages, pledges,
assigns, transfers, and delivers to Lender certain collateral (if any), listed
in the schedule at the end hereof. The term "collateral" as used herein shall
mean any funds, guaranties, agreements, or other property or rights or interests
of any nature whatsoever, or the proceeds thereof, which may have been, are, or
hereafter may be, mortgaged, pledged, assigned, transferred or delivered
directly or indirectly by or on behalf of the Debtor of the Undersigned or any
other party to Lender or to the holder of the aforesaid note of the Debtor, or
which may have been, are, or hereafter may be held by any party as trustee or
otherwise, as security, whether immediate or underlying, for the performance of
this guaranty or the payment of the Liabilities or any of them or any security
therefor.
The Undersigned waives any notice of the incurring by the Debtor at any
time of any of the Liabilities, and waives any and all presentment, demand,
protest, or notice of dishonor, nonpayment, or other default with respect to any
of the Liabilities and any obligation of any party at any time comprised in the
collateral. The Undersigned hereby grants to Lender full power, in its
uncontrolled discretion and without notice to the Undersigned, but subject to
the provisions of any agreement between the Debtor or any other party and Lender
at the time in force, to deal in any manner with the Liabilities and the
collateral, including, but without limiting the generality of the foregoing, the
following powers:
(a) To modify or otherwise change any terms of all or any part of the
Liabilities or the rate of interest thereon (but not to increase the
principal amount of the note of the Debtor to Lender), to grant any
extension or renewal thereof and any other indulgence with respect
thereto, and to effect any release, compromise, or settlement with
respect thereto;
(b) To enter into any agreement of forbearance with respect to all or any
part of the Liabilities, or with respect to all or any part of the
collateral, and to change the terms of any such agreement;
(c) To forbear from calling for additional collateral to secure any of the
Liabilities or to secure any obligation comprised in the collateral;
(d) To consent to the substitution, exchange, or release of all or any
part of the collateral, whether or not the collateral, if any,
received by Lender upon any such substitution, exchange, or release
shall be of the same or of a different character or value than the
collateral surrendered by Lender;
(e) In the event of the nonpayment when due, whether by acceleration or
otherwise, of any of the Liabilities, or in the event of default in
the performance of any obligation comprised in the collateral, to
realize on the collateral or any part thereof, as a whole or in such
parcels or subdivided interests as Lender may elect, at any public or
private sale or sales, for cash or on credit or for future delivery,
without demand, advertisement, or notice of the time or place of sale
or any adjournment thereof (the Undersigned hereby waiving any such
demand, advertisement and notice to the extent permitted by law), or
by foreclosure or otherwise, or to forbear from realizing thereon, all
as Lender in its uncontrolled discretion may deem proper, and to
purchase all or any part of the collateral for its own account at any
such sale or foreclosure, such powers to be exercised only to the
extent permitted by law.
The obligations of the Undersigned hereunder shall not be released,
discharged or in any way affected, nor shall the Undersigned have any rights or
recourse against Lender, by reason of any action Lender may take or omit to take
under the foregoing powers.
In case the Debtor shall fail to pay all or any part of the Liabilities
when due, whether by acceleration or otherwise, according to the terms of said
note, the Undersigned, immediately upon the written demand of Lender, will pay
to Lender the amount due and unpaid by the Debtor as aforesaid, in like manner
as if such amount constituted the direct and primary obligation of the
Undersigned. Lender shall not be required, prior to any such demand on, or
payment by, the Undersigned, to make any demand upon or pursue or exhaust any of
its rights or remedies against the Debtor or others with respect to the payment
of any of the Liabilities, or to pursue or exhaust any of its rights or remedies
with respect to any part of the collateral. The Undersigned shall have no right
of subrogation whatsoever with respect to the Liabilities or the collateral
unless and until Lender shall have received full payment of all the Liabilities.
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11-29-1996 SBA GUARANTY Page 2
Loan No 10024 (Continued)
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The obligations of the Undersigned hereunder, and the rights of Lender
in the collateral, shall not be released, discharged, or in any way affected,
nor shall the Undersigned have any rights against Lender; by reason of the fact
that any of the collateral may be in default at the time of acceptance thereof
by Lender or later; nor by reason of the fact that a valid lien in any of the
collateral may not be conveyed to, or created in favor of, Lender; nor by reason
of the fact that any of the collateral may be subject to equities or defenses or
claims in favor of others or may be invalid or defective in any way; nor by
reason of the fact that any of the Liabilities may be invalid for any reason
whatsoever; nor by reason of the fact that the value of any of the collateral,
or the financial condition of the Debtor or of any obligor under or guarantor of
any of the collateral, may not have been correctly estimated or may have changed
or may hereafter change; nor by reason of any deterioration, waste, or loss by
fire, theft, or otherwise of any of the collateral, unless such deterioration,
waste, or loss be caused by the willful act or willful failure to act of Lender.
The Undersigned agrees to furnish Lender, or the holder of the
aforesaid note of the Debtor, upon demand, but not more often than semiannually,
so long as any part of the indebtedness under such note remains unpaid, a
financial statement setting forth, in reasonable detail, the assets,
liabilities, and net worth of the Undersigned.
The Undersigned acknowledges and understands that if the Small Business
Administration (SBA) enters into, has entered into, or will enter into, a
Guaranty Agreement, with Lender or any other lending institution, guaranteeing a
portion of the Debtor's Liabilities, the undersigned agrees that it is not a
coguarantor with SBA and shall have no right of contribution against SBA. The
undersigned further agress that all liability hereunder shall continue
notwithstanding payment by SBA under its Guaranty Agreement to the other lending
institution.
The term "Undersigned" as used in this agreement shall mean the signer
or signers of this agreement, and such signers, if more than one, shall be
jointly and severally liable hereunder. The Undersigned further agrees that all
liability hereunder shall continue notwithstanding the incapacity, lack of
authority, death, or disability of any one or more of the Undersigned, and that
any failure by Lender or its assigns to file or enforce a claim against the
estate of any of the Undersigned shall not operate to release any other of the
Undersigned from liability hereunder. The failure of any other person to sign
this guaranty shall not release or affect the liability of any signer hereof.
The undersigned waives any rights it may have pursuant to Arizona
Revised Statutes Section 12-1641 et. seq., and agrees, pursuant to Arizona
Revised Statues Section 33-814, that the obligations of the undersigned may be
enforced regardless of whether any Trustee's sale of security for the debt
herein guaranteed is held or not.
THIS GUARANTY IS DATED NOVEMBER 29, 1996.
GUARANTOR:
Klein Competition Components, Inc.
By: /s/ Thomas G. Klein
-----------------------------
Thomas G. Klein, President
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Note -- Corporate guarantors must execute guaranty in corporate name, by duly
authorized officer, and seal must be affixed and duly attested; partnership
guarantors must execute guaranty in firm name, together with signature of a
general partner. Formally executed guaranty is to be delivered at the time of
disbursement of loan.
(LIST COLLATERAL SECURING THE GUARANTY)
EXHIBIT 10.8
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RECORDATION REQUESTED BY:
CENTURY BANK
7275 EAST EASY STREET, SUITE B-103
P.O. BOX 5328
CAREFREE, AZ 85377
WHEN RECORDED MAIL TO:
CENTURY BANK
7275 EAST EASY STREET, SUITE B-103
P.O. BOX 5328
CAREFREE, AZ 85377
SEND TAX NOTICES TO:
Klein Engines & Competition Components,
Inc.
1207 North Miller Road
Tempe, AZ 85281-1856 FOR RECORDER'S USE ONLY
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DEED OF TRUST
THIS DEED OF TRUST IS DATED JUNE 30, 1997, among Klein Engines & Competition
Components, Inc., whose address is 1207 North Miller Road, Tempe, AZ 85281-1856
(referred to below as "Trustor"); CENTURY BANK, whose address is 7275 EAST EASY
STREET, SUITE B-103, P.O. BOX 5328, CAREFREE, AZ 85377 (referred to below
sometimes as "Lender" and sometimes as "Beneficiary"); and First American Title
Insurance Company, a California corporation, whose address is 111 W. Monroe,
Phoenix, AZ 85003 (referred to below as "Trustee").
CONVEYANCE AND GRANT. For valuable consideration, Trustor conveys to Trustee in
trust, with power of sale, for the benefit of Lender as Beneficiary, all of
Trustor's right, title, and interest in and to the following described real
property, together with all existing or subsequently erected or affixed
buildings, improvements, and fixtures; all easements, rights of way, and
appurtenances; all water and water rights flowing through, belonging or in any
way appertaining to the Real Property, and all of Trustor's water rights that
are personal property under Arizona law, including without limitation all type 2
nonirrigation grandfathered rights (if applicable), all irrigation rights, all
ditch rights, rights to irrigation district stock, all contracts for effluent,
all contracts for Central Arizona Project water, and all other contractual
rights to water, and together with all rights (but none of the duties) of
Trustor as declarant under any presently recorded declaration of covenants,
conditions, and restrictions affecting real property; and all other rights,
royalties, and profits relating to the real property, including without
limitation all minerals, oil, gas, geothermal and similar matters, located in
Maricopa County, State of Arizona (the "Real Property"):
Refer to the attached "Exhibit A"
The Real Property or its address is commonly known as 1111 North Miller Road,
Tempe, AZ 85281-1856.
Trustor presently assigns to Lender (also known as Beneficiary in this Deed of
Trust) all of Trustor's right, title, and interest in and to all present and
future leases of the Property and all Rents from the Property. In addition,
Trustor
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06-30-1997 DEED OF TRUST Page 2
Loan No (Continued)
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grants Lender a Uniform Commercial Code security interest in the Rents and the
Personal Property defined below.
DEFINITIONS. The following words shall have the following meanings when used in
this Deed of Trust. Terms not otherwise defined in this Deed of Trust shall have
the meanings attributed to such terms in the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Beneficiary. The word "Beneficiary" means CENTURY BANK, its successors and
assigns. CENTURY BANK also is referred to as "Lender" in this Deed of Trust.
Deed of Trust. The words "Deed of Trust" mean this Deed of Trust among
Trustor, Lender, and Trustee, and includes without limitation all assignment
and security interest provisions relating to the Personal Property and Rents.
Guarantor. The word "Guarantor" means and includes without limitation any and
all guarantors, sureties, and accommodation parties in connection with the
Indebtedness.
Improvements. The word "Improvements" means and includes without limitation
all existing and future improvements, buildings, structures, mobile homes
affixed on the Real Property, facilities, additions, replacements, and other
construction on the Real Property.
Indebtedness. The word "Indebtedness" means all principal and interest
payable under the Note and any amounts expended or advanced by Lender to
discharge obligations of Trustor or expenses incurred by Trustee or Lender to
enforce obligations of Trustor under this Deed of Trust, together with
interest on such amounts as provided in this Deed of Trust.
Lender. The word "Lender" means CENTURY BANK, its successors and assigns.
Note. The word "Note" means the Note dated June 30, 1997, in the principal
amount of $440,000.00 from Trustor to Lender, together with all renewals,
extensions, modifications, refinancings, and substitutions for the Note.
NOTICE TO TRUSTOR: THE NOTE CONTAINS A VARIABLE INTEREST RATE.
Personal Property: The words "Personal Property" mean all equipment,
fixtures, and other articles of personal property now or hereafter owned by
Trustor, and now or hereafter attached or affixed to the Real Property;
together with all accessions, parts, and additions to, all replacements of,
and all substitutions for, any of such property; and together with all
proceeds (including without limitation all insurance proceeds and refunds of
premiums) from any sale or other disposition of the Property.
Property. The word "Property" means collectively the Real Property and the
Personal Property.
Real Property. The words "Real Property" mean the property, interests, and
rights described above in the "Conveyance and Grant" section.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now or
hereafter existing, executed I connection with the Indebtedness.
Rents. The word "Rents" means all present and future rents, revenues, income,
issues, royalties, profits, and other benefits derived from the Property.
Trustee. The word "Trustee" means First American Title Insurance Company, a
California corporation and any substitute or successor trustees.
Trustor. The word "Trustor" means any and all persons and entities executing
this Deed of Trust, including without limitation all Trustors named above.
THIS DEED OF TRUST, INCLUDING THE ASSIGNMENT OF RENTS AND THE SECURITY INTEREST
IN THE RENTS AND PERSONAL PROPERTY, IS GIVEN TO SECURE (1) PAYMENT OF THE
INDEBTEDNESS AND (2) PERFORMANCE OF ANY AND ALL OBLIGATIONS OF TRUSTOR UNDER THE
NOTE, THE RELATED DOCUMENTS, AND THIS DEED OF TRUST. THIS DEED OF TRUST IS GIVEN
AND ACCEPTED ON THE FOLLOWING TERMS:
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06-30-1997 DEED OF TRUST Page 3
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PAYMENT AND PERFORMANCE. Except as otherwise provided in this Deed of Trust,
Trustor shall pay to Lender all amounts secured by this Deed of Trust as they
become due, and shall strictly and in a timely manner perform all of Trustor's
obligations under the Note, this Deed of Trust, and the Related Documents.
POSSESSION AND MAINTENANCE OF THE PROPERTY. Trustor agrees that Trustor's
possession and use of the Property shall be governed by the following
provisions:
Possession and Use. Until the occurrence of an Event of Default, Trustor may
(a) remain in possession and control of the Property, (b) use, operate or
manage the Property, and ( c) collect any Rents from the Property.
Duty to Maintain. Trustor shall maintain the Property in tenantable condition
and promptly perform all repairs, replacements, and maintenance necessary to
preserve its value.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Deed of
Trust, shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended,
42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the Hazardous
Materials Transportation Act, 49 U.S.C. Section 1801, et. seq., the Resource
Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq. Or other
applicable state or Federal laws, rules, or regulations adopted pursuant to
any of the foregoing. The terms "hazardous waste" and "hazardous substance"
shall also include, without limitation, petroleum and petroleum by-products
or any fraction thereof, and asbestos. Trustor represents and warrants to
Lender that: (a) During the period of Trustor's ownership of the Property,
there has been no use, generation, manufacture, storage, treatment, disposal,
release of threatened release of any hazardous waste or substance by any
person on, under, about, or from the Property; (b) Trustor has no knowledge
of, or reason to believe that there has been, except as previously disclosed
to and acknowledged by Lender in writing, (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release of
any hazardous waste or substance on, under, about, or from the Property by
any prior owners or occupants of the Property or (ii) any actual or
threatened litigation or claims of any kind by any person relating to such
matters; and ( c) except as previously disclosed to an acknowledged by Lender
in writing, (i) neither Trustor nor any tenant, contractor, agent or other
authorized user of the Property shall use, generate, manufacture, store,
treat, dispose of, or release any hazardous waste or substance on, under,
about, or from the Property and (ii) any such activity shall be conducted in
compliance with all applicable federal, state, and local laws, regulations
and ordinances, including without limitation those laws, regulations, and
ordinances described above. Trustor authorizes Lender and its agents to enter
upon the Property to make such inspections and tests, at Trustor's expense,
as Lender may deem appropriate to determine compliance of the Property with
this section of the Deed of Trust. Beneficiary, at its option, but without
obligation to do so, may correct any condition violating any applicable
environmental law affecting the Property, and in doing so shall conclusively
be deemed to be acting reasonably and for the purpose of protecting the value
of its collateral, and all costs of correcting a condition or violation shall
be payable to Beneficiary by Trustor as provided in the Expenditures by
Lender section of this Deed of Trust. Any inspections or tests made by Lender
shall be for Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Trustor or to any other
person. The representations and warranties contained herein are based on
Trustor's due diligence in investigating the Property for hazardous waste and
hazardous substances. Trustor hereby (a) releases and waives any future
claims against Lender for indemnity or contribution in the event Trustor
becomes liable for cleanup or other costs under any such laws, and (b) agrees
to indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties, and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Deed of Trust or as a consequence of any use, generation, manufacture,
storage, disposal, release or threatened release occurring prior to Trustor's
ownership or interest in the Property, whether or not the same was or should
have been known to Trustor. The provisions of this section of the Deed of
Trust, including the obligation to indemnify, shall survive the payment of
the Indebtedness and the satisfaction and reconveyance of the lien of this
Deed of Trust and shall not be affected by Lender's acquisition of any
interest in the Property, whether by foreclosure or otherwise.
Nuisance, Waste. Trustor shall not cause, conduct, or permit any nuisance nor
commit, permit, or suffer any stripping of or waste on or to the Property or
any portion of the Property. Without limiting the generality of the
foregoing, Trustor will not remove, or grant to any other party the right to
remove, any timber, minerals (including oil and gas), soil, gravel or rock
products without the prior written consent of Lender.
Removal of Improvements. Trustor shall not demolish or remove any
Improvements from the Real Property without the prior written consent of
Lender. As a condition to the removal of any Improvements, Lender may require
Trustor to make arrangements satisfactory to Lender to replace such
Improvements with Improvements of at least equal value.
Lender's Right to Enter. Lender and its agents and representatives may enter
upon the Real Property at all reasonable times to attend to Lender's
interests and to inspect the Property for purposes of Trustor's compliance
with the terms and conditions of this Deed of Trust.
Compliance with Governmental Requirements. Trustor shall promptly comply with
all laws, ordinances, and regulations, now or hereafter in effect, of all
governmental authorities applicable to the use or occupancy of the Property,
including without limitation, the Americans With disabilities Act. Trustor
may contest in good faith any such law, ordinance, or regulation and withhold
compliance during any proceeding, including appropriate appeals, so long as
Trustor has notified Lender in writing prior to doing so and so long as, in
Lender's sole opinion, Lender's interests in the Property are not
jeopardized. Lender may require Trustor to post adequate security or a surety
bond, reasonably satisfactory to Lender, to protect Lender's interest.
Duty to Protect. Trustor agrees neither to abandon nor leave unattended the
Property. Trustor shall do all
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06-30-1997 DEED OF TRUST Page 4
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other acts, in addition to those acts set forth above in this section, which
from the character and use of the Property are reasonably necessary to
protect and preserve the Property.
DUE ON SALE - CONSENT BY LENDER. Lender may, at its option, declare immediately
due and payable all sums secured by this Deed of Trust upon the sale or
transfer, without the Lender's prior written consent, of all or any part of the
Real Property, or any interest in the Real Property. A "sale or transfer" means
the conveyance of Real Property or any right, title, or interest therein;
whether legal, beneficial or equitable; whether voluntary or involuntary;
whether by outright sale, deed, installment sale contract, land contract,
contract for deed, leasehold interest with a term greater than (3) years,
lease-option contract, or by sale, assignment, or transfer of any beneficial
interest in or to any land trust holding title to the Real Property, or by any
other method of conveyance of Real Property interest. If any Trustor is a
corporation, partnership, or limited liability company, transfer also includes
any change in ownership or more than twenty-five percent (25%) of the voting
stock, partnership interests or limited liability company interests, as the case
may be, of Trustor. However, this option shall not be exercised by Lender if
such exercise is prohibited by federal law or by Arizona law.
TAXES AND LIENS. The following provisions relating to the taxes and liens on the
Property are a part of this Deed of Trust.
Payment. Trustor shall pay when due (an in all events prior to delinquency)
all taxes and assessments, including without limitation sales or use taxes in
any state, local privilege or excise taxes based on gross revenues, special
taxes, charges (including water and sewer), fines and impositions levied
against Trustor or on account of the Property, and shall pay when due all
claims for work done on or for services rendered or material furnished to the
Property. Trustor shall maintain the Property free of all liens having
priority over or equal to the interest of Lender under this Deed of Trust,
except for the lien of taxes and assessments not due and except as otherwise
provided in this Deed of Trust. Beneficiary shall have the right, but not the
duty or obligation, to charge Trustor for any such taxes or assessments in
advance of payment. In no event does exercise or non-exercise by Beneficiary
of this right relieve Trustor from Trustor's obligation under this Deed of
Trust or impose any liability whatsoever on Beneficiary.
Right To Contest. Trustor may withhold payment of any tax, assessment, or
claim in connection with a good faith dispute over the obligation to pay, so
long as Lender's interest in the Property is not jeopardized. If a lien
arises or is filed as a result of nonpayment, Trustor shall within fifteen
(15) days after the lien arises or, if a lien is filed, within fifteen (15)
days after Trustor has notice of the filing, secure the discharge of the
lien, or if requested by Lender, deposit with Lender cash or a sufficient
corporate surety bond or other security satisfactory to Lender in an amount
sufficient to discharge the lien plus any costs and attorneys' fees or other
charges that could accrue as a result of a foreclosure or sale under the
lien. In any contest, Trustor shall defend itself and Lender and shall
satisfy any adverse judgment before enforcement against the Property. Trustor
shall name Lender as an additional obligee under any surety bond furnished in
the contest proceedings.
Evidence of Payment. Trustor shall upon demand furnish to Lender satisfactory
evidence of payment of the taxes or assessments and shall authorize the
appropriate governmental official to deliver to Lender at any time a written
statement of the taxes and assessments against the Property.
Notice of Construction. Trustor shall notify Lender at least fifteen (15)
days before any work is commenced, any services are furnished, or any
materials are supplied to the Property, if any mechanic's lien, materialmen's
lien, or other lien could be asserted on account of the work, services, or
materials. Trustor will upon request of Lender furnish to Lender advance
assurances satisfactory to Lender that Trustor can and will pay the cost of
such improvements.
PROPERTY DAMAGE INSURANCE. The following provisions relating to insuring the
Property are a part of this Deed of Trust.
Maintenance of Insurance. Trustor shall procure and maintain policies of fire
insurance with standard extended coverage endorsements on a replacement basis
for the full insurable value covering all Improvements on the Real Property
in an amount sufficient to avoid application of any coninsurance clause, and
with a standard mortgagee clause in favor of Lender. Trustor shall also
procure and maintain comprehensive general liability insurance in such
coverage amounts as Lender may request, with Trustee and Lender being named
as additional insureds in such liability insurance policies. Additionally,
Trustor shall maintain such other insurance, including but not limited to
hazard, business interruption, and boiler insurance, as Lender may reasonably
require. Policies shall be written in form, amounts, coverages, and basis
reasonably acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. Trustor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of insurance
in form satisfactory to Lender, including stipulations that coverages will
not be canceled or diminished without at least ten (10) days' prior written
notice to Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any way by
any act, omission, or default of Trustor or any other person. Should the Real
Property at any time become located in an area designated by the Director of
the Federal Emergency Management Agency as a special flood hazard area,
Trustor agrees to obtain and maintain Federal Flood Insurance for the full
unpaid principal balance of the loan, up to the maximum policy limits set
under the National Flood Insurance Program, or as otherwise required by
Lender, and to maintain such insurance for the term of the loan.
Application of Proceeds. Trustor shall promptly notify Lender of any loss or
damage to the Property. Lender may make proof of loss if Trustor fails to do
so within fifteen (15) days of the casualty. Whether or not
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06-30-1997 DEED OF TRUST Page 5
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Lender's security is impaired, Lender may, at its election, receive and
retain the proceeds of any insurance and apply the proceeds to the reduction
of the Indebtedness, payment of any lien affecting the Property, or the
restoration and repair of the Property. If Lender elects to apply the
proceeds to restoration and repair, Trustor shall repair or replace the
damaged or destroyed Improvements in a manner satisfactory to Lender. Lender
shall, upon satisfactory proof of such expenditure, pay or reimburse, Trustor
from the proceeds for the reasonable cost of repair or restoration if Trustor
is not in default under this Deed of Trust. Any proceeds which have not been
disbursed within 180 days after their receipt and which Lender has not
committed to the repair or restoration of the Property shall be used first to
pay any amount owing to Lender under this Deed of Trust, then to pay accrued
interest, and the remainder, if any, shall be applied to the principal
balance of the Indebtedness. If Lender holds any proceeds after payment in
full of the Indebtedness, such proceeds shall be paid to Trustor as Trustor's
interests may appear.
Unexpired Insurance at Sale. Any unexpired insurance shall inure to the
benefit of, and pass to, the purchaser of the Property covered by this Deed
of Trust at any trustee's sale or other sale held under the provisions of
this Deed of Trust, or at any foreclosure sale of such Property.
Trustor's Report on Insurance. Upon request of Lender, however not more than
once a year, Trustor shall furnish to Lender a report on each existing policy
of insurance showing: (a) the name of the insureds; (b) the risks insured; (
c) the amount of the policy; (d) the property insured, the then current
replacement value of such property, and the manner of determining that value;
and (e) the expiration date of the policy. Trustor shall, upon request of
Lender, have an independent appraiser satisfactory to Lender determine the
cash value replacement cost of the Property.
EXPENDITURES BY LENDER. If Trustor fails to comply with any provision of this
Deed of Trust, or if any action or proceeding is commenced that would materially
affect Lender's interest in the Property, Lender on Trustor's behalf may, but
shall not be required to, take any action that Lender deems appropriate to the
extent permitted by applicable law. Any amount that Lender expends in so doing
will bear interest at the rate provided for in the Note from the date incurred
or paid by Lender to the date of repayment by Trustor. All such expenses, at
Lender's option, will (a) be payable on demand, (b) be added to the balance of
the Note and be apportioned among and be payable with any installment payments
to become due during either (i) the term of any applicable insurance policy or
(ii) the remaining term of the Note, or ( c) be treated as a balloon payment
which will be due and payable at the Note's maturity. This Deed of Trust also
will secure payment of these amounts. The rights provided for in this paragraph
shall be in addition to any other rights or any remedies to which Lender may be
entitled on account of the default and shall be exercisable by Lender to the
extent permitted by applicable law. Any such action by Lender shall not be
construed as curing the default so as to bar Lender from any remedy that it
otherwise would have had.
WARRANTY; DEFENSE OF TITLE. The following provisions relating to ownership of
the Property are a part of this Deed of Trust.
Title. Trustor warrants that: (a) Trustor holds good and marketable title of
record to the Property in fee simple, free and clear of all liens and
encumbrances other than those set forth in the Real Property description or
in any title insurance policy, title report, or final title opinion issued in
favor of, and accepted by, Lender, or have otherwise been previously
disclosed to and accepted by Lender in writing in connection with this Deed
of Trust, and (b) Trustor has the full right, power, and authority to execute
and deliver this Deed of Trust to Lender.
Defense of Title. Subject to the exception in the paragraph above, Trustor
warrants and will forever defend the title to the Property against the lawful
claims of all persons. In the event any action or proceeding is commenced
that questions Trustor's title or the interest of Trustee or Lender under
this Deed of Trust, Trustor shall defend the action at Trustor's expense.
Trustor may be the nominal party in such proceeding, but Lender shall be
entitled to participate in the proceeding and to be represented in the
proceeding by counsel of Lender's own choice, and Trustor will deliver, or
cause to be delivered, to Lender such instruments as Lender may request from
time to time to permit such participation.
Compliance With Laws. Trustor warrants that the Property and Trustor's use of
the Property complies with all existing applicable laws, ordinances, and
regulations of governmental authorities.
CONDEMNATION. The following provisions relating to condemnation proceedings are
a part of this Deed of Trust.
Application of Net Proceeds. If all or any part of the Property is condemned
by eminent domain proceedings or by any proceeding or purchase in lieu of
condemnation, Lender may at its election require that all or any portion of
the net proceeds of the award by applied to the Indebtedness or the repair or
restoration of the Property. The net proceeds of the award shall mean the
award after payment of all reasonable costs, expenses, and attorneys' fees
incurred by Trustee or Lender in connection with the condemnation.
Proceedings. If any proceeding in condemnation is filed, Trustor shall
promptly notify Lender in writing, and Trustor shall promptly take such steps
as may be necessary to defend the action and obtain the award. Trustor may be
the nominal party in such proceeding, but Lender shall be entitled to
participate in the proceeding and to be represented in the proceeding by
counsel of its own choice, and Trustor will deliver or cause to be delivered
to Lender such instruments as may be requested by it from time to time to
permit such participation.
IMPOSITION OF TAXES, FEES, AND CHARGES BY GOVERNMENTAL AUTHORITIES. The
following provisions relating to governmental taxes, fees, and charges are a
part of this Deed of Trust.
Current Taxes, Fees and Charges. Upon request by Lender, Trustor shall
execute such documents in addition to this Deed of Trust and take whatever
other action is requested by Lender to perfect and continue Lender's lien on
the Real Property. Trustor shall reimburse Lender for all taxes, as described
below, together
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06-30-1997 DEED OF TRUST Page 6
Loan No (Continued)
================================================================================
with all expenses incurred in recording, perfecting, or continuing this Deed
of Trust, including without limitation all taxes, fees, documentary stamps,
and other charges for recording or registering this Deed of Trust.
Taxes. The following shall constitute taxes to which this section applies:
(a) a specific tax upon this type of Deed of Trust or upon all or any part of
the Indebtedness secured by this Deed of Trust; (b) a specific tax on Trustor
which Trustor is authorized or required to deduct from payments on the
Indebtedness secured by this type of Deed of Trust; ( c) a tax on this type
of Deed of Trust chargeable against the Lender or the holder of the Note; and
(d) a specific tax on all or any portion of the Indebtedness or on payments
of principal and interest made by Trustor.
Subsequent Taxes. If any tax to which this section applies is enacted
subsequent to the date of this Deed of Trust, this event shall have the same
effect as an Event of Default (as defined below), and Lender may exercise any
or all of its available remedies for an Event of Default as provided below,
unless Trustor either (a) pays the tax before it becomes delinquent, or (b)
contests the tax as provided above in the Taxes and Liens section and
deposits with Lender cash or a sufficient corporate surety bond or other
security satisfactory to Lender.
SECURITY AGREEMENT; FINANCING STATEMENTS. The following provisions relating to
this Deed of Trust as a security agreement are a part of this Deed of Trust.
Security Agreement. This instrument shall constitute a security agreement to
the extent any of the Property constitutes fixtures or other personal
property, and Lender shall have all of the rights of a secured party under
the Uniform Commercial Code as amended from time to time.
Security Interest. Upon request by Lender, Trustor shall execute financing
statements and take whatever other action is requested by Lender to perfect
and continue Lender's security interest in the Rents and Personal Property.
In addition to recording this Deed of Trust in the real property records,
Lender may, at any time and without further authorization from Trustor, file
executed counterparts, copies or reproductions of this Deed of Trust as a
financing statement. Trustor shall reimburse Lender for all expenses incurred
in perfecting or continuing this security interest. Upon default, Trustor
shall assemble the Personal Property in a manner and at a place reasonably
convenient to Trustor and Lender and make it available to Lender within three
(3) days after receipt of written demand from Lender.
Addresses. The mailing addresses of Trustor (debtor) and Lender (secured
party), from which information concerning the security interest granted by
this Deed of Trust may be obtained (each as required by The Uniform
Commercial Code), are as stated on the first page of this Deed of Trust.
FURTHER ASSURANCES; ATTORNEY-IN-FACT. The following provisions relating to
further assurances and attorney-in-fact are a part of this Deed of Trust.
Further Assurances. At any time, and from time to time, upon request of
Lender, Trustor will make, execute and deliver, or will cause to be made,
executed or delivered, to Lender or to Lender's designee, and when requested
by Lender, cause to be filed, recorded, refiled, or rerecorded, as the case
may be, at such times and in such offices and places as Lender may deem
appropriate, any and all such mortgages, deeds of trust, security deeds,
security agreements, financing statements, continuation statements,
instruments of further assurance, certificates, and other documents as may,
in the sole opinion of Lender, be necessary or desirable in order to
effectuate, complete, perfect, continue, or preserve (a) the obligations of
Trustor under the Note, this Deed of Trust, and the Related Documents, and
(b) the liens and security interests created by this Deed of Trust as first
and prior liens on the Property, whether now owned or hereafter acquired by
Trustor. Unless prohibited by law or agreed to the contrary by Lender in
writing, Trustor shall reimburse Lender for all costs and expenses incurred
in connection with the matters referred to in this paragraph.
Attorney-in-Fact. If Trustor fails to do any of the things referred to in the
preceding paragraph, Lender may do so for and in the name of Trustor and at
Trustor's expense. For such purposes, Trustor hereby irrevocably appoints
Lender as Trustor's attorney-in-fact for the purpose of making, executing,
delivering, filing, recording, and doing all other things as may be necessary
or desirable, in Lender's sole opinion, to accomplish the matters referred to
in the preceding paragraph.
FULL PERFORMANCE. If Trustor pays all the Indebtedness when due, and otherwise
performs all the obligations imposed upon Trustor under this Deed of Trust,
Lender shall execute and deliver to Trustee a request for full reconveyance
without warranty and shall execute and deliver to Trustor suitable statements of
termination of any financing statement on file evidencing Lender's security
interest in the Rents and the Personal Property. Any reconveyance fee required
by law shall be paid by Trustor, if permitted by applicable law.
DEFAULT. Each of the following, at the option of Lender, shall constitute an
event of default ("Event of Default") under this Deed of Trust.
Default on Indebtedness. Failure of Trustor to make any payment when due on
the Indebtedness.
Default on Other Payments. Failure of Trustor within the time required by
this Deed of Trust to make any payment for taxes or insurance, or any other
payment necessary to prevent filing of or to effect discharge of any lien.
Default in Favor of Third Parties. Should Borrower or any Trustor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Trustor's ability to repay the Loans or perform their respective obligations
under this Deed of Trust or any of the Related Documents.
Compliance Default. Failure of Trustor to comply with any other term,
obligation, covenant or condition contained in this Deed of Trust, the Note,
or in any of the Related Documents.
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06-30-1997 DEED OF TRUST Page 7
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False Statements. Any warranty, representation or statement made or furnished
to Lender by or on behalf of Trustor under this Deed of Trust, the Note, or
the Related Documents is false or misleading in any material respect, either
now or at the time made or furnished.
Defective Collateralization. This Deed of Trust or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
Insolvency. The dissolution or termination of Trustor's existence as a going
business, the insolvency of Trustor, the appointment of a receiver for any
part of Trustor's property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Trustor.
Foreclosure, Forfeiture, etc. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession, or any
other method, by any creditor of Trustor or by any governmental agency
against any of the Property. However, this subsection shall not apply in the
event of a good faith dispute by Trustor as to the validity or reasonableness
of the claim which is the basis of the foreclosure or forfeiture proceeding,
provided that Trustor gives Lender written notice of such claim and furnishes
reserves or a surety bond for the claim satisfactory to Lender.
Breach of Other Agreement. Any breach by Trustor under the terms of any other
agreement between Trustor and Lender that is not remedied within any grace
period provided therein, including without limitation any agreement
concerning any indebtedness or other obligation of Trustor to Lender, whether
existing now or later.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Trustor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender in good faith deems itself insecure.
Right to Cure. If such a failure is curable, and if Trustor has not been
given a notice of a breach of the same provision of this Deed of Trust within
the preceding twelve (12) months, it may be cured (and no Event of Default
will have occurred) if Trustor, after Lender sends written notice demanding
cure of such failure: (a) cures the failure within fifteen (15) days; or (b)
if the cure requires more than fifteen (15) days, immediately initiates steps
sufficient to cure the failure and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. Upon the occurrence of any Event of Default and
at any time thereafter, Trustee or Lender, at its option, may exercise any one
or more of the following rights and remedies, in addition to any other rights or
remedies provided by law:
Accelerate Indebtedness. Lender shall have the right at its option without
notice to Trustor to declare the entire Indebtedness immediately due and
payable, including any prepayment penalty which Trustor would be required to
pay.
Foreclosure. With respect to all or any part of the Real Property, the
Trustee shall have the right to foreclose by notice and sale, and Lender
shall have the right to foreclose by judicial foreclose, in either case in
accordance with and to the full extent provided by applicable law. To the
extent permitted by law, Trustor shall be and remain liable for any
deficiency remaining after sale, either pursuant to the power of sale or
judicial proceedings.
UCC Remedies. With respect to all or any part of the Personal Property,
Lender shall have all the rights and remedies of a secured party under the
Uniform Commercial Code.
Collect Rents. Lender shall have the right, without notice to Trustor, to
take possession of and manage the Property and collect the Rents, including
amounts past due and unpaid, and apply the net proceeds, over and above
Lender's costs, against the Indebtedness. In furtherance of this right,
Lender may require any tenant or other user of the Property to make payments
of rent or use fees directly to Lender. If the Rents are collected by Lender,
then Trustor irrevocably designates Lender as Trustor's attorney-in-fact to
endorse instruments received in payment thereof in the name of Trustor and to
negotiate the same and collect the proceeds. Payments by tenants or other
users to Lender in response to Lender's demand shall satisfy the obligations
for which the payments are made, whether or not any proper grounds for the
demand existed. Lender may exercise its rights under this subparagraph either
in person, by agent, or through a receiver.
Appoint Receiver. Lender shall have the right to have a receiver appointed to
take possession of all or any part of the Property, with the power to protect
and preserve the Property, to operate the Property preceding foreclosure or
sale, and to collect the Rents from the Property and apply the proceeds, over
and above the cost of the receivership, against the Indebtedness. The
receiver may serve without bond if permitted by law. Lender's right to the
appointment of a receiver shall exist whether or not the apparent value of
the Property exceeds the Indebtedness by a substantial amount. Employment by
Lender shall not disqualify a person from serving as a receiver.
Tenancy at Sufferance. If Trustor remains in possession of the Property after
the Property is sold as provided above, or Lender otherwise becomes entitled
to possession of the Property upon default of Trustor, Trustor shall become a
tenant at sufferance of Lender or the purchaser of the Property and shall, at
Lender's option,
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06-30-1997 DEED OF TRUST Page 8
Loan No (Continued)
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either (a) pay a reasonable rental for the use of the Property, or (b) vacate
the Property immediately upon the demand of Lender.
Other Remedies. Trustee or Lender shall have any other right or remedy
provided in this Deed of Trust or the Note or by law or in equity or by other
rights and remedies afforded by Arizona law.
Notice of Sale. Lender shall give Trustor reasonable notice of the time and
place of any public sale of the Personal Property or of the time after which
any private sale or other intended disposition of the Personal Property is to
be made. Reasonable notice shall mean notice given at least ten (10) days
before the time of the sale or disposition. Any sale of Personal Property may
be made in conjunction with any sale of the Real Property.
Sale of the Property. To the extent permitted by applicable law, Trustor
hereby waives any and all rights to have the Property marshaled. In
exercising its rights and remedies, the Trustee or Lender shall be free to
seel all or any part of the Property together or separately, in one sale or
by separate sales. Lender shall be entitled to bid at any public sale on all
or any portion of the Property.
Insurance Policies. Beneficiary shall have the right upon an Event of
Default, but not the obligation, to assign all of Trustor's right, title, and
interest in and to all policies of insurance on the Property and any unearned
premiums paid on such insurance to any receiver or any purchaser of the
Property at a foreclosure sale, and Trustor hereby appoints Beneficiary as
Attorney-in-fact to assign and transfer such policies.
Waiver; Election of Remedies. A waiver by any party of a breach of a
provision of this Deed of Trust shall not constitute a waiver of or prejudice
the party's rights otherwise to demand strict compliance with that provision
or any other provision. Election by Lender to pursue any remedy provided in
this Deed of Trust, the Note, in any Related Documents, or provided by law
shall not exclude pursuit of any other remedy, and an election to make
expenditures or to take action to perform an obligation of Trustor under this
Deed of Trust after failure of Trustor to perform shall not affect Lender's
right to declare a default and to exercise any of its remedies.
Attorneys' Fees; Expenses. If Lender institutes any suit or action to enforce
any of the terms of this Deed of Trust, Lender shall be entitled to recover
such sum as the court may adjudge reasonable as attorneys' fees at trial and
on any appeal. Whether or not any court action is involved, all reasonable
expenses incurred by Lender which in Lender's opinion are necessary at any
time for the protection of its interest or the enforcement of its rights
shall become a part of the Indebtedness payable on demand and shall bear
interest at the Note rate from the date of expenditure until repaid. Expenses
covered by this paragraph include, without limitation, however subject to any
limits under applicable law, Lender's attorneys' fees whether or not there is
a lawsuit, including attorneys' fees or bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals and
any anticipated post-judgment collection services, the cost of searching
records, obtaining title reports (including foreclosure reports), surveyor's
reports, appraisal fees, title insurance, and fees for the Trustee, to the
extent permitted by applicable law. Trustor also will pay any court costs, in
addition to all other sums provided by law.
Rights of Trustee. Trustee shall have all of the rights and duties of Lender
as set forth in this section.
POWERS AND OBLIGATIONS OF TRUSTEE. The following provisions relating to the
powers and obligations of Trustee are part of this Deed of Trust.
Power of Trustee. In addition to all powers of Trustee arising as a matter of
law, Trustee shall have the power to take the following actions with respect
to the Property upon the written request of Lender and Trustor: (a) join in
preparing and filing map or plat of the Real Property, including the
dedication of streets or other rights to the public; (b) join in granting any
easement or creating any restriction on the Real Property; and ( c) join in
any subordination or other agreement affecting this Deed of Trust or the
interest of Lender under this Deed of Trust.
Obligations to Notify. Trustee shall not be obligated to notify any other
party of a pending sale under any other trust deed or lien, or of any action
or proceeding in which Trustor, Lender, or Trustee shall be a party, unless
the action or proceeding is brought by Trustee.
Trustee. Trustee shall meet all qualifications required for Trustee under
applicable law. In addition to the rights and remedies set forth above, with
respect to all or any part of the Property, the Trustee shall have the right
to foreclose by notice and sale, and Lender shall have the right to foreclose
by judicial foreclosure, in either case in accordance with and to the full
extent provided by applicable law.
Successor Trustee. Lender, at Lender's option, may from time to time appoint
a successor Trustee to any Trustee appointed hereunder by an instrument
executed and acknowledged by Lender and recorded in the office of the
recorder of Maricopa County, Arizona. The instrument shall contain, in
addition to all other matters required by state law, the names of the
original Lender, Trustee, Trustor, the book and page where this Deed of Trust
is recorded, and the name and address of the successor trustee, and the
instrument shall be executed and acknowledged by Lender or its successors in
interest. The successor trustee, without conveyance of the Property, shall
succeed to all the title, power, and duties conferred upon the Trustee in
this Deed of Trust and by applicable law. This procedure for substitution of
trustee shall govern to the exclusion of all other provisions for
substitution.
NOTICES TO TRUSTOR AND OTHER PARTIES. Any notice under this Deed of Trust shall
be in writing, may be sent by telefacsimile, and shall be effective when
actually delivered, or when deposited with a nationally recognized overnight
courier, or, if mailed, shall be deemed effective when deposited in the United
States mail first class, certified or registered mail, postage prepaid, directed
to the addresses shown near the beginning of this Deed of Trust. Any party may
change its address for notices under this Deed of Trust by giving formal written
<PAGE>
06-30-1997 DEED OF TRUST Page 9
Loan No (Continued)
================================================================================
notice to the other parties, specifying that the purpose of the notice is to
change the party's address. All copies of notices of foreclosure from the holder
of any lien which has priority over this Deed of Trust shall be sent to Lender's
address, as shown near the beginning of this Deed of Trust. For notice purposes,
Trustor agrees to keep Lender and Trustee informed at all times of Trustor's
current address.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are apart of
this Deed of Trust:
Amendments. This Deed of Trust, together with an Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Deed of Trust. No alteration of or amendment to
this Deed of Trust shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Annual Reports. If the Property is used for purposes other than Trustor's
residence, Trustor shall furnish to Lender, upon request, a certified
statement of net operating income received from the Property during Trustor's
previous fiscal year in such form and detail as Lender shall require. "Net
operating income" shall mean all cash receipts from the Property, less all
cash expenditures made in connection with the operation of the Property.
Arbitration. Lender and Trustor agree that all disputes, claims, and
controversies between them, whether individual, joint, or class in nature,
arising from this Deed of Trust or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of the
American Arbitration Association, upon request of either party. No act to
take or dispose of any Collateral shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. Ths
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or
mortgage; obtaining a writ of attachment or imposition of a receiver; or
exercising any rights relating to personal property, including taking or
disposing of such property with or without judicial process pursuant to
Article 9 of the Uniform Commercial Code. Any disputes, claims, or
controversies concerning the lawfulness or reasonableness of any act, or
exercise of any right, concerning any Collateral, including any claim to
rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided, however, that no arbitrator
shall have the right or the power to enjoy or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be entered in any
court having jurisdiction. Nothing in this Deed of Trust shall preclude any
party from seeking equitable relief from a court of competent jurisdiction.
The statue of limitations, estoppel, waiver, laches, and similar doctrines
which would otherwise be applicable in an action brought by a party shall be
applicable in any arbitration proceeding, and the commencement of an
arbitration proceeding shall be deemed the commencement of an action for
these purposes. The Federal Arbitration Act shall apply to the construction,
interpretation, and enforcement of this arbitration provision.
Applicable Law. This Deed of Trust has been delivered to Lender and accepted
by Lender in the State of Arizona. Subject to the provisions on arbitration,
this Deed of Trust shall be governed by and construed in accordance with the
laws of the State of Arizona.
Caption Headings. Caption headings in this Deed of Trust are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Deed of Trust.
Merger. There shall be no merger of the interest or estate created by this
Deed of Trust with any other interest or estate in the Property at any time
held by or for the benefit of Lender in any capacity, without the written
consent of Lender.
Multiple Parties; Corporate Authority. All obligations of Trustor under this
Deed of Trust shall be joint and several, and all references to Trustor shall
mean each and every Trustor. This means that each of the person signing below
is responsible for all obligations in this Deed of Trust.
Severability. If a court of competent jurisdiction finds any provision of
this Deed of Trust to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any such
offending provision shall be deemed to be modified to be within the limits of
enforceability or validity; however, if the offending provision cannot be so
modified, it shall be stricken and all other provisions of this Deed of Trust
in all other respects shall remain valid and enforceable.
Successors and Assigns. Subject to the limitations stated in this Deed of
Trust on transfer of Trustor's interest, this Deed of Trust shall be binding
upon and inure to the benefit of the parties, their successors, and assigns.
If ownership of the Property becomes vested in a person other than Trustor,
Lender, without notice to Trustor, may deal with Trustor's successors with
reference to this Deed of Trust and the Indebtedness by way of forbearance or
extension without releasing Trustor from the obligations of this Deed of
Trust or liability under Indebtedness.
Time Is of the Essence. Time is of the essence in the performance of this
Deed of Trust.
Waivers and Consents. Lender shall not be deemed to have waived any rights
under this Deed of Trust (or under the Related Documents) unless such waiver
is in writing and signed by Lender. No delay or omission on the part of
Lender in exercising any right shall operate as a waiver of such right or any
other right. A waiver by any party of a provision of this Deed of Trust shall
not constitute a waiver of or prejudice the party's right otherwise to demand
strict compliance with that provision or any other provision. No prior waiver
by Lender, nor any course of dealing between Lender and Trustor, shall
constitute a waiver of any of Lender's rights or any of Trustor's obligations
as to any future transactions. Whenever consent by Lender is required in
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06-30-1997 DEED OF TRUST Page 10
Loan No (Continued)
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this Deed of Trust, the granting of such consent by Lender in any instance
shall not constitute continuing consent to subsequent instances where such
consent is required.
Waiver of Homestead Exemption. Trustor hereby releases and waives all rights
and benefits of the homestead exemption laws of the State of Arizona as to
all indebtedness secured by this Deed of Trust.
EACH TRUSTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS DEED OF TRUST,
AND EACH TRUSTOR AGREES TO ITS TERMS.
TRUSTOR:
Klein Engines & Competition Components, Inc.
By: /s/ Thomas G. Klein
----------------------------------------------
Thomas G. Klein, President
By: /s/ Merlin Genderson
----------------------------------------------
Merlin Gunderson, Secretary
CORPORATE ACKNOWLEDGMENT
STATE OF ARIZONA )
) ss
County of Maricopa )
On this 30th day of June, 1997, before me, the undersigned Notary Public,
personally appeared Thomas G. Klein, President; and Merlin Gunderson, Secretary
of Klein Engines & Competition Components, Inc., and known to me to be
authorized agents of the corporation that executed the Deed of Trust and
acknowledged the Deed of Trust to be the free and voluntary act and deed of the
corporation, by authority of its Bylaws or by resolution of its board of
directors, for the uses and purposes therein mentioned, and on oath stated that
they are authorized to execute this Deed of Trust and, in fact, executed the
Deed of Trust on behalf of the corporation.
By /s/ Terri Mann Residing at Mesa
----------------------------
Notary Public in and for the State of Arizona OFFICIAL SEAL
TERRI MANN
My Commission Expires: 10-29-97 Notary Public - State of Arizona
MARICOPA COUNTY
My Commission Expires Oct. 29, 1997
<PAGE>
06-30-1997 DEED OF TRUST Page 11
Loan No (Continued)
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REQUEST FOR FULL RECONVEYANCE
(To be used only when obligations have been paid in full)
To:_________________________________________, Trustee
The undersigned is the legal owner and holder of all Indebtedness secured by
this Deed of Trust. All sums secured by this Deed of Trust have been fully paid
and satisfied. You are hereby directed, upon payment to you of any sums owing to
you under the terms of this Deed of Trust or pursuant to any applicable statute,
to cancel the Note secured by this Deed of Trust (which is delivered to you
together with this Deed of Trust), and to reconvey, without warranty, to the
parties designated by the terms of this Deed of Trust, the estate now held by
you under this Deed of Trust. Please mail the reconveyance and Related Documents
to:
________________________________________________________________________________
Date:_____________________ Beneficiary:________________________
By:________________________
Its:________________________
================================================================================
<PAGE>
EXHIBIT "A"
PARCEL NO. 1:
- -------------
That part of the Northwest quarter of the Southeast quarter of Section 11,
Township 1 North, Range 4 East of the Gila and Salt River Base and Meridian,
Maricopa County, Arizona, described as follows:
BEGINNING at the Southwest corner of the Northwest quarter of the Southeast
quarter;
thence North 0 degrees 0 minutes 1 second East, 205 feet;
thence North 89 degrees 44 minutes 33 seconds East, 33 feet to the TRUE POINT OF
BEGINNING;
thence North 89 degrees 44 minutes 33 seconds East, 50 feet;
thence South 0 degrees 0 minutes 8 seconds West, 15 feet;
thence North 89 degrees 44 minutes 33 seconds East, 77.27 feet;
thence North 0 degrees 4 minutes 10 seconds East, 60 feet;
thence South 89 degrees 44 minutes 30 seconds West, 127.342 feet;
thence South 0 degrees 0 minutes 1 second West, 45 feet to the TRUE POINT OF
BEGINNING.
PARCEL NO 2:
- ------------
That part of the Northwest quarter of the Southeast quarter of Section 11,
Township 1 North, Range 4 East of the Gila and Salt River Base and Meridian,
Maricopa County, Arizona, described as follows:
BEGINNING at the Southwest corner of the Northwest quarter of the Southeast
quarter;
thence North 0 degrees 0 minutes 1 second East, 250 feet;
thence North 89 degrees 44 minutes 33 seconds East, 33 feet to the TRUE POINT OF
BEGINNING;
thence North 89 degrees 44 minutes 30 seconds East, 127.342 feet;
-2-
<PAGE>
thence North 0 degrees 4 minutes 10 seconds East, 300 feet;
thence South 89 degrees 44 minutes 33 seconds West, 127.705 feet;
thence South 0 degrees 0 minutes 1 second West, 300 feet to the TRUE POINT OF
BEGINNING.
-3-
PROMISSORY NOTE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$440,000.00 06-30-1997 07-01-2007 07 66 JTL
- -------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
Borrower: Klein Engines & Competition Components, Inc. Lender: Century Bank
(TIN: 86-0720262) 7275 East Easy Street Suite B103
1207 North Miller Road PO BOX 5328
Tempe, AZ 85281-1856 Carefree, AZ 85377
======================================================================================================
Principal Amount: $440,000.00 Initial Rate: 9.500% Date of Note: June 30, 1997
</TABLE>
PROMISE TO PAY. Klein Engines & Competition Components, Inc. ("Borrower")
promises to pay to CENTURY BANK ("Lender"), or order, in lawful money of the
United States of America, the principal amount of Four Hundred Forty Thousand &
00/100 Dollars ($440,000.00), together with interest on the unpaid principal
balance from June 30, 1997, until paid in full.
PAYMENT. Subject to any payment changes resulting from changes in the Index,
Borrower will pay this loan in 119 regular payments of $4,101.00 each and one
irregular last payment estimated at $330,726.71. Borrower's first payment is due
August 1, 1997, and all subsequent payments are due on the same day of each
month after that. Borrower's final payment due July 1, 2007, will be for all
principal and all accrued interest not yet paid. Payments include principal and
interest. Interest on this Note is computed on a 365/360 simple interest basis;
that is, by applying the ratio of the annual interest rate over a year of 360
days, multiplied by the outstanding principal balance, multiplied by the actual
number of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will be
applied first to any unpaid collection costs and any late charges, then to any
unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an independent index which is the Wall Street
Journal Prime Rate (the "Index"). The Index is not necessarily the lowest rate
charged by Lender on its loans. If the Index becomes unavailable during the term
of this loan, Lender may designate s substitute index after notice to Borrower.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The interest rate change will not occur more often than each daily. The Index
currently is 8.500% per annum. The interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 1.000 percentage point over
the Index, resulting in an initial rate of 9.500% per annum. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law. Whenever increases occur in the interest rate,
Lender, at its option, may do one or more of the following: (a) increase
Borrower's payments to insure Borrower's loan will pay off by its original final
maturity date, (b) increase Borrower's payments to cover accruing interest, (c)
increase the number of Borrower's payments and (d) continue Borrower's payments
at the same amount and increase Borrower's final payment.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrowers agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Note, Borrower understands that Lender is entitled to a
minimum interest charge of $100.00 other than Borrower's obligation to pay any
minimum interest charge, Borrower may pay without penalty all or a portion of
the amount owed earlier than it is due. Early payments will not, unless agreed
to by Lender in writing, relieve Borrower of Borrower's obligation to continue
to make payments under the payment schedule. Rather, they will reduce the
principal balance due and may result in Borrower making fewer payments.
LATE CHARGE. If payment is 10 days or more late, Borrower will be charged 5.000%
of the regularly scheduled payment of $25.00, whichever is greater.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Borrower defaults under any loan, extension of credit,
security agreement, purchase or sales agreement, or any other agreement, in
favor of any other creditor or person that may materially affect any of
Borrower's property or Borrower's ability to repay this Note or perform
Borrower's obligation under this Note or any of the Related Documents. (d) any
representation or statement made or furnished to Lender by Borrower or on
Borrower's behalf is false or misleading in any material respect, either now or
at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assessment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Note. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (i) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breech of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then the Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the variable interest rate on this note
to 18.000% per annum. The interest rate will not exceed the maximum rate
permitted by applicable law. Lender may hire or pay someone else to help collect
this Note if Borrower does not pay. Borrower also will pay Lender that amount.
This includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses whether or not there is a lawsuit, including
attorney's fees and legal expenses for bankruptcy proceedings (including efforts
to modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. If not prohibited by applicable
law, Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by Lender
in the State of Arizona. If there is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of MARICOPA County, the
State of Arizona. Lender and Borrower hereby waive the right to any jury trial
in any action, proceeding, or counterclaim brought by either Lender or Borrower
against the other. Subject to the provisions on arbitration, this Note shall be
governed by and construed in accordance with the laws of the State of Arizona.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other
<PAGE>
06-30-1997 PROMISSORY NOTE Page 2
Loan No 10024 (Continued)
================================================================================
account), including without limitation all accounts held jointly with someone
else and all accounts Borrower may open in the future, excluding however, all
IRA and Keogh accounts, and all trust accounts for which the grant of a security
interest would be prohibited by law. Borrower authorizes Lender, to extend
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
COLLATERAL. This Note is secured by a Deed of Trust dated June 30, 1997 to a
trustee in favor of Lender on a real property located in MARICOPA County, State
of Arizona, all the terms and conditions of which are hereby incorporated and
made a part of this Note.
ARBITRATION. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in nature,
arising from this Note or otherwise, including without limitation contract and
tort disputes, shall be arbitrated pursuant to the Rules of the American
Arbitration Association, upon request of either party. No act to take or dispose
of any Collateral securing this note shall constitute a waiver of this
arbitration agreement or be prohibited by this arbitration agreement. This
includes, without limitation, obtaining injunctive relief or a temporary
restraining order; invoking a power of sale under any deed of trust or mortgage;
obtaining a writ of attachment or imposition of a receiver; or exercising any
rights relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the Uniform
Commercial Code. Any disputes, claims, or controversies concerning the
lawfulness or reasonableness of any act, or exercise of any right, concerning
any Collateral securing this Note, including any claim to rescind, reform, or
otherwise modify any agreement relating to the Collateral securing this Note,
shall also be arbitrated, provided however that no arbitrator shall have the
right or the power to enjoin or restrain any act of any party. Judgment upon any
award rendered by any arbitrator may be entered in any court having
jurisdiction. Nothing in this Note shall preclude any party from seeking
equitable relief from a court of competent jurisdiction. The statute of
limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and enforcement
of this arbitration provision.
CHANGE IN INTEREST RATES. Lender reserves the right to increase the monthly
payment in the event of an increase in the rate of interest.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person who
signs, guaranties or endorses this Note, to the extent allowed by law, waive
presentment demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fails to realize upon
or perfect Lender's security interest in the lateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
EFFECTIVE RATE. Borrower agrees to an effective rate of interest that is the
rate specified in this Note plus any additional rate resulting from any other
charges in the nature of interest paid or to be paid in connection with this
Note.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THIS NOTE.
BORROWER:
Klein Engines & Competition Components, Inc.
By: /s/ Thomas G. Klein By: /s/ Merlin Gunderson
---------------------------- -----------------------------
Thomas G. Klein, President Merlin Gunderson, Secretary
================================================================================
BUSINESS LOAN AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$440,000.00 06-30-1997 07-01-2007 07 66 JTL
- -------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
Borrower: Klein Engines & Competition Components, Inc. Lender: Century Bank
(TIN: 86-0720262) 7275 East Easy Street Suite B103
1207 North Miller Road PO BOX 5328
Tempe, AZ 85281-1856 Carefree, AZ 85377
======================================================================================================
</TABLE>
THIS BUSINESS LOAN AGREEMENT between Klein Engines & Competition Components,
Inc. ("Borrower") and CENTURY BANK ("Lender"0 is made and executed on the
following terms and conditions. Borrower has received prior commercial loans
from Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any exhibit
or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of June 30, 1997, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Business Loan Agreement, as
this Business Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Business Loan Agreement from time to time.
Borrower. The word "Borrower" means Klein Engines & Competition
Components, Inc.. The word "Borrower" also includes, as applicable, all
subsidiaries and affiliates of Borrower as provided below in the
paragraph titled "Subsidiaries and Affiliates."
CERCLA. The word "CERCLA" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien or
title retention contract, lease or consignment intended as a security
device, or any other security or lien interest whatsoever, whether
created by law, contract, or otherwise.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Grantor. The word "Grantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Guarantor. The word "Guarantor" means and includes without limitation
each and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well
as all claims by Lender against Borrower, or any one or more of them;
whether now or hereafter existing, voluntary or involuntary, due or not
due, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be obligated as a guarantor, surety, or otherwise; whether
recovery upon such Indebtedness may be or hereafter may become barred
by any statute of limitations; and whether such Indebtedness may be or
hereafter may become otherwise unenforceable.
Lender. The word "Lender" means CENTURY BANK, its successors and
assigns.
Loan. The word "Loan" or "Loans" means and includes without limitation
any and all commercial loans and financial accommodations from Lender
to Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to
this Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan
obligations in favor of Lender, as well as any substitute, replacement
or refinancing note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and
security interests securing indebtedness owed by Borrower to Lender;
(b) liens for taxes, assessments, or similar charges either not yet due
or being contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet
delinquent; (d) purchase money liens or purchase money security
interests upon or in any property acquired or held by Borrower in the
ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph
of this Agreement titled "indebtedness and Liens"; (e) liens and
security interests which, as of the date of this Agreement, have been
disclosed to and approved by the Lender in writing; and (f) those liens
and security interests which in the aggregate constitute an immaterial
and insignificant monetary mount with respect to the net value of
Borrower's assets.
Related Documents. The words "Related Documents" mean and include
without limitation all promissory notes, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract,
or otherwise, evidencing, governing, representing, or creating a
Security Interest.
Security Interest. The words "Security Interest" mean and include
without limitation any type of collateral security, whether in the form
of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional
sale, trust receipt, lien or title retention contract, lease or
consignment intended as a security device, or any other security or
lien interest whatsoever, whether
<PAGE>
06-30-1997 BUSINESS LOAN AGREEMENT Page 2
Loan No (Continued)
================================================================================
created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and
Reauthorization Act of 1986 as now or hereafter amended.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Loan Advance and each subsequent Loan Advance under the Agreement shall be
subject to the fulfillment to Lender's satisfaction of all of the conditions set
forth in this Agreement and in the Related Documents.
Loan Documents. Borrower shall provide to Lender in form satisfactory
to Lender the following documents for the Loan: (a) the Note, (b)
Security Agreements granting to Lender security interests in the
Collateral, (c) Financing Statements perfecting Lender's Security
Interests; (d) evidence of insurance as required below; and (e) any
other documents required under this Agreement or by Lender or its
counsel, including without limitation any guaranties described below.
Borrower's Authorization. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of this Agreement, the Note and
the Related Documents, and such other authorizations and other
documents and instruments as Lender or its counsel, in their sole
discretion, may require.
Payment of Fees and Expenses. Borrower shall have paid to Lender all
fees, charges, and other expenses which are then due and payable as
specified in this Agreement or any Related Document.
Representations and Warranties. The representations and warranties set
forth in this Agreement, in the Related Documents, and in any document
or certificate delivered to Lender under this Agreement are true and
correct.
No Event of Default. There shall not exist at the time of any advance a
condition which would constitute an Event of Default under this
Agreement.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized,
validly existing, and in good standing under the laws of the State of
Nevada, is qualified to do business in the State of Arizona as a
foreign corporation, and is validly existing and in good standing in
all states in which Borrower is doing business. Borrower has the full
power and authority to own its properties and to transact the
businesses in which it is presently engaged or presently proposes to
engage. Borrower also is duly qualified as a foreign corporation and is
in good standing in all states in which the failure to so qualify would
have a material adverse effect on its businesses or financial
condition.
Authorization. The execution, delivery, and performance of this
Agreement and all Related Documents by Borrower, to the extent to be
executed, delivered or performed by Borrower, have been duly authorized
by all necessary action by Borrower; do not require the consent or
approval of any other person, regulatory authority or governmental
body; and do not conflict with, result in a violation of, or constitute
a default under (a) any provision of its articles or incorporation or
organization, or bylaws, or any agreement or other instrument binding
upon Borrower or (9) any law, governmental regulation, court decree, or
order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as
of the date of the statement, and there has been no material adverse
change in Borrower's financial condition subsequent to the date of the
most recent financial statement supplied to Lender. Borrower has no
material contingent obligations except as disclosed in such financial
statements.
Legal Effect. This Agreement constitutes, and any instrument or
agreement required hereunder to be given by Borrower when delivered
will constitute, legal, valid and binding obligations of Borrower
enforceable against Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender
and as accepted by Lender, and except for property tax liens for taxes
not presently due and payable, Borrower owns and has good title to all
of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements
relating to such properties. All of Borrower's properties are titled in
Borrower's legal name, and Borrower has not used, or filed a financing
statement under, any other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous
substance," "disposal," "release," and "threatened release," as used in
this Agreement, shall have the same meanings as set forth in the
"CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801, et. Seq., the Resource Conservation and Recovery Act, 42
U.S. C. Section 6901, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's
ownership of the properties, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under,
about or from any of the properties. (B) Borrower has no knowledge of,
or reason to believe that there has been (I) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened
release of any hazardous waste or substance on, under, about or from
the properties by any prior owners or occupants of any of the
properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower
nor any tenant, contractor, agent or other authorized user of any of
the properties shall use, generate, manufacture, store, treat, dispose
of, or release any hazardous waste or substance on, under, about or
from any of the properties; and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation those laws,
regulations and ordinances described above. Borrower authorizes Lender
and its agents to enter upon the properties to make such inspections
and tests and Lender may deem appropriate to determine compliance of
the properties with this section of the Agreement. Any inspections or
tests made by Lender shall be at Borrower's expense and for Lender's
purposes only and shall not be construed to create any responsibility
or liability on the part of Lender to Borrower or to any other person.
The representations and warranties contained herein are based on
Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives
any future claims against Lender for indemnity or contribution in the
event Borrower becomes liable for cleanup or other costs under any such
laws, and (b) agrees to indemnify and hold harmless Lender against any
and all claims, losses, liabilities, damages, penalties, and expenses
which Lender may directly or indirectly sustain or suffer resulting
from a breach of this section of the Agreement or as a consequence of
any use, generation, manufacture, storage, disposal, release or
threatened release occurring prior to Borrower's ownership or interest
in the properties, whether or not the same was or should have been
known to Borrower. The provisions of this section of the Agreement,
including the obligation to indemnify, shall survive the payment of the
Indebtedness and the termination or expiration of this Agreement and
shall not be affected by Lender's acquisition of any interest in any of
the properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation,
administrative proceeding or similar action (including those for unpaid
taxes) against Borrower is pending or threatened, and no other event
has occurred which may materially adversely affect Borrower's financial
condition or properties, other than litigation, claims, or other
events, if any, that have been disclosed to and acknowledged by Lender
in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports
of Borrower that are or were required to be filed, have been filed, and
all taxes, assessments and other governmental charges have been paid in
full, except those presently being or to be contested by Borrower in
good faith in the ordinary course of business and for which adequate
reserves have been provided.
<PAGE>
06-30-1997 BUSINESS LOAN AGREEMENT Page 3
Loan No (Continued)
================================================================================
Lien Priority. Unless otherwise previously disclosed to Lender in
writing, Borrower has not entered into or granted any Security
Agreements, or permitted the filing or attachment of any Security
Interests on or affecting any of the Collateral directly or indirectly
securing repayment of Borrower's Loan and note, that would be prior or
that may in any way be superior to Lender's Security Interests and
rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note
and all of the Related Documents are binding upon Borrower as well as
upon Borrower's successors, representatives and assigns, and are
legally enforceable in accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely
for business or commercial related purposes.
Employee Benefit Plants. Each employee benefit plan as to which
Borrower may have any liability complies in all material respects with
all applicable requirements of law and regulations, and (I) no
Reportable Event nor Prohibited Transaction (as defined in ERISA) has
occurred with respect to any such plan, (ii) Borrower has not withdrawn
from any such plan or initiated steps to do so, (iii) no steps have
been taken to terminate any such plan, and (iv) there are no unfunded
liabilities other than those previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of
business, or Borrower's Chief executive office, if Borrower has more
than one place of business, is located at 1207 North Miller Road,
Tempe, AZ 85281-1856. Unless Borrower has designated otherwise in
writing this location is also the office or offices where Borrower
keeps its records concerning the Collateral.
Information. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection
with this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender
will be, true and accurate in every material respect on the date as of
which such information is dated or certified; and none of such
information is or will be incomplete by omitting to state any material
fact necessary to make such information not misleading.
Survival of Representations and Warranties. Borrower understands and
agrees that Lender, without independent investigation, is relying upon
the above representations and warranties in making the above referenced
Loan to Borrower. Borrower further agrees that the foregoing
representations and warranties shall be continuing in nature and shall
remain in full force and effect until such time as Borrower's
Indebtedness shall be paid in full, or until this Agreement shall be
terminated in the manner provided above, whichever is the last to
occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material
adverse changes in Borrower's financial condition, and (b) all existing
and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor
which could materially affect the financial condition of Borrower or
the financial condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent
basis, and permit Lender to examine and audit Borrower's books and
records at all reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in
no event later than one hundred twenty (120) days after the end of each
fiscal year, Borrower's balance sheet and income statement for the year
ended, audited by a certified publish accountant satisfactory to
Lender. All financial reports required to be provided under this
Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consisted basis, and certified by
Borrower as being true and correct.
Additional Information. Furnish such additional information and
statements, lists of assets and liabilities, agings of receivables and
payables, inventory schedules, budgets, forecasts, tax returns, and
other reports with respect to Borrower's financial condition and
business operations as Lender may request from time to time.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender. Borrower,
upon request of Lender, will deliver to Lender from time to time the
policies or certificates of insurance in form satisfactory to Lender,
including stipulations that coverages will not be canceled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person. In
connection with all policies covering assets in which Lender holds or
is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports
on each existing insurance policy showing such information as Lender
may reasonably request, including without limitation the following: (a)
the name of the insurer; (b) the risks insured; (c) the amount of the
policy; (d) the properties insured; (e) the then current property
values on the basis of which insurance has been obtained, and the
manner of determining those values; and (f) the expiration date of the
policy. In addition, upon request of Lender (however not more often
than annually), Borrower will have an independent appraiser
satisfactory to Lender determine, as applicable, the actual cash value
or replacement cost of any Collateral. The cost of such appraisal shall
be paid by Borrower.
Guaranties. Prior to disbursement of any Loan proceeds, furnish
executed guaranties of the Loans in favor of Lender, executed by the
guarantor named below, on Lender's forms, and in the amount and under
the conditions spelled out in the guaranties.
Guarantor Amount
--------- ------
Thomas G. Klein Unlimited
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all
assessments, taxes, governmental charges, levies and liens, of every
kind and nature, imposed upon Borrower or its properties, income, or
profits, prior to the date on which penalties would attach, and all
lawful claims that, if unpaid, might become a lien or charge upon any
of Borrower's properties, income, or profits. Provided however,
Borrower will not be required to pay and discharge any such assessment,
tax, charge, levy, lien or claim so long as (a) the legality of the
same shall be contested in good faith by appropriate proceedings, and
(b) Borrower shall have established on its books adequate reserves with
respect to such contested assessment, tax, charge, levy, lien, or claim
in accordance with generally accepted accounting practices. Borrower,
upon demand of Lender, will furnish to Lender evidence of payment of
the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at
any time a written statement of any assessments, taxes, charges,
levies, liens and claims against Borrower's properties, income, or
profits.
Performance. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in
a timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
this Agreement or under any of the Related Documents.
<PAGE>
06-30-1997 BUSINESS LOAN AGREEMENT Page 4
Loan No (Continued)
================================================================================
Operations. Maintain executive and management personnel with
substantially the same qualifications and experience as the present
executive and management personnel; provide written notice to Lender of
any change in executive and management personnel; conduct its business
affairs in a reasonable and prudent manner and in compliance with all
applicable federal, state and municipal laws, ordinances, rules and
regulations respecting its properties, charters, businesses and
operations, including without limitation, compliance with the Americans
With Disabilities Act and with all minimum funding standards and other
requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time
to inspect any and all Collateral for the Loan or Loans and Borrower's
other properties and to examine or audit Borrower's books, accounts,
and records and to make copies and memoranda of Borrower's books,
accounts, and records. If Borrower now or at any time hereafter
maintains any records (including without limitation computer generated
records and computer software programs for the generation of such
records) in the possession of a third party, Borrower, upon request of
Lender, shall notify such party to permit Lender free access to such
records at all reasonable times and to provide Lender with copies of
any records it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide
Lender at least annually and at the time of each disbursement of Loan
proceeds with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying
that the representations and warranties set forth in this Agreement are
true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all
respects with all environmental protection federal, state and local
laws, statues, regulations and ordinances; not cause or permit to
exist, as a result of an intentional or unintentional action or
omission on its part or on the part of any third party, on property
owned and/or occupied by Borrower, any environmental activity where
damage may result to the environment, unless such environmental
activity is pursuant to and in compliance with the conditions of a
permit issued by the appropriate federal, state or local governmental
authorities; shall furnish to lender promptly and in any event within
thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with
any environmental activity whether or not there is damage to the
environment and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such
promissory notes, mortgages, deeds of trust, security agreements,
financing statements, instruments, documents and other agreements as
Lender or its attorneys may reasonably request to evidence and secure
to Loans and to perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the
normal course of business and indebtedness to Lender contemplated by
this Agreement, create, incur or assume indebtedness for borrowed
money, including capital leases, (b) except as allowed as a Permitted
Lien, sell, transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets, or (c) sell with
recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently
engaged, (b) cease operations, liquidate, merge, transfer, acquire or
consolidate with any other entity, change ownership, change its name,
dissolve or transfer or sell Collateral out of the ordinary course of
business, (c) pay any dividends on Borrower's stock (other than
dividends payable in its stock), provided, however, that
notwithstanding the foregoing, but only so long as no Event of Default
has occurred and is continuing or would result from the payment of
dividends, if Borrower is a "Subchapter S Corporation" (as defined in
the Internal Revenue Code of 1986, as amended), Borrower may pay cash
dividends on its stock to its shareholders from time to time in amounts
necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as
Shareholders of a Subchapter S Corporation because of their ownership
of shares of stock of Borrower, or (d) purchase or retire any of
Borrower's outstanding shares or alter or amend Borrower's capital
structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance
money or assets, (b) purchase, create or acquire any interest in any
other enterprise or entity, or (c) incur any obligation as surety or
guarantor other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
RIGHT OF SETOFF. Borrower grants to lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when
due on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or
failure of Borrower to comply with or to perform any other term,
obligation, covenant or condition contained in any other agreement
between Lender and Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor
default under any loan, extension of credit, security agreement,
purchase or sales agreement, or any other agreement, in favor of any
other creditor or person that may materially affect any of Borrower's
property or Borrower's or any Grantor's ability to repay the Loans or
perform their respective obligations under this Agreement or any of the
Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under
this Agreement or the Related Documents is false or misleading in any
material respect at the time made or furnished, or becomes false or
misleading at any time thereafter.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of
any Security Agreement to create a valid and perfect Security Interest)
at any time and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a
receiver
<PAGE>
06-30-1997 BUSINESS LOAN AGREEMENT Page 5
Loan No (Continued)
================================================================================
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against
Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the
Indebtedness, or by any governmental agency. This includes a
garnishment, attachment, or levy on or of any of Borrower's deposit
accounts with Lender. However, this event of Default shall not apply if
there is a good faith dispute by Borrower or Grantor, as the case may
be, as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding, and if Borrower or
Grantor gives Lender written notice of the creditor or forfeiture
proceeding and furnishes reserves or a surety bond for the creditor or
forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor
dies or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness. Lender, at its
option, may, but shall not be required to, permit the Guarantor's
estate to assume unconditionally the obligations arising under the
guaranty in a manner satisfactory to Lender, and, in doing so, cure the
Event of Default.
Change in Ownership. Any change in ownership of twenty-five percent
(25%) or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's
financial condition, or Lender believes the prospect of payment of
performance of the Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been
given a notice of a similar default within the preceding twelve (12)
months, it may be cured (and no Event of Default will have occurred) if
Borrower or Grantor, as the case may be, after receiving written notice
from Lender demanding cure of such default: (a) cures the default
within fifteen (15) days; or (b) if the cure requires more than fifteen
(15) days, immediately initiates steps which Lender deems in Lender's
sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate and, at Lender's option, all
Indebtedness immediately will become due and payable, all without notice of any
kind to Borrower, except that in addition, Lender shall have all the rights and
remedies provided in the Related Documents or available at law, in equity, or
otherwise. Except as may be prohibited by applicable law, all of Lender's rights
and remedies shall be cumulative and may be exercised singularly or
concurrently. Election by Lender to pursue any remedy shall not exclude pursuit
of any other remedy, and an election to make expenditures or to take action to
perform an obligation of Borrower or of any Grantor shall not affect Lender's
right to declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement.
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment
to this Agreement shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
Applicable Law. This Agreement has been delivered to Lender and
accepted by Lender in the State of Arizona. If there is a lawsuit,
Borrower agrees upon Lender's request to submit to the jurisdiction of
the courts of MARICOPA County, the State of Arizona. Lender and
Borrower hereby waive the right to any jury trial in any action,
proceeding, or counterclaim brought by either Lender or Borrower
against the other. Subject to the provisions on Arbitration, this
agreement shall be governed by and construed in accordance with the
laws of the state of Arizona.
Arbitration. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in
nature, arising from this Note or otherwise, including without
limitation contract and tort disputes, shall be arbitrated pursuant to
the Rules of the American Arbitration Association, upon request of
either party. No act to take or dispose of any Collateral shall
constitute a waiver of this arbitration agreement or be prohibited by
this arbitration agreement. This includes, without limitation,
obtaining injunctive relief or a temporary restraining order; invoking
a power of sale under any deed of trust or mortgage; obtaining a writ
of attachment or imposition of a receiver; or exercising any rights
relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the
Uniform Commercial Code. Any disputes, claims, or controversies
concerning the lawfulness or reasonableness of any act, or exercise of
any right, concerning any Collateral, including any claim to rescind,
reform, or otherwise modify any agreement relating to the Collateral,
shall also be arbitrated, provided however that no arbitrator shall
have the right or the power to enjoin or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Note shall preclude any
party from seeking equitable relief from a court of competent
jurisdiction. The statute of limitations, estoppel, waiver, laches, and
similar doctrines which would otherwise be applicable in an action
brought by a party shall be applicable in any arbitration proceeding,
and the commencement of an arbitration proceeding shall be deemed the
commencement of an action for these purposes. The Federal Arbitration
Act shall apply to the construction, interpretation, and enforcement of
this arbitration provision.
Caption Headings. Caption headings in this Agreement are for
convenience purposes only and are not to be used to interpret or define
the provisions of this Agreement.
Multiple Parties; Corporate Authority. All obligations of Borrower
under this Agreement shall be joint and several, and all references to
Borrower shall mean each and every Borrower. This means that each of
the persons signing below is responsible for all obligations in this
Agreement.
Consent to Loan Participation. Borrower agrees and consents to lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any
other matter relating to the Loan, and Borrower hereby waives any
rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation
interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of
any such participation interests will be considered as the absolute
owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the
sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser or such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may
enforce its interests irrespective of any personal claims or defenses
that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification
and collection of this Agreement or in connection with the Loans made
pursuant to this Agreement. Lender may pay someone else to help collect
the Loans and to enforce this Agreement, and Borrower will pay that
<PAGE>
06-30-1997 BUSINESS LOAN AGREEMENT Page 6
Loan No (Continued)
================================================================================
amount. This includes, subject to any limits under applicable law,
Lender's attorneys' fees and Lender's legal expenses, whether or not
there is a lawsuit, including attorneys' fees for bankruptcy
proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all
other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to given
at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the
other parties, specifying that the purpose of the notice is to change
the party's address. To the extent permitted by applicable law, if
there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision
of this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible,
any such offending provision shall be deemed to be modified to be
within the limits of enforceability or validity; however, if the
offending provision cannot be so modified, it shall be stricken and all
other provisions of this Agreement in all other respects shall remain
valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of
any provisions of this Agreement makes it appropriate, including
without limitation any representation, warranty or covenant, the word
"Borrower" as used herein shall include all subsidiaries and affiliates
of Borrower. Notwithstanding the foregoing however, under no
circumstances shall this Agreement be construed to require Lender to
make any Loan or other financial accommodation to any subsidiary or
affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall
inure to the benefit of Lender, its successors and assigns. Borrower
shall not, however, have the right to assign its rights under this
Agreement or any interest therein, without the prior written consent of
Lender.
Survival. All warranties, representations, and covenants made by
Borrower in this Agreement or in any certificate or other instrument
delivered by Borrower to Lender under this Agreement shall be
considered to have been relied upon by Lender and will survive the
making of the loan and delivery to Lender of the Related Documents,
regardless of any investigation made by Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of
this Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this
Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor, shall
constitute a waiver of any of Lender's rights or of any obligations of
Borrower or of any Grantor as to any future transactions. Whenever the
consent of Lender is required under this Agreement, the granting of
such consent by Lender in any instance shall not constitute continuing
consent in subsequent instances where such consent is required, and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE
30, 1997.
BORROWER:
Klein Engines & Competition Components, Inc.
By:Thomas G. Klein By: /s/ Merlin Gunderson
----------------------------- -------------------------------
Thomas G. Klein, President Merlin Gunderson, Secretary
LENDER:
CENTURY BANK
By: /s/ Signature Illegible
----------------------------
Authorized Officer
================================================================================
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
07 66 JTL
- --------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
Borrower: Klein Engineered Competition Components, Inc. LENDER: CENTURY BANK
(TIN: 86-0720262) 7275 EAST EASY STREET SUITE B103
1205 and 1207 N. Miller Road PO BOX 5328
Tempe, AZ 85281 CARFREE, AZ 85377
GUARANTOR: Thomas G. Klein
2632 W. Loughlin Dr.
Chandler, AZ 85224
========================================================================================================
</TABLE>
AMOUNT OF GUARANTOR. The amount of this Guaranty is Unlimited.
CONTINUING UNLIMITED GUARANTY. For good and valuable consideration, Thomas G.
Klein ("Guarantor") absolutely and unconditionally guarantees and promises to
pay CENTURY BANK ("Lender") or its order, in legal tender of the United States
of America, the Indebtedness (as that term is defined below) of Klein Engines &
competition Components, Inc. ("Borrower") to Lender on the terms and conditions
set forth in this Guaranty. Under this Guaranty, the liability of Guarantor is
limited and the obligations of Guarantor are continuing.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means Klein Engines & Competition
Components, Inc.
GUARANTOR. The word "Guarantor" means Thomas G. Klein.
GUARANTY. The word "Guaranty" means this Guaranty made by the Guarantor
for the benefit of Lender dated June 30, 1997.
INDEBTEDNESS. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and indebtedness to Lender, now existing or herein
incurred or created, including without limitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card
indebtedness, lease obligations, other obligations, and liabilities of
Borrower, or any of them, and any present or future judgements against
Borrower, or any of them; and whether any such indebtedness is
voluntarily or involuntarily incurred, due or not due, absolute or
contingent, liquidated or unliquidated, determined or undetermined;
whether Borrower may be liable individually or jointly with others, or
primarily or secondarily, or as guarantor or surely; whether recovery
on the Indebtedness may be or may not be voidable on account of
infancy, insanity, ultra vires, or otherwise.
LENDER. The word "Lender" means CENTURY BANK, its successors and
assigns.
RELATED DOCUMENTS. The words "Related Documents" mean and include
without limitation all promissory nots, credit agreements, loan
agreements, environmental agreements, guaranties, security agreements,
mortgages, deeds of trust, and all other instruments, agreements and
documents, whether now or hereafter existing, executed in connection
with the Indebtedness.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be upon and
continuous for so long as this Guaranty remains in force. Guarantor intends to
guarantee at all times the performance and prompt payment when due, whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness.
Accordingly, no payments made upon the Indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter incurred or contracted. Any married persons who signs this Guaranty
hereby expressly agrees that recourse under this agreement may be had against
both his or her separate property and community property, whether now owned or
hereafter acquired.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness incurred or
contracted before receipt by Lender of any notice revocation shall have been
fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. If Guarantor elects to
revoke this Guaranty, Guarantor may only do so in writing. Guarantor's written
notice of revocation must be mailed to Lender, by certified mail, at the address
of Lender listed above or such other place as Lender may designate in writing.
Written revocation of this Guaranty will apply only to advances or new
Indebtedness created after actual receipt by Lender of Guarantor's written
revocation. For this purpose and without limitation, the term "new Indebtedness"
does not include Indebtedness which at the time of notice of revocation is
contingent, unliquidated, undetermined or not due and which later becomes
absolute, liquidated, determined or due. This Guaranty will continue to bind
Guarantor for all Indebtedness incurred by Borrower or committed by Lender prior
to receipt of Guarantor's written notice of revocation, including any
extensions, renewals, substitution or modification of the Indebtedness. All
renewals, extensions, substitution, and modifications of the Indebtedness
granted after Guarantor's revocation, are contemplated under this Guaranty and,
specifically will not be considered to be new Indebtedness. This Guaranty shall
bind the estate of Guarantor as to Indebtedness created before and after the
death or incapacity of Guarantor, regardless of Lender's actual notice of
Guarantor's death. Subject to the foregoing, Guarantor's executor or
administrator or other legal representative may terminate this Guaranty in the
same manner in which Guarantor might have terminated it and with the same
effect. Release of any other guarantor or termination of any other guaranty of
the Indebtedness shall not affect the liability of Guarantor under this
Guaranty. A revocation received by Lender from any one or more aggregate amount
of Indebtedness covered by this Guaranty, and it is specifically acknowledged
and agreed by Guarantor that reductions in the amount of Indebtedness even to
zero dollars ($0.00), prior to written revocation of this Guaranty by Guarantor
shall not constitute a termination of this Guaranty. This is binding upon
Guarantor and Guarantor's heirs, successors and assigns so long as any of the
guaranteed Indebtedness remains unpaid and even through the Indebtedness
guaranteed may from time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either before
or after any revocation hereof, without notice or demand and without lessening
Guarantor's liability under this Guaranty, from time to time: (a) prior to
revocation as set forth above, to make one or more additional secured or
unsecured loans to Borrower, to lease equipment or other goods to Borrower, or
otherwise to extend additional credit to Borrower; (b) to alter, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
including increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(c) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, subordinate, fall or decide not to
perfect, and release any such security, with or without the substitution of new
collateral; (d) to release, substitute, agree not to sue, or deal with any one
or more of Borrower's sureties, endorsers, or other guarantors on any terms or
in any manner Lender may choose; (e) to determine how, when and what application
of payments and credits shall be made on the Indebtedness; (f) to apply such
security and direct the order or manner of sale thereof, including without
limitations, any nonjudicial sale permitted by the terms of the controlling
security agreement or deed of trust, as Lender in its discretion may determine;
(g) to sell, transfer, assign, or grant participation in all or any part of the
Indebtedness; and (h) to assign or
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06-30-1997 COMMERCIAL GUARANTY Page 2
Loan No (Continued)
================================================================================
transfer this Guaranty in whole or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (e) Guarantor has not and will not, without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor's assets, or any
interest therein; (f) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial
information which will be provided to Lender is and will be true and correct in
all material respects and fairly present the financial condition of Guarantor as
of the dates the financial information is provided; (g) no material adverse
change has occurred in Guarantor's financial condition since the date of the
most recent financial statements provided to Lender and no event has occurred
which may materially adversely affect Guarantor's financial condition; (h) no
litigation, claim, investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Guarantor is pending or threatened;
(i) Lender has made no representation to Guarantor as to the creditworthiness of
Borrower; and (j) Guarantor has established adequate means of obtaining from
Borrower on a continuing basis information regarding Borrower's financial
condition. Guarantor agrees to keep adequately informed from such means of any
facts, events, or circumstances which might in any way affect Guarantor's risks
under this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" all or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
In addition to the waivers set forth above, Guarantor expressly waives, to the
extent permitted by Arizona law, all of Guarantor's rights under sections
12-1641, 12-1642, 12- 1643, 12-1644, 44-142, and 47-3605 of the Arizona Revised
Statues, and Rule 171 of the Arizona Revised Statues Rules of Civil Procedure,
as now enacted or hereafter modified, amended or replaced.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers and reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest in specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debs or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender
<PAGE>
06-30-1997 COMMERCIAL GUARANTY Page 3
Loan No (Continued)
================================================================================
hereby is authorized, in the name of Guarantor, from time to time to execute and
file financing statements and continuation statements and to execute such other
documents and to take such other actions as Lender deems necessary or
appropriate to perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
Amendments. This Guaranty, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Guaranty. No alteration of or amendment
to this Guaranty shall be effective unless given in writing and signed
by the party or parties sought to be charged or bound by the alteration
or amendment.
Applicable Law. This Guaranty has been delivered to Lender and accepted
by Lender in the State of Arizona. If there is a lawsuit, Guarantor
agrees upon Lender's request to submit to the jurisdiction of the
courts of MARICOPA County, State of Arizona. Lender and Guarantor
hereby waive the right to any jury trial in any action, proceeding, or
counterclaim brought by either Lender or Guarantor against the other.
Subject to the provisions on arbitration, this Guaranty shall be
governed by and construed in accordance with the laws of the State of
Arizona.
Arbitration. Lender and Borrower agree that all disputes, claims and
controversies between them, whether individual, joint, or class in
nature, arising from this Note or otherwise, including without
limitation contract and tort disputes, shall be arbitrated pursuant to
the Rules of the American Arbitration Association, upon request of
either party. No act to take or dispose of any Collateral shall
constitute a waiver of this arbitration agreement or be prohibited by
this arbitration agreement. This includes, without limitation,
obtaining injunctive relief or a temporary restraining order; invoking
a power of sale under any deed of trust or mortgage; obtaining a writ
of attachment or imposition of a receiver; or exercising any rights
relating to personal property, including taking or disposing of such
property with or without judicial process pursuant to Article 9 of the
Uniform Commercial Code. Any disputes, claims, or controversies
concerning the lawfulness or reasonableness of any act, or exercise of
any right, concerning any Collateral, including any claim to rescind,
reform, or otherwise modify any agreement relating to the Collateral,
shall also be arbitrated, provided however that no arbitrator shall
have the right or the power to enjoin or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be entered in
any court having jurisdiction. Nothing in this Note shall preclude any
party from seeking equitable relief from a court of competent
jurisdiction. The statute of limitations, estoppel, waiver, laches, and
similar doctrines which would otherwise be applicable in an action
brought by a party shall be applicable in any arbitration proceeding,
and the commencement of an arbitration proceeding shall be deemed the
commencement of an action for these purposes. The Federal Arbitration
Act shall apply to the construction, interpretation, and enforcement of
this arbitration provision.
Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's
legal expenses, incurred in connection with the enforcement of this
Guaranty. Lender may pay someone else to help enforce this Guaranty,
and Guarantor shall pay the costs and expenses of such enforcement.
Costs and expenses include Lender's attorneys' fees and legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal
expenses for bankruptcy proceedings (and including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. Guarantor also shall pay all court
costs and such additional fees as may be directed by the court.
Notices. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimile,
and, except for revocation notices by Guarantor, shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier, or when deposited in the United States mail, first
class postage prepare, addressed to the party to whom the notice is to
be given at the address shown above or to such other addresses as
either party may designate to the other in writing. All revocation
notices by Guarantor shall be in writing and shall be effective only
upon delivery to Lender as provided above in the section titled
"DURATION OF GUARANTY." If there is more than one Guarantor, notice to
any Guarantor will constitute notice to all Guarantors. For notice
purposes, Guarantor agrees to keep Lender informed at all times of
Guarantor's current address.
Interpretation. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall
be deemed to have been used in the plural where the context and
construction so require; and where there is more than one Borrower
named in this Guaranty or when this Guaranty is executed by more than
one Guarantor, the words "borrower" and "Grantor" respectively shall
mean all and any one more of them. The words "Guarantor," "Borrower,"
and "Lender" include the heirs, successors, assigns, and transferees of
each of them. Caption headings in this Guaranty are for convenience
purposes only and are not to be used to interpret or define the
provisions of this Guaranty. If a court of competent jurisdiction finds
any provision of this Guaranty to be invalid or unenforceable as to any
person or circumstance, such finding shall not render that provision
invalid or unenforceable as to any other persons or circumstances, and
all provisions of this Guaranty in all other respects shall remain
valid and enforceable. If any one or more of Borrower or Guarantor are
corporations or partnerships, it is not necessary for Lender to inquire
into the powers of Borrower or Guarantor or of the officers, directors,
partners, or agents acting or purporting to act on their behalf, and
any Indebtedness made or created in reliance upon the professed
exercise of such powers shall be guaranteed under this Guaranty.
Waiver. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender.
No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Guaranty shall not prejudice or
constitute a waiver of Lender's right otherwise to demand strict
compliance with that provision or any other provision of this Guaranty.
No prior waiver by Lender, nor any course of dealing between Lender and
Guarantor, shall constitute a waiver of any of Lender's rights or of
any of Guarantor's obligations as to any future transactions. Whenever
the consent of Lender is required under this Guaranty, the granting of
such consent by Lender in any instance shall not constitute continuing
consent to subsequent instances where such consent is required and in
all cases such consent may be granted or withheld in the sole
discretion of Lender.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTIVE AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED JUNE 30, 1997.
GUARANTOR:
/s/ Thomas G. Klein
- ---------------------------
Thomas G. Klein
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06-30-1997 COMMERCIAL GUARANTY Page 4
Loan No (Continued)
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INDIVIDUAL ACKNOWLEDGMENT
State of Arizona )
) ss
County of Maricopa )
On this day before me, the undersigned Notary Public, personally appeared Thomas
G. Klein, to me known to be the individual described in and who executed the
Commercial Guaranty, and acknowledged that he or she signed the Guaranty as his
or her free and voluntary act and deed, for the uses and purposes therein
mentioned.
Given under my hand and official seal this 30th day of June, 1997.
By Terri Mann Residing at Mesa.
------------------------------------------ -------------------
Notary Public in and for the State of Arizona My commisson expires 10/29/97
-------- ----------
OFFICIAL SEAL
TERRI MANN
Notary Public - State of Arizona
MARICOPA COUNTY
My Commission Expires Oct 29, 1997
================================================================================
LICENSE OF TECHNOLOGY AND TRADE SECRETS
Parties
This License Agreement is made by and between FEULING ADVANCED
TECHNOLOGIES, INC., A Nevada Corporation, its successors and/or assigns,
("Licensor"), and, KLEIN ENGINEERED COMPETITION COMPONENTS, INC., a Nevada
corporation, with its principal office located in Tempe, Arizona ("Licensee").
Recitals
The Licensor is the owner of the entire right in and to patents,
trademarks, and certain trade secret information concerning proprietary secret
processes, techniques, tooling, customers, designs and proprietary know-how for
the design and manufacture of the Center Fire Two Valve Cylinder Head Kits and
Assemblies for the Big Block Chevrolet Engines. Licensee desires to obtain a
scope of use license, and the Licensor is willing to grant, subject to the terms
and conditions set forth in this Agreement, the licenses from the Licensor, for
the specific scope of use and in the designated territory, to use the Licensor's
intellectual property in the manufacture and sale in the after market of Center
Fire Valve Cylinder Head Kits and Assemblies for Big Block Chevrolet Engine
applications.
Terms of Agreement
Article I
Certain Definitions
Section 1.1 Use Throughout. Terms defined in this Article I and
parenthetically elsewhere shall have the same meaning throughout this Agreement.
Defined terms may be used in the singular or plural.
Section 1.2 "Technology" means:
1.2.1 The Licensor's secret processes, techniques, tooling designs,
product designs and proprietary know-how and custom made proprietary machinery
and tooling, plants, technology arising from and protected by the following U.S.
Patents owned by Licensor:
U.S. Patent Number 4,838,219 for an Intake Port;
U.S. Patent Number 4,976,231 for an Intake Port;
U.S. Patent Number 4,815,706 for Valves; and,
U.S. Patent Number 5,445,135 for Combustion Chambers
AND, certain trade secret information concerning proprietary secret
processes, techniques, tooling, equipment, designs, customer lists, and
proprietary know-how for the design and manufacture of the following products
(limited to aftermarket sales):
Center Fire Valve Cylinder Head Kite and Accessories for Chevrolet Big
Block Engines; and
TK 1 JF
Initials
<PAGE>
Strictly subject to the requirements of Section 10.1 hereof, the
non-exclusive, aftermarket use of the following Trademarks of Licensor solely
upon the products to be manufactured pursuant to this agreement, to wit:
1. "FEULING"
2. "MAX FLOW" (for use with valves)
3. "CENTER FIRE"
4. "TORQUE POWER"
5. "HIGH VELOCITY" (for use with ports)
Section 1.3 "Developments" means any and all improvements and
developments, whether or not patented, irrespective of the maker thereof,
relating to or derived from the Technology or its use, including, without
limitation, any process, method, technique or know-how.
Section 1.4 "Patents" means any patents which may issue in the
Territory on the Technology described in Section 1.2.1, and all renewals of such
patents, if any.
Section 1.5 "Territory" means worldwide.
Section 1.6 "Aftermarket sale" means sales for use by individual owner
of automobiles, trucks, recreational vehicles, static and/or stationary engines,
and marine application (specifically subject to the limitations stated
hereinbelow); and specifically precludes sales by Licensee to any OEM
manufactures including, but not limited to, General Motors, Ford, and Chrysler.
As to all marine applications, License grants to Licensee this License
under the specific understanding and agreement that Licensee will sell
exclusively to NORDSKOG, or to such other successor as solely designated by
Licensor, under the terms and conditions attached hereto as Exhibit "C",
including, but not limited to, Licensee payment to Licensor of a royalty of TEN
PERCENT (10%) of all Moines received by Licensee from marine sales, which
royalties to be paid separately and independently of the royalties required of
Licensee under this Agreement, and which marine royalties shall be payable
quarterly. Licensor retains all rights as stated hereinbelow and in Exhibit 'C',
including, but not limited to, product inspection and accounting arising from
marine sales under Exhibit 'C', for any such marine sales.
Section 1.7 "Revenue(s)" means the invoice price contracted by Licensee
in a bona fide commercial transaction between unaffiliated parties and shall not
include freight charges, and/or taxes on the invoice price.
TK 2 JF
Initials
<PAGE>
Article II
Grant of License; Disclosure of Developments
Section 2.1 Grant. Subject to this Agreement's terms and conditions,
the Licensor hereby grants to the extent that it lawfully may, to the Licensee,
the right to use the Technology and the Developments disclosed under Section
2.2, for the manufacture and sale of Center Fire Two Valve Cylinder Head Kits
and Accessories for Chevrolet Big Block Engines, solely for Aftermarket Sale, in
the designated Territory, during the License Term set forth in Section 9.1.
Licensor further grants a right of first refusal limited to any new Center Fire
Two Valve Cylinder Head Kits and Accessories product. The Licensor specifically
reserves all rights in and to the Technology other than the rights granted
Licensee herein.
2.1.1 Marking. Licensee agrees that all products sold pursuant to this
license shall be clearly marked with the subject matter patent number (8) and/or
designation of registered trademark (s).
Section 2.2 Sublicenses/Assignment
2.2.1 The license granted to the licensee under Section 2.1 does not
include the right to sublicense the Technology and the Developments to others in
the Territory without the express written permission of Licensor for such
sublicenses which may be granted or denied at the sole discretion of Licensor.
Any such sublicense, if allowed, shall be upon the same terms and conditions
granted Licensee herein. The sole exception hereto is the agreed NORDSKOG (or
successor) exclusive sale agreement, the terms of which are set forth in Exhibit
'C' hereto.
2.2.2 The rights granted to Licensee hereunder are not assignable
without the express, written consent of Licensor which may be granted or denied
at the sole discretion of Licensor. Any such assignment, if allowed, shall be
upon the same terms and conditions granted Licensee herein.
Section 2.3 Reservation of Rights. Subject to the Licensee's right to
use the same pursuant to the terms of this Agreement, the Licensor reserves all
proprietary rights in and to all discoveries, inventions, patent rights, trade
secrets, know-how or other proprietary data embodied in the Technology or the
Developments. The Licensee agrees to receive and use the Technology and the
Developments for the terms of the License granted under Section 9.1 and the
subject to such reservation, and agrees to cease all use of Technology or
Developments upon termination of such license. Licensee acknowledges that the
Technology licensed herein is of a sensitive nature and is the trade secret and
proprietary intellectual property of Licensor and hereby accepts Licensor's
confidential disclosure to Licensee of the Technology pursuant to the terms of
this contract.
TK 3 JF
Initials
<PAGE>
Section 2.4 CARB or Federal Requirements. Licensee acknowledges that
the California Air Resources Board and/or other state and/or Federal agencies
may require the Licensee and/or resellers of Licensee's products, to apply for
and receive exemption status (50 state legal) allowing the products produces
under license herein to be sold for aftermarket installation. Such requirements
may change due to changes in the law from time to time. The parties hereto agree
that the reasonable cost incurred is such requirements will be borne equally
between the parties. In the event Licensee desires to engage in projects
utilizing the Technology, which projects might require additional governmental
requirements, such requirements will be borne by Licensee. Licensee acknowledges
that any and all responsibility for ongoing compliance in manufacture is that of
the Licensee.
Article III
Commencement of Disclosure
3.1 Deliveries. Subject to the terms and conditions of this Agreement,
the Licensor shall, within 30 days after the signing of this Agreement, commence
any additional disclosure of the Technology and Developments to the Licensee, by
delivering to the Licensee copies of the Technology Documents and the drawings
and other technical documentation in the Licensor's possession.
Article IV
Parties Independent
Section 4.1 Status of Parties. Nothing in this Agreement shall be
construed to constitute the Licensee as the partner, employee or agent of the
Licensor, not shall either party have any authority to bind the other party in
any respect, it being intended that each shall remain an independent party,
responsible only for its own actions.
Article V
Consideration
Section 5.1 Initial Lease/Installment Payments. Licensor agrees to
license the subject matter technology, sell the present inventory (Exhibit 'A')
and lease the tooling (Exhibit 'B') to Licensee for the sum of $ 400,000.00,
plus running royalties, and Licensee agrees to license the subject matter
technology, buy the present inventory (Exhibit 'A') and lease the tooling
(Exhibit 'B') from Licensor for the sum of $ 400,000.00, plus running royalties.
Licensee shall pay $ 50,000.00 (non-refundable) to Licensor on September 16,
1997, with the remaining balance payable in twenty four equal monthly payments,
plus interest calculated at eight percent (8%) per annum commencing December 1,
1997 and continuing on the first day of each following month until paid in full.
Said payments, timely made, are agreed to be a material provision of this
agreement. The tooling shall remain with Licensor's established vendors until
the $ 350,000.00, plus
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interest, balance of the initial, non-refundable license/lease/royalty
pre-payment hereunder shall be paid in full. This Agreement shall also serve as
a secured promissory not, with all Technology pledged for performance. Upon full
and timely payment of the initial, non-refundable license/lease/royalty
pre-payment hereunder, licensee may purchase the tooling (Exhibit 'B') from
Licensor for $ 1.00.
Section 5.2 Running Royalty. In consideration of Licensor's disclosure
of the Technology, and, in consideration for the scope of use license granted by
the Licensor for continued use of the Technology, and the performance of the
Licensor's other obligations under this Agreement, the Licensee shall pay to the
Licensor running royalties equal to the percentages of 5% of the revenues for
any and all products sold (except marine) by Licensee which utilize any of the
Technology licensed to Licensee herein. Additionally, this License is subject to
an agreed non-refundable, minimum monthly royalty payment, in the amount of $
5,000.00. Said monthly minimum royalty shall be due on October 1, 1998 and on
the first day of each month thereafter for the life of this License. Said
minimum monthly royalty, as paid, may be applied toward the total running
royalty payments due upon revenues (except for marine) during the quarter in
which the month occurs, but may not be carried forward future occurring
quarters. Running royalty payments shall be payable quarterly beginning one year
from the date of execution of this License Agreement, i.e.: on August 1, 1998.
The separate royalties payable for marine shall also be payable at the same time
as the running royalties herein, but shall be paid by separate cheque and with
separate accounting. The minimum monthly royalty shall not be credited to the
quarterly marine running royalty payments.
5.2.1 Quarterly running royalties payable under this License to be paid
within 21 calender days after the end of each such quarter by bank check or wire
transfer to Licensor's designated account.
Section 5.3 Royalty Statements. All royalty payments shall be
accompanied by royalty statements, certified by the Licensee and financial
officer, setting forth the Net Revenues of the Licensee and the calculation of
the amounts of royalties and other sums payable to the Licensor under this
Agreement (including any currency conversion), all in such detail as the
Licensor may reasonably request. Licensee shall provide separate payments and
accounting for marine.
Section 5.4 Payment. All payments tendered to the Licensor by the
Licensee under this Agreement shall be made in United States dollars, without
any deductions. Payments shall be made at the Licensor's address for receipt of
notice under Section 11.2, or at such other address or deposited in such bank
account as the Licensor may from time to time designate by notice to the
Licensee.
Section 5.5 Additional Consideration. Licensee agrees to sell products
produced pursuant to this agreement to Licensor for the lowest price said
products are offered to Licensee's best customers.
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Section 5.6 Default Remedies. In the event of Licensee insolvency or
any breach of the terms herein, specifically including, the timely making of all
payments required hereunder, then shall this agreement terminate (except for the
confidentiality provisions hereinbelow), and all rights shall immediately revest
in Licensor, including marine. All payments made to date of termination shall be
deemed non-refundable royalties. Licensee shall have rights to cure any default
as follows:
(a) Any default of payment (initial purchase or royalty),
including, but not limited to, failure to timely pay or
insufficient funds, shall be curable by Licensor's receipt of
full payment of the amount due within three days of FAX notice
of such default;
(b) Any other default hereof shall be curable by Licensee by
fully complying within thirty (30) days notice by Licensor.
Notice of any default shall be reasonably identified, as shall
requirements for cure. Default Notice may be by FAX.
Article VI
Confidentiality
Section 6.1 Nondisclosure of Confidential Information. The Licensee
shall at all times during and after the term of this Agreement hold in the
strictest confidence, and shall not directly or indirectly disclose to others,
or use for any purpose other than as contemplated in this Agreement, any of the
Technology or the Developments disclosed to the Licensee by the Licensor or as
to the Developments of the Licensee. Notwithstanding the foregoing, the Licensee
shall have the right to make disclosures of the Technology and such Developments
on a strict "need-to-know" basis to the Licensee's employees, and, with the
Licensor's prior approval, the Licensee's prospective suppliers and contractors,
and to whom such disclosure is necessary for the performance of this Agreement;
provided that the Licensee shall first obtain from each employee, supplier or
contrived and their respective employee confidentiality agreements with respect
to the Technology and such Developments in the form substantially similar to the
requirements of this Agreement, and the Licensee shall promptly deliver copies
of all such confidentiality agreements to the Licensor.
Section 6.2 Exceptions. The Licensee shall not be held to a duty of
confidentiality for any of the Technology or any of the Developments which:
6.2.1 is, or becomes, generally known in the manufacturing industry by
reason of a single integrated publication; or
6.2.2 after its disclosure to the Licensee, is received by the Licensee
in an integrated form from an independent third party whose disclosure of such
Technology or Developments shall not constitute a direct or indirect breach by
that third party of any duty of confidentiality owed to the Licensee.
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6.3 Documents. Licensor may designate as confidential, by legending
prominently as such, any drawings, charts, blueprints, specifications, magnetic
cards, films or other documentary or physical manifestation or disclosure of any
of the Technology or the Developments (cooectively, the "Documents"). The
Licensee shall legend prominently any Documents it may prepare which embody any
Technology or Developments, to identify them as confidential trade secret
proprietary information.
Section 6.4 Licensor Confidentiality Obligations. The Licensor shall
comply with the provision of confidentiality in Section 6.1 through 6.3 in
connection with any disclosures of confidential information made to the
Licensor.
Section 6.5 Unique Character of Confidential Information. The Licensee
acknowledges that the Technology and Developments to be disclosure by the
Licensor are of a special and unique character which gives them a peculiar valve
and that consequently any wrongful use or disclosure of the Technology or
Developments will cause injury not readily measurable in monetary damages, and
therefore irreparable. Accordingly, whether in court action or arbitration, the
Licensor shall be entitled to the remedies of injunction, specific performance
and other equitable relief to redress any such breach, and no proof of special
damages shall be necessary for the enforcement of or for any action upon such
obligations. Without limiting the generality of the foregoing, the Licensor
shall have the right to require the surrender and return to the Licensor of all
Technology and Developments disclosure by the Licensor, and all Documents and
material related hereto.
Section 6.6 Non Competition by Licensor. Licensor herein agrees that it
will not compete with Licensee in the aftermarket sales of Center Fire Valve
Cylinder Head Kits and Assemblies for Big Block Chevrolet Engine Applications,
in the Field of Use, and for the term, granted herein to Licensee, so long as
Licensee shall not be in breach of any term hereof. Upon breach, as stated
above, all rights revest in Licensor, this non-compete shall automatically
terminate as to Licensor, and Licensee shall cease and desist from any and all
use.
Section 6.7 Survival. The obligations of the Licensee and the Licensor
under this Article VI shall, except as otherwise expressly provided, survive
termination of this Agreement.
Article VII
The Licensee's Conduct of Business
Section 7.3 Compliance With Laws. The Licensee represents and warrants
to the Licensor that in the Licensee's performance of its obligations under this
Agreement, the Licensee shall indemnify the Licensor against any loss which the
Licensor may incur as a result of any claim or demand which nay be made against
the Licensor based upon the Licensee's failure to so comply.
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Section 7.4 Insurance. as a material term, Licensee shall promptly (and
prior to any sale of products using the Technology and/or taking possession of
the inventory) cause its product liability, advertising claims and general
liability insurance to be modified to name the Licensor as an additional
insured. Licensee shall maintain such insurance in an aggregate amount not less
than one million dollars (U.S. #1,000,000) during the term of the license
granted under Section 2.1. The Licensee shall promptly provide the Licensor with
a certificate of insurance from Licensee's insurance company evidencing such
coverage and the naming of Licensor as also insured. Licensee shall indemnify
and hold Licensor harmless from any and all claims arising from the Licensee's
use of the Technology.
Article VIII
Infringement
Section 8.1 Notice of Infringement.
8.1.1 The Licensee shall promptly notify the Licensor of any
instance which comes to the Licensee's attention involving a possible
misappropriation of any trade secret, or infringement of any Patent or other
proprietary right of the Licensor, relating to the Licensed Technology or the
Developments.
8.1.2 The Licensor shall make such inquiry as it deems
appropriate. If, in its sole judgment, the Licensor elects to bring an
infringement or misappropriation or other suit, the Licensee shall at the
request of the Licensor, promptly lend all reasonable assistance to the
Licensor, in the prosecution of such suit.
8.1.3 Nothing contained in this Agreement shall be construed
as an obligation of the Licensor or the Licensee, to bring or to prosecute any
suit or other proceeding against any third party for misappropriation of trade
secrets, or infringement of any patent or other intellectual property rights.
Section 8.2 Notice of Claims.
8.2.1. The Licensee shall give prompt notice to the Licensor
of any claim, action or proceeding pending or threatened against the Licensee,
alleging misappropriation of trade secrets or infringement of any patent or
other proprietary rights asserted by a third party, based on the use by the
Licensee or its sublicensees' use of the Technology or any Developments. If the
Licensee's or any or its sublicensees' use of the Technology and Developments is
in accordance with the provisions of this Agreement, and if the Licensor shall
so request, the Licensee shall make, and shall cause its sublicensees to make,
any practical modification of it's or their practice under the license or
sublicense granted, amendment of this Agreement or other means (without the
obligation of the Licensor or the Licensee to incur any material expense in
request thereof) in order to avoid suit or reduce the potential adverse effect
of any such claim or action.
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8.2.2 Licensor knows of no prior patents or prior art which
would render the rights granted herein an infringement upon same. Nothing
contained in this Agreement shall be construed as a warranty by the patent or
other intellectual property rights of third parties, and the Licensor disclaims
any such warranty.
8.2.3 Licensee is responsible for all costs related to or
occurring from any returns of products produces by Licensee using the technology
licensed herein whether returned for defective workmanship or part failures or
defects covered by warranty or otherwise. As between the parties only, any
design flaw, as noticed by Licensee to Licensor, and as supported by sufficient
evidence, which would require a re-design, such re-design will be done by
Licensor at no cost to Licensee. Nothing herein shall change Licensee's sole
responsibility for defective workmanship, part failures, defects or product
liability of any kind as to any and all third parties, of which Licensor is
indemnified and held harmless.
Article IX
Term; Termination
Section 9.1 License Term. The initial term of the License granted under
Section 2.1 shall commence on the date of this Agreement and shall continue in
perpetuity so long as Licensee adheres to the terms and conditions of this
license agreement.
Section 9.3 Termination. The License granted to the Licensee under
Section 2.1 may be terminated upon notice as follows:
9.3.1 by the Licensor, if the other party has materially
breached or failed to punctually perform any of its duties or obligations under
the Agreement and such breach remains uncured or such failure to perform
continues for at least 30 days after the aggrieved party has given notice to the
other party; or
9.3.2 by the Licensor, if the Licensee is insolvent or becomes
the subject of a voluntary petition in bankruptcy for its reorganiization or
liquidation, or makes any assignment for the benefit of its creditors, or if a
trustee or receiver of its property is appointed, or if the Licensee takes or is
subjected to any other similar action based upon its inability to meet its
financial obligations; or
9.3.3 by the Licensor, if the Licensee assigns this Agreement
or any of its rights under this Agreement without obtaining the Licensor's prior
written consent; or
9.3.4 by the Licensor, if there is a sale of substantially all
of the assets or a majority of the shares of the Licensee; or
9.3.5 by the Licensor, if the aggregate running royalties to
be received by the Licensor under Article V, during any one year period,
commencing for calendar year 1998, shall be less than one hundred thousand
dollars [S $ 100,000] in total, including separate..........
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Section 9.4 Effects of Expiration or Termination. If the term of the
License granted to the Licensee under Section 2.1 or if the shall License is
terminated, all rights of the Licensee under the License shall cease and the
Licensee shall cease to use any part of the Technology or the Developments and
shall immediately return and surrender to the Licensor all of the Technology,
the custom-made machinery, the developments disclosed by the Licensor, any and
all Documents and all other tangible disclosures of the Technology or
Developments, including the separate marine license, which shall then vest in
Licensor.
Section 9.5 Obligations Surrounding Termination. Not-with- standing any
termination of the License granted to Licensee under Section 2.1, and any
exercise by either party of any rights or remedies hereunder, the following
rights and obligations shall survive any such termination or exercise of rights
to the degree necessary to permit their complete fulfillment or discharge:
9.5.1 the Licensor's right to receive or recover, and the
Licensee's obligation to pay, the amount of all royalties and other sums payable
under Article V which is vested in, accrued or accruable at the time of
termination or exercise of such rights, and any adjustments in payments required
thereafter as a result of any audits under Section 7.2; and
9.5.2 Article VI, and any subsequent undertaking or agreement,
that may be in effect at the time of termination with respect to the maintenance
of the confidentiality or secrecy of the Technology and or the Developments and
covenant not to complete; and
9.5.3 any rights or remedies of either party under Article
VIII or X and any cause of action or claims of either party whether or not
accrued at the time of termination, because of any breach of or failure to
perform any obligation under this
Agreement.
Article X
Trademarks
10.1 The Licensee acknowledges the validity of all trademark
registrations and applications in the USA and/or foreign countries, owned by the
Licensor and herein licensed for use to Licensee for the term of, and pursuant
to the terms of this Agreement. The Licensee further acknowledges that the
Licensor is the sole owner of the entire right, title, and interest in and to
the trademarks covered by these registrations and/or applications hereinafter
called "Mark or Marks," and any and all goodwill in said Marks now or in the
future.
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The Licensee shall not do any thing or commit any act which might
prejudice or adversely affect the vitality of the marks and any such act shall
be considered a material breach of this agreement. Licensee shall cease to use
the marks, or ant similar marks, in any manner on the expiration or other
termination of this Agreement.
The Licensee further agreed that it will do nothing inconsistent with
such Licenseeship and that all use of the marks by Licensee shall inure solely
to the benefit of, and be on behalf of Licensor. Licensee agrees to be bound by
the requirements of this Section 10 for the duration of the term of the license
granted herein. Quality in Mark and Technology is a material provision of this
Agreement.
10.1 (a) Quality Standards
Licensee agrees that the nature and quality of all services rendered by
Licensee in connection with the Mark/Technology; all goods sold or used by
Licensee under the Mark/Technology; and all related advertising, promotional and
other related uses of the Mark/Technology by Licensee shall conform to the
quality standards set by, and be under the control of, Licensor. Nothing herein
shall be deemed an acceptance by Licensor of any responsibility for the product
liability.
10.2 (b) Quality Maintenance
Licensee agrees to cooperate with Licensor in facilitating Licensor's
control of such nature and quality, to permit reasonable inspection of
Licensee's operation, and to supply Licensor with specimens of all uses of the
Mark/Technology upon request. Nothing herein shall be deemed an acceptance by
Licensor of any responsibility for product liability.
10.1 Form of Use
Licensee agrees to use the Mark only in the form and manner and with
appropriate legends as prescribed from time to time by Licensor, and not to use
any other trademark or service mark in combination with the Mark without first
obtaining the prior written approval of Licensor.
Article XI
General Provisions
Section 11.1 Notices. All notice required or permitted under this
Agreement shall be in writing and shall be effective upon personal delivery to
or being sent by registered or certified mail, return receipt requested, postage
fully prepaid and addressed to the respective parties at their addresses set
forth below or to any other address designated by the parties at a later date:
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Licensor: Feuling Advanced Technologies, Inc.
c/o Gilliam, Duncan & Harms
4565 Ruffner Street, Suite 200
San Diego, California 92111
Licensee: Thomas Klein, President
Klein Engineered Competition Components, Inc.
1207 North Miller Road
Tempe, Arizona 85281
Section 11.2 Binding Effect. The Agreement shall be binding upon and
shall inure to the benefit of the Licensor and the Licensee and of their
respective successors and permitted assigns.
Section 11.3 Waiver.
(a) Requirements of Writing - No waiver of, acquiescence to , or
consent to any breach of or default of any term or condition contained in this
Agreement by Licensor shall be of any force or effect unless same is in writing,
specifically identified, and signed by Licensor.
(b) No Implied Waiver - No waiver of, acquiescence to, or consent to
any breach of or default of any term or condition contained in this Agreement by
Licensor pursuant to subparagraph (a), above, shall be deemed, express or
implied, generally or specifically, to be a waiver, consent, or acquiescence to
any other breach or default.
(c) No delay or omission in the exercise of any right or remedy by
Licensor shall impair such right or remedy or be construed as a waiver. A
consent by Licensor to or approval of any act shall not be deemed to waive or
render unnecessary consent to or approval of any other or subsequent act.
Section 11.4 Severability. If for any reason in any jurisdiction in
which any provision of this Agreement is sought to be enforced, any one or more
of the provision of this Agreement shall be held to be invalid, illegal or
unenforceable in any respect, such holding shall not affect any other provision
of this Agreement and this Agreement shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
Section 11.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of California with all
applicable contracts deemed made and to be performed wholly in that State. The
federal law and public policy of the United States of America shall not govern
this Agreement or a fact of its interpretation, save as to operation of Licenses
under U.S. Patents. The venue for the interpretation and or enforcement of any
provision of this agreement is mutually agreed by the parties hereto to be
proper court of jurisdiction located in San Diego, California.
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Section 11.6 Legal Fees and Costs. The prevailing party to any action
to interpret and or enforce any provision of this Agreement shall be intitled to
recover from the unsuccessful party(ies) to this Agreement, all costs, expenses
and actual attorney's fees relating to the enforcement of, interpretation of, or
any litigation, arbitration, mediation or private settlement, relating to this
Agreement, in addition to any other relief that may be afforded.
Section 11.7 Accounting/Audit/Inspection. For the term of this License,
Licensee shall maintain true, accurate and complete books and records of all
transactions and uses of the Technology, including sales made under the separate
marine agreement (Exhibit 'C'). Licensee shall make quarterly reports of gross
revenues and costs, concurrently with the royalty statements. Licensor shall
have the right to inspect such books and records at any time, with fourty-eight
hours notice to Licensee. Licensee hereby agrees that court order for production
of accounting, in the event of Licensee's failure to produce the records ad
required hereunder, may be granted. Licensor shall have the right to audit all
books and records, not more than once per year. Such audit will be conducted by
a representative of Licensor's sole choice, and will be paid for by Licensor,
except in the event that such audit reveals an under-reporting of three percent
(3%) or greater, in which event Licensee shall pay all costs of audit. Licensee
and Licensor shall promptly pay any adjustment required between them as a result
of any such audit. True, accurate and complete books and records, as well as
audit and inspection rights are a material provision of this License Agreement.
Section 11.7 Counterparts. This Agreement may be executed in several
counterparts, each of which shall constitute an original, but all of which
together shall constitute one and the same instrument. The headings contained in
this Agreement have been inserted for convenience of reference only and shall
not modify, define, expand or limit any of the provisions of this Agreement.
Section 11.8 Challenge. A legal challenge to the validity of any
patent, trademark, or the other Technology licensed herein shall be a material
breach of this agreement should such a challenge be unsuccessful and/or should
Licensee not prevail in such an action.
Section 11.9 Drafting Ambiguities. Each party to this Agreement and its
counsel have reviewed and revised this Agreement or has had the opportunity to
do so. The rule of construction that any ambiguities are to be resolved against
the drafting party shall not be employed in the interpretation of this Agreement
or of any amendments or exhibits to this Agreement.
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Section 11.10 Entire Agreement. This Agreement, which includes its
Addendums, and Exhibits, constitutes the entire agreement of the parties
relating to its subject matter, supersedes all prior oral or written
understanding or agreements regarding that subject matter and may not be
amended, modified or canceled except by a written instrument executed by both
the Licensor and Licensee.
IN WITNESS WHEREOF, LICENSOR and LICENSEE have executed this Agreement
in duplicate as of July 29, 1997 and affixed the corporate seal of the parties
hereto. The signatories of the respective parties hereto, by affixing their
signatures to this agreement, each individually warrant their ability to bind
the party on whose behalf they are executing this agreement.
LICENSOR:
FEULING ADVANCED TECHNOLOGY, INC.
By: /s/ James J. Feuling
------------------------------------
James J. Feuling,
President
LICENSEE:
KLEIN ENGINEERED COMPETITION COMPONENTS INC.
By: /s/ Thomas Klein
------------------------------------
Thomas Klein,
President
EXHIBIT 16
----------
ANDERSEN ANDERSEN & STRONG, L.C. 941 East 3300 South, Suite 202
Salt Lake City, Utah 84106
Certified Public Accountants and Business Consultants Telephone 801-486-0096
Member SEC Practice Section of the AICPA Fax 801-486-0098
E-mail KAndersen @msn.com
Securities and Exchange Commission
450 - 5th Street, N.W.
Washington, D.C. 20549
January 19, 1998
Re: Klein Engines
1207 N. Miller Rd.
Tempe, Az. 85281
Dear Sirs:
We have been furnished with a copy of Item 3, Changes in and Disagreements with
Accountants, to be included as part of a Form 10 filing.
We agree with the statements made, in response to that Item, insofar as they
relate to our firm.
Sincerely,
/s/ L. Rex Andersen
--------------------------
L. Rex Andersen, Partner
A member of ACF International with affiliated offices worldwide
EXHIBIT 21
----------
SUBSIDIARIES OF
KLEIN ENGINES & COMPETITION COMPONENTS, INC.
Name of Subsidiary State of Incorporation
- ------------------ ----------------------
K-Way, Inc. Nevada
Klein Competition Components, Inc. Nevada
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This exhibit contains summary financial information extracted from the
Registrant's financial statements for the period ended September 30, 1997, and
is qualified in its entirety by reference to such financial statements. This
exhibit shall not be deemed filed for the purposes of Section 11 of the
Securities Act of 1933, and Section 18 of the Securities Exchange Act of 1934,
or otherwise subject to the liability of such Sections, nor shall it be deemed a
part of any other filing which incorporates this report by reference, unless
such other filing expressly incorporates this Exhibit by reference
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 86
<SECURITIES> 0
<RECEIVABLES> 126
<ALLOWANCES> 11
<INVENTORY> 938
<CURRENT-ASSETS> 1188
<PP&E> 2654
<DEPRECIATION> 279
<TOTAL-ASSETS> 3854
<CURRENT-LIABILITIES> 782
<BONDS> 1700
0
0
<COMMON> 8
<OTHER-SE> 1365
<TOTAL-LIABILITY-AND-EQUITY> 3854
<SALES> 2202
<TOTAL-REVENUES> 2202
<CGS> 1728
<TOTAL-COSTS> 1728
<OTHER-EXPENSES> 1825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 103
<INCOME-PRETAX> (1409)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1409)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1409)
<EPS-PRIMARY> (.20)
<EPS-DILUTED> (.20)
</TABLE>
