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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DURASWITCH INDUSTRIES, INC.
(Name of small business issuer in the Charter)
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NEVADA 3679 88-0308867
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
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234 S. EXTENSION ROAD, MESA, ARIZONA 85210
(Address of Principal Place of Business or Intended Principal Place of Business
and Telephone Number of Principal Executive Offices)
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R. TERREN DUNLAP, CHIEF EXECUTIVE OFFICER
DURASWITCH INDUSTRIES, INC.
234 S. EXTENSION ROAD
MESA, ARIZONA 85210
(480) 833-3131
(Name, Address, and Telephone Number of Agent for Service)
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Copies to:
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P. ROBERT MOYA, ESQ. STEVEN D. PIDGEON, ESQ.
MARK K. BRIGGS, ESQ. RICHARD B. STAGG, ESQ.
QUARLES & BRADY LLP SNELL & WILMER L.L.P.
ONE E. CAMELBACK ROAD, SUITE 400 ONE ARIZONA CENTER
PHOENIX, ARIZONA 85012-1649 400 EAST VAN BUREN
(602) 230-5500 PHOENIX, ARIZONA 85004
(602) 382-6252
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED
TITLE OF EACH CLASS AMOUNT MAXIMUM PROPOSED MAXIMUM AMOUNT
OF SECURITIES TO BE OFFERING PRICE AGGREGATE OF
TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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Common Stock, par value $.001 per
share.......................... 2,300,000 shares $10.00 $23,000,000 $6,394
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(1) Includes 300,000 shares to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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SUBJECT TO COMPLETION DATED JUNE 4, 1999
PROSPECTUS
2,000,000 SHARES OF COMMON STOCK
[DURASWITCH INDUSTRIES, INC. LOGO]
DuraSwitch Industries, Inc. is offering 2,000,000 shares of its common
stock. We have applied for our common stock to be listed on the American Stock
Exchange under the symbol "DRA." We estimate that the offering price will be
between $8.00 and $10.00 per share.
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD PURCHASE SHARES
ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS YOU SHOULD CONSIDER
BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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THE OFFERING PER SHARE TOTAL
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Public Price................................................ $ $
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Underwriting Discounts and Commissions...................... $ $
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Proceeds to DuraSwitch...................................... $ $
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DuraSwitch and one of its stockholders have granted to the underwriters a
45-day option to purchase up to an additional 300,000 shares of common stock to
cover over-allotments; 225,734 additional shares from DuraSwitch and 74,266
additional shares from the selling stockholder.
THE COMMON STOCK IS CURRENTLY TRADED ON THE OTC BULLETIN BOARD UNDER THE
SYMBOL "DSWT." THE LAST REPORTED SALE PRICE OF THE COMMON STOCK ON THE OTC
BULLETIN BOARD ON JUNE 2, 1999, PRIOR TO OUR ANTICIPATED 4.25 TO 1 REVERSE STOCK
SPLIT, WAS $2.25. THE PUBLIC OFFERING PRICE OF THE COMMON STOCK, WHICH REFLECTS
THE ANTICIPATED REVERSE STOCK SPLIT, WILL BE DETERMINED BY NEGOTIATIONS WITH THE
UNDERWRITERS AND MAY NOT BE INDICATIVE OF THE PRICES THAT PREVAILED ON THE OTC
BULLETIN BOARD PRIOR TO THIS OFFERING.
[Cruttenden Roth Logo]
The date of this Prospectus is , 1999.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE CANNOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE> 3
Inside Front Cover: The top half of the page shows a detailed view of the
DuraSwitch PushGate(TM) components. The bottom half of the page is the table of
contents.
Gatefold layout: Pictures arranged around the DuraSwitch logo depicting the
different products in which our switches have been incorporated, followed by a
close up picture of the switches or ICP next to the product. The captions under
each of the products surrounding the DuraSwitch logo read as follows:
"Automotive," "Aeronautical Controls," "Irrigation Systems," "Medical,"
"Retail," "Restaurant Equipment," "Theme Park Transportation," and "Ship Bridge
Controls." The caption under the centered DuraSwitch logo reads "DuraSwitch's
products have been custom designed, engineered and manufactured for a wide
variety of applications requiring a durable, reliable, low cost switch for slim
profile designs that provide excellent tactile feedback." The caption at the
bottom of the page will read as follows: "The Best New Product of 1998" in the
electrical/electronics category - Design News." The bottom caption will be
followed by the award logo.
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DuraSwitch(R), PushGate(TM), Rotor(TM), SnapRotor(TM), Slider(TM),
Slammer(TM), DuraSwitch ICP(TM), Touch the Future(R), and DuraSwitch.com(TM) are
trademarks of DuraSwitch. Each other trademark, trade name or service mark
appearing in this prospectus belongs to its holder.
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Summary Consolidated Financial Information.................. 4
Risk Factors................................................ 5
Use of Proceeds............................................. 10
Dilution.................................................... 11
Capitalization.............................................. 12
Dividend Policy............................................. 12
Selected Financial Data..................................... 13
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 14
Business.................................................... 20
Management.................................................. 31
Security Ownership of Certain Beneficial Owners and
Management................................................ 35
Certain Relationships and Related Transactions.............. 35
Underwriting................................................ 37
Description of Securities................................... 39
Market for Common Stock and Related Stockholder Matters..... 41
Interest of Named Experts and Counsel....................... 43
Legal Matters............................................... 43
Experts..................................................... 43
Available Information....................................... 43
Index to Financial Statements............................... F-1
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PROSPECTUS SUMMARY
This section summarizes information contained elsewhere in this prospectus.
This summary is not complete and does not contain all the information that is
important to you. To understand this offering fully, you should read the entire
prospectus carefully, including the risk factors, financial statements and the
notes to the financial statements. When we refer to "us," "we," "our," "the
Company" and "DuraSwitch" in this prospectus, we mean DuraSwitch Industries,
Inc., and its consolidated subsidiaries, including its predecessor Total Switch,
Inc. Unless we tell you otherwise, the information in this prospectus reflects
the 4.25 to 1 reverse stock split that will be effected immediately prior to
this offering and assumes no exercise of the underwriters' over-allotment option
or the representative's warrant.
DURASWITCH INDUSTRIES, INC.
Business: We design, manufacture and distribute custom electronic
switches and integrated controls panels (ICPs) that are
used to operate or control products in a wide variety of
commercial and consumer applications. Our switches and
ICPs are based upon an innovative technology that
utilizes a magnetic-based design we developed and
patented. We believe this patented technology positions
us as the only company capable of providing a durable,
reliable, low cost switch that can easily be
incorporated into a slim profile, flat panel design
without sacrificing the consistent tactile feedback
response, or "click," highly desired by end users. In
recognition of these capabilities, Design News, a trade
magazine widely read by design engineers, named our
initial product, the DuraSwitch PushGate, as "The Best
New Product of 1998" in the electrical/electronic
category.
Market: Electronic switches and ICPs are used in a wide variety
of consumer, industrial and agricultural products, such
as computers, consumer electronics, mobile phones,
consumer appliances, automobiles, fitness equipment,
trains, ships, airplanes, tractors, generators, medical
devices and consumer food preparation equipment, and
represent a multi-billion dollar global market.
Customers: Since commencing operations in May 1997, we have
provided custom-designed solutions for a number of
leading companies in a variety of industries. Examples
include:
- the panels operating the doors of the monorail trains
at Disney World;
- lawn irrigation systems made by Rain Bird/Clemar
Manufacturing Corp.;
- boat trolling motors distributed by Johnson Worldwide
Associates;
- mobile digital phones developed by Ericsson Inc.;
- ship bridge radar control systems produced by Raytheon
Marine Company;
- peripheral controls for computers made by Covid, Inc.;
and
- restaurant food preparation equipment made by
Frymaster and Ram Center, Inc.
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Competitive Advantages
of Our Products: Our patented magnetic-based technology enables us to
make switches and ICPs that:
- offer superior durability, enhanced reliability and
better value compared to switches utilizing
traditional technologies;
- can be easily incorporated into flat panel, slim
profile designs currently demanded by the market; and
- provide the consistent tactile feedback response
highly desired by end users.
We believe that no switch or ICP relying on competing
technologies is capable of providing the unique
combination of features offered by DuraSwitch products
incorporating our patented technology.
Strategy: Our objective is to become a leader in the electronic
switch and integrated controls panel industries by
making DuraSwitch technology the design standard for
electronic switches and ICPs. In order to achieve this
objective, we intend to pursue the following strategies,
among others:
- exploit and maintain our patented technology's
competitive advantages compared to traditional
electro-mechanical and membrane switch technologies;
- increase market awareness of our products' patented
technological advantages;
- leverage our current strategic alliances as well as
pursue new strategic alliances and acquisitions to
increase market share; and
- provide full service design engineering, testing and
manufacturing capability to our customers.
Our executive offices are located at 234 S. Extension Road, Mesa, Arizona
85210. Our telephone number at that location is (480) 833-3131. Our web site
address is www.duraswitch.com. Information contained on our web site does not
constitute part of this prospectus.
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THE OFFERING
Common stock offered: 2,000,000 shares.
Common stock
to be outstanding
after the offering: 7,471,877 shares. This number does not include: (a)
113,459 shares issuable upon the exercise of warrants
outstanding as of May 15, 1999, all of which were
exercisable on that date; nor (b) 726,471 shares
issuable upon exercise of outstanding stock options
granted under our 1997 and 1999 Stock Option Plans, of
which options for 536,942 shares were exercisable as of
May 15, 1999. As of that date, the weighted average
exercise price of all outstanding options was $11.47 per
share and the weighted average exercise price of all
outstanding warrants was $2.73 per share. See
"Description of Securities -- Warrants and Options" and
"Management -- Stock Option Plans."
Over-allotment option: Up to 300,000 shares, 225,734 from DuraSwitch and 74,266
from a selling stockholder. If the underwriters exercise
the over-allotment option in full, the total public
price will be $ , the total underwriting
discounts will be $ , and DuraSwitch will
receive total proceeds of $ .
Proposed AMEX symbol: "DRA"
Use of proceeds: Research and development, capital equipment acquisition,
expansion of sales and marketing efforts, repayment of
indebtedness, acquisitions and working capital. See "Use
of Proceeds."
Risk factors: For a discussion of certain risks you should consider
before investing, see "Risk Factors."
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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THREE MONTHS
ENDED
PERIOD FROM MAY 1, 1997 MARCH 31,
(DATE OF INCEPTION) TO YEAR ENDED ----------------
DECEMBER 31, 1997 DECEMBER 31, 1998(1) 1998(1) 1999
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(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 6 $ 1,355 $ 308 $ 468
Gross profit (loss)....................... (1) 55 25 4
Loss from operations...................... (453) ( 1,549) (289) (468)
Net loss.................................. (449) ( 1,599) (293) (450)
Non-cash discount(2)...................... -- (740) -- --
Net loss attributable to common
stockholders............................ $ (449) $(2,339) $ (293) $ (450)
Net loss per common share, basic and
diluted................................. $(0.12) $ (0.55) $(0.07) $(0.09)
Weighted average common shares
outstanding, basic and diluted.......... 3,787 4,269 4,217 5,073
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MARCH 31, 1999 (UNAUDITED)
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PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 412 $ 662 $15,729
Working capital......................................... 238 591 15,698
Total assets............................................ 2,391 2,641 17,708
Long-term debt, net of current portion.................. 184 184 90
Total stockholders' equity.............................. 1,119 1,472 16,672
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(1) Includes the results of operations of Aztec Industries, Inc. since our
acquisition of Aztec on January 31, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Prior to January
31, 1998, we were a development stage company.
(2) A non-cash charge of $740,000 was incurred in connection with a beneficial
conversion feature relating to the sale of convertible preferred stock on
June 29, 1998. See Note 11 in Notes to the Consolidated Financial Statements
of DuraSwitch included elsewhere in this prospectus.
(3) Pro Forma gives effect to the April 1999 exercise of warrants to purchase
252,155 shares of common stock in exchange for $250,000 in cash,
cancellation of a note payable of $102,737 and our acceptance of a short
term promissory note in the amount of $147,263.
(4) Pro Forma As Adjusted reflects the sale of the 2,000,000 shares of common
stock at an assumed initial public offering price of $9.00 per share after
deducting underwriting discounts and estimated offering expenses and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
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RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before buying shares of our common stock.
WE ARE AN EARLY STAGE COMPANY AND ARE NOT CERTAIN WHETHER WE WILL BECOME
PROFITABLE
We have not made a profit since beginning operations in May 1997, and we
are not certain whether we will ever become profitable. In order to become
profitable, we must, among other things, achieve sufficient sales to cover our
operating costs. To increase sales, we must increase market awareness of our
products, further develop distribution channels and hire and retain key sales
representatives. Our failure to accomplish these objectives would have a
material adverse effect upon our business, financial condition and results of
operations.
WE HAVE A LIMITED OPERATING HISTORY WHICH MAKES IT DIFFICULT TO EVALUATE OUR
STRATEGY AND FORECAST OUR OPERATING RESULTS
We have a limited operating history which makes it difficult to evaluate
our strategy and forecast our operating results. We cannot assure you that our
business strategy will be successful. Our net revenue in any given period is
difficult to forecast because it is dependent largely upon the timing of product
purchases by our customers. Although we have secured numerous purchase orders
for prototypes and production models of our products, our customers are not
required to make subsequent purchases and the timing of any future purchases may
vary significantly from quarter to quarter until we establish a larger customer
base.
FAILURE OF OUR PRODUCTS TO ACHIEVE WIDESPREAD COMMERCIAL ACCEPTANCE WILL HINDER
OUR GROWTH
We have not yet proven conclusively that our products will achieve
widespread acceptance in the market. Our failure to achieve widespread market
acceptance for our products in a timely manner would have a material adverse
effect on our business, financial condition and results of operations. For our
products to achieve widespread commercial acceptance, we must establish that:
- products using our patented technology will comply with error rates that
are acceptable for market applications;
- our products can be successfully produced at a reasonable cost;
- our products will continue to perform reliably in the field with an
acceptable useful life; and
- customers and end users will continue to demand our products.
It is difficult this early in the market cycle to accurately predict the
level of market acceptance our products will achieve. There can be no assurance
that we will market our products successfully.
LOSS OF ONE OF OUR PRINCIPAL CUSTOMERS COULD SIGNIFICANTLY DECREASE OUR REVENUES
Over 50% of our net sales in the fiscal year ended December 31, 1998 were
generated from sales to 13 accounts, including one account which constituted
over 11% of our net sales. We do not expect that these customers will account
for significant product sales in 1999, although we anticipate that one current
customer and several prospective customers will account for a significant
percentage of our sales for the balance of 1999. There can be no assurance,
however, that our current significant customer will order as much product in
1999 as we anticipate or that any of our prospective customers will order any
products. A reduction in orders from any principal customers or a failure to
receive significant purchase commitments from prospective customers could hinder
our anticipated growth and may have a material adverse effect on our business,
financial condition and results of operations.
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INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY DIMINISH OUR
COMPETITIVE TECHNOLOGICAL ADVANTAGES
Our success depends, in large part, on our ability to protect our
technology through United States and foreign patents, to preserve our trade
secrets and to operate without infringing the proprietary rights of third
parties. We may be unable to secure patents for all of our products and
processes. In addition, the issuance of patent protection for all our products
may not afford us sufficient protection from competitors that develop similar or
superior technologies.
As we take our products to market, we could encounter unanticipated patent
barriers. A patent search will not disclose applications that are currently
pending in the United States Patent Office, and there could be one or more such
pending applications that would take precedence over one of our applications. In
addition, the laws of certain countries do not protect our proprietary rights to
the same extent as do the laws of the U.S. Accordingly, there can be no
assurance that we will be able to protect our proprietary technology against
unauthorized copying or use. We may have to engage in litigation to enforce our
proprietary rights, to determine the validity and scope of our proprietary
rights or to defend or assert claims of infringement. Any litigation or failure
to protect our proprietary rights could have a material adverse effect upon our
business, financial condition and results of operations.
WE MAY BE UNABLE TO MANAGE EXPANSION OF OUR OPERATIONS EFFECTIVELY
Our anticipated expansion may significantly strain our management and
manufacturing capabilities, and our subcontractors' resources. To manage growth
effectively, we must continue to enhance our operational, financial and
management systems, successfully manage our quality assurance program, and
expand, train and manage our employee base. Due to the custom nature of our
products and the level of technical and design engineering expertise necessary
to support our customers, there may be only a limited number of persons with the
requisite skills to serve in these positions and it may become increasingly
difficult for us to hire those persons. There can be no assurance that we will
be able to manage our expansion effectively. Any failure to effectively manage
our anticipated future growth could have a material adverse effect on our
business, financial condition and results of operations.
COMPETITION MAY PREVENT US FROM GAINING SIGNIFICANT MARKET SHARE
The market for products similar to ours is highly competitive and well
established. We face competition from over 125 companies in the
electro-mechanical switch market and a substantial number of membrane switch and
integrated controls panel manufacturing companies in their respective markets.
Many of our competitors have established products, high name recognition, and
significantly greater resources than ours. Our competitors' long term
relationships with their customers along with OEMs' reluctance to try our new
switch technology could also result in our inability to achieve sufficient
sales. We also may encounter difficulties in convincing potential customers to
change over to our new technology because they may be required to incur
additional engineering and tooling costs. Direct and indirect competition could
materially and adversely affect our revenues and profitability through pricing
pressure and loss of sales.
In addition, it may be possible for one of our competitors to develop
technology that is superior to ours, which could adversely affect our
competitive position. Our failure to compete successfully would have a material
adverse effect on our business, financial condition and results of operations.
LOSS OF A KEY EXECUTIVE OFFICER COULD NEGATIVELY IMPACT OUR OPERATIONS
Our success depends on the efforts of R. Terren Dunlap, Chief Executive
Officer and Chairman of the Board, and Anthony J. Van Zeeland, Chief Operating
Officer/Executive Vice President of Engineering and the inventor of our patented
technology. In particular, Mr. Van Zeeland has been the key individual
responsible for developing solutions to the design challenges presented by our
customers. We believe our relationships with these individuals are good.
However, we cannot ensure that the services of these individuals will continue
to be available to us in the future. Although we have obtained "key man" life
insurance with DuraSwitch as beneficiary, if we lose either of these individuals
and cannot find adequate
6
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replacements, there would be a material adverse effect on our business,
financial condition and results of operations. See "Management."
MANAGEMENT WILL BE ENTITLED TO A SIGNIFICANT PORTION OF OUR PRE-TAX PROFITS
Under employment agreements with our three principal officers, we will pay
approximately 15% of our pre-tax profits to them as bonuses. In addition, we
have agreed to pay 1.1% of invoiced sales to an entity controlled by two of
these officers in exchange for intellectual property consulting services. These
payments will reduce amounts available to operate our business and will reduce
our earnings.
LACK OF AN ACTIVE TRADING MARKET COULD ADVERSELY AFFECT OUR STOCK PRICE
There is limited trading in our common stock on the OTC Bulletin Board,
which is traded pursuant to Rule 15c2-11 under the Securities Exchange Act of
1934. Immediately prior to this offering, we will effect a 4.25 to 1 reverse
stock split. Although our common stock will be listed on the American Stock
Exchange upon completion of this offering, there is no assurance that an active
trading market will develop or be sustained. The public offering price of the
common stock will be determined by negotiations between us and the underwriters
rather than the market prices that prevailed prior to this offering, and may not
be indicative of the prices that may prevail in the public market following the
offering. Therefore, the market price of our common stock might decline below
the public offering price. Also, the trading price of our common stock could be
subject to significant fluctuations in response to variations in quarterly
operating results, regulatory actions, developments in the electronic switch
industry, the condition of the overall stock market or general economic
conditions. See "Underwriting."
WE MAY INCUR UNEXPECTED EXPENSES DUE TO PRODUCT DEFECTS
New products frequently contain undetected defects when introduced in the
marketplace. Although we are not presently aware of any defects that would
materially and adversely affect our products' performance, there can be no
assurance that our products will not experience defects in the future. If we
detect product defects, we may be forced to suspend or delay shipments, make
expensive and time consuming design modifications, recall previously shipped
products, absorb service and warranty costs, experience unfavorable publicity,
or experience strained relationships with distributors, customers and strategic
partners. These difficulties could have a material adverse effect on our
business, financial condition and results of operations.
INABILITY TO SECURE FAVORABLE LICENSING AGREEMENTS COULD NEGATIVELY IMPACT OUR
GROWTH
In order to promote widespread market acceptance of our products, we intend
to license our technology to other electronic switch or ICP manufacturers under
terms which are favorable to us. However, we may be unable to enter into any
favorable licensing agreements with other manufacturers. Our inability to secure
favorable licensing agreements could negatively impact our anticipated growth
and may materially and adversely affect our business, financial condition and
results of operations.
OUR PURSUIT OF STRATEGIC ALLIANCES AND ACQUISITIONS MAY HAVE UNINTENDED NEGATIVE
CONSEQUENCES
We intend to consider acquisitions of and strategic alliances with other
companies in our industry that could complement our business. There can be no
assurance that suitable acquisition or alliance candidates can be identified or,
if identified, that we will be able to consummate such transactions. Further,
there can be no assurance that we will be able to integrate successfully any
acquired companies into our existing operations, which could increase our
operating expenses. Moreover, any acquisition by us may result in potentially
dilutive issuances of equity securities, incurrence of additional debt and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability. Acquisitions and strategic alliances
involve numerous risks, such as diverting attention of our management from other
business concerns, our entrance into markets in which we have no or only limited
experience and the potential loss of key employees of the acquired company, any
of which could have a material adverse effect on our business, financial
condition and results of operations.
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WE MAY ALLOCATE A SIGNIFICANT PORTION OF THE PROCEEDS OF THIS OFFERING TO
UNSPECIFIED USES
Over 60% of the net proceeds of this offering are not committed to specific
uses identified in this prospectus and will be available for general corporate
purposes including working capital or future acquisitions. Accordingly, we will
have broad discretion in using the net proceeds of this offering and you will
not have an opportunity to evaluate the relative merits of those unspecified
uses prior to your investment. See "Use of Proceeds."
WE MAY NEED ADDITIONAL FINANCING IN THE FUTURE TO IMPLEMENT OUR LONG TERM
BUSINESS PLAN
We may not be able to fully implement our long term business plan with only
the net proceeds from this offering. We may need additional equity or debt
financing, collaborative arrangements with corporate partners, or funds from
other sources for these purposes. Additional financings may be dilutive to our
stockholders or may require us to relinquish rights to certain of our
technologies or products. We may have difficulty obtaining these funds on
acceptable terms, if at all. If we cannot obtain adequate funds from operations
or additional sources of financing, we may experience operational difficulties
and delays due to a lack of working capital and, as a result, our business,
financial condition and results of operations will be materially and adversely
affected.
WE MAY BE UNABLE TO EFFECTIVELY MANAGE ANY POTENTIAL INTERNATIONAL OPERATIONS
To the extent our products or raw materials are purchased from, or
manufactured or assembled by, our overseas suppliers, we are subject to the
general risks of conducting business internationally, including:
- unexpected changes in regulatory requirements;
- fluctuations in currency exchange rates;
- tariffs and other barriers and restrictions;
- potentially adverse tax consequences; and
- the burdens of complying with a variety of foreign laws.
In addition, our international operations will be subject to international
political and economic instability and changes in diplomatic and trade
relationships. These factors may force us to find more costly or less desirable
alternative sources for products, services or raw materials, which could
materially and adversely impact our business, financial condition and results of
operations in the future or require us to modify our business practices.
PRODUCT LIABILITY CLAIMS MAY INCREASE OUR COSTS OF DOING BUSINESS
Designing, testing, manufacturing, marketing and sale of our products
entail an inherent risk of product liability claims. Although we currently have
product liability insurance coverage of $2 million, product liability insurance
coverage can be expensive, difficult to obtain and may not be available on
acceptable terms, if at all, in the future. Product liability insurance coverage
might not be adequate to cover our costs of responding to product liability
claims, even ones without merit. Therefore, product liability claims could
materially and adversely affect our business, financial condition, or results of
operations.
WE MAY LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR COMPUTER SOFTWARE OR
SYSTEMS, OR THOSE OF MATERIAL THIRD PARTIES, ARE NOT YEAR 2000 COMPLIANT
Our business depends on the operation of systems that could potentially be
impacted by Year 2000 related problems. We have conducted an internal review and
believe our computer software and systems are Year 2000 compliant. We are in the
process of contacting key suppliers regarding their Year 2000 readiness. We are
also developing contingency plans for third party and internal failures related
to the Year 2000 issue. However, we may incur material unanticipated expenses to
remedy any problems caused
8
<PAGE> 13
by the Year 2000 related failures of our or third parties' information or other
systems. The incurrence of these expenses could have a material adverse effect
on our business, financial condition and results of operation.
STOCKHOLDERS WHO ACQUIRE COMMON STOCK IN THIS OFFERING WILL NOT BE ABLE TO
EXERCISE SIGNIFICANT INFLUENCE AS MINORITY STOCKHOLDERS
Following the completion of this offering, our executive officers and
directors will own approximately 49% of the outstanding common stock, including
shares of common stock subject to options and warrants. Accordingly, as a group,
our executive officers and directors will have significant influence over
electing directors to our Board, approving matters requiring stockholder
approval and our general affairs. This concentration of ownership could delay or
prevent a change of control that minority stockholders may believe is in their
best interests.
SOME PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS MAY DETER A CHANGE
IN CONTROL, EVEN IF SUCH CHANGE IN CONTROL WOULD BE BENEFICIAL TO STOCKHOLDERS
Our Articles of Incorporation and Bylaws empower our Board of Directors,
without approval of the stockholders, to fix the rights and preferences of, and
to issue, shares of preferred stock. The Articles do not provide for cumulative
voting for election of directors. In addition, our Bylaws provide for a
staggered board. These provisions could have the effect of deterring unsolicited
takeovers or other business combinations or delaying or preventing changes in
control or management, including transactions in which stockholders might
otherwise receive a premium for their shares over market prices. In addition,
these provisions may limit the ability of stockholders to approve transactions
that they may deem to be in their best interests.
FORWARD-LOOKING STATEMENTS MAY BE UNRELIABLE
This prospectus (including the documents incorporated by reference in this
prospectus) contains forward-looking statements regarding our plans,
expectations, estimates and beliefs. Our actual results could differ materially
from those discussed in, or implied by, these forward-looking statements.
Forward-looking statements are identified by words such as "believe,"
"anticipate," "expect," "intend," "plan," "will," "may" and other similar
expressions. In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements in these documents include, but are not
necessarily limited to, those relating to our:
- intention to further penetrate the switch and integrated controls panel
markets;
- ability to carry out our business strategy;
- objective to establish DuraSwitch technology as the design standard in
the electronic switch and ICP industries;
- estimates of the size and anticipated growth in the switch and integrated
controls panel markets;
- success in developing new or enhanced products to take advantage of
market opportunities or to respond to competition;
- ability to complete any future acquisitions of products or businesses;
- achieving Year 2000 compliance or the impact on us of any third party's
Year 2000 compliance; and
- ability to protect our intellectual property.
When you consider the forward-looking statements in this prospectus, you
should keep in mind the information located in this section and elsewhere in
this prospectus because the risks discussed in that cautionary information,
among others, could cause our actual results to be worse than those described in
any forward-looking statements.
9
<PAGE> 14
USE OF PROCEEDS
Assuming a public offering price of $9.00 per share, we estimate that we
will receive $15,200,000 in net proceeds from this offering ($16,967,497 if the
over-allotment option is exercised in full) after deducting the estimated
underwriting discounts and offering expenses. We anticipate using the net
proceeds from this offering as follows:
<TABLE>
<CAPTION>
APPLICATION OF NET PROCEEDS APPROXIMATE AMOUNT PERCENTAGE
- --------------------------- ------------------ ----------
<S> <C> <C>
Research and development.................................... $ 2,000,000 13.2%
Capital equipment acquisition............................... 2,000,000 13.2%
Sales and marketing......................................... 1,700,000 11.1%
Repayment of indebtedness................................... 333,000 2.2%
General corporate and working capital purposes, including
possible acquisitions of and investments in competing or
complementary businesses and technologies................. 9,167,000 60.3%
----------- -----
Total............................................. $15,200,000 100.0%
=========== =====
</TABLE>
We anticipate using the net proceeds from this offering to:
- fund engineering, tooling, and testing equipment related to research and
development of additional switch and integrated controls panel
configurations using our patented technology as well as refinements and
patentable design variations as new applications are developed;
- expand our manufacturing capability through capital equipment purchases
for manufacturing cells dedicated to high-volume customers;
- expand our sales and marketing efforts, including increasing awareness of
our products' competitive advantages, enhancing our presence on the
Internet, and hiring more regional sales managers to support our
independent sales representative firms in the United States; and
- repay approximately $133,000 of outstanding debt, which bears interest at
an annual rate of 13.2% and is due March 31, 2002, and $200,000 we
borrowed from certain stockholders on April 30, 1999, which bears
interest at an annual rate of 10% and is due July 1, 2000.
We will use the balance of the net proceeds of this offering for working
capital and general corporate purposes. The amounts actually expended on any
particular project may vary significantly from our current plans, particularly
given our early stage of operations. We may use a portion of the proceeds from
the offering for possible acquisitions of, or investments in, companies that
expand, complement or are otherwise related to our current business. We have no
current plans, agreements or commitments with respect to any acquisitions of, or
investments in, other companies. Pending these uses, we will invest the net
proceeds in short-term, interest-bearing, investment-grade securities.
10
<PAGE> 15
DILUTION
Our net tangible book value on a pro forma basis as of March 31, 1999 was
$721,536 or $0.13 per share of common stock, adjusted for the subsequent
exercise of warrants for 252,155 shares of common stock, which increased our net
tangible book value by $352,737. Net tangible book value per share is determined
by dividing net tangible book value (total tangible assets less total
liabilities on a pro forma basis) by the total number of outstanding shares of
common stock on a pro forma basis. Without taking into account any other changes
in our net tangible book value subsequent to March 31, 1999, other than to give
effect to the sale of the 2,000,000 shares of common stock offered hereby (at an
assumed public offering price of $9.00 per share) and the receipt of the
estimated net proceeds therefrom (after deducting the estimated underwriting
discounts and other estimated expenses of this offering), our pro forma net
tangible book value as of March 31, 1999 would have been $15,921,536 or $2.13
per share. This represents an immediate increase in net tangible book value of
$15,200,000 or $2.00 per share to existing holders of common stock and an
immediate dilution (i.e., the difference between the offering price and the net
tangible book value after this offering) to new investors purchasing shares of
common stock in this offering of $6.87 per share. The following table
illustrates the per share dilution to new investors purchasing shares of common
stock in this offering:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $9.00
Pro forma net tangible book value per share before
offering............................................... $0.13
Increase in net tangible book value per share attributable
to new investors....................................... $2.00
Pro forma net tangible book value per share after
offering.................................................. $2.13
-----
Per share dilution to new investors......................... $6.87
=====
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1999
(as adjusted for the exercise of the warrants to purchase 252,155 shares of
common stock described above), the number of shares of common stock purchased,
the percentage of total cash consideration paid, and the average price per share
paid by present stockholders and by investors purchasing shares of common stock
in this offering (before deducting the estimated underwriting discounts and
other estimated expenses of this offering).
<TABLE>
<CAPTION>
SHARES PURCHASED(1) CASH CONSIDERATION PAID(1)
-------------------- ---------------------------------------
AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 5,471,877 73.2% $ 4,873,291 21.3% $0.89
New investors....................... 2,000,000 26.8% $18,000,000 78.7% $9.00
--------- ----- ----------- -----
Total..................... 7,471,877 100.0% $22,873,291 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Excludes (i) 113,459 shares of common stock issuable upon the exercise of
warrants outstanding as of May 15, 1999 at a weighted average price of $2.73
per share, all of which were exercisable, (ii) 726,471 shares of common
stock issuable upon exercise of options outstanding as of May 15, 1999 at a
weighted average exercise price of $11.47 per share, of which options for
536,942 shares were exercisable, and (iii) up to 300,000 shares of common
stock issuable upon exercise of the underwriters' over-allotment option. The
exercise of such options and warrants could result in further dilution to
new investors. See "Capitalization," "Description of Securities -- Warrants
and Options" and "Management -- Stock Option Plans."
11
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of DuraSwitch as of March
31, 1999. The table also reflects the 4.25 to 1 reverse stock split effective
immediately prior to the completion of this offering. This table should be read
in conjunction with our Consolidated Financial Statements and the related Notes
included with this prospectus together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
<S> <C> <C> <C>
Long-term debt..................................... $ 183,560 $ 183,560 $ 89,690
----------- ----------- -----------
Stockholders' equity:
Preferred stock, $0.001 par value; 10,000,000
shares authorized; no shares issued or
outstanding................................... -- -- --
Common stock, $0.001 par value; 40,000,000 shares
authorized; 5,219,722 shares issued and
outstanding, actual; 5,471,877 shares issued
and outstanding, pro forma; 7,471,877 shares
issued and outstanding, as adjusted(1)........ 5,220 5,472 7,472
Additional paid in capital....................... 4,502,432 5,002,180 20,200,180
Accumulated deficit.............................. (3,238,630) (3,238,630) (3,238,630)
Stock subscription receivable.................... (150,000) (150,000) (150,000)
Promissory note receivable....................... -- (147,263) (147,263)
----------- ----------- -----------
Total stockholders' equity....................... 1,119,022 1,471,759 16,671,759
----------- ----------- -----------
Total capitalization.......................... $ 1,302,582 $ 1,655,319 $16,761,449
=========== =========== ===========
</TABLE>
- ---------------
(1) Excludes 113,459 shares of common stock issuable upon the exercise of
warrants outstanding as of May 15, 1999 at a weighted average price of $2.73
per share, all of which were exercisable, and 726,471 shares of common stock
issuable upon exercise of options outstanding as of May 15, 1999 at a
weighted average exercise price of $11.47 per share, of which options for
536,942 shares were exercisable. Also excludes 206,353 shares of common
stock reserved for future issuance pursuant to our 1999 Stock Option Plan.
See "Description of Securities -- Warrants and Options,"
"Management -- Stock Option Plans."
(2) Pro Forma gives effect to the April 1999 exercise of warrants to purchase
252,155 shares of common stock for $250,000 in cash, cancellation of a note
payable in the amount of $102,737 and acceptance of a short term promissory
note in the amount of $147,263.
(3) Pro Forma As Adjusted reflects the sale of the 2,000,000 shares of common
stock offered hereby at an assumed initial public offering price of $9.00
per share after deducting underwriting discounts and estimated offering
expenses and the application of the estimated net proceeds therefrom.
DIVIDEND POLICY
We have not declared or paid cash dividends on our common stock. We intend
to retain all future earnings to fund the operation of our business and,
therefore, do not anticipate paying cash dividends in the foreseeable future.
12
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited
1997 and 1998 Consolidated Financial Statements and unaudited 1998 and 1999
interim Consolidated Financial Statements and does not provide all of the
information contained in our financial statements and the related notes. Our
unaudited 1998 and 1999 interim Consolidated Financial Statements, in the
opinion of our management, reflect all adjustments, including only normal
recurring adjustments, that we consider necessary for fair presentation of our
consolidated financial position and results of operations for these periods. You
should read this financial information in conjunction with the Consolidated
Financial Statements and the related Notes included elsewhere in this
prospectus, together with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
MAY 1, 1997 ENDED
(DATE OF INCEPTION) YEAR ENDED MARCH 31,
TO DECEMBER 31, DECEMBER 31, ----------------
1997 1998(1) 1998(1) 1999
------------------- ------------ ------- ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales......................................... $ 6 $ 1,355 $ 308 $ 468
Cost of goods sold................................ (7) (1,300) (283) (464)
------ ------- ------ ------
Gross profit (loss)............................... (1) 55 25 4
Selling, general and administrative expenses...... (310) (1,195) (210) (367)
Research and development.......................... (142) (409) (104) (105)
------ ------- ------ ------
Loss from operations.............................. (453) (1,549) (289) (468)
Other income (expense)............................ 4 (50) (4) 18
------ ------- ------ ------
Net loss.......................................... (449) (1,599) (293) (450)
Non-cash discount(2).............................. -- (740) -- --
------ ------- ------ ------
Net loss attributable to common stockholders...... $ (449) $(2,339) $ (293) $ (450)
====== ======= ====== ======
Net loss per common share, basic and diluted...... $(0.12) $( 0.55) $(0.07) $(0.09)
Weighted average common shares outstanding, basic
and diluted..................................... 3,787 4,269 4,217 5,073
====== ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1999
-------------- ----------------------
1997 1998 ACTUAL PRO FORMA(3)
---- ------ ------ ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $236 $ 144 $ 412 $ 662
Working capital (deficit).............................. 203 (26) 238 591
Total assets........................................... 380 1,528 2,391 2,641
Long-term debt......................................... 0 158 184 184
Total stockholders' equity............................. 324 752 1,119 1,472
</TABLE>
- ---------------
(1) Includes the results of operations of Aztec Industries, Inc. since our
acquisition of Aztec on January 31, 1998. Prior to January 31, 1998, we were
a development stage company. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(2) A non-cash charge of $740,000 was incurred in connection with a beneficial
conversion feature relating to the sale of convertible preferred stock on
June 29, 1998. See Note 11 in Notes to the Consolidated Financial Statements
of DuraSwitch included elsewhere in this prospectus.
(3) Pro Forma gives effect to the April 1999 exercise of warrants to purchase
252,155 shares of common stock in exchange for $250,000 in cash,
cancellation of a note payable of $102,737 and acceptance of a short term
promissory note in the amount of $147,263.
13
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Consolidated
Financial Statements and the related Notes appearing elsewhere in this
prospectus. This prospectus, including the following discussion, contains
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in these
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors" as well as those discussed
elsewhere in this prospectus.
GENERAL
We develop, manufacture, and distribute a new, patented electronic switch
based on magnetic technology. Using this unique technology, we produce custom
switches and integrated controls panels ("ICPs"). By producing a more durable,
reliable and inexpensive solution to the long-standing problem of designing a
switch that produces consistent tactile feedback and can be integrated into a
flat-panel design, we intend to expand the introduction of our patented
technology in the multi-billion dollar electronic switch and ICP industries.
We were incorporated on May 1, 1997 as "Total Switch, Inc." In order to use
stock to acquire other businesses necessary for our growth, we combined with SOS
International, Inc., an inactive publicly traded company, on December 31, 1997.
SOS had nominal assets and no liabilities on the date of the acquisition. Under
a stock exchange agreement, SOS changed its name to "DuraSwitch Industries,
Inc." and acquired all of Total Switch's stock in exchange for approximately 85%
of SOS's outstanding common stock. As a result of this transaction, Total Switch
became a wholly-owned subsidiary of DuraSwitch, and Total Switch's former
stockholders acquired a controlling interest in DuraSwitch.
During the period from May 1, 1997 (date of inception) to December 31,
1997, we focused on developing our patented technology, financing our operations
through private equity issuances, and searching for an acquisition candidate
that had an existing customer base, sales network and relevant manufacturing
capability.
On January 31, 1998, we acquired Aztec Industries, Inc., a membrane switch
manufacturing and graphics printing firm, in exchange for 70,588 shares of our
common stock and the cancellation of approximately $60,000 of loans we made
previously to Aztec. As a result of this acquisition, we acquired an established
infrastructure of technical design and manufacturing personnel, customer
contacts and manufacturing capabilities sufficient to support a significant
increase in our sales.
We generate revenues primarily from the design, development, production and
sale of our switches and ICPs. Because we typically custom design switches and
ICPs to meet a specific customer's needs, we initially charge our customer for
non-recurring engineering and tooling costs related to the new design. If the
new design meets specifications and the customer decides to proceed to the
prototype stage, we typically charge the customer for producing limited
quantities of the new product. Finally, if the customer proceeds to full
production of the product utilizing our switch or ICP, the customer will order
the desired quantity of product. In the future, we intend to generate additional
revenues through licensing our technology to other companies in the switch
industry from which we expect to receive a percentage of the revenues derived
from sales of products utilizing our switches and ICPs.
The majority of our net sales reported for the year ended December 31, 1998
were related to sales of membrane switches and graphic printing products to
existing customers. In addition, because our operations in 1998 were devoted
primarily to design engineering and creating DuraSwitch technology prototypes
for new customers, we did not generate significant sales from production
purchase orders during 1998. However, in the process of engineering and creating
prototype switches for several customers, we have since received production
purchase orders for delivery during 1999 and 2000. At April 30, 1999, we had
approximately $2.2 million of purchase orders outstanding.
14
<PAGE> 19
The principal elements comprising our cost of sales are raw and packaging
materials, labor (engineering and assembly), and manufacturing overhead. The
major raw materials used in the manufacture of our products include magnets,
stamped metal, plastics and conductive inks. Costs related to engineering design
work performed for customers and prototype models sold to customers are charged
to cost of goods sold. Costs of sales are affected by the efficiency of
production methods and utilization of manufacturing capacity, areas in which we
have significant experience.
Our research and development expenses are comprised mainly of labor and
leased equipment costs. Our selling, general and administrative expenses are
comprised mainly of labor costs associated with our sales and administrative
personnel and costs associated with our facilities.
We are in the early stage of operations and, as a result, the relationship
between net sales, cost of goods sold, and operating expenses reflected in the
financial information included in this prospectus may not represent future
expected financial relationships. Much of our cost of goods sold and operating
expenses are relatively fixed costs. We expect that these expenses will increase
if net sales and transaction volumes increase, but at a slower rate of growth
than the corresponding sales increase. Given our current stage of operations and
relatively short operating history, we do not believe period to period
comparisons of results of operations are meaningful.
MATTERS AFFECTING COMPARABILITY
For the quarter ended March 31, 1998 and year ended December 31, 1998, our
financial results include Aztec's results of operations since the acquisition
date of January 31, 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
NET SALES. Net sales increased $159,366 or 52% from $308,248 in the
three months ended March 31, 1998 (the "1998 Period") to $467,614 in the three
months ended March 31, 1999 (the "1999 Period"). The significant increase was
primarily due to a low level of sales during the quarter ended March 31, 1998,
which consisted of only two months of consolidated operations compared to three
months of consolidated operations in the quarter ended March 31, 1999. Sales
during the 1998 Period were attributable primarily to sales of membrane type
switches and graphic printing services provided to Aztec customers. During 1998,
using Aztec's sales and manufacturing capabilities, we began marketing our
patented technology and producing prototypes of custom-designed switches and
ICPs. During the 1999 Period, a majority of net sales represented sales of new
switches and ICPs relying on our patented technology rather than older membrane
switch technology.
COST OF GOODS SOLD. Cost of goods sold increased $180,115, or 64%, from
$283,602 in the 1998 Period to $463,717 in the 1999 Period. As a percentage of
net sales, cost of goods sold increased from 92% in the 1998 Period to 99% in
the 1999 Period primarily due to increased manufacturing overhead and
application engineering costs related to developing an infrastructure to
accommodate anticipated increased sales volumes of new products using our
patented technology.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $157,063 from $209,876 or 68% of net sales in
the 1998 Period to $366,939 or 78% of net sales in the 1999 Period. The increase
in selling, general and administrative expenses was directly related to building
an infrastructure to accommodate anticipated sales and production growth,
including an increase in personnel and occupancy costs relating to additional
manufacturing and office space in 1999.
RESEARCH AND DEVELOPMENT. Research and development costs for the 1998
Period were fairly constant at $104,062 versus $104,634 in the 1999 Period.
Research and development expenses have remained fairly constant because our
engineering staff has not grown in the past year. We do not expect prior levels
of research and development expenses to be indicative of research and
development expenses for future periods, which we expect to increase
substantially.
15
<PAGE> 20
LOSS FROM OPERATIONS. As a result of the factors described above, loss
from operations was $289,292 in the 1998 Period compared to a loss of $467,676
in the 1999 Period.
OTHER INCOME/EXPENSE. We had other expenses for the 1998 Period of
$4,204 compared to other income of $17,560 for the 1999 Period. Other expenses
in the 1998 Period consisted primarily of interest expense relating to notes
payable and capital equipment leases assumed in the Aztec acquisition. During
the 1999 Period, other income was related primarily to a gain on equipment sold.
PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997 COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased $1,349,028 from $5,762 in fiscal 1997
(period from May 1, 1997 to December 31, 1997) to $1,354,790 in 1998. The
significant increase in sales was primarily a result of our transition from a
start-up company to an operating company during that period. We ceased to be
classified as a start-up company and became an operating company when we
acquired Aztec on January 31, 1998. Over 50% of our net sales in 1998 were
generated from 13 accounts, including one account which constituted over 11% of
our net sales.
COST OF GOODS SOLD. Cost of goods sold increased $1,293,573 from $6,617
in fiscal 1997 to $1,300,190 in 1998. The significant increase in cost of goods
sold was primarily a result of our transition from a start-up company to an
operating company as described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased from $309,951 in fiscal 1997 to $1,194,905 in
1998. The increase in 1998 was primarily a result of our transition during that
period from a start-up company to an operating company as described above.
During fiscal 1997, we also incurred lower occupancy and personnel related
expenses because the fiscal year consisted of only eight months.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
from $142,550 in fiscal 1997 to $409,425 in 1998, an increase of $266,875 or
187%. During fiscal 1997, we incurred research and development costs related to
the initial development of our patented technology. The significant increase in
these costs in fiscal 1998 was primarily due to the addition of development
engineering personnel and equipment in order to continue development of new
products and our patented technology.
LOSS FROM OPERATIONS. As a result of the factors described above, loss
from operations increased from $453,356 in fiscal 1997 to a loss of $1,549,730
in 1998.
OTHER INCOME/EXPENSE. We had other income for fiscal 1997 of $4,270
compared to $49,698 of other expense in 1998. The primary components of other
expense during 1998 were interest expense related to notes payable and capital
equipment leases assumed in the Aztec acquisition.
NON-CASH DISCOUNT ON PROCEEDS OF PREFERRED STOCK FOR BENEFICIAL
CONVERSION FEATURE. We incurred non-cash charge of $740,000 for a beneficial
conversion feature relating to the sale of convertible preferred stock on June
29, 1998, which increased the net loss attributable to common stockholders in
1998 to $2,339,428. See Note 11 in Notes to the Consolidated Financial
Statements of DuraSwitch included elsewhere in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1999
Net cash used in operating activities in the 1998 Period was $167,529,
consisting primarily of net loss and a decrease in accounts payable, offset
primarily by depreciation and amortization and a decrease in inventory. Net cash
used in operating activities in the 1999 Period was $380,558, consisting
primarily of net loss and increases in accounts receivable and inventory, offset
by depreciation and amortization and increases in accounts payable and accrued
expenses and other current liabilities.
16
<PAGE> 21
Net cash used in investing activities in the 1998 Period was $90,518,
consisting primarily of a $58,246 advance to Aztec prior to the acquisition of
Aztec and purchases of property and equipment relating to research and
development activities. Net cash used in investing activities in the 1999 Period
was $275,803, consisting primarily of a $150,000 loan to Camplex/Concept W
Corporation and purchases of telephone system, computer and manufacturing
equipment. The loan to Camplex was made in anticipation of an acquisition of
Camplex, which we subsequently abandoned. See Note 15 to Notes to Consolidated
Financial Statements of DuraSwitch included elsewhere in this prospectus.
Net cash provided by financing activities in the 1998 Period was $138,741,
consisting primarily of net proceeds from the sale of stock and net proceeds
from borrowing from officers. Net cash provided by financing activities in the
1999 Period was $924,291, consisting primarily of net proceeds from the sale of
stock, proceeds from a $100,000 note payable to a stockholder, and a $95,000
increase in borrowings on our line of credit, offset by principal payments on
notes payable and capital leases and net payments on loans from officers.
CASH FLOW FOR THE PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO DECEMBER 31,
1997 AND YEAR ENDED DECEMBER 31, 1998
Net cash used in operating activities in fiscal 1997 was $260,727,
consisting primarily of net loss partially offset by depreciation and
amortization, issuance of stock for services, bad debt expense, decrease in
prepaid expenses and other current assets and an increase in accounts payable.
Net cash used in operating activities in 1998 was $1,235,824, consisting
primarily of net loss partially offset by depreciation and amortization,
issuance of stock for services, a decrease in inventory, and an increase in
accrued expenses and other current liabilities.
Net cash used in investing activities in fiscal 1997 was $104,527,
consisting primarily of an advance to Aztec and purchases of property and
equipment relating to research and development activities. Net cash used in
investing activities in 1998 was $180,195, consisting primarily of a $58,246
advance to Aztec prior to the acquisition of Aztec, $61,434 for capitalization
of patent filings costs, and purchases of a manufacturing air filtration system,
clean room, and various research and development testing equipment.
Net cash provided by financing activities in fiscal 1997 was $601,235,
consisting primarily of net proceeds from the sale of stock partially offset by
net payments on loans from officers. Net cash provided by financing activities
in 1998 was $1,323,898, consisting primarily of net proceeds from the sale of
stock and proceeds from loans from officers, partially offset by principal
payments on notes payable and capital leases and net payments on our line of
credit.
In December 1998, we obtained a $150,000 bank line of credit that bears
interest at the prime rate plus 2% and expires in December 1999. Outstanding
borrowings on the line of credit are secured by a lien on our inventory,
accounts receivable and bank accounts. As of March 31, 1999, $95,000 was
outstanding under this credit facility. If the line of credit is not renewed, we
intend to seek alternative sources of financing, including obtaining a
replacement credit facility from an alternative lender, the sale of additional
equity, or a combination of the foregoing.
As part of the Aztec acquisition, we assumed a note payable, due March 31,
2002, which requires monthly payments of principal and interest of $4,536 with
interest at 13.2% per year. This note is secured by a lien on certain property
and equipment. As of March 31, 1999, the amount owed on this note payable was
$133,408. Also in connection with the Aztec acquisition, we assumed an unsecured
note payable to one of Aztec's former owners, due January 31, 2000, which
carried imputed interest at 8.0% per year. As of March 31, 1999, the amount owed
on this note payable was $53,572.
During fiscal 1997 and 1998, we borrowed a total of approximately $280,000
from individuals affiliated with us. We repaid approximately $240,000 of these
loans as of December 31, 1998. These advances and unsecured notes accrued
interest at rates ranging from 9.5% to 18% per year. The balance of these notes
was paid in the first quarter of 1999.
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We have entered into various capital leases for the purchase of property
and equipment. These capital leases bear interest at rates ranging from 11.7% to
24.0%. As of March 31, 1999, future principal payments under our existing
capital leases were approximately $125,000.
On April 30, 1999, we borrowed $200,000 from two stockholders. These loans
mature on July 1, 2000 and bear an annual interest rate of 10%. We also have the
right to borrow an additional $200,000 from these stockholders under the same
terms.
At December 31, 1998, we had approximately $2,284,000 in net operating loss
carryforwards available for federal income tax purposes. We have not recognized
any benefit from these operating loss carryforwards, which are subject to
significant restriction under current tax law and begin to expire in 2011.
Assuming completion of this offering, we estimate that capital expenditures
through fiscal 2000 will be approximately $2.0 million, relating primarily to
the expansion of manufacturing capability through equipment purchases for large
volume customer production cells and automation as economically feasible.
We have experienced significant operating losses since our inception. We
expect our capital expenditure and working capital requirements in the
foreseeable future to increase depending on the rate of our expansion, our
operating results, and other adjustments in our operating plan as needed in
response to competition or unexpected events. We believe that the net proceeds
from this offering, together with available borrowings and our current cash and
cash equivalents, will be sufficient to meet our anticipated cash needs for
working capital, capital expenditures and required debt payments through fiscal
2000. If we are unable to meet our liquidity requirements or if our liquidity
requirements increase, we may require additional financing. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. There can be no assurance that financing will be
available in sufficient amounts or on terms we find acceptable, if at all. See
"Risk Factors" and "Use of Proceeds."
CHANGE IN AUDITORS
On January 3, 1999, DuraSwitch engaged Deloitte & Touche LLP as its
independent auditor for the fiscal year ending December 31, 1998, to replace the
firm of McGladrey & Pullen, LLP. Our management dismissed McGladrey & Pullen,
LLP on December 28, 1998 without approval or recommendation by the Board of
Directors.
The reports of McGladrey & Pullen, LLP on DuraSwitch's financial statements
for 1997 did not contain an adverse opinion or a disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope, or accounting
principles.
There were no disagreements with McGladrey & Pullen, LLP on any matters of
accounting principles or practices, financial statement disclosure, or auditing
scope and procedures which, if not resolved to the satisfaction of McGladrey &
Pullen, LLP, would have caused McGladrey & Pullen, LLP to make reference to the
matter in their report.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires that an enterprise
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments as fair value. The statement is
effective for our fiscal year ending December 31, 2001. We have not completed
evaluating the impact of implementing the provisions of SFAS No. 133.
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<PAGE> 23
YEAR 2000 COMPLIANCE
Our business depends on the operation of numerous systems that could
potentially be impacted by Year 2000 related problems. Those systems include,
among others:
- computer hardware and software systems used by us to deliver services to
our customers, including hardware and custom and off-the-shelf software
supplied by third parties;
- communications networks, such as the Internet, which we use to help
market our products by providing information to its existing customers
and potential customers;
- internal information technology and non-information technology systems of
our customers and suppliers;
- computer hardware and software systems we use internally to manage our
business, including hardware and custom and off-the-shelf software
supplied by third parties; and
- non-information technology systems and services we use in our business,
such as telephone systems and HVAC systems.
We have completed an internal review of the hardware and software systems
and communication networks we use to deliver services to our customers and to
manage our business, including non-information technology systems. We have
recently purchased software upgrades, computer systems and a phone system which
we believe are all Year 2000 compliant at a total cost of approximately $75,000.
We believe that all of the hardware and software we utilize in our business are
Year 2000 compliant, including non-information technology systems. Therefore, we
do not anticipate any additional expenditures to bring our systems into
compliance. However, failure of currently owned equipment or software to operate
properly with regard to the Year 2000 could require us to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
our business, financial condition and results of operations.
Furthermore, the success of our efforts may depend on the success of third
parties in dealing with their Year 2000 issues. Many of these organizations may
not be Year 2000 compliant, and the impact of widespread supplier failure on our
business is difficult to determine. We are in the process of surveying our key
suppliers regarding their Year 2000 compliance programs and status. We have
completed approximately 75% of this process, and we expect to complete this
process by September 1, 1999. As a contingency against failure of a key supplier
to provide us with needed material or services, we have identified alternative
sources for our key suppliers. We are also developing additional contingency
plans to deal with any other issues that might arise because a key supplier is
not Year 2000 compliant. We believe that we will have identified alternative
third-party suppliers and implemented any other necessary contingency plans by
September 30, 1999.
The failure of a key supplier to become Year 2000 compliant could produce a
scenario in which that supplier is not able to supply us with needed material or
services and, as a result, we would not be able to provide a customer with
product until the supplier became Year 2000 compliant. We believe that we can
minimize the chances that such a scenario will occur by identifying alternative
suppliers. No assurances can be given, however, that alternative third-party
suppliers will be successful in meeting our requirements or, if met, that the
terms of the arrangement will be as favorable as those of our current suppliers,
which could increase our expenses and have a material adverse effect on our
business, financial condition, and results of operations.
Any failure to address any unforeseen Year 2000 issue could adversely
affect our business, financial condition, and results of operations.
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<PAGE> 24
BUSINESS
OVERVIEW
We design, manufacture and distribute custom electronic switches and
integrated controls panels (ICPs) featuring an innovative technology we
developed and patented utilizing a magnetic-based design. We believe this
patented technology positions us as the only company capable of providing a
complete solution to the design challenges faced by original equipment
manufacturers (OEMs) and component suppliers seeking durable, reliable, low cost
switches and ICPs that can easily be incorporated into a slim profile, flat
panel design without sacrificing the consistent tactile feedback response, or
"click," highly desired by end users. In recognition of the unique capabilities
and innovative design of our switches, Design News, a trade magazine widely read
by design engineers, named our DuraSwitch PushGate switch "The Best New Product
of 1998" in the electrical/electronic category.
Since commencing operations in May 1997, we have provided design solutions
for a number of leading companies in a variety of industries by custom-designing
switches and ICPs that met critical needs. Examples include the panel operating
the doors of the monorail trains at Walt Disney World, lawn irrigation systems
made by Rain Bird/Clemar Manufacturing Corp., boat trolling motors distributed
by Johnson Worldwide Associates, mobile digital phones developed by Ericsson
Inc., ship bridge radar control systems produced by Raytheon Marine Company,
peripheral controls for computers made by Covid Inc., and restaurant food
preparation equipment made by Frymaster and by Ram Center, Inc.
INDUSTRY ANALYSIS
Electronic switches and ICPs are used in a wide variety of consumer,
industrial and agricultural products, such as computers, consumer electronics,
mobile phones, consumer appliances, automobiles, fitness equipment, trains,
ships, airplanes, tractors, generators, medical devices and commercial food
preparation equipment, and represent a multi-billion dollar global market.
HISTORY OF ELECTRONIC SWITCHES
In its simplest form, an electronic switch controls the flow of electric
current; press the switch to complete the circuit and the current flows to
operate a micro-processor, which in turn, performs the desired function. More
complex switches, such as volume control knobs on car radios, regulate the
precise voltage and electric current flowing through the circuit; turn the knob
to increase the voltage and the volume is increased.
ELECTRO-MECHANICAL SWITCHES. Prior to the early 1970s, traditional
electro-mechanical switches represented the design standard in the switch and
ICP industries. Switches and ICPs relying on this traditional technology still
represent a significant share of the current market.
Electro-mechanical switches operate by pushing, turning or sliding a
button, knob or lever to mechanically activate a series of movable parts that
will close or complete an electrical circuit within the switch itself. The
primary advantage of electro-mechanical switches is their feedback response,
which permits the user to feel, and sometimes see or hear, changes in the switch
when it is activated. An example of feedback response is the clicking noise or
sensation perceived by a user when pushing a traditional car radio station
preset button or turning the mechanical volume control knob.
Although they offer excellent tactile feedback to the user,
electro-mechanical switches are bulky, mechanically complex and prone to
excessive wear, resulting in high production and maintenance costs to customers
and end users. Originally designed prior to the trend toward miniaturization in
electronic components, electro-mechanical switches are not used in many
electronic products produced today because their bulkiness and cost hinders
their incorporation into the slim-profile designs currently desired by the
market. In addition, the typical design of products incorporating
electro-mechanical switches requires the switch to protrude through a panel,
making these products difficult to clean and environmentally seal, a
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design flaw that makes this type of switch undesirable for products used in
certain environments such as hospitals, kitchens and outdoors.
MEMBRANE SWITCHES. In response to the increasing demand for slim
profile, low cost, flat controls panels and push-button switches for electronic
equipment, a new electronic switch design was introduced in the early 1970s
relying on membrane switch technology. Since their introduction, membrane
switches have captured a significant share of the electronic switch and ICP
markets.
Membrane switches consist of multiple, thin-film layers topped by an
overlay with printed graphics or instructions to operate the device in which the
switch is incorporated. A typical example of a membrane switch is found on most
microwave oven control panels, which feature a graphical overlay layer with
numbered buttons and other controls functions, such as "start," "cook" and
"defrost." Membrane switches generally are thinner, more durable and less
expensive to produce and maintain than electro-mechanical switches. They usually
feature a flat, washable surface, which can be easily cleaned and disinfected,
an important feature in products used in certain environments such as hospitals
and kitchens. Unfortunately, membrane switches, while responsive to customer
demands for a slimmer/flat profile, improved durability, and lower costs of
production and maintenance, provide no feedback response to the user. Without
tactile feedback, users cannot be certain they have activated the switch or they
may activate the switch several times, which could cause the opposite effect of
what the user intended, with potential safety consequences. Also, the user may
push the switch much harder than required to activate the switch, resulting in
excessive wear and premature failure.
To solve the feedback response problem, membrane switch manufacturers
typically have offered two solutions. The first solution is to add electronic
audio or visual feedback responses, such as a "beep" sound, light, or status
icons on a display, to let the user know when the switch has been activated.
However, this "solution" increases the cost, complexity and size of the product
to which it is added, thus decreasing the advantages of a membrane switch over
an electro-mechanical switch.
The second option to overcome the feedback response problem is to
incorporate a metal, rubber or plastic dome as part of the membrane switch. When
pressed by a user, the center of the dome will invert and contact the circuit on
the membrane layer beneath it. When functioning properly, the dome will return
back to its original shape as the user releases his or her finger from the
switch, which may provide limited tactile feedback response to the user. Domed
membrane switches, however, require inconsistent amounts of force to be
activated, which has proven frustrating to the user, and often do not provide
the desired tactile feedback response. In addition, domes are prone to failure
due to materials fatigue and, as a result, are less reliable than membrane
switches without domes. Accordingly, using domes in membrane switches to solve
the feedback response problem does not provide the consistent tactile feedback
desired by the customer or end user, and increases the cost and design
complexity while decreasing the reliability of the switch.
ELECTRONIC INTEGRATED CONTROLS PANELS. An ICP typically combines various
types of switches, such as push-button, rotary, slider, toggle, dial and rocker
switches into one controls panel with a printed circuit board, lighting,
displays and other components. ICPs may include membrane switches,
electro-mechanical switches, or a combination of both. The ICP industry consists
of several ICP component parts manufacturers producing printed circuit boards,
displays, panels and switches, and represents a global multi-billion dollar
market that is significantly larger than the electro-mechanical and membrane
switch markets combined.
OEMs that produce products using ICPs typically have faced a number of
design challenges, involving tradeoffs between size, cost, durability and
customer preferences. To obtain the benefits offered by membrane switches
without forfeiting the consistent tactile feedback response characteristic of
electro-mechanical switches, OEMs often combine electro-mechanical rotary
switches with flat panel membrane push-button switches, requiring a marriage of
incompatible technologies. In addition to increasing the mechanical complexity
and bulkiness of the ICP, this design also requires that a hole be drilled
through the membrane switch surface to insert the electro-mechanical rotary
switch, increasing the ICP's cost, compromising its ability to be
environmentally sealed, and disrupting the flat profile of a typical ICP
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design using all membrane switches. Also, OEMs usually must deal with a number
of different component producers used in their ICPs, which requires a relatively
high level of coordination and technological compatibility. As a result, both
OEMs and component suppliers are seeking low cost integrated solutions to the
design challenges presented by traditional switch technologies, which force
designers to sacrifice certain desired features in exchange for others.
THE DURASWITCH SOLUTION
We have developed an award-winning technology that enables us to custom
design switches and ICPs that overcome the design challenges presented by
traditional electro-mechanical and membrane switch technologies. Using our
patented magnetic-based design, our switches and ICPs offer superior durability,
enhanced reliability and better value compared to switches utilizing traditional
technologies, are easily integrated into flat panel, slim profile designs, and
provide the consistent tactile feedback response highly desired by end users. In
short, our innovative technology enables us to combine the best features of
membrane switches without sacrificing the consistent tactile feedback response
provided by electro-mechanical switches. Our patented technology and design
expertise, together with our strategic alliances with other companies engaged in
the electronic switch and ICP industries, also enables us to offer an integrated
solution to the design challenges faced by OEMs.
COMPETITIVE ADVANTAGES
The key to our technology is its simplicity of design and reliance on
magnetic force rather than mechanical parts or the elastic properties of
materials to operate a switch. Compared to switches and ICPs using traditional
electro-mechanical and membrane switch technologies, our products offer the
following competitive advantages:
SIGNIFICANTLY GREATER DURABILITY AND RELIABILITY. Because our products
rely on a magnetic-based design with few moving parts and virtually no stress,
fatigue, or potential breaking points, they are significantly more durable and
reliable than traditional electro-mechanical and membrane switches. In fact,
while switches and ICPs relying on traditional technologies often fail and must
be replaced, we are able to offer OEMs switches and ICPs that we believe will
outlast virtually any device in which they are incorporated. By eliminating or
reducing the mechanical complexity and precision required by traditional
technologies, our patented design also makes our switches and ICPs significantly
more reliable than electro-mechanical and membrane switches.
CONSISTENT TACTILE FEEDBACK RESPONSE. Unlike membrane switches and
certain electro-mechanical switches, our design consistently produces a
distinctive "click" each time the user activates our switch. This capability
enables us to design and produce switches that do not require the addition of
audio or visual cues, such as beeps, lights, or status icons, to artificially
provide feedback to the user, a solution that would otherwise increase the
complexity, size, and cost of the switch design. We believe that no other switch
is capable of providing the consistent tactile feedback response highly desired
by end users in a low cost, slim profile design currently demanded by the
market.
EASE OF INTEGRATION IN SLIM PROFILE DESIGN. Because our switches rely on
a multiple thin layer design that incorporates a flexible circuit rather than
bulky mechanical parts, they are easily integrated into the flat panel/slim
profile products currently in demand by the market. This design also eliminates
the need to breach the surface of the ICP, enabling our ICPs to be easily
sealed, cleaned, disinfected, and protected from harsh environmental conditions.
ENHANCED VALUE TO COST RATIO. Our switches cost significantly less to
produce and maintain compared to electro-mechanical switches, because they are
not mechanically complex and are significantly more durable and reliable than
electro-mechanical switches. Our switches offer a better value to cost ratio
compared to membrane switches; although the initial selling price of our
switches may be higher in some instances, their superior durability and
reliability, combined with their ability to provide a consistent tactile
feedback response, make our switches more desirable and less expensive to
maintain than membrane switches.
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REPRESENTATIVE DESIGN SOLUTIONS
Despite our relatively short operating history, we have custom designed
solutions for a number of leading companies that have incorporated, or are in
the process of incorporating, our switches into their products. A representative
sample of these companies and the products in which our switches are being
incorporated is set forth below.
DISNEY WORLD/MONORAIL TRAINS. We designed and provided an integrated
controls panel that operates the doors on Disney World's monorail trains. Our
product, which replaced a controls panel that relied on dome membrane switches,
has proven to be significantly more durable and reliable than its predecessor,
which required frequent repairs and replacements as a result of its inability to
withstand heavy usage and repeated daily cleanings by a power wash system as
well as continuous exposure to the elements.
ERICSSON/CELLULAR PHONES. We custom designed and are producing a unique
switch to be used in a new mobile phone developed by Ericsson Inc., a leading
mobile phone manufacturer. The design challenge presented by Ericsson was to
develop a small, durable, multi-function rotary switch featuring a pop-up
mechanism. Utilizing our patented technology and design experience, we custom
designed a switch that met or exceeded all of Ericsson's product specifications
much more quickly and at a substantially lower cost than our competitors. As a
result, Ericsson has placed multiple orders with us for a significant number of
these switches. We believe Ericsson will place additional orders for even
greater numbers of our switches as they achieve full production of their new
mobile phone.
HENNESSEY/AUTOMOTIVE SERVICING EQUIPMENT. We custom designed and
produced an ICP incorporated in automobile tire balancing equipment manufactured
by Hennessey Industries, Inc. The ICP we developed replaced a controls panel
that used a flat panel membrane switch design that was prone to excessive wear
due to the harsh treatment the switches received in auto repair shops. In
response to Hennessey's need for switches that were more durable and provided
consistent feedback response even through the work gloves worn by mechanics, we
designed an ICP utilizing durable, responsive push-button switches underneath a
magnetic graphic overlay capable of being replaced quickly and inexpensively if
worn out, scratched, gouged, or otherwise rendered unreadable.
STRATEGY
Our objective is to become a leader in the electronic switch and ICP
industries by making DuraSwitch technology the design standard for electronic
switches and ICPs. In order to achieve this objective, we intend to implement
the following strategies:
EXPLOIT AND MAINTAIN OUR PATENTED TECHNOLOGY'S COMPETITIVE ADVANTAGES
We intend to exploit and maintain our patented technology's competitive
advantages, compared to electro-mechanical and membrane switch technologies,
with the objective of making our technology the design standard in the industry.
We intend to pursue this strategy by aggressively marketing our products to
broaden market awareness, implementing a licensing program to more quickly
achieve widespread distribution of our technology, and investing heavily in
research, development and testing to further refine our technology and expand
its possible applications in a wide variety of industries.
INCREASE MARKET AWARENESS OF DURASWITCH'S PATENTED TECHNOLOGICAL ADVANTAGES
We will aggressively promote our patented technology and design expertise
to achieve widespread market awareness of our products' advantages compared to
switches and ICPs relying on traditional technologies. Our promotional efforts
will be targeted to design engineers and purchasing managers, whom we believe
are the primary decision makers within our potential customer base. These
efforts will include increased advertising in trade magazines, substantially
increasing traffic to our web site, participating actively in vendor-sponsored
seminars for design engineers, and aggressively promoting our products in the
trade media. We believe that promoting our success in providing custom-designed
solutions for a number
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of high-profile companies will further enhance market awareness of our products
and their unique competitive advantages.
LEVERAGE OUR STRATEGIC ALLIANCES AND ACQUISITIONS
We intend to leverage our current strategic alliances as well as pursue new
strategic alliances and acquisitions to increase market share. We have developed
strategic alliances with various companies that design and produce complementary
electronic component products. Through these strategic alliances, we have
expanded our customer base by making sales to new customers that have existing
relationships with our partners. These strategic alliances also allow us to
expand our manufacturing capacity and co-market our products with complementary
electronic components produced by our partners. We expect to establish
additional strategic alliances with electronic components manufacturers to gain
these sales, marketing and manufacturing advantages and to obtain high quality
electronic components, such as liquid crystal displays, that we incorporate into
some of our ICP products.
We also will continue to search for strategic acquisition candidates. We
believe the electronic switch industry is fragmented and contains numerous
competitors possessing sales and marketing expertise, customer contacts, brand
recognition or industry experience greater than our own. Acquisition of one or
more of these competitors would permit us to expand our business faster than if
we developed those resources internally.
PROVIDE FULL SERVICE DESIGN ENGINEERING, TESTING AND MANUFACTURING CAPABILITY
We intend to be a "one stop shop" for design engineering, testing and
manufacturing for our customers. OEMs searching for a switch or ICP to install
in their products typically may be required to hire multiple engineers to design
the switch or ICP, hire a manufacturer to produce components, and contract with
another vendor for assembly. This multi-vendor approach is costly, complex and
time consuming, and requires a relatively high level of coordination and
compatibility. With our patented technology, our experienced technical and
engineering staff, and our production capabilities, we are able to offer
custom-designed products that combine the best features of membrane and
electro-mechanical switch technologies in an integrated solution offering
superior value, durability and reliability.
PRODUCTS
We have a number of switch products based on our patented magnetic-based
technology in various stages of production and development. We are currently
producing the DuraSwitch PushGate, DuraSwitch Rotor and DuraSwitch SnapRotor.
Switches under development include the DuraSwitch Slider and DuraSwitch Slammer.
Prices of our switches and ICPs range from under $1 for our most basic push-
button design to in excess of $30,000 for a complex flight simulator ICP
involving several different custom-designed controls panels.
THE DURASWITCH PUSHGATE
A typical DuraSwitch PushGate switch consists of up to five bonded
micro-thin layers of materials, which collectively measure less than 1/10th of
an inch. The top layer of the switch is printed with a graphical overlay that
indicates which buttons must be pressed to activate a desired function, such as
"on", "defrost" and "cook" buttons on a microwave oven. Below the top layer is a
metal shield which keeps the magnetic field inside the switch, and protects the
switch from external electrical and magnetic interference. Below the shield is a
thin, flexible layer of magnetic material. Below the magnetic layer is spacer
material containing a hole through which a patented metal disc is pushed. The
disc has a small raised, off-center button that is pushed by the user through
the surface of the switch. A flexible circuit is located at the bottom of the
switch. When the button is pressed, the disc separates from the magnet and the
underside of the disc completes the circuit by touching the contacts located on
the flexible circuit. When the button is released, the magnet pulls the disc
upward and away from the switch contacts, into its resting position, and the
circuit is broken. This magnetic-based design produces a consistent tactile
feedback response to the
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user each time the switch is activated. For a graphic display of the DuraSwitch
PushGate, see the diagram on the inside front cover of this prospectus.
THE DURASWITCH ROTOR
The DuraSwitch Rotor resembles a typical volume control knob on a car
radio, except that, unlike an electro-mechanical rotary switch, the back of our
switch is flat. The entire assembly can be less than 1/10th of an inch thick.
The DuraSwitch Rotor consists of a rotary knob containing embedded magnets, all
fastened to a flat surface. The top of the surface displays instructions for the
user. The bottom of the surface seals a circular space below the magnet
containing small (1 mm) gold-plated balls. Beneath the circular space are
printed electronic circuits, which are activated through contact with the
gold-plated balls. When the user turns the knob, the magnet within the rotary
knob causes the gold-plated balls to rotate within their circular space. As the
balls roll across the flex-circuit membrane, they close or open the circuit and
convey the user's instructions to the device. The design of the DuraSwitch Rotor
also produces a consistent tactile feedback response to the user, such that the
user can feel each "click" as the knob is turned.
THE DURASWITCH SNAPROTOR
The DuraSwitch SnapRotor is a combination of a push-button switch and a
rotary switch. When not in use, the top of the rotor knob is flush with the
surface of the device on which it is mounted. When the top of the rotor knob is
pressed, the push-button portion of the switch is activated, sending a signal to
a microprocessor and the rotor knob pops up from the device. After the rotor
knob pops up, it can then be operated in the same manner as a typical rotary
switch, such as a volume control knob. After using the rotary switch feature,
the rotor can be pushed back into the device, which again activates the
push-button portion of the switch and sends a signal to a microprocessor. A
typical application for this switch would be a combination on/off button and
volume control knob.
SWITCHES UNDER DEVELOPMENT
The DuraSwitch Slider is similar to the DuraSwitch Rotor, except that it
uses a sliding lever instead of a rotating knob. When the slide is moved, the
sealed, gold-plated balls underneath the lever move, activating a microprocessor
as they pass across contacts on a flexible circuit. As a result of the
flexibility of the materials used in its design, the DuraSwitch Slider has the
additional advantage of being able to be mounted not only on a flat surface but
also on a curved surface such as the dashboard of a car. The DuraSwitch Slider
is in the final engineering stage and we expect it to be ready for production by
late 1999.
The DuraSwitch Slammer is a tamper-resistant switch that can be used in
applications such as ATMs, vending machines, slot machines and prisons, which
require extreme durability to overcome heavy usage or abuse. The design is
similar to the DuraSwitch PushGate, but is designed to be more robust. The
DuraSwitch Slammer is in the design stage and we expect it to be ready for
production by late 1999.
Generally, our switches are custom-designed to meet specific design
challenges or customer requirements dictated by the nature of specific
applications. Accordingly, all of these switch designs may be adapted quickly
and easily to fit various types of integrated controls panel arrays and
electronic products. We are constantly refining our products and designing new
variations to meet our customers' design needs.
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CUSTOMERS
We offer a variety of switches and ICPs to original equipment manufacturers
and component manufacturers that, in turn, install them into various devices
used in a wide variety of industries. These industries, companies and products
include:
<TABLE>
<CAPTION>
INDUSTRY COMPANY APPLICATION
-------- -------------------------------- -------------------------------------
<S> <C> <C>
AMUSEMENT PARKS.................. VGS Systems Engineering Company* Amusement park turnstiles
Walt Disney World Co.* Monorail train/ride controls
AUTOMOTIVE....................... Hennessy Industries, Inc.+ Tire balancer
AVIONICS......................... Aerospace Instrument Support, Flight control simulator
Inc.*
COMMUNICATIONS................... Ericsson Inc.* Two-way radio/cell phones
Quintron Systems, Inc.* Military telcom equipment
COMPUTERS........................ Covid, Inc.* Video conferencing equipment
Telegyr Systems, Inc.* Electrical power distribution
ELECTRONIC ENTRY................. Marks U.S.A.+ Keyless locks
INDUSTRIAL CONTROLS.............. Alpha Technologies U.S., L.P.* Chemical processor controls
Anatel Corporation* Water treatment analysis
Boonton Electronics Corporation+ Volt meter front panel test equipment
Cummins-Allison Corp.* Paper shredder controls
DINET, Inc.* Industrial process controls
ETEC Systems, Inc.* PCB manufacturing equipment
Innovative Control Systems, Car wash controls
Inc.*
Jancy Engineering Company* Portable magnetic drill bases
Optimation, Inc.* Data entry stations
Paxar Corporation* Label stitching equipment
Rain Bird, Clemar Mfg. Corp.* Commercial sprinkler controls
Siemens+ Industrial test equipment
US Filter Consumer Products, Water purification controls
Inc.*
MARINE........................... Raytheon Marine* Ship board radar controls
MEDICAL.......................... Etymotic Research, Inc.* Hand-held temperature sensors
GTR Labs, LLC* X-Ray equipment
HP/Heartstream* Medical defibrillators
Heska Corporation* Veterinary oxygen sensor device
Medivators, Inc.* Endoscope disinfectors
MILITARY......................... Raytheon Systems, Company* "Land Warrior" M-16 computers
POINT-OF-SALE.................... Hypercom Corporation+ Credit and debit card readers
ProTix* Cash registers
Scan Corporation* Terminals
RESTAURANT....................... Dynamic Cooking Systems, Inc.* Oven controls
Frymaster* Portion dispensers
Lancer Corporation+ Beverage portion dispensers
Radiant Systems+ Order processing systems
RAM Center, Inc.* Frozen food dispensers
</TABLE>
- ---------------
+ Prototype
* In Production
26
<PAGE> 31
INTELLECTUAL PROPERTY
Our success depends on maintaining and protecting our proprietary
technology. As a result, we have adopted an intellectual property protection
policy designed to deter and stop infringement. To deter infringement, we file
U.S. and foreign patents for all our relevant material technological advances
and warn against potential infringement by posting patent numbers on our
products, packaging, and published materials. These materials include our web
site, business cards, letterhead, brochures, and advertisements. We intend to
prosecute litigation aggressively against infringers. In order to protect our
trade secrets and other intellectual property, we also require our employees,
consultants, advisors and collaborators to enter into confidentiality agreements
which prohibit the disclosure of proprietary information to third parties or the
use of proprietary information for commercial purposes. Our technical and sales
employees also must agree to disclose and assign to us all methods,
improvements, modifications, developments, discoveries, and inventions conceived
or developed on our time, using our property, or relating to our business. Our
management team has extensive experience in protecting technology from global
competitors and will oversee our intellectual property protection program.
We currently hold three U.S. Patents (Nos. 5,523,730, 5,666,096 and
5,867,082), and one Taiwanese Patent (No. NI-090979), for a "switch with a
magnetically-coupled armature." We also have several patent applications pending
in the U.S., Mexico, Canada, France, Great Britain, China, Taiwan, Italy and
Germany. We have made further filings under the Patent Cooperation Treaty and
through the European Patent Committee. In total, we have over 18 patent
applications in various stages of filing both in the U.S. and globally.
We currently own the following trademarks and service marks: DuraSwitch(R),
PushGate(TM), Rotor(TM), SnapRotor(TM), Slider(TM), Slammer(TM), DuraSwitch
ICP(TM), Touch the Future(R), and DuraSwitch.com(TM).
We also intend to enter into licensing agreements with leading switch and
ICP manufacturers in selected industries in order to increase distribution of
our technology and increase market awareness of our products. We believe that
our ability to convince leading switch and ICP manufacturers to use our
technology will more broadly and rapidly create awareness and acceptance of our
technology in multiple market segments.
MARKETING AND SALES
We believe that the primary decision makers related to switches and ICPs
for our OEM customers are design engineers and, to a lesser degree, purchasing
managers. Therefore, our marketing and sales efforts, which include aggressively
expanding our sales force, substantially increasing our advertising efforts,
significantly enhancing our web site, and aggressively competing for product
awards, will be directed specifically toward convincing these individuals to use
our products.
SALES FORCE & MANUFACTURER'S REPRESENTATIVE ORGANIZATIONS
We currently have four regional sales managers supervised by a Vice
President of Business Development. Our regional sales managers maintain our
relationships with several independent sales representatives groups. We contract
with these groups to call on potential customers in 39 states. For example, our
sales representative group responsible for the states of Ohio, Michigan,
Indiana, Kentucky and Pennsylvania primarily employs engineers in its sales
force and calls principally on automobile and appliance manufacturers. Our
regional sales managers call on potential customers in the remainder of the
continental United States.
We believe that independent sales representatives generally are more
efficient than our own sales force at this stage of our development. Independent
sales representatives often have existing relationships that offer us immediate
access to potential customers. Our agreements with these independent sales
representatives provide for compensation on a straight commission basis and
cancellation on 30 days notice, which lower our employee-related costs.
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<PAGE> 32
WEB SITE: WWW.DURASWITCH.COM
Design engineers and purchasing managers, the individuals most likely to
make the decision to incorporate our switches and ICPs in their products,
frequently use the Internet to search for design solutions; therefore, our web
site (www.duraswitch.com) is a key component of our current marketing efforts.
All of our advertising and promotional materials direct readers to our web site.
In addition to attracting potential customers to our web site for information,
we use our web site to generate interest in our products. We have already made
significant sales as a result of initial contact with customers through our web
site. Using our web site as a promotional tool also is less expensive than other
methods, is interactive, and reaches a global audience. Our web site has several
features, including:
- information about the comparative advantages of our patented technology,
accompanied by articles published by third parties about our products;
- virtual demonstrations of our products;
- technical data about our products to assist design engineers in designing
ICPs and electronic products using DuraSwitch components;
- e-mail communications links to our design engineers and sales
representatives to facilitate dialogue about how our products can be
integrated into the customers' products; and
- on-line product ordering capability.
ADVERTISING/PUBLIC RELATIONS
We advertise in technical periodicals such as Electronic Engineering Master
(EEM), Engineering Design News (EDN) and Design News. We believe this media
exposure is a cost-effective method of capturing the attention of design
engineers. For example, Design News weekly publications are read by
approximately 334,800 design professionals throughout the world. Our
advertisements are focused on directing new customers to our web site. We also
are listed in annual industry specifiers guides, such as Medical Device Link,
Electronic Manufacturers on the Net, Thomas Register, Electronic Engineering
Master and other industry guides. In addition, we are conducting a public
relations campaign to generate articles highlighting our products to be
published in trade magazines. To date, our products have been recognized in
several trade magazines, including Appliance Manufacturing and Engineering
Design News. In fact, Design News named the DuraSwitch PushGate switch as "The
Best New Product of 1998" in the electrical/electronic category. In the next six
months, we expect further articles about our products to appear in a wide
variety of medical, avionics, industrial, manufacturing, engineering, new
product and technology publications, each designed to attract the attention of
design engineers and purchasing managers in those industries.
SEMINARS AND TRADE SHOWS
We also intend to give educational presentations about our products at
vendor-sponsored seminars for product design engineers. At these seminars, we
will be able to meet with and provide attendees with information about our
technology and products through multi-media presentations, product
demonstrations, brochures and samples. Attractive displays in our strategic
partners' booths at trade shows offer mutually advantageous opportunities by
promoting our partners' products as well as expanding awareness of our
technology.
MANUFACTURING
We currently manufacture and assemble most of our products. We also have
the capability to manufacture off-site, including manufacturers and vendors in
other countries. To facilitate our expected growth, we are pursuing strategic
alliances and acquisitions to further enhance our manufacturing capabilities.
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<PAGE> 33
ON-SITE MANUFACTURING AND ASSEMBLY CAPABILITIES
Our on-site design, manufacturing and assembly capabilities include:
- an approximately 33,000 square foot facility consisting manufacturing and
assembly space, a full service testing lab and a clean room;
- a full service engineering and design team comprised of 11 design
engineers and technical staff;
- strict quality standards in our operations reviewed regularly by an
in-house quality assurance team including an experienced quality
consultant; and
- state of the art information technology hardware and software, including
the latest versions of AutoCad, Pro Engineering, Mechanical Desktop and
Solid View software.
These features allow us to meet the standards of our customers' on-site
quality reviews of our design, testing and manufacturing capabilities.
We are also developing cellular manufacturing processes to manufacture
complete products, from start to finish, within a manufacturing cell. Each
manufacturing cell will produce related products, which allows the team members
in each cell to gain expert knowledge about their designated products as well as
the special processes, equipment, and specific quality control techniques
required to manufacture them. Immediate feedback, minimal supervision, ease of
expansion through duplication of manufacturing cells and minimal space
requirements are benefits of this manufacturing approach.
OFF-SHORE MANUFACTURING
Our executive management team has experience using companies in foreign
countries to provide manufacturing, assembly, acquisition, raw materials and
tooling services. During the past 12 months, we have contracted for production,
assembly, tooling and delivery services with companies in the People's Republic
of China. We have obtained high quality materials and products on a timely basis
from these companies, at a significantly lower cost than domestic vendors. Due
to the risks of international political, economic and geographic issues, we
obtain quotes from alternative foreign and domestic suppliers for each customer
account that we outsource to our foreign vendors.
COMPETITION
We operate in highly competitive markets, facing competition from over 125
other companies in the electro-mechanical switch industry, and a substantial
number of membrane switch and ICP manufacturing companies. Our five main
competitors in the electro-mechanical switch industry are Grayhill, Inc., Cherry
Corporation, C&K Components, Inc., Oak Grigsby, Inc., and Cole Instrument Corp.
Our five principal competitors in the membrane switch industry are Xymox
Technologies, GM Nameplate, Molex, Incorporated, Integrated Data Systems, Inc.
(IDS) and Topflight Corporation. Our five main competitors in the ICP industry
are Lucas Controls, Inc., Eaton Corporation, Rockwell International, Inc./Allen
Bradley Division, Johnson Controls, Inc. and United Technologies Corporation
(UTEC). Many of our present and potential competitors have more established
products, greater name recognition, stronger sales distribution arrangements,
and significantly greater resources than we have. We also expect to compete with
companies that have substantial manufacturing, marketing and distribution
capabilities; areas in which we may have less experience. Competition, direct
and indirect, could materially and adversely affect our revenues and
profitability through pricing pressure and loss of sales. Competitors' long term
relationships and manufacturers' reluctance to try a new technology could result
in loss of sales. The failure to compete successfully would have a material
adverse effect upon our business and financial condition.
We compete primarily on the basis of our products' superior value to price
ratio rather than initial price. Although our products sometimes have an
initially higher price than products using membrane switch technology, we
believe our products offer a lower cost of ownership over the life of the
product primarily because they are more durable and reliable. Because we believe
that our switches will outlast almost any product into which they are installed,
our products feature a lower total cost of ownership than
29
<PAGE> 34
our competitors' products, which rely on traditional switch technologies and
require greater maintenance and replacement costs. Further, our switches and
ICPs can be integrated with removable magnetic graphic covers that, if damaged
or worn, can be easily replaced without having to replace the entire switch or
ICP, resulting in greater value and lower maintenance costs.
EMPLOYEES
As of May 31, 1999, we had 54 employees, 48 of which work full time. We
have 11 employees in our engineering department, nine in management and
administration, nine in sales and marketing, and 25 in manufacturing. None of
our employees is represented by a union. We believe our relationship with our
employees is positive.
FACILITIES
Our principal administrative, design, testing, manufacturing, and assembly
facilities are located in Mesa, Arizona, where we presently lease 33,650 square
feet of office and manufacturing space in a building located at 234 South
Extension Road. This facility consists of approximately 10,000 square feet of
office space and 23,650 square feet of manufacturing space. Our lease terminates
on January 1, 2004, subject to our option to extend the term for an additional
two years. The base monthly rent for 1999 is $13,000. Future minimum monthly
rental payments are $16,000 for 2000 and $17,000 for 2001. We believe our
current facilities will be sufficient for our operational purposes for the
foreseeable future and any additional facilities needed thereafter will be
available on commercially reasonable terms.
ENVIRONMENTAL MATTERS
A portion of our operations involve screen printing and the use of certain
inks. Due to these operations, we emit a low volume of volatile organic
compounds. We believe we have satisfied all regulatory requirements necessary to
conduct our operations.
LEGAL PROCEEDINGS
From time to time, we may be subject to claims and litigation incident to
our business. As of the date of this prospectus, we are not involved in any
claim or legal proceeding.
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<PAGE> 35
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of DuraSwitch, their ages, and their
positions held with DuraSwitch are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
R. Terren Dunlap....................... 54 Chief Executive Officer, Chairman of the Board and
Director
Anthony J. Van Zeeland................. 58 Chief Operating Officer, Executive Vice President of
Engineering and Director
Robert J. Brilon....................... 38 President, Chief Financial Officer, Treasurer and
Secretary
J. Thomas Webb......................... 47 Executive Vice President of Marketing and Director
John W. Hail........................... 68 Director
Steven R. Green........................ 40 Director
William F. Peelle...................... 50 Director
Michael A. Van Zeeland................. 24 Director
</TABLE>
R. TERREN (TERRY) DUNLAP has served as Chairman of the Board of Directors
and Chief Executive Officer of DuraSwitch since our formation in May 1997. From
1983 to March 1994, Mr. Dunlap served as Chairman and Chief Executive Officer of
Sensory Science Corp. (formerly Go-Video, Inc.), a publicly held manufacturer of
consumer electronic video products which he founded. Mr. Dunlap continues to
serve as a consultant to Sensory Science Corp. Mr. Dunlap also serves as a
director of Advantage Marketing Systems, Inc., a publicly held provider of
health products. Mr. Dunlap received a B.S. degree in Business Administration
from Ashland University and a J.D. degree from Ohio Northern University.
ANTHONY J. VAN ZEELAND has served as a director and as Chief Operating
Officer and Executive Vice President of Engineering of DuraSwitch since our
formation in May 1997. From 1990 to 1997, Mr. Van Zeeland was employed as Vice
President of Engineering at DataHand Systems, Inc., a computer keyboard
manufacturing company. During the same time period, he was also a director and
Director of Development Engineering of Monopanel Technologies, Inc., a membrane
switch manufacturing company. Mr. Van Zeeland holds a B.S. degree in Physics and
a Masters of Science in Materials Engineering from the University of Wisconsin.
Anthony J. Van Zeeland is the father of Michael A. Van Zeeland.
ROBERT J. BRILON became President and Chief Financial Officer of DuraSwitch
in November 1998. From May 1997 until November 1998, Mr. Brilon served as a
financial and business consultant to DuraSwitch. Between January 1997 and
November 1998, Mr. Brilon was Chief Financial Officer of Gary Gietz Master
Builder, a luxury custom home builder. Between April 1995 and December 1996, Mr.
Brilon was Corporate Controller for Rental Service Corp., a publicly held
industrial equipment rental company. Between April 1993 and April 1995, Mr.
Brilon served as Chief Financial Officer and Vice President of Operations and
Administration of DataHand Systems, Inc. Mr. Brilon holds a B.S. degree in
Business Administration from the University of Iowa and is a C.P.A.
J. THOMAS WEBB has served as a director of DuraSwitch since April 1998 and
part-time as Executive Vice-President of Marketing of DuraSwitch since November
1998. Since 1986, Mr. Webb has served as the Chief Executive Officer and
Chairman of the Board of Camplex/Concept W Corporation, a broadcast equipment
manufacturer. Mr. Webb attended Emporia State University.
JOHN W. HAIL has served as a director of DuraSwitch since March 1999. Since
1988, Mr. Hail has served as Chief Executive Officer and Chairman of the Board
of Directors of Advantage Marketing Systems, Inc., a publicly held provider of
health and beauty products. He also serves on the board of directors of Pre-Paid
Legal Services, Inc., a publicly held company engaged in the sale of legal
services contracts. Mr. Hail received an honorary doctorate degree from Oklahoma
City University.
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<PAGE> 36
STEVEN R. GREEN has served as a director of DuraSwitch since June 1998. He
has been the Managing Director of Blackwater Capital Partners L.P., the selling
stockholder, since November 1997. Between 1990 and November 1997, Mr. Green
acted as a sole practitioner in the field of investment banking, specializing in
mergers and acquisitions, initial public offerings, refinancings,
recapitalizations, and reorganizations. Mr. Green holds a B.A. degree from
U.C.L.A.
WILLIAM E. PEELLE has served as a director of DuraSwitch since May 1999.
Mr. Peelle founded Peelle Law Offices Co. in 1994 and has practiced law and
represented a number of businesses since 1975. Mr. Peelle has also served as the
elected prosecuting attorney of Clinton County, Ohio, since 1994. Mr. Peelle has
served as counsel or as a member of the Board of several community
organizations. Mr. Peelle received his Juris Doctorate from Ohio Northern
University, and has a B.S. degree in Business Administration from Ohio State
University.
MICHAEL A. VAN ZEELAND has served as a director of DuraSwitch since May
1997. Mr. Van Zeeland is currently a graduate student at U.C.L.A., working on
his Ph.D. in plasma physics. From January 1998 to September 1998, we employed
him as an engineering physicist. During the summer of 1997, he was employed at
Arizona State University working on theoretical physics. During the summer of
1996, Mr. Van Zeeland worked as an intern at the University of California-Irvine
in a program funded by the National Science Foundation. From August 1995 to May
1996, Mr. Van Zeeland worked as an intern under the NASA Space Grant Program,
where he wrote FORTRAN programs, ran simulations and collected data to use to
study hurricane formation. From May 1992 to August 1993, he worked as an
Engineer Technician with DataHand Systems, Inc. Mr. Van Zeeland holds a B.S.
degree in Engineering Physics from the University of Arizona.
Executive officers serve at the discretion of the Board of Directors.
STRUCTURE OF THE BOARD OF DIRECTORS
The Bylaws provide for a Board of Directors of one to nine members. The
current Board of Directors consists of seven members. All newly elected
directors will serve for a three year term and approximately one-third of the
directors will be elected annually. We have established an Audit Committee and
Compensation Committee, each of which have only independent directors. The Audit
Committee will review the professional services provided by our independent
auditors, our annual financial statements and our system of internal controls.
Our Audit Committee consists of Messrs. Green and Hail. The Compensation
Committee will review executive salaries and administer our bonus, incentive
compensation and stock option plans. In addition, the Compensation Committee
will consult with our management regarding our compensation policies and
practices. The Compensation Committee consists of Messrs. Hail and Peelle.
DIRECTOR COMPENSATION
Directors are reimbursed for reasonable expenses incurred in attending
meetings. During the first three months of 1999, we paid Mr. Webb $21,630 as a
referral fee in connection with certain shares of common stock sold by us.
EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid to our Chief Executive Officer. No executive officer who was
serving as an executive officer on December 31, 1998 had an aggregate salary and
bonus exceeding $100,000 for the fiscal year ended December 31, 1998.
32
<PAGE> 37
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
SECURITIES
NAME AND OTHER ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
------------------ ---- ------- ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
R. Terren Dunlap.................. 1998 $72,000 -- -- -- $780(1)
Chief Executive Officer 1997 $58,154 $10,000 -- -- --
</TABLE>
- ---------------
(1) Payments received by VanDun, LLC, of which Mr. Dunlap is a 50% owner.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No executive officer named in the Summary Compensation Table received stock
option grants during the fiscal year ended December 31, 1998.
FISCAL YEAR-END OPTION VALUES
No executive officer named in the Summary Compensation Table had options
outstanding as of December 31, 1998 nor exercised any options during the fiscal
year ended December 31, 1998.
STOCK OPTION PLANS
Our 1997 Stock Option Plan was adopted by the Board of Directors and
approved by our stockholders effective as of May 1, 1997, and our 1999 Stock
Option Plan was adopted by the Board of Directors and approved by our
stockholders effective as of March 8, 1999. Both Plans authorize the Board of
Directors or a Compensation Committee of the Board to grant stock options to
employees, directors and appropriate third parties. Under the 1997 Plan, 823,535
shares are authorized for issuance, and under the 1999 Plan, 235,294 shares are
authorized for issuance. Under both Plans, the exercise price is determined by
the Board of Directors or the Compensation Committee. The Plans provide for the
granting of either "incentive stock options" within the meaning of Section 422
of the Internal Revenue Code of 1986, or nonqualified stock options. Incentive
stock options may be granted only to employees, including officers. The exercise
price of incentive stock options granted under the Plans must be at least the
fair market value of the common stock on the date of grant. The exercise price
of any incentive stock option granted to an optionee who beneficially owns more
than 10% (a "10% Holder") of our voting stock must be at least 110% of the fair
market value of the underlying shares on the date of grant. The exercise price
of nonqualified stock options may be any amount determined in good faith by the
Board of Directors or the Compensation Committee. All outstanding options that
we have granted under the Plans have exercise prices at least equal to the fair
market value of the common stock on the dates of grant, and we intend to
continue this policy with respect to future option grants.
No option may be exercised more than 10 years (or, in the case of an
incentive stock option granted to a 10% Holder, more than five years) after its
grant date. Options granted under the Plans are not transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by the optionee, or his or
her guardian or legal representative. Incentive stock options held by our
employees may be exercised by the participant only while employed by us or
within one year following termination resulting from death or permanent
disability or within three months after termination for any reason other than
cause, death or permanent disability, or on or before the date the participant's
employment with us is terminated, if for cause. Nonqualified stock options may
be exercised within one year after cessation of services to us for any reason
other than death, permanent disability, retirement or cause, two years after
cessation of services by reason of death, permanent disability or retirement, or
the date of cessation of services for cause. The 1997 Plan expires in 2007, and
the 1999 Plan expires in 2009.
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<PAGE> 38
As of May 15, 1999, options to purchase 733,530 shares were outstanding
under the 1997 Stock Option Plan, and options to purchase 28,941 shares were
outstanding under the 1999 Plan.
EMPLOYMENT AND SEVERANCE AGREEMENTS
In May 1997, we entered into an employment agreement with Mr. Dunlap
providing that, commencing on May 1, 1997 and continuing for seven years
thereafter, Mr. Dunlap will serve as our Chief Executive Officer at a base
salary of $72,000, increasing after 18 months to a level commensurate with
industry standards and our ability to pay. Mr. Dunlap is also entitled to
receive an incentive profit sharing bonus each year of 6.6% of our net profit
before taxes and dividends.
In May 1997, we entered into an employment agreement with Mr. Anthony Van
Zeeland providing that, commencing on May 1, 1997 and continuing for seven years
thereafter, Mr. Van Zeeland will serve as our Chief Operating Officer at a base
salary of $72,000, increasing after 18 months to a level commensurate with
industry standards and our ability to pay. Mr. Van Zeeland is also entitled to
receive an incentive profit sharing bonus each year of 3.4% of our net profit
before taxes and dividends. We have also agreed to pay Mr. Van Zeeland an annual
one-time bonus of $5,000 for each United States patent (and $1,000 for each
foreign patent) issued in his name as inventor or co-inventor with a maximum of
$20,000 during any fiscal year.
In November 1998, we entered into an employment agreement with Mr. Brilon
providing that, commencing on November 20, 1998 and continuing for three years
thereafter, Mr. Brilon will serve as our President and Chief Financial Officer
at a base salary of $75,000, increasing after December 31, 1998 to $95,000 or a
level commensurate with industry standards, based on Mr. Brilon's performance
and our ability to pay. In addition, Mr. Brilon receives an automobile
allowance. Mr. Brilon is also entitled to receive an incentive profit sharing
bonus each year of 5% of our net profit before tax, goodwill amortization and
other non-cash charges. We have also agreed to issue stock options to Mr. Brilon
to purchase 176,472 shares of common stock, which vest as follows: 58,824 on
December 31, 1998, 58,824 on December 31, 1999, and 58,824 on December 31, 2000.
In November 1998, we entered into an employment agreement with Mr. Webb
providing that, commencing on November 20, 1998 and continuing until January 1,
2000, Mr. Webb will serve on a part-time basis as our Executive Vice President
of Marketing at a base salary equal to $26,000. We have also agreed to issue
stock options to Mr. Webb to purchase 65,882 shares of common stock, which vest
as follows: 28,235 on January 1, 1999, 18,824 on January 1, 2000, and 18,823 on
January 1, 2001.
SEVERANCE AND CHANGE OF CONTROL PROVISIONS
Each of the employment agreements described above provide for certain
benefits to our executive officers upon their severance or upon a change of
control of DuraSwitch. If we terminate any of these individuals, with or without
cause, we would be required to pay him his gross annual base salary for an
additional two year period after termination as to continue all standard
employee benefits for two years, including health and medical benefits. In
addition, in the case of Mr. Brilon, all stock options held but not vested would
vest immediately. If Mr. Dunlap or Mr. Van Zeeland leaves voluntarily, we have
agreed to pay him his gross annual base salary for an additional 18 months after
termination as well as continuation of all standard employee benefits during
such period. If Mr. Brilon leaves voluntarily, we have agreed to pay him his
gross annual base salary for an additional 12 months after termination and to
continue all standard employee benefits during such period. Each of these
executive officers have agreed that they will not, for the two year period
following his termination, or in the case of Mr. Dunlap and Mr. Van Zeeland, for
the one year period following termination, compete with us within the United
States.
In the event that we are acquired and the executive officer is terminated
as a result of such takeover, we have agreed to make a lump sum payment to such
executive officer equal to 2.99 times his gross annual salary. In addition, in
the case of Mr. Brilon, all stock options held but not vested would vest
immediately.
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<PAGE> 39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of May 15, 1999 and as adjusted to reflect the
sale of the common stock offered hereby, by (i) each person or entity known to
us to own beneficially more than 5% of the outstanding shares of common stock,
(ii) each of our directors and (iii) all our directors and executive officers as
a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED(1)
--------------------------------------------
PERCENT PRIOR PERCENT AFTER
IDENTITY OF STOCKHOLDER OR GROUP(2) NUMBER TO OFFERING OFFERING
- ----------------------------------- ---------- ------------- -------------
<S> <C> <C> <C>
R. Terren Dunlap...................................... 1,447,506 26.5% 19.4%
Anthony J. Van Zeeland................................ 1,447,506 26.5 19.4
Robert J. Brilon...................................... 130,290(3) 2.3 1.7
Steven R. Green....................................... 630,388(4) 11.5 8.4
John W. Hail.......................................... 5,624(5) 0.1 0.1
J. Thomas Webb........................................ 28,235(6) 0.5 0.4
Michael A. Van Zeeland................................ 15,255 0.3 0.2
William F. Peelle..................................... 15,863 0.3 0.2
All directors and executive officers as a group (8
persons)............................................ 3,720,667 66.1% 48.8%
</TABLE>
- ---------------
(1) Shares beneficially owned and percentage of ownership are based on 5,471,877
shares of common stock outstanding immediately prior to the offering and
7,471,877 shares of common stock outstanding immediately after the offering.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("SEC") and generally includes voting or
investment power with respect to securities. In accordance with SEC rules,
shares which may be acquired upon exercise of stock options or warrants
which are currently exercisable or which become exercisable within 60 days
of the date of the table (May 15, 1999) are deemed beneficially owned by the
holder. Except as indicated by footnote, and subject to community property
laws where applicable, the persons or entities named in the table above have
sole voting and investment power with respect to all shares of common stock
shown as beneficially owned by them.
(2) Except as otherwise noted, the mailing address of each of the stockholders
in the table is 234 S. Extension Road, Mesa, Arizona 85210.
(3) Includes (i) 81,706 shares subject to options which are currently
exercisable, and (ii) 47,059 shares subject to warrants which are currently
exercisable.
(4) Represents 630,388 shares owned by Blackwater Capital Partners L.P., of
which Steven R. Green, one of our directors, is managing partner.
Blackwater's mailing address is 1800 Glenview Road, Glenview, Illinois
60025. Blackwater may sell up to 74,266 shares to the underwriters as part
of the over-allotment option. If the underwriters fully exercise the
over-allotment option, Blackwater will own 556,122 shares of common stock
after the offering, which will be 7.2 % of our total issued and outstanding
shares following the offering.
(5) Includes 3,741 shares owned by TVC, Inc., of which John W. Hail is the
majority shareholder.
(6) Includes 28,235 shares subject to options which are currently exercisable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In May 1997, Mr. R. Terren Dunlap, our Chief Executive Officer, and Mr.
Anthony J. Van Zeeland, our Chief Operating Officer, formed an Arizona
corporation known as Total Switch, Inc. In connection with the formation of
Total Switch, Mr. Dunlap and Mr. Van Zeeland each received shares of common
stock representing a 49.5% equity interest in Total Switch and Mr. Michael Van
Zeeland (Mr. Anthony J. Van Zeeland's son) and Mr. Rhett Dunlap (Mr. R. Terren
Dunlap's son) each received shares of common stock representing a 0.5% equity
interest in Total Switch. These individuals contributed a nominal amount of
capital for Total Switch's initial capitalization. In addition, Mr. Anthony J.
Van Zeeland assigned his continuing rights in the patents for his switch
technology, and Total Switch issued a note payable to creditors of Mr. A. Van
Zeeland in the amount of $20,569 to satisfy loans made to Mr. A. Van Zeeland to
cover the costs of filing the patents for his switch technology.
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<PAGE> 40
On May 1, 1997, we granted Mr. Brilon 22,883 options to purchase common
stock at an exercise price of $0.02 per share and 1,525 shares of common for
consulting services.
We have entered into an employment agreement with Mr. A. Van Zeeland.
Pursuant to this agreement, Mr. A. Van Zeeland was granted options to purchase
83,903 shares of common stock at fair market value, which were immediately
exercised at $0.02 per share. See "Management -- Employment and Severance
Agreements."
On May 1, 1997, we entered into an agreement with VanDun, LLC, a limited
liability company wholly-owned by Mr. A. Van Zeeland and Mr. R. Terren Dunlap,
pursuant to which VanDun provides intellectual property consulting services to
us. The agreement requires us to pay VanDun a management fee equal to 1.1% of
invoiced sales for all component switches and integrated component switch panels
sold by us during the term of this agreement. The agreement terminates upon the
expiration of our patents in approximately 20 years. In fiscal 1998 we paid
VanDun $780. This agreement obligates Messrs. Van Zeeland and Dunlap to preserve
all their personal notes and records regarding our intellectual property and to
assist us in protecting our intellectual property from infringement, including
testifying during legal or administrative proceedings. These duties extend
beyond the terms of Messrs. Van Zeeland's and Dunlap's employment agreements and
noncompetition covenants.
On June 29, 1998, we issued shares of Series A Preferred Stock convertible
into 504,311 shares of our common stock, together with warrants to purchase
252,155 additional shares of common stock, to Blackwater Capital Partners, L.P.
(and another entity controlled by Blackwater). Blackwater purchased these
securities for a total payment of $1,000,000. As part of this transaction, we
granted registration rights to Blackwater with respect to all of the common
stock issuable upon exercise or conversion of the preferred stock and warrants.
On December 31, 1998, Blackwater converted all of their shares of preferred
stock into 504,311 shares of our common stock. Steven R. Green, a director of
DuraSwitch, is the managing director of Blackwater Capital Partners.
On November 1, 1998 we entered into a consulting agreement with Mr. Brilon
for management services. Under this agreement, Mr. Brilon received $1,380 and
warrants to purchase 47,059 shares of common stock at $3.19 per share. The
agreement was terminated on November 20, 1998 when Mr. Brilon became our
full-time employee.
On January 15, 1999, we borrowed $100,000 from Blackwater Capital Partners.
The loan accrued interest at an annual rate of 9%. On April 30, 1999, Blackwater
exercised warrants to purchase 126,077 shares of common stock. As payment for
the exercise price, Blackwater agreed to cancel our $100,000 loan and executed a
note payable to us in the amount of $147,263. This note bears interest at 8% per
annum and is payable on the earlier of the completion of this offering or
December 31, 1999.
During the first quarter of 1999, we loaned $150,000 to Camplex/Concept W
Corporation, an entity that we had considered as a possible acquisition
candidate. Subsequent to March 31, 1999, we determined that we would not acquire
Camplex. The $150,000 loan is due January 1, 2000, and bears interest at 9%. J.
Thomas Webb, one of our directors, is the CEO, Chairman of the Board and a major
stockholder of Camplex.
Based on a prior relationship of Anthony J. Van Zeeland, the inventor of
our technology, with his prior employer, we granted to that employer a
nonexclusive license to manufacture products using our technology. Because we
may unilaterally cancel the license in April 2000, we do not believe this
licensing arrangement will materially affect our business.
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<PAGE> 41
UNDERWRITING
The underwriters named below, for whom Cruttenden Roth Incorporated is
acting as representative, have severally agreed to purchase from us, and we have
agreed to sell to the underwriters, the number of shares of common stock set
forth opposite each underwriter's name below, subject to the terms and
conditions set forth in our underwriting agreement.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------ ---------
<S> <C>
Cruttenden Roth Incorporated................................
---------
Total.................................................. 2,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates, opinions and letters from our counsel and independent public
accountants. The nature of the underwriters' obligations is such that they are
committed to purchase and pay for all the shares of common stock if any are
purchased.
We have granted an option to the underwriters, exercisable for a period of
45 days after the date of this prospectus, to purchase up to an additional
225,734 shares of our common stock at the public offering price set forth on the
cover page of this prospectus, less the underwriting discounts and commissions.
Blackwater Capital Partners, L.P., the selling stockholder, has granted an
option to the underwriters to purchase an additional 74,266 shares of our common
stock on the same terms and conditions. The underwriters may exercise this
option only to cover over-allotments, if any. To the extent that the
underwriters exercise this option, each of the underwriters will be committed,
subject to certain conditions, to purchase the additional shares of common stock
in approximately the same proportion as set forth in the above table.
We have been advised by the representative that the underwriters propose to
offer the shares of common stock directly to the public at the public offering
price set forth on the cover page of this prospectus and to certain securities
dealers at such price less a concession not in excess of $ per share.
The underwriters may allow, and such selected dealers may reallow, a discount
not in excess of $ per share to certain brokers and dealers. After the
public offering of the shares, the public offering price and other selling terms
may be changed by the representative. No change in such terms will change the
amount of proceeds to be received by us as set forth on the cover page of this
prospectus.
The representative has advised us that it does not expect any sales of the
shares of common stock offered hereby to be made to discretionary accounts
controlled by the underwriters.
In connection with this offering, we have agreed to issue the
representative a warrant to purchase up to 200,000 shares of our common stock.
The representative's warrant will have a term of five years and will be
exercisable commencing one year after the effective date of this offering, at an
exercise price per share of 120% of the initial price of the common stock being
offered hereby to the public. The representative's warrant cannot be transferred
except in limited circumstances. During the exercise period, the holders of the
representative's warrant are entitled to certain demand and incidental
registration rights which will expire five years after the date of this
prospectus and which may require us to register for public resale the shares of
common stock issuable under the warrant. The number of shares covered by the
representative's warrant and the exercise price thereof are subject to
adjustment in certain events to prevent dilution.
We have also agreed to pay the representative a non-accountable expense
allowance equal to 3% of the aggregate public offering price of the shares of
common stock sold in the offering. The representative's
37
<PAGE> 42
expenses in excess of the non-accountable expense allowance, including its legal
expenses, will be borne by the representative. To the extent that the expenses
of the representative are less than the non-accountable expense allowance, the
excess will be considered compensation to the representative.
In total, we will pay compensation to the representative and the
underwriters as follows:
- commission of $ per share of common stock sold;
- nonaccountable expense allowance of $ per share of common stock
sold; and
- warrants to purchase up to 200,000 shares of common stock at 120% of the
per share offering price.
The public offering price for the common stock will be determined by
negotiation between us and the representative. In determining such price,
consideration will be given to various factors, including market conditions for
the public offering, the past history of and prospects for our business,
operations, earnings and financial position, an assessment of our management,
the market for securities of companies in businesses similar to ours, the
general condition of the securities markets and other relevant factors. There
can be no assurance that the public offering price will correspond to the price
at which the common stock traded prior to this offering or will trade in the
public market subsequent to the offering or that an active trading market will
develop and continue after the offering.
Our executive officers, directors and certain affiliates have agreed that
they will not, without the prior written consent of the representative (which
consent may be withheld in its sole discretion) and subject to certain limited
exceptions, offer, pledge, sell, contract to sell, sell any option or contract
to purchase, sell short, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock, or enter into any swap or
similar agreement that transfers, in whole or in part, any of the economic
consequences of ownership of the common stock, for a period of 180 days after
the date of completion of this offering. The representative, on behalf of the
underwriters, may, in its sole discretion and at any time without notice,
release all or any portion of the securities subject to these lock-up
agreements. In addition, we have agreed that, for a period of 180 days after the
date of completion of this offering, we will not, without the consent of the
representative, make any offering, purchase, sale or other disposition of any
shares of our common stock or other securities convertible into or exchangeable
or exercisable for shares of common stock (or enter into any related agreement)
except for the grant of options to purchase shares of common stock pursuant to
our stock option plans and the issuance of shares of common stock issued
pursuant to the exercise of options granted under such plans. After this 180 day
period, certain of our stockholders have agreed that the representative will
have a right of first refusal for a period of two years to be their sole broker
for any sales of their shares.
The representative has advised us that, pursuant to Regulation M under the
Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or the
imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above that
which might otherwise prevail in the open market. A "stabilizing bid" is a bid
for or the purchase of shares of common stock on behalf of the underwriters for
the purpose of fixing or maintaining the price of the common stock. A "syndicate
covering transaction" is a bid for or purchase of common stock on behalf of the
underwriters to reduce a short position incurred by the underwriters in
connection with the offering. A "penalty bid" is an arrangement permitting the
representative to reclaim the selling concession otherwise accruing to an
underwriter or syndicate member in connection with the offering if the common
stock originally sold by such underwriter or syndicate member is purchased by
the representative in a syndicate covering transaction and has therefore not
been effectively placed by such underwriter or syndicate member. The
representative has advised us that such transactions may be effected on the
American Stock Exchange or otherwise and, if commenced, may be discontinued at
any time.
The underwriting agreement provides that we and the selling stockholder
will indemnify the underwriters and their controlling persons against certain
liabilities under the Securities Act or will
38
<PAGE> 43
contribute to payments the underwriters and their controlling persons may be
required to make in respect thereof.
The foregoing is a summary of the principal terms of the underwriting
agreement. It does not purport to be complete and is qualified in its entirety
by reference to the form of underwriting agreement that is filed as an exhibit
to our registration statement of which this prospectus is a part.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 40,000,000 shares of common stock,
par value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share. The following summary of certain provisions of our capital
stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our Articles of Incorporation (the "Articles")
and Bylaws which are included as exhibits to the Registration Statement of which
this prospectus is a part, and by the provisions of applicable law.
COMMON STOCK
Immediately prior to the offering, there were 5,471,877 shares of common
stock outstanding which were held of record by approximately 300 stockholders.
The holders of common stock are entitled to one vote per share on all matters to
be voted upon by the stockholders. Stockholders are not entitled to cumulate
their votes for the election of directors. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, the holders of common
stock are entitled to receive such dividends pro rata, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share pro rata in all assets remaining after payment of liabilities, subject
to prior distribution rights of preferred stock, if any, then outstanding. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
Subject to the provisions of our Articles and the limitations mandated by
law, we are authorized to issue 10,000,000 shares of preferred stock, 2,143,321
of which are designated Series A Convertible Preferred Stock and the remainder
of which are undesignated preferred stock. The Board of Directors has the
authority to issue the undesignated preferred stock in one or more series and to
determine the powers, preferences and rights and the qualifications, limitations
or restrictions granted to or imposed upon any wholly unissued series of
undesignated preferred stock and to fix the number of shares constituting any
series and the designation of such series, without any further vote or action by
the stockholders. Shares of preferred stock so designated may have voting,
conversion, liquidation preference, redemption, sinking fund provisions and
other rights which are superior to those of the common stock. The issuance of
preferred stock may have the effect of delaying, deferring or preventing a
change in control of DuraSwitch without further action by the stockholders, may
discourage bids for the common stock at a premium over the market price of the
common stock and may adversely affect the market price of and the voting and
other rights of the holders of common stock.
At present, we have no shares of preferred stock issued and outstanding.
WARRANTS AND OPTIONS
As of May 15, 1999, we had outstanding warrants to purchase 113,459 shares
of our common stock, all of which were exercisable. Of these warrants, warrants
to purchase 42,870 shares are exercisable at $1.98 per share and warrants to
purchase 70,589 shares are exercisable at $3.19 per share. Each warrant
39
<PAGE> 44
contains provisions for the adjustment of the exercise price and the aggregate
number of shares issuable upon exercise of the warrant under certain
circumstances, including stock dividends, stock splits, reorganizations,
reclassifications and consolidations.
As of May 15, 1999, options to purchase 726,471 shares of common stock were
outstanding, 536,942 of which are exercisable.
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of our Articles and Bylaws and provisions of applicable
Nevada Law may affect potential changes in control. The cumulative effect of
these provisions may be to make it more difficult to acquire and exercise
control and to make changes in management.
Pursuant to our Articles, the affirmative vote of at least two-thirds of
the directors present at any meeting of the Board of Directors at which a quorum
is present is required for a sale of all or substantially all of our assets, a
merger with another entity, an amendment of the Bylaws, a dissolution, and a
sale of all of our issued and outstanding stock.
Nevada law prohibits business combinations between Nevada corporations and
interested stockholders for a period of three years after the interested
stockholder's date of acquiring shares unless the combination or the purchase of
the shares by the interested stockholder is approved by the board of directors.
Applicable Nevada law also prohibits such business combinations following the
expiration of three years after the interested stockholder's date of acquiring
shares unless the combination meets the requirements specified in Section 78.439
for director and stockholder approvals or Sections 78.441 to 78.444 inclusive
with respect to the consideration to be received in the combination by all
stockholders other than the interested stockholder. Applicable Nevada law
defines interested stockholders to include persons who, alone or together with
affiliates, beneficially own 10% of the outstanding stock of the corporation. A
Nevada corporation may opt-out of the application of these provisions under
certain circumstances. We have not opted out of the application of these
provisions.
Applicable Nevada law also denies voting rights to a stockholder who
acquires a controlling interest in a Nevada corporation, unless such voting
rights are approved by a majority of the voting powers of the corporation. A
Nevada corporation may opt-out of the application of these provisions under
certain circumstances. We have not opted out of the application of this statute.
Nevada law does not require a stockholder vote of the surviving corporation
in a merger if (a) the merger does not amend the existing articles of
incorporation, (b) each outstanding share of the surviving corporation before
the merger is unchanged, and (c) the number of shares to be issued by the
surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to such issuance.
The effect of these provisions may be to make more difficult the
accomplishment of a merger or other takeover or change in control. To the extent
that these provisions have this effect, removal of our incumbent Board of
Directors and management may be rendered more difficult. Furthermore, these
provisions may make it more difficult for stockholders to participate in a
tender or exchange offer for common stock and in so doing may diminish the
market value of the common stock.
PERSONAL LIABILITY OF DIRECTORS AND OFFICERS
The General Corporation Law authorizes a Nevada corporation to eliminate or
limit the personal liability of directors and officers to the corporation and
its stockholders for damages for breach of certain fiduciary duties as a
director. We believe that such a provision is beneficial in attracting and
retaining qualified directors and officers, and accordingly, our Articles
include a provision eliminating liability for damages for any breach of
fiduciary duty as a director or officer, except for (i) acts or omissions which
involve intentional misconduct, fraud or a knowing violation of law; or (ii)
authorizing unlawful distribution in violation of the General Corporation Law.
Directors are not insulated from liability for breach of their duty or loyalty
or for claims arising under the federal securities laws. The foregoing
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<PAGE> 45
provisions of the Articles may reduce the likelihood of derivative litigation
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefitted us and our stockholders.
We have comprehensive directors and officers liability insurance coverage, with
an aggregate policy limit of $2,000,000 for the benefit of its officers and
directors insuring such persons against certain liabilities, including
liabilities under the securities laws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
DuraSwitch pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable.
REGISTRATION RIGHTS
Holders of 756,466 shares of common stock and a holder of warrants to
acquire 47,059 shares of common stock have the right to receive notice of
proposed registrations of securities by us and to cause us to include all or a
portion of their shares in such registrations, provided, among other conditions,
that the underwriters of any such offering shall have the right to limit the
number of shares included in such registration. We are obligated to pay the
offering expenses of each such offering. Holders of applicable registration
rights have waived their rights to participate in this offering with the
exception of 74,266 shares of common stock in the over-allotment.
TRANSFER AGENT AND REGISTRAR
We have appointed First American Stock Transfer, located in Phoenix,
Arizona as the transfer agent and registrar for our common stock.
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Since January 1998, our common stock has traded on the OTC Bulletin Board.
In light of the limited trading market for our common stock (approximately
375,000 shares), we believe our past trading prices are not meaningful when
evaluating the offering price. The high and low inter-dealer price (as adjusted
for the 4.25 to 1 reverse stock split) for the calendar quarters since trading
began on the OTC Bulletin Board are as follows:
<TABLE>
<CAPTION>
PERIOD ENDED HIGH LOW
- ------------ ------ ------
<S> <C> <C>
March 31, 1998.............................................. $24.44 $17.47
June 30, 1998............................................... $21.25 $12.75
September 30, 1998.......................................... $20.40 $12.75
December 31, 1998........................................... $14.88 $ 6.38
March 31, 1999.............................................. $ 9.56 $ 6.38
June 30, 1999............................................... -- --
</TABLE>
These bid prices are inter-dealer prices without retail markup, markdown or
commission, and may not represent actual transactions.
We have applied for listing with the American Stock Exchange (AMEX) under
the trading symbol "DRA" by requesting a preliminary listing eligibility
opinion.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock in the public market,
or the perception that such sales could occur, could adversely affect the
prevailing market price of our common stock. Upon
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<PAGE> 46
completion of this offering, there will be 7,471,877 shares of common stock
outstanding. Of these shares, the 2,000,000 shares sold in this offering plus
the 375,000 shares which formerly traded on the OTC Bulletin Board will be
freely transferable without restriction or further registration under the
Securities Act of 1933, except for shares owned by our "affiliates" as that term
is defined in Rule 144 under the Securities Act. The remaining 5,096,877 shares
of common stock outstanding will be "restricted securities," as that term is
defined in Rule 144, and may in the future be sold without registration under
the Securities Act to the extent permitted by Rule 144 or any applicable
exemption under the Securities Act.
In general, under Rule 144 of the Securities Act as currently in effect, a
person who has beneficially owned "restricted securities" for at least one year
is entitled to sell within any three month period a number of shares of common
stock that does not exceed the greater of (i) 1% of the then outstanding shares
of our common stock (74,719 shares after giving effect to this offering) and
(ii) the average weekly trading volume of the common stock on the American Stock
Exchange during the four calendar weeks preceding such sale. Sales under Rule
144 are subject to certain restrictions relating to manner of sale, notice and
the availability of current public information about DuraSwitch. A person who
has beneficially owned shares for at least two years and who has not been an
affiliate of DuraSwitch at any time during the 90 days preceding a sale would be
entitled to sell such shares without regard to the volume limitations, manner of
sale provisions or notice or other requirements of Rule 144.
Officers, directors and certain of our stockholders owning an aggregate of
3,689,745 shares of common stock and warrants and options to purchase 312,295
shares of common stock have entered into lock-up agreements with the
underwriters pursuant to which these stockholders have agreed not to sell or
otherwise dispose of any shares of common stock for a period of 180 days after
the date of this prospectus without the prior written consent of the
underwriters. See "Underwriting."
Prior to the expiration of the lock-up agreements with the underwriters, we
expect to file a Registration Statement on Form S-8 under the Securities Act to
register all of the shares of common stock reserved for issuance pursuant to the
exercise of options issued under our 1997 and 1999 Stock Option Plans. After the
effective date of such Registration Statement and the expiration of the lock-up
agreements, shares purchased upon exercise of options granted pursuant to the
Plans generally will be available for resale in the public market. As of May 15,
1999, options to purchase 762,471 shares of common stock were outstanding,
536,942 of which were exercisable. To date, 90,005 options have been exercised.
Following completion of this offering, holders of 756,466 shares of common
stock and holders of warrants to acquire 47,059 shares of common stock will have
the right, under certain conditions, to cause us to register such shares under
the Securities Act and to participate in future registrations. See "Description
of Securities -- Registration Rights."
Prior to this offering, there has been only a small trading market for our
common stock, and no precise prediction can be made of the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of our common stock in the public market could adversely affect
prevailing market prices and limit our ability to raise additional capital.
HOLDERS
As of May 15, 1999, there were approximately 300 holders of record of our
common stock. We believe that our common stock is held by in excess of 400
beneficial holders.
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<PAGE> 47
INTEREST OF NAMED EXPERTS AND COUNSEL
Joel H. Bock, an attorney with the firm of Dorn, McEachran, Jambor &
Keating, who provides intellectual property-oriented legal services to us, owns
a total of 15,255 shares of common stock. We provided 7,628 of those shares to
Mr. Bock as partial payment for his firm's legal services. He purchased the
remaining shares on June 1, 1997 at $1.31 per share, which was the market price
at that time.
LEGAL MATTERS
The legality of the common stock offered hereby will be passed upon for us
by our general counsel, Quarles & Brady LLP, Phoenix, Arizona. Legal issues
related to intellectual property matters are being passed upon for us by Dorn,
McEachran, Jambor & Keating, Chicago, Illinois. Certain legal matters will be
passed upon for the underwriters by Snell & Wilmer L.L.P., Phoenix, Arizona.
EXPERTS
The financial statements of DuraSwitch Industries, Inc. as of December 31,
1998 and for the year then ended, and the financial statements of Aztec
Industries, Inc. as of January 31, 1998 and for the year then ended included in
this prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and are so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing. The financial statements of DuraSwitch Industries, as
of December 31, 1997 and the period then ended included in this prospectus have
been audited by McGladrey & Pullen LLP, independent auditors, as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
DuraSwitch has filed with the Commission, 450 Fifth Street N.W.,
Washington, D.C. 20549, a registration statement under the Act concerning the
common stock offered by this prospectus. Certain portions of the registration
statement have not been included in this prospectus as permitted by the
Commission's regulations. For further information concerning DuraSwitch and the
shares of common stock offered hereby, see the registration statement and its
exhibits, which may be inspected at the offices of the Commission, without
charge. Copies of the material contained therein may be obtained from the
Commission upon payment of the prescribed fees. Statements contained in this
prospectus as to the contents of any contract or other documents are not
necessarily complete; where such contract or other document is an exhibit to the
registration statement, each such statement is qualified in all respects by the
provisions of such exhibit, to which reference is hereby made for a full
statement of the provisions thereof.
After completion of this offering, DuraSwitch will be subject to the
informational requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information may be
inspected and copied at public reference facilities of the Commission at 450
Fifth Street N.W., Washington, D.C. 20549; and at the regional offices
maintained by the Commission at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; 7 World Trade Center, 13th Floor, New York, New York 10048; and
5670 Wilshire Boulevard, Los Angeles, California 90036. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street N.W., Washington, D.C. 20549 at prescribed rates. Additionally, the
Commission maintains a web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding issuers that
file electronically with the Commission.
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<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DURASWITCH INDUSTRIES, INC.
Independent Auditors' Reports............................... F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1997 and March 31, 1999 (Unaudited).................... F-4
Consolidated Statements of Operations Period from May 1,
1997 (Date of Inception) to December 31, 1997, Year
Ended December 31, 1998 and Three Months Ended March
31, 1998 and 1999 (Unaudited).......................... F-5
Consolidated Statements of Stockholders' Equity Period
from May 1, 1997 (Date of Inception) to December 31,
1997, Year Ended December 31, 1998 and Three Months
Ended March 31, 1998 and 1999 (Unaudited).............. F-6
Consolidated Statements of Cash Flows Period from May 1,
1997 (Date of Inception) to December 31, 1997, Year
Ended December 31, 1998 and Three Months Ended March
31, 1998 and 1999 (Unaudited).......................... F-7
Notes to Consolidated Financial Statements................ F-9
AZTEC INDUSTRIES, INC.
Independent Auditors' Report................................ F-20
Financial Statements:
Balance Sheet as of January 31, 1998...................... F-21
Statement of Operations Year Ended January 31, 1998....... F-22
Statement of Stockholders' Capital Deficiency Year Ended
January 31, 1998....................................... F-23
Statement of Cash Flows Year Ended January 31, 1998....... F-24
Notes to Financial Statements............................. F-25
</TABLE>
F-1
<PAGE> 49
The following report is in the form that will be signed upon completion of
the 4.25-to-1 reverse stock split discussed in Note 2 to the consolidated
financial statements, assuming that from February 26, 1999 to the date of such
completion, no other material events have occurred that would affect the
accompanying consolidated financial statements or required disclosure therein.
If the stock split ratio changes, all references to numbers of shares, per share
amounts and stock option data included within the consolidated financial
statements will also change.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
June 3, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors
DuraSwitch Industries, Inc.
Mesa, Arizona
We have audited the accompanying consolidated balance sheet of DuraSwitch
Industries, Inc. and subsidiaries (the "Company") as of December 31, 1998, and
the related consolidated statements of operations and accumulated deficit,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Company for the period from May 1,
1997 (date of inception) to December 31, 1997 were audited by other auditors
whose report, dated October 1, 1998, expressed an unqualified opinion on those
statements.
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 significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly,
in all material respects, the financial position of the Company at December 31,
1998, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The Company was in the development stage at December 31, 1997. During the
year ended December 31, 1998, the Company completed its development activities
and commenced its planned principal operations.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
February 26, 1999, except for Note 2, as to which the date is , 1999
F-2
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
Board of Directors
DuraSwitch Industries, Inc.
(A Development Stage Company)
Mesa, Arizona
We have audited the accompanying balance sheet of DuraSwitch Industries,
Inc. (A Development Stage Company) as of December 31, 1997, and the related
statements of operations, stockholders' equity, and cash flows for the period
from May 1, 1997 (date of inception) to December 31, 1997. 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 significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DuraSwitch Industries, Inc.
(A Development Stage Company) as of December 31, 1997, and the results of its
operations and its cash flows for the period from May 1, 1997 (date of
inception) to December 31, 1997, in conformity with generally accepted
accounting principles.
MCGLADREY & PULLEN, LLP
Phoenix, Arizona
October 1, 1998
F-3
<PAGE> 51
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1998, AND MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31,
1997 1998 1999
--------- ----------- -------------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 235,981 $ 143,860 $ 411,790
Accounts receivable (net of allowance for doubtful
accounts of $9,346 at December 31, 1998 and March
31, 1999)......................................... 5,762 136,078 316,224
Loan to Camplex / Concept W Corporation.............. 150,000
Inventory............................................ 235,567 365,275
Prepaid expenses and other current assets............ 16,955 76,640 83,165
--------- ----------- -----------
Total current assets.............................. 258,698 592,145 1,326,454
Property and equipment -- net.......................... 60,337 167,672 339,455
Goodwill -- net........................................ 662,767 644,529
Patents and other assets............................... 60,880 105,246 80,141
--------- ----------- -----------
Total assets........................................... $ 379,915 $ 1,527,830 $ 2,390,579
========= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 23,957 $ 221,243 $ 453,991
Accrued expenses and other current liabilities....... 19,568 223,331 310,007
Line of credit....................................... 95,000
Loans from officers.................................. 11,898 40,281
Current portion of notes payable and capital leases
payable........................................... 132,985 228,999
--------- ----------- -----------
Total current liabilities......................... 55,423 617,840 1,087,997
--------- ----------- -----------
Long-term debt:
Notes payable........................................ 107,701 93,870
Capital leases payable............................... 50,014 89,690
--------- ----------- -----------
Total long-term liabilities....................... 157,715 183,560
--------- ----------- -----------
Total liabilities................................. 55,423 775,555 1,271,557
--------- ----------- -----------
Commitments and contingencies (Notes 1 and 14)
Stockholders' equity:
Preferred stock, $.001 par value, 10,000,000 shares
authorized, no shares issued and outstanding
Common stock, $.001 par value, 40,000,000 shares
authorized, 4,138,609 and 4,911,250 and 5,219,722
shares issued and outstanding, respectively....... 4,139 4,911 5,220
Common stock paid for but not issued (32,424
shares)........................................... 260,000
Additional paid-in capital........................... 509,439 3,535,878 4,502,432
Accumulated deficit.................................. (449,086) (2,788,514) (3,238,630)
Stock subscription receivable........................ (150,000)
--------- ----------- -----------
Total stockholders' equity........................ 324,492 752,275 1,119,022
--------- ----------- -----------
Total liabilities and stockholders' equity............. $ 379,915 $ 1,527,830 $ 2,390,579
========= =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 52
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF THREE MONTHS
INCEPTION) TO YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------------------
1997 1998 1998 1999
------------- ------------ --------------- ---------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
Net sales............................... $ 5,762 $ 1,354,790 $ 308,248 $ 467,614
Cost of goods sold...................... 6,617 1,300,190 283,602 463,717
--------- ----------- --------- ---------
Gross (loss) profit................ (855) 54,600 24,646 3,897
--------- ----------- --------- ---------
Operating expenses:
Selling, general and administrative... 309,951 1,194,905 209,876 366,939
Research and development.............. 142,550 409,425 104,062 104,634
--------- ----------- --------- ---------
Total operating expenses........... 452,501 1,604,330 313,938 471,573
--------- ----------- --------- ---------
Loss from operations.................... (453,356) (1,549,730) (289,292) (467,676)
Other income (expense) -- net........... 4,270 (49,698) (4,204) 17,560
--------- ----------- --------- ---------
Net loss................................ (449,086) (1,599,428) (293,496) (450,116)
--------- ----------- --------- ---------
Noncash discount on proceeds of
preferred stock for beneficial
conversion feature.................... (740,000)
--------- ----------- --------- ---------
Net loss attributable to common stock... $(449,086) $(2,339,428) $(293,496) $(450,116)
========= =========== ========= =========
Net loss per common share, basic and
diluted............................... $ (.12) $ (.55) $ (0.07) $ (0.09)
========= =========== ========= =========
Weighted average shares outstanding,
basic and diluted..................... 3,786,898 4,268,642 4,216,900 5,072,743
========= =========== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 53
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO DECEMBER 31, 1997,
YEAR ENDED DECEMBER 31, 1998 AND
THREE MONTHS ENDED MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK
PAID FOR
COMMON STOCK BUT NOT ISSUED PREFERRED STOCK STOCK ADDITIONAL
--------------------- ------------------- -------------------- SUBSCRIPTION PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT RECEIVABLE CAPITAL
--------- --------- ------- --------- -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ISSUANCE OF COMMON STOCK..... 470,588 $ 60,000
Effect of 6.4834 for 1 stock
split..................... 2,580,424
Effect of reverse merger
accounted for as a
recapitalization.......... 620,792
Stock options exercised..... 83,903 1,650
Issuance of stock for
cash...................... 305,101 $ 388,444
Issuance of stock for
services.................. 32,036 1,989 45,765 60,000
Conversion of preferred
stock to common stock..... 350,866 448,444 (350,866) (448,444)
Cash for stock not issued... 32,424 $ 260,000
Recapitalization due to
change in par value....... (507,944) $ 507,944
Compensation expense from
stock options............. 1,495
Net loss....................
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, DECEMBER 31, 1997... 4,138,609 4,139 32,424 260,000 -- -- 509,439
Issuance of stock for cash
previously received....... 32,424 32 (32,424) (260,000) 259,968
Issuance of stock for
acquisition of Aztec
Industries, Inc........... 70,588 71 566,929
Net proceeds from sale of
common stock for cash..... 143,451 143 533,608
Net proceeds from sale of
preferred stock and common
stock warrants............ 504,311 740,000 883,085
Issuance of stock for
services.................. 15,765 16 41,826
Stock options exercised..... 6,102 6 124
Compensation expense from
stock options............. 1,403
Conversion of preferred
stock to common stock..... 504,311 504 (504,311) (740,000) 739,496
Net loss....................
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, DECEMBER 31, 1998... 4,911,250 4,911 3,535,878
Net proceeds from sale of
common stock (unaudited).. 305,805 306 $(150,000) 955,280
Issuance of stock for
services (unaudited)...... 2,667 3 8,497
Compensation expense from
stock options
(unaudited)............... 2,777
Net loss (unaudited)........
--------- --------- ------- --------- -------- --------- --------- ----------
BALANCE, MARCH 31, 1999
(UNAUDITED)................. 5,219,722 $ 5,220 -- $ -- -- $ -- $(150,000) $4,502,432
========= ========= ======= ========= ======== ========= ========= ==========
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -----------
<S> <C> <C>
ISSUANCE OF COMMON STOCK..... $ 60,000
Effect of 6.4834 for 1 stock
split.....................
Effect of reverse merger
accounted for as a
recapitalization..........
Stock options exercised..... 1,650
Issuance of stock for
cash...................... 388,444
Issuance of stock for
services.................. 61,989
Conversion of preferred
stock to common stock.....
Cash for stock not issued... 260,000
Recapitalization due to
change in par value.......
Compensation expense from
stock options............. 1,495
Net loss.................... $ (449,086) (449,086)
----------- -----------
BALANCE, DECEMBER 31, 1997... (449,086) 324,492
Issuance of stock for cash
previously received.......
Issuance of stock for
acquisition of Aztec
Industries, Inc........... 567,000
Net proceeds from sale of
common stock for cash..... 533,751
Net proceeds from sale of
preferred stock and common
stock warrants............ (740,000) 883,085
Issuance of stock for
services.................. 41,842
Stock options exercised..... 130
Compensation expense from
stock options............. 1,403
Conversion of preferred
stock to common stock.....
Net loss.................... (1,599,428) (1,599,428)
----------- -----------
BALANCE, DECEMBER 31, 1998... (2,788,514) 752,275
Net proceeds from sale of
common stock (unaudited).. 805,586
Issuance of stock for
services (unaudited)...... 8,500
Compensation expense from
stock options
(unaudited)............... 2,777
Net loss (unaudited)........ (450,116) (450,116)
----------- -----------
BALANCE, MARCH 31, 1999
(UNAUDITED)................. $(3,238,630) $ 1,119,022
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 54
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF THREE MONTHS
INCEPTION) TO YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1998 1999
------------- ------------ --------- ---------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $(449,086) $(1,599,428) $(293,496) $(450,116)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 18,868 131,169 24,642 42,183
Gain on sale of equipment................. (12,500)
Stock option compensation expense......... 1,495 1,403 351 2,777
Issuance of stock for services............ 61,989 41,842 8,500
Bad debt expense.......................... 59,797 11,033 1,726
Changes in operating assets and
liabilities net of the effects of
acquisition:
Accounts receivable..................... (5,762) 16,507 2,463 (180,146)
Inventory............................... 114,046 125,325 (129,708)
Prepaid expenses and other current
assets............................... 21,447 (54,551) (846) 19,028
Accounts payable........................ 23,957 (26,735) (63,722) 232,748
Accrued expenses and other current
liabilities.......................... 6,568 128,890 36,028 86,676
--------- ----------- --------- ---------
Net cash used in operating activities... (260,727) (1,235,824) (167,529) (380,558)
--------- ----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in patents and other
assets.................................... (9,330) (61,434) (11,102) (5,786)
Advances to Aztec
Industries, Inc. ......................... (59,797) (58,246) (58,246)
Loan to Camplex.............................. (150,000)
Proceeds from sale of equipment.............. 12,500
Purchases of property and equipment.......... (35,400) (60,515) (21,170) (132,517)
--------- ----------- --------- ---------
Net cash used in investing activities... (104,527) (180,195) (90,518) (275,803)
--------- ----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of stock.............. 650,094 1,416,966 99,649 805,586
Principal payments on notes payable and
capital leases............................ (80,451) (13,025) (36,014)
Proceeds from notes payable to stockholder... 100,000
Net (decrease) increase in line of credit.... (41,000) 8,000 95,000
Net change in loans from officers............ (48,859) 28,383 44,117 (40,281)
--------- ----------- --------- ---------
Net cash provided by financing
activities........................... 601,235 1,323,898 138,741 924,291
--------- ----------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................. 235,981 (92,121) (119,306) 267,930
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD....................................... 235,981 235,981 143,860
--------- ----------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD....... $ 235,981 $ 143,860 $ 116,675 $ 411,790
========= =========== ========= =========
</TABLE>
(Continued)
F-7
<PAGE> 55
DURASWITCH INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1997
(DATE OF THREE MONTHS
INCEPTION) TO YEAR ENDED ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, ---------------------
1997 1998 1998 1999
------------- ------------ --------- ---------
(UNAUDITED)
(SEE NOTE 15)
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION --
Cash paid for interest....................... $ 58,970 $ 7,527 $ 10,531
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Acquisition of equipment through capital
lease..................................... 55,684 57,873
Purchase of Aztec Industries, Inc.:
Accounts receivable.......................... 157,856 157,856
Inventories.................................. 349,613 349,613
Prepaids and other current assets............ 5,134 5,134
Property and equipment....................... 38,352 38,352
Goodwill..................................... 729,652 729,652
Accounts payable............................. (224,021) (224,021)
Accrued expenses............................. (74,873) (74,873)
Advances from the Company.................... (58,246) (58,246)
Line of credit............................... (41,000) (41,000)
Notes payable................................ (287,124) (287,124)
Leases payable............................... (28,343) (28,343)
Common stock................................. (567,000) (567,000)
Initial capitalization of Company:
Prepaids and other assets.................... $ 38,402
Patents...................................... 60,010
Property and equipment....................... 35,345
Accrued expenses............................. (13,000)
Notes payable to stockholders................ (60,757)
Common stock................................. (60,000)
</TABLE>
See notes to consolidated financial statements.
(Concluded)
F-8
<PAGE> 56
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM MAY 1, 1997 (DATE OF INCEPTION) TO
DECEMBER 31, 1997, YEAR ENDED DECEMBER 31, 1998 AND
THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (UNAUDITED)
1. NATURE OF BUSINESS
The Company was incorporated as Total Switch, Inc. ("TSI") on May 1, 1997.
On December 31, 1997, TSI entered into a stock exchange agreement with SOS
International, Inc. ("SOS"), a Nevada corporation that was traded on the OTC
Bulletin Board. SOS had nominal assets and no liabilities on the date of the
acquisition. Under the stock exchange agreement, SOS changed its name to
DuraSwitch Industries, Inc. (the "Company") and acquired all of TSI's stock in
exchange for approximately 85 percent of SOS's outstanding common stock. As a
result of this transaction, TSI became a wholly-owned subsidiary of the Company,
and TSI's former stockholders took controlling interest in the Company. For
accounting purposes, the acquisition has been treated as a recapitalization of
TSI with TSI as the acquirer (reverse merger). As a consequence of this
combination, the Company became a publicly-traded company.
At December 31, 1997, the Company was in the development stage. During
1998, through the acquisition of Aztec Industries, Inc. ("Aztec"), the Company
commenced operations and is no longer in the development stage. The Company
designs, manufactures, markets and distributes integrated electronic control
panels developed with its patented technology.
On January 31, 1998, the Company acquired 100 percent of the outstanding
stock of Aztec by issuing 70,588 shares of common stock valued at $8.03 per
share, which price was based on the price of recent sales of common stock at
such time, and the forgiveness of advances made to Aztec prior to the
acquisition. The purchase of Aztec was recorded using the purchase accounting
method, which requires an adjustment of all assets and liabilities of Aztec to
their estimated fair values on the date of acquisition. The excess of the
consideration paid by the Company over the estimated fair value of the net
assets acquired ("goodwill") was $729,652 and is being amortized over ten years.
The results of operations of Aztec have been included in the Company's
consolidated financial statements beginning on February 1, 1998. During 1997,
the Company had advanced $59,797 to Aztec. At December 31, 1997, the Company
recognized an allowance equal to the balance of the advance.
The following unaudited pro forma combined condensed financial information
for 1997 include the results of operations for the Company, presented as if the
Company and Aztec had been combined for all of 1997, along with adjustments
which give effect to events that are directly attributable to the transaction
and are expected to have a continuing impact.
<TABLE>
<S> <C>
Net sales................................................... $1,572,782
Loss from operations........................................ $ (649,027)
Net loss.................................................... $ (697,668)
Basic net loss per common share............................. $ (0.18)
</TABLE>
Pro forma financial information is not presented for 1998 because the
Company purchased Aztec on January 31, 1998, and the 1998 operations previous to
the purchase would not have a material effect on the Company's operations.
The Company has experienced significant operating losses since its
inception. The Company anticipates that it will be able to continue to raise
additional capital from the sale of its equity securities. (Through February 26,
1999, the Company has raised approximately $650,000 of additional proceeds from
the sale of its common stock subsequent to December 31, 1998). In addition, the
Company has a $150,000 line of credit it may utilize, if necessary. As a result,
management believes the Company will be able to generate cash sufficient to meet
the Company's presently projected cash and working capital
F-9
<PAGE> 57
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requirements for the next 12 months. The timing and amounts of cash used will
depend on many factors, including the Company's ability to increase revenues,
control expenditures, and become profitable. Additional funds may be required if
the Company is not successful in any of these areas. The Company's ability to
continue funding its operations is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis, or to obtain
additional funds through equity or debt financing, or from other sources of
financing, as may be required.
2. STOCK SPLIT
In connection with a proposed public offering of shares of the Company's
common stock, on June , 1999, the Company's Board of Directors declared a
4.25-to-1 reverse stock split to be effective upon the effective date of the
Registration Statement. All references in the financial statements to number of
shares, per share amounts and stock option data of the Company's common and
preferred stock have been restated to reflect the effect of the stock split.
3. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
PRINCIPLES OF CONSOLIDATION -- All material intercompany balances and
transactions have been eliminated in consolidation.
CASH EQUIVALENTS -- The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
INVENTORY is carried at the lower of cost, determined using the FIFO
("first-in, first-out") method, or market.
PROPERTY AND EQUIPMENT -- Depreciation is computed using the
straight-line method over the useful lives of the related assets as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 3 years
Other machinery and equipment............................... 5 years
Office furniture and fixtures............................... 5 years
</TABLE>
PATENTS are recorded at cost and amortized using the straight-line method
over five years. Patents are recorded net of accumulated amortization of $8,460
and $25,528 at December 31, 1997 and 1998, respectively.
GOODWILL is recorded at cost and is being amortized on a straight-line
basis over ten years. Goodwill is recorded net of accumulated amortization of
$66,885 at December 31, 1998.
INCOME TAXES -- Deferred taxes are provided on temporary differences
between the tax basis of assets and liabilities for financial reporting purposes
and income tax purposes.
LOSS PER COMMON SHARE -- Basic earnings or loss per share is computed by
dividing the loss attributable to the common stockholders by the weighted
average number of common shares outstanding during the period. Diluted earnings
or loss per share is computed using the weighted average number of shares of
common stock outstanding plus the effect of any stock options or warrants if
they are dilutive.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF -- The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of the asset may not be recoverable. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair market value
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
F-10
<PAGE> 58
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying values of cash and
cash equivalents, accounts receivable, accounts payable and loans payable
approximate fair values due to the short-term maturities of these instruments.
The fair value of notes payable and capital leases approximate the carrying
value of these instruments because the terms are similar to those in the market
place under which they could be replaced.
SEGMENTS -- The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 131, Disclosure about Segments of an Enterprise and
Related Information, for the year ended December 31, 1998. SFAS No. 131 modifies
the disclosure requirements for reportable segments. The Company operates in
only one segment. Consequently, the implementation of this Statement had no
effect on the Company's financial statement presentation.
COMPREHENSIVE INCOME -- The Company has adopted SFAS No. 130, Reporting
Comprehensive Income, for the year ended December 31, 1998. SFAS No. 130
establishes standards for reporting and displaying comprehensive income, and its
components in a full set of general-purpose financial statements. The adoption
of this pronouncement had no effect on the Company's consolidated financial
statements.
NEW ACCOUNTING PRONOUNCEMENT -- In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 133 requires that an enterprise recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments as fair value. The statement is effective
for the Company's fiscal year ending December 31, 2001. The Company has not
completed evaluating the impact of implementing the provisions of SFAS No. 133.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
4. CONCENTRATIONS
The Company maintained its deposits in three financial institutions at
December 31, 1998 and in one financial institution at December 31, 1997. At
December 31, 1997 and 1998, the Company maintained deposits in excess of federal
depository insurance.
During 1998, over 50 percent of the Company's net sales were generated from
sales to 13 customers, including one customer which constituted over 11 percent
of the Company's net sales.
5. INVENTORY
Inventory consists of the following at December 31, 1998:
<TABLE>
<S> <C>
Raw materials............................................... $101,765
Work in process............................................. 111,764
Finished goods.............................................. 42,038
Less reserve for obsolete inventory......................... (20,000)
--------
Total inventory............................................. $235,567
========
</TABLE>
F-11
<PAGE> 59
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Computer equipment.......................................... $ 51,331 $ 81,341
Office furniture and fixtures............................... 7,509 24,759
Other machinery and equipment............................... 11,905 116,378
-------- --------
Total....................................................... 70,745 222,478
Less accumulated depreciation............................... (10,408) (54,806)
-------- --------
Property, plant and equipment -- net........................ $ 60,337 $167,672
======== ========
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Note payable to bank, payments of principal and interest of
$4,536 with interest at 13.2% per annum, due March 31,
2002, collateralized by property and equipment............ $142,582
Note payable to former owner of Aztec, imputed interest at
8% per annum, due January 31, 2000, unsecured............. 72,787
--------
Total....................................................... 215,369
Less current portion........................................ 107,668
--------
Long term notes payable..................................... $107,701
========
</TABLE>
Future minimum maturities of notes payable as of December 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $107,668
2000........................................................ 47,083
2001........................................................ 49,812
2002........................................................ 10,806
--------
Total....................................................... $215,369
========
</TABLE>
8. LOANS FROM OFFICERS
Loans from officers consist of two notes payable due to two stockholders
who are employees of the Company. The notes are due in 1999. The notes, which
bear interest at a rate of 9.5 percent and 18 percent, are not collateralized.
The note payable with the interest rate of 18% was repaid in January 1999.
In May 1998 and June 1998, the Company obtained additional funding of
$139,000 through the issuance of promissory notes to stockholders as well as to
a family member of one of the stockholders. These notes bear interest at a rate
of 18 percent. These notes were repaid in full on June 30, 1998.
9. LINE OF CREDIT
The Company maintains a $150,000 line of credit with a bank that bears
interest at the prime rate plus 2% (9.75% at December 31, 1998) and expires on
December 4, 1999. Outstanding borrowing on the line of credit are collateralized
by the Company's accounts, accounts receivable and inventory. The Company had no
borrowings on the line of credit at December 31, 1998. The Company borrowed
$95,000 against this line of credit in 1999.
F-12
<PAGE> 60
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CAPITAL LEASES
The Company has property and equipment with a gross value of $92,643 and a
book value of $70,555 under various capital leases. The amortization of fixed
assets acquired in capital leases is included in depreciation expense. At
December 31, 1998, the present value of future minimum capital lease payments
are as follows:
<TABLE>
<S> <C>
1999........................................................ $34,429
2000........................................................ 31,289
2001........................................................ 27,177
-------
Total....................................................... 92,895
Less interest at rates ranging from 11.69% to 16.26%........ 17,564
-------
Present value of minimum capital lease obligations.......... 75,331
Less current portion of capital lease obligations........... 25,317
-------
Long term portion of capital lease obligations.............. $50,014
=======
</TABLE>
11. STOCKHOLDERS' EQUITY
COMMON STOCK -- On May 1, 1997, 470,588 shares of common stock were
issued to the founders in exchange for patents, services, equipment and cash.
On December 31, 1997, the stockholders approved a change in the par value
of its common stock from no par to a par value of $.001 per share.
In January 1998, the Company issued 32,424 shares of common stock for cash
that was received in December 1997.
SERIES A CONVERTIBLE PREFERRED STOCK -- The Series A convertible
preferred stock is convertible into common stock at a rate of one for one and
has the same voting rights as the common stock. Dividends accumulate as declared
by the Board of Directors and none have been declared. Preferred stockholders
have preferences in the event of liquidation and would receive dividends prior
to common stockholders if dividends are declared.
During the period ended December 31, 1997, the Company completed a private
placement offering. The Company sold 350,866 of Series A convertible preferred
stock for cash and services totaling $448,444, net of costs. The proceeds of
this offering were used to pay debt, general and administrative expenses,
research and development and for working capital. All Series A convertible
preferred stock outstanding during the period was converted to common stock in
December 1997 upon the reverse merger at a rate of one for one.
During 1998, the Company raised $1,000,000 in a private placement from the
sale of 504,311 shares of Series A convertible preferred stock and warrants to
purchase 252,155 shares of common stock at a price of approximately $1.98 per
share. The warrants expire June 30, 2001. All shares of Series A convertible
preferred stock were converted to common stock on December 31, 1998. The Company
incurred offering costs of $116,915, which were treated as a reduction of
additional paid-in capital. The Series A convertible preferred stock sold in
1998 had a beneficial conversion feature because the preferred stock was
immediately convertible into common stock at a price less than the then current
fair market value, which value was based on the price of recent sales of common
stock at such time. The carrying amount of the preferred stock was discounted by
the intrinsic value of the beneficial conversion feature, which was determined
to be $740,000. The $740,000 discount was immediately amortized and charged to
accumulated deficit and is treated in a manner similar to a dividend to
preferred stockholders.
F-13
<PAGE> 61
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK -- In connection with the sale of common stock during 1998,
the Company issued warrants to purchase 89,929 shares of common stock as
consideration for services provided by consultants who assisted the Company in
raising capital. The estimated fair value of the warrants issued was $185,844,
as determined using the Black-Scholes valuation model assuming an expected
average risk-free interest rate of 5 percent, an expected life of four to five
years, an expected volatility of 45 percent and expected dividend rate of 0
percent. These warrants expire on June 30, 2003 (42,870 warrants with an
exercise price of $1.98 per share) and November 20, 2003 (47,059 warrants with
an exercise price of $3.19 per share).
WARRANTS -- As discussed above, the Company has 342,084 of outstanding
warrants to purchase common stock.
<TABLE>
<CAPTION>
WARRANTS PRICE RANGE
-------- -----------
<S> <C> <C>
Balance, December 31, 1997.................................. -- --
Warrants issued during 1998................................. 342,084 $1.98-$3.19
------- -----------
Balance, December 31, 1998.................................. 342,084 $1.98-$3.19
======= ===========
</TABLE>
REVERSE MERGER -- On December 31, 1997, a reverse merger was effectuated
with SOSI as discussed in Note 1. Concurrent with the reverse merger, the
following occurred: all outstanding preferred stock was converted into common
stock, a 6.4834-for-1 stock split occurred for all common shares outstanding,
and 620,792 shares of common stock were retained by the stockholders of SOSI.
12. INCENTIVE STOCK OPTION PLAN
Effective May 1, 1997, the Board of Director's approved a stock option plan
("1997 plan"). This plan provides for the granting of incentive and nonqualified
stock options to officers, directors and employees of the Company. The plan also
provides for the granting of nonqualified stock options to any director,
consultant or other individual whose participation the Board of Directors
determines to be in the best interest of the Company.
Upon completion of the reverse merger, the Board of Directors ratified the
change of the plan name to the Company's 1997 Stock Option Plan. Furthermore,
the Board of Directors ratified the number of shares reserved to be granted
under the plan to adjust for the 6.4834-for-1 stock split. Subsequent to
December 31, 1998, in a stockholders' meeting, the stockholders ratified the
Board of Directors' proposal to increase the number of shares authorized for
options under this plan to 823,535.
The Company accounts for the fair value of the options issued to
nonemployees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The compensation cost that has been charged against income for
1997 and 1998 for the plan options is $1,495 and $1,403, respectively. Options
granted to nonemployees were for services performed such as engineering,
consulting and public relations.
The fair value of all stock option grants is estimated on the date of grant
in accordance with SFAS No. 123 using minimum value option pricing for options
granted prior to December 31, 1997, with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield..................................... 0%
Risk-free interest rate..................................... 5%
Expected life............................................... 10 years
</TABLE>
The assumptions used for options granted during 1998 are the same, except
the expected life of the options has been decreased from ten years to three
years and a volatility rate of 45 percent was used. During 1998, the Company
used the Black-Scholes valuation model to determine the options' fair value.
F-14
<PAGE> 62
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As permitted by SFAS No. 123, the Company has elected to continue to
measure cost for its stock-based compensation plans with employees using the
intrinsic value method of accounting prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no
compensation cost has been recognized as the option prices are equal to or
greater than fair market value on the grant dates. Had compensation for the
Company's stock options granted to employees been determined based upon the fair
value at the grant date for awards consistent with a methodology prescribed in
SFAS No. 123, the Company's net loss attributable to common stock and net loss
per share for the periods ended December 31, 1997 and 1998 would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Net loss:
As reported.............................................. $(449,086) $(2,339,428)
Pro forma................................................ (450,382) (2,635,764)
Basic net loss per share:
As reported.............................................. (0.12) (.55)
Pro forma................................................ (0.12) (.62)
Diluted net loss per share:
As reported.............................................. (0.12) (.55)
Pro forma................................................ (0.12) (.62)
</TABLE>
Options granted under the plan expire up to ten years after the date of
grant. The exercise price of such shares is equal to the market price or current
asking price of the Company's stock on the date of grant. Options that expire or
terminate prior to exercise are added to the shares available for future grants.
A summary of changes in stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
OPTION EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Options granted on May 1, 1997.............................. 140,347 $ 0.02
Options granted during 1997................................. 42,256 0.13
Exercised................................................... (83,903) (0.02)
------- ------
Balance, December 31, 1997.................................. 98,700 0.06
Options granted during 1998................................. 640,932 13.18
Exercised................................................... (6,102) (0.02)
------- ------
Balance, December 31, 1998.................................. 733,530 $11.60
======= ======
</TABLE>
<TABLE>
<CAPTION>
1997 1998
----- --------
<S> <C> <C>
Exercisable at the end of the period........................ -- 445,296
===== ========
Weighted average fair value of options
granted during the period................................. $0.13 $ 13.18
===== ========
</TABLE>
F-15
<PAGE> 63
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
$ 0.02 $ 1.32 92,834 8.5 $ 0.60 92,834 $ 0.60
$ 6.38 $ 6.93 351,128 9.9 $ 6.38 68,776 $ 6.46
$16.19 $22.31 289,568 8.8 $21.51 283,686 $21.59
- ------ ------ ------- --- ------ ------- ------
$ 0.02 $22.31 733,530 9.3 $11.60 445,296 $14.96
====== ====== ======= === ====== ======= ======
</TABLE>
13. INCOME TAXES
Net deferred tax assets consist of the following at December 31:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards.............................. $ 135,600 $ 913,600
Contribution carryforwards................................ 1,600 6,800
Other..................................................... 16,000 18,900
--------- ---------
Total deferred tax assets................................... 153,200 939,300
Less valuation allowance.................................... (153,200) (939,000)
--------- ---------
Total....................................................... -- 300
Deferred tax liabilities -- Depreciation.................... -- (300)
--------- ---------
Total....................................................... $ -- $ --
========= =========
</TABLE>
During the periods ended December 31, 1997 and 1998, the Company recognized
a valuation allowance of $153,200 and $611,000, respectively, against deferred
tax assets. The valuation allowance reduces deferred tax assets to an amount
that represents management's best estimate of the amount of such deferred tax
assets that more likely than not will be realized. Realization of the deferred
tax assets is dependent upon sufficient future taxable income during the period
that temporary differences and carryforwards are expected to be available to
reduce taxable income.
The Company's net operating loss carryforwards of approximately $2,284,000
for federal income tax purposes begin to expire in 2011.
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate to pretax income for the periods
ended December 31, 1997 and 1998 due to the following:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Benefit calculated at statutory rate........................ $ 157,000 $ 544,000
Increase (decrease) in income resulting from:
State income taxes, net................................... 36,000 96,000
Nondeductible expenses.................................... (39,800) (29,000)
Valuation allowance....................................... (153,200) (611,000)
--------- ---------
Total....................................................... $ -- $ --
========= =========
</TABLE>
F-16
<PAGE> 64
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. COMMITMENTS
MANAGEMENT SERVICES AGREEMENT -- The Company has a management services
agreement with a company owned and operated by the two major stockholders. This
management agreement requires the Company to pay a management service fee equal
to 1.1 percent of the invoiced sales price for all Company-patented technology
component switches and integrated switch panels sold by the Company. Also, the
Company has agreed to pay an equivalent percentage of any license or sublicense
fees received from the patented technology. This agreement remains in effect
until the expiration of the last patents which may issue on the switch
technology. During 1998, the Company expensed approximately $800 under this
agreement.
EMPLOYMENT AND SEPARATION AGREEMENTS -- The Company has several employment
and separation agreements with key members of management. These agreements call
for a base salary and bonuses based upon the performance of the Company. These
agreements also provide for salary and benefits in the event of termination.
LEASE AGREEMENTS -- Rent expense for the periods ended December 31, 1997
and 1998 approximated $11,000 and $81,500, respectively. Future minimum rental
payments, which includes a five-year lease for the Company's office and
manufacturing facilities, which expires January 1, 2004 and provides for one
two-year extension option, are as follows:
<TABLE>
<S> <C>
1999........................................................ $156,133
2000........................................................ 192,168
2001........................................................ 201,906
2002........................................................ 211,829
2003........................................................ 222,094
--------
Total....................................................... $984,130
========
</TABLE>
During 1998, the Company entered into an exclusive financial advisor
agreement with Duff & Phelps Securities ("D&P"). D&P is to assist the Company in
raising capital. The Company pays D&P a monthly fee, and the Company is required
to pay D&P additional fees if certain transactions occur. This agreement expires
May 2000 and can be terminated by either party with 30 days written notice.
15. NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE-MONTH
PERIODS ENDED MARCH 31, 1998 AND 1999
ORGANIZATION AND BASIS OF PRESENTATION -- The accompanying interim
financial statements have been prepared by the Company in accordance with the
rules and regulations of the Securities and Exchange Commission for interim
reporting. Accounting policies utilized in the preparation of financial
information herein presented are the same as set forth in the Company's annual
financial statements. Certain disclosures and information normally included in
financial statements have been condensed or omitted. In the opinion of the
management of the Company, these financial statements contain all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the interim financial statements. Interim results of operations
are not necessarily indicative of the results of operations for the full year.
F-17
<PAGE> 65
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a. INVENTORY -- Inventory consists of the following at March 31, 1999:
<TABLE>
<S> <C>
Raw materials............................................... $137,112
Work in process............................................. 216,251
Finished goods.............................................. 16,912
Less reserve for obsolete inventory......................... (5,000)
--------
Total inventory............................................. $365,275
========
</TABLE>
b. NOTES PAYABLE -- During the three months ended March 31, 1999, the
Company borrowed $100,000 from a stockholder. The outstanding balance
under this note payable bears interest at 9 percent per annum. This note
was cancelled on April 30, 1999, in connection with warrants that were
exercised on April 30, 1999.
c. CAPITAL LEASES PAYABLE -- During the first quarter of 1999, the Company
acquired equipment with a cost of $57,873 under three capital leases
that bear interest at rates ranging from 18.36 percent to 24.02 percent.
At March 31, 1999, the total amount outstanding on capital leases was
$125,208.
d. STOCK OPTIONS -- During the three months ended March 31, 1999, there
were no options granted, exercised or cancelled under the 1997
DuraSwitch Stock Option Plan. Options exercisable totaled 515,883 at
March 31, 1999.
The Company's 1999 Stock Option Plan (the "1999 Option Plan") was
adopted by the Company's Board of Directors and ratified by the
stockholders on March 8, 1999. The maximum number of shares of common stock
subject to options that may be outstanding at any time under the 1999
Option Plan is 235,294 shares of common stock. A summary of stock option
activity related to the 1999 Option Plan is as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTION EXERCISE
SHARES AVERAGE
------ --------
<S> <C> <C>
Outstanding, January 1, 1999................................
Option granted during 1999.................................. 23,529 $7.97
Exercised...................................................
------ -----
Outstanding, March 31, 1999................................. 23,529 $7.97
====== =====
Exercisable at March 31, 1999............................... 11,765
======
</TABLE>
The Company accounts for the fair value of the options issued to
nonemployees in accordance with SFAS No. 123, Accounting for Stock-Based
Compensation. The compensation cost that has been charged against income
for the quarters ended March 31, 1998 and 1999 for stock options is $351
and $2,777, respectively. Options granted to nonemployees were for services
performed such as engineering, consulting and public relations.
As permitted by SFAS No. 123, the Company has elected to continue to
measure cost for its stock-based compensation plans with employees using
the intrinsic value method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
Accordingly, no compensation cost has been recognized as the option prices
are equal to or greater than fair market value on the grant dates. Had
compensation for the Company's stock options granted to employees been
determined based upon the fair value at the grant date for awards
consistent with methodology prescribed in SFAS No. 123, the Company's net
loss attributable to
F-18
<PAGE> 66
DURASWITCH INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock and net loss per share for the quarters ended March 31, 1998
and 1999 would have been increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Net loss:
As reported............................................... $(293,496) $(450,116)
Pro forma................................................. (432,096) (475,491)
Basic and diluted net loss per share:
As reported............................................... (.07) (.09)
Pro forma................................................. (.10) (.09)
</TABLE>
The fair value of each stock option grant is estimated on the date of
the grant using the Black-Scholes valuation model to determine the option's
fair value with the following assumptions:
<TABLE>
<S> <C>
Expected dividend yield..................................... 0%
Risk-free interest rate..................................... 5%
Expected life............................................... 3 years
Volatility rate............................................. 41%
</TABLE>
e. LOAN TO CAMPLEX -- During the first quarter of 1999, the Company
advanced $150,000 to Camplex/Concept W Corporation ("Camplex"), an
entity that the Company had considered as a possible acquisition
candidate. Subsequent to March 31, 1999, the Company determined that it
would not acquire Camplex. The $150,000 unsecured loan to Camplex is due
January 1, 2000 and bears interest at 9 percent per annum.
f. DEFERRED OFFERING COSTS -- The consolidated balance sheet at March 31,
1999 includes $25,553 of deferred costs relating to costs incurred for a
planned public offering.
g. STOCKHOLDERS' EQUITY -- During the first quarter of 1999, the Company
sold 305,805 shares of common stock for net cash proceeds of $805,586
and a $150,000 stock subscription receivable. The stock subscription
receivable is due the earlier of the sale of the 74,266 shares of stock
issued upon receipt of this stock subscription note or December 31, 1999
and bears interest at 8 percent per annum.
h. SUBSEQUENT EVENTS -- On April 30, 1999, the Company borrowed $200,000
from two stockholders. The outstanding borrowings are due July 1, 2000
and bear interest at a rate of 10 percent per annum. Under each of the
separate promissory note arrangements, the Company has the option to
borrow up to an additional $100,000 under the same terms. The Company
also issued to the noteholders warrants to purchase 23,530 shares of
common stock at a price of $3.19 per share. The warrants expire on March
1, 2002.
On April 30, 1999, warrants to purchase 252,155 shares of common stock at
a price of approximately $1.98 per share were exercised. The Company
received cash of approximately $250,000, a promissory note receivable of
$147,263, and cancellation of a $100,000 note payable and $2,733 of
accrued interest for the exercise of the warrants.
* * * * * *
F-19
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
Board of Directors
Aztec Industries, Inc.
Phoenix, Arizona
We have audited the accompanying balance sheet of Aztec Industries, Inc.
(the "Company") as of January 31, 1998, and the related statements of
operations, stockholders' capital deficiency, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at January 31, 1998, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix Arizona
February 26, 1999
F-20
<PAGE> 68
AZTEC INDUSTRIES, INC.
BALANCE SHEET
JANUARY 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable....................................... $ 157,856
Inventory................................................. 349,613
Prepaid expenses and other current assets................. 5,134
---------
Total current assets................................... 512,603
Property and equipment -- net............................... 38,352
---------
Total assets................................................ $ 550,955
=========
LIABILITIES AND STOCKHOLDERS' CAPITAL DEFICIENCY
Current liabilities:
Accounts payable.......................................... $ 224,021
Line of credit............................................ 41,000
Accrued expenses and other current liabilities............ 74,873
Advances from DuraSwitch.................................. 117,197
Current portion of notes payable and capital leases
payable................................................ 97,152
---------
Total current liabilities.............................. 554,243
---------
Long-term liabilities:
Notes payable............................................. 199,502
Capital leases payable.................................... 18,813
---------
Total long-term liabilities............................ 218,315
---------
Total liabilities...................................... 772,558
---------
Commitments and contingencies (Notes 1 and 9)
Stockholders' capital deficiency:
Common stock, no par value, 10,000,000 shares authorized,
9,182 shares issued and outstanding.................... 121,909
Accumulated deficit....................................... (343,512)
---------
Total stockholders' capital deficiency................. (221,603)
---------
Total liabilities and stockholders' capital deficiency...... $ 550,955
=========
</TABLE>
See notes to financial statements.
F-21
<PAGE> 69
AZTEC INDUSTRIES, INC.
STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 31, 1998
<TABLE>
<S> <C>
Net sales................................................... $1,567,020
Cost of goods sold.......................................... 1,241,526
----------
Gross profit........................................... 325,494
Operating expenses -- Selling, general and administrative... 448,200
----------
Loss from operations........................................ (122,706)
Interest and other expense.................................. (52,911)
----------
Net loss.................................................... $ (175,617)
==========
</TABLE>
See notes to financial statements.
F-22
<PAGE> 70
AZTEC INDUSTRIES, INC.
STATEMENT OF STOCKHOLDERS' CAPITAL DEFICIENCY
YEAR ENDED JANUARY 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK,
NO PAR VALUE
------------------ ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
------ -------- ----------- ---------
<S> <C> <C> <C> <C>
BALANCE, FEBRUARY 1, 1997....................... 9,182 $121,909 $(167,895) $ (45,986)
Net loss........................................ (175,617) (175,617)
----- -------- --------- ---------
BALANCE, JANUARY 31, 1998....................... 9,182 $121,909 $(343,512) $(221,603)
===== ======== ========= =========
</TABLE>
See notes to financial statements.
F-23
<PAGE> 71
AZTEC INDUSTRIES, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED JANUARY 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(175,617)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 15,656
Gain on sale of fixed assets........................... (3,000)
Changes in assets and liabilities:
Accounts receivable.................................... 46,244
Inventory.............................................. (85,078)
Prepaid expenses and other current assets.............. (5,134)
Accounts payable....................................... (26,582)
Accrued expenses and other current liabilities......... 21,627
---------
Net cash used in operating activities................ (211,884)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash received from sale of equipment...................... 3,000
Purchases of property and equipment....................... (15,387)
---------
Net cash used in investing activities................ (12,387)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable............................... 204,958
Principal paid on notes payable and capital leases........ (83,926)
Net repayments of line of credit.......................... (9,000)
Advances from DuraSwitch.................................. 117,197
---------
Net cash provided by financing activities............ 229,229
---------
Increase in cash and cash equivalents....................... 4,958
Cash and cash equivalents, beginning of year................ (4,958)
---------
Cash and cash equivalents, end of year...................... $ --
=========
Supplemental disclosure of cash flow
information -- Cash paid for interest....................... $ 38,844
=========
</TABLE>
See notes to financial statements.
F-24
<PAGE> 72
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED JANUARY 31, 1998
1. DESCRIPTION OF BUSINESS
Aztec Industries, Inc. (the "Company") was incorporated in Arizona on May
11, 1972. The Company designs, manufactures, markets and distributes membrane
switch products and overlays.
On January 31, 1998, DuraSwitch Industries, Inc. acquired 100 percent of
the Company's outstanding stock. The financial statements do not include any
adjustments to give effect to the acquisition.
2. SUMMARY OF ACCOUNTING PRINCIPLES
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be
cash equivalents.
INVENTORY is carried at the lower of cost, determined using the FIFO
(first-in, first-out) method, or market.
PROPERTY AND EQUIPMENT -- Depreciation is computed using the straight-line
method over the useful lives of the related assets as follows:
<TABLE>
<S> <C>
Equipment................................................... 3-5 years
Office furniture and fixtures............................... 5 years
</TABLE>
Assets under capital leases are amortized over the shorter of the related
estimated useful lives or the term of the lease.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF -- The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset may
not be recoverable. If such assets are considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair market value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs to sell.
INCOME TAXES -- Deferred taxes are provided on temporary differences
between the tax basis of assets and liabilities for financial reporting purposes
and income tax purposes.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. INVENTORY
Inventory consists of the following at January 31, 1998:
<TABLE>
<S> <C>
Raw materials............................................... $159,008
Work in process............................................. 174,906
Finished goods.............................................. 63,699
Less reserve for obsolete inventory......................... (48,000)
--------
Total inventory............................................. $349,613
========
</TABLE>
F-25
<PAGE> 73
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at January 31, 1998:
<TABLE>
<S> <C>
Equipment................................................... $517,649
Office furniture and fixtures............................... 2,080
--------
Total....................................................... 519,729
Less accumulated depreciation............................... (481,377)
--------
Property, plant and equipment -- net........................ $ 38,352
========
</TABLE>
5. NOTES PAYABLE
Notes payable at January 31, 1998 consist of the following:
<TABLE>
<S> <C>
Note payable to bank, which requires monthly payments of
principal and interest of $4,536 with interest at 13.2%,
due March 31, 2002, collateralized by property and
equipment................................................. $173,585
Note payable to Company president, interest at 7.5%, due
January 31, 2000, unsecured............................... 113,539
--------
Total....................................................... 287,124
Less current portion........................................ 87,622
--------
Long-term debt.............................................. $199,502
========
</TABLE>
Future minimum maturities of notes payable as of January 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ 87,622
2000........................................................ 98,636
2001........................................................ 44,138
2002........................................................ 50,370
2003........................................................ 6,358
--------
Total....................................................... $287,124
========
</TABLE>
6. LINE OF CREDIT
The Company maintains a $50,000 line of credit with a bank that bears
interest at 10.5 percent and expires on March 31, 1998. At January 31, 1998, the
Company had outstanding borrowings of $41,000. Outstanding borrowings were
collateralized by accounts receivable and inventory.
7. CAPITAL LEASES PAYABLE
The Company has acquired property and equipment with a gross value of
$36,959 and a book value of $25,900 under various capital leases. The
amortization of fixed assets acquired in capital leases is included
F-26
<PAGE> 74
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
in depreciation expense. At January 31, 1998, the present value of future
minimum capital lease payments with terms in excess of one year are as follows:
<TABLE>
<S> <C>
1999........................................................ $11,998
2000........................................................ 12,821
2001........................................................ 9,680
-------
Total....................................................... 34,499
Less interest at rates ranging from 11.69% to 16.25%........ 6,156
-------
Present value of minimum capital lease obligations.......... 28,343
Less current portion of capital lease obligations........... 9,530
-------
Long-term portion of capital lease obligations.............. $18,813
=======
</TABLE>
8. INCOME TAXES
Net deferred tax assets consist of the following components as of January
31, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Operating loss carryforwards.............................. $176,200
Contribution carryforwards................................ 400
--------
Total deferred tax assets................................... 176,600
Less valuation allowance.................................... (175,300)
--------
Total....................................................... 1,300
Deferred tax liabilities -- Depreciation and amortization... (1,300)
--------
Total....................................................... $ --
========
</TABLE>
At January 31, 1998, the Company had a valuation allowance of $175,300
against the net deferred tax assets to reduce the total to zero. The valuation
allowance reduces deferred tax assets to an amount that represents management's
best estimate of the amount of such deferred tax assets that more likely than
not will be realized. Realization of the deferred tax assets is dependent upon
sufficient future taxable income during the period that temporary differences
and carryforwards are expected to be available to reduce taxable income.
The Company's net operating loss carryforwards of approximately $441,000
for federal and state income tax purposes begin to expire in 2016.
The income tax benefit differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the year ended
January 31, 1998 due to the following:
<TABLE>
<S> <C>
Benefit calculated at statutory rate........................ $59,700
Increase (decrease) in income resulting from:
State income tax benefit, net............................... 10,500
Nondeductible expenses.................................... (600)
Valuation allowance....................................... (69,600)
-------
Total....................................................... $ --
=======
</TABLE>
F-27
<PAGE> 75
AZTEC INDUSTRIES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
Rent expense for the year ended January 31, 1998 was $79,262. The Company
had operating leases for its manufacturing facilities that require total monthly
payments of $6,832 and that expire on December 31, 1998. The future minimum
rental payments remaining at January 31, 1998 total $75,152.
* * * * * *
F-28
<PAGE> 76
Inside Back Cover: At the top of the page is the following text: "Our Web site
is a key component of our current marketing efforts. All of our advertising and
promotional materials direct readers to the site. In addition to attracting
potential customers to our web site for information, we use our web site to
generate interest in our products. We have already made significant sales as a
result of initial contact with customers through our web site." Graphic at
center depicts the home page of the DuraSwitch Web site accompanied by the
DuraSwitch.com logo. Text, in bullet point form, at bottom of page: "Our web
site has several features including: Information about the comparative
advantages of our patented technology; Articles published by third parties about
our products; Technical data to assist design engineers; e-mail communications
links to our design engineers and sales representatives to facilitate dialogue;
and on-line product ordering capability."
<PAGE> 77
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[DURASWITCH INDUSTRIES, INC. LOGO]
2,000,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
[Cruttenden Roth Logo]
UNTIL , 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 78
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 78.751 et seq. of the Nevada General Corporation Law (the "General
Corporation Law") allow a company to indemnify its officers, directors,
employees, and agents from any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative, or investigative, except
under certain circumstances. Indemnification may only occur if a determination
has been made that the officer, director, employee, or agent acted in good faith
and in a manner which such person believed to be in the best interests of the
company. A determination may be made by the stockholders; by a majority of the
directors who were not parties to the action, suit, or proceeding confirmed by
opinion of independent legal counsel; or by opinion of independent legal counsel
in the event of a quorum of directors who were not a party to such action, suite
or event a quorum of director who were not a party to such action, suit or
proceeding does not exist. Provided the terms and conditions of these provisions
of the General Corporation Law are met, officers, directors, employees, and
agents of DuraSwitch may be indemnified against any cost, loss, or expense
arising out of any liability under the Securities Act of 1933.
The General Corporation Law provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or enterprise, against expenses, judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
The General Corporation Law provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect to any claim,
issue or matter as to which such person shall have been adjudged to be liable to
the corporation unless and only to the extent that the court in which such
action or suit was brought or other court of competent jurisdiction shall
determine that in view of all the circumstances of the case, such person is
fairly and reasonably entitled to be indemnified for such expenses which the
court shall deem proper.
The General Corporation Law further provides that to the extent a director
or officer of a corporation has been successful in the defense of any action,
suit or proceeding referred to in subsections (a) and (b) or in the defense or
any claim, issue or matter therein, he shall be indemnified against expenses
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by the General Corporation Law shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled;
and that the corporation may purchase and maintain insurance on behalf of a
director or officer of the corporation against any liability asserted against
him or any liability and expenses incurred by him in any such capacity or
arising out of his status as such, whether or not the corporation would have the
power to indemnify him against such liabilities and expenses under the General
Corporation Law.
Section 78.037 of the General Corporation Law provides that a corporation
in its original articles of incorporation or an amendment thereto validly
approved by stockholders may eliminate or limit personal liability of a director
or officer to the corporation or its stockholders for damages for breach of
fiduciary duty. However, no such provision may eliminate or limit the liability
of a director or officer for acts or
II-1
<PAGE> 79
omissions which involve intentional misconduct, fraud or knowing violation of
law, or the payment of unlawful distributions. A provision of this type has no
effect on the availability of equitable remedies, such as injunction or
rescission, for breach of fiduciary duty. DuraSwitch's Articles of Incorporation
contain such a provision.
DuraSwitch's Bylaws provide that we will indemnify officers and directors
to the full extent permitted by and in the manner permissible under the laws of
the State of Nevada.
DuraSwitch has comprehensive directors and officers liability insurance
coverage, with an aggregate policy limit of $2,000,000 for the benefit of its
officers and directors insuring such persons against certain liabilities,
including liabilities under the securities laws.
DuraSwitch and its officers, directors and other persons are entitled to be
indemnified under certain circumstances for certain securities law violations in
the Underwriting Agreement (attached on Exhibit 1.1 hereto).
The holders of DuraSwitch's capital stock or warrants to purchase capital
stock who have contractual registration rights are required to be indemnified by
us against losses, claims, damages or liabilities arising out of any untrue
statement of a material fact or omission thereof in a registration statement
under the Securities Act of 1933. Our obligation to indemnify such holders
includes the officers, directors and partners of such holders, one of whom is
currently a director of DuraSwitch. We will not be liable for any such indemnity
to the extent that any such loss, claim, damage or liability arises out of or is
based upon any untrue statement or material omission in reliance upon and in
conformity with written information furnished by such person to DuraSwitch,
specifically for use therein.
The indemnification provided as set forth above is not exclusive of any
other rights to which a director or officer of DuraSwitch may be entitled. The
general effect of the forgoing provisions may be to reduce the circumstances in
which a director or officer may be required to bear the economic burdens of the
forgoing liabilities and expenses.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses (other than
underwriting discounts) to be born by the Registrant in connection with the
issuance and distribution of the securities offered hereby:
<TABLE>
<CAPTION>
TOTAL
----------
<S> <C>
SEC filing fee.............................................. $ 6,394
Underwriter's non-accountable expense allowance............. 540,000
AMEX entry fee.............................................. 35,000
Printing and engraving...................................... 100,000
Legal fees and expenses..................................... 130,000
Accounting fees and expenses................................ 100,000
Transfer agent and registrar fees and expenses.............. 15,000
Director's and officers' liability insurance................ 70,000
Miscellaneous............................................... 3,606
----------
Total.................................................. $1,000,000
==========
</TABLE>
II-2
<PAGE> 80
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following paragraphs set forth certain information with respect to
securities sold by DuraSwitch within the past three years in transactions that
were not registered under the Securities Act pursuant to the provisions of
Section 4(2) of the Securities Act and/or Regulation D as promulgated under the
Securities Act.
In May 1997, Mr. R. Terren Dunlap, our Chief Executive Officer, and Mr.
Anthony J. Van Zeeland, our Chief Operating Officer, formed an Arizona
corporation known as Total Switch, Inc. In connection with the formation of
Total Switch, Mr. Dunlap and Mr. Van Zeeland each received shares of common
stock representing a 49.5% equity interest in Total Switch and Mr. Michael Van
Zeeland (Mr. Anthony J. Van Zeeland's son) and Mr. Rhett Dunlap (Mr. R. Terren
Dunlap's son) each received shares of common stock representing a 0.5% equity
interest in Total Switch. These individuals contributed a nominal amount of
capital for Total Switch's initial capitalization. In addition, Mr. Anthony J.
Van Zeeland assigned his continuing rights in the patents for his switch
technology, and Total Switch issued a note payable to creditors of Mr. Van
Zeeland in the amount of $20,569 to satisfy loans made to Mr. Van Zeeland to
cover the costs of filing the patents for his switch technology.
On May 1, 1997, TotalSwitch granted Mr. Brilon 22,883 options to purchase
common stock at an exercise price of $0.02 per share and 1,525 shares of common
for consulting services.
On May 1, 1997, Total Switch issued 30,510 shares of common stock to
Richard L. Barrett in return for services.
During fiscal 1997, Total Switch issued 350,866 shares of common stock to
26 investors in a private placement at a price of $1.31 per share.
On December 31, 1997, Total Switch was acquired by an inactive
publicly-held Nevada corporation, formerly known as SOS International, Inc. In
connection with this transaction, SOS changed its name to DuraSwitch Industries,
Inc., and the founders of Total Switch became the holders of 85% of DuraSwitch
with the original stockholders of SOS holding the remaining 15%.
On January 31, 1998, DuraSwitch issued 70,588 shares of common stock to
certain of the former shareholders of Aztec Industries, Inc. in return for all
of the issued and outstanding capital stock of Aztec Industries, Inc. pursuant
to a Share Exchange Agreement dated January 16, 1998 by and among DuraSwitch
Industries, Inc., Aztec Industries, Inc., and the stockholders of Aztec.
In the first quarter ending March 31, 1998, DuraSwitch issued 44,894 shares
of common stock to 6 investors in a private placement at a price of $8.02 per
share.
In June 1998, DuraSwitch issued 16,706 shares of common stock to four
investors in a private placement at a price of $4.25 per share.
In June 1998, DuraSwitch issued 8,235 shares of common stock to one
investor in a private placement in return for services.
On December 31, 1998, DuraSwitch issued 504,311 shares of common stock to
Blackwater Capital Partners, L.P. in conversion of their shares of Series A
Preferred Stock. Blackwater had purchased the shares of Series A Preferred Stock
as well as warrants to purchase 252,155 shares of common stock for $1,000,000 on
June 29, 1998.
During fiscal year 1998, DuraSwitch issued 121,804 shares of common stock
to 11 accredited investors in a private placement for $3.19 per share.
In September and December 1998, DuraSwitch issued 6,102 shares of common
stock to two holders of options upon exercise of those options.
II-3
<PAGE> 81
From January to April 1999, DuraSwitch issued 308,472 shares of common
stock to 24 accredited investors in a private placement for $3.19 per share.
On April 30, 1999, DuraSwitch issued 252,155 shares of common stock to
Blackwater and its assignee upon exercise of their warrants.
ITEM 27. EXHIBITS.
See "Exhibit Index" following the Signature page which is incorporated
herein by reference.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
underwriters, at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424 (b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of the registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act of 1933,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered in the registration statement, and that offering of the securities
at that time as the initial bona fide offering of those securities.
II-4
<PAGE> 82
SIGNATURES
In accordance with the requirements of the Securities Act of 1933,
DuraSwitch hereby certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2, and has authorized this
registration statement to be signed on its behalf by the undersigned in the City
of Phoenix, State of Arizona, on June 4, 1999.
DuraSwitch Industries, Inc.
By: /s/ R. TERREN DUNLAP
------------------------------------
R. Terren Dunlap
Chief Executive Officer, Chairman of
the Board
and Director
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
PERSON TITLE DATE
------ ----- ----
<C> <S> <C>
/s/ R. TERREN DUNLAP Chief Executive Officer, and June 4, 1999
- --------------------------------------------------- Director (Principal Executive
R. Terren Dunlap Officer)
/s/ ROBERT J. BRILON President, Chief Financial June 4, 1999
- --------------------------------------------------- Officer, Secretary and Treasurer
Robert J. Brilon (Principal Financial and
Accounting Officer)
/s/ ANTHONY J. VAN ZEELAND Chief Operating Officer, Executive June 4, 1999
- --------------------------------------------------- Vice President of Engineering and
Anthony J. Van Zeeland Director
/s/ J. THOMAS WEBB Executive Vice-President of June 4, 1999
- --------------------------------------------------- Marketing and Director
J. Thomas Webb
Director
- ---------------------------------------------------
John W. Hail
/s/ STEVEN R. GREEN Director June 4, 1999
- ---------------------------------------------------
Steven R. Green
/s/ WILLIAM F. PEELLE Director June 4, 1999
- ---------------------------------------------------
William F. Peelle
/s/ MICHAEL A. VAN ZEELAND Director June 4, 1999
- ---------------------------------------------------
Michael A. Van Zeeland
</TABLE>
S-1
<PAGE> 83
DURASWITCH INDUSTRIES, INC.
EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM SB-2
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
1.1 Proposed Form of Underwriting Agreement
2.1 Stock Exchange Agreement and addendum effective as of
December 31, 1997 by and among SOS International, Inc.,
Total Switch, Inc., and R. Terren Dunlap and Anthony J. Van
Zeeland
2.2 Share Exchange Agreement dated January 16, 1998 by and among
DuraSwitch Industries, Inc., Anthony Gene Shumway, Dian D.
Shumway, Dana S. Jones, and Ivan R. Jones and The Anthony
Gene Shumway Family Revocable Living Trust and Aztec
Industries, Inc.
3.1 Amended and Restated Articles of Incorporation of DuraSwitch
Industries, Inc., as filed September 18, 1998
3.2 Amended and Restated Bylaws of DuraSwitch Industries, Inc.,
as adopted June 2, 1999
4.1 Articles 3, 4, 5 and 7 of the Amended and Restated Articles
of Incorporation of DuraSwitch Industries, Inc. (included in
Exhibit 3.1)
4.2 Articles II, VI and VII of the Amended and Restated Bylaws
of DuraSwitch Industries, Inc., (included in Exhibit 3.2)
4.3* Specimen Common Stock Certificate
5.1 Opinion of Quarles & Brady LLP
10.1 Employment and Separation Agreement dated May 1, 1997 by and
between Registrant and R. Terren Dunlap
10.2 Employment and Separation Agreement dated May 1, 1997 by and
between Registrant and Anthony J. Van Zeeland
10.3 Employment and Separation Agreement dated November 20, 1998
by and between DuraSwitch Industries, Inc. and J. Thomas
Webb
10.4 Employment and Separation Agreement dated November 20, 1998
by and between DuraSwitch Industries, Inc. and Robert J.
Brilon
10.5 Registrant's 1997 Stock Option Plan
10.6 Form of Grant Letter pursuant to 1997 Stock Option Plan
10.7 Registrant's 1999 Stock Option Plan
10.8 Form of Representative's Warrants
10.9 Series A Convertible Stock and Warrant Purchase Agreement
dated June 30, 1998 by and among DuraSwitch Industries, Inc.
and Blackwater Capital Partners, L.P. and Blackwater Capital
Group, L.L.C.
10.10 Registration Rights Agreement dated June 30, 1998, by and
between DuraSwitch Industries, Inc. and Blackwater Capital
Group, L.L.C.
10.11 Registration Rights Agreement dated June 30, 1998, by and
between DuraSwitch Industries, Inc. and Blackwater Capital
Partners, L.P.
10.12 Letter agreement dated May 14, 1998, as amended July 14,
1998, by and between DuraSwitch Industries, Inc. and Duff &
Phelps Securities, LLC
10.13 Promissory Note of DuraSwitch Industries, Inc. dated January
30, 1998, as amended December 31, 1998, in the aggregate
amount of $164,000 payable to Anthony G. Shumway
10.14 Warrant to Purchase 182,199 shares of Common Stock of
DuraSwitch Industries, Inc. issued June 30, 1998 and held by
Duff & Phelps Securities, LLC
</TABLE>
EX-1
<PAGE> 84
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <C> <S>
10.15 Standard Sublease dated October 15, 1998, as amended
February 22, 1999, by and between 234 South Extension,
L.L.C. and DuraSwitch Industries, Inc.
10.16 Management Services Agreement dated May 1, 1997 by and
between Total Switch, Inc. and VanDun, LLC.
10.17 Agreement for Assignment of Present and Future Inventions in
Certain Subject Matter dated May 1, 1997 by and between
Total Switch, Inc. and Anthony J. Van Zeeland
10.18 Ericsson, Inc. purchase order dated April 7, 1999 (portions
of the exhibit have been omitted pursuant to a request for
confidential treatment)
16.1 Letter on change in certifying accountant
21.1 Subsidiaries of the Registrant
23.1 Consent of McGladrey & Pullen, L.L.P.
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Quarles & Brady LLP (included in Exhibit 5.1)
24.1 Form of Power of Attorney of Selling Stockholder
27.1 Financial Data Schedule
99.1 Form of Lock-up Agreement
</TABLE>
- ---------------
* To be filed by amendment
EX-2
<PAGE> 1
EXHIBIT 1.1
DRAFT 05/14/99
______________ SHARES
DURASWITCH INDUSTRIES, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
__________________, 1999
CRUTTENDEN ROTH INCORPORATED
As Representative of the several Underwriters
24 Corporate Plaza
Newport Beach, California 92660
Ladies and Gentlemen:
DuraSwitch Industries, Inc., a Nevada corporation (the "Company"),
addresses you as the Representative of each of the persons, firms and
corporations listed in Schedule A hereto (herein collectively called the
"Underwriters") and hereby confirms its agreement with the several Underwriters
as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell
____________ shares of its authorized and unissued Common Stock, $.01 par value
per share (the "Firm Shares"), to the several Underwriters. The Company and
Blackwater Capital Partners, L.P. (the "Selling Securityholder") also propose to
grant to the Underwriters an option to purchase up to __________ additional
shares of the Company's Common Stock, $.01 par value per share (the "Option
Shares"), as provided in Section 8 hereof. In addition, the Company proposes to
sell to you, individually and not in your capacity as Representative, five-year
warrants (the "Representative's Warrants") to purchase up to ______ shares of
Common Stock, $.001 par value per share, of the Company (the "Representative's
Warrant Stock"), which sale will be consummated in accordance with the terms and
conditions of the Representative's Warrant Agreement (the "Representative's
Warrant Agreement"), the form of which is filed as an exhibit to the
Registration Statement described below. As used in this Agreement, the term
"Shares" shall include the Firm Shares and the Option Shares. All shares of
Common Stock, $.01 par value per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby, including the Firm Shares and
the Option Shares, are hereinafter referred to as "Common Stock."
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. The
Company represents and warrants to, and agrees with, each Underwriter that:
<PAGE> 2
(a) A registration statement on Form SB-2 (File No. 333-_____) with
respect to the Shares, the Representative's Warrants and the Representative's
Warrant Stock, including a prospectus, has been prepared and filed by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the applicable rules and regulations (the "Rules and
Regulations") of the Securities and Exchange Commission (the "Commission") under
the Act and has been filed with the Commission; such amendments to such
registration statement, such prospectuses and abbreviated registration
statements pursuant to Rule 462(b) of the Rules and Regulations (a "462
Registration Statement") as may have been required prior to the date hereof have
been similarly prepared and filed with the Commission; and the Company will file
such additional amendments to such registration statement, such amended
prospectuses and such 462 Registration Statements as may hereafter be required.
Copies of such registration statement and amendments together with each exhibit
filed therewith, of each related prospectus contained or filed as part of any
pre-effective amendment to such registration statement or filed pursuant to Rule
424(a) (the "Preliminary Prospectuses") and of any 462 Registration Statement
have been delivered to you.
If the registration statement relating to the Shares has been declared
effective under the Act by the Commission, the Company will prepare and promptly
file with the Commission the information omitted from the registration statement
pursuant to Rule 430A(a) or, if the Representative, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the information required to be included in any term sheet filed
pursuant to Rule 434(b) or (c), as applicable, of the Rules and Regulations
pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules and
Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if the
Representative, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits (including exhibits incorporated by
reference), in the form in which it became or becomes, as the case may be,
effective (including, if the Company omitted information from the registration
statement pursuant to Rule 430A(a) or files a term sheet pursuant to Rule 434 of
the Rules and Regulations, the information deemed to be a part of the
registration statement at the time it became effective pursuant to Rule 430A(b)
or Rule 434(d) of the Rules and Regulations) and, in the event of any amendment
thereto or the filing of any 462 Registration Statement after the effective date
of such registration statement, shall also mean (from and after the
effectiveness of such amendment or the filing of any 462 Registration Statement)
such registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); provided, however, that if in
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reliance on Rule 434 of the Rules and Regulations and with the consent of the
Representative, on behalf of the several Underwriters, the Company shall have
provided to the Underwriters a term sheet pursuant to Rule 434(b) or (c), as
applicable, prior to the time that a confirmation is sent or given for purposes
of Section 2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus
subject to completion" (as defined in Rule 434(g) of the Rules and Regulations)
last provided to the Underwriters by the Company and circulated by the
Underwriters to all prospective purchasers of the Shares (including the
information deemed to be a part of the Registration Statement at the time it
became effective pursuant to Rule 434(d) of the Rules and Regulations).
Notwithstanding the foregoing, if any revised prospectus shall be provided to
the Underwriters by the Company for use in connection with the offering of the
Shares that differs from the prospectus referred to in the immediately preceding
sentence (whether or not such revised prospectus is required to be filed with
the Commission pursuant to Rule 424(b) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the Underwriters for such use. If in reliance on Rule 434
of the Rules and Regulations and with the consent of the Representative, on
behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior
to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the Prospectus and the term sheet, together, will not be
materially different from the prospectus in the Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (i)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (ii) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (iii) the Prospectus, and any
amendments or supplements thereto, did not and will not include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph (b) shall apply to information
contained in or omitted from the Registration Statement or Prospectus, or any
amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter specifically for use in the preparation thereof. The information set
forth on the inside front cover page of the Prospectus (insofar as such
information relates to the Underwriters) concerning stabilization,
over-allotment and passive market making by the Underwriters, and under the
[first and second paragraphs] under the
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<PAGE> 4
caption "Underwriting" in any Preliminary Prospectus and in the Prospectus
constitutes the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement.
(c) If the Company has elected to rely on Rule 462(b) and the
462 Registration Statement has not been declared effective, (i) the Company has
filed a 462 Registration Statement in compliance with, and that is effective
upon filing pursuant to, Rule 462(b) and has received confirmation of its
receipt and (ii) (a) the Company has given irrevocable instructions for
transmission of the applicable filing fee in connection with the filing of the
462 Registration Statement, in compliance with Rule 111 promulgated under the
Act or (b) the Commission has received payment of such filing fee.
(d) Each of the Company and its direct and indirect
subsidiaries (hereinafter, the "Subsidiaries") is duly incorporated and validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation with full power and authority (corporate and other) to own,
lease and operate its properties and conduct its business as described in the
Prospectus; each of the Company and its Subsidiaries is duly qualified to do
business as a foreign corporation and in good standing in each jurisdiction in
which the ownership or leasing of its properties or the conduct of its business
requires such qualification, except where the failure to be so qualified or to
be in good standing would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations, business or business prospects
of the Company and its Subsidiaries, taken as a whole (hereinafter, a "Material
Adverse Effect"); no proceeding has been instituted in any such jurisdiction
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification; each of the Company and the Subsidiaries
is in possession of and operating in compliance with all authorizations,
licenses, certificates, consents, orders and permits from state, federal and
other regulatory authorities that are material to the conduct of its business,
all of which are valid and in full force and effect. Neither the Company nor any
of its Subsidiaries is in violation of their respective charter or bylaws and no
event has occurred which, with notice or lapse of time or both, would constitute
a breach or violation of any of the terms and provisions of, or constitute a
default under, any obligation, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness, or in any lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument to which either the Company or any of its
Subsidiaries is a party or by which their properties may be bound. Neither the
Company nor any of its Subsidiaries is in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, administrative
agency, regulatory body, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any Subsidiary or their
respective properties except where such violation would not have a Material
Adverse Effect.
(e) Each of the Company and its Subsidiaries has full legal
right, power and authority to enter into this Agreement and the Representative's
Warrant Agreement and perform the transactions contemplated hereby and thereby.
Each of this Agreement and the Representative's Warrant Agreement has been duly
authorized, executed and delivered by the Company and is a valid and binding
agreement on the part of the Company, enforceable in accordance with its terms,
except
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<PAGE> 5
as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and rules of law
governing specific performance, estoppel, waiver, injunctive relief, and other
equitable remedies (regardless of whether enforcement is sought in a proceeding
at law or in equity). The making, execution and performance of this Agreement
and the Representative's Warrant Agreement by the Company and the consummation
of the transactions herein and therein contemplated will not conflict with or
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, (i) any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company or any Subsidiary is a party or by which their respective properties may
be bound, (ii) the charter or bylaws of the Company or any Subsidiary or (iii)
any law, order, rule, regulation, writ, injunction, judgment or decree of any
court, administrative agency, regulatory body, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any
Subsidiary or their respective properties. No consent, approval, authorization
or order of or qualification with any court, government or governmental agency
or body, domestic or foreign, having jurisdiction over the Company or any
Subsidiary or their respective properties is required for the execution and
delivery of this Agreement and the Representative's Warrant Agreement and the
consummation by the Company of the transactions herein and therein contemplated,
except such as may be required under the Act, by the National Association of
Securities Dealers, Inc. (the "NASD"), or under state or other securities or
Blue Sky laws, all of which requirements have been satisfied in all material
respects.
(f) There is not pending or, to the Company's knowledge,
threatened, any action, suit, claim or proceeding against either the Company or
any of its Subsidiaries, any of the Company's or any of its Subsidiaries'
officers, any of their respective properties, assets or rights before any court,
administrative agency, regulatory body, government or governmental agency or
body, domestic or foreign, having jurisdiction over the Company or any of its
Subsidiaries or their respective officers or properties, or otherwise which (i)
might, individually or in the aggregate, result in any material adverse change
in the condition (financial or otherwise), earnings, operations, business or
business prospects of the Company and its Subsidiaries, taken as a whole (a
"Material Adverse Change"), or (ii) might prevent consummation of the
transactions contemplated hereby, or (iii) is required to be disclosed in the
Registration Statement or Prospectus and is not so disclosed. For purposes of
this Agreement, the phrases "to the Company's knowledge or "to the knowledge of
the Company" shall mean the knowledge of the senior management personnel of each
of the Company and its Subsidiaries. There are no agreements, contracts, leases
or documents of the Company or any Subsidiary of a character required to be
described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement by the Act or the Rules and
Regulations which have not been accurately described in all material respects in
the Registration Statement or Prospectus or filed as exhibits to the
Registration Statement. Neither the Company nor any Subsidiary is a party or
subject to the provisions of any injunction, judgment, decree or order of any
court, administrative agency, regulatory body, government or governmental agency
or body domestic or foreign, that could be expected to result in a Material
Adverse Change. Each of the Company and its Subsidiaries has conducted and is
conducting its business in
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<PAGE> 6
compliance with all applicable federal, state, local and foreign statutes, laws,
rules, regulations, ordinances, codes, decisions, decrees, directives and
orders, except where the failure to do so would not, singly or in the aggregate,
have a Material Adverse Effect.
(g) All outstanding shares of capital stock of each of the
Company and its Subsidiaries have been duly authorized and validly issued and
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, and were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities. The Company has an authorized, issued and outstanding capitalization
as set forth in the Prospectus under the caption "Capitalization." The capital
stock of the Company conforms to the description thereof contained in the
Registration Statement and the Prospectus (and such statements correctly state
the substance of the instruments defining the capitalization of the Company).
The Shares to be issued and sold by the Company hereunder have been duly
authorized for issuance and sale to the Underwriters pursuant to this Agreement,
and, when issued and delivered by the Company against payment therefor in
accordance with the terms of this Agreement, will be duly and validly issued and
fully paid and nonassessable, and will be sold free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest. No preemptive
right, co-sale right, registration right, right of first refusal or other
similar right of stockholders exists with respect to any of the Shares or the
issuance and sale thereof other than those that have been satisfied or expressly
waived prior to the date hereof and those that will automatically expire upon
and will not apply to the consummation of the transactions contemplated on or
before the Closing Date. No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act or under state or other securities or Blue Sky laws. Except as disclosed in
the Registration Statement, the Prospectus and the financial statements of the
Company, and the related notes thereto included in the Prospectus, the Company
has no outstanding options to purchase, or any preemptive rights or other rights
to subscribe for or to purchase, any securities or obligations convertible into,
or any contracts or commitments to issue or sell, shares of its capital stock or
any such options, rights, convertible securities or obligations. The description
of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised thereunder,
set forth in the Prospectus under the caption "Management - Executive
Compensation" fairly and accurately presents the information required to be
shown with respect to such plans, arrangements, options and rights. All
outstanding options of the Company have been duly authorized and issued in
compliance with the option plan pursuant to which such options were granted and
with all federal and state securities laws and the Nevada General Corporation
Law.
(h) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, there has not been (i)
any Material Adverse Change, (ii) any transaction that is material to either the
Company or any of its Subsidiaries, (iii) any obligation, direct or contingent,
incurred by either the Company or any of its Subsidiaries, except obligations
incurred in the ordinary course of business, (iv) any change in the capital
stock or outstanding indebtedness of either the Company or any of its
Subsidiaries, (v) any dividend or distribution of any kind declared, paid or
made on the capital stock of either the Company or any of its Subsidiaries, (vi)
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<PAGE> 7
any default in the payment of principal of or interest on any outstanding debt
obligations, or (vii) any loss or damage (whether or not insured) to the
property of either the Company or any of its Subsidiaries which has been
sustained or will have been sustained which has a Material Adverse Effect.
(i) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its Subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a Material Adverse Effect, (ii) the agreements to which either the Company
or any of its Subsidiaries is a party described in, or filed as exhibits to, the
Registration Statement and Prospectus are valid agreements, enforceable by the
Company or its Subsidiaries, as the case may be, except as the enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles and rules of law governing specific
performance, estoppel, waiver, injunctive relief and other equitable remedies
(regardless of whether enforcement is sought in a proceeding at law or in
equity) and, to the Company's knowledge, the other contracting party or parties
thereto are not in breach or default under any of such agreements, and (iii)
either the Company or its Subsidiaries has valid and enforceable leases for all
properties described in the Registration Statement and Prospectus, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles and rules of law
governing specific performance, estoppel, waiver, injunctive relief and other
equitable remedies (regardless of whether enforcement is sought in a proceeding
at law or in equity). Except as set forth in the Registration Statement and
Prospectus, the Company and its Subsidiaries own or lease all such properties as
are necessary to its operations as now conducted or as proposed to be conducted.
(j) Deloitte & Touche, L.L.P. ("D&T"), the Company's current
auditors, which have examined the consolidated financial statements of the
Company, together with the related schedules and notes, as of December 31, 1998,
and for the year then ended, filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations.
McGladrey & Pullen LLP ("M&P"), the Company's former auditors, which have
examined the consolidated financial statements of the Company, together with the
related schedules and notes, as of December 31, 1997, and for the year then
ended, filed with the Commission as a part of the Registration Statement, which
are included in the Prospectus, are independent accountants within the meaning
of the Act and the Rules and Regulations. The audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its Subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements of the Company, together with the related
schedules and notes, and the unaudited consolidated financial information, filed
with the Commission as part of the Registration Statement, have been prepared
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<PAGE> 8
in accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein. The
selected and summary consolidated financial and statistical data included in the
Registration Statement fairly present the information shown therein and have
been compiled on a basis consistent with the audited consolidated financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(k) Each of the Company and its Subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization, and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(l) There are no issues related to the Company's, or any of
its Subsidiaries', preparedness for the Year 2000 that (i) are of a character
required to be described or referred to in the Registration Statement or
Prospectus or by the Act or the Rules and Regulations or by the Exchange Act or
the rules and regulations of the Commission thereunder which have not been
accurately described in the Registration Statement or Prospectus or (ii) might
reasonably be expected to result in any Material Adverse Change or have a
Material Adverse Effect. All internal computer systems and each Constituent
Component (as defined below) of those systems and all computer-related products
and each Constituent Component (as defined below) of those products of the
Company and each of its Subsidiaries fully comply with the Year 2000
Qualification Requirements. "Year 2000 Qualification Requirements" means that
the internal computer systems and each Constituent Component (as defined below)
of those systems and all computer-related products and each Constituent
Component (as defined below) of those products of the Company and each of its
Subsidiaries (i) have been reviewed to confirm that they store, process
(including sorting and performing mathematical operations, calculations and
computations), input and output data containing date and information correctly
regardless of whether the date contains dates and times before, on or after
January 1, 2000, (ii) have been designated to ensure date and time entry
recognition, calculations that accommodate same-century and multi-century
formulas and date values, leap year recognition and calculations, and date-data
interface values that reflect the century, (iii) accurately manage and
manipulate data involving dates and times, including single-century formulas and
multi-century formulas, and will not cause an abnormal ending scenario within
the application or generate incorrect values or invalid results involving such
dates, (iv) accurately process any date rollover, and (v) accept and respond to
two-digit year date input in a manner that resolves any ambiguities as to the
century. "Constituent Component" means all software (including operating
systems, programs, packages and utilities), firmware, hardware, networking
components, and peripherals provided as part of the configuration.
8
<PAGE> 9
(m) Each of the Company and its Subsidiaries has timely filed
all necessary federal, state, local and foreign income and franchise tax returns
and has paid all taxes shown thereon as due, and there is no tax deficiency that
has been or, might be asserted against the Company or any of its Subsidiaries
that might have a Material Adverse Effect. All tax liabilities are adequately
provided for on the books of each of the Company and its Subsidiaries.
(n) Each of the Company and its Subsidiaries maintains
insurance with insurers of recognized financial responsibility of the types and
in the amounts generally deemed prudent for its business and consistent with
insurance coverage maintained by similar companies in similar businesses or as
otherwise required by any agreement to which either the Company or a Subsidiary
is a party, including, but not limited to, insurance covering real and personal
property owned or leased by the Company or its Subsidiaries against theft,
damage, destruction, acts of vandalism, products liability, errors and
omissions, and all other risks customarily insured against, all of which
insurance is in full force and effect. Neither the Company nor any Subsidiary
has been refused any insurance coverage sought or applied for; and the Company
does not have any reason to believe that it will not be able to renew its or any
Subsidiary's existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not have a Material Adverse Effect.
(o) The conditions for use of Form SB-2, as set forth in the
General Instructions thereto, have been satisfied.
(p) No labor disturbance by the employees of the Company or
any of its Subsidiaries exists or, to the Company's knowledge, is imminent. The
Company is not aware of any existing or imminent work stoppage or labor strike
by the employees of any of the Company's or any of its Subsidiaries' principal
suppliers, subcontractors, distributors (domestic or foreign) that might be
expected to result in a Material Adverse Change or to have a Material Adverse
Effect. No collective bargaining agreement exists with any of the Company's or
any of its Subsidiaries' employees and, to the Company's Knowledge, no such
agreement is imminent.
(q) If any full-time employee identified in the Prospectus has
entered into any non-competition, non-disclosure, confidentiality or other
similar agreement with any party other than the Company or its Subsidiaries,
such employee is neither in violation thereof nor is expected to be in violation
thereof as a result of the business conducted or expected to be conducted by the
Company or its Subsidiaries as described in the Prospectus or such person's
performance of his or her obligations to the Company or any Subsidiary. To the
Company's knowledge, no consultant or scientific advisor of the Company or any
Subsidiary (individually, a "Consultant" and collectively "Consultants") is in
violation of any non-competition, non-disclosure, confidentiality or similar
agreement between such Consultant and any party other than the Company or a
Subsidiary. Each Consultant engaged by or on behalf of the Company or any of its
Subsidiaries to render services for the Company or any of its Subsidiaries has
entered into an agreement with the Company or such Subsidiary, as the case may
be, providing for terms and conditions of non-competition, non-disclosure and
confidentiality in connection with such services ("Consulting Agreements").
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<PAGE> 10
Assuming due authorization, execution and delivery of the Consulting Agreements
by each Consultant, the Consulting Agreements are the legal, valid, binding and
enforceable instruments of the Consultants, except as enforceability may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting rights generally or by general
equitable principles and rules of law governing specific performance estoppel,
waiver, injunctive relief, and other equitable remedies (regardless of whether
enforcement is sought in a proceeding at law or in equity).
(r) The Common Stock is registered pursuant to Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is
approved for quotation on the American Stock Exchange, Inc. ("AMEX"). The
Company has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from AMEX, nor has the Company received any
notification that the Commission, AMEX or the NASD is contemplating terminating
such registration or quotation.
(s) Each of the Company and its Subsidiaries owns or possesses
exclusive rights to use all patents, patent rights, patent licenses, inventions,
trade secrets, trademarks, service marks, trade names, copyrights, service
names, mask works, technology, know-how and other proprietary intellectual
rights which are necessary to conduct its business as now conducted and as
described in the Registration Statement and Prospectus. The expiration of any
patents, patent rights, trade secrets, trademarks, service marks, trade names or
copyrights would not have a Material Adverse Effect. The Company or its assignor
has duly and properly filed with the U.S. Patent and Trademark Office and/or
respective patent offices in foreign countries all pending patent applications
(the "Patent Applications"). All issued United States patents and Patent
Applications have been properly assigned to the Company, and all documents
reflecting such assignment to the Company have been properly recorded in the
U.S. Patent and Trademark Office. The information contained in the Registration
Statement and Prospectus concerning patents owned by or licensed to the Company
or its Subsidiaries is accurate in all material respects. Neither the Company
nor any of its Subsidiaries has received any notice of, nor has it any knowledge
of, any infringement of or conflict with asserted rights of either the Company
or any of its Subsidiaries by others with respect to any patents, patent rights,
inventions, trade secrets, trademarks, service marks, trade names, copyrights,
mask works, technology or know-how. Neither the Company nor any of it
Subsidiaries has received any notice of, nor has it any knowledge of, any
infringement of or conflict with asserted rights of others with respect to any
patent, patent rights, inventions, trade secrets, know-how, trademarks, service
marks, trade names or copyrights which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, might have a Material
Adverse Effect.
(t) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it is not and will not become an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the 1940 Act and such rules and regulations.
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<PAGE> 11
(u) Each of the Company and its Subsidiaries is conducting
business in compliance with all applicable statutes, rules, regulations and
orders administered or issued by any domestic or foreign administrative agency,
regulatory body, government or governmental agency in the jurisdictions in which
each is conducting business except where such noncompliance would not result in
a Material Adverse Effect.
(v) Each of the Company and its Subsidiaries to which ISO 9001
certification standards apply is in compliance with such ISO 9001 certification
standards and all CE mark certification requirements. Each of the Company and
its Subsidiaries has submitted all reports and other documentation necessary to
be submitted in accordance with all foreign regulatory orders, laws and
regulations in jurisdictions in which the Company or such Subsidiary is
conducting business except where such failure would not have a Material Adverse
Effect. Neither the Company nor any such Subsidiaries has received notification
of violation of any applicable statute, rule, regulation or order administered
or issued by any foreign administrative agency, regulatory body, government or
governmental agency in foreign jurisdictions in which it is conducting business.
(w) Except as set forth in the Registration Statement and
Prospectus, (i) each of the Company and its Subsidiaries is in compliance with
all laws, orders, rules and regulations relating to the use, treatment, storage
and disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to their respective businesses
except where failure to do so would not have a Material Adverse Effect, (ii)
neither the Company nor any of its Subsidiaries has received notice from any
administrative agency, regulatory body, government, governmental authority or
third party of an asserted claim under Environmental Laws, (iii) neither the
Company nor any of its Subsidiaries will be required to make material capital
expenditures to comply or cause its Subsidiaries to comply with Environmental
Laws in the foreseeable future and (iv) no property which is, or has been,
owned, leased or occupied by the Company or any of its Subsidiaries has been
designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended, or otherwise designated as
a contaminated site under applicable state or local law.
(x) Each employee benefit plan, within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), that is maintained, administered or contributed to by the Company or
any of its Subsidiaries for employees or former employees of the Company or any
of its Subsidiaries has been maintained in compliance with its respective terms
and the requirements of any applicable statutes, orders, rules and regulations,
including but not limited to ERISA and the Internal Revenue Code of 1986, as
amended (the "Code"). Each employee benefit plan intended to be qualified under
Section 401(a) of the Code has either obtained from the Internal Revenue Service
("IRS") a favorable determination letter as to its qualified status under the
Code, including all amendments to the Code effected by the Tax Reform Act of
1986 and subsequent legislation, or has applied to the IRS for such a
determination letter prior to the requisite period under applicable Treasury
Regulations or IRS pronouncements in which to apply for a determination letter
and to make any amendments necessary to obtain a favorable determination. No
prohibited transaction, within the meaning of Section 406 of ERISA or Section
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<PAGE> 12
4975 of the Code, has occurred with respect to any such plan, excluding
transactions effected pursuant to a statutory or administrative exemption. For
each such plan which is subject to the funding rules of Section 412 of the Code
or Section 302 of ERISA, no "accumulated funding deficiency", as defined in
Section 412 of the Code, has been incurred, whether or not waived, and the fair
market value of the assets of each such plan (excluding for these purposes
accrued but unpaid contributions) exceeded the present value of all benefits
accrued under such plan determined using reasonable actuarial assumptions.
Neither the Company nor any of its Subsidiaries has been a party to or made
contributions to or otherwise incurred any obligation under any employee benefit
plan that was subject to Title IV of ERISA or Section 412 of the Code, and any
"multi-employer plan" as defined in Section 3(37) of ERISA.
With respect to each employee benefit plan, the Company and
each Subsidiary has complied with (i) the applicable health care continuation
and notice provisions of the Consolidated Omnibus Budget Reconciliation Act of
1985 ("COBRA") and the proposed regulations thereunder, (ii) the applicable
requirements of the Family and Medical Leave Act of 1993 and the regulations
thereunder, and (iii) the applicable requirements of the Health Insurance
Portability and Accountability Act of 1996 and the temporary regulations
thereunder. Neither the Company nor any Subsidiary has any material obligations
under COBRA with respect to any former employees or qualifying beneficiaries
thereunder. Neither the Company nor any of its Subsidiaries are parties to a
retiree medical plan.
(y) The Company has not distributed, and will not distribute
prior to the later of (i) the Closing Date or any date on which Option Shares
are to be purchased, as the case may be, and (ii) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
(z) Neither the Company nor any of its Subsidiaries has at any
time during the last five (5) years (i) made any unlawful contribution to any
candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(aa) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might reasonably be expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Shares.
(bb) Except as otherwise set forth in the Registration
Statement and the Prospectus, each officer and director of the Company, and each
person listed on Schedule 1 attached hereto has agreed in writing that such
person will not, except as described below, for a period of 180 days from the
date of the final Prospectus (the "Lock-Up Period"), sell, offer to sell,
solicit an offer to buy, contract to sell, loan, pledge, grant any option to
purchase, or otherwise transfer or dispose of
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<PAGE> 13
(collectively, a "Disposition"), any shares of Common Stock, or any securities
convertible into or exercisable or exchangeable for Common Stock (collectively,
"Securities"), now owned or hereafter acquired by such person or with respect to
which such person has or hereafter acquires the power of disposition otherwise
than (i) on the transfer of shares of Common Stock or Securities during such
person's lifetime by bona fide gift or upon death by will or intestacy, provided
that any transferee agrees to be bound by the Lock-Up Agreement, and (ii) on the
transfer or other disposition of shares of Common Stock or Securities as a
distribution to limited partners or stockholders of such person, provided that
the distributees thereof agree to be bound by the terms of the Lock-Up
Agreement. The foregoing restriction has been expressly agreed to preclude the
holder of the Securities from engaging in any hedging, pledge or other
transaction which is designed to or may reasonably be expected to lead to or
result in a Disposition of Securities during the Lock-up Period, even if such
Securities would be disposed of by someone other than such stockholder. Such
prohibited hedging, pledge or other transactions would include, without
limitation, any short sale (whether or not against the box), any pledge of
shares covering an obligation that matures, or could reasonably mature during
the Lock-Up Period, or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from any
Securities. Furthermore, such person has also agreed and consented to the entry
of stop transfer instructions with the Company's transfer agent against the
transfer of the Securities held by such person except in compliance with the
restrictions described in this subsection (bb). The Company has provided to
counsel for the Underwriters ("Underwriters' Counsel") a complete and accurate
list of all securityholders of the Company as of [May __, 1999] and the number
and type of securities held by each securityholder. In addition, each officer
and director of the Company, and each person listed on Schedule 1 attached
hereto (excluding Blackwater Capital Group, L.L.C., Blackwater Capital Partners,
L.P. or their assigns) also has agreed pursuant to the Lock-Up Agreement that
the Representative shall have an irrevocable preferential right for a period of
two years from the termination of the Lock-Up Period to purchase for its account
or to sell for the account of each such officer, director or securityholder any
Securities of the Company that any of such officers, directors, or stockholders
may seek to sell under Rule 144 promulgated under the Act. Each such officer,
director, or securityholder will consult the Representative with regard to any
such offering and will offer the Representative the opportunity to purchase or
sell any such Securities on terms not more favorable to such officer, director
or securityholder than they can secure elsewhere. The Company has provided to
Underwriters' Counsel true, accurate and complete copies of all of the
agreements pursuant to which its officers, directors and stockholders have
agreed to such or similar restrictions (the "Lock-up Agreements") presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release any of its officers, directors or other stockholders from any
Lock-up Agreements currently existing or hereafter effected without the prior
written consent of Cruttenden Roth Incorporated.
(cc) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any stockholder who owns
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<PAGE> 14
beneficially more than five percent (5%) of the Common Stock or any of the
members of the families of any of them, except as disclosed in the Registration
Statement and the Prospectus.
(dd) Other than the Representative, on behalf of the several
Underwriters, no person is or will be owed any finder's fee or commission or
similar payment in connection with the transactions contemplated by this
Agreement.
(ee) All offers and sales of capital stock of the Company
prior to the date hereof were at all relevant times duly registered or exempt
from the registration requirements of the Act and were duly registered or
subject to an available exemption from the registration requirements of the
applicable state securities or Blue Sky laws. There are no persons with
registration or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under the
Act, other than those which have been waived or complied with.
(ff) No relationship, direct or indirect, exists between or
among the Company on the one hand and the directors, officers, stockholders,
customers or suppliers of the Company on the other hand, that is required by the
Act or the 1934 Act or the Rules and Regulations to be described in the
Registration Statement and the Prospectus that is not described as so required.
(gg) The Preliminary Prospectuses and Prospectus delivered to
the Underwriters for use in connection with this offering were identical to the
versions of the Preliminary Prospectuses and Prospectuses created to be
transmitted to the Commission for filing via the Electronic Data Gathering
Analysis and Retrieval System ("EDGAR"), except to the extent permitted by
Regulation S-T.
(hh) The Representative's Warrants have been duly and validly
authorized by the Company and upon delivery to you in accordance with the
Representative's Warrant Agreement will be duly issued and legal, valid and
binding obligations of the Company.
(ii) The Representative's Warrant Stock has been duly
authorized and reserved for issuance upon the exercise of the Representative's
Warrants and when issued upon payment of the exercise price therefore will be
validly issued, fully paid and non-assessable shares of Common Stock of the
Company.
3. REPRESENTATIONS AND WARRANTIES OF SELLING SECURITYHOLDER. The
Selling Securityholder represents and warrants to, and agrees with, each of the
several Underwriters that:
(a) The Selling Securityholder has full power to enter into
this Agreement and to sell, assign, transfer and deliver to the Underwriters the
Shares to be sold by the Selling Securityholder hereunder in accordance with the
terms of this Agreement. This Agreement has been duly executed and delivered by
the Selling Securityholder.
(b) The Selling Securityholder has duly executed and delivered
a power of attorney and custody agreement (the "Power-of-Attorney" and the
"Custody Agreement",
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<PAGE> 15
respectively) in the form heretofore delivered to the Representative, appointing
______________ as the Selling Securityholder's attorney-in-fact (the
"Attorney-in-Fact") with authority to execute, deliver and perform this
Agreement on behalf of the Selling Securityholder and appointing ____________ as
custodian thereunder (the "Custodian"). Certificates in negotiable form,
endorsed in blank or accompanied by blank stock powers duly executed, with
signatures appropriately guaranteed, representing the Shares to be sold by the
Selling Securityholder hereunder have been deposited with the Custodian pursuant
to the Custody Agreement for the purpose of delivery pursuant to this Agreement.
The Selling Securityholder has full power (corporate and other) to enter into
the Custody Agreement and the Power-of-Attorney and to perform its obligations
under the Custody Agreement. The delivery of the Custody Agreement and the
Power-of-Attorney have been duly executed and delivered by the Selling
Securityholder and, assuming due authorization, execution and delivery by the
Custodian, are the legal, valid, binding and enforceable instruments of the
Selling Securityholder. The Selling Securityholder agrees that each of the
Shares represented by the certificates on deposit with the Custodian is subject
to the interests of the Underwriters hereunder, that the arrangements made for
such custody, the appointment of the Attorney-in-Fact and the right, power and
authority of the Attorney-in-Fact to execute and deliver this Agreement, to
agree on the price at which the Shares (including the Selling Securityholder's
Shares) are to be sold to the Underwriters, and to carry out the terms of this
Agreement, are to that extent irrevocable and that the obligations of the
Selling Securityholder hereunder shall not be terminated, except as provided in
this Agreement or the Custody Agreement, by any act of the Selling
Securityholder, by operation of law or otherwise, or by its liquidation or
dissolution or by the occurrence of any other event. If the Selling
Securityholder shall liquidate or dissolve, or if any other event should occur,
before the delivery of such Shares hereunder, the certificates for such Shares
deposited with the Custodian shall be delivered by the Custodian in accordance
with the respective terms and conditions of this Agreement as if such
liquidation or dissolution or other event had not occurred, regardless of
whether the Custodian or the Attorney-in-Fact shall have received notice
thereof.
(c) The Selling Securityholder is the lawful owner of the
Shares to be sold by the Selling Securityholder hereunder and upon sale and
delivery of, and payment for, such Shares, as provided herein, the Selling
Securityholder will convey good and marketable title to such Shares, free and
clear of any security interests, liens, encumbrances, equities, claims or other
defects.
(d) The Selling Securityholder has not, directly or
indirectly, (i) taken any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (ii) since the filing of the
Registration Statement (A) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Shares (B) paid or agreed to pay
to any person any compensation for soliciting another to purchase any other
securities of the Company (except for the sale of Shares by the Selling
Securityholder under this Agreement).
(e) To the extent that any statements or omissions are made in
the Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with
information furnished to the Company by the Selling
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<PAGE> 16
Securityholder, such Preliminary Prospectus did, and the Registration Statement
and the Prospectus and any amendments or supplements thereto, when they become
effective or are filed with the Commission, as the case may be, will, conform in
all material respects to the requirements of the Act and the Rules and
Regulations thereunder and will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they are made, not misleading. The Selling Securityholder has
reviewed the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and the Registration Statement, and the
information regarding the Selling Securityholder set forth therein under the
caption "Selling Stockholder" is complete and accurate.
(f) The sale of the Shares by the Selling Securityholder
pursuant to this Agreement is not prompted by any adverse information concerning
the Company that is not set forth in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(g) The sale of the Shares to the Underwriters by the Selling
Securityholder pursuant to this Agreement, the compliance by the Selling
Securityholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained, such as may be required under state securities or Blue Sky laws and,
if the registration statement filed with respect to the Shares (as amended) is
not effective under the Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the Act or
(ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Selling
Securityholder is a party or by which the Selling Securityholder or any of the
Selling Securityholder's properties are bound, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Selling Securityholder.
4. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares which is set forth opposite the name of such
Underwriter in Schedule A hereto (subject to adjustment as provided in Section
11).
Delivery of definitive certificates for the Firm Shares to be
purchased by the Underwriters pursuant to this Section 4 shall be made against
payment of the purchase price therefor by the several Underwriters by certified
or official bank check or checks drawn in same-day funds, payable to the order
of the Company or by wire transfer in same day funds, at the offices of Snell &
Wilmer L.L.P., Phoenix, Arizona (or at such other place as may be agreed upon
between the Representative and the Company), at 7:00 A.M. Pacific daylight
savings time, (a) on the third (3rd)
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<PAGE> 17
full business day following the first day that Shares are traded or (b) if this
Agreement is executed and delivered after 1:30 P.M. Pacific daylight savings
time, the fourth (4th) full business day following the day that this Agreement
is executed and delivered or (c) at such other time and date not later than
seven (7) full business days following the first day that Shares are traded as
the Representative and the Company may determine (or at such time and date to
which payment and delivery shall have been postponed pursuant to Section 10
hereof), such time and date of payment and delivery being herein called the
"Closing Date;" provided, however, that if the Company has not made available to
the Representative copies of the Prospectus within the time provided in Section
5(a)(4) hereof, the Representative may, in its sole discretion, postpone the
Closing Date until no later than two (2) full business days following delivery
of copies of the Prospectus to the Representative. The certificates for the Firm
Shares to be so delivered will be made available to you at such office or such
other location as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representative so elects,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representative.
It is understood that you, individually, and not as the
Representative of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such Underwriter or Underwriters.
Any such payment by you shall not relieve any such Underwriter or Underwriters
of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the
several Underwriters intend to make a public offering (as such term is described
in Section 12 hereof) of the Firm Shares at a public offering price of $_____
per share. After the public offering, the several Underwriters may, in their
discretion, vary the public offering price.
5. FURTHER AGREEMENTS OF THE COMPANY AND SELLING SECURITYHOLDER.
(a) The Company covenants and agrees with each of Underwriters
that:
(1) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible. The Company will use its best efforts
to cause any 462 Registration Statement as may be required subsequent to the
date the Registration Statement is declared effective to become effective as
promptly as possible. The Company will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement, any
subsequent amendment to the Registration Statement or any 462 Registration
Statement has become effective or any supplement to the Prospectus has been
filed. If the Company omitted information from the Registration Statement at the
time it was originally declared effective in reliance upon Rule 430A(a) of the
Rules and
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<PAGE> 18
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission. If the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations have been filed,
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations. If for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed. The Company will notify you promptly of any request by the
Commission for the amending or supplementing of the Registration Statement or
the Prospectus or for additional information. Promptly upon your request, the
Company will prepare and file with the Commission any amendments or supplements
to the Registration Statement or Prospectus which, in the opinion of
Underwriters' Counsel, may be necessary or advisable in connection with the
distribution of the Shares by the Underwriters. The Company will promptly
prepare and file with the Commission, and promptly notify you of the filing of,
any amendments or supplements to the Registration Statement or Prospectus which
may be necessary to correct any statements or omissions, if, at any time when a
prospectus relating to the Shares is required to be delivered under the Act, any
event shall have occurred as a result of which the Prospectus or any other
prospectus relating to the Shares as then in effect would include any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. In case any Underwriter is required to deliver a
prospectus nine (9) months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, it will prepare promptly
upon request, but at the expense of such Underwriter, such amendment or
amendments to the Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of Section 10(a)(3)
of the Act. The Company will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations and the provisions of this Agreement.
(2) The Company will advise you, promptly after it shall receive notice
or obtain knowledge, of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(3) The Company will arrange for qualification (including by providing
full cooperation with Underwriter's Counsel, whose services in this matter are
required and which you and the Company will seek to expedite) of the Shares for
offering and sale under the securities
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<PAGE> 19
laws of such jurisdictions as you may designate and to continue such
qualifications in effect for so long as may be required for purposes of the
distribution of the Shares, provided, however, that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process in any
jurisdiction in which it is not otherwise required to be so qualified or to so
execute a general consent to service of process. In each jurisdiction in which
the Shares shall have been qualified as above provided, the Company will make
and file such statements and reports in each year as are or may be required by
the laws of such jurisdiction for such purpose.
(4) The Company will furnish to you, as soon as
available, and, in the case of the Prospectus and any term sheet or abbreviated
term sheet under Rule 434, in no event later than the first full business day
following the first day that Shares are traded, copies of each Registration
Statement (two of which will be signed and which will include all exhibits),
each Preliminary Prospectus, the Prospectus and any amendments or supplements to
such documents, including any prospectus prepared to permit compliance with
Section 10(a)(3) of the Act, all in such quantities as you may from time to time
reasonably request. Notwithstanding the foregoing, if the Representative, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the Company shall provide to you copies of a
Preliminary Prospectus updated in all respects through the date specified by you
in such quantities as you may from time to time reasonably request.
(5) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
forty-fifth (45th) day following the end of the fiscal quarter first occurring
after the first anniversary of the effective date of the Registration Statement,
an earnings statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the Act and covering
a twelve (12) month period beginning after the effective date of the
Registration Statements.
(6) During a period of five (5) years after the date
hereof, the Company will furnish to its stockholders as soon as practicable
after the end of each respective period, annual reports (including financial
statements audited by independent certified public accountants) and, upon
request by a stockholder, unaudited quarterly reports of operations for each of
the first three quarters of the fiscal year, and will furnish to you and the
other several Underwriters hereunder, upon request (i) concurrently with
furnishing such reports to its stockholders, statements of operations of the
Company for each of the first three (3) quarters in the form furnished to the
Company's stockholders, (ii) concurrently with furnishing to its stockholders, a
balance sheet of the Company as of the end of such fiscal year, together with
statements of operations, of stockholders' equity, and of cash flows of the
Company for such fiscal year, accompanied by a copy of the certificate or report
thereon of independent certified public accountants, (iii) as soon as they are
available, copies of all reports (financial or other) mailed to stockholders,
(iv) as soon as they are available, copies of all reports and financial
statements furnished to or filed with the Commission, any securities exchange or
AMEX, (v) every material press release and every material news item or article
in respect of the Company or its affairs which was generally released to
stockholders or prepared by the Company,
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and (vi) any additional information of a public nature concerning the Company,
or its business which you may reasonably request. During such five (5) year
period, if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and such subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(7) The Company will apply the net proceeds from the
sale of the Shares being sold by it in the manner set forth under the caption
"Use of Proceeds" in the Prospectus.
(8) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(9) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 12(a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 12(b)(i),
the Company will pay the several Underwriters for all out-of-pocket expenses
(including fees and disbursements of Underwriters' counsel) incurred by the
Underwriters in investigating or preparing to market or marketing the Shares and
to the extent any advances to the Underwriters exceeds such expenses, the
Underwriters shall return such excess to the Company.
(10) If at any time during the ninety (90) day period
after the Registration Statement becomes effective, any rumor, publication or
event relating to or affecting the Company shall occur as a result of which in
your opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(11) During the Lock-up Period, the Company will not,
without the prior written consent of the Representative, effect the Disposition
of, directly or indirectly, any Securities other than the sale of the Firm
Shares and the Option Shares hereunder and the Company's issuance of options or
Common Stock under the Company's presently authorized stock option and stock
purchase plans described in the Registration Statement and the Prospectus
following Stockholder Approval.
(12) The Company will not grant any Common Stock
options (whether or not pursuant to an option plan) or Common Stock Warrants at
any time prior to the Stockholder Approval.
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(13) The Company will cause the Securities to be
included for quotation on AMEX following the Closing Date.
(b) If the Underwriters purchase the Option Shares from the
Selling Securityholder, then the Selling Securityholder covenants and agrees
with each of the Underwriters that:
(1) The Selling Securityholder will not, directly or
indirectly, without the prior written consent of the Representative, on behalf
of the Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, pledge, grant of any option to purchase or other sale or
disposition) of any Securities legally or beneficially owned by the Selling
Securityholder or any securities convertible into, or exchangeable or
exercisable for, Securities for a period of 180 days after the date hereof
except as provided in this Agreement.
(2) The Selling Securityholder will not, directly or
indirectly, (i) take any action designed to cause or result in, or that has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (ii) (A) sell, bid for, purchase,
or pay anyone any compensation for soliciting purchases of, the Shares or (B)
pay or agree to pay to any person any compensation for soliciting another to
purchase any other securities of the Company (except for the sale of Shares by
the Selling Securityholder under this Agreement).
(3) The Selling Securityholder acknowledges the receipt
of valuable consideration under this Agreement in connection with the sale of
the Shares hereunder and agrees to be bound by all terms of this Agreement
applicable to the Selling Securityholder.
6. EXPENSES.
(a) The Company agrees with each Underwriter that:
(1) The Company will pay and bear all costs and
expenses in connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and exhibits),
Preliminary Prospectuses and the Prospectus and any amendments or supplements
thereto; the printing of this Agreement, the Agreement Among Underwriters, the
Selected Dealer Agreement, all Blue Sky filing fees and related expenses, the
Underwriters' Questionnaire and Power of Attorney, and any instruments related
to any of the foregoing; the issuance and delivery of the Shares hereunder to
the several Underwriters, including transfer taxes, if any, the cost of all
certificates representing the Shares and transfer agents' and registrars' fees;
the fees and disbursements of counsel for the Company; all fees and other
charges of the Company's independent certified public accountants; the cost of
furnishing to the several Underwriters copies of the Registration Statement
(including appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASD
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filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD filings and
Blue Sky qualifications); and all other expenses directly incurred by the
Company in connection with the performance of its obligations hereunder. The
provisions of this Section 6(a)(i) are intended to relieve the Underwriters from
the payment of the expenses and costs which the Company hereby agrees to pay.
(2) In addition to its other obligations under Section
6(a)(i) hereof, the Company will pay to you a nonaccountable expense allowance
equal to _____% of the gross sales price of the Shares to the public. This
nonaccountable expense allowance with respect to the Firm Shares shall be paid
to you on the Closing Date and the nonaccountable expense allowance with respect
to the Option Shares shall be paid to you on the closing of the sale to you of
such Option Shares. The Company has previously paid to you a fee of $25,000,
which shall be credited to this nonaccountable expense allowance.
(3) In addition to its other obligations under Section
9(a) hereof, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding described in
Section 9(a) hereof, it will reimburse the Underwriters on a monthly basis for
all reasonable legal or other expenses incurred in connection with investigating
or defending any such claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the Company's obligation to reimburse the Underwriters for
such expenses and the possibility that such payments might later be held to have
been improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Underwriters
shall promptly return such payment to the Company together with interest,
compounded daily, determined on the basis of the prime rate (or other commercial
lending rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on corporate
loans posted by a substantial majority of the nation's thirty (30) largest banks
(the "Prime Rate"). Any such interim reimbursement payments which are not made
to the Underwriters within thirty (30) days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 9(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 9(b) hereof, they will reimburse the
Company on a monthly basis for all reasonable legal or other expenses incurred
in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company for such expenses and the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company shall
promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
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reimbursement payments which are not made to the Company within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from the
date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
6(a)(3) and 6(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules of the
Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 6(a)(3) and 6(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created by the provisions of
Sections 9(a) and 9(b) hereof or the obligation to contribute to expenses which
is created by the provisions of Section 9(d) hereof.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., Pacific Standard time, on the date following the date of
this Agreement, or such later date and time as shall be consented to in writing
by you; and no stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter, threatened by the Commission, and
any request of the Commission for additional information (to be included in the
Registration Statement or the Prospectus or otherwise) shall have been complied
with to the satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, the registration, authorization, issue, sale and delivery of the
Shares, and the one-for-four reverse stock split contemplated by the Prospectus,
shall have been satisfactory to Underwriters' Counsel, and such counsel shall
have been furnished with such papers and information as they may have requested
to enable them to pass upon the matters referred to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there
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shall not have been any change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
Subsidiaries, taken as a whole, from that set forth in the Registration
Statement or Prospectus, which, in your sole judgment, is material and adverse
and that makes it, in your sole judgment, impracticable or inadvisable to
proceed with the public offering of the Shares as contemplated by the
Prospectus.
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, the
following opinion of Quarles & Brady, LLP, counsel for the Company, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by Snell & Wilmer, L.L.P., Underwriters' counsel, in rendering its
opinion pursuant to Section 7(g) of this Agreement) and with reproduced copies
or signed counterparts thereof for each of the Underwriters, to the effect that:
(1) Each of the Company and its Subsidiaries has been
duly incorporated and are validly existing as corporations in good standing
under the laws of the jurisdiction of their incorporation;
(2) Each of the Company and its Subsidiaries has the
corporate power and authority to own, lease and operate its properties and to
conduct their respective businesses as described in the Registration Statement
and the Prospectus;
(3) Each of the Company and its Subsidiaries is duly
qualified to do business as a foreign corporation and is in good standing in
each jurisdiction, if any, in which the ownership or leasing of their respective
properties or the conduct of their respective businesses requires such
qualification, except where the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its Subsidiaries, taken as a whole;
(4) The authorized, issued and outstanding capital
stock of the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein; the issued and outstanding
shares of capital stock of the Company have been duly and validly issued and are
fully paid and nonassessable, and will not have been issued in violation of the
Company's charter or bylaws or in violation of or subject to any preemptive
right, co-sale right, registration right, right of first refusal or other
similar right, and all offers and sales of the Company's capital stock were at
all relevant times exempt from the registration or qualification requirements of
the Act and state securities laws. The Company's outstanding options as
described in the Prospectus have been duly authorized and shares of Common Stock
have been reserved for issuance pursuant to the terms of the Company's stock
option plans;
(5) The Firm Shares or the Option Shares, as the case
may be, to be issued by the Company pursuant to the terms of this Agreement have
been duly authorized and, upon issuance and delivery against payment therefor in
accordance with the terms hereof, will be duly and
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validly issued and fully paid and nonassessable and will not have been issued in
violation of or subject to any preemptive right, co-sale right, registration
right, right of first refusal or, to the best of such counsel's knowledge, other
similar right contained in the Company's charter or bylaws or in any other
agreement or contract to which the Company is a party; and the forms of
certificates evidencing the Shares comply with Nevada law;
(6) The Company has the corporate power and authority
to enter into this Agreement and to issue, sell and deliver to the Underwriters
the Shares to be issued and sold by it hereunder;
(7) The Company has the corporate power and authority
to enter into Representative's Warrant Agreement and to issue, sell and deliver
to the Representative the Representative's Warrants to be issued and sold by it
thereunder;
(8) Each of this Agreement and the Representative's
Warrant Agreement has been duly authorized by all necessary corporate action on
the part of the Company and has been duly executed and delivered by the Company
and, assuming due authorization, execution and delivery by you, is a valid and
binding agreement of the Company, enforceable in accordance with its terms,
except insofar as indemnification and contribution provisions may be limited by
applicable law and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(9) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or, to the best of such counsel's knowledge,
threatened under the Act;
(10) The Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting schedules), financial data derived therefrom and other
financial and statistical information included therein, as to which such counsel
need express no opinion), as of the effective date of the Registration
Statement, and with respect to the Prospectus as of __________, 1999, complied
as to form in all material respects with the requirements of the Act and the
applicable Rules and Regulations;
(11) The information in the Prospectus under the
caption (a) ["Description of Capital Stock," "Shares Eligible For Future Sale"
and "Business-Legal Proceedings,"] to the extent that it constitutes matters of
law or legal conclusions, has been reviewed by such counsel and is a fair
summary of such matters and conclusions and (b) ["Business-Government
Regulation"] to the extent that it reflects matters of law or summaries of law
or regulations, is correct in all material respects;
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(12) The description in the Registration Statement and
the Prospectus of the charter and bylaws of the Company and of statutes are
accurate and fairly present the information required to be presented by the Act
and the applicable Rules and Regulations;
(13) There are no agreements, contracts, leases or
documents to which the Company is a party of a character required to be
described or referred to in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement that are not described or
referred to therein or filed as required;
(14) The performance of this Agreement and the
Representative's Warrant Agreement and the consummation of the transactions
herein and therein contemplated (other than performance of the Company's
indemnification obligations hereunder or under the Representative's Warrant
Agreement, concerning which no opinion need be expressed) will not (a) result in
any violation of the charter or bylaws of the Company or any of its Subsidiaries
or (b) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any bond, debenture, note or other
evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of
trust, loan agreement, joint venture or other agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which its properties are
bound, or any applicable statute, rule or regulation generally applicable to
transactions of the type contemplated hereunder or any order, writ or decree of
any court, government or governmental agency or body having jurisdiction over
the Company or any of its Subsidiaries or any of their respective properties or
operations which such breach, conflict, violation or default is reasonably
likely to have a Material Adverse effect.;
(15) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or body having
jurisdiction over the Company or any of its Subsidiaries or any of the Company's
or its Subsidiaries' properties or operations is necessary in connection with
the consummation by the Company of the transactions herein contemplated, except
such as have been obtained under the Act or such as may be required under state
or other securities or Blue Sky laws in connection with the purchase and the
distribution of the Shares by the Underwriters;
(16) There are no legal or governmental proceedings
pending or, to such counsel's best knowledge, threatened against the Company or
any of its Subsidiaries of a character required to be disclosed in the
Registration Statement or the Prospectus by the Act or the Rules and
Regulations, other than those described therein;
(17) To the best of such counsel's knowledge, each of
the Company and its Subsidiaries is not in violation of its respective charter
or bylaws and no breach or default exists, and to such counsel's knowledge, no
event has occurred which, with notice or lapse of time or both, would constitute
a breach or violation of any of the terms and provisions of, or constitute a
default under, any bond, debenture, note or other evidence of indebtedness, or
any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which either the Company or any of
its Subsidiaries is a party or by which their respective properties are
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bound, and which is known to such counsel, or any applicable statute, rule or
regulation or any order, writ or decree of any court, government or governmental
agency or body having jurisdiction over the Company or any of its Subsidiaries
or any of the Company's or any of its Subsidiaries properties or operations,
except such breaches, violations or defaults which would not have a Material
Adverse Effect.
(18) Each of the Company and its Subsidiaries is not,
and upon the sale of the Shares as herein contemplated will not be, an
"investment company,' as defined under the Investment Company Act of 1940, as
amended.
(19) Each of the Company and its Subsidiaries is in
compliance with, and conducts its respective businesses in conformity with, all
applicable laws and regulations under the laws of the states of its
incorporation and foreign qualifications and the federal laws of the United
States, relating to the operation of its business as described in the
Registration Statement, except to the extent that any failure so to comply or
conform would not have a Material Adverse Effect;
(20) Except as set forth in the Registration Statement
and Prospectus, no holders of Common Stock or other securities of the Company
have registration rights with respect to securities of the Company and, except
as set forth in the Registration Statement and Prospectus, all holders of
securities of the Company having rights to registration of such shares of Common
Stock or other securities, because of the filing of the Registration Statement
by the Company, have, with respect to the offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement;
(21) The Representative's Warrants have been duly and
validly authorized by the Company and upon delivery to the Representative in
accordance with the Representative's Warrant Agreement will be duly issued and
legal, valid and binding obligations of the Company;
(22) The Representative's Warrant Stock to be issued by
the Company pursuant to the terms of the Representative's Warrant has been duly
authorized and, upon issuance and delivery against payment therefore in
accordance with the terms of the Representative's Warrant Agreement, will be
duly and validly issued and fully paid and nonassessable, and to such counsel's
knowledge, will not have been issued in violation of or subject to any
preemptive right, co-sale right, registration right, right of first refusal or
other similar right of stockholders;
(23) To such counsel's knowledge, no holders of Common
Stock or other securities of the Company have registration rights with respect
to securities of the Company;
(24) If the Company elects to rely on Rule 434, the
Prospectus is not "materially different," as such term is used in Rule 434, from
the prospectus included in the Registration Statement at the time of its
effectiveness or an effective post-effective amendment thereto (including such
information that is permitted to be omitted pursuant to Rule 430A); and
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(25) The conditions for use of Form SB-2, as set forth
in the General Instructions thereto, have been satisfied.
In addition, such counsel shall state that such counsel has
acted as outside corporate legal counsel to the Company and participated in
conferences with officials and other representatives of the Company, the
Representative, Underwriters' Counsel and the independent certified public
accountants of the Company, at which such conferences the contents of the
Registration Statement and Prospectus and related matters were discussed, and
although they have not verified the accuracy or completeness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads such counsel to believe that, at the
time the Registration Statement became effective and at all times subsequent
thereto up to and on the Closing Date and on any later date on which Option
Shares are to be purchased, the Registration Statement and any amendment or
supplement thereto (other than the financial statements including supporting
schedules, other financial information derived therefrom and other financial and
statistical information included therein, as to which such counsel need express
no opinion) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the
Registration Statement, the Prospectus and any amendment or supplement thereto
(except as aforesaid) contained any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to
questions of law not involving the laws of the United States or the State of
Arizona upon opinions of local counsel, and as to matters of fact, to the extent
such counsel deems proper, upon certificates of responsible officers of the
Company, and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such opinion, representation or certificate.
References to the Registration Statement and the Prospectus in this subsection
(d) shall include any amendment or supplement thereto at the date of such
opinion. Copies of any opinion, representation or certificate so relied upon
shall be delivered to you, as Representative of the Underwriters, and to
Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, the following
opinion of Dorn, McEachran, Jambor & Keating, intellectual property counsel for
the Company, dated the Closing Date or such later date on which Option Shares,
as the case may be, are to be purchased, addressed to the Underwriters and with
reproduced copies or signed counterparts thereof for each of the Underwriters:
(1) "Intellectual Property" means: (a) currently
existing domestic and foreign patents, patent applications, and patent
disclosures; (b) currently existing domestic (including federal and state) and
foreign trademarks, servicemarks, trade names, trade dress, domain names, and
all applications, registrations, renewals related thereto; and (c) currently
existing domestic and foreign copyright applications and copyright
registrations, including renewals related thereto.
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(2) Exhibit A attached hereto is a complete and
accurate listing of all Intellectual Property owned by, registered to, or
assigned to the Company. All right, title, and interest to the Intellectual
Property listed in Exhibit A is valid and subsisting.
(3) The Intellectual Property has been properly
assigned to the Company, and, except as otherwise stated in counsel's opinion,
the Company is currently listed as the sole assignee of record in the respective
patent office, trademark office, copyright office, or other appropriate
government or administrative office.
(4) The Company is unaware of any irregularities in the
chain of title to any of the Intellectual Property.
(5) The Company has taken all necessary and desirable
action to maintain and protect each item of Intellectual Property. In this
respect, all currently pending domestic and foreign applications related to the
procurement, establishment, or registration of the Intellectual Property are
being diligently prosecuted, and none of the pending domestic and foreign
applications has been fully rejected or abandoned.
(6) The Company has not licensed, assigned, sold, or
otherwise transferred any of the rights (or any portion of the rights) to the
Intellectual Property to any third party.
(7) All domestic and foreign applications related to
the procurement, establishment, or registration of the Intellectual Property
have been properly executed by the respective inventor(s), an authorized
representative of a corporate applicant, an authorized attorney or legal
representative, or an appropriate person or entity in accordance with the
respective governing laws, rules, regulations, and procedures.
(8) All domestic and foreign applications related to
the procurement, establishment, or registration of the Intellectual Property
have been properly filed and prosecuted by the respective inventor(s), an
authorized representative of a corporate applicant, an authorized attorney or
legal representative, or an appropriate person or entity in accordance with the
respective governing laws, rules, regulations, and procedures.
(9) In the opinion of counsel, all pertinent prior art
references known to the Company or the Company's representative during the
prosecution of the U.S. patents and the U.S. applications were disclosed to the
PTO or cited by the PTO. To the best of counsel's knowledge, no
misrepresentations or mischaracterizations of the prior art were made during the
prosecution of any foreign or domestic patent application related to the
Intellectual Property. To the best of counsel's knowledge, the provisions of 37
C.F.R. Section1.56 were fully complied with during the prosecution of the U.S.
patents and the U.S. applications related to the Intellectual Property.
(10) Counsel is unaware of any irregularities in the
prosecution of any foreign or domestic applications relating to the procurement,
establishment, or registration of the
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Intellectual Property, where such irregularities may impact the validity or
enforceability of the Intellectual Property or otherwise impact the Company's
rights in the Intellectual Property.
(11) Regarding any pending patent applications listed
in Exhibit A, counsel is unaware of any circumstances that would adversely
affect the ability of the Company to obtain validly issued patents having
reasonable claim scope.
(12) Except as set forth in the Registration Statement,
counsel is unaware of any actual or threatened legal, governmental, or other
third party action, suit, claim, or proceeding (including those relating to
infringement) relating to Intellectual Property rights owned by or affecting the
business operations of the Company which are pending or threatened against the
Company and which action, suit, claim, or proceeding would, with respect to any
of the foregoing, have a material adverse effect on the condition (financial or
other), earnings, operations, business, or business prospects of the Company.
(13) Except as set forth in the Registration Statement,
to the best of counsel's knowledge, the Company is not infringing or otherwise
violating any Intellectual Property rights of any third party, and, to the best
of counsel's knowledge, no third party is infringing or otherwise violating any
of the Company's Intellectual Property in a way that would have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business, or business prospects of the Company.
(14) The information in the Registration Statement and
the Prospectus under the captions "_____________________" have been reviewed by
such counsel and are a fair and accurate summary of such matters.
(15) To such counsel's knowledge, there are no facts or
circumstances which would require the Company to obtain licenses under third
party Intellectual Property rights which are necessary to allow the Company to
conduct the business now being conducted or proposed to be conducted by the
Company as described in the Prospectus.
(16) Counsel is unaware of any asserted, unasserted, or
threatened claims relating to the scope, validity, or ownership of any of the
Intellectual Property.
References to the Registration Statement and the
Prospectus in this subsection (e) shall include any amendment or supplement
thereto at the date of such opinion.
(f) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of ________________, counsel for the Selling Securityholder, dated the
Closing Date, to the effect that:
(1) The Selling Securityholder has full corporate power
to enter into this Agreement, the Custody Agreement and the Power-of-Attorney
and to sell, transfer and deliver the Shares being sold by the Selling
Securityholder hereunder in the manner provided in this Agreement
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and to perform its obligations under the Custody Agreement. The execution and
delivery of this Agreement, the Custody Agreement and the Power-of-Attorney have
been duly authorized by all necessary action (corporate or other) of the Selling
Securityholder. This Agreement, the Custody Agreement and the Power-of-Attorney
have been duly executed and delivered by the Selling Securityholder. Assuming
due authorization, execution and delivery by the Custodian, the Custody
Agreement and the Power-of-Attorney are the legal, valid, binding and
enforceable instruments of the Selling Securityholder, subject to applicable
bankruptcy, insolvency and similar laws affecting creditors' rights generally
and subject, as to enforceability, to general principles of equity (regardless
of whether enforcement is sought in a proceeding in equity or at law);
(2) The delivery by the Selling Securityholder to the
several Underwriters of certificates for the Shares being sold hereunder by the
Selling Securityholder against payment therefor as provided herein, will convey
good and marketable title to such Shares to the several Underwriters, free and
clear of all security interests, liens, encumbrances, equities, claims or other
defects; and
(3) The sale of the Shares to the several Underwriters
by the Selling Securityholder pursuant to this Agreement, the compliance by the
Selling Securityholder with the other provisions of this Agreement, the Custody
Agreement and the consummation of the other transactions herein contemplated do
not (i) require the consent, approval, authorization, registration or
qualification of or with any governmental authority, except such as have been
obtained and such as may be required under state securities or blue sky laws, or
(ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Selling
Securityholder is a party or by which such Selling Securityholder or any of the
Selling Securityholder's respective properties are bound, or the charter
documents or by-laws of the Selling Securityholder, if applicable, or any
statute or any judgment, decree, order, rule or regulation of any court or other
governmental authority or any arbitrator applicable to the Selling
Securityholder.
In rendering such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials. Copies of such opinion shall be
delivered to the Representative and Underwriters' Counsel.
References to the Registration Statement and the Prospectus in this
subsection (f) shall include any amendment or supplement thereto at the date of
such opinion.
(g) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, an opinion of
Snell & Wilmer, L.L.P. in form and substance satisfactory to you, with respect
to the sufficiency of all such corporate proceedings and other legal matters
relating to this Agreement and the transactions contemplated hereby as you may
reasonably require, and the Company shall have furnished to such counsel such
documents as they may have requested for the purpose of enabling them to pass
upon such matters.
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(h) You shall have received on the Closing Date and on any later date
on which Option Shares are to be purchased, as the case may be, a letter or
letters from D&T, addressed to the Underwriters, dated the Closing Date or such
later date on which Option Shares are to be purchased, as the case may be (in
each case, the "Bring Down Letter"), confirming that they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the applicable published Rules and Regulations and based upon the
procedures described in the letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), dated the
date hereof, or such later date on which Option Shares are to be purchased, as
the case may be, (i) confirming, to the extent true, that the statements and
conclusions set forth in the Original Letter are accurate as of the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be, and (ii) setting forth any revisions and additions to the statements and
conclusions set forth in the Original Letter that are necessary to reflect any
changes in the facts described in the Original Letter since its date, or to
reflect the availability of more recent financial statements, data or
information. The Bring Down Letter shall not disclose any change in the
condition (financial or otherwise), earnings, operations, business or business
prospects of the Company from that set forth in the Registration Statement or
Prospectus, which, in your sole judgment, is material and adverse and that makes
it, in your sole judgment, impracticable or inadvisable to proceed with the
public offering of the Shares as contemplated by the Prospectus. The Original
Letter from D&T shall be addressed to or for the use of the Underwriters in form
and substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth their opinion with respect to their examination
of the consolidated balance sheets of the Company as of December 31, 1998
(including the balance sheets of Aztec Industries, Inc. as of January 31, 1998),
and related consolidated statements of operations and common stockholders'
equity (deficit) and cash flows for the twelve (12) months ended December 31,
1998, (iii) state that D&T has performed the procedures set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information and providing the report of D&T as described in SAS 71 on the
financial statements for the periods ended March 31, 1999 and 1998 (the
"Quarterly Financial Statements"), (iv) state that in the course of such review,
nothing came to their attention that leads them to believe that any material
modifications need to be made to any of the Quarterly Financial Statements in
order for them to be in compliance with generally accepted accounting principles
consistently applied across the periods presented, (v) state that nothing came
to their attention that caused them to believe that the financial statements
included in the Registration Statement and Prospectus do not comply as to form
in all material respects with the applicable accounting requirements of Rule
11-02 of Regulation S-X and that any adjustments thereto have not been properly
applied to the historical amounts in the compilation of such statements, and
(vi) address other matters agreed upon by D&T and you. In addition, you shall
have received from D&T a letter addressed to the Company and made available to
you for the use of the Underwriters stating that their review of the Company's
system of internal accounting controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of and for the twelve (12) months ended December 31, 1998, and as
of and for the three (3) months ended March 31, 1999 did not disclose any
weaknesses in internal controls that they considered to be material weaknesses.
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[(i) At the time of the execution of this Agreement, the
Underwriters shall have received from M&P, former independent public accountants
for the Company, a letter dated such date and addressed to the Underwriters, in
form and substance satisfactory to the Underwriters, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72 (or
any successor bulletin), with respect to the audited and unaudited financial
statements and certain financial and capital stock information contained in the
Registration Statement and the Prospectus.]
(j) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of the Company, dated the Closing Date or such later date on which
Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that, and you shall be satisfied that:
(1) The representations and warranties of the Company
in this Agreement are true and correct in all material respects, as if made on
and as of the Closing Date and such later date on which Option Shares are to be
purchased, as the case may be, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be;
(2) No stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(3) When the Registration Statement became effective
and at all times subsequent thereto up to the delivery of such certificate, the
Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained all material information required to be included therein by
the Act and the Rules and Regulations, and in all material respects conformed to
the requirements of the Act and the Rules and Regulations, the Registration
Statement, and any amendment or supplement thereto, did not and does not include
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading, the Prospectus, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(4) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company or any of
its Subsidiaries, (b) any transaction that is material to the Company or any of
its
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<PAGE> 34
Subsidiaries, except transactions entered into in the ordinary course of
business or that were contemplated by and disclosed in the Registration
Statement and the Prospectus, (c) any obligation, direct or contingent, that is
material to the Company or any of its Subsidiaries, incurred by the Company or
any of its Subsidiaries, except obligations incurred in the ordinary course of
business, (d) any change in the capital stock or outstanding indebtedness of the
Company or any of its Subsidiaries that is material to the Company or such
Subsidiary or is out of the ordinary course of business of the Company or such
Subsidiary , (e) any dividend or distribution of any kind declared, paid or made
on the capital stock of the Company, or (f) any loss or damage (whether or not
insured) to the property of the Company or any of its Subsidiaries which has
been sustained or will have been sustained which has a Material Adverse Effect.
(k) The Representative shall have received a certificate from
the Selling Securityholder, signed by the Selling Securityholder, dated the
Closing Date and such later date on which Option Shares are to be purchased, as
the case may be, to the effect that:
(1) The representations and warranties of the Selling
Securityholder in this Agreement are true and correct in all material respects
as if made on and as of the Closing Date, or the date on which Option Shares are
to be purchased, as the case may be;
(2) The Selling Securityholder has performed all
covenants and agreements on its part to be performed or satisfied at or prior to
the Closing Date, or the date on which Option Shares are to be purchased, as the
case may be;
(3) To the extent that any statements or omissions are
made in the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement thereto in reliance upon and in conformity with
information furnished to the Company by the Selling Securityholder, as amended
as of the Closing Date, the Registration Statement does not include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein not misleading, and the Prospectus, as amended or
supplemented as of the Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and
(l) The Company shall have obtained and delivered to you an
agreement from each officer and director of the Company, each person set forth
on Schedule B attached hereto and each entity that is a stockholder and is
affiliated with an officer or director of the Company in writing prior to the
date hereof that such person will not, except as described below, during the
Lock-up Period, effect the Disposition of any Securities now owned or hereafter
acquired by such person or with respect to which such person has or hereafter
acquires the power of disposition, otherwise than (i) on the transfer of shares
of Common Stock or Securities during such person's lifetime by bona fide gift or
upon death by will or intestacy, provided that any transferee agrees in writing
to be bound by the Lock-Up Agreement, and (ii) on the transfer or other
disposition of shares of Common Stock or Securities as a distribution to limited
partners or stockholders of such person, provided that the
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<PAGE> 35
distributees thereof agree in writing to be bound by the terms of the Lock-Up
Agreement. The foregoing restriction shall have been expressly agreed to
preclude the holder of the Securities from engaging in any hedging, pledge or
other transaction which is designed to or may reasonably be expected to lead to
or result in a Disposition of Securities during the Lock-Up Period, even if such
Securities would be disposed of by someone other than the such holder. Such
prohibited hedging, pledge or other transactions would include, without
limitation, any short sale (whether or not against the box), any pledge of
shares covering an obligation that matures or could reasonably mature during the
Lock-Up Period, or any purchase, sale or grant of any right (including, without
limitation, any put or call option) with respect to any Securities or with
respect to any security (other than a broad-based market basket or index) that
includes, relates to or derives any significant part of its value from
Securities. Furthermore, such person will have also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Securities held by such person except in compliance with
this restriction. In addition, each officer and director of the Company, and
each person listed on Schedule 1 attached hereto (excluding Blackwater Capital
Group, L.L.C., Blackwater Capital Partners, L.P. or their assigns) also has
agreed pursuant to the Lock-Up Agreement that the Representative shall have an
irrevocable preferential right for a period of two years from the termination of
the Lock-Up Period to purchase for its account or to sell for the account of
each such officer, director or securityholder any Securities of the Company that
any of such officers, directors, or stockholders may seek to sell under Rule 144
promulgated under the Act. Each such officer, director, or securityholder will
consult the Representative with regard to any such offering and will offer the
Representative the opportunity to purchase or sell any such Securities on terms
not more favorable to such officer, director or securityholder than they can
secure elsewhere.
(m) The Representative's Warrant Agreement shall have been
entered into by the Company and you, and the Representative's Warrants shall
have been issued and sold to you pursuant thereto.
(n) The Company and the Selling Stockholder, if applicable,
shall have furnished to you such further certificates and documents as you shall
reasonably request (including certificates of officers of the Company) as to the
accuracy of the representations and warranties of the Company herein, as to the
performance by the Company of its obligations hereunder and as to the other
conditions concurrent and precedent to the obligations of the Underwriters
hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are satisfactory to
Underwriters' Counsel. The Company will furnish you with such number of
conformed copies of such opinions, certificates, letters and documents as you
shall reasonably request.
8. OPTION SHARES.
(a) On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters, for the purpose of
covering over-allotments in connection with the distribution
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<PAGE> 36
and sale of the Firm Shares only, a nontransferable option to purchase up to an
aggregate of ________________ Option Shares at the purchase price per share for
the Firm Shares set forth in Section 4 hereof (the "Option"). The Option may be
exercised by the Representative on behalf of the several Underwriters on one (1)
or more occasions in whole or in part during the period of forty five (45) days
after the date on which the Firm Shares are initially offered to the public by
giving written notice (the "Option Notice") to the Company. The number of Option
Shares to be purchased by each Underwriter upon the exercise of the Option shall
be the same proportion of the total number of Option Shares to be purchased by
the several Underwriters pursuant to the exercise of the Option as the number of
Firm Shares purchased by such Underwriter (set forth in Schedule A hereto) bears
to the total number of Firm Shares purchased by the several Underwriters (set
forth in Schedule A hereto), adjusted by the Representative in such manner as to
avoid fractional shares.
Delivery of definitive certificates for the Option
Shares to be purchased by the several Underwriters pursuant to the exercise of
the Option granted by this Section 8 shall be made against payment of the
purchase price therefor by the several Underwriters by certified or official
bank check or checks drawn in same day funds, payable to the order of the
Company or by wire transfer in same day funds. In the event of any breach of the
foregoing, the Company shall reimburse the Underwriters for the interest lost
and any other expenses borne by them by reason of such breach. Such delivery and
payment shall take place at the offices of Snell & Wilmer L.L.P., Phoenix,
Arizona, or at such other place as may be agreed upon between the Representative
and the Company (i) on the Closing Date, if written notice of the exercise of
the Option is received by the Company at least two (2) full business days prior
to the Closing Date, or (ii) on a date which shall not be later than the third
(3rd) full business day following the date the Company receives written Notice
of the Option, if such notice is received by the Company after the date two (2)
full business days prior to the Closing Date.
The certificates for the Option Shares to be so delivered will be made
available to you at such office or such other location, as you may reasonably
request for checking at least one (1) full business day prior to the date of
payment and delivery and will be in such names and denominations as you may
request, such request to be made at least two (2) full business days prior to
such date of payment and delivery. If the Representative so elects, delivery of
the Option Shares may be made by credit through full fast transfer to the
accounts at The Depository Trust Company designated by the Representative.
It is understood that you, individually, and not as the Representative
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the date of payment and
delivery for the Option Shares to be purchased by such Underwriter or
Underwriters. Any such payment by you shall not relieve any such Underwriter or
Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of the Option provided for in Section 8(a) hereof,
the obligations of the several Underwriters to purchase such Option Shares will
be subject (as of the date
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hereof and as of the date of payment and delivery for such Option Shares) to the
accuracy of and compliance with the representations, warranties and agreements
of the Company herein, to the accuracy of the statements of the Company and
officers of the Company made pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder, to the conditions set
forth in Section 7 hereof, and to the condition that all proceedings taken at or
prior to the payment date in connection with the sale and transfer of such
Option Shares shall be satisfactory in form and substance to you and to
Underwriters' Counsel, and you shall have been furnished with all such
documents, certificates and opinions as you may request in order to evidence the
accuracy and completeness of any of the representations, warranties or
statements, the performance of any of the covenants or agreements of the
Company, or the satisfaction of any of the conditions herein contained.
9. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within the
meaning of the Act or the Exchange Act, against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject (including, without limitation, in its capacity as an
Underwriter or as a "qualified independent underwriter" within the meaning of
Schedule E of the Bylaws of the NASD), under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities (or actions in respect thereof) arising out of or based upon (i)
any breach of any representation, warranty, agreement or covenant of the Company
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, (iii) any untrue statement or alleged untrue statement
of any material fact contained in any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or (iv) any untrue statement or alleged untrue statement
of any material fact contained in any audio or visual materials used in
connection with the marketing of the Shares and furnished by the Company,
including without limitation, slides, videos, films and tape recordings, and
agrees to reimburse each Underwriter for any legal or other expenses reasonably
incurred by it in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the Company shall
not be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through the Representative, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement provided
in this Section 9(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any losses,
claims, damages, liabilities or actions based upon any untrue
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<PAGE> 38
statement or alleged untrue statement of material fact or omission or alleged
omission to state therein a material fact purchased Shares, if a copy of the
Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected had not been sent or given to such
person within the time required by the Act and the Rules and Regulations, unless
such failure is the result of noncompliance by the Company with Section 5(a)(4)
hereof. This indemnity agreement shall be in addition to any liabilities which
the Company may otherwise have.
(b) The Selling Securityholder agrees to indemnify and hold
harmless each Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act or the Exchange Act against any losses, claims,
damages, damages or liabilities, joint or several, to which such Underwriter or
such controlling person may become subject under the Act, the Exchange Act or
otherwise, arising out of or are based upon: (i) any breach of any
representation, warranty, agreement or covenant of the Selling Securityholder
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto or any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto based upon information furnished by or on behalf of the
Selling Securityholder, or (iii) the omission or alleged omission to state in
the Registration Statement or any amendment thereto, any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, a material fact
required to be stated therein or necessary to make the statements therein
relating to the Selling Securityholder not misleading, and agrees to reimburse
each Underwriter and each such controlling person for any legal or other
expenses reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending against or appearing as a third-party
witness in connection with any such loss, claim, damage, liability or action;
provided, however, that the Selling Securityholder will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omissions made in the Registration Statement or any
amendment thereto, any Preliminary Prospectus or the Prospectus or any amendment
or supplement thereto, or any such Application in reliance upon and in
conformity with written information furnished to the Company or to the Selling
Securityholder by any Underwriter through the Representative specifically for
use therein and (ii) the Selling Securityholder will not be liable to any
Underwriter or any person controlling such Underwriter with respect to any such
untrue statement or omission made in any Preliminary Prospectus that is
corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting to such loss, claim, damage or liability purchased Shares from
such Underwriter but was not sent or given a copy of the Prospectus (as amended
or supplemented) at or prior to the written confirmation or the sale of such
Shares to such person in any case where such delivery of the Prospectus (as
amended and supplemented) is required by the Act, unless such failure to deliver
to the Prospectus (as amended and supplemented) was a result of noncompliance by
the Company with Section 5(a)(4) of this Agreement. This indemnity agreement
shall be in addition to any liability which the Selling Securityholder may
otherwise have.
(c) Each Underwriter, severally and not jointly, agrees to
indemnify and hold harmless the Company and the Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
and the Selling Stockholder may become subject under the
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<PAGE> 39
Act or otherwise, specifically including, but not limited to, losses, claims,
damages or liabilities (or actions in respect thereof) arising out of or based
upon (i) any breach of any representation, warranty, agreement or covenant of
such Underwriter herein contained, (ii) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement or any
amendment or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, or (iii) any untrue statement or alleged
untrue statement of any material fact contained in any Preliminary Prospectus or
the Prospectus or any amendment or supplement thereto, or the omission or
alleged omission to state therein a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, in the case of subparagraphs (ii) and (iii) of this
Section 9(c) to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company or to
the Selling Securityholder by such Underwriter, directly or through the
Representative, specifically for use in the preparation thereof, and agrees to
reimburse the Company and the Selling Securityholder for any legal or other
expenses reasonably incurred by the Company or by the Selling Securityholder in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 9(c) shall extend upon
the same terms and conditions to, and shall inure to the benefit of, each
officer of the Company who signed the Registration Statement and each director
of the Company, and each person, if any, who controls the Company within the
meaning of the Act or the Exchange Act. This indemnity agreement shall be in
addition to any liabilities which such Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against any indemnifying
party under this Section 9, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under this Section 9 except to the extent that it has been
prejudiced by such omission. In case any such action is brought against any
indemnified party, and it notified the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it shall elect by written notice delivered to the indemnified
party promptly after receiving the aforesaid notice from such indemnified party,
to assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded that there may be legal
defenses available to it which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall have
the right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying party
to such indemnified party of the indemnifying party's election so to assume the
defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 9 for any legal or
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other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 9(a), 9(b), or 9(c) hereof who are parties to
such action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on all claims that are the subject matter of such proceeding.
(e) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
9 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the public offering
price, and the Company and the Selling Securityholder are responsible for the
remaining portion, provided, however, that (i) no Underwriter shall be required
to contribute any amount in excess of the amount by which the underwriting
discount applicable to the Shares purchased by such Underwriter exceeds the
amount of damages which such Underwriter has otherwise been required to pay and
(ii) no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. The contribution agreement
in this Section 9(e) shall extend upon the same terms and conditions to, and
shall inure to the benefit of, each person, if any, who controls any
Underwriter, or the Company, or the Selling Securityholder within the meaning of
the Act or the Exchange Act and each officer of the Company who signed the
Registration Statement and each director of the Company.
(f) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 9, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 9 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in
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order to assure that adequate disclosure is made in the Registration Statement
and Prospectus as required by the Act and the Exchange Act.
(g) The liability of the Selling Securityholder under this
Section 9 shall not exceed an amount equal to the total proceeds received by the
Selling Securityholder from the sale of the Option Shares.
10. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties, covenants and agreements of the
Company, the Selling Securityholder and the Underwriters herein or in
certificates delivered pursuant hereto, and the indemnity and contribution
agreements contained in Section 9 hereof shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter within the meaning of the
Act or the Exchange Act, or by or on behalf of the Company, or any of its
officers, directors or controlling persons within the meaning of the Act or the
Exchange Act, and shall survive the delivery of the Shares to the several
Underwriters hereunder or termination of this Agreement.
11. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting Underwriter or Underwriters agreed
but failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
Underwriters shall have the right, but shall not be obligated, to take up and
pay for (in such proportions as may be agreed upon among them) the Firm Shares
which the defaulting Underwriter or Underwriters so agreed but failed to
purchase. If such remaining Underwriters do not, at the Closing Date, take up
and pay for the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase, the Closing Date shall be postponed for
twenty-four (24) hours to allow the several Underwriters the privilege of
substituting within twenty-four (24) hours (including non-business hours)
another underwriter or underwriters (which may include any nondefaulting
Underwriter) satisfactory to the Company. If no such underwriter or underwriters
shall have been substituted as aforesaid by such postponed Closing Date, the
Closing Date may, at the option of the Company, be postponed for a further
twenty-four (24) hours, if necessary, to allow the Company the privilege of
finding another underwriter or underwriters, satisfactory to you, to purchase
the Firm Shares which the defaulting Underwriter or Underwriters so agreed but
failed to purchase. If it shall be arranged for the remaining Underwriters or
substituted underwriter or underwriters to take up the Firm Shares of the
defaulting Underwriter or Underwriters as provided in this Section 11, (i) the
Company shall have the right to postpone the time of delivery for a period of
not more than seven (7) full business days, in order to effect whatever
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changes may thereby be made necessary in the Registration Statement or the
Prospectus, or in any other documents or arrangements, and the Company agrees
promptly to file any amendments to the Registration Statement, supplements to
the Prospectus or other such documents which may thereby be made necessary, and
(ii) the respective number of Firm Shares to be purchased by the remaining
Underwriters and substituted underwriter or underwriters shall be taken as the
basis of their underwriting obligation. If the remaining Underwriters shall not
take up and pay for all such Firm Shares so agreed to be purchased by the
defaulting Underwriter or Underwriters or substitute another underwriter or
underwriters as aforesaid and the Company shall not find or shall not elect to
seek another underwriter or underwriters for such Firm Shares as aforesaid, then
this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the
preceding paragraph of this Section 11, then the Company shall not be liable to
any Underwriter (except as provided in Sections 6 and 9 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 6 and 9 hereof).
The term "Underwriter" in this Agreement shall include any person
substituted for an Underwriter under this Section 11.
12. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
(a) This Agreement shall become effective at the earlier of (i)
6:30 A.M., Pacific Standard time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the public
offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the public offering shall mean the time
of the release by you, for publication, of the first newspaper advertisement
relating to the Shares, or the time at which the Shares are first generally
offered by the Underwriters to the public by letter, telephone, telegram or
telecopy, whichever shall first occur. By giving notice as set forth in Section
13 before the time this Agreement becomes effective, you, as Representative of
the several Underwriters, or the Company, may prevent this Agreement from
becoming effective without liability of any party to any other party, except as
provided in Sections 5(a)(9), 6 and 9 hereof.
(b) You, as Representative of the several Underwriters, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time on or prior to the Closing Date or on or prior to any later date on
which Option Shares are to be purchased, as the case may be, (i) if the Company
shall have failed, refused or been unable to perform any agreement on its part
to be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled is not fulfilled, including, without
limitation, any change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material
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<PAGE> 43
and adverse, or (ii) if additional governmental restrictions, not in force and
effect on the date hereof, shall have been imposed upon trading in securities
generally or minimum or maximum prices shall have been generally established on
the New York Stock Exchange or on the American Stock Exchange or in the over the
counter market by the NASD, or trading in securities generally shall have been
suspended on either such exchange or in the over the counter market by the NASD,
or if a banking moratorium shall have been declared by federal, New York or
California authorities, or (iii) if the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
to interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets as in your judgment makes it
inadvisable or impracticable to proceed with the offering, sale and delivery of
the Shares, or (v) if there shall have been an outbreak or escalation of
hostilities or of any other insurrection or armed conflict or the declaration by
the United States of a national emergency which, in the opinion of the
Representative, makes it impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. In the event of
termination pursuant to subparagraph (i) above, the Company shall remain
obligated to pay costs and expenses pursuant to Sections 5(a)9, 6 and 9 hereof.
Any termination pursuant to any of subparagraphs (ii) through (v) above shall be
without liability of any party to any other party except as provided in Sections
5, 6 and 9 hereof.
If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 12, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
13. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, or telecopied (and confirmed by letter) to you c/o Cruttenden
Roth Incorporated, 24 Corporate Plaza, San Diego, California 92660 telecopier
number (714) 852-9603, Attention: General Counsel, with a copy to Snell &
Wilmer, LLP, One Arizona Center, Phoenix, Arizona 85004, telecopier number (602)
382- 6070, Attention: Steven D. Pidgeon, Esq.; if sent to the Company, such
notice shall be mailed, delivered, telegraphed or telecopied (and confirmed by
letter) to DuraSwitch Industries, Inc., 234 S. Extension Road, Suite 103, Mesa,
Arizona 85210, Attention: President, with a copy to Quarles & Brady, One E.
Camelback Road, Suite 400, Phoenix, Arizona 85012, telecopier number (602)
230-5598, Attention: P. Robert Moya, Esq; if sent to the Selling Securityholder,
such notice shall be mailed, delivered, telegraphed (and confirmed by letter) or
telecopied (and confirmed by letter) to Blackwater Capital Partners, L.P.,
____________________________.
14. PARTIES. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters and the Company and their respective
executors, administrators, successors and assigns. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any person
or entity, other than the parties hereto and their respective executors,
administrators,
43
<PAGE> 44
successors and assigns, and the controlling persons within the meaning of the
Act or the Exchange Act, officers and directors referred to in Section 9 hereof,
any legal or equitable right, remedy or claim in respect of this Agreement or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of the parties hereto and their respective executors, administrators,
successors and assigns and said controlling persons and said officers and
directors, and for the benefit of no other person or entity. No purchaser of any
of the Shares from any Underwriter shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company under this Agreement, you shall
act on behalf of each of the several Underwriters, and the Company shall be
entitled to act and rely upon any statement, request, notice or agreement made
or given by you jointly or by Cruttenden Roth Incorporated on behalf of you.
15. APPLICABLE LAW. The validity and interpretation of this Agreement,
and the terms and conditions set forth herein, shall be governed by, and
construed in accordance with, the laws of the State of California.
16. CONSENT TO JURISDICTION AND SERVICE OF PROCESS. All judicial
proceedings arising out of or relating to this Agreement shall be initiated and
tried exclusively in the state and federal courts located in the State of
California. The aforementioned choice of venue is intended by the parties to be
mandatory and not permissive in nature, thereby precluding the possibility of
litigation between the parties with respect to or arising out of this Agreement
in any jurisdiction other than that specified in this Section 16. The Company
and the Selling Securityholder accepts for itself and in connection with its
properties, generally and unconditionally, the nonexclusive jurisdiction of the
aforesaid courts and waives any defense of forum non conveniens and irrevocably
agrees to be bound by any judgment rendered thereby in connection with this
Agreement. Each party hereby authorizes and accepts service of process
sufficient for personal jurisdiction in any action against it as contemplated by
this Section 16 by registered or certified mail, return receipt requested,
postage prepaid, to its address for the giving of notices as set forth in this
Agreement.
17. COUNTERPARTS. This Agreement may be signed in several counterparts,
each of which will constitute an original.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 45
If the foregoing correctly sets forth the understanding among
the Company and the several Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement between the Company and the several Underwriters.
Very truly yours,
DURASWITCH INDUSTRIES, INC.
By: ______________________________
R. Terren Dunlap
Chief Executive Officer
BLACKWATER CAPITAL PARTNERS, L.P.
By: ______________________________
Its:____________________________
Accepted as of the date first above written:
CRUTTENDEN ROTH INCORPORATED
On its behalf and on behalf of each of the several Underwriters named in
Schedule A hereto.
By: CRUTTENDEN ROTH INCORPORATED
By: ______________________________
Authorized Signatory
For and on behalf of the Representative
45
<PAGE> 46
SCHEDULE A
Number of Firm Shares
Underwriters To Be Purchased
- ------------------------------------------ ---------------------------------
Cruttenden Roth Incorporated..............
TOTAL.........................
1
<PAGE> 1
TOTAL SWITCH, INC.
EIN 86-0869039
TAX YEAR ENDING DECEMBER 31, 1997
Exhibit 2.1
===============================================================================
STOCK EXCHANGE AGREEMENT
entered into by and among
SOS INTERNATIONAL, INC.
a Nevada corporation,
TOTAL SWITCH, INC.,
an Arizona corporation,
TERRY DUNLAP
and
ANTONY J. VAN ZEELAND
===============================================================================
Effective as of December 11, 1997
Phoenix, Arizona
<PAGE> 2
STOCK EXCHANGE AGREEMENT
This STOCK EXCHANGE AGREEMENT (this "Agreement") is made and entered into
on the dates set forth below, to be effective as of December 11, 1997, by and
among SOS INTERNATIONAL, INC., a Nevada corporation ("SOSI"), TOTAL SWITCH,
INC., an Arizona corporation ("TSI"), and TERRY DUNLAP, an individual residing
in the State of Arizona ("Dunlap"), and ANTONY J. VAN ZEELAND, an individual
residing in the State of Arizona ("Van Zeeland"). References herein to Dunlap
and Van Zeeland are references to them in their individual capacities and also
are references to them as representatives of all of the shareholders of TSI, who
are referred to herein as the "Acquired Company's Shareholders." TSI is referred
to herein as the "Acquired Company." SOSI, the Acquired Company and the Acquired
Company's Shareholders are sometimes referred to collectively herein as the
"Parties" and sometimes individually as a "Party."
Recitals
A. On November 5, 1997, SOSI and the Acquired Company signed a letter of
intent (the "Letter of Intent").
B. The Letter of Intent provides for SOSI to (a) accomplish a 20:1 reverse
stock split (a "Reverse Stock Split") of all of its currently issued and
outstanding common stock, (b) complete any filings required to be made by SOSI
to the SEC, (c) change its name to Duraswitch Industries, Inc. and (d) issue
14,950,724 shares of common stock (the "Acquisition Stock"). The Acquisition
Stock shall be newly issued after the Reverse Stock Split to the Acquired
Company's Shareholders, who collectively own all of the issued and outstanding
stock of the Acquired Company (the "Acquired Company's Stock").
C. The Letter of Intent provides for the Acquired Company's Shareholders
to transfer to SOSI, in exchange for the Acquisition Stock, all of the Acquired
Company's Stock.
D. The Parties wish to enter into this Agreement to confirm and
definitively provide for transactions that are contemplated in the Letter of
Intent. When executed and delivered by the Parties as provided below, this
Agreement shall supersede and replace the Letter of Intent so far as the
transactions provided for in this Agreement are concerned. Other provisions of
the Letter of Intent, dealing with issuance of stock by SOSI to third parties,
shall remain in effect unless superseded by any other agreements.
Agreement
THEREFORE, in consideration of the mutual covenants and conditions herein
contained, and for other good and valuable consideration, the sufficiency and
receipt of which are hereby acknowledged, the Parties, intending to be legally
bound, hereby agree as follows.
1
<PAGE> 3
ARTICLE
1
SHARE EXCHANGES
1.1 Stock Exchanges. SOSI hereby agrees to sell, convey, assign and
transfer the Acquisition Stock to the Acquired Company's Shareholders in
exchange for sale, conveyance, assignment and transfer to SOSI of the Acquired
Company's Stock. The Acquired Company's Shareholders and the Acquired Company
hereby agree to sell, convey, assign and transfer the Acquired Company's Stock
to SOSI in exchange for sale, conveyance, assignment and transfer to the
Acquired Company's Shareholders of the Acquisition Stock. Unless the Acquired
Company's Shareholders otherwise direct, the Acquisition Stock shall be
transferred to them in the following proportions: [describe].
1.2 Closing. Consummation of the transactions described in this Agreement
(the "Closing") will occur at 9:00 a.m. on or before December 15, 1997 (the
"Closing Date") at the offices of Chase Investment, Inc. or at such other
location as is mutually agreeable to the Parties.
1.3 Stock Conveyed by SOSI. At the Closing, SOSI shall convey to the
Acquired Company's Shareholders good, valid and marketable title to the
Acquisition Stock, free and clear of encumbrances, claims, liens, security
interests, pledges or mortgages of any kind. Unless and until the Acquisition
Stock is registered under the Securities Exchange Act of 1934, no Acquired
Company's Shareholder shall be entitled to transfer all or any share of the
Acquisition Stock to any person or party unless the Acquired Company's
Shareholder first provides SOSI with an acceptable opinion of counsel that the
proposed transfer will not violate any applicable law, rule or regulation or
any provision of this Agreement. SOSI shall be entitled to place a restrictive
legend on all certificates evidencing ownership of the Acquisition Stock that
provides notice of the provisions of this paragraph and other applicable
provisions of this Agreement.
1.4 Stock Conveyed by the Acquired Company's Shareholders. At the Closing
the Acquired Company's Shareholders shall convey to SOSI good, valid and
marketable title to the Acquired Company's Stock, free and clear of
encumbrances, claims, liens, security interests, pledges or mortgages of any
kind. Following delivery to SOSI of the Acquired Company's Stock, the Acquired
Company shall deliver replacement certificates to SOSI in the same number of
shares in the Acquired Company's Stock as delivered above, in the name of SOSI.
ARTICLE
2
DELIVERIES BY SOSI AT THE CLOSING
2.1 Deliveries by SOSI. In addition to all other items required to be
delivered by SOSI at the Closing under this Agreement, SOSI shall deliver all
of the following items to the Acquired Company Shareholders, unless an item
described below is to be delivered to a single Party:
(a) the Acquisition Stock to the Acquired Company's Shareholders, by
delivery to the Acquired Company's Shareholders of one or more share
certificates
2
<PAGE> 4
evidencing ownership of the Acquisition Stock, issued by SOSI in the name of
the Acquired Company's Shareholders;
(b) a certified copy of SOSI's articles of incorporation, amended as
necessary to authorize issuance of the Acquisition Stock, together with a
certificate of SOSI's Secretary, confirming that the Acquisition Stock has been
duly issued as required in this Agreement;
(c) a current Certificate of Good Standing of SOSI, issued by the
Secretary of State of the State of Nevada;
(d) corporate records of SOSI consisting of at least the following:
certified copies of SOSI's bylaws, complete minute books and a copy of SOSI's
stock transfer ledger;
(e) a balance sheet of SOSI dated as of October 31, 1997, prepared by
SOSI's controller or accountant in accordance with generally accepted
accounting principles consistently applied;
(f) certificates of the Secretary and the Vice President or the
President of SOSI verifying the accuracy and authenticity of all corporate
records, other materials, disclosures or documents of SOSI delivered or
provided by SOSI at the Closing, and confirming the accuracy on the Closing
Date of all representations and warranties of SOSI contained herein;
(g) resignations of all officers and members of the board of
directors of SOSI, effective as of or prior to the Closing Date;
(h) certified copies of resolutions of the board of directors of SOSI
authorizing execution and delivery of this Agreement by SOSI and consummation
by SOSI of all the transactions that are contemplated herein;
(i) a legal opinion of SOSI's counsel addressed to the Acquired
Company in form mutually agreeable to the Parties; and
(j) copies of all contracts, loan agreements, memoranda and other
documents or instruments (in an amount of $5000 or more) to which SOSI is a
party or by which it is bound or to which it or any of its assets is subject.
2.2 Other Documents and Instruments. SOSI shall also deliver any and all
such other documents and instruments of conveyance, assignment and transfer,
and such other items, as may be reasonably requested or necessary in order to
vest good and marketable title to the Acquisition Stock in the Acquired
Company's Shareholders, on or prior to the date of the Closing. All instruments
and other documents or instruments exchanged by the Parties shall be in form as
needed to effectuate the transactions contemplated by this Agreement or to
evidence the same,
3
<PAGE> 5
and shall include any third party consents to the transactions contemplated
herein that may be required by the provisions of any contracts, agreements or
obligations to which SOSI is a party or pursuant to which a change in the stock
ownership of SOSI is deemed to constitute an assignment or transfer requiring
such consent or approval. These additional conveyances and transfers shall be
made by SOSI with a view toward placing the Acquired Company's Shareholders,
on or prior to the date of the Closing in actual possession and ownership of
stock of SOSI as provided herein.
ARTICLE
3
DELIVERIES BY THE ACQUIRED COMPANIES' SHAREHOLDERS
AT THE CLOSING
3.1 Deliveries by the Acquired Company's Shareholders. In addition to all
other items required to be delivered by the Acquired Company's Shareholders at
the Closing under this Agreement, at the Closing the Acquired Company's
Shareholders shall deliver all of the following items to SOSI:
(a) the Acquired Company's Stock, by delivery to SOSI of one or more
share certificates evidencing ownership of the Acquired Company's Stock,
endorsed in blank by the Acquired Company's Shareholders in the name of SOSI;
(b) certified copies of the Acquired Company's articles of
incorporation, together with certificates of the Acquired Company's confirming
that the Acquired Company's Stock has been duly transferred on the books and
records, and in the stock transfer ledgers of the Acquired Company, as required
in this Agreement;
(c) a current Certificate of Good Standing of the Acquired Company,
issued by the Secretary of State of the State of Arizona;
(d) corporate records of the Acquired Company's Shareholders
consisting of at least the following: certified copies of the Acquired Company
Shareholders' bylaws, complete minute books and a copy of the Acquired Company's
Shareholders' stock transfer ledger;
(e) a balance sheet of the Acquired Company dated as of October 31,
1997, prepared by the controller or accountant of the Acquired Company in
accordance with generally accepted accounting principles consistently applied;
(f) certificates of the Secretary and the Vice President or the
President of the Acquired Company verifying the accuracy and authenticity of all
corporate records, other materials, disclosures or documents pertaining to the
Acquired Company delivered or provided by the Acquired Company's Shareholders at
the Closing, and confirming the accuracy on the Closing Date of all
representations
4
<PAGE> 6
and warranties of the Acquired Company's Shareholders and the Acquired Company
as contained herein;
(g) certified copies of resolutions of the board of directors of the
Acquired Company authorizing execution and delivery of this Agreement by the
Acquired Company and consummation by the Acquired Company of all of the
transactions that are contemplated herein;
(h) a legal opinion of the Acquired Company's counsel addressed to SOSI
in form mutually agreeable to the Parties; and
(i) copies of all contracts of $5,000 (U.S.) or more, loan agreements,
memoranda and other documents or instruments to which the Acquired Company is a
party or by which it is bound or to which it or any of its assets is subject.
3.2 Other Documents and Instruments. The Acquired Company shall also deliver
to SOSI any and all such other documents and instruments of conveyance,
assignment and transfer, and such other items, as may be reasonably requested
or necessary in order to vest good and marketable title to the Acquired
Company's Stock in SOSI on or prior to the date of the Closing. All instruments
and other documents or instruments exchanged by the Parties shall be in form as
needed to effectuate the transactions contemplated by this Agreement or to
evidence the same, and shall include any third party consents to the
transactions contemplated herein that may be required by the provisions of any
contracts, agreements or obligations to which the Acquired Company is a party
or pursuant to which a change in the stock ownership of the Acquired Company is
deemed to constitute an assignment or transfer requiring such consent or
approval. These additional conveyances and transfers shall be made by the
Acquired Company with a view toward placing SOSI on, or prior to, the date of
the Closing in actual possession and ownership of all of the stock of the
Acquired Company as provided herein.
ARTICLE
4
REPRESENTATIONS AND WARRANTIES OF SOSI
SOSI hereby represents and warrants to, and covenants with, the Acquired
Company Shareholders that the representations and warranties provided below are
true, correct, accurate and complete in any and all respects as of the
effective date of this Agreement, and that the same will be true, correct,
accurate and complete on and as of the date of the Closing (as though made then
and as though the Closing were substituted for the date of this Agreement
throughout the following), except as may be set forth in the Disclosure
Schedule attached hereto (the "SOSI Disclosure Schedule"). The SOSI Disclosure
Schedule will be arranged in paragraphs and subparagraphs that correspond to
the designation of subparagraphs below.
4.1 Organization of SOSI. SOSI is a corporation that is duly organized,
validly existing, and in good standing in all material respects under the laws
of the State of Nevada.
5
<PAGE> 7
4.2 Authorization of Transaction. SOSI has full actual and legal corporate
power and corporate authority to execute and deliver this Agreement and to
perform its obligations hereunder.
4.3 Enforceable Obligation. This Agreement constitutes the valid and
legally binding obligation of SOSI, enforceable against SOSI in accordance with
this Agreement's terms.
4.4 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby by SOSI
will (i) to SOSI's knowledge, violate any statute, law, regulation, rule,
judgment, order, decree, stipulation, injunction, charge, or other restriction
of any government, governmental agency, or state or federal court to which SOSI
or the Acquisition Stock are subject or any provision of the articles of
incorporation or bylaws or similar governing rules or documents of SOSI, (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify
or cancel, or require any notice under any governmental rule, law or regulation
of any state or federal court or under any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage or instrument
of indebtedness or under any other arrangement to which SOSI is a party or by
which it or the Acquisition Stock are bound or to which it or any of the
Acquisition Stock is subject, (iii) nor result in the imposition of any lien,
encumbrance, claim or security interest in, to or affecting any of the
Acquisition Stock. To its knowledge, SOSI does not need to give any notice to,
make any filing with, or obtain any authorization, consent, or approval of any
state or federal government or governmental agency in order for the Parties to
consummate the transactions contemplated by this Agreement, except those that
will be obtained or made prior to Closing or those which would fail to have a
material adverse effect on the ability of SOSI to consummate the transactions
contemplated by this Agreement.
4.5 The Acquisition Stock. As of the date of Closing, the Acquisition
Stock will constitute, in the aggregate, 85% percent of all of the issued and
outstanding common stock of SOSI, with the rights, privileges and preferences
that are described in SOSI's articles of incorporation. As of the date of
Closing the Acquisition Stock will have been duly and validly issued and is and
will be nonassessable. The Acquisition Stock will be restricted stock,
consistent with Section 1.3 of this Agreement. Title to the Acquisition Stock
will be in the name of the Acquired Company's Shareholders in the official
records of SOSI and in the records of SOSI's stock transfer agent, if any.
4.6 Litigation. To SOSI's knowledge, SOSI is not subject to any
unsatisfied judgment, order, decree, stipulation, injunction, or charge nor is
it a party or threatened to be made a party to any charge, complaint, action,
suit, proceeding, hearing, or investigation of or in any court or
quasi-judicial or administrative agency of any federal, state or local
jurisdiction or before any arbitrator that relates in any way, directly or
indirectly, to the transactions contemplated in this Agreement. SOSI has no
actual reason to believe that any charge, complaint, action, suit, proceeding,
hearing, or investigation will or may be brought or threatened against SOSI in
connection with the transactions contemplated in this Agreement.
6
<PAGE> 8
4.7 Material Information. As of the Closing, no representation or warranty
by SOSI, nor any statement or certificate furnished or to be furnished to the
Acquired Company's Shareholders pursuant hereto or in connection with the
transactions contemplated hereby, contains or will contain any untrue statement
of a material fact, or omits or will omit to state any material fact necessary
to make the representation, warranty, statement or certificate not misleading.
At or prior to the Closing SOSI will deliver to the Acquired Company's
Shareholders a Disclosure Document ("Disclosure Document") that provides the
Acquired Company's Shareholders with all material information concerning SOSI
and the Acquisition Stock, as required by Rule 10b-5 of the Securities and
Exchange Commission, and SOSI and the Acquired Company's Shareholders will take
all actions and steps that are necessary to cause the Acquired Company's
Shareholders' acquisition of the Acquisition Stock to be qualified under
Regulation D of the Securities and Exchange Commission as a private placement of
securities and to be similarly qualified under applicable provisions of state
laws. The Parties will cooperate with each other in signing documents and forms
to be filed with federal and state regulatory agencies to accomplish the results
contemplated in this paragraph.
4.8 Documentation. Prior to the Closing SOSI will deliver to the Acquired
Company's Shareholders, materially correct, accurate and complete copies of all
of the contracts in an amount of $5000 or more, and agreements and documents
that comprise or relate to SOSI or the Acquisition Stock in any way. As to each
such contract, agreement, or document (collectively, each "Contract"):
(a) the Contract is the legal, valid, binding, and enforceable
obligation of the parties thereto as of the Closing Date, and is in full force
and effect as of the Closing Date;
(b) to the extent permitted by applicable law, after the Closing, to
the best of SOSI's knowledge, each Contract will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the Closing;
(c) to the knowledge of SOSI, no party to the Contract is in breach
or default, and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration of the Contract;
(d) to the knowledge of SOSI, no party to the Contract has
repudiated, breached or anticipatorily breached any provision thereof, nor is
there any reason to think that any such is likely to occur or may occur in the
future;
(e) to the knowledge of SOSI, there are no disputes, oral agreements,
or forbearance programs in effect as to the Contract; and
(f) to the knowledge of SOSI, SOSI has not assigned, transferred,
conveyed, mortgaged, deeded in trust, or encumbered any interest in the
Contract.
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<PAGE> 9
4.9 Legal Compliance.
(a) To its knowledge, SOSI has complied in all material respects with
all laws (including rules and regulations thereunder) of federal, state and
local governments (and all agencies thereof), and no charge, complaint,
action, suit, proceeding, hearing, investigation, claim, demand, or notice
has been filed or commenced against any of SOSI alleging any failure to
comply with any such law or regulation.
(b) SOSI has complied in all material respects with all applicable
laws (including rules and regulations thereunder) relating to the
employment of labor, employee civil rights, and equal employment
opportunities.
4.10 Receipt of Disclosure Schedule. Prior to Closing, SOSI received and
reviewed a copy of the Disclosure Schedule, if any, described in Section 5.10,
had discussions with representatives of the Acquired Company and the Acquired
Company's Shareholders, and received from such representatives such additional
documents and information as SOSI requested.
4.11 Restricted Stock. SOSI understands that the Acquired Company's Stock
will not be registered with the Securities and Exchange Commission, and that
transferability of the Acquired Company's Stock will be subject to the
provisions and restrictions of state and federal securities laws.
4.12 Registration Representations. SOSI is the sole party in interest
agreeing to purchase the Acquired Company's Stock by entering into this
Agreement. SOSI is acquiring the Acquired Company's Stock for SOSI's own
account, for investment purposes only and not with a view to the resale or other
distribution thereof, in whole or in part. As stated in the previous paragraph,
SOSI is aware that as of the date of Closing the Acquired Company's Stock has
not been and will not be registered under the 1933 Act.
4.13 Third Party Consents. All third parties whose consent to the
transactions contemplated in this Agreement are listed in the Disclosure
Schedule. The Disclosure Schedule also indicates the contract, agreement, permit
or other relationship to the third party that gives rise to the need for the
third party's consent.
4.14 Due Diligence Period. During the time period from the effective date
of this Agreement until the Closing date (the "Due Diligence Period"), SOSI
shall be entitled to investigate the Acquired Company, review its files, visit
the Acquired Company's business premises and to talk with officers and employees
of the Acquired Company and to meet with any and all other third parties, public
and private, and to perform such other due diligence reviews and investigations
pertaining to the transactions contemplated in this Agreement as SOSI determines
is necessary or proper.
8
<PAGE> 10
ARTICLE
5
REPRESENTATIONS, WARRANTIES AND COVENANTS OF
THE ACQUIRED COMPANY'S SHAREHOLDERS
The Acquired Company's Shareholders represent and warrant to, and covenant
with, SOSI that the representations and warranties provided below are true,
correct, accurate and complete in all respects as of the effective date of this
Agreement, and that the same will be true, correct, accurate and complete on and
as of the date of the Closing (as though made then and as though the Closing
were substituted for the date of this Agreement throughout the following),
except as may be set forth in the Disclosure Schedule attached hereto (the
"Acquired Company's Shareholders' Disclosure Schedule"). The Acquired Company's
Shareholders Disclosure Schedule will be arranged in paragraphs and
subparagraphs that correspond to the designation of subparagraphs below. All of
the representations and warranties of the Acquired Company's Shareholders
provided for in this Article 5 are to the best knowledge of the Acquired
Company's Shareholders.
5.1 Organization of the Acquired Company. The Acquired Company is a
corporation that is duly organized, validly existing, and in good standing in
all material respects under the laws of the State of Arizona.
5.2 Authorization of Transaction. The Acquired Company has full actual and
legal corporate power and corporate authority to execute and deliver this
Agreement and to perform its obligations hereunder.
5.3 Enforceable Obligation. This Agreement constitutes the valid and
legally binding obligation of the Acquired Company and the Acquired Company's
Shareholders, enforceable against each of them in accordance with this
Agreement's terms.
5.4 Noncontravention. Neither the execution and delivery of this Agreement
by the Acquired Company and the Acquired Company's Shareholders, nor the
consummation by any of them of the transactions contemplated hereby, will (i)
violate any statute, law, regulation, rule, judgment, order, decree,
stipulation, injunction, charge, or other restriction of any government,
governmental agency, or court to which the Acquired Company or the Acquired
Company's Shareholders or the Acquired Company's Stock are subject, or any
provision of the articles of incorporation or bylaws or similar governing rules
or documents of the Acquired Company, (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify or cancel, or require any notice
under any governmental rule, law or regulation or under any contract, lease,
sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage or instrument of indebtedness or under any other arrangement to which
the Acquired Company or the Acquired Company's Shareholders is a party or by
which any of them is bound or to which any of them is subject, (iii) nor result
in the imposition of any lien, encumbrance, claim or security interest in, to or
affecting any assets of the Acquired Company or the Acquired Company's Stock. No
Acquired Company or Acquired Company Shareholder needs to give any notice to,
make any filing with, or obtain any
9
<PAGE> 11
authorization, consent, or approval of any government or governmental agency in
order for the Parties to consummate the transactions contemplated by this
Agreement. The description of the Acquired Company's Stock that is contained in
Exhibit B attached is true, correct, complete and accurate in any and all
respects and constitutes 100% of all of the issued and outstanding stock of the
Acquired Company. There are no warrants, options, convertible securities or
other interests or rights to acquire the Acquired Company's Stock.
5.5 Documentation. Prior to the Closing, the Acquired Company and/or the
Acquired Company's Shareholders will deliver to SOSI true, correct, accurate and
complete copies of all of the contracts, agreements and documents that comprise
or relate to the Acquired Company or the Acquired Company's Stock in any way. As
to each such contract, agreement, or document (collectively, each "Contract"):
(a) the Contract is the legal, valid, binding, and enforceable
obligation of the parties thereto as of the Closing Date, and is in full
force and effect as of the Closing Date;
(b) to the extent permitted by applicable law, after the Closing,
each Contract will continue to be legal, valid, binding, enforceable, and
in full force and effect on identical terms following the Closing;
(c) no party to the Contract is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach
or default or permit termination, modification, or acceleration of the
Contract;
(d) no party to the Contract has repudiated, breached or
anticipatorily breached any provision thereof, nor is there any reason to
think that any such is likely to occur or may occur in the future;
(e) there are no disputes, oral agreements, or forbearance programs
in effect as to the Contract; and
(f) no Acquired Company nor Acquired Company's Shareholders have
assigned, transferred, conveyed, mortgaged, deeded in trust, or encumbered
any interest in the Contract.
5.6 Litigation. Neither the Acquired Company nor any of the Acquired
Company's Shareholders is subject to any unsatisfied judgment, order, decree,
stipulation, injunction, or charge nor is it a party or threatened to be made a
party to any charge, complaint, action, suit, proceeding, hearing, or
investigation of or in any court or quasi-judicial or administrative agency of
any federal, state or local jurisdiction or before any arbitrator that relates
in any way, directly or indirectly, to the transactions contemplated in this
Agreement. No Acquired Company or Acquired Company's Shareholder has any reason
to believe that any charge, complaint, action, suit, proceeding, hearing, or
investigation will or may be brought or threatened against any Acquired Company
in connection with the transactions contemplated in this Agreement.
10
<PAGE> 12
5.7 Legal Compliance
(a) The Acquired Company has complied with all laws (including
rules and regulations thereunder) of federal, state and local governments
(and all agencies thereof), and no charge, complaint, action, suit,
proceeding, hearing, investigation, claim, demand, or notice has been filed
or commenced against the Acquired Company alleging any failure to comply
with any such law or regulation.
(b) The Acquired Company has complied in all material respects
with all applicable laws (including rules and regulations thereunder)
relating to the employment of labor, employee civil rights, and equal
employment opportunities.
5.8 Material Information. As of the Closing, no representation or warranty
by the Acquired Company or the Acquired Company's Shareholders, nor any
statement or certificate furnished or to be furnished to any person or Party
pursuant hereto or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact, or omits or
will omit to state any material fact necessary to make the representation,
warranty, statement or certificate not misleading. At or prior to the Closing
The Acquired Company's Shareholders will deliver to SOSI a Disclosure Document
("Disclosure Document") that provides SOSI with all material information
concerning the Acquired Company, as required by Rule 10b-5 of the Securities and
Exchange Commission, and the Acquired Company's Shareholders and SOSI will take
all actions and steps that are necessary to cause the Acquired Company's
Shareholders' acquisition of the Acquisition Stock to be qualified under
Regulation D of the Securities and Exchange Commission as a private placement of
securities and to be similarly qualified under applicable provisions of state
laws. The Parties will cooperate with each other in signing documents and forms
to be filed with federal and state regulatory agencies to accomplish the results
contemplated in this paragraph.
5.9 Receipt of Disclosure Schedule. Prior to making the decision to
acquire the Acquisition Stock as provided herein, the Acquired Company and the
Acquired Company's Shareholders received and reviewed a copy of the Disclosure
Schedule described in Section 4.10, had discussions with representatives of SOSI
and received from such representatives such additional documents and information
as the Acquired Company's Shareholder requested. Each of the Acquired Company's
Shareholders acknowledges that he or she is sophisticated and experienced in
matters relating to SOSI and its planned business activities as described in the
Disclosure Schedule.
5.10 Restricted Stock. Each of the Acquired Company's Shareholders
understands that the Acquisition Stock will be restricted stock, not registered
with the Securities and Exchange Commission. Unless and until the Acquisition
Stock is registered under the Securities Exchange Act of 1934, no Acquired
Company's Shareholder shall be entitled to transfer all or any share of the
Acquisition Stock unless the Acquired Company's Shareholder first provides SOSI
with an acceptable opinion of counsel that the proposed transfer will not
violate any applicable law, rule or regulation or any provision of this
Agreement. SOSI shall be entitled to place a restrictive
11
<PAGE> 13
legend on all certificates evidencing ownership of the Acquisition Stock that
provides notice of the provisions of this paragraph and other applicable
provisions of this Agreement. Unless otherwise provided in this Agreement, each
of the Acquired Company's Shareholders shall be prohibited from trading the
Acquisition Stock for a period of two years after the date of the Closing.
5.11 REGISTRATION REPRESENTATIONS. Each of the Acquired Company
Shareholders is the sole party in interest agreeing to purchase the Acquisition
Stock by entering into this Agreement. The Acquired Company's Shareholders are
acquiring the Acquisition Stock for the Acquired Company's Shareholders' own
account, for investment purposes only and not with a view to the resale or other
distribution thereof, in whole or in part. As stated above, the Acquired
Company's Shareholders is aware that as of the date of Closing the Acquisition
Stock has not been and will not be registered under the 1933 Act and that SOSI
provides no assurance that the Acquisition Stock will ever be registered under
such act. Each of the Acquired Company's Shareholders is willing and able and
agrees to bear the economic risk of investment in the Acquisition Stock for an
indefinite period of time, and each is capable of bearing that risk. Each of the
Acquired Company's Shareholders is knowledgeable with respect to the financial,
tax and business aspects of ownership of the Acquisition Stock and of the
business operations conducted by SOSI, or the Acquired Company has been
represented by a person with such knowledge and expertise in connection with
acquisition of the Acquisition Stock.
5.12 THIRD PARTY CONSENTS. All third parties, if any, whose consent to
the transactions contemplated in this Agreement are listed in the Disclosure
Schedule. The Disclosure Schedule also indicates the contract, agreement,
permit or other relationship to the third party that gives rise to the need for
the third party's consent.
5.13 DUE DILIGENCE PERIOD. During the time period from the effective date
of this Agreement until the Closing date (the "Due Diligence Period"), the
Acquired Company's Shareholders shall be entitled to investigate SOSI, review
its files, to visit SOSI's business premises and to talk with officers and
employees of SOSI and to meet with any and all other third parties, public and
private, and to perform such other due diligence reviews and investigations
pertaining to the transactions contemplated in this Agreement as any Acquired
Company's Shareholder determines is necessary or proper. The Acquired Company's
Shareholders have received the financial statements of SOSI dated through
October 31, 1997, and deems them sufficient for purposes of entering into this
transaction.
5.14 FINANCIAL STATEMENTS. Attached to this Agreement as Exhibit D are
balance sheets (the "Financial Statements") of the Acquired Company. The
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied, and are true and accurate. Since
the date of the Financial Statements, there has been no change in the financial
condition of the Acquired Company. The Acquired Company have no liabilities,
commitments or obligations, contingent or otherwise, not shown on the Financial
Statements.
12
<PAGE> 14
ARTICLE
6
CONDITIONS PRECEDENT
6.1 Conditions Precedent to the Obligations of SOSI. The following are
conditions precedent to the obligation of SOSI to sell and convey the
Acquisition Stock to the Acquired Company's Shareholders and to receive an
assignment of the Acquired Company's Stock at the Closing. Any condition listed
below may be waived by SOSI at or prior to the Closing Date.
(a) Delivery to SOSI of all information and materials required to be
delivered under any provision of this Agreement;
(b) Receipt of all necessary third party consents;
(c) Performance by each Acquired Company Shareholder of all of his or
her or its obligations under this Agreement that are required to be
performed prior to Closing;
(d) True and correct representations and warranties by the Acquired
Company and the Acquired Company's Shareholders in connection with this
Agreement; and
(e) Discovery of no materially adverse information at or prior to
the Closing concerning the Acquired Company.
6.2 Conditions Precedent to the Obligations of the Acquired Company's
Shareholders. The following are conditions precedent to the obligations of
Acquired Company's Shareholders to sell and transfer the Acquired Company Stock
to SOSI, and to acquire the Acquisition Stock from SOSI, at the Closing. Any
condition listed below may be waived by the Acquired Company's Shareholders at
or prior to the Closing.
(a) Delivery to the Acquired Company's Shareholders of all
information and materials required to be delivered by SOSI under any
provision of this Agreement;
(b) Receipt of all necessary third party consents;
(c) Performance by SOSI of all of its obligations under this
Agreement that are required to be performed prior to Closing; and
(d) Discovery of no materially adverse information at or prior to
the Closing concerning SOSI.
6.3 Survival of Representations and Warranties. The representations and
warranties of the Parties contained in this Agreement shall survive the Closing
and shall continue to be the obligations of the Parties for a period of two
years after the date of the Closing.
13
<PAGE> 15
ARTICLE
7
GENERAL PROVISIONS
7.1 Costs and Fees. If any Party breaches any term of this Agreement, the
breaching Party agrees to pay the non-breaching Party all reasonable attorneys'
fees, expert witness fees, investigation costs, costs of tests and analysis,
travel and accommodation expenses, deposition and trial transcript costs, court
costs and other costs and expenses incurred by the non-breaching Party in
enforcing this Agreement or preparing for legal or other proceedings, at the
trial or appellate level, whether or not such proceedings are instituted. If
any legal or other proceedings are instituted, the Party prevailing in any such
proceeding shall be paid all of the aforementioned costs, expenses and fees by
the other Party, and if any judgment is secured by such prevailing Party, all
such costs, expenses, and fees shall be included in such judgment, attorneys'
fees to be set by the court and not by the jury. References in this paragraph
to "legal proceedings" refer to litigation as well as arbitration proceedings
and any other similar or related proceedings.
7.2 Waiver. No delay by a Party in exercising any right or remedy shall
constitute a waiver of a Party's rights under this Agreement, and no waiver by
any Party of the breach of any covenant of this Agreement by the other shall be
construed as a waiver of any preceding or succeeding breach of the same or any
other covenant or condition of this Agreement.
7.3 Indemnification. Each Party (the "Indemnifying Party") shall protect,
indemnify and hold harmless the other Party and its directors, officers,
employees, agents, affiliates and representatives (each an "Indemnified Party")
against any and all costs, expenses, damages (whether such damages are general,
special, consequential, limited, direct or indirect or incidental), liabilities
or losses, including attorneys' fees, caused by, for or on account of the
Indemnifying Party's negligence, gross negligence or willful misconduct or
failure to perform its obligations under this Agreement or the negligence,
gross negligence or willful misconduct of the Indemnifying Party's directors,
officers, employees, agents affiliates or representatives.
(a) If an Indemnified Party intends to seek indemnification under
this paragraph from any Indemnifying Party with respect to any action or claim,
the Indemnified Party shall give the Indemnifying Party notice of such claim or
action upon the receipt of actual knowledge or information by the Indemnified
Party of any possible claim or of the commencement of such claim or
action, which period shall in no event be later than the earlier of (i) fifteen
business days prior to the last day of responding to such claim or action or
(ii) one half of the period allowed for responding to such claim or action or,
if no time period for responding exists, as soon as reasonably possible. The
Indemnifying Party shall have no liability under this paragraph for any claim
or action for which such notice is not provided, unless the failure to give
such notice does not prejudice the Indemnifying Party.
(b) The Indemnifying Party shall have the right to assume the
defense of any such claim or action, at its sole cost and expense, with counsel
designated
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<PAGE> 16
by the Indemnifying Party and reasonably satisfactory to the Indemnified
Party: provided, however, that if the defendants in any such action include
both the Indemnified Party and the Indemnifying Party, and the Indemnified
Party shall have reasonably concluded that there may be legal defenses
available to it which are different from or additional to those available
to the Indemnifying party, the Indemnified Party shall have the right to
select separate counsel, at the Indemnifying Party's expense, to assert
such legal defenses and to otherwise participate in the defense of such
action on behalf of such Indemnified Party.
(c) Should any Indemnified Party be entitled to indemnification under
this Section as a result of a claim by a third party, and should the
Indemnifying Party fail to assume the defense of such claim or action, the
Indemnified Party may, at the expense of the Indemnifying Party, contest
or, (with the prior consent of the Indemnifying Party, which consent shall
not be unreasonably withheld) settle such claim or action. Except to the
extent expressly provided herein, no Indemnified Party shall settle any
claim or action with respect to which it has sought or intends to seek
indemnification pursuant to this Section without the prior written consent
of the Indemnifying Party, which consent shall not be unreasonably withheld
or delayed.
(d) If an Indemnifying Party is obligated to indemnify and hold any
Indemnified Party harmless under this Agreement, the amount owing to the
Indemnified Party shall be the amount of such Indemnified Party's actual
out-of-pocket loss, net of any insurance or other recovery.
(e) The duty to indemnify under this Agreement will continue in full
force and effect for a period of two years with respect to any loss,
liability, damage or other expense based on facts or conditions which
occurred prior to such termination.
7.4 Notices. No notice, consent, approval or other communication provided
for herein or given in connection herewith shall be validly given, made,
delivered or served unless it is in writing and delivered personally, sent by
overnight courier, or sent by registered or certified United States mail,
postage prepaid, with return receipt requested, to the addresses for each Party
set forth below. Any Party hereto may from time to time change its address by
notice to the other Parties given in the manner provided herein. Notices,
consents, approvals, and communications by mail shall be deemed delivered upon
the earlier of forty-eight (48) hours after deposit in the United States mail
in the manner provided above or upon delivery to the respective addresses set
forth above if delivered personally or sent by overnight courier. Addresses of
the Parties are the following:
15
<PAGE> 17
To SOSI: 4646 South Procyon Avenue
Suite #C
Las Vegas, Nevada 89103
with a copy to: Max C. Tanner, Esq.
2950 E. Flamingo Rd. #G
Las Vegas, Nevada 89121
To the Acquired Company: 3260 North Hayden
Suite 207
Scottsdale, Arizona 85251
with a copy to: Robert Moya, Esq.
Quarles & Brady
1 Camelback Road, #400
Phoenix, Arizona 85012
To the Acquired Company's Shareholders:
Terry Dunlap
3260 North Hayden
Suite 207
Scottsdale, Arizona 85251
7.5 Interpretation and Time. The captions of the paragraphs of this
Agreement are for convenience only and shall not govern or influence the
interpretation hereof. This Agreement is the result of negotiations among the
Parties and, accordingly, shall not be construed for or against any Party
regardless of which Party drafted this Agreement or any portion thereof. Time
is of the essence under this Agreement.
7.6 Successors and Assigns. All of the provisions hereof shall inure to
the benefit of and be binding upon the successors and assigns of the Parties.
7.7 No Partnership. This Agreement is not intended to, and nothing
contained in this Agreement shall, create any partnership, joint venture or
other similar arrangement among the Parties.
7.8 Further Documents. Each of the Parties shall execute and deliver all
such other and additional documents and perform all such acts, in addition to
execution and delivery of this Agreement and performance of the Party's
obligations hereunder, as are reasonably required from time to time in order to
carry out the purposes, matters and transactions that are contemplated in this
Agreement.
16
<PAGE> 18
7.9 Incorporation of Exhibits. All exhibits attached to this Agreement
are by this reference incorporated herein.
7.10 Governing Law. This Agreement shall be governed by the laws of the
State of Arizona, without giving effect to the conflict of law provisions or
principles of the State of Arizona.
7.11 Date of Performance. If the date of performance of any obligation or
the last day of any time period provided for herein should fall on a Saturday,
Sunday or legal holiday, then said obligation shall be due and owing, and said
time period shall expire, on the first day thereafter which is not a Saturday,
Sunday or legal holiday. Except as may otherwise be set forth herein, any
performance provided for herein shall be timely made if completed no later than
5:00 p.m., Phoenix, Arizona time, on the day of performance.
7.12 Counterparts. This Agreement may be executed in any number of
counterparts. This Agreement may be signed by original signatures or by fax
signatures. Any set of counterparts of this Agreement, whether faxed or
originals or both, showing signatures by all Parties, taken together, shall
constitute a single copy of this Agreement.
7.13 Resolution of Disputes. In the event of any dispute among the Parties
as to their rights and obligations under this Agreement, including, but not
limited to, any question as to whether or not a Party has performed its
obligations fully or remedied an alleged breach, and any and all other disputes
arising under this Agreement, shall be resolved as follows.
(a) The Parties shall submit their dispute to at least four (4) hours
of mediation in accordance with the mediation procedures of American
Arbitration Association ("AAA").
(b) In the event the dispute does not then settle within 15 calendar
days after the first mediation session, the Parties agree to submit the
dispute to binding arbitration in accordance with the arbitration
procedures of the AAA except as modified in this Agreement. The arbitration
hearing shall be conducted no later than 45 calendar days after the first
mediation session.
(c) The arbitrator or arbitrators conducting the arbitration hearing
shall render the arbitration decision in writing, which writing shall
explain the reasoning and bases for the decision.
(d) The Parties agree to share equally the costs of mediation.
However, if the dispute is settled through arbitration, the prevailing
Party shall be entitled to recover all costs incurred, including reasonable
attorneys' fees, to enforce its rights hereunder, in addition to any
damages recovered, as provided in "Costs and Fees" above.
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<PAGE> 19
7.14 Severability. If any term or provision of this Agreement shall, to
any extent, be determined by a court of competent jurisdiction to be invalid or
unenforceable, the remainder of this Agreement shall not be affected thereby,
and each term and provision of this Agreement shall be valid and be enforceable
to the fullest extent permitted by law.
7.15 Assignment. No Party shall assign this Agreement, nor any interest
arising herein, without the written consent of the other Parties.
7.16 Recitals. The recitals set forth above are a part of this Agreement.
7.17 Jurisdiction and Venue. Venue for and jurisdiction over any legal
proceedings available to the Parties hereunder shall lie in the appropriate
courts of the State of Arizona, located in Phoenix, Arizona.
IN WITNESS WHEREOF, the Parties hereto have hereunder affixed their
signatures on the dates set forth below to be effective as of the date first set
forth above.
SOS INTERNATIONAL, INC.,
a Nevada Corporation,
Date: Dec. 12, 1997 By: /s/ David Beecher
------------- -----------------------------
Name: David Beecher
--------------------------
Its: President
---------------------------
TOTAL SWITCH, INC., an Arizona corporation,
Date: Dec. 11, 1997 By: /s/ R. Terren Dunlap
------------- -----------------------------
Name: R. Terren Dunlap
--------------------------
Its: CEO
---------------------------
Date: Dec. 11, 1997 /s/ R. Terren Dunlap "Terry"
------------- --------------------------------
TERRY DUNLAP
18
<PAGE> 20
Date: Dec. 11, 1997 /s/ Antony J. Van Zeeland
------------- -------------------------
ANTONY J. VAN ZEELAND
19
<PAGE> 21
ADDENDUM TO STOCK EXCHANGE AGREEMENT
entered into by and among
SOS INTERNATIONAL, INC., a Nevada corporation;
TOTAL SWITCH, INC., an Arizona corporation;
TERRY DUNLAP and ANTONY J. VAN ZEELAND
Effective as of December 11, 1997
- -------------------------------------------------------------------------------
This Addendum is being executed by the parties to correct the Stock
Exchange Agreement dated December 11, 1997, to reflect the intention of the
parties at the time of signing said agreement.
I. The names of the following parties are hereby corrected: R. Terren
Dunlap, instead of Terry Dunlap, and Anthony J. Van Zeeland, instead
of Antony J. Van Zeeland.
II. Article 1.1 on page 2 requires a description of the proportionate
transfer of the stock exchanges. The parties herein agree that said
description is incorporated by reference to the Letter of Intent dated
11/4/97 between SOS International and Total Switch, Inc.
III. Article 1, paragraph 1.2 Closing, is corrected to reflect the actual
closing date of December 31, 1997.
IV. The Stock Exchange Agreement is amended to reflect the agreement that
DuraSwitch Industries, Inc. agrees to transfer the trade name SOS
International, Inc. and all rights to said name to the individuals D.
Beechek and A. Popp to be used for continued manufacturing of
emergency devices. Further, any and all ownership of said emergency
devices will be transferred to D. Beechek and A. Popp. Further, stock
options held by D. Beechek and A. Popp totaling 2,837,820 will be
exchanged for these assets plus 60,000 shares of DuraSwitch restricted
stock pursuant to the Share Exchange Agreement and Letter of Intent.
SOS INTERNATIONAL, INC., a Nevada
corporation,
By: /s/David Beechek
------------------------------
Name: DAVID BEECHEK
----------------------------
Its: PRESIDENT
-----------------------------
Page 1 of 2
Addendum to Stock Exchange Agreement
<PAGE> 22
TOTAL SWITCH, INC., an Arizona
corporation,
By: /s/ R. Terren Dunlap
---------------------------------
Name: R. TERREN DUNLAP
-------------------------------
Its: CEO
--------------------------------
/s/ R. Terren Dunlap
-------------------------------------
R. TERREN DUNLAP
-------------------------------------
/s/ Anthony J. Van Zeeland
-------------------------------------
ANTHONY J. VAN ZEELAND
Page 2 of 2
Addendum to Stock Exchange Agreement
<PAGE> 1
Exhibit 2.2
SHARE EXCHANGE AGREEMENT
THIS AGREEMENT made the 16th day of January, 1998 by and among
DURASWITCH INDUSTRIES, INC., a corporation incorporated pursuant to the laws of
the State of Nevada (the "Purchaser"); Anthony G. Shumway, Dian D. Shumway, Dana
S. Jones, and Ivan R. Jones and The Anthony Gene Shumway Family Revocable Living
Trust (collectively, the "Sellers"); and Aztec Industries, Inc., an Arizona
corporation (the "Company").
WHEREAS the Sellers as a group beneficially own and control all the issued and
outstanding shares in the capital of the Company, the current shareholdings
being The Anthony Gene Shumway Family Revocable Living Trust (the "Trust")
owning 6886.35 shares, and Ivan R. Jones owning 2295.45 shares; and
WHEREAS, for convenience sake herein, the Trustee, Anthony G. Shumway, is
authorized and will sign individually, however, the shares and the options will
be issued in the name of the Trust; and
WHEREAS the Sellers desire to sell and the Purchaser desires to purchase all of
the said issued and outstanding shares in the capital of the Company owned by
the Sellers, all upon and subject to the terms and conditions hereinafter set
forth; and
NOW THEREFORE, in consideration of the premises and the mutual agreements and
covenants herein contained (the adequacy of such consideration is hereby
mutually admitted by each party), the Parties hereto covenant and agree as
follows:
ARTICLE 1
DEFINITIONS AND PRINCIPLES OF INTERPRETATION
1.1 Definitions - Whenever used in this Agreement, unless there is something in
the subject matter or context inconsistent therewith, the following words and
terms shall have the meanings as follows:
(a) "Agreement" means this Share Exchange Agreement and all
supplemental instruments and amendments;
(b) "Business" means the business presently carried on by the
Company consisting of the manufacture, sale and distribution
of screen printed membrane switch panels and graphic overlays.
(c) "Business Day" means a day other than a Saturday, Sunday or
any day on which the principal Arizona commercial banks are
open for business during normal banking hours;
(d) "Closing" means the completion of the sale to and purchase by
the Purchaser of the Purchased Shares hereunder by the
transfer and delivery of documents of title and the payment of
the purchase price as contemplated herein;
(e) "Closing Date" means January 31, 1998, or such other date as
the Parties may agree as the date upon which the Closing shall
take place;
(f) "Closing Time" means 11:59 p.m. MST, on the Closing Date or
such other time as the Parties may agree as the time at which
the Closing shall take place;
1
<PAGE> 2
SHARE EXCHANGE AGREEMENT
(g) "Financial Statements" means the unaudited financial
statements of the Company for the quarter ended December 31,
1997, consisting of a balance sheet and operating statement,
and the year end unaudited financial statements of the Company
dated Jan. 31, 1997, 96, 95, 94, and 93; copies of each of
which are annexed as Schedule "A" hereto;
(h) "Parties" means the Sellers, the Company and the Purchaser
collectively and "Party" means any one of them;
(i) "Person" means any individual, corporation, partnership,
trustee or trust or unincorporated association, and pronouns
have a similarly extended meaning;
(j) "Purchase Price" means the purchase price to be paid by the
Purchaser to the Sellers for the Purchased Shares as provided
in Article 2 hereof;
(k) "Purchased Shares" means all the currently issued and
outstanding common shares in the capital of the Company;
(l) "Sellers' Counsel" means Charles E. Davis, 1201 S. Alma School
Rd., Suite 3400, Mesa, Arizona 85210.
(m) "To Company's knowledge" means that, to the actual knowledge
of the Sellers, such matters are as represented. Unless the
context otherwise requires, such knowledge does not require
investigation of the matters other than as normally conducted
in the ordinary course of business or in reliance on the
advice or information of professionals.
Terms defined in the preamble to this Agreement shall have the same meanings
herein as are ascribed thereto in the preamble.
1.2 Gender and Number - Words importing the singular include the plural and vice
versa; words importing gender include all genders.
1.3 Entire Agreement - This Agreement, including the Schedules hereto, together
with the agreements and other documents to be delivered pursuant hereto,
constitute the entire agreement between the Parties pertaining to the subject
matter hereof and supersede all prior agreements, understandings, negotiations
and discussions, whether oral or written, of the Parties and there are no
warranties, representations or other agreements between the Parties in
connection with the subject matter hereof except as specifically set forth
herein and therein.
1.4 Waivers, etc. - No supplement, modification, waiver or termination of this
Agreement shall be binding unless executed in writing by the Party to be bound
thereby. No waiver of any of the provisions of this Agreement, in whole or in
part, shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar), nor shall such waiver constitute a continuing
waiver unless otherwise expressly provided.
1.5 Other Words and Phrases - In this Agreement, unless otherwise expressly
provided (i) the words "hereof," "herein," "hereto" and "hereunder" and words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section, Subsection, paragraph or other subdivision, and (ii) all
references to
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SHARE EXCHANGE AGREEMENT
designated "Articles," "Sections," "Subsections," "paragraphs" or other
subdivisions are to the designated Articles, Sections, Subsections, paragraphs
and other subdivisions of this Agreement.
1.6 Headings - The Article and Section headings contained herein are included
solely for convenience of reference, are not intended to be full or accurate
descriptions of the content thereof and shall not be considered part of this
Agreement.
1.7 Applicable Law - This Agreement and the rights, obligations and relations of
the Parties shall be governed by and construed in accordance with the laws of
the State of Arizona and the federal laws of the United States applicable
therein, and the courts of Arizona shall have exclusive jurisdiction to
entertain any action in connection with this Agreement
1.8 Currency - Unless otherwise specified, all references to currency herein are
deemed to mean lawful money of the United States, and all amounts to be paid or
calculated pursuant to this Agreement are to be paid or calculated in lawful
money of the United States.
1.9 Accounting Terms - All accounting terms shall have the meanings ascribed to
them in accordance with accounting principles which are generally accepted in
the United States.
1.10 Schedules - The following schedules are attached to and incorporated in
this Agreement by reference and deemed to be an integral part hereof:
Schedule "A" - Financial Statements
Schedule "B" - Undisclosed Liabilities
Schedule "C" - Liens, Charges and Encumbrances
Schedule "D" - Non-Vehicular Equipment and Personal Property Leases
Schedule "E" - List of Real Property and Real Property Leases
Schedule "F" - List of Revenue Contracts
Schedule "G" - List of Contracts to Purchase Goods/Services
Schedule "H" - List of Employment-Related Contracts, Collective
Agreements, Pension or Similar Plans, Unfair Labor
Practice Complaints
Schedule "I" - Other Material Contracts/lnsurance Policies
Schedule "J"- Litigation
Schedule "K" - Employees over $40,000 per year and Independent
Contractors
Schedule "L" - Bank Accounts
Schedule "M" - Intellectual Property
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SHARE EXCHANGE AGREEMENT
Schedule "N" - Vehicular Equipment Owned or Leased
Schedule "O" - Environmental Matters
Schedule "P" - Forms of Non-Competition and Employment Agreements
Schedule "Q" - Additional Disclosures
Schedule "R" - Operating Licenses
Schedule "S"- Intentionally Omitted
Schedule "T" - Material Changes
Schedule "U" - Note to Anthony G. Shumway the Company
Schedule "V" - Anthony G. Shumway's Patent
Schedule "W" - Purchaser's Financials
Schedule "X" - Personal Property of Sellers
ARTICLE 2
PURCHASE, SALE AND ASSUMPTION OF OBLIGATIONS
2.1 Purchase Price - At the Closing Time, the Sellers shall endorse and
surrender to Purchaser stock certificates representing all of the Purchased
Shares, in exchange for which Purchaser will issue 300,000 shares of its voting
common stock, $.001 par value, as follows: 225,000 shares to the Trust and
75,000 shares to Mr. Jones (the "Exchange Shares"), subject to any adjustments
under this section.
2.2 Actions by Parties at or Prior to the Closing
(a) Delivery of Certificates, etc. - The Sellers shall transfer
and deliver to the Purchaser at the Closing stock certificates
representing all the Purchased Shares duly endorsed in blank
for transfer or accompanied by irrevocable stock transfer
powers of attorney duly executed in blank, in either case by
the holders of record thereof. The Sellers shall take such
steps as shall be necessary to cause the Company to enter the
Purchaser or its nominee upon the books of the Company as the
holder of the Purchased Shares and to issue one or more share
certificates to the Purchaser representing the Purchased
Shares;
(b) Loan to the Company - Prior to the Closing, the Purchaser
shall advance monies toward the payment of liabilities on
behalf of the Company immediately and pursuant to a mutually
agreed upon payoff schedule of payables. This payment shall
continue as a loan on the books of both Purchaser and Company
until after the Closing and then, at Purchaser's option, may
be converted to a capital contribution.
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SHARE EXCHANGE AGREEMENT
2.3 Assumption of Liabilities and Non-Competition Payments - Purchaser shall (1)
assume and pay amounts currently due to Mr. Shumway by the Company represented
by the promissory note in the form attached hereto as Schedule "U" (the "Shumway
Note") which note Purchaser shall assume and (2) enter into employment and
non-competition agreements with Mr. Shumway and Mr. Jones in the form attached
hereto as Schedule "H" (the "Employment Agreements").
2.4 Payments of Mr. Shumway's Personal Note by Purchaser after the Closing Time
- - Payment of the Shumway Note shall be subject to set-off and reduction to the
extent of any and all reasonable costs, damages, or losses incurred by Purchaser
due to Sellers' default or breach of any of their obligations, representations,
warranties or covenants pursuant to this Agreement or any other documents
entered into hereunder. However, any such set-offs shall apply at the end of the
Shumway Note term and not interrupt the monthly payment schedule. Any wrongful
set-off shall be deemed a breach of this Agreement. A breach of the terms of the
Shumway Note shall invalidate the noncompetition clause of Shumway's Employment
Agreement under Shumway's Employment Agreement.
2.5 Place of Closing - The Closing shall take place at the Closing Time at the
offices of the Purchaser's Legal Counsel in Phoenix, Arizona or at such other
place as may be agreed upon by the Sellers and the Purchaser.
2.6 Tender - Any tender of documents or money hereunder may be made upon the
Parties or their respective counsel.
2.7 Tax Free Exchange - The parties intend the transactions contemplated herein
to be treated as a tax free reorganization under Section 368 and related
sections of the Internal Revenue Code of 1986, as amended.
2.8 Norwest Bank Line of Credit- After Closing, prior to any default thereunder,
purchaser will pay the balance of that certain $50,000 Norwest Bank of Arizona,
N.A. line of credit.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Sellers - The Sellers and the Company
hereby jointly and severally represent and warrant to the Purchaser as follows:
(a) Enforceability of Obligations - This Agreement constitutes a
valid and binding obligation of the Sellers enforceable
against them in accordance with its terms.
(b) Right to Sell - The Sellers:
(i) are the sole beneficial owners of the Purchased
Shares (which shares constitute all the issued and
outstanding shares in the capital of the Company);
(ii) have the exclusive right to dispose of the Purchased
Shares as herein provided and such disposition will
not violate, contravene, breach or offend against or
result in any default under any indenture, mortgage,
lease, agreement, instrument, statute,
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SHARE EXCHANGE AGREEMENT
regulation, order, judgment, decree or law to which
the Sellers are a party or subject or by which the
Sellers are bound or affected; and
(iii) are the holders of record of all the Purchased
Shares, free and clear of any liens, charges,
encumbrances or rights of others (other than the
rights of the Purchaser hereunder) and no Person
(other than the Purchaser hereunder) has any
agreement, option or any rights capable of becoming
an agreement or option for the acquisition of the
Purchased Shares.
(c) Licenses, Registrations and Compliance - The Company is
registered, licensed or otherwise qualified as a corporation
to do business in each jurisdiction in which the nature of
their businesses or the property owned or leased by them makes
such registration, licensing or other qualification necessary,
and such registrations, licenses or qualifications (as the
case may be) are in good standing. To Company's knowledge, the
Company is not in violation of any applicable laws,
regulations, orders, rules, decrees or ordinances. To
Company's knowledge, the licenses and operating authorizations
issued by federal, state or local authorities to the Company,
copies of which are attached hereto as Schedule "R" (the
"Operating Licenses") comprise all the operating authorities
held in respect of the Business. To Company's knowledge, the
Operating Licenses are all of the operating authorities
necessary or reasonably required for the carrying on of the
Business as presently conducted. The Operating Licenses are in
good standing, are in full force and effect and are being held
and operated in accordance with their terms and conditions
and, to Company's knowledge, all applicable laws, ordinances,
rules and regulations. To Company's knowledge, the Operating
Licenses are regularly subject to review or notification. To
Company's knowledge, there is no litigation, arbitration or
other proceeding pending or threatened which would adversely
affect the use of the Operating Licenses by the Business or
which may result in the revocation, cancellation, suspension
or any adverse modification of any of such Operating Licenses.
(d) Organization and Valid Existence; the Company - The Company is
a corporation duly incorporated and organized and validly
exists under the laws of its state of jurisdiction, and has
all necessary corporate power, authority and capacity to own
and lease its property and assets (including, without
limitation, the property and assets shown in the Financial
Statements) and to carry on the Business as presently
conducted.
(e) Capitalization - All issued and outstanding common shares of
the Company have been duly and validly issued and are
outstanding as fully paid and non-assessable shares in the
capital of the Company.
(f) Financial Statements - To Company's knowledge, the Financial
Statements are true and correct and have been prepared in
accordance with generally accepted accounting principles
applied on a basis consistent with that of the preceding
period. To Company's knowledge, the Financial Statements
present a true, accurate and complete statement of the
consolidated financial condition and assets and liabilities of
the Company as at October 31, 1997 and year end statements,
respectively.
(g) Absence of Undisclosed Liabilities - Except to the extent
reflected or reserved against in the Financial Statements
(including the notes thereto) or incurred subsequent to the
date thereof
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<PAGE> 7
SHARE EXCHANGE AGREEMENT
and disclosed in Schedule "B" and except as incurred in the
ordinary and usual course of the Business of the Company, the
Company, to the Company's knowledge, has neither outstanding
indebtedness nor any material liabilities or obligations
(whether accrued, absolute, contingent, known, unknown, or
otherwise) of a nature customarily reflected or reserved
against in a balance sheet (including the notes thereto)
prepared in accordance with generally accepted accounting
principles.
(h) Stockholder Equity - The total stockholder equity of the
Company at the date of Closing calculated in accordance with
generally accepted accounting principles (applied on a basis
consistent with those applied in connection with the Financial
Statements) is not less than the total stockholder equity of
the Company as at the date of, and as set forth in the
Financial Statements, except for adjustments due to items
disclosed herein or through information furnished in writing
to Purchaser.
(i) Revenue Contracts - The revenue contracts of the Company
representing accounts for greater than 5% of net revenue
annually are set out at Schedule "F."
(j) Tax Matters. - To Company's knowledge, the Company has duly
and timely filed all federal, state and local income,
franchise, capital, sales or use, excise, fuel, property or
other tax returns or reports required by any law or regulation
to be filed by it and has duly paid all taxes, assessments and
reassessments and all other taxes, duties, governmental
charges, penalties, interest and fines due and payable by it
on or before the date hereof.
The last three fiscal years' federal and state income tax
returns of the Company, provided to Purchaser hereunder, to
Company's knowledge, are accurate in all respects including,
without limitation, the tax depreciation values of all capital
properties.
The Company has not received from any authority any
assessment, reassessment or notice of underpayment of any
taxes or other penalty or charges and no such notice is
reasonably to be expected.
There is no misrepresentation that is attributable to neglect,
carelessness, willful default or fraud in tax returns of the
Company previously filed or, to Company's knowledge, neglect
or carelessness in the Company's tax returns previously filed.
No consents extending or waiving the time limited for
reassessment of any taxes, duties, governmental charges,
penalties, interest or fines, or any statutes of limitations
related thereto have been filed with respect to the Company
for any fiscal year.
The Company has withheld from each payment made to any of its
officers, directors, former directors, and employees and
former employees the amount of all taxes and other deductions
(including without limitation, income taxes, unemployment,
disability, and other required taxes and contributions)
required to be withheld and has paid the same together with
the employer's share of same, if any (to the extent required
to be paid so no such amount is past due), to the proper tax
or other receiving officers within the prescribed times and
has filed, in complete and accurate form, all information and
other returns required pursuant to any applicable legislation
within the prescribed time.
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<PAGE> 8
SHARE EXCHANGE AGREEMENT
The provisions made for current and deferred taxes included in
the Financial Statements are sufficient for the payment of all
accrued and unpaid federal, state and local income, franchise,
capital, sales or use, excise, fuel, property or other taxes,
assessments and reassessments, duties, governmental charges,
penalties, interest and fines of, and payable by, the Company
whether or not disputed, for the period ended the date thereof
and for all periods prior thereto. The reserve for taxes on
the financial statements does not take into account the affect
that the acquisition and post-acquisition activities may have
on taxes for the Company.
The Sellers represent that their Social Security or Federal
I.D. Numbers are as follows:
<TABLE>
<S> <C> <C>
Aztec Industries, Inc. 86-0264077
Anthony G. Shumway ###-##-#### Dian D. Shumway: ###-##-####
Ivan R. Jones ###-##-#### Dana S. Jones: ###-##-####
</TABLE>
The Purchaser represents that its federal employer
identification number is set out below:
DuraSwitch Industries, Inc.: 88-0308867
(k) Absence of Changes - Other than as disclosed on Schedule "T"
hereto since the date of the Financial Statements there has
not been:
(i) any material decrease in the condition or operations
of the Business, assets or financial condition of the
Company other than changes in the ordinary and normal
course of business, none of which has been materially
adverse; or
(ii) any damage, destruction or loss, labor trouble or
other event, development or condition of any
character (whether or not covered by insurance)
materially and adversely affecting the Business,
assets, properties or future prospects of the
Company.
(l) Absence of Unusual Transactions - Except as otherwise
disclosed on Schedule "T" attached hereto, since the date of
the Financial Statements the Company has not:
(i) transferred, assigned, sold or otherwise disposed of
any of the assets shown in the Financial Statements
or cancelled any debts or claims except in each case
in the ordinary and usual course of business;
(ii) incurred or assumed any obligation or liability
(fixed or contingent), except those listed in
Schedule "B" hereto and except unsecured current
obligations and liabilities incurred in the ordinary
and normal course of business;
(iii) issued or sold any shares in its capital or any
warrants, bonds, debentures or other securities of
the Company or issued, granted or delivered any
right, option or other commitment for the insurance
of any such or other securities, except as described
in Schedule "Q";
(iv) discharged or satisfied any lien or encumbrance, or
paid any obligation or liability (fixed or
contingent) other than liabilities included in the
Financial Statements and
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<PAGE> 9
SHARE EXCHANGE AGREEMENT
liabilities incurred since the date thereof in the
ordinary and normal course of business;
(v) undertaken any action or transaction, or suffered any
circumstance or situation, having an adverse effect
on stockholders equity other than in the ordinary
course of business;
(vi) declared or made any payment of any dividend or other
distribution in respect of any shares in its capital
or purchased or redeemed any such shares thereof or
effected any subdivision, consolidation or
reclassification of any such shares, except as
described in Schedule "Q";
(vii) except as disclosed in its current Financial
Statement or on any Schedule attached hereto,
suffered any operating loss or any extraordinary
loss, or waived any rights of substantial value, or
entered into any commitment or transaction not in the
ordinary and usual course of business where such
loss, rights, commitment or transaction is or would
be material in relation to the Company;
(viii) amended or changed or taken any action to amend or
change its articles or bylaws, provided, however, the
articles were amended to conform to requirements of
Arizona law regarding the provisions that are no
longer applicable or required of corporations in the
State of Arizona;
(ix) made any general wage or salary increases in respect
of personnel which it employs, other than increases
in the ordinary and normal course of business;
(x) except as disclosed in Schedule "C," mortgaged,
pledged, subjected to lien, granted a security
interest in or otherwise encumbered any of its assets
or property, whether tangible or intangible;
(xi) except with Purchaser's prior written consent, or
described in Schedule "Q," made any single capital
expenditure in excess of $1,000; or
(xii) authorized or agreed or otherwise become committed to
do any of the foregoing.
(m) Title to Properties - Except as disclosed in the Financial
Statements or in Schedule "C" hereto, the Company has good and
marketable title to all its properties, interests in personal
properties and assets, including without limitation those
reflected in the Financial Statements or acquired since the
date of the Financial Statements free and clear of all
pledges, liens, encumbrances or charges of any kind or
character.
(n) Leased Equipment - Schedule "D" contains a true and complete
list of all non-vehicular equipment of the Company. Also
attached at Schedule "D" is a complete list of all material
personal property and fixtures in the possession or custody of
the Company which, as of the date hereof, is leased or held
under license or similar arrangement and details of the
leases, licenses, agreements and other documentation relating
thereto.
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SHARE EXCHANGE AGREEMENT
(o) Collectibility of Accounts Receivable - The net accounts
receivable (i.e. after discounts, reserves for uncollectibles
or other contractual allowances) shown in the Financial
Statements or acquired subsequent to the date thereof and
prior to the date of this Agreement, and subject to normal
uncollectible rates and write-offs, per industry standards, to
Company's knowledge, either have been collected or are good
and collectible at the aggregate recorded amounts thereof
(subject to no defense, counterclaim or set off), provided,
however, Schedule "Q" contains a list of accounts which may be
problematical. This representation shall be read in
conjunction with Section 5.08 hereof.
(p) Leases of Real Property - The Company is not a party to or
bound by any leases of real property other than those referred
to in Schedule "E" hereto, and all interests held by the
Company as lessee under such leases are free and clear of any
and all liens, charges and encumbrances of any nature and kind
whatsoever. All rental and other payments required to be paid
by the Company as lessee, pursuant to such leases have been
duly paid except for accrued payments for 333 S. Nina Drive,
which are not to be paid by the Purchaser, but are the
responsibility of the Sellers. Such leases are in full force
and effect without amendment thereto and the Company is not in
default in meeting its obligations contained in any such
lease.
(q) Real Property - Except as set out at Schedule "E" hereto, the
Company does not own any real property in fee simple.
(r) Vehicular Equipment - Schedule "N" contains a list of all
vehicular equipment owned or leased by the Company. Such
vehicular equipment is in a good state of repair, reasonable
wear and tear excepted, and, to Company's knowledge, each
vehicle complies with all laws and regulations affecting its
operation and each vehicle bears a current safety standards
certificate. By signing hereunder, Purchaser acknowledges it
has examined and accepts the condition of the assets.
(s) Condition of Assets - All material non-vehicular tangible
assets of the Company set out at Schedule "D" used in or in
connection with the Business are in good condition, repair and
proper working order, reasonable wear and tear excepted. By
signing hereunder, Purchaser acknowledges it has examined and
accepts the condition of such assets.
(t) Revenue Contracts - Except as set out in Schedule "F," the
Company is not, at the date of the execution of this
Agreement, a party to any contract garnering net revenues in
excess of 5% of total net revenues of the Company pursuant to
which it is to provide manufacturing or other services.
(u) Contracts to Purchase - Except as set out in Schedule "G," the
Company is not a party to any contract to purchase any goods
and/or services with a value in excess of $10,000/year.
(v) Employment-Related Contracts - Except as set out in Schedule
"H" or elsewhere in this Agreement, the Company does not have
any union or collective labor, pension, deferred profit
sharing, retirement, employee benefit, stock option or other
similar agreements or plans nor has it had any such plan or
agreement in the past and a qualified profit sharing plan.
Except as set out in Schedule "H," the Company has not, in the
last four (4) years, experienced any labor disputes which were
of a material nature, work stoppages or strikes
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SHARE EXCHANGE AGREEMENT
(legal or otherwise). To Company's knowledge, there is not now
any circumstance or conduct which could result in the filing
of an unfair labor practice complaint against the Company; any
such complaints previously raised and currently ongoing and
the current status thereof are particularized in Schedule "H."
To Company's knowledge, no attempts have (within the last 60
days) been made by any trade union or employee association to
organize or represent any employees of the Company. Except as
set out on Schedule "H," to Company's knowledge, the Company
has complied at all times with minimum wage, overtime and
benefit rules and regulations under all applicable state and
federal laws.
(w) Material Contracts - To Company's knowledge, except for the
liens, charges and encumbrances listed in Schedule "C," the
equipment and other personal property leases and agreements
referred to in Schedule "D," the revenue contracts listed in
Schedule "F," the purchase contracts listed in Schedule "G,"
the employment contracts and pension plans listed in Schedule
"K," the leases set out in Schedule "E," other items disclosed
herein and the insurance policies and agreements listed in
Schedule "I," the Company is not a party to or bound by any
material contract or commitment whether oral or written. To
Company's knowledge, the contracts and agreements listed in
Schedule "I" are all in full force and effect unamended and no
material default exists in respect thereof on the part of any
of the Parties thereto. To Company's knowledge, such contracts
and agreements include all the presently outstanding material
contracts entered into by the Company in the course of
carrying on its respective business and all quotations, orders
proposals or tenders for such contracts which remain open for
acceptance. Subject to unforeseen happenings in the future,
the Company has the capacity, including the necessary
personnel, equipment and supplies, to perform all their
obligations thereunder.
(x) Employee Benefit Plans - The Company has a so-called 401(k)
plan with a January year end which was previously a profit
sharing plan that was converted into the 401(k) plan (the
"Plan"). The Company has delivered to Purchaser a correct and
complete copy of the Plan's documents and summary Plan
description, and all related IRS determination letters, Form
5500 Annual Reports, trust agreements, funding agreements and
insurance contracts. The Plan is the only employee benefit
plan ever maintained or contributed to by the Company. To
Company's knowledge, with respect to the Plan: (i) it has
never been completely or partially terminated or been the
subject of a "reportable event" which would require a notice
to the PBGC; (ii) there have been no "prohibited
transactions"; (iii) the Company or its officers have no
reason to believe that they have incurred or that they will
incur any liability to the PBGC or otherwise under Title IV of
ERISA or under the Internal Revenue Code of 1997; and (iv) the
Company has never contributed to, had liability to or
maintained any multi-employer plan. The Company does not have
any obligation to provide material post-retirement benefits of
any nature to its employees, former employees or their
survivors, dependents or beneficiaries, except as may be
required by the Consolidated Omnibus Budget Reconciliation Act
of 1986 ("COBRA") or any other applicable state medical
benefits continuation laws, nor will any such obligation to
provide such post-retirement benefits be incurred solely as a
result of the consummation of the within transactions. The
Company has not caused there to occur a "mass lay-off," as
defined in section 693.3 of the regulations issued under the
Worker Adjustment and Retention Notification Act (20 CFR 639)
at any time in the past.
(y) Absence of Guarantees - To the Company's knowledge, the
Company has not given or agreed to give, or is a party or
bound by, any guaranty of indebtedness or other obligations
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<PAGE> 12
SHARE EXCHANGE AGREEMENT
of third Parties or any other commitment by which the Company
is, or is contingently, responsible for such indebtedness or
other obligation.
(z) Absence of Conflicting Agreements - To Company's knowledge,
the Company is not a party to, bound or affected by or subject
to any indenture, mortgage, lease, agreement, instrument,
charter or bylaw provision, statute, regulation, order,
judgment, decree or law which would be violated, contravened,
breached by or under which default would occur, as a result of
the execution and delivery of this Agreement or the
consummation of any of the transactions provided for herein.
(aa) Litigation - Except for the items disclosed in Schedule "J"
hereto, all of which are fully insured against, to Company's
knowledge, there is no suit, action, litigation, arbitration
proceeding or governmental proceeding, hearing before an
administrative tribunal, including appeals and applications
for review, in progress, pending or threatened against or
relating to the Company or its properties or Business. Except
as shown in Schedule "J," to Company's knowledge, there is not
presently outstanding against the Company any adverse
judgment, decree, injunction, rule or order of any court,
governmental department, commission, agency, instrumentality
or arbitrator.
(bb) Employees, etc. - Schedule "K" contains the names and titles
of all personnel employed or engaged by the Company whose
annual rate of remuneration exceeds $40,000, including rates
of remuneration, positions held and date of commencement of
employment. To Company's knowledge, the employment records of
the Company are true, complete and correct. Also set forth in
Schedule "K" hereto is a complete list of all independent
contractors, subcontractors, and agents which are presently
engaged by the Company on a basis which involves a commitment
which cannot be cancelled by the Company on 30 days notice or
less.
(cc) Bank Accounts, etc. - There is set forth in Schedule "L"
hereto the name of each bank or other depository in which the
Company maintains any bank account, trust account or safety
deposit box, the account numbers for each, and the names of
all persons authorized to draw thereon or who have access
thereto.
(dd) Insurance - The Company currently has in force the policies of
insurance set out in Schedule "I" hereto. Such policies are
issued by responsible insurers, and are appropriate to the
Business, property and assets, and are in such amounts and
against such risks as are customarily carried and insured
against by owners of comparable businesses, properties and
assets; all such policies of insurance are in full force and
effect and the Company is not in default, whether as to the
payment of premium or otherwise, under the terms of any such
policy. To Company's knowledge, the Company has no liability
for retrospective insurance premiums or costs. The Company
will provide Purchaser with all insurance policies which they
have had in effect for the last seven (7) years.
Notwithstanding the foregoing, there exists insurance policies
on the life of Anthony G. Shumway that will be distributed to
him prior to the Closing.
(ee) Absence of Uninsured Liabilities - To Company's knowledge, the
Company does not have any outstanding liabilities nor is it
the subject of any outstanding claims which liabilities or
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SHARE EXCHANGE AGREEMENT
claims are normally covered by insurance policies but which
liabilities or claims are not covered by its insurance.
(ff) Intellectual Property - Attached as Schedule "M" is a true and
correct schedule (including the appropriate registration
numbers and expiration dates, if applicable) identifying all
patents, patent rights or licenses, patent applications,
trademarks, trademark registrations and applications,
trademark rights, trade names, trade secrets, service marks
and applications therefore, copyrights and copyright
registrations and copyright applications used in whole or in
part or required for the proper carrying on of the Business of
the Company.
(gg) Copies of Agreements, etc. - True, correct and complete copies
of all mortgages, leases, agreements, instruments and other
documents listed on the Schedules to this Agreement, and of
the policies of insurance referred to herein, either have been
delivered to the Purchaser or will be delivered prior to
Closing.
(hh) Corporate Records - The corporate records and minute books of
the Company contain true and accurate copies of the bylaws,
material minutes of the meetings and resolutions of the
directors and shareholders of the Company; that such meetings
were duly called and held, that such bylaws and resolutions
were duly passed and the share certificate books, registers of
shareholders, registers of transfers and registers of
directors of the Company are true and accurate in all material
respects.
(ii) Books of Account - The books and records of account of the
Company fairly set out and disclose in all material respects,
and in accordance with GAAP, applied consistently, the
financial position of the Company as of the date hereof and
are true and correct regarding the financial transactions of
the Company and, to Company's knowledge, have been accurately
recorded in such books and records.
(jj) Third-Party Approvals - Except as listed on Schedule "Q,"
there are no approvals, consents or waivers required to be
obtained or applications required to be filed from or with
governmental authorities or from any other Person whatsoever,
including pursuant to any leases or contracts containing
prohibitions or pre-consent provisions to the within
transactions in order to permit the transactions contemplated
herein or to preserve the Business and/or assets of the
Company.
(kk) Compliance with Environmental Laws - Except as disclosed in
Schedule "O" hereto, to Company's knowledge, the Company and
the Business are in compliance with and have always been in
compliance with all, and do not violate, and have not violated
in any material respect any applicable federal, state,
municipal or local laws, regulations, orders, certificates of
approval, licenses, permits, governmental decrees, ordinances
or any and all other legislation or regulatory instruments
with respect to environmental, health or safety matters
(collectively, "Environmental Laws") and, for greater
certainty, and without limiting the generality of the
foregoing:
(i) to Company's knowledge, the Company has operated at
all times and has received, handled, used, stored,
treated, shipped and disposed at all times all
contaminants in strict compliance with all
Environmental Laws and has removed all contaminants
in compliance with all Environmental Laws from, out
of and off the real property
13
<PAGE> 14
SHARE EXCHANGE AGREEMENT
owned or leased or under its control or the control
of its respective agents or employees;
(ii) to Company's knowledge, there have been no spills,
releases, deposits, emissions or discharges of
hazardous or toxic substances, materials, pollutants,
contaminants or wastes on or near any of the real
property owned or leased by the Company, or under the
control of the Company, its agents or employees, nor
has any of such real property been used at any time
by any Person as a landfill or waste disposal site;
the adverse effects of any spills, releases,
deposits, emissions or discharges as disclosed in
Schedule "O" have been eliminated or ameliorated and
the natural environment has been restored to the
state it was in prior to such spill, release,
deposit, emission or discharge;
(iii) to Company's knowledge, there have been no spills,
releases, deposits, emissions or discharges, in
violation of Environmental Laws. of any hazardous or
toxic substances, materials, pollutants, contaminants
or wastes into the earth, air or into any river,
stream, lake, reservoir or other body of water
(including groundwater) or into any municipal or
other sewer or drain water systems except as
disclosed in Schedule "O" hereto; the adverse effects
of any and all spills, releases, deposits, emissions
or discharges so disclosed have been eliminated or
ameliorated and the natural environment has been
restored to the state it was in prior to such spill,
release, deposit, emission or discharge;
(iv) to Company's knowledge, there are not now nor have
there ever been underground storage vessels,
associated piping or appurtenances thereto located on
any of the real property owned or leased by the
Company except as disclosed in Schedule "O" hereto;
Schedule "O" sets forth the date any such underground
storage vessels, associated piping or appurtenances
thereto were installed, as well as the composition of
same; all underground storage vessels, associated
piping and appurtenances thereto have been installed
in compliance with Environmental Laws, and all the
foregoing required to be removed, replaced or
upgraded pursuant to Environmental Laws have been
removed, replaced or upgraded in compliance
therewith: all reports, correspondence, invoices,
receipts and other records associated with the
installation, removal, replacement or upgrading of
any underground storage vessels, associated piping
and appurtenances thereto dating back a period of 10
years have been or will, prior to Closing, be
delivered Purchaser;
(v) to Company's knowledge, no orders, directions or
notices have been issued pursuant to any
Environmental Laws to the Company except as disclosed
in Schedule "O" hereto, copies of which shall be
delivered to the Purchaser prior to Closing;
(vi) to Company's knowledge, the Company has maintained
all environmental operating documents, manifests and
other records in the manner and for the time periods
required by Environmental Laws;
(vii) to Company's knowledge, the Company has not conducted
any environmental audits except as disclosed in
Schedule "O" (for the purposes hereof "environmental
audits"
14
<PAGE> 15
SHARE EXCHANGE AGREEMENT
means any evaluations, assessments, studies or tests
performed relating to environmental matters,
including without limitation any results of soil,
groundwater, air or water quality samples and any
associated reports, whether prepared by the Company,
the Sellers, their agents or employees or any other
Person whomsoever); correct and complete copies of
said environmental audits shall be delivered to the
Purchaser prior to Closing;
(viii) to Company's knowledge, the Company is in compliance
with all orders, directions, notices, certificates of
approval, certificates, licenses and permits which
have been issued to them and hold all certificates of
approval, certificates, licenses and permits or other
approvals which they are required to hold pursuant to
Environmental Laws; correct and complete copies of
all said orders, directions, notices, certificates of
approval, certificates, licenses and permits shall be
delivered to the Purchaser prior to Closing;
(ix) to Company's knowledge, the Company has never been
charged with or convicted of any offence under
Environmental Law;
(x) to Company's knowledge, the Company has not received
any written notice nor does it have any knowledge
after due investigation and inquiry of any facts
which could give rise to any notice that it is a
Potentially Responsible Party for a waste disposal
site pursuant to the Comprehensive Environmental
Response Compensation and Liability Act of the United
States of America or any other similar federal, state
or local laws, as same may be amended or supplemented
from time to time;
(xi) to Company's knowledge, no poly-chlorinated biphenyl
wastes are stored on or in any of the real property
leased by the Company; and
(xii) to Company's knowledge, the Company has not failed to
report to the proper governmental authority the
occurrence of each event which is required to be so
reported by any Environmental Laws and the Sellers
have provided or shall prior to Closing provide the
Purchaser with correct complete copies of all such
reports and all correspondence relating thereto.
The Company is not required to hold any license, permit or
approval under any Environmental Laws for any reason
whatsoever (including in connection with the operation of the
Business) except as disclosed in Schedule "O" hereto, the
Company has not received any notification pursuant to any
Environmental Laws that any work, repairs, construction or
capital expenditures are required to be made in respect of any
of the assets owned or used by them or any of them as a
condition of continued compliance with any Environmental Laws.
(ll) Compliance with Laws - To Company's knowledge, the Company is
not in violation of any laws, regulations, decrees or
ordinances applicable to the type of Business operated.
(mm) Full Disclosure - To Company's knowledge, none of the
foregoing representations, warranties and statements of fact
contains any untrue statement of material fact or omits to
state any material fact necessary to make any such statement
or representation not misleading to a
15
<PAGE> 16
SHARE EXCHANGE AGREEMENT
prospective purchaser of the Purchased Shares seeking full
information as to the Company and its respective properties,
businesses and affairs.
(nn) Seller acknowledges that the offering and sale of the Exchange
Shares are being made by the Purchaser in reliance upon an
exemption from registration under the provisions of Section
4(2) of the Securities Act of 1933, as amended. Without
limiting the generality of the foregoing and subject to the
other provisions of this letter, Sellers agree not to sell or
otherwise dispose of the Shares of Purchaser unless a
registration statement covering such Shares has been filed and
has become effective under the Securities Act of 1933 or
Sellers provide Purchaser an opinion of legal counsel
satisfactory to Purchaser that an exemption from such
registration is available.
Sellers acknowledge that the company is not presently subject
to the provisions of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, and that Seller may not be
permitted to rely on the provisions of Rule 144, promulgated
by the Securities and Exchange Commission, for authority to
sell or otherwise dispose of the Shares after a fixed period
of time.
Sellers further agree that they will not sell, transfer,
assign or encumber the Exchange Shares until after January 31,
2000.
Sellers agree that the certificates representing the
above-described Shares may bear the following restrictive
legends:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933, but
are issued in reliance on the representation that
they are taken for investment and not for
redistribution. As a condition to any transfer
hereof, the Corporation may require an opinion of
counsel satisfactory to it that all statutory
registration provisions have been met or do not
apply."
and
"The sale, transfer, assignment or encumbrance of
the shares represented by this certificate is
restricted by the provisions of a Share Exchange
Agreement dated January 14, 1998 by and among Anthony
G. Shumway, Ivan R. Jones and their respective
Spouses, and the Anthony Gene Shumway Family
Revocable Living Trust. The Company will mail to any
shareholder a copy of such agreement within five days
after receipt of a written request therefor."
Sellers understand the nature of the investment being made and
the financial risks thereof, and are able to bear the economic
risks of Sellers' investment. Sellers have been afforded
access to information regarding the business operations and
financial condition of the Purchaser and has been furnished
with financial and other information regarding the Purchaser
which they have requested and deem necessary; Sellers have
examined the same or caused the same to be examined by
Sellers' investment representatives; and Sellers do not desire
any further information or data concerning Purchaser. Sellers
have
16
<PAGE> 17
SHARE EXCHANGE AGREEMENT
been represented by legal counsel of its choice in connection
with the investment in the Shares.
Sellers further agree that the Purchaser may permit the
transfer of the Shares out of Sellers' name only if Sellers'
request for transfer is accompanied by evidence satisfactory
to the Purchaser that neither the sale nor the proposed
transfer of the Shares will result in a violation of any
applicable law, rule or regulation, federal or state.
3.2 Representations and Warranties of the Purchaser - The Purchaser hereby
represents and warrants to the Seller as follows:
(a) Organization and Valid Existence - The Purchaser is a
corporation duly incorporated and organized and is validly
existing under the laws of the State of Nevada and has all
necessary corporate power, authority and capacity to enter
into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and
the consummation of the transactions contemplated hereunder
shall be duly authorized or ratified by any necessary
corporate action on the part of the Purchaser on or prior to
Closing.
(b) Enforceability of Obligations - This Agreement will, on
Closing, constitute a valid and binding obligation of the
Purchaser enforceable against it in accordance with its terms.
(c) Absence of Conflicting Arguments - To Purchaser's knowledge,
the Purchaser is not a party to, bound or affected by or
subject of any indenture, mortgage, lease, agreement,
instrument, charter or bylaw provision, statute, regulation,
order, judgment, decree or law which would be violated,
contravened or breached by, or under which any default would
occur, as a result of the execution and delivery of this
Agreement or the consummation of any of the transactions
provided for herein.
(d) Litigation - To Purchaser's knowledge, there is no suit,
action, litigation, arbitration proceeding or governmental
proceeding, including appeals and applications for review, in
progress, pending or, to the best of the knowledge,
information and belief (after due enquiry) of the senior
officers of the Purchaser, threatened against or involving the
Purchaser or any judgment, decree, injunction, rule or order
of any court, governmental department, commission, agency,
instrumentality or arbitrator which, in any such case, might
adversely affect the ability of the Purchaser to enter into
this Agreement or to consummate the transactions contemplated
hereby.
(e) Tax - The Purchaser represents that its federal employer
identification number is 88- 0308867.
(f) Due Diligence - Purchaser acknowledges being provided access
to Company's facilities and records for due diligence and,
based on the materials and access disclosed, is satisfied with
its due diligence.
(g) Patents - The Purchaser owns those patents outright (or such
rights as described) on Schedule "V."
17
<PAGE> 18
SHARE EXCHANGE AGREEMENT
(h) Financial Statements - Purchaser's current financial
statements are attached hereto as Schedule "W," and Purchaser
hereby represents that they are accurate and correct and
prepared in accordance with GAAP, and that from the date of
the financial statements to the Closing, there has been no
material changes, except as set forth on an attachment to
Schedule "W."
(i) Laws - To Purchaser's knowledge, the consummation of this
transaction will not violate any laws or regulations of the
United States, state or local governmental authority.
3.3 No Broker - Each of the Parties represents and warrants to the others that
all negotiations relating to this Agreement and the transactions contemplated
hereby have been carried on between them directly and without the intervention
of any other party in such manner as to give rise to any valid claims against
any of the Parties for a brokerage commission, finder's fee or other like
payment.
3.4 Non-Waiver - No investigations made by or on behalf of the Purchaser or
Sellers at any time shall have the effect of waiving, diminishing the scope of
or otherwise affecting any representation or warranty made by the Sellers or
Purchaser, as the case may be, herein or pursuant hereto, unless through such
investigations a party discovers a misrepresentation or incorrectness of a
warranty or is given information which contradicts such representation or
warranty, in which case, such discovering Party shall inform the other Parties
in writing of such misrepresentation or incorrectness. If the closing takes
place after such written notice of a discovered misrepresentation or
incorrectness, the representation or warranty shall be deemed to have been
modified to the facts as they actually exist.
3.5 Nature and Survival of Representations, Warranties and Covenants - All
statements contained in any certificate or other instrument delivered by or on
behalf of a Party pursuant to or in connection with the transactions
contemplated by this Agreement shall be deemed to be made by such Party
hereunder. Subject to section 3.4 above, all representations, warranties,
covenants and agreements herein contained on the part of each of the Parties
shall survive the Closing, the execution and delivery hereunder of share or
security transfer instruments and other documents of title to the Purchased
Shares for a period of five years except for representations, warranties,
covenants and agreements relating to taxation matters, ERISA matters or
environmental matters, each of which shall survive until the applicable statute
of limitations in respect of same; and except for matters of fraud, which shall
survive forever.
ARTICLE 4
CONDITIONS PRECEDENT TO THE PERFORMANCE
BY THE PURCHASER AND THE SELLER OF
THEIR OBLIGATIONS UNDER THIS AGREEMENT
4.1 Purchaser's Conditions - The obligation of the Purchaser to complete the
exchange of the Shares hereunder shall be subject to the satisfaction of, or
compliance with, in all material respects, at or before the Closing Time, each
of the following conditions precedent (each of which is hereby acknowledged to
be inserted for the exclusive benefit of the Purchaser and may be waived by it
in whole or in part):
(a) Truth and Accuracy of Representations of Seller at the Closing
Time - Subject to section 3.4 herein, all of the
representations and warranties of the Seller made in or
pursuant to this Agreement, including, without limitation, the
representations and warranties made by the Sellers and set
forth in Sections 3.1 and 3.3 hereof, shall be true and
correct as at the
18
<PAGE> 19
SHARE EXCHANGE AGREEMENT
Closing Time and with the same effect as if made at and as of
the Closing Time (except as such representations and
warranties may be affected by the occurrence of events or
transactions expressly contemplated and permitted hereby or by
transactions in the ordinary and normal course of business),
and the Purchaser shall have received a certificate from each
of the Sellers confirming, to the best of their knowledge,
information and belief (after due inquiry), the truth and
correctness of the representations and warranties of the
Sellers contained herein;
(b) Performance of Obligations - The Sellers shall have performed
or complied with, in all respects, all of their obligations,
covenants and agreements hereunder;
(c) Receipt of Closing Documentation - All documentation relating
to the due authorization and completion of the sale and
purchase hereunder of the Purchased Shares and all actions and
proceedings taken on or prior to the Closing in connection
with the performance by the Sellers of their obligations under
this Agreement shall be satisfactory to the Purchaser and the
Purchaser shall have received copies of all such documentation
or other evidence as it may reasonably request in order to
establish the consummation of the transactions contemplated
hereby and the taking of all corporate proceedings in
connection therewith in compliance with these conditions, in
form (as to certification and otherwise) and substance
satisfactory to the Purchaser;
(d) Consents, Authorizations and Registrations - All consents,
approvals, orders and authorizations of any Persons or
governmental authorities (or registrations, declarations,
filings or recordings with any such authorities) required in
connection with the completion of any of the transactions
contemplated by this Agreement, the execution of this
Agreement, the Closing or the performance of any of the terms
and conditions hereof (collectively the "Approvals"), shall
have been obtained on or before the Closing Time; the Sellers
shall have obtained and delivered by Closing to the Purchaser
written consents, in form and substance satisfactory to the
Purchaser, to the transaction contemplated herein which are
required pursuant to the real property leases referred to in
Schedule "E" (and any customer contracts where approval or
consent is required). Including, without limiting the
generality of the foregoing, such acknowledgments and
confirmations of good standing from the lessors in respect of
the real property leases referred to in Schedule "E" hereto as
may be reasonably requested by the Purchaser;
(e) Directors and Officers of the Company - There shall have been
delivered to the Purchaser on or before the Closing Time the
resignations of such persons as the Purchaser shall direct who
are presently directors and/or officers of the Company from
such positions and duly executed comprehensive releases from
each such person and from the Sellers of all their claims
respectively, against the Company, except for any claims for
current or future unpaid transaction consideration or
remuneration; provided, however, Anthony G. Shumway and Ivan
R. Jones, under an employment agreement, will be elected
President and Vice President of the Company and one of them,
per agreement between the two, will also be given a seat on
the Board of Directors of Purchaser for a minimum of one (1)
year from the date of Closing.
19
<PAGE> 20
SHARE EXCHANGE AGREEMENT
(f) Non-Competition - There shall have been delivered to the
Purchaser from Mr. Shumway and Mr. Jones executed employment
and non-competition Agreements which agreements shall be in
the form set out at Schedule "P" hereto.
(g) Limit on Capital Expenditures - The Purchaser shall be
satisfied that the Company shall not have, since the date
hereof, incurred any capital expenditures in excess of $1,000
in the aggregate without the prior approval of the Purchaser;
(h) No Fire Damage - No substantial damage by fire or other hazard
to the assets of the Company shall have occurred from the date
hereof to the Closing Date which is not adequately insured
against;
(i) Litigation - On the Closing Date. there shall be no
litigation, governmental investigation or proceeding pending
or threatened for the purpose of enjoining or preventing the
consummation of any of the transactions contemplated by this
Agreement or otherwise claiming that such consummation is
improper;
(j) Tax Returns - Purchaser shall have received the 1997, 1996,
1995, 1994 and 1993 fiscal years' tax returns of the Company;
(k) Financial - The Purchaser shall be satisfied with the accuracy
and sufficiency of the Financial Statements and all other
financial records of the Company;
(l) Labor - The Closing of this transaction is conditional upon
Purchaser being satisfied with the Company's labor situation;
(m) Board Approval - Purchaser shall have received the approval
and authorization of its Board of Directors prior to the
entering into this Agreement;
(n) Due Diligence - Purchaser shall have satisfactorily completed
its due diligence investigations.
4.2 Seller's Conditions - The obligations of the Sellers to complete the
exchange of the Shares hereunder shall be subject to the satisfaction of or
compliance with, at or before the Closing Time, each of the following conditions
precedent (each of which is hereby acknowledged to be inserted for the exclusive
benefit of the Sellers and may be waived by them in whole or in part):
(a) Truth and Accuracy of Representations of Purchaser at Closing
Time - All of the representations and warranties of the
Purchaser made in or pursuant to this Agreement, including
without limitation the representations and warranties made by
the Purchaser and set forth in Sections 3.2 and 3.3 hereof,
shall be true and correct at the Closing Time and with the
same effect as if made at and as of the Closing Time and the
Sellers shall have received a certificate from a duly
authorized senior officer of the Purchaser confirming, to the
best of his knowledge, information and belief (after due
inquiry), the truth and correctness of the representations and
warranties of the Purchaser contained herein;
(b) Performance of Obligations - The Purchaser shall have
performed or complied with, in all respects, all of its
obligations, covenants and agreements hereunder;
20
<PAGE> 21
SHARE EXCHANGE AGREEMENT
(c) Receipt of Closing Documentation - All documentation relating
to the due authorization and completion of the sale and
purchase hereunder of the Purchased Shares and all actions and
proceedings taken on or prior to the Closing in connection
with the performance by the Purchaser of its obligations under
this Agreement shall be satisfactory to the Seller and the
Sellers shall have received copies of all such documentation
or other evidence as it may reasonably request in order to
establish the consummation of the transactions contemplated
hereby and the taking of all corporate proceedings in
connection therewith in compliance with these conditions, in
form (as to certification and otherwise) and substance
satisfactory to the Seller;
(d) Litigation - On the Closing Date. there shall be no
litigation, governmental investigation or proceeding pending
or threatened for the purpose of enjoining or preventing the
consummation of any of the transactions contemplated by this
Agreement or otherwise claiming that such consummation is
improper.
(e) Employment Agreements - Purchaser shall execute with Mr.
Shumway and Mr. Jones employment agreements substantially in
conformance with those attached as Schedule "P" to this
Agreement.
(f) Due Diligence - Seller (and Company) shall have satisfactorily
completed their due diligence investigations.
(g) Financial - Sellers shall be satisfied with the accuracy and
sufficiency of the Financial Statements and all other
financial records of the Purchaser;
(h) Board Approval - Sellers shall have received a copy of the
approval and authorization of Purchaser's Board of Directors
approving this transaction.
(i) Sellers shall be satisfied that the exchange contemplated
herein will qualify as a tax-free exchange under Section 368
of the Internal Revenue Code of 1986, as amended.
4.3 Effect of Waiver - With regard to the conditions described in Sections
4.2(f), (g) and (i), unless Sellers give notice to Purchaser before January 21,
1998 at 5 p.m. to the contrary, such conditions shall be waived by Sellers. If
any party hereby waives in writing any of the conditions precedent in this
Article 4, said waiver shall be deemed in acceptance and approval of the
condition as waived. In any event, Closing shall be deemed in satisfaction of
all conditions described in this Section 4.
ARTICLE 5
OTHER COVENANTS OF THE PARTIES
5.1 Conduct of Business Prior to Closing - During the period from the date of
this Agreement to the Closing Time, the Sellers will cause the Company to do the
following:
(a) Conduct Business in Ordinary Course - Except as otherwise
contemplated or permitted by this Agreement, to preserve all
its goodwill and customer relations and conduct the Business
in the ordinary and normal course thereof and not, without the
prior written consent of the
21
<PAGE> 22
SHARE EXCHANGE AGREEMENT
Purchaser, to enter into any transaction which if effected
before the date of this Agreement would constitute a material
breach of the representations, warranties or agreements
contained herein;
(b) Continued Insurance - To continue in force existing policies
of insurance presently maintained by the Company;
(c) Perform Obligations - To comply with all laws affecting the
operation of the Business and to pay all required taxes and
tax installments; and
(d) Prevent Certain Changes - Not, without prior written consent
of the Purchaser, to take any of the actions, do any of the
things or perform any of the acts described in paragraphs (i)
to (xii) inclusive of Subsection 3.1(l).
5.2 Access for Investigation - The Seller has caused and shall continue to cause
the Company to permit the Purchaser and its employees, agents, counsels and
accountants or other representatives, between the date hereof and the Closing
Time, without interference to the ordinary conduct of the Business of the
Company and at the Purchaser's sole cost and expense, to have free and
unrestricted access during normal business hours to the premises and to all the
books, accounts, records, and other data of the Company (including, without
limitation, all corporate, accounting and tax records of the Company) and to the
properties and assets of the Company and to furnish with respect to the
Business, properties and assets of the Company as the Purchaser shall from time
to time reasonably request to enable confirmation of the matters warranted in
Section 3.1 hereof. Without limiting the generality of the foregoing, it is
agreed that the accounting representatives of the Purchaser shall be afforded
ample opportunity to make a full investigation of all aspects of financial
affairs of the Company. It is also agreed that an environmental representative
of the Purchaser shall be afforded ample opportunity to conduct an environmental
facility audit for the purpose of confirming the matters warranted in Section
3.1 (kk). Until the Closing Time, and in the event of the termination of this
Agreement without consummation of the transactions contemplated hereby, the
Purchaser will keep confidential any information (unless readily available from
public or published information or sources) obtained from the Company or the
Seller. If this Agreement is so terminated, promptly after such termination, all
documents, work papers and other written material obtained from any Person in
connection with this Agreement and not theretofore made public (including all
copies thereof), shall be returned to the Person who provided such material.
5.3 Actions to Satisfy Closing Conditions - Each of the Parties hereby agrees to
take all such reasonable actions as are within its power to control, and to use
its best efforts to cause other actions to be taken which are not within its
power to control, so as to ensure compliance with any conditions set forth in
Article 4 hereof which are for the benefit of any other Party.
5.4 Tax Indemnity - The Sellers will be responsible for the payment of, and will
indemnify the Company for, all unpaid or reassessed income taxes, if any, not
recorded as liabilities on the financial Statements but which are applicable to
any period prior to Closing.
5.5 Customer Consents - Sellers represent that none of the contracts or leases
to which the Company is a party contain provisions requiring approval prior to
any transfer of the Purchased Shares, nor do the contracts contain provisions
which bring into effect amendment or cancellation terms under a sale as
described in this Agreement.
22
<PAGE> 23
SHARE EXCHANGE AGREEMENT
5.6 Discussions, etc. - From the date hereof until this transaction terminates,
Sellers will not engage in any discussions or negotiations with any third party
regarding the sale of the Purchased Shares or all or substantially all of the
Company's assets.
5.7 Employment Agreements - Mr. Shumway and Mr. Jones will be offered employment
with the Purchaser at Closing all in accordance with Employment Agreements in
the format attached at Schedule "P" hereto.
5.8 Receivables - Sellers represent and warrant that all of the Company's net
receivables (i.e. after discounts and other contractual allowances) as at
Closing shall be fully collectible, except as reserved in the Financial
Statements and subject to normal industry standards of non-collection.
5.9 Quit Claim - At Closing, Purchaser shall cause and permit Company to quit
claim to the individual Sellers the items described in Schedule "X."
5.11 Schedules Refinement - The Parties acknowledge that the Schedules attached
hereto are formative, and that further alterations, additions or deletions
thereto shall be made before Closing after execution hereof provided that on or
prior to the 45th day after execution hereof, the Purchaser and Seller shall
endeavor to formally confirm in writing to each other their agreement as to the
final version of the Schedules, and same shall be attached to each original
Agreement in existence, if agreed. If no such agreement can be arrived at prior
to the Closing Time, either party may terminate this Agreement with no further
liability.
5.12 Curative Period - Prior to Purchaser exercising its set-off rights under
Section 2.4 hereof, it shall give 30 days prior written notice to Sellers,
describing with reasonable specificity the basis of the set-off. If curable,
Sellers shall have such 30 day notice period to demonstrate to Purchaser that
the matter has been cured or that it will be cured in a reasonable period of
time or to dispute the same. If not cured, disputed or demonstrated that it will
be cured in a reasonable period of time, the set-off shall proceed.
ARTICLE 6
INDEMNIFICATION AND DISPUTE RESOLUTION
6.1 Mutual Indemnifications for Breaches of Warranty, etc. - The Sellers hereby
covenant and agree with the Purchaser, and the Purchaser hereby covenants and
agrees with the Sellers (the Party or Parties so covenanting and agreeing to
indemnify another Party referred to in this paragraph as the "Indemnifying
Party" and the Party so to be indemnified being hereinafter called the
"Indemnified Party") to indemnify and save harmless the Indemnified Party,
effective as and from the Closing Time, from and against any claims, demands,
actions, causes of action, damage, loss, costs, liability or expense
(hereinafter in this Article 6 called "Claims") which may be brought against the
Indemnified Party and/or which it may suffer or incur as a result of, in respect
of, or arising out of any material non-fulfillment of any covenant or agreement
on the part of the Indemnifying Party under this Agreement or any incorrectness
in or breach of any representation or warranty of the Indemnifying Party
contained herein or in any certificate or other document furnished by the
Indemnifying Party pursuant hereto. The foregoing obligation of indemnification
in respect of such Claims shall be subject to the requirement that the
Indemnifying Party shall, in respect of any Claim made by any third party, be
notified forthwith by the Indemnified Party of all material particulars thereof
and be afforded at least 30 days, at its sole cost and expense, to resist,
defend and compromise the same. Notwithstanding the foregoing, the liability of
the Sellers shall be limited to the value paid for the shares pursuant to this
Agreement and may be satisfied by tender of shares which, for purposes of this
indemnity, shall be the greater of the
23
<PAGE> 24
SHARE EXCHANGE AGREEMENT
sales value accorded hereunder or the fair market value at the time the
indemnity is satisfied. If the shares tendered by the Sellers do not satisfy the
liability, such event will constitute an Employee Initiated Separation (as
defined in the Employment Agreements attached hereto of Schedule "P").
6.2 Carriage of Action
(a) If, within ten days after receipt of the notice referred to in
Section 6.1 hereof, the Indemnifying Party gives notice to the
Indemnified Party that the Indemnifying Party wishes to
dispute the matter in question, the Indemnifying Party shall
have the right to litigate such matter in the name of the
Indemnified Party using counsel chosen by the Indemnifying
Party and the Indemnifying Party shall also have the right to
settle or compromise such matter in the name of the
Indemnified Party; provided, however, that contemporaneously
with such compromise or settlement the Indemnifying Party
shall pay or cause to be paid to the Indemnified Party, as
either may direct, the amount owing under this indemnity with
respect to such matter and provided further that:
(i) the Indemnifying Party shall furnish security to the
Indemnified Party in respect of any costs or damages
arising in connection with any litigation;
(ii) the Indemnifying Party shall agree to reimburse the
Indemnified Party promptly in respect of all
out-of-pocket expenses of the Indemnified Party in
connection with such litigation or pending
litigation; and
(iii) the Indemnifying Party shall not be entitled to take
any steps which would have the effect of forfeiting
or otherwise terminating any contract, lease or other
agreement, the benefit of which the Indemnified Party
would otherwise be entitled to enjoy.
(b) If the Indemnifying Party does not provide the notice referred
to in Subsection 6.2(a) assuming the defense of the Claim, the
Indemnified Party may defend against such Claim in such manner
as it deems appropriate and may take such action as may be
reasonably prudent in the circumstances to settle any such
Claim.
6.3 Arbitration. Any disputes of less than $100,000 arising from this Agreement
shall be resolved by binding arbitration. The parties shall select a
mutually-agreeable arbitrator(s), and such arbitration shall be governed by the
rules of the American Arbitration Association. The prevailing party shall be
entitled to Attorneys' Fees and costs, as determined as reasonable by the
arbitrator(s).
ARTICLE 7
GENERAL
7.1 Public Notices - All public notices to third Parties and all other publicity
concerning the transactions contemplated by this Agreement shall be jointly
planned and coordinated by the Sellers and the Purchaser and no Party shall act
unilaterally in this regard without the prior approval of the Sellers and the
Purchaser or any of them.
7.2 Expenses - Purchaser shall pay directly to Company's attorney Charles E.
Davis $17,939 of the Company's legal fees incurred prior to Closing, as follows:
$10,000 upon closing for fees incurred regarding
24
<PAGE> 25
SHARE EXCHANGE AGREEMENT
the share exchange transaction and the remainder payable 90 days after Closing
for fees incurred prior to December 31, 1997. The Sellers shall be solely
responsible for all other fees and expenses incurred prior to Closing.
7.3 Time - Time shall be of the essence hereof.
7.4 Notices - Any notice, direction or other document required or permitted to
be given hereunder or for the purposes hereof (hereinafter in this Section 7.4
called a "notice") to any Party shall be in writing and shall be sufficiently
given if delivered personally, or if sent by prepaid registered mail or if
transmitted by telex, facsimile or other form of recorded communication tested
prior to transmission to such Party:
(a) in the case of a notice to the Seller, to:
Anthony G. Shumway, at his business address:
c/o Aztec Industries, Inc.
333 S. Nina Dr.
Mesa, Arizona 85210
with a facsimile number of: (602) 844-0625
with a copy to the Seller's Counsel at:
Charles E. Davis, Attorney
1201 S. Alma School Rd., Suite 3400
Mesa, Arizona 85210
with a facsimile number of: (602) 964-1524
(b) in the case of a notice to the Purchaser, to:
Terren Dunlap, at his business address:
DuraSwitch Industries, Inc.
3260 N. Hayden Road, Suite 207
Scottsdale, Arizona 85251
with a facsimile number of (602) 970-1199
and a copy to Purchaser's Counsel at:
P. Robert Moya, Esq.
Quarles & Brady
One East Camelback, Suite 400
Phoenix, Arizona 85012
with a facsimile number of (602) 230-5598
25
<PAGE> 26
SHARE EXCHANGE AGREEMENT
or at such other address as the Party to whom such writing is to be given shall
have last notified the Party giving the same in the manner provided in this
section. Any notice delivered in person as provided herein shall be deemed to
have been given and received on the day it is so delivered at such address,
provided that if such day is not a Business Day then the notice shall be deemed
to have been given and received on the first Business Day next following such
day. Any notice mailed as aforesaid shall be deemed to have been given and
received on the seventh Business Day following the date of its mailing. Any
noticed transmitted by telex, facsimile or other form of recorded communication
shall be deemed given and received on the Business Day of its transmission.
7.5 Assignment - Neither this Agreement nor any rights or obligations hereunder
shall be assignable by any Party without the prior written consent of the other
Party hereto; provided, however, this Agreement shall inure to the benefit of
and be binding upon the Parties and their respective heirs, executors,
administrators and successors (including any successor by reason of amalgamation
of the Purchaser) and permitted assigns.
7.6 Further Assurances - The Parties hereto shall with reasonable diligence do
all such things and provide all such reasonable assurances as may be required to
consummate the transactions contemplated hereby, and each Party shall provide
such further documents or instruments required by any other Party as may be
reasonably necessary or desirable to effect the purpose of this Agreement and
carry out its provisions, whether before or after the Closing.
7.7 Severability - If any covenant or provision of this Agreement is prohibited
in whole or in part in any jurisdiction, such covenant or provision shall, as to
such jurisdiction, be ineffective to the extent of such prohibition without
invalidating the remaining covenants and provisions hereof and shall, as to such
jurisdiction, be deemed to be severed from this Agreement to the extent of such
prohibition.
7.8 Counterparts - This Agreement may be executed by the Parties in separate
counterparts (and by facsimile transmission) each of which when so executed and
transmitted or delivered shall be an original, but all such counterparts shall
together constitute one and the same instrument.
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
/ / /
26
<PAGE> 27
SHARE EXCHANGE AGREEMENT
IN WITNESS WHEREOF the Parties have hereunto duly executed this Agreement.
/s/ Anthony G. Shumway /s/ Dian D. Shumway
- -------------------------------------------- --------------------------
By: Anthony G. Shumway, Seller By: Dian D. Shumway, Seller
/s/ Ivan R. Jones /s/ Dana S. Jones
- -------------------------------------------- --------------------------
By: Ivan R. Jones, Seller By: Dana S. Jones, Seller
/s/ Anthony G. Shumway
- --------------------------------------------
By: Anthony G. Shumway, as Trustee for the
Anthony Gene Shumway Family Revocable
Living Trust
AZTEC INDUSTRIES, INC.
By: /s/ Anthony G. Shumway
- --------------------------------------------
Anthony G. Shumway, President
DURASWITCH INDUSTRIES, INC.
By: /s/ R. Terren Dunlap
- --------------------------------------------
R. Terren Dunlap, CEO/President
/s/ Anthony Van Zeeland
- --------------------------------------------
Witness: Anthony Van Zeeland
COO/Exec. Vice President
DuraSwitch Industries, Inc.
27
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
DURASWITCH INDUSTRIES, INC.
The Board of Directors and a majority of shareholders of said
corporation at meetings duly convened, held on the 29th day of June, 1998,
adopted resolutions to amend and restate the original Articles of Incorporation
to read as follows:
1. Name. The name of the corporation is DuraSwitch Industries,
Inc. (the "Corporation").
2. Resident Agent. The name and address of the initial
resident agent of the corporation is Corporation Trust Company of Nevada, One
East First Street, Reno, Nevada 89501.
3. Authorized Capital. The Corporation shall have authority to
issue 40,000,000 shares of Common Stock, par value $.001 per share and
10,000,000 shares of Preferred Stock, par value $.001 per share.
4. Preferred Stock.
4.1. Series. The board of directors is authorized,
subject to limitations prescribed by law and these Articles of Incorporation, to
provide for the issuance of the shares of preferred stock in series, and 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 such
series, and to fix the designation, voting powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof.
4.2. Rights and Limitations. The authority of the
board of directors with respect to each series of preferred stock shall include,
without limitation, determination of the following:
(a) The number of shares constituting that
series and the distinctive designation of that series;
(b) The dividend rate on the shares of that
series, whether dividends shall be cumulative, and, if so, from which date or
dates, and the relative rights of priority, if any, of payment of dividends on
shares of that series;
(c) Whether that series shall have voting
rights, in addition to the voting rights provided by law, and if so, the terms
of such voting rights;
(d) Whether that series shall have
conversion privileges, and if so, the terms and conditions of such conversion,
including provisions for adjustment of the conversion rate in such events as the
board of directors shall determine;
<PAGE> 2
(e) Whether or not the shares of that series
shall be redeemable, and if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable, and
the amount per share payable in case of redemption, which amount may vary under
different conditions and at different redemption dates;
(f) Whether that series shall have a sinking
fund for the redemption or purchase of shares of that series, and if so, the
terms and amount of such sinking fund;
(g) The rights of the shares of that series
in the event of voluntary or involuntary liquidation, dissolution or winding up
of the Corporation, and the relative rights of priority, if any, of payment of
shares of that series; and
(h) Any other relative rights, preferences
and limitations of that series.
4.3. Dividends. Dividends on outstanding shares of
preferred stock shall be paid or declared and set apart for payment before any
dividends shall be paid or declared and set apart for payment on the common
shares with respect to the same dividend period.
4.4. Liquidation. If upon any voluntary or
involuntary liquidation, dissolution or winding up of the Corporation, the
assets available for distribution to holders of shares of preferred stock of all
series shall be insufficient to pay such holders the full preferential amount to
which they are entitled, then such assets shall be distributed ratably among the
shares of all series of preferred stock in accordance with the respective
preferential amounts (including unpaid cumulative dividends, if any) payable
with respect thereto.
5. Stock Rights and Options. The Corporation shall have
authority, as provided under the laws of the State of Nevada, to create and
issue rights and options entitling the holders thereof to purchase shares of
stock of the Corporation. The issuance of such rights and options, whether or
not to directors, officers or employees of the Corporation or of any affiliate
thereof and not to the stockholders generally, need not be approved or ratified
by the stockholders of the Corporation or be authorized by or be consistent with
a plan approved or ratified by the stockholders of the Corporation.
6. Initial Directors and Officers. The number of persons to
serve on the board of directors thereafter shall be fixed by the Bylaws, but the
number of directors fixed by the Bylaws shall never be less than one.
7. Distributions to Stockholders. The board of directors of
the corporation may, from time to time, distribute to its stockholders, a
portion of its assets, in cash or property, whether or not the distribution,
after giving it effect would cause the Corporation's total assets to be less
than the sum of the total liabilities plus the amount that would be needed, if
dissolution were to occur at the time of distribution, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
are superior to those receiving the distribution. The Board of Directors may
base a determination that a distribution is permitted hereunder on (i) financial
statements prepared on the
2
<PAGE> 3
basis of accounting practices that are reasonable under the circumstances; (ii)
a fair valuation, including, but not limited to, unrealized appreciation and
depreciation; or (iii) any other method that is reasonable in the circumstances.
8. Director and Officer Liability. A director and officer of
the Corporation shall not be personally liable to the Corporation or its
stockholders for damages for breach of fiduciary duty as a director or officer,
except for liability (i) for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law, or (ii) for authorizing the
unlawful distribution in violation of Section 78.300 of the Nevada General
Corporation Law. If the Nevada General Corporation Law is amended after approval
by the stockholders of this Article to authorize corporate action further
eliminating or limiting the personal liability of directors or officers, then
the liability of a director or officer of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Nevada General Corporation Law,
as so amended.
3
<PAGE> 4
DuraSwitch Industries, Inc.
a Nevada corporation
(the "Corporation")
Secretary's Certificate
I, Anthony J. VanZeeland, Secretary of DuraSwitch Industries, Inc., a
Corporation organized and existing under the laws of the State of Nevada,
hereby certify that the attached resolution was duly adopted by a majority of
the Shareholders, pursuant to Section 78.320 of the Nevada General Corporation
Law, in lieu of a special meeting, and that, as such, I am authorized to
execute this Certificate on behalf of the Corporation.
RESOLVED, that the Amended and Restated Articles of Incorporation, which
authorize the issuance of 40,000,000 shares of Common Stock, par value $.001
per share and 10,000,000 shares of Preferred Stock, par value $.001 per share,
as set forth in Exhibit "A", Section 3. attached hereto and incorporated herein
by reference, be, and the same hereby are, approved, adopted and affirmed in
all respects.
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary this 8th
day of September, 1998.
/s/ Anthony J. VanZeeland
-------------------------
Anthony J. VanZeeland, Secretary
<PAGE> 5
THIS FORM SHOULD ACCOMPANY AMENDED AND RESTATED ARTICLES
OF INCORPORATION FOR A NEVADA CORPORATION
1. Name of corporation Duraswitch Industries, Inc.
-----------------------------------------------------
2. Date of adoption of Amended and Restated Articles 6/29/98
-----------------------
3. If the articles were amended, please indicate what changes have been made:
(a) Was there a name change? Yes / / No /X/ If yes, what is the new name?
------------------------------------------------------------------------
(b) Did you change the resident agent? Yes / / No /X/
If yes, please indicate the new resident agent and address.
------------------------------------------------------------------------
------------------------------------------------------------------------
Please attach the resident agent acceptance certificate.
(c) Did you change the purposes? Yes / / No /X/ Did you add Banking? / /
Gaming? / / Insurance? / / None of these? /X/
(d) Did you change the capital stock? Yes /X/ No / /
If yes, what is the new capital stock?
40,000,000 Common stock, par value $.001
10,000,000 Preferred Stock, par value $.001
------------------------------------------------------------------------
(e) Did you change the directors? Yes / / No /X/
If yes, indicate the change:
------------------------------------------------------------------------
(f) Did you add the directors liability provision? Yes / / No /X/
(g) Did you change the period of existence? Yes / / No /X/
If yes, what is the new existence?
------------------------------------------------------------------------
(h) If none of the above apply, and you have amended or modified the
articles, how did you change your articles?
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
/s/ Anthony J. VanZeeland
Chief Operating Officer/Executive Vice President 9-8-98
- ------------------------------------------------ ---------
Name and Title of Officer Date
State of Arizona
------------------- ]
] ss.
County of Maricopa ]
-------------------
On September 8, 1998, personally appeared before me, a Notary Public,
---------------------
Anthony J. VanZeeland, who acknowledged that he/she executed
- ---------------------------------------
the above instrument.
/s/ Mark D. Guthrie
--------------------
Notary Public
OFFICIAL SEAL
[SEAL] MARK D. GUTHRIE
Notary Public - State of Arizona
(NOTARY STAMP OR SEAL)
MARICOPA COUNTY
My Comm. Expires June 21, 1999
<PAGE> 6
STATE OF NEVADA
Secretary of State
I hereby certify that this is a
true and complete copy of
the document as filed in this
office.
SEP 21 '98
/s/ Dean Heller
DEAN HELLER
Secretary of State
By /s/ D Farmer
<PAGE> 1
EXHIBIT 3.2
AMENDED & RESTATED
BYLAWS
OF
DURASWITCH INDUSTRIES, INC.
a Nevada corporation
(As Adopted June 2, 1999)
ARTICLE I
OFFICES
1.1. Registered Office. The registered office of the Corporation in the
State of Nevada, shall be in the City of Carson City, State of Nevada.
1.2. Other Offices. The Corporation also may have offices at such other
places both within and without the State of Nevada as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
STOCKHOLDERS
2.1. Stockholder Meetings.
(a) Time and Place of Meetings. Meetings of the stockholders
shall be held at such times and places, either within or without the State of
Nevada, as may from time to time be fixed by the Board of Directors and stated
in the notices or waivers of notice of such meetings.
(b) Annual Meeting. Annual meetings of stockholders shall be
held at such date and time as may be set and stated in the notice of the
meeting. At the annual meeting, stockholders shall elect a board of directors
and transact such other business as properly may be brought before the annual
meeting.
(c) Special Meetings. Special meetings of the stockholders of
the Corporation for any purpose or purposes may be called at any time only by
the Chairman of the Board, or the Board of Directors pursuant to a resolution
approved by a majority of the whole Board of Directors, or at the request in
writing of shareholders owning at least 51% of the capital stock issued and
outstanding and entitled to vote. Business transacted at any special meeting of
the stockholders shall be limited to the purposes stated in the notice of such
meeting.
(d) Notice of Meetings. Except as otherwise provided by law,
the Articles of Incorporation or these Bylaws, written notice of each meeting of
the stockholders shall be given not less than ten days nor more than sixty days
before the date of such meeting to each stockholder entitled to vote thereat,
directed to such stockholder's address as it appears upon the books of the
<PAGE> 2
Corporation, such notice to specify the place, date, hour and purpose or
purposes of such meeting. If mailed, such notice shall be deemed to be given
when deposited in the United States mail, postage prepaid, addressed to the
stockholder at his address as it appears on the stock ledger of the Corporation.
When a meeting of the stockholders is adjourned to another time and/or place,
notice need not be given of such adjourned meeting if the time and place thereof
are announced at the meeting of the stockholders at which the adjournment is
taken, unless the adjournment is for more than thirty days or unless after the
adjournment a new record date is fixed for such adjourned meeting, in which
event a notice of such adjourned meeting shall be given to each stockholder of
record entitled to vote thereat. Notice of the time, place and purpose of any
meeting of the stockholders may be waived in writing either before or after such
meeting and will be waived by any stockholder by such stockholder's attendance
thereat in person or by proxy. Any stockholder so waiving notice of such a
meeting shall be bound by the proceedings of any such meeting in all respects as
if due notice thereof had been given.
(e) Quorum. Except as otherwise required by law, the Articles
of Incorporation or these Bylaws, the holders of not less than 10% of the shares
entitled to vote at any meeting of the stockholders, present in person or by
proxy, shall constitute a quorum and the affirmative vote of the majority of
such quorum shall be deemed the act of the stockholders. If a quorum shall fail
to attend any meeting of the stockholders, the presiding officer of such meeting
may adjourn such meeting from time to time to another place, date or time,
without notice other than announcement at such meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting of the stockholders as originally noticed. The foregoing
notwithstanding, if a notice of any adjourned special meeting of the
stockholders is sent to all stockholders entitled to vote thereat which states
that such adjourned special meeting will be held with those present in person or
by proxy constituting a quorum, then, except as otherwise required by law, those
present at such adjourned special meeting of the stockholders shall constitute a
quorum and all matters shall be determined by a majority of the votes cast at
such special meeting.
2.2. Determination of Stockholders Entitled to Notice and to Vote. To
determine the stockholders entitled to notice of any meeting of the stockholders
or to vote thereat, the Board of Directors may fix in advance a record date as
provided in Article VII, Section 7.1 of these Bylaws, or if no record date is
fixed by the Board of Directors, a record date shall be determined as provided
by law.
2.3. Voting.
(a) Except as otherwise required by law, the Articles of
Incorporation or these Bylaws, each stockholder present in person or by proxy at
a meeting of the stockholders shall be entitled to one vote for each full share
of stock registered in the name of such stockholder at the time fixed by the
Board of Directors or by law at the record date of the determination of
stockholders entitled to vote at such meeting.
(b) Every stockholder entitled to vote at a meeting of the
stockholders may do so either (i) in person or (ii) by one or more agents
authorized by a written proxy executed by the
2
<PAGE> 3
person or such stockholder's duly authorized agent, whether by manual signature,
typewriting, telegraphic transmission or otherwise as permitted by law. No proxy
shall be voted on after three years from its date, unless the proxy provides for
a longer period.
(c) Voting may be by voice or by ballot as the presiding
officer of the meeting of the stockholders shall determine. On a vote by ballot,
each ballot shall be signed by the stockholder voting, or by such stockholder's
proxy, and shall state the number of shares voted.
(d) In advance of or at any meeting of the stockholders, the
Chairman of the Board may appoint one or more persons as inspectors of election
(the "Inspectors") to act at such meeting. Such Inspectors shall take charge of
the ballots at such meeting. After the balloting on any question, the Inspectors
shall count the ballots cast and make a written report to the secretary of such
meeting of the results. Subject to the direction of the Chairman of the Board,
the duties of such Inspectors may further include without limitation:
determining the number of shares outstanding and the voting power of each; the
shares represented at the meeting; the existence of a quorum; the authenticity,
validity, and effect of proxies; receiving votes, ballots, or consents; hearing
and determining all challenges and questions in any way arising in connection
with the right to vote; counting and tabulating all votes of consents and
determining when the polls shall close; determining the result; and doing such
acts as may be proper to conduct the election or vote with fairness to all
stockholders. An Inspector need not be a stockholder of the Corporation and any
officer of the Corporation may be an Inspector on any question other than a vote
for or against such officer's election to any position with the Corporation or
on any other questions in which such officer may be directly interested. If
there are three or more Inspectors, the determination, report or certificate of
a majority of such Inspectors shall be effective as if unanimously made by all
Inspectors.
2.4. List of Stockholders. The officer who has charge of the stock
ledger of the Corporation shall prepare and make available, at least ten days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote thereat, showing the address of and the number of shares
registered in the name of each such stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to such meeting, either
at a place within the city where such meeting is to be held and which place
shall be specified in the notice of such meeting, or, if not so specified, at
the place where such meeting is to be held. The list also shall be produced and
kept at the time and place of the meeting of the stockholders during the whole
time thereof, and may be inspected by any stockholder who is present.
2.5. Action by Consent of Stockholders. A resolution in writing, signed
by Stockholders, representing a majority of those shares entitled to vote shall
be deemed to be the action of the Stockholders to the effect therein expressed
with the same force and effect as if the same had been duly passed by the same
vote at a duly convened meeting, and it shall be the duty of the Secretary of
the Corporation to record such Resolution in the Minute Book of the Corporation
under its proper date.
If stockholder action is taken without a meeting by less than unanimous
written consent, notice shall be given to those stockholders who have not
consented in writing.
3
<PAGE> 4
2.6. Conduct of Meetings. The Chairman of the Board shall have full and
complete authority to determine the agenda, to set the procedures and order the
conduct of meetings, all as deemed appropriate by such person in his sole
discretion with due regard to the orderly conduct of business.
2.7. Notice of Agenda Matters. If a stockholder wishes to present to
the Chairman of the Board an item for consideration as an agenda item for a
meeting of stockholders, he must give timely notice to the Secretary of the
Corporation and give a brief description of the business desired to be brought
before the meeting. To be timely, a stockholder's notice must be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than sixty days nor more than ninety days prior to the meeting; provided,
however, that if less than seventy days' notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the fifteenth day following the date on which such notice of the
date of the meeting was mailed or such public disclosure was made and provided
further that any other time period necessary to comply with federal proxy
solicitation rules or other regulations, if applicable, shall be deemed to be
timely.
ARTICLE III
BOARD OF DIRECTORS
3.1. General Powers. Unless otherwise restricted by law, the Articles
of Incorporation or these Bylaws as to action which shall be authorized or
approved by the stockholders, and subject to the duties of directors as
prescribed by these Bylaws, all corporate powers shall be exercised by or under
the authority of, and the business and affairs of the Corporation shall be
controlled by, the Board of Directors.
3.2. Election of Directors.
(a) Number, Qualification and Term of Office. The authorized
number of directors of the Corporation shall be fixed from time to time by the
Board of Directors, but shall not be less than one nor more than nine. The exact
number of directors shall be determined from time to time by a resolution duly
adopted by a majority of the whole Board of Directors. Until changed by
resolution of the Board of Directors, the Board shall be set at seven members.
Each Director must beneficially own at all times at least $25,000 worth of
shares of the Corporation's capital stock, which amount shall be computed by
multiplying (1) the number of shares then held by the Director, by (2) the Fair
Market Value per share of such capital stock on the day the Director was
elected, provided that this share ownership requirement may be waived for any
Director upon a unanimous vote of the Board of Directors. The usual term for a
Director is three years. However, the Board of Directors initially shall be
divided into three groups of as equal number as possible, and each group shall
serve one, two and three year terms, respectively. If the current members of the
Board of Directors cannot agree on which Directors shall serve which terms, then
the matter will be decided by a vote of the stockholders at the annual meeting,
with the Directors receiving the most votes serving the longest terms. "Fair
Market Value" means (1) the reported closing price of the Corporation's stock on
an established stock market, (2) if such stock is not then listed on an
exchange, the last trade price per share for such stock in the over-the-counter
market as quoted on Nasdaq Over-the-Counter Bulletin Board, or (3) if such stock
is not listed or quoted as referenced above, an amount determined in good faith
by the Board of Directors.
(b) Resignation. Any director may resign from the Board of
Directors at any time by giving written notice to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or if the time when such resignation shall become effective shall not
4
<PAGE> 5
be so specified, then such resignation shall take effect immediately upon its
receipt by the Secretary; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
(c) Nomination of Directors. Candidates for director of the
Corporation shall be nominated only either by:
(i) the Chairman of the Board or the Board of
Directors, or
(ii) nomination at any stockholders' meeting by or on
behalf of any stockholder entitled to vote thereat.
(d) Vacancies. Vacancies and new directorships resulting from
an increase in the authorized number of directors may be filled by a person
elected by a majority of the directors then in office, though less than a
quorum, or by the sole remaining director. Directors so chosen shall hold office
until their successors are duly elected at the annual meeting and qualified. If
no directors are in office, an election may be held as provided by statute.
3.3. Meetings of the Board of Directors.
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(a) Regular Meetings. Regular meetings of the Board of
Directors shall be held without call, and without any requirement of notice, at
the following times:
(i) at such times as the Board of Directors shall
from time to time by resolution determine; and
(ii) one-half hour prior to any special meeting of
the stockholders and immediately following the adjournment of any
annual or special meeting of the stockholders.
(b) Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, or the Board of Directors
pursuant to a resolution approved by a majority of the whole Board of Directors.
Notice of the time and place of special meetings of the Board of Directors shall
be given by the Secretary or an Assistant Secretary of the Corporation, or by
any other officer authorized by the Board of Directors. Such notice shall be
given to each director personally or by mail, messenger, telephone or fax at
such director's business or residence address. Notice by mail shall be deposited
in the United States mail, postage prepaid, not later than the fifth day prior
to the date fixed for such special meeting. Notice by telephone or fax shall be
sent, and notice given personally or by messenger shall be delivered, at least
24 hours prior to the time set for such special meeting. Notice of a special
meeting of the Board of Directors need not contain a statement of the purpose of
such special meeting.
(c) Adjourned Meetings. A majority of directors present at any
regular or special meeting of the Board of Directors or any committee thereof,
whether or not constituting a quorum, may adjourn any meeting from time to time
until a quorum is present or otherwise, however, notice of the time and place of
holding any adjourned meeting shall be required as provided in Section 3.3(b) of
these Bylaws.
(d) Place of Meetings. Meetings of the Board of Directors,
both regular and special, may be held either within or without the State of
Nevada.
(e) Participation by Telephone. Members of the Board of
Directors or any committee may participate in any meeting of the Board of
Directors or committee through the use of conference telephone or similar
communications equipment, so long as all members participating in such meeting
can hear one another, and such participation shall constitute presence in person
at such meeting.
(f) Quorum. At all meetings of the Board of Directors or any
committee thereof, a majority of the total number of directors of the entire
then authorized Board of Directors or such committee shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any such meeting at which there is a quorum shall be the act of the
Board of Directors or any committee, except as may be otherwise specifically
provided by law, the Articles of Incorporation or these Bylaws. A meeting of the
Board of Directors or any committee at which a quorum initially is present may
continue to transact business notwithstanding the withdrawal of
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directors so long as any action is approved by at least a majority of the
required quorum for such meeting.
(g) Waiver of Notice. The transactions of any meeting of the
Board of Directors or any committee, however called and noticed or wherever
held, shall be as valid as though had at a meeting duly held after regular call
and notice, if a quorum be present and if, either before or after the meeting,
each of the directors not present signs a written waiver of notice, or a consent
to hold such meeting, or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
(h) Actions Requiring Supermajority Vote. The Board of
Directors may take the following acts only upon an affirmative vote of at least
two-thirds of the Directors present at any meeting of the Board of Directors at
which a quorum be present: (i) a sale of all or most of the assets of the
Corporation; (ii) merger of the Corporation with another entity; (iii) amendment
of the Bylaws; (iv) borrowing of funds in excess of $100,000; (v) terminating
officers of the Corporation without cause; (vi) dissolution of the Corporation;
or (vii) sale of all the Corporation's issued and outstanding capital stock.
3.5. Action Without Meeting. Any action required or permitted to be
taken by the Board of Directors at any meeting or at any meeting of a committee
may be taken without a meeting if all members of the Board of Directors or such
committee consent in writing and the writing or writings are filed with the
minutes of the proceedings of the Board of Directors or such committee.
3.6. Compensation of Directors. Unless otherwise restricted by law, the
Articles of Incorporation or these Bylaws, the Board of Directors shall have the
authority to fix the compensation of directors. 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 committees of the Board of Directors may be allowed like
compensation for attending committee meetings.
3.7. Committees of the Board.
(a) Committees. The Board of Directors may, by resolution
adopted by a majority of the Board of Directors, designate one or more
committees of the Board of Directors, each committee to consist of one or more
directors. Each such committee, to the extent permitted by law, the Articles of
Incorporation and these Bylaws, shall have and may exercise such of the powers
of the Board of Directors in the management and affairs of the Corporation as
may be prescribed by the resolutions creating such committee. 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. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. The
Board of Directors shall have the power, at any time for any reason, to change
the members of any such committee, to fill vacancies, and to discontinue any
such committee.
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(b) Minutes of Meetings. Each committee shall keep regular
minutes of its meetings and report the same to the Board of Directors when
required.
(c) Audit Committee. The Board of Directors may appoint an
Audit Committee consisting of at least two directors, none of whom shall be
employees of the Corporation. The Audit Committee shall review the financial
affairs and procedures of the Corporation from time to time with management and
meet with the auditors of the Corporation to review the financial statements and
procedures.
(d) Executive Committee. There may be an executive committee
consisting of at least one member of the Board of Directors elected by the whole
Board. Members of the executive committee shall serve at the pleasure of the
Board of Directors and each member of the executive committee may be removed
with or without cause at any time by the Board of Directors. Vacancies shall be
filled by the Board of Directors. The executive committee may exercise the
powers of the Board of Directors and the management of the business and affairs
of the corporation, but shall not possess any authority prohibited to it by law.
3.8. Interested Directors. In addition to the statutory and corporate
common law of Nevada, no contract or transaction between the Corporation and one
or more of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose
if (i) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and noted in the minutes and the Board of Directors or
committee in good faith authorizes the contract or transaction by the
affirmative votes of a majority of the disinterested directors, even though the
disinterested directors be less than a quorum; or (ii) the material facts as to
his or their relationship or interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote thereon, and the
contract or transaction is specifically approved in good faith by vote of the
stockholders; or (iii) the contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
ARTICLE IV
OFFICERS
4.1. Officers.
(a) Number. The officers of the Corporation shall be chosen by
the Board of Directors and may include a Chairman of the Board of Directors (who
must be a director as chosen by the Board of Directors) and may include a Chief
Executive Officer, President, Chief Operating Officer, Vice President, Secretary
and a Treasurer. The Board of Directors also may appoint one or
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more Assistant Secretaries or Assistant Treasurers and such other officers and
agents with such powers and duties as it shall deem necessary. Any Vice
President may be given such specific designation as may be determined from time
to time by the Board of Directors. Any number of offices may be held by the same
person, unless otherwise required by law, the Certificate of Incorporation or
these Bylaws. The Board of Directors may delegate to any other officer of the
Corporation the power to choose such other officers and to prescribe their
respective duties and powers.
(b) Election and Term of Office. The officers shall be elected
annually by the Board of Directors at its regular meeting following the annual
meeting of the stockholders and each officer shall hold office until the next
annual election of officers and until such officer's successor is elected and
qualified, or until such officer's death, resignation or removal. Any officer
may be removed at any time, with or without cause, by a vote of the majority of
the whole Board of Directors. Any vacancy occurring in any office may be filled
by the Board of Directors.
(c) Salaries. The salaries of all officers of the Corporation
shall be fixed by the Board of Directors or a committee thereof from time to
time.
4.2. Chairman of the Board of Directors. The Chairman of the Board of
Directors, if there be a Chairman, shall preside at all meetings of the
stockholders and the Board of Directors and shall have such other power and
authority as may from time to time be assigned by the Board of Directors.
4.3. Chief Executive Officer. The Chief Executive Officer shall be the
top executive officer of the Corporation, and in the absence of the Chairman of
the Board, shall preside at all meetings of the stockholders and the Board of
Directors (if a Chairman of the Board has not been elected), and shall see that
all orders and resolutions of the Board of Directors are carried into effect.
Subject to the provisions of these Bylaws and to the direction of the Board of
Directors, the Chief Executive Officer shall have the general and active
management of the business of the Corporation, may execute all contracts and any
mortgages, conveyances or other legal instruments in the name of and on behalf
of the Corporation, but this provision shall not prohibit the delegation of such
powers by the Board of Directors to some other officer, agent or
attorney-in-fact of the Corporation.
4.4. Chief Operating Officer. The Chief Operating Officer shall report
directly to the Chief Executive Officer, and shall be in charge of certain
operations of the Corporation, as may be assigned by the Chief Executive Officer
from time to time.
4.5. President. The President shall be the second highest executive
officer of the Corporation, and shall carry out the duties of the Chief
Executive Officer in the event that the Chief Executive Officer is absent or
unable to carry out such duties. The President shall be responsible for such
other duties as the Chief Executive Officer may assign from time to time.
4.6. Vice Presidents. In the absence or disability of the President,
the Vice Presidents in order of their rank as fixed by the Board of Directors,
or if not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the President. The Vice
Presidents shall
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have such other powers and perform such other duties as from time to time may be
prescribed for them, respectively, by the Board of Directors or these Bylaws.
4.7. Secretary and Assistant Secretaries. The Secretary shall record or
cause to be recorded, in books provided for the purpose, minutes of the meetings
of the stockholders, the Board of Directors and all committees of the Board of
Directors; see that all notices are duly given in accordance with the provisions
of these Bylaws as required by law; be custodian of all corporate records (other
than financial) and of the seal of the Corporation, and have authority to affix
the seal to all documents requiring it and attest to the same; give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors; and, in general, shall perform all duties incident to the
office of Secretary and such other duties as may, from time to time, be assigned
to him by the Board of Directors or by the President. At the request of the
Secretary, or in the Secretary's absence or disability, any Assistant Secretary
shall perform any of the duties of the Secretary and, when so acting, shall have
all the powers of, and be subject to all the restrictions upon, the Secretary.
4.8. Treasurer and Assistant Treasurers. The Treasurer shall keep or
cause to be kept the books of account of the Corporation and shall render
statements of the financial affairs of the Corporation in such form and as often
as required by the Board of Directors or the President. The Treasurer, subject
to the order of the Board of Directors, shall have custody of all funds and
securities of 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. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements. The Treasurer shall perform all other duties commonly
incident to his office and shall perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time. At the request of the Treasurer, or in the Treasurer's absence or
disability, any Assistant Treasurer may perform any of the duties of the
Treasurer and, when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the Treasurer. Except where by law the signature of
the Treasurer is required, each of the Assistant Treasurers shall possess the
same power as the Treasurer to sign all certificates, contracts, obligations and
other instruments of the Corporation.
ARTICLE V
INDEMNIFICATION AND INSURANCE
5.1. Right to Indemnification. Subject to the terms and conditions of
this Article V, each officer or director of the Corporation who was or is made a
party or witness or is threatened to be made a party or witness to or is
otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans (hereinafter an "indemnitee"), whether
the basis of such proceeding is alleged action or inaction in an official
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
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authorized by the General Corporation Law of Nevada ("GCL"), as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators; provided,
however, that, except as provided in Section 5 hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that, if the GCL requires, an advancement of expenses
incurred by an indemnitee shall be made only upon delivery to the Corporation of
an undertaking in the form then required by the GCL (if any), by or on behalf of
such indemnitee, with respect to the repayment of amounts so advanced
(hereinafter an "undertaking").
5.2. Right of Indemnitee to Bring Suit. If a claim under Section 5.1 of
this Article is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expenses of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that, and
(ii) any suit by the Corporation to recover an advancement of expenses pursuant
to the terms of an undertaking the Corporation shall be entitled to recover such
expenses upon a final adjudication that, the indemnitee has not met the
applicable standard of conduct set forth in the GCL. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
suit that indemnification of the indemnitee is proper in the circumstances
because the indemnitee has met the applicable standard of conduct set forth in
the GCL, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
the indemnitee has not met the applicable standard or conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right hereunder, or by the Corporation to
recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified or to
such advancement of expenses under this Section or otherwise shall be on the
Corporation.
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5.3. Specific Limitations on Indemnification. Notwithstanding anything
in this Article to the contrary, the Corporation shall not be obligated to make
any payment to any indemnitee with respect to any proceeding (i) to the extent
that payment is actually made to the indemnitee under any insurance policy, or
is made to indemnitee by the Corporation or an affiliate thereof otherwise than
pursuant to this Article, (ii) for any expense, liability or loss in connection
with a proceeding settled without the Corporation's written consent, which
consent, however, shall not be unreasonably withheld, (iii) for an accounting of
profits made from the purchase or sale by the indemnitee of securities of the
Corporation within the meaning of Section 16(b) of the Securities Exchange Act
of 1934, as amended, or similar provisions of any state statutory or common law,
(iv) where the indemnitee acted in bad faith or with gross negligence, or (v)
where prohibited by applicable law.
5.4. Contract. The provisions of this Article shall be deemed to be a
contract between the Corporation and each director and officer who serves in
such capacity at any time while such Section is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter based in whole or in part upon any
such state of facts.
5.5. Partial Indemnity. If the indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses, liabilities or losses incurred in connection with a
proceeding but not, however, for all of the total amount thereof, the
Corporation shall nevertheless indemnify the indemnitee for the portion thereof
to which the indemnitee is entitled. Moreover, notwithstanding any other
provision of this Article, to the extent that the indemnitee has been successful
on the merits or otherwise in defense of any or all claims relating in whole or
in part to a proceeding or in defense of any issue or matter therein, including
dismissal without prejudice, the indemnitee shall be indemnified against all
loss, expense and liability incurred in connection with the portion of the
proceeding with respect to which indemnitee was successful on the merits or
otherwise.
5.6. Non-Exclusivity of Rights. The rights to indemnification and to
the advancement of expenses conferred in this Article shall not be exclusive of
any other right which any person may have or hereafter acquire under any
statute, the Articles of Incorporation, bylaw, agreement, vote of stockholders
or disinterested directors or otherwise.
5.7. Insurance. The Corporation may maintain insurance, at its expense,
to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the GCL.
5.8. Indemnification of Employees and Agents of the Corporation. The
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article with respect to the indemnification and advancement
of expenses of directors and officers of the Corporation, or to such lesser
extent as may be determined by the Board of Directors.
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5.9. Notice by Indemnitee and Defense of Claim. The indemnitee shall
promptly notify the Corporation in writing upon being served with any summons,
citation, subpoena, complaint, indictment, information or other document
relating to any matter, whether civil, criminal, administrative or
investigative, but the omission so to notify the Corporation will not relieve it
from any liability which it may have to the indemnitee if such omission does not
prejudice the Corporation's rights. If such omission does prejudice the
Corporation's rights, the Corporation will be relieved from liability only to
the extent of such prejudice; nor will such omission relieve the Corporation
from any liability which is may have to the indemnitee otherwise than under this
Article VII. With respect to any proceedings as to which the indemnitee notifies
the Corporation of the commencement thereof:
(a) The Corporation will be entitled to participate therein at
its own expense; and
(b) The Corporation will be entitled to assume the defense
thereof, with counsel reasonably satisfactory to the indemnitee; provided,
however, that the Corporation shall not be entitled to assume the defense of any
proceeding (and this Section 5.9 shall be inapplicable to such proceeding) if
the indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Corporation and the indemnitee with respect to such
proceeding. After notice from the Corporation to the indemnitee of its election
to assume the defense thereof, the Corporation will not be liable to the
indemnitee under this Article V for any expenses subsequently incurred by the
indemnitee in connection with the defense thereof, other than reasonable costs
of investigation or as otherwise provided below. The indemnitee shall have the
right to employ its own counsel in such proceeding but the fees and expenses of
such counsel incurred after notice from the Corporation of its assumption of the
defense thereof shall be at the expense of the indemnitee unless:
(i) The employment of counsel by the indemnitee has
been authorized by the Corporation in writing; or
(ii) The Corporation shall not have employed counsel
to assume the defense in such proceeding or shall not have assumed such
defense and be acting in connection therewith with reasonable
diligence;
in each of which cases the fees and expenses of such counsel shall be at the
expense of the Corporation.
(c) The Corporation shall not settle any proceeding in any
manner which would impose any penalty or limitation on the indemnitee without
the indemnitee's written consent; provided, however, that the indemnitee will
not unreasonably withhold his consent to any proposed settlement.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1. Certificates for Shares. Unless otherwise provided by a resolution
of the Board of Directors, the shares of the Corporation shall be represented by
a certificate. The certificates of stock
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of the Corporation shall be numbered and shall be entered in the books of the
Corporation as they are issued. They shall exhibit the holder's name and number
of shares and shall be signed by or in the name of the Corporation by (a) the
Chairman of the Board of Directors, the President or any Vice President and (b)
the Treasurer, any Assistant Treasurer, the Secretary or any Assistant
Secretary. Any or all of the signatures on a certificate may be facsimile. In
case any officer of the Corporation, transfer agent or registrar who has signed,
or whose facsimile signature has been placed upon such certificate, shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, such certificate may nevertheless be issued by the Corporation with
the same effect as if he were such officer, transfer agent or registrar at the
date of issuance.
6.2. Classes of Stock.
(a) If the Corporation shall be authorized to issue more than
one class of stock or more than one series of any class, the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualification,
limitations, or restrictions of such preferences or rights shall be set forth in
full or summarized on the face or back of the certificate that the Corporation
shall issue to represent such class or series of stock; provided, that, except
as otherwise provided in Section 202 of the General Corporation Law of the State
of Nevada, in lieu of the foregoing requirements, there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of stock, a statement that the Corporation will furnish
without charge to each stockholder who so requests the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences or rights.
(b) Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to applicable law (including Sections 78.195, 78.205,
78.235 and 78.242 of the Nevada General Corporation Law) or a statement that the
Corporation will furnish without charge to each stockholder who so requests the
powers, designations, preferences and relative participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences or rights.
6.3. Transfer. 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, assignation 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.
Upon receipt of proper transfer instructions from the registered owner of
uncertificated shares, such uncertificated shares shall be canceled, issuance of
new equivalent uncertificated shares or certificated shares shall be made to the
person entitled thereto and the transaction shall be recorded upon the books of
the Corporation.
6.4. Record Owner. The Corporation shall be entitled to treat the
holder of record of any share or shares of stock as the holder in fact thereof,
and, accordingly, shall not be bound to recognize any equitable or other claim
to or interest in such share on the part of any other person,
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whether or not it shall have express or other notice thereof, save as expressly
provided by the laws of the State of Nevada.
6.5. Lost Certificates. The Board of Directors may direct a new
certificate or certificates or uncertificated shares to be issued in place of
any certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates or
uncertificated shares, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as the Board of Directors shall require and to
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, stolen or destroyed.
ARTICLE VII
MISCELLANEOUS
7.1. Record Date.
(a) In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of the stockholders
or any adjournment thereof, or entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the Board of Directors may fix, in advance, a record
date, which shall not be more than sixty nor less than ten days prior to the
date of such meeting nor more than sixty days prior to any other action. If not
fixed by the Board of Directors, the record date shall be determined as provided
by law.
(b) A determination of stockholders of record entitled to
notice of or to vote at a meeting of the stockholders shall apply to any
adjournments of the meeting, unless the Board of Directors fixes a new record
date for the adjourned meeting.
(c) Holders of stock on the record date are entitled to notice
and to vote or to receive the dividend, distribution or allotment of rights or
to exercise the rights, as the case may be, notwithstanding any transfer of the
shares on the books of the Corporation after the record date, except as
otherwise provided by agreement or by law, the Articles of Incorporation or
these Bylaws.
7.2. Execution of Instruments. The Board of Directors may, in its
discretion, determine the method and designate the signatory officer or
officers, or other persons, to execute any corporate instrument or document or
to sign the corporate name without limitation, except where otherwise provided
by law, the Articles of Incorporation or these Bylaws. Such designation may be
general or confined to specific instances.
7.3. Voting of Securities Owned by the Corporation. All stock and other
securities of other corporations held by the Corporation shall be voted, and all
proxies with respect thereto shall
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be executed, by the person so authorized by resolution of the Board of
Directors, or, in the absence of such authorization, by the Chairman of the
Board.
7.4. Corporate Seal. A corporate seal shall not be requisite to the
validity of any instrument executed by or on behalf of the Corporation. If a
corporate seal is used, the same shall be at the pleasure of the officer
affixing seal either (a) a circle having on the circumference thereof the words
"DURASWITCH INDUSTRIES, INC." and in the center "Incorporated - 1993, Nevada,"
or (b) a seal containing the words "Corporate Seal" in the center thereof.
7.5. Construction and Definitions. Unless the context requires
otherwise, the general provisions, rules of construction and definitions in the
General Corporation Law of the State of Nevada and the Articles of Incorporation
shall govern the construction of these Bylaws.
7.6. Amendments. These Bylaws may be altered, amended or repealed by a
two-thirds majority vote of the Board of Directors or a simple majority vote of
the stockholders.
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EXHIBIT 5.1
[QUARLES & BRADY LLP LETTERHEAD]
June 4, 1999
DuraSwitch Industries, Inc.
234 S. Extension Road
Mesa, Arizona 85210
Re: Form SB-2 Registration Statement
Dear Sirs:
We refer to the Registration Statement on Form SB-2 filed on June 4,
1999 (the "Registration Statement"), by DuraSwitch Industries, Inc., a Nevada
corporation (the "Company"), with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, relating to the issuance and sale of up
to 2,300,000 shares of the Company's Common Stock, $.001 par value per share
(the "Shares"), by the Company and the Selling Securityholder (as defined in the
Underwriting Agreement referred to below) to the Underwriters named in Schedule
A to the Underwriting Agreement filed as Exhibit 1.1 to the Registration
Statement (the "Underwriting Agreement").
We have reviewed the General Corporation Law of the State of Nevada and
examined originals, or copies certified or otherwise identified to our
satisfaction, of such documents, and such corporate and other records and
proceedings of the Company, and made such other investigation and inquiries of
public officials and the officers of the Company, as we deemed necessary for the
opinions hereinafter expressed. On the basis of the foregoing, we are of the
opinion that:
1. The Company is a corporation validly existing and in good standing
under the laws of the State of Nevada.
2. The issued and outstanding Shares covered by the Registration
Statement to be sold by the Selling Securityholder pursuant to the Underwriting
Agreement have been legally issued and are fully paid and non-assessable.
<PAGE> 2
3. The Shares covered by the Registration Statement to be sold by the
Company pursuant to the Underwriting Agreement, when issued and delivered by the
Company against payment therefor as provided in the Underwriting Agreement, will
be legally issued, fully paid and non-assessable.
We do not find it necessary for the purposes of this opinion, and
accordingly to not purport to cover herein, the application of the securities or
"Blue Sky" laws of the various states to the issuance and sale of the Shares.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm appearing under the
caption "Legal Matters" in the Prospectus constituting part of the Registration
Statement; provided however, that by so consenting, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission.
Sincerely,
QUARLES & BRADY LLP
/S/ Quarles & Brady LLP
<PAGE> 1
Exhibit 10.1
EMPLOYMENT AND SEPARATION AGREEMENT
Agreement made, effective as of May 1, 1997, by and between Total
Switch, Inc., a corporation duly organized and existing under the laws of the
State of Arizona, with a place of business at 8655 E. Via De Ventura, Suite
G-224, Scottsdale, Arizona, 85258, hereinafter referred to as ("Employer"), and
R. Terren Dunlap, of 12515 N. 101st Place, Scottsdale, Arizona 85260,
hereinafter referred to as ("Employee").
RECITALS
The parties recite and declare:
A. Employer desires to hire Employee because of Employee's vast
business experience and expertise as an inventor, developer and
entrepreneur in building businesses based upon patented technologies,
plus ability to raise funds, create a viable business structure in
anticipation of a public offering, acquisition/merger or to continue a
profitable business.
B. Employee desires to be employed by Employer in the executive
capacity described below.
For the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties set forth in this agreement, Employer and
Employee agree as follows:
ARTICLE I
SECTION ONE:
1.1 Employment. Employer employs Employee as the CEO on the terms
and conditions stated in this agreement to:
Form the organization, create a visionary business plan,
manage, supervise and run the overall operations profitably;
attract capital, create and promote funding vehicles; create
and promote marketing, distribution and sales plans; create a
plan for growth, and profit; create a plan to maximize
shareholder value and carry out the customary duties of a CEO.
SECTION TWO:
2.1 Term of Employment. The term of Employee's employment shall be
seven (7) years commencing May 1, 1997. Continued employment of
Employee
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by Employer after May 1, 2002, shall be for the term and on the
conditions agreed to by the parties prior to the expiration of this
agreement.
SECTION THREE:
3.1 Best Efforts Of Employee. Employee agrees that his ability,
experience and talents, perform all of the duties that may be required
of and from him pursuant to the express and implicit terms of this
agreement, to the reasonable satisfaction of Employer. Such duties
shall be rendered at 8655 E. Via De Ventura, Suite G-224, Scottsdale,
Arizona, 85258, and at such other place or places as Employer shall in
good faith require or as the interest, needs, business or opportunity
of Employer shall require.
SECTION FOUR:
4.1 Compensation Of Employee. For a period of eighteen (18)
months, Employer shall pay Employee, and Employee shall accept from
Employer in full payment for Employee's services under this agreement,
compensation at the rate of $72,000, payable twice a month on the 1st
and 15th of each month or biweekly as the Board may determine while
this agreement shall be in force. After eighteen months, Employer shall
pay Employee at an increased level commensurate with industry standards
and with the Company's ability to pay.
SECTION FIVE:
5.1 Reimbursement For Expenses. Employer shall reimburse Employee
for reasonable out of pocket expenses that Employee shall incur in
connection with his services for Employer contemplated by this
agreement, on presentation by Employee of appropriate vouchers and
receipts for such expenses to Employer.
SECTION SIX:
6.1 Employee's Service As Director. Employee hereby consents to
serve as a director of Employer or any parent, subsidiary, or
corporation affiliated with Employer, on condition that Employee
receive the same compensation paid to other directors of any such
company for their services as directors.
SECTION SEVEN:
7.1 Use Of Confidential Information. Employee agrees that, in
addition to any other limitation contained in this agreement,
regardless of the circumstances of the termination of employment, he
will not communicate to any person, firm, corporation or other entity
any information relating to customer lists, prices, secrets,
advertising, nor any confidential knowledge or secrets that Employee
might from time to time acquire with respect to the business of the
Employer or any of its affiliates or subsidiaries.
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SECTION EIGHT:
8.1 Termination By Employer. If Employer shall cease conducting
its business, take any action looking toward it dissolution or
liquidation, make an assignment for the benefit of its creditors, admit
in writing its inability to pay its debts as they become due, file a
voluntary or be the subject of an involuntary petition in bankruptcy,
or be the subject of any state or federal insolvency proceeding of any
kind, then the Employee may, in his sole discretion, by written notice
to Employer, terminate his employment and Employer hereby consents to
the release of Employee under such circumstances and agrees that if
Employer ceases to operate or to exist as a result of such event, the
noncompetition and other provisions of solicitation or use of
confidential information under this agreement shall terminate.
SECTION NINE:
9.1 Trade Secrets. Employee shall not at any time or in any
manner, either directly or indirectly, divulge disclose or communicate
to any person, firm, corporation or other entity in any manner
whatsoever, any information concerning any matters affecting or
relating to the business of Employer, including without limitation, any
of its customers, the prices it obtains or has obtained from the sale
of, or at which it sells or has sold, its products or any other
information concerning the business of Employer, its manner of
operations, its plans, processes or other data without regard to
whether all of the above-stated matters will be deemed confidential,
material or important, Employer and Employee specifically and expressly
stipulating that as between them, such matters are important, material
and confident, and gravely affect the effective and successful conduct
of the business of Employers and Employer's good will, and that any
breach of the terms of this section shall be a material breach of this
agreement.
SECTION TEN:
10.1 Nondisclosure Of Confidential Information During Employment
And After Termination. Employee agrees that for and during the entire
term of this employment agreement, an information, data, figures,
sales figures, projections, estates, customer lists, tax records,
personnel history, accounting procedures, promotions, and the like,
shall be considered and kept as the private and privileged records of
Employer and will not be divulged to any person, firm, corporation or
other entity except on the direct authorization of the Employer.
Further, upon termination of this agreement for any cause, Employee
agrees that he will continue to treat as private and privileged any
information, data, figures, projections, estimates, customer lists, tax
records, personnel history, accounting procedures, and the like, and
will not release any such information to any person, firm, corporation
or other entity, either by statement, deposition or as a witness,
expect upon direct written authority of the Employer, and Employer
shall be entitled to an injunction by any competent court to enjoin and
restrain the unauthorized disclosure of such information.
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SECTION ELEVEN:
11.1 Surrender Of Records On Termination Of Employment. Employee
agrees that on termination of his employment for any cause whatsoever,
Employee will surrender to Employer in good condition any record or
records kept by Employee containing the names, addresses and other
information with regard to customers or potential customers of Employer
served by Employee.
SECTION TWELVE:
12.1 Restriction On Use or Disclosure Of Customer List And Other
Information. For a period of twelve (12) months immediately following
termination of this agreement, Employee shall neither call on nor
solicit, either for Employee or any other person, firm, corporation, or
other entity, any of the customers of Employer of whom Employee called,
with whom Employee became acquainted, or of whom Employee learned
during Employee's employment under this agreement, nor shall Employee
make known to any person, firm, corporation, or other entity, either
directly or indirectly, the names or addresses of any such customers or
any information relating in any manner to Employer's trade or business
relationship with such customers.
SECTION THIRTEEN:
13.1 Noncompetition With Former Employer. Employee agrees that for
a period of twelve (12) months after termination of his employment with
Employer in any manner, whether with or without cause, Employee will
not, within the United States, directly or indirectly engage in the
business of switch development, manufacture, distribution or in any
business competitive with Employer for a period of twelve (12) months
from such termination of employment. Directly or indirectly engaging in
business of switches or in any competitive business shall include, but
not be limited to, engaging in business as owner, partner, or agent, or
as Employee of any person, firm, corporation or other entity engaged in
such business, or in being interested directly or indirectly in any
such business conducted by any person, firm, corporation or other
entity.
SECTION FOURTEEN:
14.1 Vacation. Employee is entitled to a three week vacation (15
business days) after completing one year of service. For each
additional year of service, Employee will receive one additional week
of vacation (5 business days [e.g., three years service completed =
five weeks vacation or 25 business days]). Employee may accumulate
vacation time and choose to use it in a later year or take it as a cash
payment upon retirement or termination.
SECTION FIFTEEN:
15.1 Group Insurance Plans. The Employer will provide the Employee
and his spouse with full coverage hospitalization, surgical, medical,
major medical, dental and eye insurance. The Employer will provide a
Pre-Paid Legal plan to
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cover the Employee. The Employer will provide a disability policy for
the Employee with standard coverage and deductibles.
SECTION SIXTEEN:
16.1 Professional Fees. The Employer will pay for all Employees
professional fees related to his Continuing Legal Education, his Bar
Association dues and other educational seminars related to his
profession as a Lawyer.
SECTION SEVENTEEN:
17.1 Profit Sharing Bonus. The Company agrees to a profit sharing
bonus to the Employee base upon the prior years financial results.
Within 90 days of the fiscal year-end (currently the calendar year end
Dec. 31) the Company will compute the net profits before taxes and
before any declared dividends of those profits (subject to audit) and
pay to the Employee 6.6% of this net profit amount.
SECTION EIGHTEEN:
18.1 Signing Bonus. The Company agrees to pay Employee a bonus of
$10,000 for signing on as an Employee under this agreement.
ARTICLE II
SECTION ONE:
DEFINITIONS
1.1 Separation: means the termination of Mr. Dunlap's status as an
employee of the Corporation or any successor or assign corporation.
1.2 Separation Date or Date of Separation: means 90 days after the
date the Corporation gives Mr. Dunlap written notice that the
Corporation wishes to terminate his employment with the Corporation, or
90 days after Mr. Dunlap gives the Corporation written notice that he
wishes to terminate his employment with the Corporation.
1.3 Separation Occurrences: means an Event which would cause
Separation. For purposes of this Agreement, there are three Events
which could cause Separation. These Events are as follows:
A. Takeover Event. The Corporation is taken
over and Mr. Dunlap is asked to leave. The concept of
"takeover", for purposes of this Agreement means that
control or obsession of the Corporation has been
assumed by an outside person(s) or entity(ies). It is
contemplated that the request of Separation is as a
result of the Takeover Event.
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B. Corporation Initiated Separation. The
Corporation's Board asks Mr. Dunlap to leave or
forces Mr. Dunlap to leave as a result of its conduct
or demotes Mr. Dunlap from the CEO position or
substantially reduces his authority, although no
Takeover Event, as defined above, has occurred. The
request of Separation may be made by the Board either
with or without reason or cause.
C. Separation Initiated by Mr. Dunlap. Mr.
Dunlap decides to terminate his employment with the
Corporation, with or without reason or cause, with
termination has not been solicited in any manner by
the Corporation. Mr. Dunlap's death would be
considered to be a Separation initiated by Mr.
Dunlap.
SECTION TWO:
COMPENSATION AND SEPARATION PROVISIONS
2.1 Compensation for Separation Occurrence. Compensation is to be
paid to Mr. Dunlap for the Separation Occurrence. Mr. Dunlap is to be
paid in the following manner:
A. Upon the occurrence of a Takeover Event, Mr.
Dunlap is to receive, in a lump sum payment, on the
Date of Separation, the sum equal to 2.99x his gross
annual base salary. (He would also be entitled to
receive all rights as provided by local, state or
federal rules or regulations, e.g., Cobra
notification).
B. Upon the occurrence of a Corporation
Initiated Separation, Mr. Dunlap would receive, paid
over a two year period, in equal installments (timed
to coincide with each Corporation payroll period, as
currently made), payments the sum of which is equal
to two times (2x) his gross annual base salary,
beginning on the Date of Separation. During this two
year period, he would receive all standard employee
benefits, e.g., health insurance, at the then
prevailing cost, if any. Further, the Corporation
will be required to continue to pay Mr. Dunlap and
his spouse's medical and dental insurance coverage
until they reach age 65. The Corporation will make
the premium payments on behalf of Mr. Dunlap and his
spouse for the applicable months commencing from the
Date of Separation. The Corporation may change its
insurance coverage but will not discriminate against
Mr. Dunlap or his spouse. Any rights required to be
provided to him by local, state or federal rules or
regulations would be granted at the end of the period
(e.g., Cobra notification).
C. Upon the occurrence of Separation Initiated
by Mr. Dunlap, provided that he gave 90 days notice
prior to his departure, he would receive, paid over a
one and one-half year
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period, in equal monthly installments (timed to
coincide with each Corporation payroll period, as
currently made), payments the sum of which is equal
to one and one-half times (1.5 x) his gross annual
base salary, beginning on the Date of Separation.
During this one and one-half year period, he would
also receive all standard employee benefits, e.g.,
health insurance, other perks, and Mr. Dunlap and his
spouse would continue to receive their medical and
dental insurance coverage during the term of
payments. The Corporation will make the standard
corporate premium payments on behalf of Mr. Dunlap
and his spouse for the applicable months commencing
from the Date of Separation. The Corporation may
change its insurance coverage, but will not
discriminate against Mr. Dunlap or his spouse. Any
rights required to be provided to him by local, state
or federal rules or regulations would be granted at
the end of the one and one-half year period (e.g.,
Cobra notification would occur at the end of the one
and one-half year period).
All payments referenced herein will be
remitted without withholding for State or Federal
payroll or income taxes if requested by the Employee.
Bonus money and vacation time will not be
prorated, except in the event of Separation
Occurrences involving a Takeover Event or a
Corporation Initiated Separation, then bonus money
and vacation time will be prorated as though fully
earned and vested.
2.2 Resignation from Corporation. Upon a Separation Occurrence,
Mr. Dunlap will resign his position as Chief Executive Officer of the
Corporation.
2.3 Consulting Relationship; Covenant Not to Compete;
Confidentiality.
A. For the period of the payments to Mr. Dunlap
or twelve (12) months from the Date of Separation,
whichever is shorter, Mr. Dunlap will make available
to the Corporation his services, performing in the
same capacity and utilizing his expertise as a
consultant. Unless otherwise agreed to in writing by
the parties, the amount of time Mr. Dunlap is to
devote to such consulting is not to exceed sixty (60)
hours per twelve month period. Mr. Dunlap will be
available to perform such services with reasonable
advance notice during the foregoing period as may be
requested by the Corporation. If approved in advance,
the Corporation will reimburse Mr. Dunlap for the
actual cost of all reasonable travel expenses,
clerical expenses, toll telephone calls or other
expenses as may be required in connection with the
performance of the foregoing services. Mr. Dunlap may
condition his performance or requested services upon
such reimbursement of expenses by the Corporation.
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<PAGE> 8
B. During the period that Mr. Dunlap provides
consulting services, Mr. Dunlap will not, without the
written consent of the Corporation (acting in its
sole and absolute discretion), engage directly or
indirectly within the United States or any other
jurisdiction or country in which the Corporation is
engaged on the Date of Separation, in any business
(financially as in investor, except as to investments
in publicly held enterprises, or lender or as an
employee, director officer, partner, independent
contractor, consultant or owner or in any other
capacity calling for the rendition of personal
services or acts of management, operation or
control) which is in competition with the business
conducted by the Corporation. For the propose of this
Agreement, the "business" of the Corporation shall be
defined as the design, manufacture, development,
marketing and licensing of Switch Technologies. Mr.
Dunlap acknowledges and agrees that the foregoing
restrictive covenant is reasonable and valid in
duration, geographical scope, and all other respects.
Mr. Dunlap further acknowledges and agrees that a
breach by him of the provisions of the foregoing
restrictive covenant would cause the Corporation
irreparable injury and damage which cannot be
reasonably or adequately compensated by damages at
law. Mr. Dunlap, therefore, expressly agrees that the
Corporation shall be entitled to injunctive or other
equitable relief to enjoin the continuation of any
breach by Mr. Dunlap of the foregoing restrictive
covenant in addition to any other remedies legally
available to it. If any court of competent
jurisdiction determines that the foregoing
restrictive covenant, or any part thereof, is invalid
or unenforceable, the remainder of the restrictive
covenant, or remainder of the restrictive covenant
not determined to be invalid or unenforceable shall
be given full effect. Moreover, if the foregoing
restrictive covenant should ever be deemed to exceed
the temporal, geographic, or occupational limitations
permitted by applicable laws, those provisions shall
be and are hereby reformed to the maximum temporal,
geographic or occupational limitations permitted by
law.
C. Mr. Dunlap further acknowledges his
obligation not to use or disclose to anyone the
confidential information of the Corporation. In
addition, following separation, if Mr. Dunlap
receives any contacts or communications in
connection with any matter related to the
Corporation, prior to responding to such contract, he
shall contact his counsel concerning such contact or
communication. If he has no counsel advising him on
these matters, he will contact the Corporation who
will, at the Corporation's expense, retain counsel
for him to advise him of his rights, obligations and
duties prior to a response.
2.4 Relationship During the Time of Payment. The parties
acknowledge that the following the Date of Separation and during the
time payments are made to
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Mr. Dunlap, the relationship between Mr. Dunlap and the Corporation is
that of independent contractor and not agent or employee.
2.5 Release of Liability.
A. In consideration of the payments provided
for herein and the covenants herein made, but with
the exceptions set forth in this paragraph, Mr.
Dunlap, upon Separation will release, on his behalf
and on behalf of his heirs, executors, administrators
and assigns, any and all claims of any nature
whatsoever against the Corporation an and its
present and former agents, officers, directors,
employees, insurers and assigns, whether know or
unknown, which he may have or claim to have by reason
of any matter, cause or thing whatsoever at any time
up to the Date of Separation. The FULL WAIVER AND
RELEASE will include, without limitation, all rights
or claims arising the Arizona Civil Rights Act, or
any other applicable state or federal stature or any
common law cause of action, including claims for
breach of any express or implied contract, wrongful
discharge, tort, personal injury or any claims for
attorneys' fees or other costs. Notwithstanding any
provisions to the contrary herein, this release shall
not apply to (1) obligations and undertakings of the
Corporation pursuant to the stock option agreements
to which Mr. Dunlap is a party as of the Date of
Separation, and (2) the indemnification provisions of
the Corporation's Bylaws.
B. In consideration of the mutual covenants
herein made, but with the exceptions set forth in
this paragraph, the Corporation will release any and
all claims of any nature whatsoever against Mr.
Dunlap and his heirs, executors, administrators, and
assigns, whether known or unknown, which the
Corporation may now or hereafter have or claim to
have by reason of any matter, cause or thing
whatsoever at any time up to the Separation Date.
Notwithstanding any provisions to the contrary
herein, this release on the part of the Corporation
shall not apply to; (1) obligations and undertakings
of Mr. Dunlap under this Agreement, and (2) material
matters or transactions not documented in the
Corporation's books and records as of the Date of
Separation and arising out of or involving conduct on
the part of Mr. Dunlap that was outside the course
and scope of the authority given to him by the
Corporation in connection with his employment.
2.6 Personal Property.
A. Following Separation, any personal property
and personal files belong to Mr. Dunlap which
remain in the Corporation's offices will be delivered
to Mr. Dunlap, at the Corporation's expense, within
seven (7) days after the Date of Separation. Mr.
Dunlap, will be entitled to retain copies of files,
documents, and
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records that are or were retained in his office at
the Corporation, including his rolodex, various
business cards, address books and the like.
B. Following Separation, Mr. Dunlap may retain
the following property of the Corporation that he is
using or that is properly in his possession or
control, including equipment, furniture, computer
hardware and software, books, magazines,
publications, photographs, notebooks, tapes and video
equipment.
2.7 Personal Mail; Telephone Answering. Following Separation, the
Corporation agrees to promptly forward to Mr. Dunlap (or, at his
instruction, to hold for his pick-up) all personal correspondence
addressed to Mr. Dunlap that may be received by the Corporation after
the Date of Separation. The Corporation agrees to freely and promptly
provide to any person who might inquire the address and telephone
number of Mr. Dunlap, except if instructed to the contrary.
2.8 Extension of Stock Options. Following Separation, the right to
exercise Mr. Dunlap's existing stock options of Common Stock of the
Corporation shall be extended for the maximum period permitted by the
plans under which such options were granted.
2.9 Same Day Sale. Following Separation, upon the exercise of any
options and the same day sale of the underlying Common Stock, the
Corporation will facilitate a cashless exercise until the settlement
date of the stock sale if requested by Mr. Dunlap.
2.10 Subsequent Extended Rights. Any subsequent extended rights to
other stock option holders will be offered to Mr. Dunlap.
2.11 Underwriting. In the case of any public offering or
underwriting, the Corporation shall use its best efforts so that Mr.
Dunlap may be a selling shareholder, at Mr. Dunlap's option.
2.12 Capital. Nothing in this Agreement shall restrict the right of
the Corporation to issue additional shares or classes of stock or other
securities, or to recapitalize, reclassify, or otherwise alter or
change its present debt or equity position or rights and privileges
attached thereto.
SECTION THREE:
GENERAL MISCELLANEOUS PROVISIONS
3.1 No Disparagement. Following the Date of Separation, Mr. Dunlap
agrees not to disparage the Corporation or any of its officers,
directors, employees or agents. The Corporation agrees, following
Separation, not to disparage Mr. Dunlap.
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3.2 Bylaw Indemnification. The Corporation agrees that following
the Date of Separation, the indemnification provisions under the Bylaws
of the Corporation will continue in full force and effect for the
benefit of Mr. Dunlap for so long as such indemnification provisions
would have any application to claims against Mr. Dunlap.
3.3 Press Release. Any press release by the Corporation or Mr.
Dunlap concerning the termination of Mr. Dunlap's employment
relationship with the Corporation shall be subject to mutual approval
of the parties hereto.
3.4 Nondisclosure. The Parties agree and represent that they will
not seek newspaper, a magazine, television, radio or other media or
industry publicity as to the facts or terms of the Separation. The
parties further agree and represent that they will not discuss or
disclose, directly or indirectly, orally or in writing, spontaneously
or in response to inquiry, to any entity or person, the facts or merits
of claims or the terms of the Separation; provide, however, that the
foregoing prohibition shall not apply to discussion restricted to Mr.
Dunlap's immediate family, and provided, further, that the terms of
Separation and this Agreement may be disclosed in response to a request
initiated by any state or federal regulatory agency or pursuant to any
subpoena issued by and court with competent jurisdiction, to the
parties' attorneys, tax advisors or accountants in connection with the
preparation of review of the parties' income tax returns, to current
and future lenders to the Corporation, or by the Corporation as
necessary to comply with the requirements of any Stock Exchange or any
federal or state securities law or regulation.
3.5 Jurisdiction. This Agreement shall be governed in all
respects, whether as to validity, construction, capacity, performance
or otherwise, by the laws of the State of Arizona, irrespective of the
fact that one or more of the parties may become a resident of a
different state and no action involving this Agreement may be brought
except in the Superior Court of the State of Arizona or in the United
States District Court for the District of Arizona. If any provisions of
this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable for whatever reason, the remaining
provisions of this Agreement shall nevertheless continue in full force
and effect without being impaired in any manner whatsoever.
3.6 Attorney's Fees. Should either party employ an attorney to
enforce any of the provisions of this Agreement, to protect its
interest in any manner arising under this Agreement, or to recover
damages for the breach of any of the terms of this Agreement, the
non-prevailing party in such action pursued in a court of competent
jurisdiction agrees to pay to the prevailing party all reasonable
costs, damages and expenses, including attorneys' fees, incurred or
expended by the prevailing party in connection therewith.
3.7 Cooperation of the Parties. Mr. Dunlap and the Corporation
agree to cooperate fully and to take all additional actions that may be
reasonably necessary or reasonably appropriate to give full force and
effect to the terms and intent of this Agreement and which are not
inconsistent with its terms.
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3.8 Costs. Mr. Dunlap and the Corporation shall bear his or its
own costs, attorneys' fees and other expenses incurred in connection
with the negotiation and preparation of this Agreement and any
Separation which occurs pursuant to this Agreement.
3.9 Term. Unless otherwise agreed in writing by the parties, this
Agreement shall continue in full force and effect during the life of
the Corporation or its successors and/or assignees.
3.10 No Waiver. No term or provision of this Agreement shall be
construed as a waiver by the Corporation of any provision of its
Articles of Incorporation or Bylaws restricting the sale or transfer of
shares of the Corporation.
3.11 Employment. Except as specifically provided herein, nothing in
this Agreement shall confer on any employee of the Corporation any
right to continue in the employ of the Corporation, nor shall it
interfere in any way with his employment at any time.
3.12 Notice. Any notices or demands which shall be required or
permitted by law or by any of the terms or provisions of this Agreement
shall be in writing and shall be effective when delivered personally or
when sent by United States mail, registered or certified. Such notices
and demands shall be addressed to the Corporation or individual at
their addresses set forth in the caption of this Agreement, or at such
other addresses as any party hereto may relate in writing to the other
parties.
3.13 Benefit. The provision of this Agreement shall inure to the
benefit of and be binding upon the parties hereto, their heirs,
trustees, legal representatives, successors and permitted assignees.
3.14 Marginal Headings. The marginal headings in the paragraphs
contained in the Agreement are for convenience only, and are not to be
considered a part of this Agreement or used in determining its content
or context.
3.15 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one
instrument.
3.16 Amendment. The Corporation and Mr. Dunlap reserve the right to
alter, amend, revoke or terminate this Agreement in whole or in part at
any time by their joint instrument in writing to that effect. The
parties must unanimously agree to alter, amend, revoke or terminate
this Agreement.
3.17 Whole Agreement. With regard to the subject of this Agreement,
the terms of this instrument constitute the entire agreement between
the parties and shall be binding upon and inure to the benefit of those
parties and the executors, administrators, personal representatives,
estates, heirs, successors and assigns of each. The parties represent
that there are no collateral agreements or side agreements not
otherwise provided for within the terms of this instrument. This
Agreement supersedes and takes precedence over any
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prior written or oral inducements, representations or agreements as may
be set forth in the Articles of Incorporation of the Corporation or the
Bylaws of the Corporation, or elsewhere.
ARTICLE III
SECTION ONE:
1.1 Law To Govern Contract. It is agreed that this agreement shall
be governed by, construed and enforced in accordance with the laws of
the State of Arizona.
SECTION TWO:
2.1 Entire Agreement. This agreement shall constitute the entire
agreement between the parties and any prior understanding or
representation of any kind preceding the date of this agreement shall
not be binding upon either party except to the extent incorporated in
this agreement.
SECTION THREE:
3.1 Modification Of Agreement. Any modification of this agreement
or additional obligation assumed by either party in connection with
this agreement shall be binding only if evidenced in writing signed by
each party or an authorized representative of each party.
SECTION FOUR:
4.1 Attorneys Fees. In the event that any action is filed in
relation to this agreement, the unsuccessful party in the action shall
pay to the successful party, in additional to all the sums that either
party may be called on to pay a reasonable sum for the successful
party's attorney's fees.
SECTION FIVE:
5.1 Notices. Any notice provided for or concerning this agreement
shall be in writing and shall be deemed sufficiently given when sent by
certified or registered mail if sent to the respective address of each
party as set forth at the beginning of this agreement.
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IN WITNESS WHEREOF, the undersigned execute this Agreement to be effective on
the date hereinabove written.
/s/ R. Terren Dunlap
-------------------------------------------
R. Terren Dunlap
Total Switch, Inc. an Arizona Corporation
By: /s/ Anthony J. Van Zeeland
-----------------------------------------
Its: Director
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Exhibit 10.2
EMPLOYMENT AND SEPARATION AGREEMENT
Agreement made, effective as of May 1, 1997, by and between Total
Switch, Inc., a corporation duly organized and existing under the laws of the
State of Arizona, with a place of business at 8655 E. Via De Ventura, Suite
G-224, Scottsdale, Arizona, 85258, hereinafter referred to as ("Employer"), and
Anthony J. Van Zeeland, of 2140 S. Rogers Circle, Mesa, Arizona, 85202,
hereinafter referred to as ("Employee").
RECITALS
The parties recite and declare:
A. Employer desires to hire Employee because of Employee's vast
business experience and expertise as an inventor and developer of
certain patented switch technology known as "Switch Panel with
Magnetically-Coupled Armature." He also has secured a license for his
technology and has opportunities to manufacture and sell his switches
to major markets.
B. Employee desires to be employed by Employer in the executive
capacity described below.
For the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties set forth in this agreement, Employer and
Employee agree as follows:
SECTION ONE:
1.1 Employment. Employer employs Employee as the COO on the terms
and conditions stated in this agreement to:
Continue to research and develop, improve and expand
on the technology, to plan and develop the manufacturing
systems for the products, to manage the quality assurance, the
procurement of parts, manufacturing and servicing of products,
hire quality engineers when needed and as budgeted, plus the
customary duties of a COO.
SECTION TWO:
2.1 Term of Employment. The term of Employee's employment shall be
seven (7) years commencing May 1, 1997. Continued employment of
Employee by Employer after May 1, 2002, shall be for the term and on
the conditions agreed to by the parties prior to the expiration of this
agreement.
SECTION THREE:
3.1 Best Efforts Of Employee. Employee agrees that his ability,
experience and talents, perform all of the duties that may be required
of and from him pursuant to the express and implicit terms of this
agreement, to the reasonable
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satisfaction of Employer. Such duties shall be rendered at 8655 E. Via
De Ventura, Suite G-224, Scottsdale, Arizona, 85258, and at such other
place or places as Employer shall in good faith require or as the
interest, needs, business or opportunity of Employer shall require.
SECTION FOUR:
4.1 Compensation Of Employee. For a period of eighteen (18)
months, starting July 1, 1997, Employer shall pay Employee, and
Employee shall accept from Employer in full payment for Employee's
services under this agreement, compensation at the rate of $72,000,
payable twice a month on the 1st and 15th of each month or biweekly as
the Board may determine while this agreement shall be in force. After
eighteen months, Employer shall pay Employee at an increased level
commensurate with industry standards and with the Company's ability to
pay.
SECTION FIVE:
5.1 Reimbursement For Expenses. Employer shall reimburse Employee
for reasonable out of pocket expenses that Employee shall incur in
connection with his services for Employer contemplated by this
agreement, on presentation by Employee of appropriate vouchers and
receipts for such expenses to Employer.
SECTION SIX:
6.1 Employee's Service As Director. Employee hereby consents to
serve as a director of Employer or any parent, subsidiary, or
corporation affiliated with Employer, on condition that Employee
receive the same compensation paid to other directors of any such
company for their services as directors.
SECTION SEVEN:
7.1 Use Of Confidential Information. Employee agrees that, in
addition to any other limitation contained in this agreement,
regardless of the circumstances of the termination of employment, he
will not communicate to any person, firm, corporation or other entity
any information relating to customer lists, prices, secrets,
advertising, nor any confidential knowledge or secrets that Employee
might from time to time acquire with respect to the business of the
Employer or any of its affiliates or subsidiaries.
SECTION EIGHT:
8.1 Termination By Employer. If Employer shall cease conducting
its business, take any action looking toward its dissolution or
liquidation, make an assignment for the benefit of its creditors, admit
inability to pay its debts as they become due, file a voluntary or be
the subject of an involuntary petition in bankruptcy, or be the subject
of any state or federal insolvency proceeding of any kind, then the
Employee may, in his sole discretion, by written notice to Employer,
terminate his employment and Employer hereby consents to the release of
Employee under such circumstances and agrees that if Employer ceases to
operate or to exist as a result of such event, the noncompetition and
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other provision of solicitation or use of confidential information
under this agreement shall terminate.
SECTION NINE:
9.1 Trade Secrets. Employee shall not at any time or in any
manner, either directly or indirectly, divulge disclose or communicate
to any person, firm, corporation or other entity in any manner
whatsoever, any information concerning any matters affecting or
relating to the business of Employer, including without limitation, any
of its customers, the prices it obtains or has obtained from the sale
of, or at which it sells or has sold, its products or any other
information concerning the business of Employer, its manner of
operations, its plans, processes or other data without regard to
whether all of the above-stated matters will be deemed confidential,
material or important, Employer and Employee specifically and expressly
stipulating that as between them, such matters are important, material
and confident, and gravely affect the effective and successful conduct
of the business of Employer and Employer's good will, and that any
breach of the terms of this section shall be a material breach of this
agreement.
SECTION TEN:
10.1 Nondisclosure Of Confidential Information During Employment
And After Termination. Employee agrees that for and during the entire
term of this employment agreement, any information, data, figures,
sales figures, projections, estates, customer lists, tax records,
personnel history, accounting procedures, promotions, and the like,
shall be considered and kept as the private and privileged records of
Employer and will not be divulged to any person, firm, corporation or
other entity except on the direct authorization of the Employer.
Further, upon termination of the agreement for any cause, Employee
agrees that he will continue to treat as private and privileged any
information, data, figures, projections, estimates, customer lists, tax
records, personnel history, accounting procedures, and the like, and
will not release any such information to any person, firm, corporation
or other entity, either by statement, deposition or as a witness,
expect upon direct written authority of the Employer, and Employer
shall be entitled to an injunction by any competent court to enjoin and
restrain the unauthorized disclosure of such information.
SECTION ELEVEN:
11.1 Surrender Of Records On Termination Of Employment. Employee
agrees that on termination of his employment for any cause whatsoever,
Employee will surrender to Employer in good condition any record or
records kept by Employee containing the names, addresses and other
information with regard to customers or potential customers of Employer
served by Employee.
SECTION TWELVE:
12.1 Restriction On Use of Disclosure Of Customer List And Other
Information. For a period of twelve (12) months immediately following
termination of this agreement, Employee shall neither call on nor
solicit, either for Employee or any
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other person, firm, corporation, or other entity, any of the customers
of Employer of whom Employee called, with whom Employee became
acquainted, or of whom Employee learned during Employee's employment
under this agreement, nor shall Employee make known to any person,
firm, corporation, or other entity, either directly or indirectly, the
names or addresses of any such customers or any information relating in
any manner to Employer's trade or business relationship with such
customers.
SECTION THIRTEEN:
13.1 Noncompetition With Former Employer. Employee agrees that for
a period of twelve (12) months after termination of his employment with
Employer in any manner, whether with or without cause, Employee will
not, within the United States, directly or indirectly engage in the
business of switch development, manufacture, distribution or in any
business competitive with Employer for a period of twelve (12) months
from such termination of employment. Directly or indirectly engaging in
business of switches or in any competitive business shall include, but
not be limited to, engaging in business as owner, partner, or agent, or
as Employee of any person, firm, corporation or other entity engaged in
such business, or in being interested directly or indirectly in any
such business conducted by any person, firm, corporation or other
entity.
SECTION FOURTEEN:
14.1 Vacation. Employee is entitled to a three week vacation (15
business days) after completing one year of service. For each
additional year of service, Employee will receive one additional week
of vacation (5 business days [e.g., three years service completed =
five weeks vacation or 25 business days]). Employee may accumulate
vacation time and choose to use it in a later year or take it as a cash
payment upon retirement or termination.
SECTION FIFTEEN:
15.1 Group Insurance Plans. The Employer will provide the Employee
and his spouse with full coverage hospitalization, surgical, medical,
major medical, dental and eye insurance. The Employer will provide a
Pre-Paid Legal plan to cover the Employee. The Employer will provide a
disability policy for the Employee with standard coverage and
deductibles.
SECTION SIXTEEN:
16.1 Professional Fees. The Employer will pay for all Employee's
professional fees and other educational seminars related to his
profession as an Engineer.
SECTION SEVENTEEN:
17.1 Profit Sharing Bonus. Employer agrees to pay a profit sharing
bonus to the Employee based upon the prior year's financial results.
Within 90 days of the fiscal year-end (currently the calendar year end
December 31) Employer will compute the net profits before taxes and
before any declared dividends of those profits (subject to audit) and
pay to the Employee 3.4% of his net profit amount.
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SECTION EIGHTEEN:
18.1 Performance Bonus. Employer agrees to pay Employee a bonus of
$5,000 for each United States Patent issued in his name as inventor or
co-inventor with a maximum of $20,000 during any fiscal year. A $1,000
bonus will be paid for Foreign Patents issued under the same terms and
calendar.
ARTICLE II
DEFINITIONS
1.1 Separation: means the termination of Mr. Van Zeeland's status
as an employee of the Corporation or any successor or assign
corporation.
1.2 Separation Date of Date of Separation: means 90 days after the
date the Corporation gives Mr. Van Zeeland written notice that the
Corporation wishes to terminate his employment with the Corporation, or
90 days after Mr. Van Zeeland gives the Corporation written notice that
he wishes to terminate his employment with the Corporation.
1.3 Separation Occurrences: means an Event which would cause
Separation. For purposes of this Agreement, there are three Events
which could cause Separation. These Events are as follows:
A. Takeover Event. The Corporation is taken
over and Mr. Van Zeeland is asked to leave. The
concept of "takeover", for purposes of this Agreement
means that control or possession of the Corporation
has been assumed by an outside person(s) or entity
(ies). It is contemplated that the request of
Separation is as a result of the Takeover Event.
B. Corporation Initiated Separation. The
Corporation's Board asks Mr. Van Zeeland to leave or
forces Mr. Van Zeeland to leave as a result of its
conduct or demotes Mr. Van Zeeland from the COO
position or substantially reduces his authority,
although no Takeover Event, as defined above, has
occurred. The request of Separation may be made by
the Board either with or without reason or cause.
C. Separation Initiated by Mr. Van Zeeland. Mr.
Van Zeeland decides to terminate his employment with
the Corporation, with or without reason or cause, and
the termination has not been solicited in any manner
by the Corporation. Mr. Van Zeeland's death would be
considered to be a Separation initiated by Mr. Van
Zeeland.
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SECTION TWO:
COMPENSATION AND SEPARATION PROVISIONS
2.1 Compensation for Separation Occurrence. Compensation is to be
paid to Mr. Van Zeeland for the Separation Occurrence. Mr. Van Zeeland
is to be paid in the following manner:
A. Upon the occurrence of a Takeover Event, Mr.
Van Zeeland is to receive, in a lump sum payment, on
the Date of Separation, the sum equal to 2.99 times
(2.99x) his gross annual base salary. (He would also
be entitled to receive all rights as provided by
local, state or federal rules or regulations, e.g.,
Cobra notification).
B. Upon the occurrence of a Corporation
Initiated Separation, Mr. Van Zeeland would receive,
paid over a two year period, in equal installments
(timed to coincide with each Corporation payroll
period, as currently made), payments the sum of which
is equal to two times (2x) his gross annual base
salary, beginning on the Date of Separation. During
this two year period, he would receive all standard
employee benefits, e.g., health insurance, at the
then prevailing cost, if any. Further, the
Corporation will be required to continue to pay Mr.
Van Zeeland and his spouse's medical and dental
insurance coverage until they reach age 65. The
Corporation will make the premium payments on behalf
of Mr. Van Zeeland and his spouse for the applicable
months commencing from the Date of Separation. The
Corporation may change its insurance coverage but
will not discriminate against Mr. Van Zeeland or his
spouse. Any rights required to be provided to him by
local, state or federal rules or regulations would be
granted at the end of the period (e.g., Cobra
notification).
C. Upon the occurrence of Separation Initiated
by Mr. Van Zeeland, provided that he gave 90 days'
notice prior to his departure, he would receive, paid
over a one and one-half year period, in equal monthly
installments (timed to coincide with each Corporation
payroll period, as currently made), payments the sum
of which is equal to one and one-half times (1.5 x)
his gross annual base salary, beginning on the Date
of Separation. During this one and one-half year
period, he would also receive all standard employee
benefits, e.g., health insurance and other benefits,
and Mr. Van Zeeland and his spouse would continue to
receive their medical and dental insurance coverage
during the term of payments. The Corporation will
make the standard corporate premium payments on
behalf of Mr. Van Zeeland and his spouse for the
applicable months commencing from the Date of
Separation. The Corporation may change its insurance
coverage, but will not discriminate against Mr. Van
Zeeland or his spouse. Any rights required to be
provided to him by local, state or federal rules or
regulations would be granted at the end of the one
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and one-half year period (e.g., Cobra notification
would occur at the end of the one and one-half year
period).
All payments referenced herein will be
remitted without withholding for State of Federal
payroll or income taxes if requested by the Employee.
Bonus money and vacation time will not be
prorated, except in the event of Separation
Occurrences involving a Takeover Event or a
Corporation Initiated Separation, then bonus money
and vacation time will be prorated as thought fully
earned and vested.
2.2 Resignation from Corporation. Upon a Separation Occurrence,
Mr. Van Zeeland will resign his position as Chief Operating Officer of
the Corporation.
2.3 Consulting Relationship; Covenant Not to Compete;
Confidentiality.
A. For the period of the payments to Mr. Van
Zeeland or twelve (12) months from the Date of
Separation, whichever is shorter, Mr. Van Zeeland
will make available to the Corporation his services,
performing in the same capacity and utilizing his
expertise as a consultant. Unless otherwise agreed to
in writing by the parties, the amount of time Mr. Van
Zeeland is to devote to such consulting is not to
exceed sixty (60) hours per twelve month period. Mr.
Van Zeeland will be available to perform such
services with reasonable advance notice during the
foregoing period as may be requested by the
Corporation. If approved in advance, the Corporation
will reimburse Mr. Van Zeeland for the actual cost of
all reasonable travel expenses, clerical expenses,
toll telephone calls or other expenses as may be
required in connection with the performance of the
foregoing services. Mr. Van Zeeland may condition his
performance or requested services upon such
reimbursement of expenses by the Corporation.
B. During the period that Mr. Van Zeeland
provides consulting services, Mr. Van Zeeland will
not, without the written consent of the Corporation
(acting in its sole and absolute discretion), engage
directly or indirectly within the United States or
any other jurisdiction or country in which the
Corporation is engaged on the Date of Separation, in
any business (financially as in investor, except as
to investments in publicly held enterprises, or
lender or as an employee, director, officer, partner,
independent contractor, consultant or owner or in any
other capacity calling for the rendition of personal
services or acts of management, operations of
control) which is in competition with the business
conducted by the Corporation. For the propose of this
Agreement, the "business" of the Corporation shall be
defined as the design, manufacture, development,
marketing and licensing of Switch Technologies. Mr.
Van Zeeland acknowledges and agrees that the
foregoing restrictive covenant is reasonable and
valid in
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duration, geographical scope, and all other respects.
Mr. Van Zeeland further acknowledges and agrees that
a breach by him of the provisions of the foregoing
restrictive covenant would cause the Corporation
irreparable injury and damage which cannot be
reasonably or adequately compensated by damages at
law. Mr. Van Zeeland, therefore, expressly agrees
that the Corporation shall be entitled to injunctive
or other equitable relief to enjoin the continuation
of any breach by Mr. Van Zeeland of the foregoing
restrictive covenant in addition to any other
remedies legally available to it. If any court of
competent jurisdiction determines that the foregoing
restrictive covenant, or any part thereof, is invalid
or unenforceable, the remainder of the restrictive
covenant, or remainder of the restrictive covenant
not determined to be invalid or unenforceable shall
be given full effect. Moreover, if the foregoing
restrictive covenant should ever be deemed to exceed
the temporal, geographic, or occupational limitations
permitted by applicable laws, those provisions shall
be and are hereby reformed to the maximum temporal,
geographic or occupational limitations permitted by
law.
C. Mr. Van Zeeland further acknowledges his
obligation not to use or disclose to anyone the
confidential information of the Corporation. In
addition, following separation, if Mr. Van Zeeland
receives any contacts or communications in connection
with any matter related to the Corporation, prior to
responding to such contact, he shall contact his
counsel concerning such contact or communication. If
he has no counsel advising him on these matters, he
will contact the Corporation which will, at the
Corporation's expense, retain counsel for him to
advise him of his rights, obligations and duties
prior to a response.
2.4 Relationship During the Time of Payment. The parties
acknowledge that following the Date of Separation and during the time
payments are made to Mr. Van Zeeland, the relationship between Mr. Van
Zeeland and the Corporation is that of independent contractor and not
agent or employee.
2.5 Release of Liability.
A. In consideration of the payments provided
for herein and the covenants herein made, but with
the exceptions set forth in this paragraph, Mr. Van
Zeeland, upon Separation will release, on his behalf
and on behalf of his heirs, executors, administrators
and assigns, any and all claims of any nature
whatsoever against the Corporation and its present
and former agents, officers, directors, employees,
insurers and assigns, whether known or unknown, which
he may have or claim to have by reason of any matter,
cause or thing whatsoever at any time up to the Date
of Separation. The FULL WAIVER AND RELEASE will
include, without limitation, all rights or claims
arising from the Arizona Civil Rights Act, or any
other applicable state or federal stature or any
common law cause of actions, including claims for
breach of any
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express or implied contract, wrongful discharge,
tort, personal injury or any claims for attorneys'
fees or other costs. Notwithstanding any provisions
to the contrary herein, this release shall not apply
to (1) obligations and undertakings of the
Corporation pursuant to the stock option agreements
to which Mr. Van Zeeland is a party as of the Date of
Separation, and (2) the indemnification provisions of
the Corporation's Bylaws.
B. In consideration of the mutual covenants
herein made, but with the exceptions set forth in
this paragraph, the Corporation will release any and
all claims of any nature whatsoever against Mr. Van
Zeeland and his heirs, executors, administrators, and
assigns, whether known or unknown, which the
Corporation may now or hereafter have or claim to
have by reason of any matter, cause or thing
whatsoever at any time up to the Separation Date.
Notwithstanding any provisions to the contrary
herein, this release on the part of the Company shall
not apply to: (1) obligations and undertakings of Mr.
Van Zeeland under this Agreement, and (2) material
matters or transactions not documented in the
Corporation's books and records as of the Date of
Separation and arising out of or involving conduct on
the part of Mr. Van Zeeland that was outside the
course and scope of the authority given to him by the
Corporation in connection with his employment.
2.6 Personal Property.
A. Following Separation, any personal property
and personal files belonging to Mr. Van Zeeland which
remain in the Corporation's offices will be delivered
to Mr. Van Zeeland, at the Corporation's expense,
within seven (7) days after the Date of Separation.
Mr. Van Zeeland will be entitled to retain copies of
files, documents, and records that are or were
retained in his office at the Corporation, including
his rolodex, various business cards, address books
and the like.
B. Following Separation, Mr. Van Zeeland may
retain the following property of the Corporation that
he is using or that is properly in his possession or
control, including equipment, furniture, computer
hardware and software, books, magazines,
publications, photographs, notebooks, tapes and video
equipment.
2.7 Personal Mail; Telephone Answering. Following Separation, the
Corporation agrees to promptly forward to Mr. Van Zeeland (or, at his
instruction, to hold for his pick-up) all personal correspondence
addressed to Mr. Van Zeeland that may be received by the Corporation
after the Date of Separation. The Corporation agrees to freely and
promptly provide to any person who might inquire the address and
telephone number of Mr. Van Zeeland, except if instructed to the
contrary.
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2.8 Extension of Stock Options. Following Separation, the right to
exercise Mr. Van Zeeland's existing stock options of Common Stock of
the Corporation shall be extended for the maximum period permitted by
the plans under which such options were granted.
2.9 Same Day Sale. Following Separation, upon the exercise of any
options and the same day sale of the underlying Common Stock, the
Corporation will facilitate a cashless exercise until the settlement
date of the stock sale if requested by Mr. Van Zeeland.
2.10 Subsequent Extended Rights. Any subsequent extended rights to
other stock option holders will be offered to Mr. Van Zeeland.
2.11 Underwriting. In the case of any public offering or
underwriting, the Corporation shall use it best efforts so that Mr. Van
Zeeland may be a selling shareholder, at Mr. Van Zeeland's option.
2.12 Capital. Nothing in this Agreement shall restrict the right of
the Corporation to issue additional shares or classes of stock or other
securities, or to recapitalize, reclassify, or otherwise alter or
change its present debt or equity position or rights and privileges
attached thereto.
SECTION THREE:
GENERAL MISCELLANEOUS PROVISIONS
3.1 No Disparagement. Following the Date of Separation, Mr. Van
Zeeland agrees not to disparage the Corporation or any of its officers,
directors, employees or agents. The Corporation agrees, following
Separation, not to disparage Mr. Van Zeeland.
3.2 Bylaw Indemnification. The Corporation agrees that following
the Date of Separation, the indemnification provisions under the Bylaws
of the Corporation will continue in full force and effect for the
benefit of Mr. Van Zeeland for so long as such indemnification
provisions would have any application to claims against Mr. Van
Zeeland.
3.3 Press Release. Any press release by the Corporation of Mr. Van
Zeeland concerning the termination of Mr. Van Zeeland's employment
relationship with the Corporation shall be subject to mutual approval
of the parties hereto.
3.4 Nondisclosure. The Parties agree and represent that they will
not seek newspaper, magazine, television, radio or other media or
industry publicity as to the facts or terms of the Separation. The
parties further agree and represent that they will not discuss or
disclose, directly or indirectly, orally or in writing, spontaneously
or in response to inquiry, to any entity or person, the facts or merits
of claims or the terms of the Separation; provided, however, that the
foregoing prohibition shall not apply to discussion restricted to Mr.
Van Zeeland's immediate family, and provided, further, that the terms
of Separation and this Agreement may be disclosed in response to a
request initiated by any state or
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federal regulatory agency or pursuant to any subpoena issued by any
court of competent jurisdiction, to the parties' attorneys, tax
advisors or accountants in connection with the preparation and review
of the parties' income tax returns, to current and future lenders to
the Corporation, or by the Corporation as necessary to comply with the
requirements of any Stock Exchange or any federal or state securities
law or regulation.
3.5 Jurisdiction. This Agreement shall be governed in all
respects, whether as to validity, construction, capacity, performance
or otherwise, by the laws of the State of Arizona, irrespective of the
fact that one or more of the parties may become a resident of a
different state and no action involving this Agreement may be brought
expect in the Superior Court of the State of Arizona or in the United
States District Court for the District of Arizona. If any provisions of
this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable for whatever reason, the remaining
provisions of this Agreement shall nevertheless continue in full force
and effect without being impaired in any manner whatsoever.
3.6 Attorneys' Fees. Should either party employ an attorney to
enforce any of the provisions of this Agreement, to protect its
interest in any manner arising under this Agreement, or to recover
damages for the breach of any of the terms of this Agreement, the
non-prevailing party in such action pursued in a court of competent
jurisdiction agrees to pay to the prevailing party all reasonable
costs, damages and expenses, including attorneys' fees, incurred or
expended by the prevailing party in connection therewith.
3.7 Cooperation of the Parties. Mr. Van Zeeland and the
Corporation agree to cooperate fully and to take all additional actions
that may be reasonably necessary or reasonably appropriate to give full
force and effect to the terms and intent of this Agreement and which
are not inconsistent with its terms.
3.8 Costs. Mr. Van Zeeland and the Corporation shall bear his or
its own costs, attorneys' fees and other expenses incurred in
connection with the negotiation and preparation of this Agreement and
any Separation which occurs pursuant to this Agreement.
3.9 Term. Unless otherwise agreed in writing by the parties, this
Agreement shall continue in full force and effect during the life of
the Corporation or its successors and/or assignees.
3.10 No Waiver. No term or provision of this Agreement shall be
construed as a waiver by the Corporation of any provision of its
Articles of Incorporation or Bylaws restricting the sale or transfer of
shares of the Corporation.
3.11 Employment. Except as specifically provided herein, nothing in
this Agreement shall confer on any employee of the Corporation any
right to continue in the employ of the Corporation, nor shall it
interfere in any way with his employment at any time.
3.12 Notice. Any notices or demands which shall be required or
permitted by law or by any of the terms or provisions of this Agreement
shall be in writing and
11
<PAGE> 12
shall be effective when delivered personally or when sent by United
States mail, registered or certified. Such notices and demands shall be
addressed to the Corporation or individual at their addresses set forth
in the caption of this Agreement, or at such other addresses as any
party hereto may relate in writing to the other parties.
3.13 Benefit. The provision of this Agreement shall inure to the
benefit of and be binding upon the parties hereto, their heirs,
trustees, legal representatives, successors and permitted assignees.
3.14 Marginal Headings. The marginal headings in the paragraphs
contained in the Agreement are for convenience only, and are not to be
considered a part of this Agreement or used in determining its content
or context.
3.15 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one
instrument.
3.16 Amendment. The Corporation and Mr. Van Zeeland reserve the
right to alter, amend, revoke or terminate this Agreement in whole or
in part at any time by their joint instrument in writing to that
effect. The parties must unanimously agree to alter, amend, revoke or
terminate this Agreement.
3.17 Whole Agreement. With regard to the subject of this Agreement,
the terms of this instrument constitute the entire agreement between
the parties and shall be binding upon and inure to the benefit of those
parties and the executors, administrators, personal representatives,
estates, heirs, successors and assigns of each. The parties represent
that there are no collateral agreements or side agreements not
otherwise provided for within the terms of this instrument. This
Agreement supersedes and takes precedence over any prior written or
oral inducements, representations or agreements as may be set forth in
the Articles of Incorporation of the Corporation or the Bylaws of the
Corporation, or elsewhere.
ARTICLE III
SECTION ONE:
1.1 Law To Govern Contract. It is agreed that this agreement shall
be governed by, construed and enforced in accordance with the laws of
the State of Arizona.
SECTION TWO:
2.1 Entire Agreement. This agreement shall constitute the entire
agreement between the parties and any prior understanding or
representation of any kind preceding the date of this agreement shall
not be binding upon either party except to the extent incorporated in
this agreement.
12
<PAGE> 13
SECTION THREE:
3.1 Modification Of Agreement. Any modification of this agreement
or additional obligation assumed by either party in connection with
this agreement shall be binding only if evidenced in writing signed by
each party or an authorized representative of each party.
SECTION FOUR:
4.1 Attorneys' Fees. In the event that any action is filed in
relation to this agreement, the unsuccessful party in the action shall
pay to the successful party, in additional to all the sums that either
party may be called on to pay, a reasonable sum for the successful
party's attorneys' fees.
SECTION FIVE:
5.1 Notices. Any notice provided for or concerning this agreement
shall be in writing and shall be deemed sufficiently given when sent by
certified or registered mail if sent to the respective address of each
party set forth at the beginning of this agreement.
IN WITNESS WHEREOF, the undersigned execute this Agreement to be effective on
the date hereinabove written.
/s/ Anthony J. Van Zeeland
----------------------------------------------
Anthony J. Van Zeeland
Total Switch, Inc. an Arizona Corporation
By: /s/ R. Terren Dunlap
-------------------------------------------
Its: Director
13
<PAGE> 1
Exhibit 10.3
EMPLOYMENT AND SEPARATION AGREEMENT
This employment agreement ("Agreement") made this date, November 20,
1998, by and between DURASWITCH INDUSTRIES, INC., a Nevada corporation, with its
current place of business at 333 S. Nina Drive, Mesa, Arizona 85210
("DuraSwitch"), and J. THOMAS WEBB of Emporia, Kansas ("Employee").
RECITALS
The parties recite and declare:
A. Employer desires to hire Employee because of Employee's vast
business experience and expertise as an inventor, developer and entrepreneur in
building an electronic manufacturing business, Camplex/Concept W ("Camplex").
B. Employee desires to be employed by Employer in the marketing
and operations capacity for the compensation described herein.
For the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties set forth in this Agreement, Employer and
Employee agree as follows:
ARTICLE I
SECTION ONE:
1.1 Employment. Employer employs Employee to serve as Executive
Vice President of Marketing of DuraSwitch Industries, Inc. (DuraSwitch)
and on the terms and conditions stated in this agreement to:
- The Employee's primary responsibility will be to add
direction and experience to the DuraSwitch marketing
and sales organization through review of yearly sales
programs and the relationships on a continuing basis.
- The Employee's primary duties will be to direct the
marketing activities that market and sell the
DuraSwitch products.
- Assist the C.E.O. and President in special projects
in the operational organization as may be assigned
- Assist the C.E.O. and President in the development
and preparation of the long term corporate Five-year
Guide for Planning providing for the future survival
and growth of the business consistent with the
corporate purpose.
- Assist the C.E.O. and President in the development
and preparation of the short term One to Three-year
Strategic Plan and budget (including capital
<PAGE> 2
Employment and Separation Agreement
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expenditure budget) based upon the goals set forth in
the Five-year Guide for Planning.
- Such other reasonable duties as may be assigned by
the Employer.
SECTION TWO:
2.1 Term of Employment. The term of Employee's employment shall be
until January 1, 2000, commencing the date of this Agreement. Continued
employment of Employee by Employer after January 1, 2000, shall be for
the term and on the conditions agreed to by the parties prior to the
expiration of this agreement.
SECTION THREE:
3.1 Best Efforts of Employee. Employee agrees in accordance with
his ability, experience and talents to perform all of the duties that
may be required of and from him pursuant to the express and implicit
terms of this Agreement, to the reasonable satisfaction of Employer.
Such duties shall be rendered at the Mesa, Arizona corporate office of
DuraSwitch and the Camplex office, Emporia, Kansas, as Employer shall
in good faith require.
SECTION FOUR:
4.1 Compensation of Employee. For the period of the agreement,
Employer shall pay Employee, and Employee shall accept from Employer as
payment in full for Employee's services under this Agreement,
compensation of $26,000.00 U.S. dollars annually, less any withholdings
for applicable taxes or benefits, payable biweekly as the Board may
determine while this Agreement shall be in force.
SECTION FIVE:
5.1 Reimbursement for Expenses. Employer shall reimburse Employee
for reasonable out of pocket expenses that Employee shall incur in
connection with his services for Employer contemplated by this
Agreement, on presentation by Employee of appropriate vouchers and
receipts for such expenses to Employer.
SECTION SIX:
6.1 Use of Confidential Information. Employee agrees that, in
addition to any other limitation contained in this Agreement,
regardless of the circumstances of the termination of employment, he
will not communicate to any person, firm, corporation or other entity,
any information relating to customer lists, prices, advertising, nor
any confidential knowledge or
2
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Employment and Separation Agreement
- --------------------------------------------------------------------------------
secrets that Employee might from time to time acquire with respect to
the business of the Employer or any of its affiliates or subsidiaries.
SECTION SEVEN:
7.1 Trade Secrets. Employee shall not at any time or in any
manner, either directly or indirectly, knowingly divulge disclose or
communicate to any person, firm, corporation or other entity in any
manner whatsoever, any trade secret information concerning any material
matters affecting or relating to the business of Employer, including
without limitation, any of its customers, the prices it obtains or has
obtained from the sale of, or at which it sells or has sold, its
products or any other information concerning the business of Employer,
its manner of operations, its plans, processes or other data without
regard to whether all of the above-stated matters will be deemed
confidential, material or important, Employer and Employee specifically
and expressly stipulating that as between them, such matters are
important, material and confidential, and gravely affect the effective
and successful conduct Employer's business and Employer's good will,
and that any breach of the terms of this section shall be a material
breach of this Agreement.
SECTION EIGHT:
8.1 Invention Assignment. Employee agrees that all inventions,
developments and improvements (whether patentable or not) made or
conceived by Employee, solely or jointly with others, during employment
with Employer, and which pertain to the products, processes or business
of Employer, or which result from or are suggested by or otherwise
arise out of Employee's work, are the sole property of Employer.
Employee will keep complete records of such inventions, developments
and improvements and will promptly and fully disclose and assign them
to Employer.
8.2 Execute Assignments. Employee agrees that at Employer's
expense he will execute such assignments, patent applications, and
other papers and do such things as may be necessary to enable Employer
to perfect its title to and obtain patents on such inventions,
developments and improvements, both in the United States of America and
in all foreign countries; unless the Employer breaches this Agreement
8.3 List. Attached hereto is a list and brief description of all
inventions, developments and improvements made or conceived by Employee
prior to employment with Employer on which no patent application has as
yet been filed. Should any question arise as to whether an invention,
development or improvement was made or conceived during employment by
Employer, all such items not on this list shall be presumed to belong
to Employer.
If No Items Listed, Then Initial:
-----------------
(initial)
3
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Employment and Separation Agreement
- --------------------------------------------------------------------------------
SECTION NINE:
9.1 Nondisclosure of Confidential Information During Employment
and After Termination. Employee agrees that for and during the entire
term of this Employment Agreement, any information, data, figures,
sales figures, projections, estates, customer lists, tax records,
personnel history, accounting procedures, promotions, and the like,
shall be considered and kept as the private and privileged records of
Employer and will not be divulged to any person, firm, corporation or
other entity except on the direct authorization of the Employer.
Further, upon termination of this Agreement for any cause, Employee
agrees that he will continue to treat as private and privileged any
information, data, figures, projections, estimates, customer lists, tax
records, personnel history, accounting procedures, and the like, and
will not release any such information to any person, firm, corporation
or other entity, either by statement, deposition or as a witness,
except upon direct written authority of the Employer, or in response to
a Court Order, provided that: (1) Employee provides Employer with
written notice of such order within 24 hours of receiving notice of
such Order; and (2) Employee limits disclosure made in response to such
Order to the minimum amount to satisfy said Order. Employer shall be
entitled to an injunction by any competent court to enjoin and restrain
the unauthorized disclosure of such information.
SECTION TEN:
10.1 Surrender of Records on Termination of Employment. Employee
agrees that on termination of his employment for any cause whatsoever,
except in the case of wrongful termination or breach of this Agreement
by Employer, Employee will surrender to Employer in good condition any
record or records kept by Employee containing the names, addresses and
other information with regard to customers or potential customers of
Employer served by Employee.
SECTION ELEVEN:
11.1 Restriction on Use or Disclosure of Customer List and Other
Information. For a period of 24 months immediately following
termination of this Agreement, Employee shall neither call on nor
solicit, either for Employee or any other person, firm, corporation, or
other entity, any of the customers of Employer of whom Employee called,
with whom Employee became acquainted, or of whom Employee learned
during Employee's employment under this Agreement, nor shall Employee
make known to any person, firm, corporation, or other entity, either
directly or indirectly, the names and addresses of any such customers
or any information relating in any manner to Employers' trade or
business relationship with such customers. The foregoing, however,
shall not preclude Employee from taking employment with such persons or
entities after termination of this Agreement pursuant to its terms,
provided such employment will not result in a violation of section
12.1.
4
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Employment and Separation Agreement
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SECTION TWELVE:
12.1 Noncompetition with Employer. Except in the case of breach of
this Agreement by Employer, Employee agrees that for a period of 24
months after termination of his employment with Employer in any manner,
whether with or without cause, Employee will not, within the United
States, directly or indirectly engage in the business of switch
development, manufacture, distribution or in any similar business
competitive with Employer or DuraSwitch.
SECTION THIRTEEN:
13.1 Vacation. Employee is entitled to a two week (10 business
days) vacation time annually. Employee may accumulate 50% of his
vacation time and choose to use it in a later year, but may not take it
as a cash payment upon retirement or termination, except in a Takeover
Event under Article II, Section One, subparagraph 1.3A.
SECTION FOURTEEN
14.1 Employee Stock Options. The Employer agrees to issue
non-qualified stock options at fair market value {$1.50 closing price
on OTC:BB} to vest 120,000 on 1/1/99, 80,000 on 1/1/2000, and 80,000 on
1/1/2001.
ARTICLE II
SECTION ONE:
Definitions
1.1 "Separation" means the termination of Employee's status as an
employee of Employer or any successor assign corporation.
1.2 "Separation Date" or "Date of Separation" means 30 days after
the date that Employer gives Employee written notice that Employer
wishes to terminate his employment with Employer, or 30 days after
Employee gives Employer written notice that he wishes to terminate his
employment with Employer.
1.3 "Separation Occurrences" means an Event which would cause
Separation. For purposes of this Agreement, there are three Events
which could cause Separation. These Events are as follows:
A. Takeover Event. "Takeover `Event", for purposes of
this agreement means the Corporation is taken over and Mr.
Webb is asked to leave. The concept of
5
<PAGE> 6
Employment and Separation Agreement
- --------------------------------------------------------------------------------
"takeover" for purposes of this Agreement means that control
or possession of the Corporation has been assumed by an
outside person(s) or entity(ies). It is contemplated that the
request of Separation is as a result of the Takeover Event.
B. Employer Initiated Separation. For purposes of this
Agreement, "Employer Initiated Separation" means Employer
terminates this Agreement for any reason other than Employee's
breach of this Agreement, Employee Initiated Separation or a
Takeover Event.
C. Employee Initiated Separation. For purposes of this
Agreement, "Employee Initiated Separation" shall mean: (i)
Employee terminating this Agreement for any reason other than
Employer breaching this Agreement; (ii) death of Employee;
(iii) disability of Employee for 60 consecutive days; (iv)
Employee's gross material neglect of duties; (v) Employee's
willful failure to abide by good faith instructions from
Employer; (vi) commission of a felony or serious misdemeanor
offense; or (vii) Employee's breach of this Agreement.
SECTION TWO:
Compensation and Separation Provisions
2.1 Compensation for Separation Occurrence. Compensation is to be
paid to Employee for a Separation Occurrence. Employee is to be paid in
the following manner.
A. Upon the occurrence of a Takeover Event, Employee is
to receive, in a lump sum payment, on the Date of Separation,
the sum equal to 2.99 times his gross annual base salary, less
any applicable withholding for state and federal taxes. (He
would also be entitled to receive all rights as provided by
local, state or federal rules or regulation, e.g., COBRA
notification plus accrued vacation and accrued bonus.)
B. Upon the occurrence of an Employer Initiated
Separation, Employee would receive, paid over a two year
period in equal installments (timed to coincide with each
Employer payroll period, as currently made), payments the sum
of which is equal to two times his gross annual base salary,
less any applicable withholding for state and federal taxes
beginning on the Date of Separation. During this two-year
period, he would receive all standard employee benefits (e.g.,
health insurance) at the then prevailing cost, if any.
Further, Employer will be required to continue to pay
Employee's, his spouse's, and dependent children's medical and
dental insurance coverage until Employee reaches age 65,
except for any portions paid normally by any new employer of
Employee. Employer will make the standard premium payments on
behalf of Employee and his spouse for the applicable months
commencing from the Date of Separation. Employer may change
its insurance coverage but will not
6
<PAGE> 7
discriminate against Employee or his spouse. Any rights
required to be provided to him by local, state or federal
rules or regulations would be granted at the end of the period
(e.g., Cobra notification plus accrued vacation and accrued
bonus).
2.2 Resignation from Corporation. Upon a Separation Occurrence,
Employee will resign his position as President or any other office of
Employer of DuraSwitch, and if serving on the Board of Employer or
DuraSwitch, will resign his position from such Board.
2.3 Release of Liability.
A. In consideration of the payments provided for herein
and the covenants herein made, but with the exceptions set
forth in this paragraph, and provided Employer has not
breached this Agreement, Employee, upon Separation will
release, on his behalf and on behalf of his heirs, executors,
administrators and assigns, any and all claims of any nature
whatsoever against Employer and its present and former agents,
officers, directors, employees, insureds and assigns, whether
known or unknown, which he may have or claim to have by reason
of any matter, cause or thing whatsoever at any time up to the
date of Separation. The FULL WAIVER AND RELEASE will include,
without limitation, all rights or claims arising under the
Arizona Civil Right Act, or any other applicable state or
federal statute or any common law cause of action, including
claims for breach of any express or implied contract, wrongful
discharge, tort, personal injury or any claims for attorney's
fees or other costs. Notwithstanding any provision to the
contrary herein, this release shall not apply to (1)
obligations and undertakings of Employer pursuant to the stock
option agreements to which Employee is a party as of the date
of Separation, or (2) the indemnification provision of
Employer's Bylaws.
SECTION THREE:
General Miscellaneous Provisions
3.1 No Disparagement. Following the Date of Separation, Employee
agrees not to disparage Employer or DuraSwitch or any of their
respective officers, directors, employees or agents. Employer agrees,
following Separation, not to disparage Employee.
3.2 Bylaw Indemnification. Employer agrees that following the Date
of Separation, the indemnification provisions under the Bylaws of
Employer will continue in full force and effect for the benefit of
Employee for so long as such indemnification provisions would have any
application to claims against Employee.
7
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Employment and Separation Agreement
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3.3 Jurisdiction. This Agreement shall be governed in all
respects, whether as to validity, construction, capacity, performance
or otherwise, by the laws of the State of Arizona, irrespective of the
fact that one or more of the parties may become a resident of a
different state and no action involving this Agreement may be brought
except in the Superior Court of the State of Arizona or in the United
States District Court of the District of Arizona. If any provisions of
this Agreement are held by a court of competent jurisdiction to be
invalid, void or unenforceable for whatever reason, the remaining
provisions of this Agreement shall nevertheless continue in full force
and effect without being impaired in any manner whatsoever.
3.4 Attorney's Fees. Should either party employ an attorney to
enforce any of the provisions of this Agreement, to protect its
interest in any manner arising under this Agreement, or to recover
damages for the breach of any of the terms of this agreement, the
non-prevailing party in such action pursued in a court of competent
jurisdiction agrees to pay to the prevailing party all reasonable
costs, damages and expenses, including attorney's fees, incurred or
expended by the prevailing party in connection therewith.
3.5 Cooperation of the Parties. Employee and Employer agree to
cooperate fully and to take all additional actions that may be
reasonably necessary or reasonably appropriate to give full force and
effect to the terms and intent of this Agreement and which are not
inconsistent with its terms.
3.6 Costs. Except for attorneys' fees, Employee and Employer shall
bear their own costs and other expenses incurred in connection with the
negotiation and preparation of this Agreement and any Separation which
occurs pursuant to this Agreement.
3.7 Term. Unless otherwise agreed in writing by the parties, this
Agreement shall continue in full force and effect during the life of
Employer of its successors and/or assignees.
3.8 No Waiver. No term or provision of this Agreement shall be
construed as a waiver by Employer of any provision of its Articles of
Incorporation or Bylaws restricting the sale of transfer of shares of
Employer.
3.9 Employment. Except as specifically provided herein, nothing in
this Agreement shall confer on any employee of Employer any right to
continue in the employ of Employer, nor shall it interfere in any way
with his employment at any time.
3.10 Notice. Any notices or demands which shall be required or
permitted by law or by any of the terms or provisions of this Agreement
shall be in writing and shall be effective when delivered personally or
when sent by United States mail, registered or certified. Such notices
and demands shall be addressed to Employer or individual at their
addresses set forth in the
8
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Employment and Separation Agreement
- --------------------------------------------------------------------------------
caption of this Agreement, or at such other addresses as any party
hereto may relate in writing to the other parties.
3.11 Benefit. The provisions of this Agreement shall inure to the
benefit of and be binding upon the parities hereto, their heirs,
trustees, legal representatives, successors and permitted assignees.
3.12 Marginal Headings. The marginal headings in the paragraphs
contained in this Agreement are for convenience only, and are not to be
considered a part of this Agreement or used in determining its content
or context.
3.13 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one
instrument.
3.14 Amendments. Employer and Employee reserve the right to alter,
amend, revoke or terminate this Agreement in whole or in part at any
time by their joint instrument in writing to that effect. This
Agreement must be amended in writing in order to be effective and
binding.
3.15 Whole Agreement. With regard to the subject of this Agreement,
the terms of this instrument constitute the entire agreement between
the parties and shall be binding upon and inure to the benefit of those
parties and the executors, administrators personal representative,
estate, heirs, successors and assigns of each. The parties represent
that there are no collateral agreements or side agreements not
otherwise provided for within the terms of this instrument,. This
Agreement supersedes and takes precedence over any prior written or
oral inducements, representations or agreements as may be set forth in
the Articles of Incorporation of Employer or the Bylaws of Employer, or
elsewhere.
3.16 Time. Time is of the essence of Employer's obligations
hereunder.
3.17 Breach. In the event either party breaches this Agreement the
aggrieved party shall have, in addition to all other rights and
remedies specifically contained herein, all rights and remedies
available at law and equity. The pursuit of some rights and remedies at
one time shall not preclude the pursuit of others at other times. All
remedies provided herein and at law and equity are cumulative and not
exclusive.
9
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Employment and Separation Agreement
- --------------------------------------------------------------------------------
IN WITNESS WHEREOF, the undersigned execute this Agreement to be effective on
the date herein written.
/s/ J. Thomas Webb
------------------------------
J. Thomas Webb
DURASWITCH INDUSTRIES, INC.,
a Nevada corporation
By: /s/ R. Terren Dunlap
---------------------------
R. Terren Dunlap
Its: C.E.O and President
10
<PAGE> 1
Exhibit 10.4
EMPLOYMENT AND SEPARATION AGREEMENT
This employment agreement ("Agreement") made this date, November 20,
1998, by and between DURASWITCH INDUSTRIES, INC., a Nevada corporation, with its
current place of business at 333 S. Nina Drive, Mesa, Arizona 85210
("DuraSwitch"), and ROBERT J. BRILON ("Employee").
RECITALS
The parties recite and declare:
A. Employer desires to hire Employee because of Employee's vast
business experience and expertise as a business professional.
B. Employee desires to be employed by Employer in the executive
capacity for the compensation described herein.
For the reasons set forth above, and in consideration of the mutual
covenants and promises of the parties set forth in this Agreement, Employer and
Employee agree as follows:
ARTICLE I
SECTION ONE:
1.1 Employment. Employer employs Employee to serve as the
President of DuraSwitch on the terms and conditions stated in this
agreement to:
- Serve as the President and CFO of DuraSwitch and the
usual overall operational duties associated with
these offices.
- For the period November 20, 1998 through January 31,
1999 the Employee's primary responsibilities will be
to facilitate the private and public stock offering
efforts of DuraSwitch
- The Employee's primary responsibility will be to
direct the activities of the corporation to produce,
on a continuing basis, maximum, yet balanced benefits
for the Employer's customers, employees, and
shareholders.
- Assist the C.E.O. in the development and preparation
of the short term One to Three-year Strategic Plan
and budget (including capital expenditure budget)
based upon the goals set forth in the Five-year Guide
for Planning.
- Such other reasonable duties as may be assigned by
the Employer.
1
<PAGE> 2
SECTION TWO:
2.1 Term of Employment. The term of Employee's employment shall be
three years commencing November 20, 1998. Continued employment of
Employee by Employer after November 19, 2001, shall be for the term and
on the conditions agreed to by the parties prior to the expiration of
this agreement.
SECTION THREE:
3.1 Best Efforts of Employee. Employee agrees in accordance with
his ability, experience and talents to perform all of the duties that
may be required of and from him pursuant to the express and implicit
terms of this Agreement, to the reasonable satisfaction of Employer.
SECTION FOUR:
4.1 Compensation of Employee. For the period through December 31,
1998, Employer shall pay Employee, and Employee shall accept from
Employer as payment in full for Employee's services under this
Agreement, compensation of $75,000.00 U.S. dollars annually, less any
withholdings for applicable taxes or benefits, payable twice a month on
the 1st and 15th of each month, or biweekly as the Board may determine
while this Agreement shall be in force. After December 31, 1998
Employer shall pay Employee at $95,000 annually or an increased level
commensurate with industry standards, based upon the Employee's
performance and on Employer's ability to pay.
SECTION FIVE:
5.1 Reimbursement for Expenses. Employer shall reimburse Employee
for reasonable out of pocket expenses that Employee shall incur in
connection with his services for Employer contemplated by this
Agreement, on presentation by Employee of appropriate vouchers and
receipts for such expenses to Employer.
5.2 Auto Allowance. A leased vehicle will be provided at an amount
not to exceed $700 per month. The Employer will pay all expenses to
maintain vehicle, plus cost for tags, license, property taxes, fuel,
and insurance. A travel log recording all mileage used (whether it is
for business or personal) is to be maintained by the employee and
submitted to accounting monthly. The IRS considers the personal use
portion of the mileage as a taxable benefit and those taxes will be
deducted from the Employee's paycheck.
2
<PAGE> 3
SECTION SIX:
6.1 Use of Confidential Information. Employee agrees that, in
addition to any other limitation contained in this Agreement,
regardless of the circumstances of the termination of employment, he
will not communicate to any person, firm, corporation or other entity,
any information relating to customer lists, prices, advertising, nor
any confidential knowledge or secrets that Employee might from time to
time acquire with respect to the business of the Employer or any of its
affiliates or subsidiaries.
SECTION SEVEN:
7.1 Trade Secrets. Employee shall not at any time or in any
manner, either directly or indirectly, knowingly divulge disclose or
communicate to any person, firm, corporation or other entity in any
manner whatsoever, any trade secret information concerning any material
matters affecting or relating to the business of Employer, including
without limitation, any of its customers, the prices it obtains or has
obtained from the sale of, or at which it sells or has sold, its
products or any other information concerning the business of Employer,
its manner of operations, its plans, processes or other data without
regard to whether all of the above-stated matters will be deemed
confidential, material or important, Employer and Employee specifically
and expressly stipulating that as between them, such matters are
important, material and confidential, and gravely affect the effective
and successful conduct Employer's business and Employer's good will,
and that any breach of the terms of this section shall be a material
breach of this Agreement.
SECTION EIGHT:
8.1 Invention Assignment. Employee agrees that all inventions,
developments and improvements (whether patentable or not) made or
conceived by Employee, solely or jointly with others, during employment
with Employer, and which pertain to the products, processes or business
of Employer, or which result from or are suggested by or otherwise
arise out of Employee's work, are the sole property of Employer.
Employee will keep complete records of such inventions, developments
and improvements and will promptly and fully disclose and assign them
to Employer.
8.2 Execute Assignments. Employee agrees that at Employer's
expense he will execute such assignments, patent applications, and
other papers and do such things as may be necessary to enable Employer
to perfect its title to and obtain patents on such inventions,
developments and improvements, both in the United States of America and
in all foreign countries; unless the Employer breaches this Agreement
8.3 List. Attached hereto is a list and brief description of all
inventions, developments and improvements made or conceived by Employee
prior to employment with Employer on which no patent application has as
yet been filed. Should any question arise as to whether an invention,
development or improvement was made or conceived during employment by
Employer, all such items not on this list shall be presumed to belong
to Employer.
3
<PAGE> 4
If No Items Listed state None: NONE
SECTION NINE:
9.1 Nondisclosure of Confidential Information During Employment
and After Termination. Employee agrees that for and during the entire
term of this Employment Agreement, any information, data, figures,
sales figures, projections, estates, customer lists, tax records,
personnel history, accounting procedures, promotions, and the like,
shall be considered and kept as the private and privileged records of
Employer and will not be divulged to any person, firm, corporation or
other entity except on the direct authorization of the Employer.
Further, upon termination of this Agreement for any cause, Employee
agrees that he will continue to treat as private and privileged any
information, data, figures, projections, estimates, customer lists, tax
records, personnel history, accounting procedures, and the like, and
will not release any such information to any person, firm, corporation
or other entity, either by statement, deposition or as a witness,
except upon direct written authority of the Employer, or in response to
a Court Order, provided that: (1) Employee provides Employer with
written notice of such order within 24 hours of receiving notice of
such Order; and (2) Employee limits disclosure made in response to such
Order to the minimum amount to satisfy said Order. Employer shall be
entitled to an injunction by any competent court to enjoin and restrain
the unauthorized disclosure of such information.
SECTION TEN:
10.1 Surrender of Records on Termination of Employment. Employee
agrees that on termination of his employment for any cause whatsoever,
except in the case of wrongful termination or breach of this Agreement
by Employer, Employee will surrender to Employer in good condition any
record or records kept by Employee containing the names, addresses and
other information with regard to customers or potential customers of
Employer served by Employee.
SECTION ELEVEN:
11.1 Restriction on Use or Disclosure of Customer List and Other
Information. For a period of 24 months immediately following
termination of this Agreement, Employee shall neither call on nor
solicit, either for Employee or any other person, firm, corporation, or
other entity, any of the customers of Employer of whom Employee called,
with whom Employee became acquainted, or of whom Employee learned
during Employee's employment under this Agreement, nor shall Employee
make known to any person, firm, corporation, or other entity, either
directly or indirectly, the names and addresses of any such customers
or any information relating in any manner to Employers' trade or
business relationship with such customers. The foregoing, however,
shall not preclude Employee from taking employment
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with such persons or entities after termination of this Agreement
pursuant to its terms, provided such employment will not result in a
violation of section 12.1.
SECTION TWELVE:
12.1 Noncompetition with Employer. Except in the case of breach of
this Agreement by Employer, Employee agrees that for a period of 24
months after termination of his employment with Employer in any manner,
whether with or without cause, Employee will not, within the United
States, directly or indirectly engage in the business of switch
development, manufacture, distribution or in any similar business
competitive with DuraSwitch.
SECTION THIRTEEN:
13.1 Vacation. Employee is entitled to a six weeks (30 business
days) vacation time annually. Employee may accumulate 50% of his
vacation time and choose to use it in a later year.
SECTION FOURTEEN:
14.1 Group Insurance Plans. Employer will pay the entire premium
amount for the Employee, his spouse and dependent children with full
coverage hospitalization, surgical, medical, major medical, dental,
life and eye insurance as provided to other executive employees. The
Employer will pay for a disability insurance policy for Employee. The
Employer may also provide a pre-paid Legal plan and disability
insurance, at the sole discretion of Employer.
SECTION FIFTEEN:
15.1 Profit Incentive Bonus. The Employer agrees to an incentive
bonus to the Employee based upon fiscal year financial results
beginning with the year ended December 31, 1999 through December 31,
2001. Within 45 days of the fiscal year end the Employer will compute
the results of the profit (subject to audit) and pay to the Employee a
bonus of 5% of the net profit before tax, goodwill amortization,
non-cash charges (i.e., option compensation, stock for services,
acquisition valuation adjustments) of DuraSwitch.
SECTION SIXTEEN:
16.1 Employee Stock Options. The Employer agrees to issue stock
options at fair market value [$1.50 closing price on BB] to vest
250,000 shares on 12/31/98, 250,000 shares on 12/31/99, and 250,000
shares on 12/31/2000.
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ARTICLE II
SECTION ONE:
Definitions
1.1 "Separation" means the termination of Employee's status as an
employee of Employer or any successor assign corporation.
1.2 "Separation Date" or "Date of Separation" means 30 days after
the date that Employer gives Employee written notice that Employer
wishes to terminate his employment with Employer, or 30 days after
Employee gives Employer written notice that he wishes to terminate his
employment with Employer.
1.3 "Separation Occurrences" means an Event which would cause
Separation. For purposes of this Agreement, there are three Events
which could cause Separation. These Events are as follows:
A. Takeover Event. "Takeover Event", for purposes of
this agreement means the Corporation is taken over and Mr.
Brilon is asked to leave. The concept of "takeover" for
purposes of this Agreement means that control or possession of
the Corporation has been assumed by an outside person(s) or
entity(ies). It is contemplated that the request of Separation
is as a result of the Takeover Event.
B. Employer Initiated Separation. For purposes of this
Agreement, "Employer Initiated Separation" means Employer
terminates this Agreement for any reason other than Employee's
breach of this Agreement, Employee Initiated Separation or a
Takeover Event.
C. Employee Initiated Separation. For purposes of this
Agreement, "Employee Initiated Separation" shall mean: (i)
Employee terminating this Agreement for any reason other than
Employer breaching this Agreement; (ii) death of Employee;
(iii) disability of Employee for 60 consecutive days; (iv)
Employee's gross material neglect of duties; (v) Employee's
willful failure to abide by good faith instructions from
Employer; (vi) commission of a felony or serious misdemeanor
offense; or (vii) Employee's breach of this Agreement.
SECTION TWO:
Compensation and Separation Provisions
2.1 Compensation for Separation Occurrence. Compensation is to be
paid to Employee for a Separation Occurrence. The Employee will
maintain a relationship with the Company to satisfy that a termination
event does not occur to effect any non-employee options issued Mr.
Brilon dated 5/1/97. Employee is to be paid in the following manner.
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A. Upon the occurrence of a Takeover Event, Employee is
to receive, in a lump sum payment, on the Date of Separation,
the sum equal to 2.99 times his gross annual base salary, less
any applicable withholding for state and federal taxes. (He
would also be entitled to receive all rights as provided by
local, state or federal rules or regulation, e.g., COBRA
notification plus accrued vacation and accrued bonus.) All
stock options not vested upon a Takeover Event would
immediately vest to the Employee.
B. Upon the occurrence of an Employer Initiated
Separation, Employee would receive, paid over a two year
period in equal installments (timed to coincide with each
Employer payroll period, as currently made), payments the sum
of which is equal to two times his gross annual base salary,
less any applicable withholding for state and federal taxes
beginning on the Date of Separation. During this two-year
period, he would receive all standard employee benefits (e.g.,
health insurance) at the then prevailing cost, if any.
Further, Employer will be required to continue to pay
Employee's, his spouse's, and dependent children's medical and
dental insurance coverage until Employee reaches age 65,
except for any portions paid normally by any new employer of
Employee. Employer will make the standard premium payments on
behalf of Employee and his spouse for the applicable months
commencing from the Date of Separation. Employer may change
its insurance coverage but will not discriminate against
Employee or his spouse. Any rights required to be provided to
him by local, state or federal rules or regulations would be
granted at the end of the period (e.g., Cobra notification
plus accrued vacation and accrued bonus). All stock options
held but not vested would immediately vest.
C. Upon the occurrence of Employee Initiated Separation,
provided that he gives 30 days notice prior to his departure,
he shall receive, paid over a one year period, in equal
monthly installments (timed to coincide with each Corporation
payroll period, as currently made), payments the sum of which
is equal to one times his gross annual base salary, beginning
on the Date of Separation. During this one-year period,
Employee shall also receive all standard employee benefits
(e.g., health insurance), and Employee, his spouse and
dependants shall continue to receive their medical and dental
insurance coverage during the term of payments. Employer will
make the standard corporate premium payments on behalf of
Employee, his spouse and dependants for the applicable months
commencing from the date of Separation. Employer may change
its insurance coverage, but will not discriminate against
Employee, his spouse or dependants. Any right required to be
provided to him by local, state or federal rules or
regulations would be granted at the end of the one-year period
(e.g., Cobra notification would occur at the end of the
one-year period). Bonus money and vacation time will not be
prorated.
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2.2 Resignation from Corporation. Upon a Separation Occurrence,
Employee will resign his position as President or any other office of
DuraSwitch.
2.3 Release of Liability. In consideration of the payments
provided for herein and the covenants herein made, but with the
exceptions set forth in this paragraph, and provided Employer has not
breached this Agreement, Employee, upon Separation will release, on his
behalf and on behalf of his heirs, executors, administrators and
assigns, any and all claims of any nature whatsoever against Employer
and its present and former agents, officers, directors, employees,
insureds and assigns, whether known or unknown, which he may have or
claim to have by reason of any matter, cause or thing whatsoever at any
time up to the date of Separation. The FULL WAIVER AND RELEASE will
include, without limitation, all rights or claims arising under the
Arizona Civil Right Act, or any other applicable state or federal
statute or any common law cause of action, including claims for breach
of any express or implied contract, wrongful discharge, tort, personal
injury or any claims for attorney's fees or other costs.
Notwithstanding any provision to the contrary herein, this release
shall not apply to (1) obligations and undertakings of Employer
pursuant to the stock option agreements to which Employee is a party as
of the date of Separation, or (2) the indemnification provision of
Employer's Bylaws.
SECTION THREE:
General Miscellaneous Provisions
3.1 No Disparagement. Following the Date of Separation, Employee
agrees not to disparage Employer or DuraSwitch or any of their
respective officers, directors, employees or agents. Employer agrees,
following Separation, not to disparage Employee.
3.2 Bylaw Indemnification. Employer agrees that following the Date
of Separation, the indemnification provisions under the Bylaws of
Employer will continue in full force and effect for the benefit of
Employee for so long as such indemnification provisions would have any
application to claims against Employee.
3.3 Jurisdiction. This Agreement shall be governed in all
respects, whether as to validity, construction, capacity, performance
or otherwise, by the laws of the State of Arizona, irrespective of the
fact that one or more of the parties may become a resident of a
different state and no action involving this Agreement may be brought
except in the Superior Court of the State of Arizona or in the United
States District Court of the District of Arizona. If any provisions of
this Agreement are held by a court of competent jurisdiction to be
invalid, void or unenforceable for whatever reason, the remaining
provisions of this Agreement shall nevertheless continue in full force
and effect without being impaired in any manner whatsoever.
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3.4 Attorney's Fees. Should either party employ an attorney to
enforce any of the provisions of this Agreement, to protect its
interest in any manner arising under this Agreement, or to recover
damages for the breach of any of the terms of this agreement, the
non-prevailing party in such action pursued in a court of competent
jurisdiction agrees to pay to the prevailing party all reasonable
costs, damages and expenses, including attorney's fees, incurred or
expended by the prevailing party in connection therewith.
3.5 Cooperation of the Parties. Employee and Employer agree to
cooperate fully and to take all additional actions that may be
reasonably necessary or reasonably appropriate to give full force and
effect to the terms and intent of this Agreement and which are not
inconsistent with its terms.
3.6 Costs. Except for attorneys' fees, Employee and Employer shall
bear their own costs and other expenses incurred in connection with the
negotiation and preparation of this Agreement and any Separation which
occurs pursuant to this Agreement.
3.7 Term. Unless otherwise agreed in writing by the parties, this
Agreement shall continue in full force and effect during the life of
Employer of its successors and/or assignees.
3.8 No Waiver. No term or provision of this Agreement shall be
construed as a waiver by Employer of any provision of its Articles of
Incorporation or Bylaws restricting the sale of transfer of shares of
Employer.
3.9 Employment. Except as specifically provided herein, nothing in
this Agreement shall confer on any employee of Employer any right to
continue in the employ of Employer, nor shall it interfere in any way
with his employment at any time.
3.10 Notice. Any notices or demands which shall be required or
permitted by law or by any of the terms or provisions of this Agreement
shall be in writing and shall be effective when delivered personally or
when sent by United States mail, registered or certified. Such notices
and demands shall be addressed to Employer or individual at their
addresses set forth in the caption of this Agreement, or at such other
addresses as any party hereto may relate in writing to the other
parties.
3.11 Benefit. The provisions of this Agreement shall inure to the
benefit of and be binding upon the parities hereto, their heirs,
trustees, legal representatives, successors and permitted assignees.
3.12 Marginal Headings. The marginal headings in the paragraphs
contained in this Agreement are for convenience only, and are not to be
considered a part of this Agreement or used in determining its content
or context.
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3.13 Counterparts. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one
instrument.
3.14 Amendments. Employer and Employee reserve the right to alter,
amend, revoke or terminate this Agreement in whole or in part at any
time by their joint instrument in writing to that effect. This
Agreement must be amended in writing in order to be effective and
binding.
3.15 Whole Agreement. With regard to the subject of this Agreement,
the terms of this instrument constitute the entire agreement between
the parties and shall be binding upon and inure to the benefit of those
parties and the executors, administrators personal representative,
estate, heirs, successors and assigns of each. The parties represent
that there are no collateral agreements or side agreements not
otherwise provided for within the terms of this instrument, except the
Share Exchange Agreement. This Agreement supersedes and takes
precedence over any prior written or oral inducements, representations
or agreements as may be set forth in the Articles of Incorporation of
Employer or the Bylaws of Employer, or elsewhere, except in the Share
Exchange Agreement.
3.16 Time. Time is of the essence of Employer's obligations
hereunder.
3.17 Breach. In the event either party breaches this Agreement the
aggrieved party shall have, in addition to all other rights and
remedies specifically contained herein, all rights and remedies
available at law and equity. The pursuit of some rights and remedies at
one time shall not preclude the pursuit of others at other times. All
remedies provided herein and at law and equity are cumulative and not
exclusive.
IN WITNESS WHEREOF, the undersigned execute this Agreement to be effective on
the date herein written.
/s/ Robert J. Brilon
-----------------------------------
Robert J. Brilon
DURASWITCH INDUSTRIES, INC.,
a Nevada corporation
By: /s/ R. Terren Dunlap
--------------------------------
R. Terren Dunlap
Its: Chief Executive Officer
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Exhibit 10.5
DURASWITCH INDUSTRIES, INC.
1997 STOCK OPTION PLAN
1. PURPOSE
The purposes of the 1997 Stock Option Plan ("Plan") of DuraSwitch
Industries, Inc., a Nevada corporation, are to attract and retain the best
available employees and directors of DuraSwitch Industries, Inc. or any parent
or subsidiary or affiliate of DuraSwitch Industries, Inc. which now exists or
hereafter is organized or acquired by or acquires DuraSwitch Industries, Inc.
(collectively or individually as the context requires the "Company") as well as
appropriate third parties who can provide valuable services to the Company, to
provide additional incentive to such persons and to promote the success of the
business of the Company. To the extent applicable, this Plan is intended to
comply with Rule 16b-3 under Section 16 of the Securities Exchange Act of 1934,
as amended or any successor rule ("Rule 16b-3"), and, to the extent applicable,
the Plan shall be construed, interpreted and administered to comply with Rule
16b-3 and Section 162(m) of the Code.
2 DEFINITIONS
(a) "Affiliate" means any corporation, partnership, joint venture or
other entity, domestic or foreign, in which the Company, either directly or
through another affiliate or affiliates, has a 50% or more ownership interest.
(b) "Affiliated Group" means the group consisting of the Company and any
entity that is an "affiliate," a "parent" or a "subsidiary" of the Company.
(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Compensation or Stock Option Committee of the
Board (as designated by the Board), if such a committee has been appointed.
(e) "Code" means the United States Internal Revenue Code of 1986, as
amended.
(f) "Incentive Stock Options" means options intended to qualify as
incentive stock options under Section 422 of the Code, or any successor
provision.
(g) "ISO Group" means the group consisting of the Company and any
corporation that is a "parent" or a "subsidiary" of the Company.
(h) "Nonemployee Director" shall have the meaning assigned in Section
4(a)(ii) hereof.
(i) "Nonqualified Stock Options" means options that are not intended to
qualify for favorable income tax treatment under Sections 421 through 424 of
the Code.
(j) "Parent" means a corporation that is a "parent" of the Company
within the meaning of Code Section 424(e).
(k) "Section 16" means Section 16 of the Securities Exchange Act of 1934,
as amended.
(l) "Subsidiary" means a corporation that is a "subsidiary" of the
Company within the meaning of Code Section 424(f).
3. INCENTIVE AND NONQUALIFIED STOCK OPTIONS
Two types of options (referred to herein as "options," without distinction
between such two types) may be granted under the Plan: Incentive Stock Options
and Nonqualified Stock Options.
4. ELIGIBILITY AND ADMINISTRATION
(a) Eligibility. The following individuals shall be eligible to receive
grants pursuant to the Plan as follows:
(i) Any employee (including any officer or director who is an
employee) of the Company or any ISO Group member shall be eligible to receive
either Incentive Stock Options or Nonqualified Stock Options under the Plan. An
employee may receive more than one option under the Plan.
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<PAGE> 2
(ii) Any director of or consultant to the Company who is not an
employee of the Company or any Affiliated Group member (a "Nonemployee
Director") shall be eligible to receive only Nonqualified Stock Options under
the Plan.
(iii) Any other individual whose participation the Board or the
Committee determines is in the best interests of the Company shall be eligible
to receive Nonqualified Stock Options.
(b) Administration. The Plan may be administered by the Board or by a
Committee appointed by the Board which, to the extent applicable, shall be
constituted so to permit the Plan to comply under Rule 16b-3 and Section 162(m)
of the Code.
(i) The Company shall indemnify and hold harmless each director and
Committee member for any action or determination made in good faith with respect
to the Plan or any option.
(ii) The Board or the Committee shall have full and final authority
to waive, in whole or in part, any limitations, restrictions or conditions
previously imposed on any option. Determinations by the Committee or the Board
shall be final and conclusive upon all parties.
5. SHARES SUBJECT TO OPTIONS
The stock available for grant of options under the Plan shall be shares of
the Company's authorized but unissued or reacquired voting common stock. The
aggregate number of shares that may be issued pursuant to exercise of options
granted under the Plan shall be 500,000 shares. If any outstanding option grant
under the Plan for any reason expires or is terminated, the shares of common
stock allocable to the unexercised portion of the option grant shall again be
available for options under the Plan as if no options had been granted with
respect to such shares. No individual may be granted options covering more than
100,000 shares in any calendar year.
6. TERMS AND CONDITION OF OPTIONS
Option grants under the Plan shall be evidenced by agreements in such form
and containing such provisions as are consistent with the Plan as the Board or
the Committee shall from time to time approve. Each agreement shall specify
whether the option(s) granted thereby are Incentive Stock Options or
Nonqualified Stock Options. Such agreements may incorporate all or any of the
terms hereof by reference and shall comply with and be subject to the following
terms and conditions:
(a) Shares Granted. Each option grant agreement shall specify the number
of Incentive Stock Options and/or Nonqualified Stock Options being granted; one
option shall be deemed granted for each share of stock. In addition, each option
grant agreement shall specify the exercisability and/or vesting schedule of such
options, if any.
(b) Purchase Price. The purchase price for a share subject to (i) a
Nonqualified Stock Option may be any amount determined in good faith by the
Committee, and (ii) an Incentive Stock Option shall not be less than 100% of the
fair market value of the share on the date the option is granted, provided,
however, the option price of an Incentive Stock Option shall not be less than
110% of the fair market value of such share on the date the option is granted to
an individual then owning (after the application of the family and other
attribution rules of Section 424(d) or any successor rule of the Code) more than
10% of the total combined voting power of all classes of stock of the Company or
any ISO Group member. For purposes of the Plan, "fair market value" at any date
shall be (i) the reported closing price of such stock on the New York Stock
Exchange or other established stock exchange or Nasdaq National Market on such
date, or if no sale of such stock shall have been made on that date, on the
preceding date on which there was such a sale, (ii) if such stock is not then
listed on an exchange or the Nasdaq National Market, the last trade price per
share for such stock in the over-the-counter market as quoted on Nasdaq or the
pink sheets or successor publication of the National Quotation Bureau on such
date, or (iii) if such stock is not then listed or quoted as referenced above,
an amount determined in good faith by the Board or the Committee.
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<PAGE> 3
(c) Termination. Unless otherwise provided herein or in a specific option
grant agreement which may provide for accelerated vesting and/or longer or
shorter periods of exercisability, no option shall be exercisable after the
expiration of the earliest of
(i) in the case of an Incentive Stock Option:
(1) 10 years from the date the option is granted, or five years
from the date the option is granted to an individual owning (after the
application of the family and other attribution rules of Section 424(d) of the
Code) at the time such option was granted, more than 10% of the total combined
voting power of all classes of stock of the Company or any ISO Group member,
(2) three months after the date the optionee ceases to perform
services for the Company or any ISO Group member, if such cessation is for any
reason other than death, disability (within the meaning of Code Section
22[e][3]), or cause,
(3) one year after the date the optionee ceases to perform
services for the Company or any ISO Group member, if such cessation is by
reason of death or disability (within the meaning of Code Section 22[e][3]), or
(4) the date the optionee ceases to perform services for the
Company or any ISO Group member, if such cessation is for cause, as determined
by the Board or the Committee in its sole discretion;
(ii) in the case of a Nonqualified Stock Option;
(1) 10 years from the date the option is granted,
(2) one year after the date the optionee ceases to perform
services for the Company or any Affiliated Group member, if such cessation is
for any reason other than death, permanent disability, retirement or cause,
(3) two years after the date the optionee ceases to perform
services for the Company or any Affiliated Group member, if such cessation is by
reason of death, permanent disability or retirement, or
(4) the date the optionee ceases to perform services for the
Company or any Affiliated Group member, if such cessation is for cause, as
determined by the Board or the Committee in its sole discretion;
provided, that, unless otherwise provided in a specific option grant agreement,
an option shall only be exercisable for the periods above following the date an
optionee ceases to perform services to the extent the option was exercisable on
the date of such cessation.
(d) Method of Payment. The purchase price for any share purchased pursuant
to the exercise of an option granted under the Plan shall be paid in full upon
exercise of the option by any of the following methods, (i) by cash, (ii) by
check, or (iii) to the extent permitted under the particular grant agreement, by
transferring to the Company shares of stock of the Company at their fair market
value as of the date of exercise of the option as determined in accordance with
paragraph 6(b), provided that the optionee held the shares of stock for at least
six months. Notwithstanding the foregoing, the Company may arrange for or
cooperate in permitting broker-assisted cashless exercise procedures. The
Company may also extend and maintain, or arrange for the extension and
maintenance of, credit to an optionee to finance the optionee's purchase of
shares pursuant to the exercise of options, on such terms as may be approved by
the Board or the Committee, subject to applicable regulations of the Federal
Reserve Board and any other applicable laws or regulations in effect at the time
such credit is extended.
(e) Exercise. Except for options which have been transferred pursuant to
paragraph 6(f), no option shall be exercisable during the lifetime of an
optionee by any person other than the optionee, his or her guardian or legal
representative. The Board or the Committee shall have the power to set the time
or times within which each option shall be exercisable and to accelerate the
time or times of exercise; provided, however, no options may be exercised prior
to the later of the expiration of twenty four months from the date of grant
thereof or shareholder approval, unless otherwise provided by the Board or
Committee. To the extent that an
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<PAGE> 4
optionee has the right to exercise one or more options and purchase shares
pursuant thereto, the option(s) may be exercised from time to time by written
notice to the Company stating the number of shares being purchased and
accompanied by payment in full of the purchase price for such shares. Any
certificate for shares of outstanding stock used to pay the purchase price shall
be accompanied by a stock power duly endorsed in blank by the registered owner
of the certificate (with the signature thereon guaranteed). If the certificate
tendered by the optionee in such payment covers more shares than are required
for such payment, the certificate shall also be accompanied by instructions from
the optionee to the Company's transfer agent with respect to the disposition of
the balance of the shares covered thereby.
(f) Transferability. No Option shall be transferable by an optionee
otherwise than by will or the laws of descent and distribution, provided that
the Board or Committee in its discretion may grant options that are
transferable, without payment of consideration, to immediate family members of
the optionee or to trusts or partnerships for such family members; the Board or
Committee may also amend outstanding options to provide for such
transferability.
(g) ISO $100,000 Limit. If required by applicable tax rules regarding a
particular grant, to the extent that the aggregate fair market value (determined
as of the date an Incentive Stock Option is granted) of the shares with respect
to which an Incentive Stock Option grant under this Plan (when aggregated, if
appropriate, with shares subject to other Incentive Stock Option grants made
before said grant under this Plan or another plan maintained by the Company or
any ISO Group member) is exercisable for the first time by an optionee during
any calendar year exceeds $100,000 (or such other limit as is prescribed by the
Code), such option grant shall be treated as a grant of Nonqualified Stock
Options pursuant to Code Section 422(d).
(h) Investment Representation. Unless the shares of stock covered by
the Plan have been registered with the Securities and Exchange Commission
pursuant to Section 5 of the Securities Act of 1933, as amended, each optionee
by accepting an option grant represents and agrees, for himself or herself and
his or her transferees by will or the laws of descent and distribution, that all
shares of stock purchased upon the exercise of the option grant will be acquired
for investment and not for resale or distribution. Upon such exercise of any
portion of any option grant, the person entitled to exercise the same shall upon
request of the Company furnish evidence satisfactory to the Company (including a
written and signed representation) to the effect that the shares of stock are
being acquired in good faith for investment and not for resale or distribution.
Furthermore, the Company may if it deems appropriate affix a legend to
certificates representing shares of stock purchased upon exercise of options
indicating that such shares have not been registered with the Securities and
Exchange Commission and may so notify its transfer agent.
(i) Rights of Optionee. An optionee or transferee holding an option grant
shall have no rights as a shareholder of the Company with respect to any shares
covered by any option grant until the date one or more of the options granted
thereunder have been properly exercised and the purchase price for such shares
has been paid in full. No adjustment shall be made for dividends (ordinary or
extraordinary, whether cash, securities or other property) or distributions or
other rights for which the record date is prior to the date such share
certificate is issued, except as provided for in paragraph 6(k). Nothing in the
Plan or in any option grant agreement shall confer upon any optionee any right
to continue performing services for the Company or any Affiliated Group member,
or interfere in any way with any right of the Company or any Affiliated Group
member to terminate the optionee's services at any time.
(j) Fractional Shares. The Company shall not be required to issue
fractional shares upon the exercise of an option. The value of any fractional
share subject to an option grant shall be paid in cash in connection with an
exercise that results in all full shares subject to the grant having been
exercised.
(k) Reorganizations, Etc. Subject to paragraph 9 hereof, if the
outstanding shares of stock of the class then subject to this Plan are increased
or decreased, or are changed into or exchanged for a different number or kind of
shares or securities, as a result of one or more reorganizations, stock splits,
reverse stock splits, stock dividends, spin-offs, other distributions of assets
to shareholders, appropriate adjustments shall be made in the number and/or type
of shares or securities for which options may thereafter be granted under this
Plan and for which options then outstanding under this Plan may thereafter be
exercised. Any such adjustments in outstanding options shall be made without
changing the aggregate exercise price applicable to the unexercised portions of
such options.
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<PAGE> 5
(l) Option Modification. Subject to the terms and conditions and within
the limitations of the Plan, the Board or the Committee may modify, extend or
renew outstanding options granted under the Plan, accept the surrender of
outstanding options (to the extent not theretofore exercised), reduce the
exercise price of outstanding options, or authorize the granting of new options
in substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, no modification of an option (either directly or
through modification of the Plan) shall, without the consent of the optionee,
alter or impair any rights of the optionee under the option.
(m) Grants to Foreign Optionees. The Board or the Committee in order to
fulfill the Plan purposes and without amending the Plan may modify grants to
optionees who are foreign nationals or performing services for the Company or an
Affiliated Group member outside the United States to recognize differences in
local law, tax policy or custom.
(n) Other Terms. Each option grant agreement may contain such other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Board or the Committee, such as without limitation
discretionary performance standards, tax withholding provisions, or other
forfeiture provisions regarding competition and confidential information.
7. TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time terminate or amend the Plan; provided that, to
the extent applicable, shareholder approval shall be obtained of any action for
which shareholder approval is required in order to comply with Rule 16b-3, the
Code or other applicable laws or regulatory requirements within such time
periods prescribed.
8. SHAREHOLDER APPROVAL AND TERM OF THE PLAN
The Plan shall be effective as of May 1, 1997, the date as of which it was
adopted by the Board, subject, to the extent applicable, to ratification by the
shareholders of the Company within (each of) the time period(s) prescribed under
Rule 16b-3, the Code, and any other applicable laws or regulatory requirements,
and shall continue thereafter until terminated by the Board. Unless sooner
terminated by the Board, in its sole discretion, the Plan will expire on April
30, 2007, solely with respect to the granting of Incentive Stock Options or such
later date as may be permitted by the Code for Incentive Stock Options, provided
that options outstanding upon termination or expiration of the Plan shall remain
in effect until they have been exercised or have expired or been forfeited.
9. MERGER, CONSOLIDATION OR REORGANIZATION
In the event of a merger, consolidation or reorganization with another
corporation in which the Company is not the surviving corporation, the Board,
the Committee (subject to the approval of the Board) or the board of directors
of any corporation assuming the obligations of the Company hereunder shall take
action regarding each outstanding and unexercised option pursuant to either
clause (a) or (b) below:
(a) Appropriate provision may be made for the protection of such option
by the substitution on an equitable basis of appropriate shares of the surviving
corporation, provided that the excess of the aggregate fair market value (as
defined in paragraph 6[b]) of the shares subject to such option immediately
before such substitution over the exercise price thereof is not more than the
excess of the aggregate fair market value of the substituted shares made
subject to option immediately after such substitution over the exercise price
thereof; or
(b) Appropriate provision may be made for the cancellation of such
option. In such event, the Company, or the corporation assuming the obligations
of the Company hereunder, shall pay the optionee an amount of cash (less normal
withholding taxes) equal to the excess of the highest fair market value (as
defined in paragraph 6[b]) per share of the Common Stock during the 60-day
period immediately preceding the merger, consolidation or reorganization over
the option exercise price, multiplied by the number of shares subject to such
options (whether or not then exercisable).
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<PAGE> 6
10. DISSOLUTION OR LIQUIDATION
Anything contained herein to the contrary notwithstanding, on the effective
date of any dissolution or liquidation of the Company, the holder of each then
outstanding option (whether or not then exercisable) shall receive the cash
amount described in paragraph 9(b) hereof and such option shall be cancelled.
11. WITHHOLDING TAXES
(a) General Rule. Pursuant to applicable federal and state laws, the
Company is or may be required to collect withholding taxes upon the exercise of
an option. The Company may require, as a condition to the exercise of an option
or the issuance of a stock certificate, that the optionee concurrently pay to
the Company (either in cash or, at the request of optionee but in the
discretion of the Board or the Committee and subject to such rules and
regulations as the Board or the Committee may adopt from time to time, in
shares of Common Stock of the Company) the entire amount or a portion of any
taxes which the Company is required to withhold by reason of such exercise, in
such amount as the Committee or the Board in its discretion may determine.
(b) Withholding from Shares to be Issued. In lieu of part or all of any
such payment, the optionee may elect, subject to such rules and regulations as
the Board or the Committee may adopt from time to time, or the Company may
require that the Company withhold from the shares to be issued that number of
shares having a fair market value (as defined in paragraph 6[b]) equal to the
amount which the Company is required to withhold.
(c) Special Rule for Insiders. To the extent applicable, any such request
or election (to satisfy a withholding obligation using shares) by an individual
who is subject to the provisions of Section 16 shall be made in accordance with
the rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
* * *
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<PAGE> 1
Exhibit 10.6
DURASWITCH INDUSTRIES, INC.
LETTER OF STOCK OPTION GRANT
NEITHER THIS OPTION NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF
THIS OPTION HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND NEITHER
THIS OPTION NOR SUCH SHARES MAY BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION REQUIREMENT UNDER SUCH ACT OR AN
EXEMPTION FROM SUCH REGISTRATION REQUIREMENT, AND, IF AN EXEMPTION SHALL BE
APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL ACCEPTABLE TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
Re: Options to Acquire _____ Shares of DuraSwitch's Common Stock
Dear Optionee:
In order to provide additional incentive to certain selected employees,
independent contractors, advisors and others, DuraSwitch Industries, Inc., a
Nevada corporation (the "Company") adopted the Total Switch, Inc. 1997 Stock
Option Plan (the "1997 Stock Option Plan"). By means of this letter
("Letter"), the Company is offering to you ("Optionee") non-qualified stock
options pursuant to the 1997 Stock Option Plan, a copy of which you should have
received or which can be requested and will be sent by mail within 10 days of
your request.
1. Grant of Option. Effective __________, the Company hereby grants to
Optionee options (the "Options") to purchase from the Company, upon the terms
and conditions and at the times hereinafter set forth, an aggregate of
__________ shares of the common stock of the Company (the "Shares") at a
purchase price of $__________ per share.
2. Exercise Term of Option. Unless earlier terminated (see paragraph 7
herein), the Options may be purchased between the vesting and expiration dates
described in this paragraph and in the table following this paragraph. All
Options granted hereunder shall expire on the tenth anniversary of the
effective date of grant.
Number of Shares
Date Which Vest
_______________ __________
3. Nontransferability. The Options shall not be transferable otherwise
than by will or by the laws of descent and distribution, and the Options shall
be exercisable only by (a) Optionee, during Optionee's lifetime (except as
contemplated by the next clause); or (b) Optionee's legal representative or a
person who acquired the right to
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<PAGE> 2
exercise the Options by bequest or inheritance, during the one-year period
following Optionee's death.
4. Other Conditions and Limitations.
(a) Any Shares issued upon exercise of these Options shall not be issued
unless the issuance and delivery of shares pursuant thereto shall comply with
all relevant provisions of law including, without limitation, the Securities
Exchange Act of 1934, as amended, the rules and regulations promulgated
thereunder, any applicable state securities or "Blue Sky" law or laws (or an
exemption from such provision is available), and the requirements of any stock
exchange upon which the Shares may then be listed and further shall be subject
to the approval of counsel for the Company with respect to such compliance.
(b) No transfer of any Shares issued upon the exercise of these Options
will be permitted by the Company, unless any request for transfer is
accompanied by evidence satisfactory to the Company that the proposed transfer
will not result in a violation of any applicable law, rule or regulation,
whether federal or state, such evidence including, in the sole discretion of
the Company, an opinion of counsel reasonably acceptable to the Company.
(c) Inability of the Company to obtain approval from any regulatory body
having jurisdictional authority deemed by the Company's counsel to be necessary
for the lawful issuance and sale of any Shares hereunder shall relieve the
Company of any liability with respect to the nonissuance or sale of such Shares
as to which such requisite authority shall not have been obtained.
(d) If required by applicable tax rules, to the extent that the aggregate
fair market value (determined as of the date these Options are granted) of
Shares exercisable for the first time by Optionee during any calendar year
(when aggregated, if appropriate, with shares subject to other incentive stock
option grants made under another plan maintained by the Company of any ISO
Group member as defined in the 1997 Stock Option Plan) exceeds $100,000 (or
such other limit as is prescribed by the Internal Revenue Code), this option
grant shall be treated as a grant of nonqualified stock options pursuant to
Code Section 422(d).
5. Exercise of Options. Optionee may exercise Options only by giving the
Chief Executive Officer or President of the Company written notice in the form
attached to this Letter, by personal hand delivery, or by registered or
certified mail, postage prepaid, at the following address, of Optionee's intent
to exercise Options including the number of Shares that Optionee intends to
acquire:
DuraSwitch Industries, Inc.
333 South Nina Drive
Mesa, AZ 85210
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<PAGE> 3
Optionee's exercise notice must be accompanied by the option price, which shall
be payable in cash or by check, or by such valuable consideration as approved
by the Company's Board. In no event will Shares be transferred to Optionee on
exercise of Options until the full consideration therefor has been received by
the Company.
6. Valuation and Withholding. If required by applicable regulations, the
Company shall, at the time of issuance of any Shares purchased, provide
Optionee with a statement of valuation of the Shares issued. The Company shall
be entitled to withhold amounts from Optionee's compensation or otherwise to
receive an amount adequate to provide for any applicable federal, state and
local income taxes (or require Optionee to remit such amount as a condition of
issuance). The Company may, in its sole discretion, satisfy any such
withholding requirement, in whole or in part, by withholding from the Shares to
be issued the number of shares that would satisfy the withholding amount due.
7. Termination of Options. Notwithstanding anything to the contrary,
these Options can become exercisable (vest) only while Optionee is an employee
of the Company, and shall not be exercisable after the earliest of (i) ten
years after the Option Date; (ii) one year after the date Optionee's employment
with the Company terminates, if such termination is for any reason other than
permanent disability, death or cause; (iii) two years after the date Optionee's
employment with the Company terminates, if such termination is for permanent
disability, death or retirement; or (iv) the date Optionee's employment
terminates, if such termination is for cause, as determined by the Company in
its sole discretion. The Options shall be exercisable for the periods stated
above following the date of termination to the extent the Options were
exercisable on the date of such termination.
8. Notice of Disposition of Shares. If Optionee disposes of any Shares
acquired on the exercise of Options within either (a) two years after the
Option Date or (b) one year after the date of exercise of these Options,
Optionee must notify the Company within seven days of such disposition.
9. Reorganizations, etc. If the outstanding shares of the Common Stock
are increased or decreased, or are changed into or exchanged for a different
number or kind of shares or securities, as a result of one or more stock
splits, reverse stock splits, stock dividends, spin-offs, spin-outs or other
distributions of assets to shareholders, or assumption and conversion of
outstanding grants due to an acquisition or the like, appropriate adjustments
shall be made with respect to the Options and/or the number of Shares for which
the Options may thereafter be exercised.
10. Fractional Shares. The Company shall not be required to issue
fractional shares upon the exercise of Options. The value of any fractional
share subject to an Option shall be paid in cash in connection with the
exercise that results in all full Shares subject to the Options having been
exercised.
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11. Miscellaneous. Optionee will have no rights as a shareholder with
respect to the Shares until the exercise of Options and payment of the full
purchase price therefor. Nothing herein contained shall impose any obligation
on the Company or any parent or subsidiary of the Company or on Optionee with
respect to Optionee's continued employment by the Company or any parent or
subsidiary of the Company. Nothing herein contained shall impose any obligation
upon Optionee to exercise any Options.
12. Governing Law. This Letter of Grant shall be subject to and construed
in accordance with the laws of the State of Arizona.
13. Construction. The language in all parts of this Letter shall in all
cases be construed as a whole according to its fair meaning and not strictly
for nor against any party. The Section headings contained in this Letter are
for reference purposes only and will not affect in any way the meaning or
interpretation of this Letter. All terms used in one number or gender shall be
construed to include any other number or gender as the context may require. The
parties agree that each party has reviewed this Letter and has had the
opportunity to have counsel review the same and that any rule of construction
to the effect that ambiguities are to be resolved against the drafting party
shall not apply in the interpretation of this Letter or any amendment or any
exhibits thereof.
14. Severability. In the event any term or provision of this Letter is
declared by a court of competent jurisdiction to be invalid or unenforceable
for any reason, this Letter shall remain in full force and effect, and either
(a) the invalid or unenforceable provision shall be modified to the minimum
extent necessary to make it valid and enforceable or (b) if such a modification
is not possible, this Letter of Grant shall be interpreted as if such invalid
or unenforceable provision were not a part hereof.
15. Attorneys' Fees. Except as otherwise provided herein, in the event
any party hereto institutes an action or other proceeding to enforce any rights
arising out of this Letter of Grant, the party prevailing in such action or
other proceeding shall be paid all reasonable costs and attorneys' fees by the
non-prevailing party, such fees to be set by the court and not by a jury and to
be included in any judgment entered in such proceeding.
16. Entire Agreement. This Letter of Grant constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supercedes all prior or contemporaneous understandings or agreements in regard
thereto. No modification or addition to this Letter of Grant shall be valid
unless in writing, specifically referring to this Letter of Grant and signed by
all parties hereto. No waiver of any rights under this Letter of Grant shall be
valid unless in writing and signed by the party to be charged with such waiver.
No waiver of any term or condition contained in this Letter of Grant shall be
deemed or construed as a further or continuing waiver of such term or
condition, unless the waiver specifically provides otherwise.
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<PAGE> 5
17. Relationship to the 1997 Stock Option Plan. The Options contained in
this Letter of Grant are subject to the terms, conditions and definitions of
the 1997 Stock Option Plan. To the extent that the terms, conditions and
definitions of this Letter of Grant are inconsistent with the terms, conditions
and definitions of the 1997 Stock Option Plan, the terms, conditions and
definitions of the 1997 Stock Option Plan shall govern. Optionee acknowledges
receipt of a copy of the 1997 Stock Option Plan and represents that Optionee is
familiar with the terms and provisions thereof. Optionee hereby accepts this
option subject to all terms and provisions. Optionee agrees to accept as
binding, conclusive and final all decisions or interpretations of the Board or
any committee appointed by the Board upon any questions arising under the 1997
Stock Option Plan. Optionee agrees to consult Optionee's independent tax
advisors with respect to the income tax consequences to Optionee, if any, of
participating in the 1997 Stock Option Plan.
Optionee should execute this original Letter of Grant and return it to the
Company as soon as possible. Optionee may retain the enclosed copy of this
Letter for Optionee's records.
Sincerely,
DuraSwitch Industries, Inc.
By
---------------------------
R. Terren Dunlap, CEO
=============================================================================
RE: DURASWITCH INDUSTRIES, INC.
ACCEPTANCE
The undersigned understands, acknowledges and agrees to the terms and
conditions of the Options granted pursuant to this Letter of Grant.
---------------------------
Dated:
---------------------
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<PAGE> 1
EXHIBIT 10.7
DURASWITCH INDUSTRIES, INC.
1999 STOCK OPTION PLAN
1. PURPOSE
The purposes of the DuraSwitch Industries, Inc. 1999 Stock Option Plan
(the "Plan") are to attract and retain the best available employees and
directors of DuraSwitch Industries, Inc. or any parent or subsidiary or
affiliate of DuraSwitch Industries, Inc. which now exists or hereafter is
organized or acquired by or acquires DuraSwitch Industries, Inc. (collectively
or individually, as the context requires, the "Company") as well as appropriate
third parties who can provide valuable services to the Company, to provide
additional incentive to such persons and to promote the success of the business
of the Company.
2. DEFINITIONS
(a) "AFFILIATE" means any corporation, partnership, joint venture or
other entity, domestic or foreign, in which the Company, either directly or
through another affiliate or affiliates, has a 50% or more ownership interest.
(b) "AFFILIATED GROUP" means the group consisting of the Company and
any entity that is an "affiliate," a "parent" or a "subsidiary" of the Company.
(c) "BOARD" means the Board of Directors of the Company.
(d) "CHANGE IN CONTROL" means an event which shall be deemed to have
occurred in the event that any person, entity or group shall become the
beneficial owner of more than 50% of the voting power of all of the then
outstanding shares of the Company. For purposes of the preceding sentence,
"person, entity or group" shall not include (i) any employee benefit plan of the
Corporation, or (ii) any person, entity or group which, as of the effective date
of this Plan, is the beneficial owner of Company common stock.
(e) "COMMITTEE" means the Compensation or Stock Option Committee of the
Board (as designated by the Board), if such a committee has been appointed.
(f) "CODE" means the United States Internal Revenue Code of 1986, as
amended.
(g) "FAIR MARKET VALUE" means (i) the reported closing price of the
Company's stock on the Nasdaq SmallCaps Market or an established stock market,
(ii) if such stock is not then listed on an exchange or the Nasdaq SmallCaps
Market, the last trade price per share for such stock in the over-the-counter
market as quoted on Nasdaq or the pink sheets, or (iii) if such stock is not
listed or quoted as reference above, and amount determined in good faith by the
Board or the Committee.
<PAGE> 2
(h) "INCENTIVE STOCK OPTIONS" means options intended to qualify as
incentive stock options under Section 422 of the Code, or any successor
provision.
(i) "ISO GROUP" means the group consisting of the Company and any
corporation that is a "parent" or a "subsidiary" of the Company.
(j) "NONEMPLOYEE DIRECTOR" shall have the meaning assigned in Section
4(a)(ii) hereof.
(k) "NONQUALIFIED STOCK OPTIONS" means options that are not intended to
qualify for favorable income tax treatment under Sections 421 through 424 of the
Code.
(l) "SUBSIDIARY" means a corporation that is a "subsidiary" of the
Company within the meaning of Code Section 424(f).
3. INCENTIVE AND NONQUALIFIED STOCK OPTIONS
Two types of options (referred to herein as "options," without
distinction between such two types) may be granted under the Plan: Incentive
Stock Options and Nonqualified Stock Options.
4. ELIGIBILITY AND ADMINISTRATION
(a) ELIGIBILITY. The following individuals shall be eligible to receive
grants pursuant to the Plan as follows:
(i) Any employee (including any officer or director who is an
employee) of the Company or any ISO Group member shall be eligible to receive
either Incentive Stock Options or Nonqualified Stock Options under the Plan. An
employee may receive more than one option under the Plan.
(ii) Any director who is not an employee of the Company or any
Affiliated Group member (a "Nonemployee Director") shall be eligible to receive
only Nonqualified Stock Options.
(iii) Any other individual whose participation the Board or
the Committee determines is in the best interests of the Company shall be
eligible to receive Nonqualified Stock Options.
(b) Administration. The Plan may be administered by the Board or by a
Committee appointed by the Board. The Company shall indemnify and hold harmless
each director and Committee member for any action or determination made in good
faith with respect to the Plan or any option. The Board or the Committee shall
have full and final authority to waive, in whole
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<PAGE> 3
or in part, any limitations, restrictions or conditions previously imposed on
any option. Determinations by the Committee or the Board shall be final and
conclusive upon all parties.
5. SHARES SUBJECT TO OPTIONS
The stock available for grant of options under the Plan shall be shares
of the Company's authorized but unissued or reacquired voting common stock. The
aggregate number of shares that may be issued pursuant to exercise of options
granted under the Plan shall be 1,000,000 shares. If any outstanding option
grant under the Plan for any reason expires or is terminated, the shares of
common stock allocable to the unexercised portion of the option grant shall
again be available for options under the Plan as if no options had been granted
with respect to such shares.
6. TERMS AND CONDITION OF OPTIONS
Option grants under the Plan shall be evidenced by agreements in such
form and containing such provisions as are consistent with the Plan as the Board
or the Committee shall from time to time approve. Each agreement shall specify
whether the option(s) granted thereby are Incentive Stock Options or
Nonqualified Stock Options. Such agreements may incorporate all or any of the
terms hereof by reference and shall comply with and be subject to the following
terms and conditions:
(a) SHARES GRANTED. Each option grant agreement shall specify the
number of Incentive Stock Options and/or Nonqualified Stock Options being
granted; one option shall be deemed granted for each share of stock. In
addition, each option grant agreement shall specify the exercisability and/or
vesting schedule of such options, if any.
(b) PURCHASE PRICE. The purchase price for a share subject to (i) a
Nonqualified Stock Option may be any amount determined in good faith by the
Board or the Committee, and (ii) an Incentive Stock Option shall not be less
than 100% of the Fair Market Value of the share on the date the option is
granted, provided, however, the option price of an Incentive Stock Option shall
not be less than 110% of the Fair Market Value of such share on the date the
option is granted to an individual then owning (after the application of the
family and other attribution rules of Section 424(d) or any successor rule of
the Code) more than 10% of the total combined voting power of all classes of
stock of the Company or any ISO Group member.
(c) EXERCISABILITY. The Board or the Committee shall have the power to
set the time or times within which each option shall be exercisable and to
accelerate the time or times of exercise.
(d) TERMINATION. Unless otherwise provided herein or in a specific
option grant agreement which may provide for accelerated vesting and/or longer
or shorter periods of exercisability, no option shall be exercisable after the
expiration of the earliest of:
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<PAGE> 4
(i) 10 years from the date the option is granted, or five
years from the date an Incentive Stock Option is granted to an individual owning
(after the application of the family and other attribution rules of Section
424(d) of the Code) at the time such option was granted, more than 10% of the
total combined voting power of all classes of stock of the Company or any ISO
Group member,
(ii) three months after the date the optionee ceases to
perform services for the Company or any ISO Group member, if such cessation is
for any reason other than death, disability (within the meaning of Code Section
22(e)(3)), or cause,
(iii) one year after the date the optionee ceases to perform
services for the Company or any ISO Group member, if such cessation is by reason
of death or disability (within the meaning of Code Section 22(e)(3)), or
(iv) the date the optionee ceases to perform services for the
Company or any ISO Group member, if such cessation is for cause, as determined
by the Board or the Committee in its sole discretion.
Unless otherwise provided in a specific option grant
agreement, an option shall only be exercisable for the periods above following
the date an optionee ceases to perform services to the extent the option was
exercisable on the date of such cessation.
(e) METHOD OF EXERCISE. To the extent that an optionee has the right to
exercise one or more options and purchase shares pursuant thereto, the option(s)
may be exercised from time to time by written notice to the Company stating the
number of shares being purchased and accompanied by payment in full of the
purchase price for such shares. Except for options which have been transferred
pursuant to paragraph 6(f), no option shall be exercisable during the lifetime
of an optionee by any person other than the optionee, his or her guardian or
legal representative. The purchase price for any share purchased pursuant to the
exercise of an option granted under the Plan shall be paid in full upon exercise
of the option by any of the following methods, (i) by cash, (ii) by check, or
(iii) to the extent permitted under the particular grant agreement, by
transferring to the Company shares of stock of the Company at their Fair Market
Value as of the date of exercise of the option, provided that the optionee held
the shares of stock for at least six months. The Company may also extend and
maintain, or arrange for the extension and maintenance of, credit to an optionee
to finance the optionee's purchase of shares pursuant to the exercise of
options, on such terms as may be approved by the Board or the Committee, subject
to applicable regulations of the Federal Reserve Board and any other applicable
laws or regulations in effect at the time such credit is extended.
(f) NONTRANSFERABILITY. No option shall be transferable by an optionee
otherwise than by will or the laws of descent and distribution, provided that
the Board or Committee in its discretion may grant options that are
transferable, without payment of consideration, to immediate family members of
the optionee or to trusts or partnerships for such family members; the Board or
Committee may also amend outstanding options to provide for such
transferability.
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<PAGE> 5
(g) ISO $100,000 LIMIT. If required by applicable tax rules regarding a
particular grant, to the extent that the aggregate fair market value (determined
as of the date an Incentive Stock Option is granted) of the shares with respect
to which an Incentive Stock Option grant under this Plan (when aggregated, if
appropriate, with shares subject to other Incentive Stock Option grants made
before said grant under this Plan or another plan maintained by the Company or
any ISO Group member) is exercisable for the first time by an optionee during
any calendar year exceeds $100,000 (or such other limit as is prescribed by the
Code), such option grant shall be treated as a grant of Nonqualified Stock
Options pursuant to Code Section 422(d).
(h) INVESTMENT REPRESENTATION. Unless the shares of stock covered by
the Plan have been registered with the Securities and Exchange Commission
pursuant to Section 5 of the Securities Act of 1933, as amended, each optionee
by accepting an option grant represents and agrees, for himself or herself and
his or her transferees by will or the laws of descent and distribution, that all
shares of stock purchased upon the exercise of the option grant will be acquired
for investment and not for resale or distribution. Upon such exercise of any
portion of any option grant, the person entitled to exercise the same shall upon
request of the Company furnish evidence satisfactory to the Company (including a
written and signed representation) to the effect that the shares of stock are
being acquired in good faith for investment and not for resale or distribution.
Furthermore, the Company may if it deems appropriate affix a legend to
certificates representing shares of stock purchased upon exercise of options
indicating that such shares have not been registered with the Securities and
Exchange Commission and may so notify its transfer agent.
(i) RIGHTS OF OPTIONEE. An optionee or transferee holding an option
grant shall have no rights as a shareholder of the Company with respect to any
shares covered by any option grant until the date one or more of the options
granted thereunder have been properly exercised and the purchase price for such
shares has been paid in full. No adjustment shall be made for dividends
(ordinary or extraordinary, whether cash, securities or other property) or
distributions or other rights for which the record date is prior to the date
such share certificate is issued, except as provided for in paragraph 6(k).
Nothing in the Plan or in any option grant agreement shall confer upon any
optionee any right to continue performing services for the Company or any
Affiliated Group member, or interfere in any way with any right of the Company
or any Affiliated Group member to terminate the optionee's services at any time.
(j) FRACTIONAL SHARES. The Company shall not be required to issue
fractional shares upon the exercise of an option. The value of any fractional
share subject to an option grant shall be paid in cash in connection with an
exercise that results in all full shares subject to the grant having been
exercised.
(k) REORGANIZATIONS, ETC. Subject to paragraph 9 hereof, if the
outstanding shares of stock of the class then subject to this Plan are increased
or decreased, or are changed into or exchanged for a different number or kind of
shares or securities, as a result of one or more reorganizations, stock splits,
reverse stock splits, stock dividends, spin-offs, other distributions of assets
to shareholders, appropriate adjustments shall be made in the number and/or type
of shares
5
<PAGE> 6
or securities for which options may thereafter be granted under this Plan and
for which options then outstanding under this Plan may thereafter be exercised.
Any such adjustments in outstanding options shall be made without changing the
aggregate exercise price applicable to the unexercised portions of such options.
(l) OPTION MODIFICATION. Subject to the terms and conditions and within
the limitations of the Plan, the Board or the Committee may modify, extend or
renew outstanding options granted under the Plan, accept the surrender of
outstanding options (to the extent not theretofore exercised), reduce the
exercise price of outstanding options, or authorize the granting of new options
in substitution therefor (to the extent not theretofore exercised).
(m) OTHER TERMS. Each option grant agreement may contain such other
terms, provisions and conditions not inconsistent with the Plan as may be
determined by the Board or the Committee, such as without limitation
discretionary performance standards, tax withholding provisions, or other
forfeiture provisions regarding competition and confidential information.
7. TERMINATION OR AMENDMENT OF THE PLAN
The Board may at any time terminate or amend the Plan; provided, that
to the extent applicable, shareholder approval shall be obtained of any action
for which shareholder approval is required in order to comply with the Code or
other applicable laws or regulatory requirements within such time periods
prescribed.
8. SHAREHOLDER APPROVAL AND TERM OF THE PLAN
The Plan shall be effective as of March 8, 1999, the date as of which
it was adopted by the Board, subject, to the extent applicable, to approval by
the shareholders of the Company within (each of) the time period(s) prescribed
under the Code, and any other applicable laws or regulatory requirements, and
shall continue thereafter until terminated by the Board. Unless sooner
terminated by the Board, in its sole discretion, the Plan will expire ten years
from its effective date solely with respect to the granting of Incentive Stock
Options or such later date as may be permitted by the Code for Incentive Stock
Options, provided that options outstanding upon termination or expiration of the
Plan shall remain in effect until they have been exercised or have expired or
been forfeited.
9. MERGER, CONSOLIDATION OR REORGANIZATION
In the event of a merger, consolidation or reorganization with another
corporation in which the Company is not the surviving corporation, the Board,
the Committee (subject to the approval of the Board) or the board of directors
of any corporation assuming the obligations of the Company hereunder shall take
action regarding each outstanding and unexercised option pursuant to either
clause (a) or (b) below:
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(a) Appropriate provision may be made for the protection of such option
by the substitution on an equitable basis of appropriate shares of the surviving
corporation, provided that the excess of the aggregate Fair Market Value of the
shares subject to such option immediately before such substitution over the
exercise price thereof is not more than the excess of the aggregate fair market
value of the substituted shares made subject to option immediately after such
substitution over the exercise price thereof; or
(b) Appropriate provision may be made for the cancellation of such
option. In such event, the Company, or the corporation assuming the obligations
of the Company hereunder, shall pay the optionee an amount of cash (less normal
withholding taxes) equal to the excess of the highest Fair Market Value per
share of the Common Stock during the 60-day period immediately preceding the
merger, consolidation or reorganization over the option exercise price,
multiplied by the number of shares subject to such options (whether or not then
exercisable).
10. DISSOLUTION OR LIQUIDATION
Anything contained herein to the contrary notwithstanding, on the
effective date of any dissolution or liquidation of the Company, the holder of
each then outstanding option (whether or not then exercisable) shall receive the
cash amount described in paragraph 9(b) hereof and such option shall be
canceled.
11. WITHHOLDING TAXES
(a) GENERAL RULE. Pursuant to applicable federal and state laws, the
Company is or may be required to collect withholding taxes upon the exercise of
an option. The Company may require, as a condition to the exercise of an option
or the issuance of a stock certificate, that the optionee concurrently pay to
the Company (either in cash or, at the request of optionee but in the discretion
of the Board or the Committee and subject to such rules and regulations as the
Board or the Committee may adopt from time to time, in shares of Common Stock of
the Company) the entire amount or a portion of any taxes which the Company is
required to withhold by reason of such exercise, in such amount as the Committee
or the Board in its discretion may determine.
(b) WITHHOLDING FROM SHARES TO BE ISSUED. In lieu of part or all of any
such payment, the optionee may elect, subject to such rules and regulations as
the Board or the Committee may adopt from time to time, or the Company may
require that the Company withhold from the shares to be issued that number of
shares having a Fair Market Value equal to the amount which the Company is
required to withhold.
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<PAGE> 1
EXHIBIT 10.8
Draft 5/7/99
DURASWITCH INDUSTRIES, INC.
COMMON STOCK WARRANT
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED FOR SALE, SOLD
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR PURSUANT TO AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT.
This certifies that, for good and valuable consideration, receipt of
which is hereby acknowledged, __________________ ("Holder") is entitled to
purchase, subject to the terms and conditions of this Warrant, from DuraSwitch
Industries, Inc., a Nevada corporation (the "Company"), ________ fully paid and
nonassessable shares of the Company's Common Stock no par value per Share.
("Common Stock") of the Company, in accordance with Section 2 during the period
commencing on ______ 1999 [one year from the date of the Prospectus] and ending
at 5:00 p.m. California time, ________, 2003 (the "Expiration Date"), at which
time this Warrant will expire and become void unless earlier terminated as
provided herein. The shares of Common Stock of the Company for which this
Warrant is exercisable, as adjusted from time to time pursuant to the terms
hereof, are hereinafter referred to as the "Shares."
1. Exercise Price. The initial purchase price for the Shares shall be
$_________ per share [120% of the price to the public]. Such price shall be
subject to adjustment pursuant to the terms hereof (such price, as adjusted from
time to time, is hereinafter referred to as the "Exercise Price").
2. Exercise and Payment.
(a) Cash Exercise. At any time after _________, 1999, this
Warrant may be exercised, in whole or in part, from time to time by the Holder,
during the term hereof, by surrender of this Warrant and the Notice of Exercise
annexed hereto duly completed and executed by the Holder to the Company at the
principal executive offices of the Company, together with payment in the amount
obtained by multiplying the Exercise Price then in effect by the number of
Shares thereby purchased, as designated in the Notice of Exercise. Payment may
be in cash or by check payable to the order of the Company.
(b) Net Issuance. In lieu of payment of the Exercise Price
described in Section 2(a), the Holder may elect to receive, without the payment
by the Holder of any additional consideration, shares equal to the value of this
Warrant or any portion hereof by the surrender of this Warrant or such portion
to the Company, with the net issue election notice annexed hereto (the "Net
Issuance Election") duly executed, at the principal executive offices of the
Company. Thereupon, the Company shall issue to the Holder such number of fully
paid and nonassessable shares of
<PAGE> 2
Common Stock as is computed using the following formula:
where: X = Y (A-B)
-----------
A
X = the number of shares to be issued to the Holder pursuant to
this Section 2.
Y = the number of shares covered by this Warrant in respect of
which the net issuance election is made pursuant to this
Section 2.
A = the fair market value of one share of Common Stock, as
determined in accordance with the provisions of this Section
2.
B = the Exercise Price in effect under this Warrant at the time
the net issuance election is made pursuant to this Section 2.
For purposes of this Section 2, the "fair market value" per share of the Common
Stock shall mean:
(i) If the Common Stock is traded on a national securities
exchange or admitted to unlisted trading privileges on such an exchange, or is
listed on the National Market (the "National Market") of the National
Association of Securities Dealers Automated Quotations System (the "Nasdaq") or
other over-the-counter quotation system, the fair market value shall be the last
reported sale price of the Common Stock on such exchange or on the Nasdaq
National Market on the last business day before the effective date of exercise
of the Net Issuance Election or if no such sale is made on such day, the mean of
the closing bid and asked prices such day on such exchange, the Nasdaq National
Market or over-the-counter quotation system; and
(ii) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and ask prices are not reported, the fair
market value shall be the price per share which the Company could obtain from a
willing buyer for shares sold by the Company from authorized but unissued
shares, as such price shall be determined by mutual agreement of the Company and
the Holder of this Warrant.
3. Reservation of Shares. The Company hereby agrees that at all times
there shall be reserved for issuance and delivery upon exercise of this Warrant
such number of shares of Common Stock or other shares of capital stock of the
Company from time to time issuable upon exercise of this Warrant. All such
shares shall be duly authorized, and when issued upon such exercise, shall be
validly issued, fully paid and non-assessable, free and clear of all liens,
security interests, charges and other encumbrances or restrictions on sale and
free and clear of all preemptive rights.
4. Delivery of Stock Certificates. Within a reasonable time after
exercise, in whole or in part, of this Warrant, the Company shall issue in the
name of and deliver to the Holder a certificate or certificates for the number
of fully paid and nonassessable shares of Common Stock which the Holder shall
have requested in the Notice of Exercise or Net Issuance Election, as
applicable. If this
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<PAGE> 3
Warrant is exercised in part, the Company shall deliver to the Holder a new
Warrant for the unexercised portion of this Warrant at the time of delivery of
such stock certificate or certificates.
5. No Fractional Shares. No fractional shares or scrip representing
fractional shares will be issued upon exercise of this Warrant. If upon any
exercise of this Warrant a fraction of a share results, the Company will pay the
Holder the difference between the cash value of the fractional share and the
portion of the Exercise Price allocable to the fractional share.
6. Listing. Prior to the issuance of any shares of Common Stock upon
exercise of this Warrant, the Company shall secure the listing of such shares of
Common Stock upon each national securities exchange or automated quotation
system, if any, upon which shares of Common Stock are then listed (subject to
official notice of issuance upon exercise of this Warrant) and shall maintain,
so long as any other shares of Common Stock shall be so listed, such listing of
all shares of Common Stock from time to time issuable upon the exercise of this
Warrant; and the Company shall so list on each national securities exchange or
automated quotation system, and shall maintain such listing of, any other shares
of capital stock of the Company issuable upon the exercise of this Warrant if
and so long as any shares of the same class shall be listed on such national
securities exchange or automated quotation system.
7. Charges, Taxes and Expenses. The Company shall pay all transfer
taxes or other incidental charges, if any, in connection with the transfer of
the Shares purchased pursuant to the exercise hereof from the Company to the
Holder.
8. Loss, Theft, Destruction or Mutilation of Warrant. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to the Company,
and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new Warrant of like tenor and dated as of such
cancellation, in lieu of this Warrant.
9. Saturdays, Sundays, Holidays, Etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding
weekday which is not a legal holiday.
10. Adjustment of Exercise Price and Number of Shares. The Exercise
Price and the number of and kind of securities purchasable upon exercise of this
Warrant shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the Company
shall at any time after the date hereof but prior to the expiration of this
Warrant subdivide its outstanding securities as to which purchase rights under
this Warrant exist, by split-up or otherwise, or combine its outstanding
securities as to which purchase rights under this Warrant exist, the number of
Shares as to which this Warrant is exercisable as of the date of such
subdivision, split-up or combination
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<PAGE> 4
shall forthwith be proportionately increased in the case of a subdivision, or
proportionately decreased in the case of a combination. Appropriate adjustments
shall also be made to the Exercise Price, but the aggregate purchase price
payable for the total number of Shares purchasable under this Warrant as of such
date shall remain the same.
(b) Stock Dividend. If at any time after the date hereof the
Company declares a dividend or other distribution on Common Stock payable in
Common Stock or other securities or rights convertible into Common Stock
("Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon exercise or
conversion thereof), then the number of shares of Common Stock for which this
Warrant may be exercised shall be increased as of the record date (or the date
of such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividend, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all such securities convertible into
Common Stock) of Common Stock as a result of such dividend, and the Exercise
Price shall be adjusted so that the aggregate amount payable for the purchase of
all the Shares issuable hereunder immediately after the record date (or on the
date of such distribution, if applicable), for such dividend shall equal the
aggregate amount so payable immediately before such record date (or on the date
of such distribution, if applicable).
(c) Other Distributions. If at any time after the date hereof the
Company distributes to holders of its Common Stock, other than as part of its
dissolution or liquidation or the winding up of its affairs, any shares of its
capital stock, any evidence of indebtedness or any of its assets (other than
cash, Common Stock or Common Stock Equivalents), then the Company may, at its
option, either (i) decrease the Exercise Price of this Warrant by an appropriate
amount based upon the value distributed on each share of Common Stock as
determined in good faith by the Company's Board of Directors or (ii) provide by
resolution of the Company's Board of Directors that on exercise of this Warrant,
the Holder hereof shall thereafter be entitled to receive, in addition to the
shares of Common Stock otherwise receivable on exercise hereof, the number of
shares or other securities or property which would have been received had this
Warrant at the time been exercised.
(d) Merger. If at any time after the date hereof there shall be a
merger or consolidation of the Company with or into another corporation when the
Company is not the surviving corporation, then the Holder shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
herein and upon payment of the aggregate Exercise Price then in effect, the
number of shares or other securities or property of the successor corporation
resulting from such merger or consolidation, which would have been received by
Holder for the shares of stock subject to this Warrant had this Warrant at such
time been exercised.
(e) Reclassification, Etc. If at any time after the date hereof
there shall be a change or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different number of
securities of any other class or classes, then the Holder shall thereafter be
entitled to receive upon exercise of this Warrant, during the period specified
herein and
4
<PAGE> 5
upon payment of the Exercise Price then in effect, the number of shares or other
securities or property resulting from such change or reclassification, which
would have been received by Holder for the shares of stock subject to this
Warrant had this Warrant at such time been exercised.
11. Notice of Adjustments; Notices. Whenever the Exercise Price or
number of Shares purchasable hereunder shall be adjusted pursuant to Section 10
hereof, the Company shall execute and deliver to the Holder a certificate
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated and
the Exercise Price and number of and kind of securities purchasable hereunder
after giving effect to such adjustment, and shall cause a copy of such
certificate to be mailed (by first class mail, postage prepaid) to the Holder.
12. Rights As Stockholder; Notice to Holders. Nothing contained in this
Warrant shall be construed as conferring upon the Holder or his or its
transferees the right to vote or to receive dividends or to consent or to
receive notice as a shareholder in respect of any meeting of shareholders for
the election of directors of the Company or of any other matter, or any rights
whatsoever as shareholders of the Company. The Company shall give notice to the
Warrantholder by registered mail if at any time prior to the expiration or
exercise in full of the Warrants, any of the following events shall occur:
(a) a dissolution, liquidation or winding up of the Company shall
be proposed;
(b) a capital reorganization or reclassification of the Common
Stock (other than a subdivision or combination of the outstanding Common Stock
and other than a change in the par value of the Common Stock) or any
consolidation or merger of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and that does not result in any reclassification or change of Common
Stock outstanding) or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as an
entirety; or
(c) a taking by the Company of a record of the holders of any class
of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) for other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other rights.
Such giving of notice shall be simultaneous with the giving of
notice to holders of Common Stock. Such notice shall specify the record date or
the date of closing the stock transfer books, as the case may be. Failure to
provide such notice shall not affect the validity of any action taken in
connection with such dividend, distribution or subscription rights, or proposed
merger, consolidation, sale, conveyance, dissolution, liquidation or winding up.
13. Restricted Securities. The Holder understands that this Warrant and
the Shares purchasable hereunder constitute "restricted securities" under the
federal securities laws inasmuch
5
<PAGE> 6
as they are, or will be, acquired from the Company in transactions not involving
a public offering and accordingly may not, under such laws and applicable
regulations, be resold or transferred without registration under the Securities
Act of 1933, as amended (the "1933 Act") or an applicable exemption from such
registration. Unless the Shares are subsequently registered pursuant to Section
16, the Holder further acknowledges that the securities legend on Exhibit A to
the Notice of Exercise attached hereto shall be placed on any Shares issued to
the Holder upon exercise of this Warrant.
14. Certification of Investment Purpose. Unless a current registration
statement under the 1933 Act shall be in effect with respect to the securities
to be issued upon exercise of this Warrant, the Holder covenants and agrees
that, at the time of exercise hereof, it will deliver to the Company a written
certification executed by the Holder that the securities acquired by him upon
exercise hereof are for the account of such Holder and acquired for investment
purposes only and that such securities are not acquired with a view to, or for
sale in connection with, any distribution thereof.
15. Disposition of Shares; Transferability.
(a) Holder hereby agrees not to make any disposition of any Shares
purchased hereunder unless and until:
(i) Holder shall have notified the Company of the proposed
disposition and provided a written summary of the terms and conditions of the
proposed disposition; and
(ii) Holder shall have complied with all requirements of this
Warrant applicable to the disposition of the Shares;
The Company shall not be required (i) to transfer on its books
any Shares which have been sold or transferred in violation of the provisions of
this Section 15 or (ii) to treat as the owner of the Shares, or otherwise to
accord voting or dividend rights to, any transferee to whom the Shares have been
transferred in contravention of the terms of this Warrant.
(b) Transfer. This Warrant shall be transferable only on the books
of the Company maintained at its principal office in Tempe, Arizona or wherever
its principal office may then be located, upon delivery thereof duly endorsed by
the Holder or by its duly authorized attorney or representative, accompanied by
proper evidence of succession, assignment or authority to transfer. Upon any
registration of transfer, the Company shall execute and deliver new Warrants to
the person entitled thereto.
(c) Limitations on Transfer. This Warrant shall not be sold,
transferred, assigned or hypothecated (any such action, a "Transfer") by the
Holder except to (i) one or more persons, each of whom on the date of transfer
is an officer of the Holder; (ii) a general partnership or general partnerships,
the general partners of which are the Holder and one or more persons, each of
whom on the date of transfer is an officer of the Holder; (iii) a successor to
the Holder in any merger or
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<PAGE> 7
consolidation; (iv) a purchaser of all or substantially all of the Holder's
assets; (v) any person receiving this Warrant from one or more of the persons
listed in this Section 15(c) at such person's or persons' death pursuant to
will, trust or the laws of intestate succession, or (vi) after one year from the
date of this Warrant, any person receiving the Warrant from the persons listed
in this Section 15. This Warrant may be divided or combined, upon request to the
Company by the Holder, into a certificate or certificates representing the right
to purchase the same aggregate number of Shares. If at the time of a Transfer, a
Registration Statement is not in effect to register this Warrant, the Company
may require the Holder to make such representations, and may place such legends
on certificates representing this Warrant, as may be reasonably required in the
opinion of counsel to the Company to permit a Transfer without such
registration.
16. Registration Rights.
(a) Piggyback Registration. If at any time during the four-year
period commencing ___________, 1999 and ending on __________, 2003, the Company
shall determine to register for its own account or the account of others under
the 1933 Act any of its equity securities, other than on Form S-4 or Form S-8 or
their then equivalents relating to equity securities to be issued solely in
connection with any acquisition of any entity or business, or equity securities
issuable in connection with stock option or other employee benefit plans, the
Company shall send to each Holder of Warrants or Shares written notice of such
determination and, if within twenty (20) days after receipt of such notice, such
Holder shall so request in writing (hereafter a "Selling Holder"), the Company
shall include in such Registration Statement all or any part of the Shares
issuable or issued upon exercise of the Warrants (the "Registrable Securities")
such Selling Holder requests to be registered. The obligations of the Company
under this Section 16(a) may be waived by Holders holding a majority in interest
of the Registrable Securities. In the event that the managing underwriter for
said offering advises the Company in writing that the inclusion of such
securities in the offering would be materially detrimental to the offering, such
securities shall nevertheless be included in the Registration Statement,
provided that the Holder and each holder of Shares desiring to have their Shares
included in the Registration Statement agree in writing, for a period of 90 days
following such offering, not to sell or otherwise dispose of such Shares
pursuant to such Registration Statement, which Registration Statement the
Company shall keep effective for a period of at least nine months following the
expiration of such 90-day period.
(b) Demand Registration. In addition to any Registration Statement
pursuant to subparagraph (a) above, during the four-year period beginning on
______, 1999 and ending on __________, 2003, the Company will, as promptly as
practicable (but in any event within sixty (60) days), after written request
(the "Request") by the Holder, or by a person or persons holding (or having the
right to acquire by virtue of holding the Warrants) at least 25% of the
Registrable Securities (such Holder or Holders to be included in the definition
of "Selling Holder" for the purposes of Section 16(c) hereof), prepare and file
at its own expense a Registration Statement with the Commission and appropriate
"blue sky" authorities sufficient to permit the public offering of the
Registrable Securities and will use its best efforts at its own expense through
its officers, directors, auditors and counsel, in all matters necessary or
advisable, to cause such Registration Statement to
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<PAGE> 8
become effective as promptly as practicable and to maintain such effectiveness
so as to permit resale of the Shares covered by the Request until the earlier of
the time that all such Shares have been sold or the expiration of 90 days from
the effective date of the Registration Statement, provided, however, that the
Company shall only be obligated to file one such Registration Statement under
this Section 16(b).
(c) Obligations of the Holders. In connection with the registration
of the Registrable Securities pursuant to either Sections 14(a) or (b), the
Selling Holders shall have the following obligations:
(i) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Agreement with respect to each
Selling Holder that such Selling Holder shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of the Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request. At least fifteen (15) days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Selling Holder of the information the Company requires from each such
Selling Holder (the "Requested Information") in the case of a Registration
Statement being prepared pursuant to Section 16(b) or if such Selling Holder
elects to have any of such Selling Holder's Registrable Securities included in
the Registration Statement in the case of a Registration Statement being
prepared pursuant to Section 16(a).
(ii) Each Selling Holder by such Selling Holder's acceptance
of the Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement hereunder, unless such Selling Holder has notified the
Company in writing of such Selling Holder's election to exclude all of such
Selling Holder's Registrable Securities from the Registration Statement; and
(iii) No Selling Holder may participate in any underwritten
registration hereunder unless such Selling Holder (i) agrees to sell such
Selling Holder's Registrable Securities on the basis provided in any
underwriting arrangements approved by the Selling Holders entitled hereunder to
approve such arrangements, (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other documents
reasonably required under the terms of such underwriting arrangements, and (iii)
agrees to pay its pro rata share of all underwriting discounts and commissions
and other fees and expenses of investment bankers and any manager or managers of
such underwriting, except as provided in Section 16(d) below.
(d) Obligations of the Company. If and whenever the Company is
required to use its best efforts to take action pursuant to any Federal or state
law or regulation to permit the sale or other disposition of any Shares
purchasable upon exercise of this Warrant that are then
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<PAGE> 9
held or that may be acquired upon exercise of the Warrants in order to effect or
cause the registration of any Registrable Securities under the Securities Act as
provided in this Section 16, the Company shall, as expeditiously as practicable:
(i) Prepare and file with the SEC, as soon as practicable
within ninety (90) days after the end of the period within which requests for
registration may be given to the company a Registration Statement or
Registration Statements relating to the registration on any appropriate form
under the Securities Act, which form shall be available for the sale of the
Registrable Securities in accordance with the intended method or methods of
distribution thereof, and use its best efforts to cause such Registration
Statements to become effective; provided that before filing a Registration
Statement or Prospectus or any amendment or supplements thereto, including
documents incorporated by reference after the initial filing of any Registration
Statement, the Company will furnish to the Holders of the Registrable Securities
covered by such Registration Statement and the underwriters, if any, copies of
all such documents provided to be filed, which documents will be subject to the
review of such Holders and underwriters;
(ii) prepare and file with the SEC such amendments and
post-effective amendments to a Registration Statement as may be necessary to
keep such Registration Statement effective for a reasonable period not to exceed
45 days; cause the related Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424
under the Securities Act; and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such Registration
Statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such Registration Statement or
supplement to such Prospectus;
(iii) notify the selling Holders of Registrable Securities and
the managing underwriters, if any, promptly, and (if requested by any such
Person) confirm such advice in writing, (A) when a Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to a
Registration Statement or any post-effective amendment, when the same has become
effective; (B) of any request by the SEC for amendments or supplements to a
Registration Statement or related Prospectus or for additional information; (C)
of the issuance by the SEC of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose;
(D) if at any time the representations and warranties of the Company
contemplated by paragraph (xiv) below ceases to be true and correct in all
material respects; (E) of the receipt by the Company of any notification with
respect to the suspension of the qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and (F) of the happening of any event that makes
any statement of a material fact made in the Registration Statement, the
Prospectus or any document incorporated therein by reference untrue or which
requires the making of any changes in the Registration Statement or Prospectus
so that they will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
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<PAGE> 10
(iv) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of a Registration Statement at the
earliest possible moment;
(v) if reasonably requested by the managing underwriters,
immediately incorporate in a Prospectus supplement or post-effective amendment
such information as the managing underwriters believe (on advice of counsel)
should be included therein as required by applicable law relating to such sale
of Registrable Securities, including, without limitation, information with
respect to the purchase price being paid for the Registrable Securities by such
underwriters and with respect to any other terms of the underwritten (or
"best-efforts" underwritten) offering; and make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such Prospectus supplement or post-effective
amendment;
(vi) furnish to each selling Holder of Registrable Securities
and each managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
(vii) deliver to each selling Holder of Registrable Securities
and the underwriters, if any, without charge, as many copies of the Prospectus
or Prospectuses (including each preliminary Prospectus) any amendment or
supplement thereto as such Persons may reasonably request; the company consents
to the use of such Prospectus or any amendment or supplement thereto by each of
the selling Holders of Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus or any Amendment or supplement thereto;
(viii) prior to any public offering of Registrable Securities,
cooperate with the selling Holders of Registrable Securities, the underwriters,
if any, and their respective counsel in connection with the registration or
qualification of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any selling Holder or underwriter reasonably requests in writing, keep each such
registration or qualification effective during the period such Registration
Statement is required to be kept effective and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of
the Registrable Securities covered by the applicable Registration Statement;
provided that the Company will not be required to qualify to do business in any
jurisdiction where it is not then so qualified or to take any action which would
subject the Company to general service of process in any jurisdiction where it
is not at the time so subject;
(ix) cooperate with the selling Holders of Registrable
Securities and the managing underwriters, if any, to facilitate the timely
preparation and delivery of certificates representing Registrable Securities to
be sold and not bearing any restrictive legends; and enable such Registrable
Securities to be in such denominations and registered in such names as the
managing underwriters may request at least two Business Days prior to any sale
of Registrable
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<PAGE> 11
Securities to the underwriters;
(x) use its best efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities within the United
States as may be necessary to enable the seller or sellers thereof or the
underwriters, if any, to consummate the disposition of such Registrable
Securities;
(xi) upon the occurrence of any event contemplated by Section
16(d)(iii)(F) above, prepare a supplement or post-effective amendment to the
applicable Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document so that,
as thereafter delivered to the purchasers of the Registrable Securities being
sold thereunder, such Prospectus will not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
(xii) with respect to each issue or class of Registrable
Securities, use its best efforts to cause all Registrable Securities covered by
the Registration Statements to be listed on each securities exchange, if any, on
which similar securities issued by the Company are then listed if requested by
the Holders of a majority of such issue or class of Registrable Securities;
(xiii) enter into such agreements (including an underwriting
agreement) and take all such other action reasonably required in connection
therewith in order to expedite or facilitate the disposition of such Registrable
Securities and in such connection, if the registration is in connection with an
underwritten offering (A) make such representations and warranties to the
underwriters, in such form, substance and scope as are customarily made by
issuers to underwriters in underwritten offering and confirm the same if and
when requested; (B) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions in form, scope and substance shall be
reasonably satisfactory to the underwriters) addressed to the underwriters
covering the matters customarily covered in opinions requested in underwritten
offerings and such other matters as may be reasonably requested by such
underwriters; (C) obtain "cold comfort" letters and updates thereof from the
Company's accountants addressed to the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in "cold
comfort" letters by underwriters in connection with underwritten offerings; (D)
set forth in full in any underwriting agreement entered into the indemnification
provisions and procedures of Section 16(f) hereof with respect to all parties to
be indemnified pursuant to said Section; and e. deliver such documents and
certificates as may be reasonably requested by the underwriters to evidence
compliance with clause (i) above and with any customary conditions contained in
the underwriting agreement or other agreement entered into by the Company; the
above shall be done at each closing under such underwriting or similar agreement
or as and to the extent required hereunder;
(xiv) make available for inspection by one or more
representatives of the Holders of Registrable Securities being sold, any
underwriter participating in any disposition
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<PAGE> 12
pursuant to such registration, and any attorney or accountant retained by such
Holders or underwriter, all financial and other records, pertinent corporate
documents and properties of the Company, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such representatives, in connection with such; and
(xv) otherwise use its best efforts to comply with all
applicable Federal and state regulations; and take such other action as may be
reasonably necessary to or advisable to enable each such Holder and each such
underwriter to consummate the sale or disposition in such jurisdiction or
jurisdiction in which any such Holder or underwriter shall have requested that
the Registrable Securities be sold.
Except as otherwise provided in this Agreement, the Company shall have sole
control in connection with the preparation, filing, withdrawal, amendment or
supplementing of each Registration Statement, the selection of underwriters, and
the distribution of any preliminary prospectus included in the Registration
Statement, and may include within the coverage thereof additional shares of
Common Stock or other securities for its own account or for the account of one
or more of its other security holders.
The Company may require each Seller of Registrable Securities as to
which any registration is being effected to furnish to the Company such
information regarding the distribution of such securities and such other
information as may otherwise be required by the Securities Act to be included in
such Registration Statement.
(e) Expenses of Registration. All expenses, other than underwriting
discounts and commissions and other fees and expenses of investment bankers and
other than brokerage commissions, incurred in connection with registrations,
filings or qualifications pursuant to Section 16(a) or 16(b), including, without
limitation, all registration, listing and qualifications fees, printers and
accounting fees and the fees and disbursements of counsel for the Company and
the Selling Holders, shall be borne by the Company; provided, however, that the
Company shall only be required to bear the fees and out-of-pocket expenses of
one legal counsel selected by the Selling Holders in connection with such
registration.
(f) Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(i) To the extent permitted by law, the Company will indemnify
and hold harmless each Selling Holder who holds such Registrable Securities, the
directors, if any, of such Selling Holder, the officers, if any, of such Selling
Holder, each person, if any, who controls any Selling Holder within the meaning
of the 1933 Act, any underwriter (as defined in the 1933 Act) for the Selling
Holders, the directors, if any, of such underwriter and the officers, if any, of
such underwriter, and each person, if any, who controls any such underwriter
within the meaning of the 1933 Act (each, an "Indemnified Person"), against any
losses, claims, damages, expenses or liabilities (joint or several)
(collectively, "Claims") to which any of them may become subject under the 1933
Act or otherwise, insofar as such Claims (or actions or proceedings, whether
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<PAGE> 13
commenced or threatened, in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement when it first became effective, or any related final
prospectus, amendment or supplement thereto, or the omission or alleged omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which the
statements therein were made, not misleading (a "Violation"). The Company shall
reimburse the Selling Holders and each such underwriter or controlling person,
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 16(f)(i) shall not apply in such case to the extent any such Claim
arising out of or based upon a Violation which occurs in reliance upon and in
conformity with information furnished in writing to the Company by any
Indemnified Person or underwriter for such Indemnified Person expressly for use
in connection with the preparation of the Registration Statement or any such
amendment thereof or supplement thereto, and shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld.
(ii) In connection with any Registration Statement in which a
Selling Holder is participating, each such Selling Holder agrees to indemnify
and hold harmless, to the same extent and in the same manner set forth in
Section 16(f)(i), the Company, each of its directors, each of its officers who
signs the Registration Statement, each person, if any, who controls the Company
within the meaning of the 1933 Act, any underwriter and any other stockholder
selling securities pursuant to the Registration Statement or any of its
directors or officers or any person who controls such stockholder or underwriter
within the meaning of the 1933 Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against any Claim to which any of
them may become subject, under the 1933 Act or otherwise, insofar as such Claim
arises out of or is based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such Selling
Holder expressly for use in connection with such Registration Statement, and
such Selling Holder will reimburse any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this Section
16(f)(ii) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Selling Holder,
which consent shall not be unreasonably withheld.
(iii) The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution to the same extent as provided
above, with respect to information furnished in writing by such persons
expressly for inclusion in the Registration Statement.
(iv) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 16(f) of notice of the commencement of any
action (including any
13
<PAGE> 14
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is made against any indemnifying party under this
Section 16(f), deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying parties;
provided, however, that an Indemnified Person or Indemnified Party shall have
the right to retain its own counsel, with the fees and expenses to be paid by
the indemnifying party, if, in the reasonable opinion of counsel retained by the
indemnifying party, the representation by such counsel of the Indemnified Person
or Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The Indemnifying Party shall pay for only one separate legal counsel
for the Indemnified Parties; such legal counsel shall be selected by the
Indemnified Parties holding a majority in interest of the Registrable
Securities. The failure to deliver written notice to the indemnifying party
within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 16(f), except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 16(f) shall be made by periodic
payments of the amount thereof during the course of the investigation or
defense, as such expense, loss, damage or liability is incurred and is due and
payable.
(v) Notwithstanding any of the foregoing, if, in connection
with an underwritten public offering of Registrable Securities, the Company, the
Selling Holders and the underwriter(s) enter into an underwriting or purchase
agreement relating to such offering which contains provisions covering
indemnification and contribution among the parties, the indemnification and
contribution provisions of this Section 16(f) shall be deemed inoperative for
purposes of such offering.
(g) Contribution. To the extent any indemnification by an
indemnifying party is prohibited or limited by law, the indemnifying party
agrees to make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 14(e) to the fullest extent permitted by
law; provided, however, that (i) no contribution shall be made under
circumstances where the maker would not have been liable for indemnification
under the fault standards set forth in Section 16(f), (ii) no seller of
Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (iii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
(h) Reports Under Exchange Act. With a view to making available to
the Holders the benefits of Rule 144 promulgated under the 1933 Act or any other
similar rule or
14
<PAGE> 15
regulation of the SEC that may at any time permit the Holders to sell securities
of the Company to the public without registration ("Rule 144"), the Company
agrees to:
(i) make and keep public information available, as those terms
are understood and defined in Rule 144; and
(ii) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the Securities Exchange
Act of 1934, as amended (the "Exchange Act"); and
(iii) furnish to each Holder so long as such Holder owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, (ii) a
copy of the most recent annual or quarterly report of the Company and such other
reports and documents so filed by the Company, and (iii) such other information
as may be reasonably requested to permit the Holders to sell such securities
without registration pursuant to Rule 144.
(i) Assignment of the Registration Rights. The rights to have
the Company register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the Holders to transferees or assignees of all or any
portion of such securities only if: (i) the Holder agrees in writing with the
transferee or assignee to assign such rights, (ii) the Company is, within a
reasonable time after such transfer or assignment, furnished with written notice
of the name and address of such transferee or assignee (iii) such assignment is
in accordance with and permitted by law and all other agreements between the
transferor or assignor and the Company, including without limitation,
stockholder's agreements, warrants and subscription agreements, and the
transferor or assignor otherwise is not in material default of any obligation to
the Company under any such other agreement, and (iv) at or before the time the
Company received the written notice contemplated by clause (ii) of this
sentence, the transferee or assignee agrees in writing with the Company to be
bound by all of the provisions contained herein.
17. Miscellaneous.
(a) Construction. Unless the context indicates otherwise, the term
"Holder" shall include any transferee or transferees of this Warrant pursuant to
Section 15(b), and the term "Warrant" shall include any and all warrants
outstanding pursuant to this Agreement, including those evidenced by a
certificate or certificates issued upon division, exchange, substitution or
transfer pursuant to Section 15.
(b) Restrictions. By receipt of this Warrant, the Holder makes the
same representations with respect to the acquisition of this Warrant as the
Holder is required to make upon the exercise of this Warrant and acquisition of
the Shares purchasable hereunder as set forth in the Form of Investment Letter
attached as Exhibit A to the Notice of Exercise attached hereto.
(c) Notices. Unless otherwise provided, any notice required or
permitted
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<PAGE> 16
under this Warrant shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified or three (3) days
following deposit with the United States Post Office, by registered or certified
mail, postage prepaid and addressed to the party to be notified (or one (1) day
following timely deposit with a reputable overnight courier with next day
delivery instructions), or upon confirmation of receipt by the sender of any
notice by facsimile transmission, at the address indicated below or at such
other address as such party may designate by ten (10) days' advance written
notice to the other parties.
To Holder:
Attention:
To the Company: DuraSwitch Industries, Inc.
234 S. Extension Road, Suite 103
Mesa, Arizona 85210
Attention:
(d) Governing Law. This Warrant shall be governed by and construed
under the laws of the State of California as applied to agreements among
California residents entered into and to be performed entirely within
California.
(e) Entire Agreement. This Warrant, the exhibits and schedules
hereto, and the documents referred to herein, constitute the entire agreement
and understanding of the parties hereto with respect to the subject matter
hereof, and supersede all prior and contemporaneous agreements and
understandings, whether oral or written, between the parties hereto with respect
to the subject matter hereof.
(f) Binding Effect. This Warrant and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding upon
the Company and its successors and assigns, and Holder and its successors and
assigns.
(g) Waiver; Consent. This Warrant may not be changed, amended,
terminated, augmented, rescinded or discharged (other than by performance), in
whole or in part, except by a writing executed by the parties hereto, and no
waiver of any of the provisions or conditions of this Warrant or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto.
(h) Severability. If one or more provisions of this Warrant are
held to be unenforceable under applicable law, such provision shall be excluded
from this Warrant and the balance of the Warrant shall be interpreted as if such
provision were so excluded and the balance shall be enforceable in accordance
with its terms.
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<PAGE> 17
(i) Counterparts. This Warrant may be signed in several
counterparts, each of which shall constitute an original.
IN WITNESS WHEREOF, the parties hereto have executed this Common
Stock Warrant effective as of the date hereof.
DATED: _______________, 1999 THE COMPANY:
DuraSwitch Industries, Inc.
By:
Its:
HOLDER:
By:
Its:
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<PAGE> 18
NOTICE OF EXERCISE
To: DURASWITCH INDUSTRIES, INC.
1. The undersigned hereby elects to purchase _____________ shares
of Common Stock no par value per Share ("Stock") of DuraSwitch Industries, Inc.,
a Nevada corporation (the "Company") pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price pursuant to the
terms of the Warrant.
2. Attached as Exhibit A is an investment representation letter
addressed to the Company and executed by the undersigned as required by Section
14 of the Warrant.
3. Please issue certificates representing the shares of Stock
purchased hereunder in the names and in the denominations indicated on Exhibit A
attached hereto.
4. Please issue a new Warrant for the unexercised portion of the
attached Warrant, if any, in the name of the undersigned.
Holder:
----------------------------
Dated:
--------------- -----------------------------------
By:
--------------------------------
Its:
-------------------------------
18
<PAGE> 19
NET ISSUANCE ELECTION NOTICE
To: DURASWITCH INDUSTRIES, INC. Date:_____________
The undersigned hereby elects under Section 2 of the attached
Warrant to surrender the right to purchase ___________ shares of Common Stock
pursuant to the attached Warrant. The Certificate(s) for the shares issuable
upon such net issuance election shall be issued in the name of the undersigned
or as otherwise indicated below.
Signature:
________________________________
Name for Registration
________________________________
Mailing Address
________________________________
________________________________
19
<PAGE> 1
EXHIBIT 10.9
SERIES A CONVERTIBLE PREFERRED
STOCK AND WARRANT PURCHASE AGREEMENT
This Series A Convertible Preferred Stock and Warrant Purchase Agreement
(the "Agreement") is entered into as of June 30, 1998, by and among DuraSwitch
Industries, Inc., a Nevada corporation (the "Company") and Blackwater Capital
Partners, L.P., a Delaware limited partnership ("BCP") and Blackwater Capital
Group, LLC, a Delaware limited liability company ("BCG"). Collectively, BCP and
BCG are referred to herein as "Purchasers".
R E C I T A L S
A. The Company desires to sell, and BCP desires to buy, 2,143,321 shares of
the Company's Series A Convertible Preferred stock (the "Preferred
Shares"), which will be convertible into the same number of shares of
the Company's Common stock.
B. As an inducement for BCP to purchase the Preferred Shares, BCP has
requested that the Company issue to BCG and BCP each, warrants to
purchase 535,830 shares of the Company's common stock, and the
Company desires to accommodate BCP's request.
C. BCP has loaned US$250,000 to the Company, which is evidenced by a demand
promissory note in the same amount dated June 18, 1998 (the "Note"), and
BCP and the Company desire to cancel the Note as part of the
consideration for the Preferred Shares.
A G R E E M E N T
The parties agree as follows:
1. AGREEMENT TO EXCHANGE.
1.1 Sale and Purchase of Preferred Shares. The Company will sell and
issue to BCP, and BCP agrees to purchase from the Company, the
Preferred Shares in exchange for US$1,000,000.
1.2 Issuance of Warrants. As an inducement to purchase the Preferred
Shares, the Company will issue to BCG and BCP each, warrants to
purchase 535,830 shares of the Company's common stock exercisable
for $0.466565671 per share (the "Warrants"). The Warrants will be
in substantially the same form as Exhibit A attached to this
Agreement.
2. CLOSING, DELIVERY, PAYMENT AND EXCHANGE.
2.1 Closing Date. The Company's issuance of the Warrants and of
certificates evidencing the Preferred Shares and the BCP's
tendering of the payment for the Preferred Shares (the "Closing")
will take place at 1:00 p.m. on June 30, 1998, at the offices of
Quarles
1
<PAGE> 2
& Brady, One East Camelback Road, Suite 400, Phoenix, Arizona
85012 or at such other time or place as the Company and
Purchasers may mutually agree (the "Closing Date").
2.2 Delivery. At the Closing, the Company will deliver: (i) to BCP,
certificates representing the Preferred Shares; and (ii) to BCG
and BCP, the Warrants. At the Closing, BCP will deliver to the
Company: (i) US$750,000 payable in a cashier's check or via wire
transfer to an account designated by the Company; and (ii) the
original Note, which shall be deemed paid in full by the Company
upon the Closing Date. The Company shall immediately thereafter
pay US$80,000 to Duff & Phelps Securities, LLC, a Delaware
limited liability company ("Duff & Phelps").
2.3 Use of Funds. The Company must utilize the US$1,000,000 its
receives from BCP pursuant to this Agreement for expenses
associated with this transaction, working capital, audit fees,
legal fees, capital expenditures and payment of brokerage fees.
2.4 Amended Certificate and Bylaws. On or before the Closing Date,
the Company will amend its certificate of incorporation (the
"Amended Certificate") and Bylaws in the same forms as Exhibit B
and Exhibit C, respectively.
2.5 Put Option. If the Company receives more than an additional
US$1,000,000 in equity offerings from any source other than
Purchasers before June 15, 1999, BCP will have the option to
force the Company to purchase from BCP 50% of the Preferred
Shares purchased by BCP pursuant to this Agreement in exchange
for the greater of: (i) a lump sum of $800,000; or (ii) the
highest per-share price paid by such subsequent investors,
whichever is greater. BCP must give the Company notice of its
intent to exercise this option within 30 days after the Company
receives the funds from such equity offering.
2.6 Registration Rights. The Company grants to Purchasers certain
registration rights that are described further in the
Registration Rights Agreement between the Company and Purchasers
attached as Exhibit D and incorporated in this Agreement by
reference.
2.7 Corporate Governance. The Company will cause Steven R. Green to
be appointed to its Board of Directors to fill the current vacant
seat on the Board for the remainder of that seat's term, which
ends in the year 2001. The Company also will invite John B.
Sadler Jr. and Kevin R. Keuper to all Board meetings as
non-voting advisors to the Board for the period of time that Duff
& Phelps is retained by the Company as an investment advisor.
2
<PAGE> 3
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to the Purchasers as follows:
3.1 Organization, Good Standing and Qualification. The Company is a
corporation duly organized, validly existing and in good standing
under the laws of the State of Nevada. The Company has all
requisite corporate power and authority to own and operate its
properties and assets, to execute and deliver this Agreement, to
issue and sell the Preferred Shares, Warrants and the common
stock issuable upon conversion of the Preferred Shares and
exercise of the Warrants (the "Conversion Shares"), to carry out
the provisions of this Agreement, and to carry on its business as
presently conducted and as presently proposed to be conducted.
The Company is duly qualified and is authorized to do business
and is in good standing as a foreign corporation in all
jurisdictions in which the nature of its activities and of its
properties (both owned and leased) makes such qualification
necessary, except for those jurisdictions in which failure to do
so would not have a material adverse effect on the Company or its
business.
3.2 Capitalization; Voting Rights. The authorized capital stock of the
Company, immediately after the Closing, will consist of 40,000,000
shares of common stock, 19,289,889 shares of which are issued and
outstanding, 6,800,000 shares of which are reserved for future
issuance as a result of the exercise of options and warrants and
upon conversion of preferred stock and the remainder are not
issued or outstanding; and 10,000,000 shares of preferred stock,
2,143,321 of which are designated Series A Convertible Preferred
Stock, 2,143,321 of which are issued and outstanding and the
reaminder of which are undesignated preferred stock, none of which
are issued or outstanding. All issued and outstanding shares of
the Company's common stock and preferred stock (i) have been duly
authorized and validly issued (ii) are fully paid and
nonassessable, and (iii) were issued in compliance with all
applicable state and federal laws concerning the issuance of
securities. The rights, preferences, privileges and restrictions
of the Preferred Shares will be as stated in the Amended
Certificate. When issued, the Preferred Shares and the Conversion
Shares will be validly issued, fully paid and nonassessable, and
will be free of any liens or encumbrances; provided, however, that
the Preferred Shares and the Conversion Shares may be subject to
restrictions on transfer under state and/or federal securities
laws as set forth herein or as otherwise required by such laws at
the time a transfer is proposed.
3.3 Authorization; Binding Obligations. All corporate action on the
part of the Company, its officers, directors and shareholders
necessary for the authorization of this Agreement, the performance
of all obligations of the Company hereunder and thereunder at the
Closing and the authorization, sale, issuance and delivery of the
Preferred Shares pursuant to this Agreement and the Conversion
Shares pursuant to the Amended Certificate has been taken or will
be taken prior to the Closing. This Agreement, when executed and
delivered, will be valid and binding obligations of the
3
<PAGE> 4
Company enforceable in accordance with their terms, except: (i) as
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting
enforcement of creditors' rights; and (ii) general principles of
equity that restrict the availability of equitable remedies. The
sale of the Preferred Shares and the subsequent conversion of
Preferred Shares into Conversion Shares are not and will not be
subject to any preemptive rights or rights of first refusal that
have not been properly waived or complied with.
3.4 Offering Valid. Assuming the accuracy of the representations and
warranties of the Purchasers contained in Section 4.3, the offer,
sale and issuance of the Preferred Shares and the Conversion
Shares will be exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"). Neither
the Company nor any agent on its behalf has solicited or will
solicit any offers to sell or has offered to sell or will offer to
sell all or any part of the Preferred Shares to any person or
persons so as to bring the sale of such Preferred Shares by the
Company within the registration provisions of the Securities Act.
3.5 Filings with the SEC. To the knowledge of the Company's Board: (i)
the Company has made all filings with the Securities and Exchange
Commission (the "SEC") that it has been required by law to make
within the past three (3) years under the Securities Act of 1933,
as amended (the "Securities Act"), and the Securities Exchange Act
of 1934, as amended (the "Exchange Act") (collectively, the
"Public Filings"); (ii) each of the Public Filings has complied
with the Securities Act and the Exchange Act in all material
respects; (iii) none of the Public Filings, as of their respective
dates, contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements made therein, in light of the circumstances under which
they were made, not misleading; (iv) the Company has delivered to
the Purchasers a correct and complete copy of the most recent
Public Filing (as amended to date); and (v) the Company is in
compliance with, in all material respects, the rules and
regulations of each stock exchange on which the Company's stock is
listed.
3.6 Financial Statements.
(a) To the knowledge of the Company's Board, the financial
statements (including any footnotes thereto) provided to
Purchasers have been prepared in accordance with GAAP,
applied on a consistent basis during the periods involved,
except as indicated in the notes thereto or, in the case
of unaudited statements, as permitted by Form 10-Q, and
fairly present the financial position of the Company as of
the dates thereof and the results of operations, changes
in stockholders' equity and cash flows for the periods
then ended (subject, in the case of the unaudited
statements, to recurring year end adjustments normal in
nature and amount and the absence of footnotes.)
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(b) Since January 1, 1998, the books and records of the Company
and any subsidiaries of the Company have been, and are
being, maintained in material compliance with applicable
legal and accounting requirements, and such books and
records accurately reflect in all material respects all
material transactions customarily reflected in such books
and records in respect of the business, assets, liabilities
and affairs of the Company on a consolidated basis.
4. REPRESENTATIONS AND WARRANTIES OF PURCHASERS.
Each Purchaser hereby represents and warrants to the Company as follows:
4.1 Requisite Power and Authority. Purchaser has all necessary power
and authority under all applicable provisions of law to execute
and deliver this Agreement and to carry out its provisions. All
action on Purchaser's part required for the lawful execution and
delivery of this Agreement has been or will be effectively taken
prior to the Closing. Upon its execution and delivery, the terms
of this Agreement will be valid and binding obligations of
Purchaser enforceable in accordance with its terms, except: (i)
as limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other laws of general application affecting
enforcement of creditors' rights and (ii) general principles of
equity that restrict the availability of equitable remedies.
4.2 Consents. All consents, approvals, orders, authorizations,
registrations, qualifications, designations, declarations or
filings with any governmental or banking authority on the part of
Purchaser required in connection with the consummation of the
transactions contemplated in the Agreement have been or will be
obtained prior to and be effective as of the Closing.
4.3 Investment Representations. Purchaser understands that the
Warrants, Preferred Shares and the Conversion Shares have not
been registered under the Securities Act or any applicable state
securities laws. Purchaser also understands that the Warrants and
Preferred Shares are being offered and sold pursuant to
exemptions from registration contained in the Securities Act and
applicable state securities laws based in part upon Purchaser's
representations contained in this Agreement.
(a) Purchasers Bears Economic Risk. Purchaser has substantial
experience in evaluating and investing in private
placement transactions involving securities of companies
similar to the Company, is capable of evaluating the
merits and risks of its investment in the Company and has
the analytical and financial capacity to protect its own
interests. Purchaser understands that it must bear the
economic risk of this investment indefinitely unless the
Warrants, Preferred Shares or the Conversion Shares are
registered pursuant to the Securities Act and applicable
state securities laws, or exemptions from such
registrations are available. Purchaser understands that
the Company has no present intention of registering
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the Warrants, Preferred Shares or the Conversion Shares.
Purchaser also understands that there is no assurance that
exemptions from registration under the Securities Act and
applicable state securities laws will be available and
that, even if available, such exemptions may not allow
Purchaser to transfer all or any portion of the Warrants,
Preferred Shares or the Conversion Shares under the
circumstances, in the amounts or at the times Purchaser
might propose.
(b) Acquisition for Own Account. Purchaser is acquiring the
Shares and the Conversion Shares for Purchaser's own
accounts for investment only, and not with a view towards
their distribution.
(c) Purchasers Can Protect Its Interest. Purchaser represents
that by reason of its, or of its management's, business or
financial experience, Purchaser has the capacity to
protect their own interests in connection with the
transactions contemplated in this Agreement. Further,
Purchaser is aware of no publication of any advertisement
in connection with the transactions contemplated in this
Agreement.
(d) Accredited Investor. Purchaser represents it is an
"accredited investor" within the meaning of Regulation D
under the Securities Act.
(e) Company Information. Purchaser has received and read the
Company's financial statements and has had an opportunity
to discuss the Company's business, management and
financial affairs with directors, officers and management
of the Company and has had the opportunity to review the
Company's operations and facilities. Purchaser also has
been given the opportunity to ask all desired questions of
and received adequate answers from, the Company and its
management regarding the terms and conditions of this
investment.
5. COVENANTS.
The Company covenants and agrees that from and after the date of this
Agreement (except as otherwise provided herein, or unless each Purchaser has
given its prior written consent) so long as any Purchaser owns any shares of
Preferred Stock or any of the Warrants are outstanding:
5.1 Maintenance of Existence: Compliance with Law. The Company shall
preserve and maintain in good standing its corporate legal
existence and all of its rights, privileges and franchises which
are necessary to conduct its business as currently being
conducted.
5.2 Conduct of Businesses. The Company shall, and shall cause its
Subsidiaries to, conduct their businesses in the ordinary course,
consistent with the present conduct of
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their businesses, and will use their best efforts to maintain,
preserve and protect their assets and good-will.
5.3 Books and Records. The Company shall, and shall cause its
Subsidiaries to, keep adequate records and books of account with
respect to their business activities, in which proper entries,
reflecting all of their financial transactions, are made in
accordance with GAAP.
5.4 Issuance of Additional Preferred Stock. As long as any of the
Warrants shall remain outstanding, the Company shall not issue
any additional shares of preferred stock other than as dividends
on the Preferred Stock.
6. MISCELLANEOUS.
6.1 Governing Law and Venue. This Agreement shall be governed by and
construed and enforced in accordance with the internal laws of
the State of Arizona without reference to principles of conflict
of laws. The parties to this Agreement hereby consent to the
jurisdiction in personam of the Superior Court of the State of
Arizona, in and for the County of Maricopa or of the United
States District Court for the District of Arizona, in any legal
proceeding to enforce any obligations under this Agreement, and
agree that venue in Maricopa County is not inconvenient.
6.2 Survival. The representations, warranties, covenants and
agreements made in this Agreement will survive the closing of the
transactions contemplated by this Agreement.
6.3 Successors and Assigns. Except as otherwise expressly provided in
this Agreement, the provisions of this Agreement will inure to
the benefit of, and be binding upon, the successors, assigns,
heirs, executors and administrators of the Company and
Purchasers.
6.4 Entire Agreement. This Agreement, its the Exhibits and Schedules
and the other documents delivered pursuant to it constitute the
full and entire understanding and agreement between the parties
with regard to the subjects of this Agreement and no party will
be liable or bound to any other in any manner by any
representations, warranties, covenants or agreements except as
specifically set forth herein and therein.
6.5 Separability. In case any provision of the Agreement shall be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way
be affected or impaired thereby.
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6.6 Amendment and Waiver. This Agreement may be amended or modified
only upon the written consent of all the parties. Any waiver,
permit, consent or approval of any kind or character of any
breach, default or noncompliance under this Agreement or under
the Amended Certificate or any waiver of any provisions or
conditions of this Agreement must be in writing and shall be
effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement, the Amended
Certificate, by-law, or otherwise afforded to any party, will be
cumulative and not alternative.
6.7 Delays or Omissions. It is agreed that no delay or omission to
exercise any right, power or remedy accruing to any party, upon
any breach, default or noncompliance by another party under this
Agreement will impair any such right, power or remedy; nor will
it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any
similar breach, default or noncompliance occurring afterward.
6.8 Notices. All notices required or permitted under this Agreement
must be in writing and are deemed effectively given: (i) upon
personal delivery to the party to be notified; (ii) when sent by
confirmed facsimile and first class mail if sent during normal
business hours of the recipient, or if not, then on the next
business day; (iii) five days after having been sent by
registered or certified mail, return receipt requested, postage
prepaid; or (iv) one day after deposit with a nationally
recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications must be sent
to the Company and Purchasers at the address as set forth on the
signature page of this Agreement or at such other address as the
Company or Purchasers may designate by 10 days advance notice to
the other parties to this Agreement in accordance with the notice
provisions in this Section.
6.9 Expenses. Each party shall pay its own costs, fees and expenses
with respect to the negotiation, execution, delivery and
performance of this Agreement.
6.10 Attorneys' Fees. If any dispute among the parties to this
Agreement results in litigation, the prevailing party in such
dispute is entitled to recover from the losing party all fees,
costs and expenses of enforcing any right of such prevailing
party under or with respect to this Agreement, including without
limitation, such reasonable fees and expenses of attorneys and
accountants, which shall include, without limitation, all fees,
costs and expenses of appeals.
6.11 Titles and Subtitles. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
6.12 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of
which together shall constitute one instrument.
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<PAGE> 9
6.13 Broker's Fees. The Company has paid a finder's fee to Duff &
Phelps in connection with the transactions contemplated by this
Agreement. Purchasers represent and warrant that no agent,
broker, investment banker, person or firm acting on behalf of or
under the authority of such party is or will be entitled to any
broker's or finder's fee from the Company or any other commission
directly or indirectly from the Company in connection with the
transactions contemplated in this Agreement.
6.14 Attachments. The Exhibits and Schedules which are attached to
this Agreement are incorporated herein by this reference as if
fully set forth herein.
6.15 Facsimiles. This Agreement may be executed by manual or facsimile
signatures.
The Company and Purchasers have executed this Agreement as of the date
set forth in the first paragraph of this Agreement.
COMPANY:
DURASWITCH INDUSTRIES, INC.
333 South Nina Drive
Mesa, Arizona 85210
Fax: 602-844-1199
/S/ R. Terren Dunlap
---------------------------------
R. Terren Dunlap, President
PURCHASERS:
BLACKWATER CAPITAL PARTNERS, L.P.
1800 Glenview Road
Glenview, IL 60025
Fax: 847-729-2296
/s/ Steven R. Green
---------------------------------
Steven R. Green, General Partner
BLACKWATER CAPITAL GROUP, LLC
1800 Glenview Road
Glenview, IL 60025
Fax: 847-729-2296
/s/ Steven R. Green
---------------------------------
Steven R. Green, General Partner
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<PAGE> 1
EXHIBIT 10.10
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement"), which shall be
effective as of June 30, 1998, is by and between DuraSwitch Industries, Inc., a
Nevada Corporation (the "Company") and Blackwater Capital Group, L.L.C., a
Delaware limited liability company ("Holder").
R E C I T A L S
A. The Company and Holder are parties to a Stock and Warrant Purchase
Agreement (the "Stock Purchase Agreement") and a Warrant No. W98-001(
the "Warrant Agreement"), each of which are dated of even date herewith.
B. Pursuant to the Warrant Agreement, Holder is acquiring the right to
purchase 535,830 shares of the Company's Common Stock (the "Shares").
C. The Shares initially will not be registered under the Securities Act of
1933, as amended, or under the securities laws of any state, in reliance
upon exemptions from registration thereunder.
A G R E E M E N T
In consideration of the mutual covenants and obligations set forth in
this Agreement, the Company and Holder, hereby agree as follows:
1. Definitions. As used in this Agreement, the terms listed in this
Section have the meanings set forth below:
(a) "Affiliate" of any Person means any other Person who either
directly or indirectly is in control of, is controlled by or is
under common control with such Person; provided that for purposes
of this definition an investment entity shall be deemed to be
controlled by its investment manager, investment advisor or
general partner.
(b) "Business Day" means any Monday, Tuesday, Wednesday, Thursday or
Friday that is not a day on which banking institutions in the
City of Phoenix are authorized by law, regulation or executive
order to close.
(c) "Exchange Act" means the Securities Exchange Act of 1934, as
amended (or any similar successor federal statute), and the rules
and regulations thereunder, as the same are effect from time to
time.
(d) "Holder" means Holder and its successors, assigns and transferees
(subject to Section 10 of this Agreement). For purposes of this
Agreement, the Company may deem the registered holder of a
Registrable Security as the Holder of it (subject to Section 10).
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(e) "Person" means an individual, partnership, corporation, limited
liability company, joint venture, trust or unincorporated
organization, a government or agency or political subdivision
thereof or any other entity.
(f) "Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by a prospectus supplement
with respect to the terms of the offering of any portion of the
Registrable Securities covered by such Registration Statement and
by all other amendments and supplements to the prospectus,
including post-effective amendments, and all material
incorporated by reference in such prospectus.
(g) "Registrable Securities" means (i) all shares of the Company's
Common Stock issued or issuable to Holder pursuant to the Stock
Purchase Agreement as further described in Recital Section B; and
(ii) any other securities issued as a result of or in connection
with any stock dividend, stock split or reverse stock split,
combination, recapitalization, reclassification, merger or
consolidation, exchange or distribution in respect of the shares
of Common Stock referred in to (i) above.
(h) "Registration Expenses" shall have the meaning set forth in
Section 5.
(i) "Registration Statement" means any registration statement which
covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus included
therein, all amendments and supplements to such Registration
Statement including post effective amendments, all exhibits and
all material incorporated by reference in such Registration
Statement.
(j) "Registration Termination Date" means the date that is five years
following the date hereof.
(k) "SEC" means the U.S. Securities and Exchange Commission, or any
other U.S. federal agency at the time administering the
Securities Act.
(l) "Securities Act" means the Securities Act of 1933, as amended (or
any similar successor federal statute), and the rules and
regulations thereunder, as the same are in effect from time to
time.
(m) "Underwritten Offering" means an offering that is registered
under the Securities Act in which securities of the Company are
sold pursuant to a firm commitment underwriting, to an
underwriter at a fixed price for reoffering to the public or
pursuant to agency or best efforts arrangements with an
underwriter.
2. Securities Subject to this Agreement. The Registrable Securities are
entitled to the benefits of this Agreement.
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3. Registration.
(a) Piggyback Registration. If the Company at any time proposes to
file a registration statement with respect to any class of
equity securities, whether for its own account (other than a
registration statement on Form S-4 or S-8, or any successor or
substantially similar form or a registration statement covering
(i) an employee stock option, stock purchase or compensation
plan or securities issued or issuable pursuant to any such plan
or (ii) a dividend reinvestment plan) or for the account of a
holder of securities of the Company pursuant to registration
rights granted by the Company (a "Requesting Securityholder"),
then the Company shall in each case give written notice of such
proposed filing to Holder at least 20 Business Days before the
anticipated filing date of any such registration statement by
the Company, and such notice shall offer to Holder the
opportunity to have any or all of the Registrable Securities
held by Holder included in such registration statement. If
Holder desires to have the Registrable Securities registered
under this Section 3, Holder must so advise the Company in
writing within 10 Business Days after the date of receipt of
such notice (which request shall set forth the amount of
Registrable Securities for which registration is requested), and
the Company shall include in such Registration Statement all the
Registrable Securities so requested to be included therein;
provided, however, that if such Registration Statement is for an
Underwritten Offering, Holder shall join in the underwriting on
the same terms and conditions as the Company or the Requesting
Securityholders and shall execute any underwriting agreement,
"lock-up" letters or other customary agreements or documents
executed by the Company or the Requesting Securityholders in
connection therewith, except Holder shall not be required to
give any representations and warranties relating to the Company.
Company shall pay all Registration Expenses with respect to any
registration pursuant to this Section 3(a).
(b) Demand Registration. (i) Upon the written request of Holder, and
provided that there is then no Registration Statement in effect
with respect to the Registrable Securities, the Company will
effect, in accordance with the terms of this Agreement, the
registration under the Securities Act of the Registrable
Securities held by Holder which the Company has been so
requested to register by Holder, subject to Section 3(c);
provided that the number of securities requested to be so
registered shall be not less than 50% of the Registrable
Securities held by Holder. Holder cannot request such
registration earlier than one year after the date of this
Agreement. In addition, Holder cannot request such registration
during the 90-day period following the completion of any
Underwritten Offering. The Company shall not be obligated to
effect more than two demand registrations pursuant to this
Section 3(b), provided that the Company shall not be required to
effect more than one registration on a form other than S-3 (or
any successor to such form). Holder shall pay all Registration
Expenses with respect to any registration pursuant to this
Section 3(b).
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(c) No Obligation. Neither the giving of notice by the Company nor
any request by Holder to register Registrable Securities pursuant
to Section 3(a) shall in any way obligate the Company to file any
such Registration Statement. The Company may, at any time prior
to the effective date thereof, determine not to offer the
securities to which Registration Statement relates and/or
withdraw the Registration Statement from the SEC, without
liability of the Company to the Holders.
4. Registration Procedures and Other Agreements.
(a) General. In connection with the Company's registration
obligations pursuant to Section 3, the Company will:
(i) prepare and file with the SEC a new Registration Statement
or such amendments and post-effective amendments to an
existing Offering Registration Statement as may be
necessary to keep such Registration Statement effective;
provided, however, that no Registration Statement shall be
required to remain in effect after all Registrable
Securities covered by such Registration Statement have
been sold and distributed as contemplated by such
Registration Statement;
(ii) furnish to each selling Holder, without charge, at least
one manually signed or "Edgarized" copy and as many
conformed copies as may reasonable be requested, of the
then effective Registration Statement and any
post-effective amendment thereto, and one copy of all
financial statements and schedules, all documents
incorporated therein by reference and all exhibits thereto
(including those incorporated by reference);
(iii) deliver to each selling Holder, without charge, as many
copies of the then effective Prospectus (including each
prospectus subject to completion) and any amendments or
supplements thereto as such Holder may reasonably request;
and
(iv) cooperate and assist in any filings required to be made
with the National Association of Securities Dealers, Inc.
(b) Each selling Holder must furnish to the Company, upon request, in
writing such information and documents as, in the opinion of
counsel to the Company may be reasonably required to prepare
properly and file such Registration Statement in accordance with
the applicable provisions of the Securities Act.
5. Registration Expenses. "Registration Expenses" include without
limitation all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws (including reasonable fees
and disbursements of one counsel in connection with blue sky
qualifications or registrations (or the obtaining of exemptions
therefrom) of the Registrable Securities, printing expenses (including
expenses of printing Prospectuses), messenger and delivery
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<PAGE> 5
expenses, internal expenses (including all salaries and expenses of its
officers and employees performing legal or accounting duties), fees and
disbursements of its counsel and its independent certified public
accountants (including the expenses of any special audit or "comfort"
letters required by or incident to such performance or compliance),
securities acts liability insurance (if the Company elects to obtain
such insurance), fees and expenses of any special experts retained by
the Company in connection with any registration hereunder and the fees
and expenses of any other Person retained by the Company.
6. Suspension of Sales under Certain Circumstances.
(a) Upon receipt of any notice from the Company that dispositions
under the then current Prospectus must be discontinued and
suspended, each Holder will forthwith discontinue and suspend
disposition of Registrable Securities pursuant to such
Prospectus until (i) the Holders are advised in writing by the
Company that a new Registration Statement covering the offer of
Registrable Securities has become effective under the Securities
Act, or (ii) the Holders receive copies of a supplemented or
amended Prospectus contemplated by Section 4(a) hereof, or (iii)
the Holders are advised in writing by the Company that the use
of the Prospectus may be resumed.
(b) If at any time following the date hereof any of the Company's
shares of Common Stock are to be sold pursuant to an Underwritten
Offering, then for the period commencing 45 days prior to, and
expiring 180 days after, the effective date of such Underwritten
Offering, none of the Holders will effect any public sale or
distribution of any Registrable Securities or any other shares of
Common Stock of the Company then owned by such Holders, other
than pursuant to such Underwritten Offering (if any Registrable
Securities are included in such Underwritten Offering).
7. Indemnification.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless, to the full extent permitted by law, but
without duplication, each Holder of Registrable Securities, any
their respective officers and directors, if any, and each Person
who controls such Holder within the meaning of the Securities
Act, against all losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation and
reasonable legal fees and expenses) resulting from any untrue
statement of a material fact in, or any omission of a material
fact required to be stated in, any Registration Statement or in
any preliminary or final Prospectus, or any amendment or
supplement thereto, or necessary to make the statements therein
(in the case of a Prospectus in light of the circumstances under
which they were made) not misleading, except insofar as the same
are caused by or contained in any information furnished in
writing to the Company by any Holder or any underwriter
expressly for use therein; provided that the Company will not be
liable pursuant to this Section 7(a) if such losses, claims,
damages, liabilities or expenses have been caused by the failure
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<PAGE> 6
of any selling Holder to deliver a copy of the Registration
Statement or Prospectus, or any amendments or supplements
thereto, after the Company has furnished such copies to such
Holder.
(b) Indemnification by the Holders of Registrable Securities. In
connection with any Registration Statement covering Registrable
Securities of any Holder, such Holder will furnish to the
Company in writing such information as the Company reasonably
requests for use in connection with any such Registration
Statement or Prospectus and agrees to indemnify and hold
harmless, to the full extent permitted by law, but without
duplication, the Company, its officers, directors, shareholders,
employees, advisors and agents, and each Person who controls the
Company (within the meaning of the Securities Act), against any
losses, claims, damages, liabilities and expenses resulting from
any untrue statement of a material fact in, or any omission of a
material fact required to be stated in, the Registration
Statement or in any preliminary or final Prospectus, or any
amendment or supplement thereto, or necessary to make the
statements therein (in the case of a Prospectus in light of the
circumstances under which they were made) not misleading, but
only to the extent that such untrue statement or omission is
contained in any information so furnished in writing by such
Holder to the Company specifically for inclusion therein. If the
offering to which the Registration Statement relates is an
Underwritten Offering, each Holder agrees to enter into an
underwriting agreement in customary form with such underwriters
and to indemnify such underwriters, their officers and
directors, if any, and each Person who controls such
underwriters within the meaning of the Securities Act to the
same extent as hereinabove provided with respect to
indemnification by such Holder of the Company.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the
indemnifying party of any claim with respect to which it seeks
indemnification, and (ii) permit such indemnifying party to
assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that
any Person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in, but not
control, the defense of such claim, but the fees and expenses of
such counsel shall be at the expense of such indemnified Person,
unless (A) the indemnifying party shall have failed to assume
the defense of such claim and employ counsel reasonably,
satisfactory to the indemnified party in a timely manner, or (B)
in the reasonable judgment of any such Person, based upon
written advice of its counsel, a conflict of interest may exist
between such Person and the indemnifying party with respect to
such claims (in which case, if the Person notifies the
indemnifying party in writing, that such Person elects to employ
separate counsel at the expense of the indemnifying party, the
indemnifying party shall not have the right to assume the
defense of any such claim as to which such conflict of interest
may exist). The indemnifying party will not be subject to any
liability for any settlement made without its consent. No
indemnified party will be required to consent to the entry of
any judgment or enter
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<PAGE> 7
into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of
such claim or litigation. An indemnifying party who is not
entitled to, or elects not to, assume the defense of the claim
will not be obligated to pay the fees and expenses of more than
one counsel for all parties indemnified by such indemnifying
party with respect to such claim, as well as one local counsel
in each relevant jurisdiction.
(d) Contribution. If for any reason the indemnification provided for
in Section 7(a) or 7(b) hereof is unavailable to an indemnified
party or insufficient to hold it harmless as contemplated by
Sections 7(a) and 7(b) hereof, then the indemnifying party shall
contribute to the amount paid or payable by the indemnified
party as a result of such loss, claim, damage, liability or
expense in such proportion as is appropriate to reflect not only
the relative benefits received by the indemnifying party and the
indemnified party, but also the relative fault of the
indemnifying party and the indemnified party, as well as any
other relevant equitable considerations. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11
(f) of the Securities Act) shall be entitled to contribution
from any Person who was not guilty of such fraudulent
misrepresentations.
8. Current Public Information. The Company agrees that it will file all
reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder
(or, if it ceases to be required to file such reports, it will, upon the
request of Holders owning not less than 51% of the Registrable
Securities [excluding any Registrable Securities that have previously
been sold pursuant to a Registration Statement hereunder or Rule 144
under the Securities Act], make publicly available other information),
and it will take such further action as may reasonably be required, in
each case to the extent required from time to time to enable the Holders
to sell Registrable Securities without registration under the Securities
Act within the limitations of the applicable exemptions provided by (x)
Rule 144 under the Securities Act, as such Rule may be amended from time
to time, or (y) any similar regulation hereinafter adopted by the SEC.
9. No Inconsistent Agreements. The Company has not previously entered into
and shall not in the future enter into any agreement, arrangement or
understanding with respect to its securities which is inconsistent with
the rights granted to the Holders in this Agreement.
10. Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, without the written consent
of (a) the Company and (b) the Holders owning not less than 51% of the
Registrable Securities (excluding any Registrable Securities that have
previously been sold pursuant to a Registration Statement hereunder or
Rule 144 under the Securities Act).
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11. Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered
first-class mail, confirmed facsimile with copy by first-class mail, or
air-courier guaranteeing overnight delivery:
(a) If to a Holder of Registrable Securities, at the most current
address for such Holder, as it appears on the books of the
Company; and
(b) If to the Company: DuraSwitch Industries, 333 South Nina Drive,
Mesa, Arizona 85210, Attention: President; fax (602) 844-1199, or
at such other address as may be designated from time to time by
notice given in accordance with the provisions of this Section
11.
All such notices and other communications shall be deemed to have been
delivered and received (i) in the case of personal delivery or
facsimile, on the date of such delivery, (ii) in the case of overnight
courier, on the Business Day after the date when sent, and (iii) in the
case of mailing, on the fifth Business Day following such mailing.
12. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the successors, transferees and assigns of the parties
hereto; provided, however, that (a) no transferee in any transfer made
in reliance on Rule 144 under the Securities Act shall have any rights
as a Holder under this Agreement; and (b) no Person to whom the
Registrable Securities are transferred shall have any rights under this
Agreement as a Holder unless such Person agrees to be bound by the terms
and conditions of this Agreement.
13. Headings. The headings in this Agreement are inserted for convenience
only and shall not constitute a part hereof.
14. Governing Law; Consent to Jurisdiction. This Agreement shall be governed
by and construed and enforced in accordance with the internal laws of
the State of Arizona without reference to principles of conflict of
laws. The parties to this Agreement hereby consent to the jurisdiction
in personam of the Superior Court of the State of Arizona, in and for
the County of Maricopa or of the United States District Court for the
District of Arizona, in any legal proceeding to enforce any obligations
under this Agreement, and agree that venue in Maricopa County is not
inconvenient.
15. Construction. The Section headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement. All terms used in one number or gender
shall be construed to include any other number or gender as the context
may require. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed to be followed by the
words "without limitation."
16. Entire Agreement. This Agreement, together with any other documents and
certificates delivered hereunder, the Stock Purchase Agreement and the
Warrant Agreement, state the entire agreement of the Company and Holder
with respect to the subject matter hereof,
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merge all prior negotiations, agreements and understandings, if any, and
state in full all representations, warranties and agreements which have
induced this Agreement.
The Company and Holder have duly executed and delivered this agreement
as of the date first written above.
COMPANY: HOLDER:
DuraSwitch Industries, Inc. Blackwater Capital Group, L.L.C.
333 S. Nina Drive 1800 Glenview Road
Mesa, Arizona 85210 Glenview, Illinois 60025
Fax: 602-844-1199 Fax: 847-729-2296
/s/ R. Terren Dunlap /s/ Steven R. Green
- ----------------------------- ------------------------------
R. Terren Dunlap, President Steven R. Green, Managing Member
9
<PAGE> 1
EXHIBIT 10.11
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement"), which shall be
effective as of June 30, 1998, is by and between DuraSwitch Industries, Inc., a
Nevada Corporation (the "Company") and Blackwater Capital Partners, L.P., a
Delaware Limited Partnership ("Holder").
R E C I T A L S
A. The Company and Holder are parties to a Stock and Warrant Purchase
Agreement (the "Stock Purchase Agreement") and a Warrant No. W98-002
(the "Warrant Agreement"), each of which are dated of even date
herewith.
B. Pursuant to the Warrant Agreement, Holder is acquiring the right to
purchase 535,830 shares of the Company's Common Stock (the "Shares").
C. The Shares initially will not be registered under the Securities Act of
1933, as amended, or under the securities laws of any state, in reliance
upon exemptions from registration thereunder.
A G R E E M E N T
In consideration of the mutual covenants and obligations set forth in
this Agreement, the Company and Holder, hereby agree as follows:
1. Definitions. As used in this Agreement, the terms listed in this
Section have the meanings set forth below:
(a) "Affiliate" of any Person means any other Person who either
directly or indirectly is in control of, is controlled by or is
under common control with such Person; provided that for purposes
of this definition an investment entity shall be deemed to be
controlled by its investment manager, investment advisor or
general partner.
(b) "Business Day" means any Monday, Tuesday, Wednesday, Thursday or
Friday that is not a day on which banking institutions in the
City of Phoenix are authorized by law, regulation or executive
order to close.
(c) "Exchange Act" means the Securities Exchange Act of 1934, as
amended (or any similar successor federal statute), and the rules
and regulations thereunder, as the same are effect from time to
time.
(d) "Holder" means Holder and its successors, assigns and transferees
(subject to Section 10 of this Agreement). For purposes of this
Agreement, the Company may deem the registered holder of a
Registrable Security as the Holder of it (subject to Section 10).
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<PAGE> 2
(e) "Person" means an individual, partnership, corporation, limited
liability company, joint venture, trust or unincorporated
organization, a government or agency or political subdivision
thereof or any other entity.
(f) "Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by a prospectus supplement
with respect to the terms of the offering of any portion of the
Registrable Securities covered by such Registration Statement and
by all other amendments and supplements to the prospectus,
including post-effective amendments, and all material
incorporated by reference in such prospectus.
(g) "Registrable Securities" means (i) all shares of the Company's
Common Stock issued or issuable to Holder pursuant to the Stock
Purchase Agreement as further described in Recital Section B; and
(ii) any other securities issued as a result of or in connection
with any stock dividend, stock split or reverse stock split,
combination, recapitalization, reclassification, merger or
consolidation, exchange or distribution in respect of the shares
of Common Stock referred in to (i) above.
(h) "Registration Expenses" shall have the meaning set forth in
Section 5.
(i) "Registration Statement" means any registration statement which
covers any of the Registrable Securities pursuant to the
provisions of this Agreement, including the Prospectus included
therein, all amendments and supplements to such Registration
Statement including post effective amendments, all exhibits and
all material incorporated by reference in such Registration
Statement.
(j) "Registration Termination Date" means the date that is five years
following the date hereof.
(k) "SEC" means the U.S. Securities and Exchange Commission, or any
other U.S. federal agency at the time administering the
Securities Act.
(l) "Securities Act" means the Securities Act of 1933, as amended (or
any similar successor federal statute), and the rules and
regulations thereunder, as the same are in effect from time to
time.
(m) "Underwritten Offering" means an offering that is registered
under the Securities Act in which securities of the Company are
sold pursuant to a firm commitment underwriting, to an
underwriter at a fixed price for reoffering to the public or
pursuant to agency or best efforts arrangements with an
underwriter.
2. Securities Subject to this Agreement. The Registrable Securities are
entitled to the benefits of this Agreement.
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<PAGE> 3
3. Registration.
(a) Piggyback Registration. If the Company at any time proposes to
file a registration statement with respect to any class of equity
securities, whether for its own account (other than a
registration statement on Form S-4 or S-8, or any successor or
substantially similar form or a registration statement covering
(i) an employee stock option, stock purchase or compensation plan
or securities issued or issuable pursuant to any such plan or
(ii) a dividend reinvestment plan) or for the account of a holder
of securities of the Company pursuant to registration rights
granted by the Company (a "Requesting Securityholder"), then the
Company shall in each case give written notice of such proposed
filing to Holder at least 20 Business Days before the anticipated
filing date of any such registration statement by the Company,
and such notice shall offer to Holder the opportunity to have any
or all of the Registrable Securities held by Holder included in
such registration statement. If Holder desires to have the
Registrable Securities registered under this Section 3, Holder
must so advise the Company in writing within 10 Business Days
after the date of receipt of such notice (which request shall set
forth the amount of Registrable Securities for which registration
is requested), and the Company shall include in such Registration
Statement all the Registrable Securities so requested to be
included therein; provided, however, that if such Registration
Statement is for an Underwritten Offering, Holder shall join in
the underwriting on the same terms and conditions as the Company
or the Requesting Securityholders and shall execute any
underwriting agreement, "lock-up" letters or other customary
agreements or documents executed by the Company or the Requesting
Securityholders in connection therewith, except Holder shall not
be required to give any representations and warranties relating
to the Company. Company shall pay all Registration Expenses with
respect to any registration pursuant to this Section 3(a).
(b) Demand Registration. (i) Upon the written request of Holder, and
provided that there is then no Registration Statement in effect
with respect to the Registrable Securities, the Company will
effect, in accordance with the terms of this Agreement, the
registration under the Securities Act of the Registrable
Securities held by Holder which the Company has been so requested
to register by Holder, subject to Section 3(c); provided that the
number of securities requested to be so registered shall be not
less than 50% of the Registrable Securities held by Holder.
Holder cannot request such registration earlier than one year
after the date of this Agreement. In addition, Holder cannot
request such registration during the 90-day period following the
completion of any Underwritten Offering. The Company shall not be
obligated to effect more than two demand registrations pursuant
to this Section 3(b), provided that the Company shall not be
required to effect more than one registration on a form other
than S-3 (or any successor to such form). Holder shall pay all
Registration Expenses with respect to any registration pursuant
to this Section 3(b).
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<PAGE> 4
(c) No Obligation. Neither the giving of notice by the Company nor
any request by Holder to register Registrable Securities pursuant
to Section 3(a) shall in any way obligate the Company to file any
such Registration Statement. The Company may, at any time prior
to the effective date thereof, determine not to offer the
securities to which Registration Statement relates and/or
withdraw the Registration Statement from the SEC, without
liability of the Company to the Holders.
4. Registration Procedures and Other Agreements.
(a) General. In connection with the Company's registration
obligations pursuant to Section 3, the Company will:
(i) prepare and file with the SEC a new Registration Statement
or such amendments and post-effective amendments to an
existing Offering Registration Statement as may be
necessary to keep such Registration Statement effective;
provided, however, that no Registration Statement shall be
required to remain in effect after all Registrable
Securities covered by such Registration Statement have
been sold and distributed as contemplated by such
Registration Statement;
(ii) furnish to each selling Holder, without charge, at least
one manually signed or "Edgarized" copy and as many
conformed copies as may reasonable be requested, of the
then effective Registration Statement and any
post-effective amendment thereto, and one copy of all
financial statements and schedules, all documents
incorporated therein by reference and all exhibits thereto
(including those incorporated by reference);
(iii) deliver to each selling Holder, without charge, as many
copies of the then effective Prospectus (including each
prospectus subject to completion) and any amendments or
supplements thereto as such Holder may reasonably request;
and
(iv) cooperate and assist in any filings required to be made
with the National Association of Securities Dealers, Inc.
(b) Each selling Holder must furnish to the Company, upon request, in
writing such information and documents as, in the opinion of
counsel to the Company may be reasonably required to prepare
properly and file such Registration Statement in accordance with
the applicable provisions of the Securities Act.
5. Registration Expenses. "Registration Expenses" include without
limitation all registration and filing fees, fees and expenses of
compliance with securities or blue sky laws (including reasonable fees
and disbursements of one counsel in connection with blue sky
qualifications or registrations (or the obtaining of exemptions
therefrom) of the Registrable Securities, printing expenses (including
expenses of printing Prospectuses), messenger and delivery
4
<PAGE> 5
expenses, internal expenses (including all salaries and expenses of its
officers and employees performing legal or accounting duties), fees and
disbursements of its counsel and its independent certified public
accountants (including the expenses of any special audit or "comfort"
letters required by or incident to such performance or compliance),
securities acts liability insurance (if the Company elects to obtain
such insurance), fees and expenses of any special experts retained by
the Company in connection with any registration hereunder and the fees
and expenses of any other Person retained by the Company.
6. Suspension of Sales under Certain Circumstances.
(a) Upon receipt of any notice from the Company that dispositions
under the then current Prospectus must be discontinued and
suspended, each Holder will forthwith discontinue and suspend
disposition of Registrable Securities pursuant to such Prospectus
until (i) the Holders are advised in writing by the Company that
a new Registration Statement covering the offer of Registrable
Securities has become effective under the Securities Act, or (ii)
the Holders receive copies of a supplemented or amended
Prospectus contemplated by Section 4(a) hereof, or (iii) the
Holders are advised in writing by the Company that the use of the
Prospectus may be resumed.
(b) If at any time following the date hereof any of the Company's
shares of Common Stock are to be sold pursuant to an Underwritten
Offering, then for the period commencing 45 days prior to, and
expiring 180 days after, the effective date of such Underwritten
Offering, none of the Holders will effect any public sale or
distribution of any Registrable Securities or any other shares of
Common Stock of the Company then owned by such Holders, other
than pursuant to such Underwritten Offering (if any Registrable
Securities are included in such Underwritten Offering).
7. Indemnification.
(a) Indemnification by the Company. The Company agrees to indemnify
and hold harmless, to the full extent permitted by law, but
without duplication, each Holder of Registrable Securities, any
their respective officers and directors, if any, and each Person
who controls such Holder within the meaning of the Securities
Act, against all losses, claims, damages, liabilities and
expenses (including reasonable costs of investigation and
reasonable legal fees and expenses) resulting from any untrue
statement of a material fact in, or any omission of a material
fact required to be stated in, any Registration Statement or in
any preliminary or final Prospectus, or any amendment or
supplement thereto, or necessary to make the statements therein
(in the case of a Prospectus in light of the circumstances under
which they were made) not misleading, except insofar as the same
are caused by or contained in any information furnished in
writing to the Company by any Holder or any underwriter expressly
for use therein; provided that the Company will not be liable
pursuant to this Section 7(a) if such losses, claims, damages,
liabilities or expenses have been caused by the failure
5
<PAGE> 6
of any selling Holder to deliver a copy of the Registration
Statement or Prospectus, or any amendments or supplements
thereto, after the Company has furnished such copies to such
Holder.
(b) Indemnification by the Holders of Registrable Securities. In
connection with any Registration Statement covering Registrable
Securities of any Holder, such Holder will furnish to the Company
in writing such information as the Company reasonably requests
for use in connection with any such Registration Statement or
Prospectus and agrees to indemnify and hold harmless, to the full
extent permitted by law, but without duplication, the Company,
its officers, directors, shareholders, employees, advisors and
agents, and each Person who controls the Company (within the
meaning of the Securities Act), against any losses, claims,
damages, liabilities and expenses resulting from any untrue
statement of a material fact in, or any omission of a material
fact required to be stated in, the Registration Statement or in
any preliminary or final Prospectus, or any amendment or
supplement thereto, or necessary to make the statements therein
(in the case of a Prospectus in light of the circumstances under
which they were made) not misleading, but only to the extent that
such untrue statement or omission is contained in any information
so furnished in writing by such Holder to the Company
specifically for inclusion therein. If the offering to which the
Registration Statement relates is an Underwritten Offering, each
Holder agrees to enter into an underwriting agreement in
customary form with such underwriters and to indemnify such
underwriters, their officers and directors, if any, and each
Person who controls such underwriters within the meaning of the
Securities Act to the same extent as hereinabove provided with
respect to indemnification by such Holder of the Company.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
indemnification hereunder will (i) give prompt notice to the
indemnifying party of any claim with respect to which it seeks
indemnification, and (ii) permit such indemnifying party to
assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party; provided, however, that
any Person entitled to indemnification hereunder shall have the
right to employ separate counsel and to participate in, but not
control, the defense of such claim, but the fees and expenses of
such counsel shall be at the expense of such indemnified Person,
unless (A) the indemnifying party shall have failed to assume the
defense of such claim and employ counsel reasonably, satisfactory
to the indemnified party in a timely manner, or (B) in the
reasonable judgment of any such Person, based upon written advice
of its counsel, a conflict of interest may exist between such
Person and the indemnifying party with respect to such claims (in
which case, if the Person notifies the indemnifying party in
writing, that such Person elects to employ separate counsel at
the expense of the indemnifying party, the indemnifying party
shall not have the right to assume the defense of any such claim
as to which such conflict of interest may exist). The
indemnifying party will not be subject to any liability for any
settlement made without its consent. No indemnified party will be
required to consent to the entry of any judgment or enter
6
<PAGE> 7
into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect of
such claim or litigation. An indemnifying party who is not
entitled to, or elects not to, assume the defense of the claim
will not be obligated to pay the fees and expenses of more than
one counsel for all parties indemnified by such indemnifying
party with respect to such claim, as well as one local counsel in
each relevant jurisdiction.
(d) Contribution. If for any reason the indemnification provided for
in Section 7(a) or 7(b) hereof is unavailable to an indemnified
party or insufficient to hold it harmless as contemplated by
Sections 7(a) and 7(b) hereof, then the indemnifying party shall
contribute to the amount paid or payable by the indemnified party
as a result of such loss, claim, damage, liability or expense in
such proportion as is appropriate to reflect not only the
relative benefits received by the indemnifying party and the
indemnified party, but also the relative fault of the
indemnifying party and the indemnified party, as well as any
other relevant equitable considerations. No Person guilty of
fraudulent misrepresentation (within the meaning of Section 11
(f) of the Securities Act) shall be entitled to contribution from
any Person who was not guilty of such fraudulent
misrepresentations.
8. Current Public Information. The Company agrees that it will file all
reports required to be filed by it under the Securities Act and the
Exchange Act and the rules and regulations adopted by the SEC thereunder
(or, if it ceases to be required to file such reports, it will, upon the
request of Holders owning not less than 51% of the Registrable
Securities [excluding any Registrable Securities that have previously
been sold pursuant to a Registration Statement hereunder or Rule 144
under the Securities Act], make publicly available other information),
and it will take such further action as may reasonably be required, in
each case to the extent required from time to time to enable the Holders
to sell Registrable Securities without registration under the Securities
Act within the limitations of the applicable exemptions provided by (x)
Rule 144 under the Securities Act, as such Rule may be amended from time
to time, or (y) any similar regulation hereinafter adopted by the SEC.
9. No Inconsistent Agreements. The Company has not previously entered into
and shall not in the future enter into any agreement, arrangement or
understanding with respect to its securities which is inconsistent with
the rights granted to the Holders in this Agreement.
10. Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures
from the provisions hereof may not be given, without the written consent
of (a) the Company and (b) the Holders owning not less than 51% of the
Registrable Securities (excluding any Registrable Securities that have
previously been sold pursuant to a Registration Statement hereunder or
Rule 144 under the Securities Act).
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<PAGE> 8
11. Notices. All notices and other communications provided for or permitted
hereunder shall be made in writing by hand-delivery, registered
first-class mail, confirmed facsimile with copy by first-class mail, or
air-courier guaranteeing overnight delivery:
(a) If to a Holder of Registrable Securities, at the most current
address for such Holder, as it appears on the books of the
Company; and
(b) If to the Company: DuraSwitch Industries, 333 South Nina Drive,
Mesa, Arizona 85210, Attention: President; fax (602) 844-1199, or
at such other address as may be designated from time to time by
notice given in accordance with the provisions of this Section
11.
All such notices and other communications shall be deemed to have been
delivered and received (i) in the case of personal delivery or
facsimile, on the date of such delivery, (ii) in the case of overnight
courier, on the Business Day after the date when sent, and (iii) in the
case of mailing, on the fifth Business Day following such mailing.
12. Successors and Assigns. This Agreement shall inure to the benefit of and
be binding upon the successors, transferees and assigns of the parties
hereto; provided, however, that (a) no transferee in any transfer made
in reliance on Rule 144 under the Securities Act shall have any rights
as a Holder under this Agreement; and (b) no Person to whom the
Registrable Securities are transferred shall have any rights under this
Agreement as a Holder unless such Person agrees to be bound by the terms
and conditions of this Agreement.
13. Headings. The headings in this Agreement are inserted for convenience
only and shall not constitute a part hereof.
14. Governing Law; Consent to Jurisdiction. This Agreement shall be governed
by and construed and enforced in accordance with the internal laws of
the State of Arizona without reference to principles of conflict of
laws. The parties to this Agreement hereby consent to the jurisdiction
in personam of the Superior Court of the State of Arizona, in and for
the County of Maricopa or of the United States District Court for the
District of Arizona, in any legal proceeding to enforce any obligations
under this Agreement, and agree that venue in Maricopa County is not
inconvenient.
15. Construction. The Section headings contained in this Agreement are for
reference purposes only and will not affect in any way the meaning or
interpretation of this Agreement. All terms used in one number or gender
shall be construed to include any other number or gender as the context
may require. Whenever the words "include," "includes," or "including"
are used in this Agreement, they shall be deemed to be followed by the
words "without limitation."
16. Entire Agreement. This Agreement, together with any other documents and
certificates delivered hereunder, the Stock Purchase Agreement and the
Warrant Agreement, state the entire agreement of the Company and Holder
with respect to the subject matter hereof,
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<PAGE> 9
merge all prior negotiations, agreements and understandings, if any, and
state in full all representations, warranties and agreements which have
induced this Agreement.
The Company and Holder have duly executed and delivered this agreement
as of the date first written above.
COMPANY: HOLDER:
DuraSwitch Industries, Inc. Blackwater Capital Partners, L.P.
333 S. Nina Drive 1800 Glenview Road
Mesa, Arizona 85210 Glenview, Illinois 60025
Fax: 602-844-1199 Fax: 847-729-2296
/s/ R. Terren Dunlap /s/ Steven R. Green
- ----------------------------- -----------------------------------
R. Terren Dunlap, President Steven R. Green, Managing Partner
9
<PAGE> 1
EXHIBIT 10.12
Amendment of May 14, 1998 Agreement between
DuraSwitch Industries, Inc. and Duff & Phelps Securities, LLC
July 14, 1998
We are pleased to confirm our mutual understanding regarding both the extension
of the term of retention of D&P Securities, LLC by DuraSwitch Industries from
May 14, 1999 to May 14, 2000, and the modification of the retainer portion of
the agreement.
It is hereby agreed that the first sentence of paragraph 5 of the agreement is
hereby amended to read in its entirety:
"As compensation for the services to be rendered by D&P hereunder, the
Company shall pay D&P a fee of $24,000.00 ($4,000.00 already having
been paid) and the remaining $20,000.00 shall be payable upon the
execution of this letter"
It is hereby agreed that the following clause of the sentence from paragraph
5.D.1. be stricken:
"and the extension of this contract for 6 months."
It is hereby agreed that the first sentence of paragraph 16 of the agreement is
hereby amended to read in its entirety:
"The term of D&P's engagement hereunder shall continue until May 14,
2000."
All other terms of the agreement shall remain in full force and effect.
Accepted and Agreed:
Duff & Phelps Securities, LLC DuraSwitch Industries, Inc.
/s/ Kevin K. Kauper 7/14/98 /s/ Terry Dunlap 7/14/98
- ------------------------------- -------------------------------
Kevin K. Kauper Date Terry Dunlap Date
<PAGE> 2
[DUFF & PHELPS SECURITIES LETTERHEAD]
May 5, 1998
Mr. Terry Dunlap
DuraSwitch Industries, Inc.
333 S. Nina Drive
Mesa, Arizona 85210
Dear Mr. Dunlap,
We are pleased to confirm our mutual understanding regarding the retention of
Duff & Phelps Securities, LLC ("D&P") by DuraSwitch Industries, Inc.
("DuraSwitch" or the "Company").
Recitals and Statement of Purpose:
DuraSwitch Industries, Inc.
- ---------------------------
DuraSwitch, a development stage company, is introducing its patented switch
technology through in-house sales and national representative organizations.
DuraSwitch, an OTC non-reporting company has recently acquired two
manufacturing companies, Aztec & Camplex. Due to current negative operating
cash flow, the company seeks immediate bridge equity financing of $600,000.00
to $1,000,000.00. Additionally, the Company seeks approximately $5,000,000.00
to $7,000,000.00 of mezzanine financing to execute its acquisition and
expansion plans. The Company intends to continue its strategic partnership and
merger & acquisition strategies. The Company desires the services and expertise
of Duff & Phelps Securities to find the necessary capital; to assist, advise and
plan a strategic financial and acquisition strategy; to assist and advise in
negotiations with potential strategic partners/investors and merger/acquisition
opportunities; and to obtain the funds to fulfill the financial plan for the
growth of DuraSwitch with a goal to reach $100,000,000.00 in sales within five
years.
Duff & Phelps Securities, LLC
- -----------------------------
Duff & Phelps Securities, LLC is an investment banking firm which provides
financial advice, opinions and valuations for strategic decisions; represents
sellers and buyers of middle market companies; raises equity and mezzanine
capital through private placements for middle market and emerging companies;
and provides advisory services for public offerings.
<PAGE> 3
DuraSwitch Industries, Inc.
5/7/98
Page 2
1. The Company hereby retains D&P as its exclusive financial advisor during the
term of this agreement (the "Agreement") in connection with any of the
following transactions: merger with another entity; acquisition of another
entity; sale of all or part of its material assets to another entity; a
private placement of securities of the Company, collectively referred to as
the Transaction(s) (the "Transaction(s)"). D&P hereby accepts such
engagement on a "best efforts" basis. The Company has not granted any other
person the right to act as a financial advisor, placement agent or
underwriter in connection with the Transactions. Until the termination of
this Agreement, the Company will not solicit or negotiate with any other
financial advisor, placement agent or underwriter in connection with the
Transactions. This Agreement does not constitute a commitment or undertaking
on the part of D&P to purchase any of the Company's securities, and D&P
shall have no authority to bind the Company.
2. The Transactions will be made by means of an offering informational
memorandum (the "Memorandum") describing the Company and any securities
offered by the Company, to be prepared and approved by the Company, with the
assistance of D&P. The Company will also be responsible for updating and
supplementing the Memorandum prior to closing to reflect developments
affecting the Company. All other documents and materials to be used for
circulation to investors (collectively, "Investor Materials") in connection
with the Transactions will be provided by the Company to D&P in advance, and
no such documents or materials will be provided to investors without D&P's
and the Company's prior approval. The Memorandum and all Investor Materials
shall be the responsibility of the Company. To the extent the Transaction
involves the sale of securities, the Memorandum will include all information
to be provided to investors under Regulation D under the Securities Act of
1933, as amended (the "Securities Act"). The Company represents and warrants
that neither the Memorandum nor any of the Investor Materials shall contain
an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
3. To the extent the Transaction involves the sale of securities, each of the
Company and D&P agrees to conduct the Transactions in a manner intended to
qualify for the exemption from the registration requirements of the
Securities Act provided by Section 4(2) thereof and Regulation D thereunder.
To the extent the Transaction involves the sale of securities, each of the
Company and D&P agrees to limit offers to sell, and solicitations of offers
to buy, securities of the Company in connection with the Transactions to
persons reasonably believed by it to be "accredited investors" within the
meaning of Rule 501(a) under the Securities Act. Each of the Company and D&P
agrees that it will not engage in any form of general solicitation or
general advertising in connection with the Transactions within the meaning
of Rule 502 under the Securities Act. Each of the Company and D&P agrees to
conduct the Transactions in a manner intended to comply with the
registration or qualification requirements, or available exemptions
therefrom, under applicable state "blue sky" laws and applicable securities
laws of other jurisdictions; the Company shall be responsible for compliance
with the filing requirements of the securities laws of states and other
jurisdictions. The Company will not, for a period of six months following
the final closing date of the Transactions,
<PAGE> 4
DuraSwitch Industries, Inc.
5/7/98
Page 3
offer for sale or sell any securities unless, in the opinion of the
Company's legal counsel, concurred in by D&P's legal counsel, such offer or
sale does not jeopardize the availability of exemptions from the
registration and qualification requirements under applicable federal
securities laws, state "blue sky" laws or the securities laws of any other
jurisdiction with respect to the Transactions. The Company has not engaged
in any such Transactions during the six months prior to the date of this
Agreement.
4. The Company shall make members of management and other employees available
to D&P for purposes of satisfying D&P's due diligence requirements and
consummating the Transactions, and shall commit such time and other
resources as are necessary or appropriate to secure reasonable and timely
success of the Transactions. The Company shall cooperate with D&P in
connection with, and shall make available to D&P, such documents and other
information as D&P shall reasonably request, to satisfy its due diligence
requirements. During the term of this Agreement, the Company shall provide
to D&P monthly balance sheets, income statements, statements of cash flows
and other financial information as soon as available following the closing
of each month and shall otherwise inform D&P of any material events or
developments concerning prospective material events that may come to the
attention of the Company at any point during the term of the engagement.
Following the closing of any Transactions, the Company shall provide to D&P
quarterly updates on its business as well as quarterly balance sheets,
income statements and statements of cash flows as soon as they are
available, and shall in addition provide to D&P all information made
available either to purchasers in the Transactions or to the Company's
stockholders generally. The Company warrants and represents that all
information provided or otherwise made available to D&P by or on behalf of
the Company will be complete and correct in all material respects and will
not contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in light of the circumstances under which they are made. The
Company further warrants and represents that any projections provided by
them to D&P will have been prepared in good faith and will be based upon
assumptions which, in light of the circumstances under which they are made,
are reasonable. The Company acknowledges and agrees that in rendering its
services hereunder D&P will be using and relying on the information provided
by and on behalf of the Company without independent verification thereof by
D&P and without independent appraisal by D&P of any Company assets. D&P
assumes no responsibility for the accuracy or completeness of any
information provided by or on behalf of the Company or any other information
regarding the Company provided or otherwise made available to D&P.
5. As compensation for the services to be rendered by D&P hereunder, the
Company shall pay D&P a monthly retainer of $4,000.00 payable upon the
execution of this Agreement and each monthly anniversary date thereof. Upon
the first and any subsequent closing of the transactions, the Company agrees
to pay D&P fees per the following schedule:
a. Merger - 3% of the Transaction value with minimum fee $300,000.00.
b. Acquisition - 3% of the Transaction value with minimum fee $200,000.00.
c. Sale - 3% of Transaction value with minimum fee $250,000.00.
<PAGE> 5
DuraSwitch Industries, Inc.
5/7/98
Page 4
d. Private Placement of Securities-
1. Initial Equity Placement $600,000.00 to $1,000,000.00 - 8% of the
gross proceeds of such sales, subject to a minimum fee of
$75,000.00, and the extension of this contract for six months.
Additionally, a warrant (see paragraph 6) for 1% of the company
common stock will be granted to D&P.
2. Secondary Placement of Mezzanine Financing $5,000,000.00 to
$6,000,000.00 of - 6% of the gross proceeds of such sales subject
to a minimum fee of $250,000.00, assuming some amount is raised and
a closing has taken place. Additionally, a warrant (see paragraph
6) for 2% of the company common stock will be granted to D&P.
Transaction value will mean the aggregate fair market value of all cash,
securities and other property paid for or to the Company in connection with
a transaction, including all indebtedness of the Company repaid or assumed,
directly or indirectly (by operation of law or otherwise) in connection
with a transaction.
Such fees shall be payable by wire transfer of immediately available funds
at the closing to which such fee relates.
6. Upon the closings of the Transactions, the Company will issue to D&P a
warrant (the "Warrant") with an aggregate value pursuant to the amounts
discussed in paragraph 5. The exercise price per share subject to the
Warrant shall be equivalent to the gross Transaction value per share in the
Transaction. The Warrant shall be exercisable for that number of shares as
is determined by dividing the aggregate value by the exercise price of the
Warrant. The Warrant shall have a term of five years from the date of
issuance, and the Warrant shall not be callable by the Company. The Warrant
will have customary anti-dilution and other provisions.
7. The Company shall reimburse D&P, from time to time upon request, for its
out-of-pocket and incidental expenses, as documented for travel, meals,
lodging, postage, telephone, document reproduction, telecopying and
computer charges and database access fees, and reasonable fees and expenses
of counsel, consultants and advisors retained by D&P, incurred during the
term, and in furtherance, of its engagement hereunder. D&P shall not incur
expenses in excess of $10,000.00 without prior approval from the Company.
D&P shall submit documentation supporting any legal expenses incurred in
connection with the engagement hereby, and the Company shall reimburse D&P
for such expenses. Unless previously reimbursed, all expenses referred to
in this paragraph (7) shall, to the extent practicable, be paid from the
proceeds of the Transactions.
8. In the event that the Company shall enter into any agreement, arrangement
or relationship with any purchaser in the Transactions or otherwise in
connection with the Transactions other than as described in the Memorandum,
D&P shall be paid the fees, the Warrant and expenses described in
paragraphs 6 and 7 based upon the value to the Company of such agreement,
arrangement or relationship. In addition, to the extent that any
prospective purchaser that D&P introduced in the Transactions purchases any
other
<PAGE> 6
DuraSwitch Industries, Inc.
5/7/98
Page 5
securities of the Company within one (1) year following the termination of
our engagement hereunder, then D&P shall be entitled to receive, with
respect to such subsequent purchase, fees, and the Warrant calculated as set
forth in paragraph 6 hereof.
9. The Company will, at each closing of any Transactions involving a sale of
securities, furnish D&P with an opinion of its counsel relating to the
Company and the Transactions in form and substance satisfactory to D&P and
its counsel. In addition, at each closing the Company will provide D&P with
the same certificates of the officers of the Company, comfort letters and
other documents and certificates as are furnished to the purchasers in the
Transactions and such other certification and documents as D&P or its
counsel may reasonably request, in form and substance satisfactory to D&P
and its counsel.
10. Since D&P will be acting on behalf of the Company in connection with its
engagement hereunder, the Company has agreed to indemnify D&P, certain
related entities and their controlling persons, representatives and agents
as set forth in the indemnification agreements attached hereto as Schedule
A, the terms of which are hereby incorporated by reference herein and made a
part hereof.
11. Except as contemplated by the terms hereof or as otherwise may be
necessary for D&P to carry out its obligation hereunder, and except as
required by applicable law, regulations or by a governmental authority or
court of competent jurisdiction, D&P shall keep confidential all material
nonpublic information provided to it by the Company until the earlier to
occur of (i) the date five years from the date of this Agreement, and (ii)
the date such information shall have been made publicly available by the
Company or by others without breach of a confidentiality agreement, and
shall not disclose such information to third parties other than to such of
its employees and advisors as D&P determines have a need to know without the
consent of the Company.
12. Except as may be required by applicable law and regulations or by a
governmental authority or court of competent jurisdiction, the Memorandum
and any advice, other than to investors, to be provided by D&P pursuant to
its engagement hereunder, shall not be disclosed publicly or made available
to third parties by the Company without D&P's prior written consent.
13. The Company agrees that D&P has the right to place advertisements in
financial and other newspapers and journals, at its own expense, describing
its services rendered on behalf of the Company hereunder.
14. The Company represents and warrants to D&P that there are no brokers,
representatives or other persons which have an interest in compensation due
to D&P from any transaction contemplated herein.
15. To the extent the Transaction involves the sale of securities, the
Company agrees that during the term of D&P's engagement hereunder it will
not contact or solicit institutions or other entities other than accredited
investors as potential purchasers of the Securities. If, during the term of
D&P's engagement hereunder, or at any time during the 12-month
<PAGE> 7
DuraSwitch Industries, Inc.
5/7/98
Page 6
period following the effective date of termination of D&P's engagement
hereunder, the Company transfers for Consideration, directly or indirectly,
control of, or a material interest in, the Company or any material portion
of its businesses or assets, including without limitation, via a sale or
exchange of capital stock or assets, a lease of assets with or without a
purchase option, a merger or consolidation, a tender or exchange offer, a
leveraged buyout, the formation of a joint venture, minority investment or
partnership or any similar transaction, or the Company obtains Consideration
or a commitment to obtain Consideration which is payable to the Company
within a three-year period from the date of closing, whether through the
issuance of Securities, granting or contractual rights or otherwise, from a
Strategic Ally, the Company shall pay D&P an amount equal to the amount
specified in paragraph 5 above of such Consideration payable in cash
concurrently with the closing of such transaction. "Consideration" shall
mean the aggregate fair market value of all cash, securities and other
property paid for or to the Company in connection with a transaction,
including all indebtedness of the Company repaid or assumed, directly or
indirectly (by operation of law or otherwise) in connection with a
transaction. To the extent that any such funds are provided in return for
the issuance of Securities of the Company, the fee contemplated by this
paragraph shall supersede the fee contemplated by paragraph 5 hereof.
16. The term of D&P's engagement hereunder shall be twelve (12) months from
the date of this letter. Any party hereto may terminate this Agreement at
any time upon thirty (30) days' prior written notice, without liability or
continuing obligation except as set forth in the remainder of this
paragraph. Neither the termination nor completion of this engagement shall
affect (i) any compensation earned by D&P up to the date of termination or
completion, (ii) any compensation to be earned by D&P after termination
pursuant to paragraph 6 & 7 hereof, (iii) the reimbursement of expenses
incurred by D&P up to the date of termination or completion, or (iv) the
provisions of paragraphs 5 through 15 hereof, inclusive, which provisions
shall survive any termination of this Agreement (including by operation of
the first sentence of this paragraph). Without limiting the foregoing, D&P
shall have the right, in its sole discretion, to terminate this Agreement if
the outcome of its due diligence investigation is not satisfactory to D&P
for any reason.
17. The Company has all requisite corporate power and authority to enter
into this Agreement and the transactions contemplated hereby (including,
without limitation, the Offering). This Agreement has been duly authorized
by all necessary corporate actions on the part of the Company and has been
duly executed and delivered by the Company and constitutes a legal, valid
and binding agreement of the Company, enforceable in accordance with its
terms.
18. This Agreement shall inure to the sole and exclusive benefit of D&P and
the Company and their respective successors and the indemnified parties
hereunder and their respective successors and representatives. The
obligations and liabilities under this Agreement shall be binding upon D&P
and the Company.
<PAGE> 8
DuraSwitch Industries, Inc.
5/7/98
Page 7
19. This Agreement shall be governed by and construed in accordance with the
laws of the State of Illinois applicable to agreements executed and to be
performed entirely within said State.
20. This Agreement may not be amended or modified, nor may any provision be
waived, except in writing signed by both parties.
21. The Company acknowledges and agrees that (i) D&P is being retained solely to
assist the Company in the Transactions, and (ii) D&P is not and shall not be
construed as a fiduciary of the Company and shall have no duties or
liabilities to the equity holders or creditors of the Company or any other
person by virtue of this Agreement and the retention of D&P hereunder, all
of which are hereby expressly waived.
22. This Agreement constitutes the entire Agreement between the parties and
supersedes and cancels any and all prior or contemporaneous arrangements,
understandings and agreements, written or oral, between them relating to the
subject matter hereof.
If the foregoing correctly sets forth our understanding, please sign and return
to us an executed copy of this letter, whereupon this letter shall constitute
a binding agreement as of the date first above written.
Sincerely, Agreed to and Accepted:
Duff & Phelps Securities, LLC DuraSwitch Industries, Inc.: by
By: /s/ Kevin R. Keuper /s/ R. Terry Dunlap
------------------------- ---------------------------
Kevin R. Keuper Terry Dunlap, CEO
President President
Date: 5/14/98 Date: 5/14/98
------------------------- ---------------------------
Attachment: Schedule A
<PAGE> 9
SCHEDULE A
INDEMNIFICATION PROVISIONS
A. Indemnification. To the fullest extent lawful, the Company will
promptly, upon demand, indemnify and hold harmless Duff & Phelps Securities,
LLC and its affiliates (collectively, "D&P"), and each director, officer,
employee, agent, member and controlling person of D&P (any or all of the
foregoing hereinafter referred to as an "Indemnified Person"), from and against
all losses, claims, damages, expenses (including reasonable fees and
disbursements of counsel and accountants), costs (including, without
limitation, expenses, fees and disbursement and time charges related to giving
testimony or furnishing documents in response to a subpoena or otherwise) and
liabilities (joint or several), (collectively, "Losses"), resulting directly or
indirectly from any threatened or pending investigation, action, claim,
proceeding or dispute, including securityholder actions (whether or not D&P or
any other Indemnified Person is a potential or actual named party or witness)
(collectively, a "Claim"), which (1) are related to or arise out of any untrue
statement or alleged untrue statement of a material fact contained in any oral
or written information provided D&P or any other person by the Company or used
by the Company in connection with the transaction contemplated by the
engagement letter or any omission or alleged omission by the Company to state
therein a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, or (2) are
otherwise related to or arise out of D&P's engagement, role, activities or the
performance or non-performance of professional services on the Company's
behalf. The Company will not be responsible, however, for any Losses pursuant
to clause (2) of the preceding sentence which are judicially determined to have
resulted primarily and directly from the willful misconduct or gross negligence
of the party seeking indemnification hereunder; but pending any such judicial
determination, the indemnification and reimbursement obligations of the Company
hereunder shall continue to apply. The Company also agrees that neither D&P nor
any Indemnified Person shall have any liability to the Company, its owners,
parents, creditors or securityholders for or in connection with its engagement,
except such liability for Losses incurred by the Company which are judicially
determined to have resulted primarily and directly from D&P's willful
misconduct or gross negligence. For purposes of the foregoing, "judicially
determined" shall mean determined by a court of competent jurisdiction in a
final non-appealable judgment on the merits.
B. Proceedings. D&P will notify the Company if it learns that any
investigation, lawsuit, administrative proceeding or self-regulatory
organization proceeding has been instituted based, directly or indirectly, on
the transactions which were the subject of D&P's engagement under the
Agreement, although failure to do so will not relieve the Company from any
obligation or liability it has hereunder or otherwise, except to the extent
such failure causes the Company to forfeit substantial rights and defenses.
Should any lawsuit, administrative proceeding or self-regulatory organization
proceeding (collectively, a "Proceeding") be formally instituted against D&P or
any Indemnified Person based, directly or indirectly, on D&P's engagement under
the Agreement, the Company will be entitled to participate therein and, to the
extent that it may wish, to assume the defense of the Proceeding, with counsel
reasonably satisfactory to D&P, so long as the Company continues to pay all
costs and expenses of the defense and preparation for such Proceeding. Even if
the Company assumes the defense of a Proceeding, each Indemnified Person will
have the right to participate in such Proceeding and to retain its own counsel
at such
-1-
<PAGE> 10
Indemnified Person's own expense. Furthermore, each Indemnified Person shall
have the right to employ its own counsel in any Proceeding and to require the
Company to pay all reasonable fees and expenses of such counsel as they are
incurred if, (1) such Indemnified Party has been advised by such counsel that
there may be legal defenses available to it which are different from or
additional to defenses available to the Company (in which case the Company shall
not have the right to assume the defense of the Proceeding on behalf of such
Indemnified Party); (2) the Company shall not have assumed the defense of the
Proceeding and employed counsel reasonably satisfactory to such Indemnified
Party in a timely matter; or (3) the Company shall have authorized the
employment of such counsel in connection with the defense of the Proceeding.
C. Contribution. If any indemnification sought by an Indemnified Person
pursuant to the terms hereof is held by a court of competent jurisdiction to be
unavailable for any reason or insufficient to hold such Indemnified Person
harmless, then the Company and D&P will contribute to the Losses for which such
indemnification is held unavailable or insufficient (1) in such proportion as is
appropriate to reflect the relative benefits received (or anticipated) from the
proposed transaction by the Company on the one hand and the Indemnified Person
on the other, in connection with D&P's engagement referred to above (whether or
not the transaction contemplated by the engagement is consummated) or (2) if
(but only if) the allocation provided in clause (1) if for any reason
unenforceable, in such proportion as is appropriate to reflect not only the
relative benefits received (or anticipated) from the proposed transaction by the
Company on the one hand and the Indemnified Person on the other, but also the
relative fault of the Company and the Indemnified Person, as well as any other
relevant equitable considerations, in each case subject to the limitation that
the contribution by D&P will not exceed the amount of fees actually received by
D&P pursuant to D&P's engagement. No person found liable for fraudulent
misrepresentation shall be entitled to contribution from any person who is not
also found liable for such fraudulent misrepresentation. It is hereby agreed
that the relative benefit to the Company on the one hand and D&P on the other,
with respect to D&P's engagement, shall be deemed to be in the same proportion
as (1) the total value paid or proposed to be paid or received by the Company or
its stockholders, as the case may be pursuant to the transaction, whether or not
consummated, for which D&P is engaged to render financial advisory services
bears to (2) the fee paid or proposed to be paid to D&P in connection with such
engagement (excluding reimbursable expenses).
D. Settlement of Claims. The Company will not, without the prior written
consent of D&P, settle or compromise or consent to the entry of any judgment in
any pending or threatened Claim or Proceeding in respect of which
indemnification may be sought hereunder (whether or not D&P or any Indemnified
Person is an actual party to such Claim or Proceeding) unless such settlement,
compromise or consent includes provisions holding harmless and unconditionally
releasing D&P and each other Indemnified Person hereunder from all liability
related to or arising out of such Claim or Proceeding, including claims for
contribution. The Company shall not be liable for any settlement of any Claim
effected by D&P without its written consent (which consent shall not be
unreasonably withheld).
E. Miscellaneous. The obligations of D&P are solely corporate obligations.
No director, officer, employee, agent, shareholder or controlling person of D&P
shall be subjected to any liability to any person, nor will any such claim be
asserted by or on behalf of any other party to this Agreement. The Company's
indemnity, reimbursement and contribution obligations provided for herein shall
(1) be in addition to any liability that the Company otherwise may have to D&P
and any rights that D&P or any Indemnified Person may have at common law or
otherwise (2) survive the completion or termination of
-2-
<PAGE> 11
professional services rendered by D&P under the Agreement (3) apply to any
activities prior to this date and any amendment, modification or future
addition to D&P's engagement and (4) inure to the benefit of the heirs,
personal representatives, successors, and assigns of D&P and each other
Indemnified Person.
If any term, provision, covenant or restriction contained in this Agreement
is held by a court of competent jurisdiction or other authority to be invalid,
void, unenforceable or against its regulatory policy, the remainder of the
terms, provisions, covenants and restrictions contained in this Agreement shall
remain in full force and effect and shall in no way be affected, impaired or
invalidated.
The Company hereby consents to personal jurisdiction and service and venue
in any court in which any Claim and Proceeding which is subject to the terms
provided for herein is brought against D&P or any other Indemnified Person. THE
PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM OR
PROCEEDING RELATED TO OR ARISING OUT OF D&P'S ENGAGEMENT, ANY TRANSACTION OR
CONDUCT IN CONNECTION THEREWITH OR THIS AGREEMENT.
-3-
<PAGE> 1
Exhibit 10.13
PROMISSORY NOTE
$164,000.00, Inclusive of Interest Mesa, Arizona
January 30, 1998
FOR VALUE RECEIVED PREVIOUSLY AND CONSOLIDATION OR PREVIOUS OBLIGATIONS DUE
FROM AZTEC INDUSTRIES, INC., an Arizona corporation ("Maker") TO ANTHONY G.
SHUMWAY, a married man ("Holder"), Maker agrees to pay Holder at Mesa, Arizona
the sum of One Hundred Sixty Four Thousand and no/100 Dollars ($164,000.00) as
follows:
1. $40,000.00 at Closing, as that term is defined in that certain "Share
Exchange Agreement" dated January 16, 1998; and
2. $41,000.00 on the earlier of July 31, 1998, or upon receipt of capital
infusion into DuraSwitch Industries, Inc., a Nevada corporation, of at least One
Million Dollars ($1,000,000.00); and
3. $83,000.00 payable in monthly installments of $3,458.33 commencing 30
days after the Closing under the terms of the "Share Exchange Agreement" with
all amounts due within two years.
This Note bears a stated annual interest rate of 7.5%. All payments shall
be paid in U.S. currency.
Should any payment not be paid within five days of when due, such payment
due hereunder shall be payable with interest from the date of default at the
rate of 18%. If such default is not cured within 45 days after Maker receives a
notice of default from Holder, as described below, the whole sum of principal
and any other amount due hereunder shall become due and payable at the option of
the Holder of this Note with interest from the date of default at the rate of
18%. A notice of default shall either be personally delivered or mailed by
certified mail, postage prepaid, return receipt requested. The undersigned, in
case of suit of this note, agrees to pay attorney's fees. Maker may prepay this
Note in whole or in part at any time with or without notice.
Makers, endorsers and sureties waive demand of payment, notice of
nonpayment, protest and notice. Sureties, endorsers and guarantors agree to all
of the provisions of this note, and consent that the time or times of payment of
all or any part hereof may be extended after maturity, from time to time,
without notice.
<PAGE> 2
Holder: Maker:
AZTEC INDUSTRIES, INC.
/s/ Anthony G. Shumway By /s/ Anthony G. Shumway
- ---------------------- ------------------------------
Anthony G. Shumway Its President
c/o Aztec Industries, Inc. ------------------------------
333 S. Nina Drive Printed Name Anthony G. Shumway
Mesa, AZ 85210 --------------------
333 S. Nina Drive
Mesa, AZ 85210
2
<PAGE> 3
AMENDMENT TO PROMISSORY NOTE
OF JANUARY 30, 1998
Effective date of this amendment: December 31, 1998
Item 2 of the Promissory Note dated January 30, 1998 reads as follows:
"2. $41,000.00 on the earlier of July 31, 1998, or upon
receipt of capital infusion into DuraSwitch Industries,
Inc., a Nevada corporation, of at least One Million
Dollars ($1,000,000.00); and;"
Item 2 is hereby deleted in its entirety and revised as follows:
2. $41,000.00 to be paid as follows:
- $10,000.00 to be paid on or before December 31, 1998.
- $10,000.00 to be paid on or before January 31, 1999.
- Balance of $21,000.00 to be paid on or before
June 30, 1999.
- Accrued interest from July 31, 1998 through December 31,
1998 in the amount of $1,367.00, to be paid in full on
or before June 30, 1999.
- Interest (at eight percent [8%] per annum) on the
balance remaining after January 1, 1999, to be paid
in full on or before June 30, 1999.
In all other respects, the Promissory Note remains the same.
Holder: Maker:
AZTEC INDUSTRIES, INC.
/s/ Anthony G. Shumway By /s/ Anthony G. Shumway
- ----------------------------- ----------------------------------
Anthony G. Shumway Its President
333 S. Nina Drive Printed Name Anthony G. Shumway
Mesa, AZ 85210 333 S. Nina Drive
Mesa, AZ 85210
<PAGE> 1
Exhibit 10.14
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
No. W98-003 Warrant to Purchase 182,199 Shares
of Common Stock (subject to
adjustment)
WARRANT TO PURCHASE COMMON STOCK
OF
DURASWITCH INDUSTRIES, INC.
VOID AFTER JUNE 30, 2003
This certifies that Duff & Phelps Securities, LLC, (the "Holder"), or
assigns, for value received, is entitled to purchase from DuraSwitch Industries,
Inc., a Nevada corporation (the "Company"), having a place of business at 333
South Nina Drive, Mesa, Arizona 85210, 182,199 SHARES of Common Stock of the
Company at the Stock Purchase Price as set forth in Section 1. The term "Common
Stock" means the common stock of the Company.
This Warrant is subject to the following terms and conditions:
1. Determination of Stock Purchase Price. The exercise price per share of
this Warrant is $0.466565671 per share, as adjusted pursuant to Section
4 (the "Stock Purchase Price").
2. Exercise; Issuance of Certificates; Payment for Shares. This Warrant is
exercisable at the option of the Holder, at any time or from time to
time, before 5:00 p.m. Mountain Standard Time on June 30, 2003 (the
"Expiration Date") upon surrender to the Company, at its principal
office or such other place as Company may designate, of this Warrant
properly endorsed with the Form of Subscription (attached hereto) fully
filled in, signed and, if applicable, payment, by cashier's check or
wire transfer, of the Stock Purchase Price. The Company agrees that the
shares of Common Stock purchased under this Warrant shall be and are
deemed to be issued to the Holder as the record owner of such shares as
of the close of business on the date on which this Warrant shall have
been surrendered, properly endorsed, the completed, executed Form of
Subscription (attached to this Warrant) delivered and payment made by
cashier's check or wire transfer for such shares. Certificates for the
shares of Common Stock so purchased, together with any other securities
or property to which the Holder is entitled upon such exercise, shall
be delivered to the Holder by the Company at the Company's expense
within a reasonable time after the rights represented by this Warrant
have been so exercised. In case of a purchase of less than all the
shares which may be purchased under this Warrant, the Company shall
cancel this Warrant and execute and deliver a new Warrant or Warrants
<PAGE> 2
of like tenor for the balance of the shares purchasable under the
Warrant surrendered upon such purchase to the Holder hereof within a
reasonable time.
3. Reservation of Shares. The Company covenants and agrees that all shares
of Common Stock which may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be free of all taxes,
liens and charges with respect to the issuance thereof (other than
income taxes and taxes in respect of any transfer occurring
contemporaneously or otherwise specified herein). The Company further
covenants and agrees that during the period within which the rights
represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved, for the purpose of issue or
transfer upon exercise of the subscription rights evidenced by this
Warrant, a sufficient number of shares of authorized but unissued
Common Stock, or other securities and property, when and as required to
provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Stock Purchase Price and Number of Shares. The Stock
Purchase Price and the number of shares purchasable upon the exercise
of this Warrant shall be subject to adjustment from time to time upon
the occurrence of certain events described in this Section 4.
4.1 Subdivision or Combination of Stock. If the Company at any
time while this Warrant or any portion of it remains
outstanding and unexpired shall subdivide its outstanding
shares of Common Stock into a greater number of shares, the
Stock Purchase Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely,
in case the outstanding shares of Common Stock of the Company
shall be combined into a smaller number of shares, the Stock
Purchase Price in effect immediately prior to such combination
shall be proportionately increased.
4.2 Dividends in Common Stock, Other Stock, Property,
Reclassification. If while this Warrant or any portion of it
remains outstanding and unexpired the holders of Common Stock
(or any shares of stock or other securities at the time
receivable upon the exercise of this Warrant) shall have
received or become entitled to receive, without payment
therefor other or additional stock or other securities or
property (other than cash) of the Company by way of dividend
(other than (i) shares of Common Stock) issued as a stock
split, adjustments in respect of which shall be covered by the
terms of Section 4.1 above or (ii) an event for which
adjustment is otherwise made pursuant to Section 4.4 below),
then and in each such case, the Holder shall, upon the
exercise of this Warrant, be entitled to receive, in addition
to the number of shares of Common Stock receivable thereupon,
and without payment of any additional consideration therefor,
the amount of stock or other securities or property (other
than cash) of the Company which such Holder would hold on the
date of such exercise had he been the holder of record of such
Common Stock as of the date on which holders of Common
Page 2 of 6
<PAGE> 3
Stock received or became entitled to receive such shares or
all other additional stock and other securities.
4.3 Reorganization, Reclassification, Consolidation, Merger or
Sale. If while this Warrant or any portion of it remains
outstanding and unexpired any capital reorganization or
reclassification of the capital stock of the Company, or any
consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its
assets to another corporation shall be effected in such a way
that holders of Common Stock shall be entitled to receive
stock, securities, or other assets or property, then, as a
condition of such reorganization, reclassification,
consolidation, merger or sale, lawful provisions shall be made
so that the Holder shall thereafter have the right to purchase
and receive upon exercise of this Warrant such shares of
stock, securities or other assets or property of the successor
corporation resulting from such consolidation, merger,
reorganization, reclassification, sale or transfer that the
Holder would have been entitled to receive in such
consolidation, merger, reorganization, reclassification, sale
or transfer if this Warrant had been exercised immediately
before such consolidation, merger, reorganization,
reclassification, sale or transfer, all subject to further
adjustment pursuant to this Section 4. In the event the value
of the stock, securities or other assets or property (if not
in cash or marketable securities, then the value will be
determined in good faith by the Board of Directors of the
Company) issuable or payable with respect to one share of the
Common Stock of the Company immediately before such
consolidation, merger, reorganization, reclassification, sale
or transfer purchasable and receivable upon the exercise of
the rights represented by this Warrant is in excess of the
Stock Purchase Price effective at the time of such
consolidation, merger, reorganization, reclassification, sale
or transfer, or securities received in such consolidation,
merger, reorganization, reclassification, sale or transfer, if
any, are publicly traded, then this Warrant shall expire
unless exercised prior to such consolidation, merger,
reorganization, reclassification, sale or transfer. In any
such consolidation, merger, reorganization, reclassification,
sale or transfer described above, appropriate provision shall
be made with respect to the rights and interests of the Holder
so that the provision hereof (including, without limitation,
provisions for adjustments of the Stock Purchase Price and of
the number of shares purchasable and receivable upon the
exercise of this Warrant) shall thereafter be applicable, as
nearly as may be, in relation to any shares of stock,
securities or assets thereafter deliverable upon the exercise
hereof.
4.4 Notice of Adjustment. Upon any determination or adjustment of
the Stock Purchase Price or in the conversion ratio of the
Common Stock or any increase or decrease in the number of
shares purchasable upon the exercise of this Warrant, the
Company shall give written notice thereof, by first class
mail, postage prepaid, addressed to the registered Holder of
this Warrant at the address of such Holder as shown on the
books of the Company. The notice shall be signed by the
Company's
Page 3 of 6
<PAGE> 4
chief financial officer and shall state the Stock Purchase
Price resulting from such adjustment and the increase and
decrease, if any, in the number of shares purchasable at such
price upon the exercise of this Warrant, setting forth in
reasonable detail the method of calculation and the facts upon
which such calculation is based.
4.5 Other Notices. If at any time:
(A) the Company shall declare any cash dividend upon its
Common Stock;
(B) the Company shall declare any dividend upon its
Common Stock payable in stock or make any special
dividend or other distribution to the holders of its
Common Stock;
(C) the Company shall offer for subscription pro rata to
the holders of its Common Stock any additional shares
of stock of any class or other rights;
(D) there shall be any capital reorganization or
reclassification of the capital stock of the Company;
or consolidation or merger of the Company with, or
sale of all or substantially all of its assets to
another corporation; or
(E) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the
Company;
then, in any one or more of said cases, the Company shall
give, by first class mail, postage prepaid, addressed to the
Holder of this Warrant at the address of such Holder as shown
on the books of the Company, (a) at least 15 days' prior
written notice of the date on which the books of the Company
shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights
to vote in respect of any such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation or winding-up, and (b) in the case of any such
reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation, winding-up or public offering, at
least 15 days' prior written notice of the date when the same
shall take place; provided, however, that the Holder shall
make a best efforts attempt to respond to such notice as early
as possible after the receipt thereof. Any notice given in
accordance with the foregoing clause (a) shall also specify,
in the case of any such dividend, distribution or subscription
rights, the date on which the holders of Common Stock shall be
entitled thereto. Any notice given in accordance with the
foregoing clause (b) shall also specify the date on which the
holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger,
sale dissolution, liquidation, winding-up, conversion or
public offering, as the case may be.
Page 4 of 6
<PAGE> 5
4.6 Rights Offering. In the event the Company offers to its
stockholders the right to purchase Common Stock on a pro rata
basis, the Holder will be entitled, at its option, to elect to
participate in each and every such offering as though this
Warrant has been exercised and the Holder were, at the time of
any such rights offering, then a Holder of that number of
shares of Common Stock to which the Holder is then entitled on
the exercise hereof.
5. No Voting or Dividend Rights; Limitation of Liability. Nothing
contained in this Warrant shall be construed as conferring upon the
holder hereof the right to vote or to consent or to receive notice as a
shareholder of the Company or any other matters or any rights
whatsoever as a shareholder of the Company. No dividends or interest
shall be payable or accrued in respect of this Warrant or the interest
represented hereby or the shares purchasable hereunder until, and only
to the extent that, this Warrant shall have been exercised. No
provisions hereof, in the absence of affirmative action by the holder
to purchase shares of Common Stock, and no mere enumeration herein of
the rights or privileges of the holder hereof, shall give rise to any
liability of such holder for the Stock Purchase Price or as a
shareholder of the Company, whether such liability is asserted by the
Company or by its creditors.
6. Modification and Waiver. This Warrant and any provision hereof may be
changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is
sought.
7. Notices. Any notice, request or other document required or permitted to
be given or delivered to the Holder or the Company shall be delivered
personally, sent by registered mail, postage prepaid, or by confirmed
fax with copy by first-class mail, to the Holder at its address as
shown on the books of the Company or to the Company at the address
indicated therefor in the first paragraph of this Warrant or such other
address as either may from time to time provide to the other in the
manner described in this Section.
8. Binding Effect on Successors. This Warrant shall be binding upon any
corporation succeeding the Company by merger, consolidation or
acquisition of all or substantially all of the Company's assets. All of
the obligations of the Company relating to the Common Stock issuable
upon the exercise of this Warrant shall survive the exercise and
termination of this Warrant. All of the covenants and agreements of the
Company shall inure to the benefit of the successors and assigns of the
Holder.
9. Descriptive Headings and Governing Law. The description headings of the
several sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. This
Warrant shall be construed and enforced in accordance with, and the
rights of the parties shall be governed by, the laws of the State of
Arizona.
Page 5 of 6
<PAGE> 6
10. Lost Warrants. The Company represents and warrants to the Holder that
upon receipt of evidence satisfactory to the Company of the loss,
theft, destruction, or mutilation of this Warrant and, in the case of
any such loss, theft or destruction, upon receipt of an indemnity
reasonably satisfactory to the Company, or in the case of any such
mutilation upon surrender and cancellation of such Warrant, the
Company, at its expense, will make and deliver a new Warrant, or like
tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant.
11. Fractional Shares. No fractional shares shall be issued upon exercise
of this Warrant. The Company shall, in lieu of issuing any fractional
share, pay the holder entitled to such fraction a sum in cash equal to
such fraction multiplied by the then effective Stock Purchase Price.
DATED: JUNE 30, 1998
HOLDER: COMPANY:
DUFF & PHELPS, LLC DURASWITCH INDUSTRIES, INC.,
a Nevada corporation
By /s/ Kevin R. Keuper By /s/ R. Terren Dunlap
_________________________________ _____________________________
Kevin R. Keuper, R. Terren Dunlap,
Managing Director Chief Executive Officer
Page 6 of 6
<PAGE> 1
EXHIBIT 10.15
STANDARD SUBLEASE
1. PARTIES. This Sublease, dated, for reference purposes only, October 15,
1998, is made by and between 234 South Extension L.L.C., an Arizona Limited
Liability Company (herein called "Sublessor") and DuraSwitch Industries, Inc.
(herein called "Sublessee").
2. PREMISES. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property situated in the County
of Maricopa, State of Arizona, commonly known as The Kellwood Building
containing [plus or minus] 78,816 s.f., 234 South Extension Road, Mesa, Arizona,
and described as Unit #4, as shown on the attached composite floor plan (Exhibit
"A") containing approximately 20,643 square feet of office manufacturing area.
3. TERM.
3.1 TERM. The Term of this Sublease shall be for Five (5) years with a two
(2) year option at rates stipulated herein commencing on January 1, 1999 and
ending on December 31, 2003 unless sooner terminated pursuant to any provision
hereof.
3.2 DELAY IN COMMENCEMENT. Notwithstanding said commencement date, if for
any reason Sublessor cannot deliver possession of the Premises to Sublessee on
said date, Sublessor shall not be subject to any liability therefore, nor shall
such failure affect the validity of this Lease or the obligations of Sublessee
hereunder or extend the term hereof, but in such case Sublessee shall not be
obligated to pay rent until possession of the Premises is tendered to Sublessee;
provided, however, that if Sublessor shall not have delivered possession of the
Premises within sixty (60) days from said commencement date, Sublessee may, at
Sublessee's option, by notice in writing to Sublessor within ten (10) days
thereafter, cancel this Sublease, in which event the parties shall be discharged
from all obligations thereunder. If Sublessee occupies the Premises prior to
said commencement date, such occupancy shall be subject to all provisions
hereof, such occupancy shall not advance the termination date and Sublessee
shall pay rent for such period at the initial monthly rates set forth below.
4. RENT. Sublessee shall pay to Sublessor as rent for the Premises for year 1
equal monthly payments of $9,495.33, in advance, on the 1st day of each month of
the term hereof. Sublessee shall pay Sublessor upon the execution hereof
$9,495.33 as rent for the month of January 1999. Refer to Par 51, Schedule of
Rents, for an itemization of rental payments applicable to years 2 through 7.
*$9,355.000 (base rent) + 140.33 (rental tax). Rent for any period during the
term hereof which is for less than one month shall be a pro rata portion of the
monthly installment. Rent shall be payable in lawful money of the United
States to Sublessor at the address stated herein or to such other persons or at
such other places as Sublessor may designate in writing.
5. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution
hereof $11,354.00 as security for Sublessee's faithful performance of
Sublessee's obligations hereunder. If Sublessee fails to pay rent or other
charges due hereunder, or otherwise defaults with respect to any provision of
this Sublease, Sublessor may use, apply or retain all or any portion of said
deposit for the payment of any rent or other charge in default or for the
payment of any other sum to which Sublessor may become obligated by reason of
Sublessee's default, or to compensate Sublessor for any loss or damage which
Sublessor may suffer thereby. If Sublessor so uses or applies all or any portion
of said deposit, Sublessor shall within ten (10) days after written demand
therefore deposit cash with Sublessor in an amount sufficient to restore said
deposit to the full amount hereinabove stated and Sublessee's failure to do so
shall be a material breach of this Sublease. Sublessor shall not be required to
keep said deposit separate from its general accounts. If Sublessee performs all
of Sublessee's obligations hereunder, said deposit, or so much thereof as has
not theretofore been applied by Sublessor, shall be returned, without payment of
interest or other increment for its use to Sublessee (or at Sublessor's option,
to the last assignee, if any, of Sublessee's interest hereunder) at the
expiration of the term hereof, and after Sublessee has vacated the Premises. No
trust relationship is created herein between Sublessor and Sublessee with
respect to said Security Deposit.
6. USE.
6.1 USE. The Premises shall be used and occupied only for manufacturing,
storage and wholesaling of integrated electronic panels and for no other
purpose.
6.2 COMPLIANCE WITH LAW.
(a) Sublessor hereby discloses to Sublessee that the Premises, in its
existing state, but without regard to the use for which Sublessee will use the
Premises, may violate certain applicable building code regulations or ordinances
at the time that this Sublease is executed. It shall be the obligation of the
Sublessor, after written notice from Sublessee, to promptly, at Sublessor's sole
cost and expense, rectify any such violation that is not allowed as an exception
by the Master Lessor. In the event that Sublessee does not give to Sublessor
written notice of any violation that is not allowed by the Master Lessor within
1 year from the commencement of the term of this Sublease, it shall be
conclusively deemed that such violation did not exist and the correction of the
same shall be the obligation of the Sublessee.
(b) Except as provided in paragraph 6.2(a). Sublessee shall, at Sublessee's
expense, comply promptly with all applicable statutes, ordinances, rules
regulations, orders, restrictions or record, and requirements in effect during
the term or any part of the term hereof regulating the use by Sublessee of the
Premises. Sublessee shall not use or permit the use of the Premises in any
manner that will tend to create waste or a nuisance or, if there shall be more
than one tenant of the building containing the Premises, which shall tend to
disturb such other tenants.
6.3 CONDITION OF PREMISES. Except as provided in paragraph 6.2(a),
Sublessee hereby accepts the Premises in their condition existing as of the date
of the execution hereof, subject to all applicable zoning, municipal, county and
state laws, ordinances, and regulations governing and regulating the use of the
Premises, and accepts this Sublease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto. Sublessee acknowledges that neither
Sublessor nor Sublessor's agents have made any representation or warranty as to
the suitability of the Premises for the conduct of Sublessee's business.
7. MASTER LEASE (EXHIBIT "B")
7.1 Sublessor is the lessee of the Premises by virtue of a lease dated
11/1/64 as modified by an Amendment to Lease dated 3/1/98, a Lease
Assignment and Assumption Agreement dated 4/1/98, and Lessor's consent to
Assignment and Estoppel Certificate dated 4/1/98, hereinafter referred to as the
"Master Lease", a copy of which is attached hereto marked Exhibit 1, dated April
6, 1998 wherein the City of Mesa is the lessor, hereinafter referred to as the
"Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word "Lessor" is used it shall
be deemed to mean the Sublessor herein and wherever in the Master Lease the word
"Lessee" is used it shall be deemed to mean the Sublessee herein.
<PAGE> 2
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
sublessee does hereby expressly assume and agree to perform and comply with,
for the benefit of Sublessor and Master Lessor, each and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom: All terms and conditions of the Lease dated 11/1/64.
7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof
are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless of and from all
liability, judgments, costs, damages, claims or demands, including reasonable
attorneys fees, arising out of Sublessee's failure to comply with or perform
Sublessee's Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire term
of this Sublease, subject, however, to any earlier termination of the Master
Lease without the fault of the Sublessor, and to comply with or perform
Sublessor's Remaining Obligations and to hold Sublessee free and harmless of and
from all liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any party to the
Master Lease.
7.9 Sublessee acknowledges that Sublessor has disclosed the presence of
Asbestos containing materials within certain portions of the Premises and that
said asbestos has been identified as being encapsulated and non friable. A copy
of the Limited Asbestos Survey dated December 18, 1997 prepared by J. Bowers and
Associates is available upon request.
8. ASSIGNMENT OF SUBLEASE AND DEFAULT
8.1 Sublessor hereby assigns and transfers to Master lessor the
Sublessor's interest in this Sublease and all rentals and income [not to exceed
$261.11 per month (26.11% of $12,000 per annum + 12)] arising therefrom,
8.2 Master Lessor, by executing this document, agrees that in the
performance of Sublessor's Obligations under the Master lease, Sublessor may
receive, collect and enjoy the rents accruing under this Sublease.
8.3 Sublessor hereby irrevocably authorizes and directs Sublessee, upon
receipt of any written notice from the Master lessor stating that a default
exists in the performance of Sublessor's obligations under the Master Lease, to
pay to Master Lessor the rents due and to become due under the Sublease,
Sublessor agrees that Sublessee shall have the right to rely upon any such
statement and request from Master lessor, and that Sublessee shall pay such
rents to Master Lessor without any obligation or right to inquire as to whether
such default exists and notwithstanding any notice from or claim from Sublessor
to the contrary and Sublessor shall have no right or claim against Sublessee for
any such rents so paid by Sublessee.
8.4 No changes or modifications shall be made to this Sublease without
notifying of Master Lessor.
CONSENT OF MASTER LESSOR
9.1 Already Given (Refer to paragraph 4 of the attached March 1998
Amendment to lease part of Exhibit I)
9.2 In the event that the obligations of the Sublessor under the Master
Lease have been guaranteed by third parties then this Sublease shall not be
effective unless, within 10 days of the date hereof, said guarantors sign this
Sublease thereby giving guarantors consent to this Sublease and the terms
thereof.
9.3 Since Master Lessor has given such consent then:
(a) Such consent will not release Sublessor of its obligations or alter
the primary liability of Sublessor to pay the rent and perform and comply with
all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of rent by Master lessor from Sublessee or any one
else liable under the Master Lease shall not be deemed a waiver by Master
Lessor of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
(d) In the event of any default of Sublessor under the Master Lease,
Master Lessor may not proceed directly against Sublessor, any guarantors or any
one else liable under the Master Lease or this Sublease without first
exhausting Master Lessor's remedies against any other person or entity liable
thereon to Master Lessor.
(e) Master Lessor may not consent to subsequent sublettings and
assignments of the Master lease or this Sublease or any amendments or
modifications thereto without notifying Sublessor or any one else liable under
the Master Lease and without obtaining their consent that such action shall not
relieve such persons from liability.
(f) In the event that Sublessor shall default in its obligations under
the Master lease, then Master Lessor, at its option and without being obligated
to do so, may require Sublessee to attorn to Master Lessor in which event
Master Lessor shall undertake the obligations of Sublessor under this
Sublease from the time of the exercise of said option to termination of this
Sublease but Master lessor shall not be liable for any prepaid rents nor any
security deposit paid by Sublessee, nor shall Master Lessor be liable for any
other defaults of the Sublessor under the Sublease.
9.4 The signatures of the Master Lessor at the end of the attached
amendment to lease dated March 1, 1998 (part of Exhibit I) shall constitute
their consent to the terms of this Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and
effect.
9.6 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any default of Sublessor described in any notice of default
within ten days after service of such notice of default on Sublessee. If such
default is cured by Sublessee then Sublessee shall have the right of
reimbursement and offset from and against Sublessor
10. BROKERS FEE.
10.1 Upon execution hereof by all parties, Sublessor shall pay to Horizon
Real Estate Group, Inc. (John Fill & Jeff Hays), a licensed real estate
brokerage firm (herein called "Broker"), a fee as set forth in a separate
agreement between Sublessor and Broker, or in the event there is not separate
agreement between Sublessor and Broker, the sum of $ N/A for brokerage services
rendered by Broker to Sublessor in this transaction.
10.2 Sublessor agrees that if Sublessee exercises any option or right of
first refusal granted by Sublessor herein, or any option or right substantially
similar thereto, either to extend the term of this Sublease, to renew this
Sublease, or to lease or purchase adjacent property which Sublessor may own or
in which Sublessor has an interest, or if Broker is the procuring cause of any
lease, sublease, or sale pertaining to the Premises or any adjacent property
which Sublessor may own or in which Sublessor has an interest, then as to any of
said transaction Sublessor shall pay to Broker a fee, in cash, in accordance
with the schedule of Broker in effect at the time of the execution of this
Sublease. Notwithstanding the foregoing, Sublessor's obligation under this
Paragraph 10.2 is limited to a transaction in which Sublessor is acting as a
Sublessor, lessor or seller.
<PAGE> 3
10.4 Any fee due from Sublessor hereunder shall be due and payable upon the
exercise of any option to extend or renew, as to any extension or renewal; upon
the execution of any new lease, as to a new lease transaction or the exercise of
a right of first refusal to lease.
10.5 Any transferee of Sublessor's interest in this Sublease, or of Master
Lessor's interest in the Master Lease, by accepting an assignment thereof, shall
be deemed to have assumed the respective obligations of Sublessor or Master
Lessor under this Paragraph 10, Broker shall be deemed to be a third-party
beneficiary of this paragraph 10.
11. ATTORNEY'S FEES. If any party of the Broker named herein brings an action
to enforce the terms hereof or to declare rights hereunder, the prevailing party
in any such action, on trial and appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the Court. The
provision of this paragraph shall inure to the benefit of the Broker named
herein who seeks to enforce a right hereunder.
12. ADDITIONAL PROVISIONS. For the purpose of this Sublease, wherever in the
following provisions and Addendum the word "Lessor" is used, it shall be deemed
to mean the Sublessor herein, and wherever in the following provisions the word
"Lessee" is used, it shall be deemed to mean the Sublessee herein.
ADDITIONAL PROVISIONS
13. MAINTENANCE, REPAIRS AND ALTERATIONS.
13.1 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 6,
13.1, and 15 and except for damage caused by any negligent or intentional act
or omission of Lessee, Lessee's agents, employees, or invitees in which event
Lessee shall repair the damage, Lessor, at Lessor's expense, shall keep in
good order, condition and repair the foundations, exterior walls and the
exterior roof of the Premises. Lessor shall not, however, be obligated to paint
such exterior, nor shall Lessor be required to maintain the interior surface of
exterior walls, windows, doors or plate glass. Lessor shall have no obligation
to make repairs under this Paragraph 13.1 until a reasonable time after receipt
of written notice of the need for such repairs. Lessee expressly waives the
benefits of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Premises in good order, condition and
repair.
13.2 LESSEE'S OBLIGATIONS.
(a) Subject to the provisions of Paragraphs 6, 13.1, and 15, Lessee,
at Lessee's expense, shall keep in good order, condition and repair the
Premises and every part thereof (whether or not the damaged portion of the
Premises or the means of repairing the same are reasonably or readily
accessible to lessee) including, without limiting the generality of the
foregoing, all plumbing, heating, air conditioning, (Lessee shall procure and
maintain, at Lessee's expense, an air conditioning system maintenance contract)
ventilation, electrical and lighting facilities and equipment within the
Premises, fixtures, interior walls and interior surface of exterior walls,
ceilings, windows, doors, plate glass, and skylights, located within the
Premises, and all landscaping, driveways, parking lots, fences and signs
located in the Premises and all sidewalks and parkways adjacent to the Premises.
(b) If Lessee fails to perform Lessee's obligations under this
Paragraph 13.2 or under any other paragraph of this Lease, Lessor may at
Lessor's option enter upon the Premises after 10 days prior written notice to
Lessee (except in the case of emergency, in which case no notice shall be
required), perform such obligations on Lessee's behalf and put the Premises in
good order, condition and repair, and the cost thereof together with interest
thereon at the maximum rate then allowable by law shall be due and payable as
additional rent to Lessor together with Lessee's next rental installment.
(c) On the last day of the term hereof, or on any sooner
termination, Lessee shall surrender the Premises to Lessor in the same
condition as received, ordinary wear and tear excepted, clean and free of
debris. Lessee shall repair any damage to the Premises occasioned by the
installation or removal of its trade fixtures, furnishings and equipment.
Notwithstanding anything to the contrary otherwise stated in this Lease, Lessee
shall leave the air lines, power panels, electrical distribution systems,
lighting fixtures, space heaters, air conditioning, plumbing and fencing on the
premises in good operating condition.
13.3 Alterations and Additions.
(a) Lessee shall not, without Lessor's prior written consent make
any alterations, improvements, additions, or Utility Installations in, on or
about the Premises, except for nonstructural alterations not exceeding $2,500
in cumulative costs during the term of this Lease. In any event, whether or not
in excess of $2,500 in cumulative cost, Lessee shall make no change or
alteration to the exterior of the Premises nor the exterior of the building(s)
on the Premises without Lessor's prior written consent. As used in this
Paragraph 13.3 the term "Utility Installation" shall mean carpeting, window
coverings, air lines, power panels, electrical distribution systems, lighting
fixtures, space heaters, air conditioning, plumbing, and fencing. Lessor may
require that Lessee remove any or all of said alterations, improvements,
additions or Utility Installations at the expiration of the term, and restore
the Premises to their prior condition. Lessor may require Lessee to provide
Lessor, at Lessee's sole cost and expense, a lien and completion bond in an
amount equal to one and one-half times the estimated cost of such improvements,
to insure Lessor against any liability for mechanic's and materialmen's liens
and to insure completion of the work. Should Lessee make any alterations,
improvements, additions or Utility Installations without the prior approval of
Lessor, Lessor may require that Lessee remove any or all of the same.
(b) Any alteration, improvements, additions or utility installations
in, or about the Premises that Lessee shall desire to make and which requires
the consent of the Lessor shall be presented to Lessor in written form, with
proposed detailed plans. If Lessor shall give its consent, the consent shall be
deemed conditioned upon Lessee acquiring a permit to do so from appropriate
governmental agencies, the furnishing of a copy thereof to Lessor prior to the
commencement of the work and the compliance by Lessee of all conditions of said
permit in a prompt and expeditious manner.
(c) Lessee shall pay, when due, all claims for labor or materials
furnished or alleged to have been furnished to or for Lessee at or for use in
the Premises, which claim are or may be secured by any mechanics' or
materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of any
work in the Premises, and Lessor shall have the right to post notices of
non-responsibility in or on the Premises as provided by law. If Lessee shall, in
good faith, contest the validity of any such lien, claim or demand, then Lessee
shall, at its sole expense defend itself and Lessor against the same and shall
pay and satisfy and such adverse judgment that may be rendered thereon before
the enforcement thereof against the Lessor or the Premises, upon the condition
that if Lessor shall require, Lessee shall furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to such contested lien claim or demand
indemnifying Lessor against liability for the same and holding the Premises free
from the effect of such lien or claim. In addition, Lessor may require Lessee to
pay lessor's attorneys fees and costs in participating in such action if Lessor
shall decide it is to its best interest to do so.
(d) Unless Lessor requires their removal, as set forth in Paragraph
13.3(a), all alterations, improvements, additions and Utility Installations
(whether or not such Utility Installations constitute trade fixtures of
Lessee), which may be made on the Premises, shall become the property of Lessor
and remain upon and be surrendered with the Premises at the expiration of the
term. Notwithstanding the provisions of this Paragraph 13.3(d), Lessee's
machinery and equipment, other than that which is affixed to the Premises so
that it cannot be removed without material damage to the Premises, shall remain
the property of Lessee and may be removed by Lessee subject to the provisions
of Paragraph 13.2(c).
<PAGE> 4
14. INSURANCE; INDEMNITY.
14.1 LIABILITY INSURANCE--LESSEE. Lessee shall, at Lessee's expense,
obtain and keep in force during the term of this Lease a policy of Combined
Single Limit Bodily Injury and Property Damage Insurance insuring Lessee and
Lessor against any liability arising out of the use, occupancy or maintenance
of the Premises and all other areas appurtenant thereto. Such insurance shall
be in an amount not less than $1,000,000 per occurrence. The policy shall
insure performance by Lessee of the Indemnity provisions of this Paragraph 14.
The limits of said insurance shall not, however, limit the liability of Lessee
hereunder.
14.2 LIABILITY INSURANCE--LESSOR. Lessor shall obtain and keep in
force during the term of this Lease a policy of Combined Single Limit Bodily
Injury and Property Damage Insurance, insuring Lessor, but not Lessee, against
any liability arising out of the ownership, use, occupancy or maintenance of
the Premises and all areas appurtenant thereto in an amount not less than
$1,000,000 per occurrence.
14.3 PROPERTY INSURANCE. Lessor shall obtain and keep in force during
the term of this Lease a policy or policies of insurance covering loss or
damage to the Premises, but not Lessee's fixtures, equipment or tenant
improvements in an amount not to exceed the full replacement value thereof, as
the same may exist from time to time, providing protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, flood (in the event same is required by a lender having a
lien on the Premises) special extended perils ("all risk", as such term is used
in the insurance industry) but not plate glass insurance. In addition, the
Lessor shall obtain and keep in force, during the term of this Lease, a policy
of rental value insurance covering a period of one year, with loss payable to
Lessor, which insurance shall also cover all real estate taxes and insurance
costs for said period.
14.4 PAYMENT OF PREMIUM INCREASES.
(a) Lessee shall pay to Lessor, during the term hereof, in
addition to the rent, the amount of any increase in premiums for the insurance
required under Paragraphs 14.2 and 14.3 over and above such premiums paid
during the Base Period, as hereinafter defined, whether such premium increase
shall be the result of the nature of Lessee's occupancy, and act or omission of
Lessee, requirements of the holder of a mortgage or deed of trust covering the
Premises, increased valuation of the Premises, or general rate increases. In
the event that the Premises have been occupied previously, the words "Base
Period" shall mean the last twelve months of the prior occupancy. In the event
that the Premises have never been previously occupied, the premiums during the
"Base Period" shall be deemed to be the lowest premiums reasonably obtainable
for said insurance assuming the most nominal use of the Premises. Provided,
however, in lieu of the Base Period, the parties may insert a dollar amount at
the end of this sentence which figure shall be considered as the insurance
premium for the Base Period: $ N/A. In no event, however, shall Lessee be
responsible for any portion of the premium cost attributable to liability
insurance coverage in excess of $1,000,000 procured under paragraph 14.2.
(b) Lessee shall pay any such premium increases to Lessor within
30 days after receipt by Lessee of a copy of the premium statement or other
satisfactory evidence of the amount due. If the insurance policies maintained
hereunder cover other improvements in addition to the Premises, Lessor shall
also deliver to Lessee a statement of the amount of such increase attributable
to the Premises and showing in reasonable detail, the manner in which such
amount was computed. If the term of this Lease shall not expire concurrently
with the expiration of the period covered by such insurance, lessee's liability
for premium increases shall be prorated on an annual basis.
(c) If the Premises are part of a larger building, then Lessee
shall not be responsible for paying any increase in the property insurance
premium caused by the acts or omissions of any other tenant of the building of
which the Premises are a part.
14.5 INSURANCE POLICIES. Insurance required hereunder shall be in
companies holding a "General Policyholders Rating" of at least B plus, or such
other rating as may be required by a lender having a lien on the Premises, as
set forth in the most current issue of "Best's Insurance Guide". Lessee shall
deliver to Lessor copies of policies of liability insurance required under
Paragraph 14.1 or certificates evidencing the existence and amounts of such
insurance. No such policy shall be cancelable or subject to reduction of
coverage or other modification except after thirty (30) days prior written
notice to Lessor. Lessee shall, at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with renewals or "binders" thereof,
or Lessor may order such insurance and charge the cost thereof to Lessee, which
amount shall be payable by Lessee upon demand. Lessee shall not do or permit to
be done anything which shall invalidate the insurance policies referred to in
Paragraph 14.3.
14.6 WAIVER OF SUBROGATION. Lessee and Lessor each hereby release and
relieve the other, and waive their entire right of recovery against the other
for loss or damage arising out of or incident to the perils insured against
under paragraph 14.3 which perils occur in, on or about the Premises, whether
due to the negligence of Lessor or Lessee or their agents, employees,
contractors and/or invitees. Lessee and Lessor shall, upon obtaining the
policies of insurance required hereunder, give notice to the insurance carrier
or carriers that the foregoing mutual waiver of subrogation is contained in
this lease.
14.7 INDEMNITY. Lessee shall indemnify and hold harmless Lessor from
and against any and all claims arising from Lessee's use of the Premises, or
from the conduct of Lessee's business or from any activity, work or things
done, permitted or suffered by Lessee in or about the Premises or elsewhere and
shall further indemnify and hold harmless Lessor from and against any and all
claims arising from any breach or default in the performance of any obligation
on Lessee's part to be performed under the terms of this Lease, or arising from
any negligence of the Lessee, or any of Lessee's agents, contractors, or
employees, and from and against all costs, attorney's fees, expenses and
liabilities incurred in the defense of any such claim or any action or
proceeding brought thereon; and in case any action or proceeding be brought
against Lessor by reason of any such claim, Lessee upon notice from Lessor
shall defend the same at Lessee's expense by counsel satisfactory to Lessor.
Lessee, as a material part of the consideration to Lessor, hereby assumes all
risk of damage to property or injury to persons, in, upon or about the Premises
arising from any cause and Lessee hereby waives all claims in respect thereof
against Lessor.
14.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessee hereby agrees that
Lessor shall not be liable for injury to Lessee's business or any loss of
income therefrom or for damage to the goods, wares, merchandise or other
property of Lessee, Lessee's employees, invitees, customers, or any other
person in or about the Premises, nor shall Lessor be liable for injury to the
person of Lessee, Lessee's employees, agents or contractors, whether such
damage or injury is caused by or results from fire, steam, electricity, gas,
water or rain, or from the breakage, leakage, obstruction or other defects of
pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting
fixtures, or from any other cause, whether the said damage or injury results
from conditions arising upon the Premises or upon other portions of the
building of which the Premises are a part, or from other sources or places and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee. Lessor shall not be liable for
any damages from any act or neglect of any other tenant, if any, of the
building in which the Premises are located.
15. DAMAGE OR DESTRUCTION.
15.1 DEFINITIONS.
(a) "Premises Partial Damage" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is less than
50% of the fair market value of the Premises immediately prior to such damage or
destruction. "Premises Building Partial Damage" shall herein mean damage or
destruction to the building of which the Premises are a part to the extent that
the cost of repair is less than 50% or more of the fair market value of such
building as a whole immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall herein mean damage or
destruction to the Premises to the extent that the cost of repair is 50% or
more of the fair market value of the Premises immediately prior to such damage
or destruction. "Premises Building Total Destruction" shall herein mean damage
or destruction to the building of which the Premises are a part to the extent
that the cost of repair is 50% or more of the fair market value of such
building as a whole immediately prior to such damage or destruction.
<PAGE> 5
(c) "Insured Loss" shall herein mean damage or destruction which was
caused by an event required to be covered by the insurance described in
paragraph 14.
15.2 PARTIAL DAMAGE - INSURED LOSS. Subject to the provisions of paragraphs
15.4, 15.5, and 15.6, if at any time during the term of this Lease there is
damage which is an Insured Loss and which falls into the classification of
Premises Partial Damage or Premises Building Partial Damage, then Lessor shall,
at Lessor's sole cost, repair such damage, but not Lessee's fixtures, equipment
or tenant improvements, as soon as reasonably possible and this Lease shall
continue in full force and effect.
15.3 PARTIAL DAMAGE - UNINSURED LOSS. Subject to the provisions of
Paragraphs 15.4, 15.5, and 15.6, if at any time during the term of this Lease
there is damage which is not an Insured Loss and which falls within the
classification of Premises Partial Damage or Premises Building Partial Damage,
unless caused by a negligent or willful act of Lessee (in which event Lessee
shall make the repairs at Lessee's expense), Lessor may at Lessor's option
either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event the Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after the date of the
occurrence of such damage of Lessor's intention to cancel and terminate this
Lease, as of the date of the occurrence of such damage. In the event Lessor
elects to give such notice of Lessor's intention to cancel and terminate this
Lease, Lessee shall have the right within ten (10) days after the receipt of
such notice to give written notice to Lessor of Lessee's intention to repair
such damage at Lessee's expense, without reimbursement from Lessor, in which
event this Lease shall continue in full force and effect, and Lessee shall
proceed to make such repairs as soon as reasonably possible. If Lessee does not
give such notice within such 10-day period this Lease shall be cancelled and
terminated as of the date of the occurrence of such damage.
15.4 TOTAL DESTRUCTION. If at any time during the term of this Lease there
is damage, whether or not an insured Loss, (including destruction required by
any authorized public authority), which fall into the classification of Premises
Total Destruction or Premises Building Total Destruction, this Lease shall
automatically terminate as of the date of such total destruction.
15.5 DAMAGE NEAR END OF TERM
(a) If at any time during the last six months of the term of this
Lease there is damage, whether or not an insured Loss, which falls within the
classification of Premises Partial Damage, Lessor may at Lessor's option cancel
and terminate this Lease as of the date of occurrence of such damage by giving
written notice to Lessee of Lessor's election to do so within 30 days after the
date of occurrence to such damage.
(b) Notwithstanding paragraph 15.5(a), in the event that Lessee has
an option to extend or renew this Lease, and the time within which said option
may be exercised has not yet expired, Lessee shall exercise such option, if it
is to be exercised at all, no later than 20 days after the occurrence of an
insured Loss falling within the classification of Premises Partial Damage
during the last six months of the term of this Lease. If Lessee duly exercise
such option during said 20 day period, Lessor shall, at Lessor's expense, repair
such damage as soon as reasonably possible and this Lease shall continue in full
force and effect. If Lessee fails to exercise such option during said 20 period,
then Lessor may at Lessor's option terminate and cancel this Lease as of the
expiration of said 20 day period by giving written notice to Lessee of Lessor's
election to do so within 10 days after the expiration of said 20 day period,
notwithstanding any term or provision in the grant of option to the contrary.
15.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of damage described in paragraphs 15.2, or 15.3, and
Lessor or Lessee repairs or restores the Premises pursuant to the provisions of
this Paragraph 15, the rent payable hereunder for the period during which such
damage, repair or restoration continues shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired. Except for abatement
of rent, if any, Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair or restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 15 and shall not commence such repair or
restoration within 90 days after such obligations shall accrue, Lessee may at
Lessee's option cancel and terminate this Lease by giving Lessor written notice
of Lessee's election to do so at any time prior to the commencement of such
repair or restoration. In such event this Lease shall terminate as of the date
of such notice.
15.7 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 15, an equitable adjustment shall be made concerning
advance rent and any advance payments made by Lessee to Lessor. Lessor shall, in
addition, return to Lessee so much of Lessee's security deposit as has not
theretofore been applied by Lessor.
15.8 WAIVER. Lessor and Lessee waive the provisions of any statutes which
relate to termination of leases when leased property is destroyed and agree that
such event shall be governed by the terms of this Lease.
16. REAL PROPERTY TAXES
16.1 PAYMENT OF TAX INCREASE. Lessor shall pay the real property tax, as
defined in paragraph 16.3, applicable to the Premises; provided, however, that
Lessee shall pay, in addition to rent, the amount, if any, by which real
property taxes applicable to the Premises increase over the fiscal real estate
tax year 1998/1999. Such payment shall be made by Lessee within thirty (30) days
after receipt of Lessor's written statement setting forth the amount of such
increase and the computation thereof. If the term of this Lease shall not expire
concurrently with the expiration of the tax fiscal year, Lessee's liability for
increased taxes for the last partial lease year shall be prorated on an annual
basis.
16.2 ADDITIONAL IMPROVEMENTS. Notwithstanding paragraph 16.1 hereof, Lessee
shall pay to Lessor upon demand therefor the entirety of any increase in real
property tax if assessed solely by reason of additional improvements placed upon
the Premises by Lessee or at Lessee's request.
16.3 DEFINITION OF "REAL PROPERTY TAX". As used herein, the term "real
property tax" shall include any form of real estate tax or assessment, general,
special, ordinary or extraordinary, and any license fee, commercial rental tax,
improvement bond or bonds, levy or tax (other than inheritance personal income
or estate taxes) imposed on the Premises by any authority having the direct or
indirect power to tax, including any city, state or federal government, or any
school, agricultural, sanitary, fire, street, drainage or other improvement
district thereof, as against any legal or equitable interest of Lessor in the
Premises or in the real property of which the Premises are a part, as against
Lessor's right to rent or other assessment or charge (i) in substitution of,
partially or totally, any tax, fee, levy, assessment or charge hereinabove
included within the definition of "real property tax," or (ii) the nature of
which was hereinbefore included within the definition of "real property tax," or
(iii) which is imposed for a service or right not charged prior to June 1, 1978,
or, if previously charged, has been increased since June 1, 1978, or (iv) which
is imposed as a result of a transfer, either partial or total, of Lessor's
interest in the Premises or which is added to a tax or charge hereinbefore
included within the definition of real property tax by reason of such transfer,
or (v) which is imposed by reason of this transaction, any modifications or
changes hereto, or any transfers hereof.
16.4 JOINT ASSESSMENT. If the Premises are not separately assessed,
Lessee's liability shall be an equitable proportion of the real property taxes
for all of the land and improvements included within the tax parcel assessed,
such proportion to be determined by Lessor from the respective valuations
assigned in the assessor's work sheets or such other information as may be
reasonably available. Lessor's reasonable determination thereof, in good faith,
shall be conclusive.
16.5 PERSONAL PROPERTY TAXES.
(a) Lessee shall pay prior to delinquency all taxes assessed against
and levied upon trade fixtures, furnishings, equipment and all other personal
property of Lessee contained in the Premises or elsewhere. When possible, Lessee
shall cause said trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
(b) If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee within 10 days after receipt of a written statement setting forth the
taxes applicable to Lessee's property.
<PAGE> 6
17. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone and the utilities and services supplied to the Premises, together
with any taxes thereon. If any such services are not separately metered to
Lessee, Lessee shall pay a reasonable proportion to be determined by Lessor of
all charges jointly metered with other premises.
18. ASSIGNMENT AND SUBLETTING.
18.1 LESSOR'S CONSENT REQUIRED. Lessee shall not voluntarily or by
operation of law assign, transfer, mortgage, sublet, or otherwise transfer or
encumber all or any part of Lessee's interest in this Lease or in the Premises,
without Lessor's prior written consent, which Lessor shall not unreasonably
withhold. Lessor shall respond to Lessee's request for consent hereunder in a
timely manner and any attempted assignment, transfer, mortgage, encumbrance or
subletting without such consent shall be void, and shall constitute a breach of
this Lease.
18.2 LESSEE AFFILIATE. Notwithstanding the provisions of paragraph 18.1
hereof, Lessee may assign or sublet the Premises, or any portion thereof,
without Lessor's consent, to any corporation which controls, is controlled by
or is under common control with Lessee, or to any corporation resulting from
the merger or consolidation with Lessee, or to any person or entity which
acquires all the assets of Lessee as a going concern of the business that is
being conducted on the Premises, provided that said assignee assumes, in full,
the obligations of Lessee under this Lease. Any such assignment shall not, in
any way, affect or limit the liability of Lessee under the terms of this Lease
even if after such assignment or subletting the terms of this Lease are
materially changed or altered without the consent of Lessee, the consent of
whom shall not be necessary.
18.3 NO RELEASE OF LESSEE. Regardless of Lessor's consent, no
subletting or assignment shall release Lessee of Lessee's obligation or after
the primary liability of Lessee to pay the rent and to perform all other
obligations to be performed by lessee hereunder. The acceptance of rent by
Lessor from any other person shall not be deemed to be a waiver by Lessor of any
provision hereof. Consent to one assignment to subletting shall not be deemed
consent to any subsequent assignment or subletting. In the event of default by
any assignee of Lessee or any successor of Lessee, in the performance of any of
the terms hereof, Lessor may proceed directly against Lessee without the
necessity of exhausting remedies against said assignee. Lessor may consent to
subsequent assignments or subletting of this Lease or amendments or
modifications to this Lease with assignees of Lessee, without notifying Lessee,
or any successor of Lessee, and without obtaining its or their consent thereto
and such action shall not relieve Lessee of liability under this Lease.
19. DEFAULTS; REMEDIES.
19.1 DEFAULTS. The occurrence of any one or more of the following
events shall constitute a material default and breach of this Lease by Lessee:
(a) The vacating or abandonment of the Premises by Lessee.
(b) The failure by Lessee to make any payment of rent or any
other payment required to be made by Lessee hereunder, as and when due, where
such failure shall continue for a period of three days after written notice
thereof from Lessor to Lessee. In the event that Lessor serves Lessee with a
Notice to Pay Rent or Quit pursuant to applicable Unlawful Detainer statutes
such Notice to Pay Rent or Quit shall also constitute the notice required by
this subparagraph.
(c) The failure by Lessee to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or performed
by Lessee, other than described in paragraph (b) above, where such failure
shall continue for a period of 30 days after written notice thereof from Lessor
to Lessee; provided, however, that if the nature of Lessee's default is such
that more than 30 days are reasonably required for its cure, then Lessee shall
not be deemed to be in default if Lessee commenced such cure within said 30-day
period and thereafter diligently prosecutes such cure to completion.
(d)(i) The making by Lessee of any general arrangement or
assignment for the benefit of creditors; (ii) Lessee becomes a "debtor" as
defined in 11 U.S.C. Section 101 or any successor statute thereto (unless, in
the case of a petition filed against Lessee, the same is dismissed within 60
days); (iii) the appointment of a trustee or receiver to take possession of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where possession is not restored to Lessee within 30
days; or (iv) the attachment, execution or other judicial seizure of
substantially all of Lessee's assets located at the Premises or of Lessee's
interest in this Lease, where such seizure is not discharged within 30 days.
Provided, however, in the event that any provision of this paragraph 19.1(d) is
contrary to any applicable law, such provision shall be of no force or effect.
(e) The discovery by Lessor than any financial statement given
to Lessor by Lessee, any assignee of Lessee, any subtenant of Lessee, any
successor in interest of Lessee or any guarantor of Lessee's obligation
hereunder, and any of them was materially false.
19.2 REMEDIES. In the event of any such material default or breach of
Lessee, Lessor may at any time thereafter, with or without notice or demand
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such default or breach;
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession of the Premises to Lessor. In such event
Lessor shall be entitled to recover from Lessee all damages incurred by
necessary renovation and alteration of the Premises, reasonable attorney's
fees, and any real estate commission actually paid; the worth at the time of
award by the court having jurisdiction thereof of the amount by which the
unpaid rent for the balance of the term after the time of such award exceeds
the amount of such rental loss for the same period that Lessee proves could be
reasonably avoided; that portion of the leasing commission paid by Lessor
pursuant to Paragraph 15 applicable to the unexpired term of this Lease.
(b) Maintain Lessee's right to possession in which case this
Lease shall continue in effect whether or not Lessee shall have abandoned the
Premises. In such event Lessor shall be entitled to enforce all of Lessor's
rights and remedies under this Lease, including the right to recover the rent
as it becomes due hereunder.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located. Unpaid installments of rent and other unpaid monetary obligations
of Lessee under the terms of this Lease shall bear interest from the date due
at the maximum rate then allowable by law.
19.3 DEFAULT BY LESSOR. Lessor shall not be in default unless Lessor
fails to perform obligations required of Lessor within a reasonable time, but
in no event later than thirty (30) days after written notice by Lessee to
Lessor and to the holder of any first mortgage or deed of trust covering the
Premises whose name and address shall have theretofore been furnished to Lessee
in writing, specifying wherein Lessor has failed to perform such obligation;
provided, however, that if the nature of Lessor's obligation is such that more
than thirty (30) days are required for performance then Lessor shall not be in
default if Lessor commences performance within such 30-day period and
thereafter diligently prosecutes the same to completion.
19.4 LATE CHARGES. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing accounting charges, and late charges which may be imposed on Lessor
by the terms of any mortgage or trust deed covering the Premises. Accordingly,
if any installment of rent or any other sum due from Lessee shall not be
received by Lessor or Lessor's designee within ten (10) days after such amount
shall be due, then, without any requirement for notice to Lessee, Lessee shall
pay to Lessor a late charge equal to 6% of such overdue amount. The parties
hereby agree that such late charge represents a fair and reasonable estimate of
the costs Lessor will incur by reason of late payment by Lessee. Acceptance of
such late charge by Lessor shall in no event constitute a waiver of Lessee's
default with respect to such overdue amount, nor prevent Lessor from exercising
any of the other rights and remedies granted hereunder. In the event that a
late charge is payable hereunder, whether or not collected, for three (3)
consecutive installments of rent, then rent shall automatically
<PAGE> 7
become due and payable quarterly in advance, rather than monthly,
notwithstanding paragraph 4 or any other provision of this Lease to the
contrary.
19.5 IMPOUNDS. In the event that a late charge is payable hereunder,
whether or not collected, for three (3) installments of rent or any other
monetary obligation of Lessee under the terms of this Lease, Lessee shall pay
to Lessor, if Lessor shall so request, in addition to any other payments
required under this Lease, a monthly advance installment, payable at the same
time as the monthly rent, as estimated by Lessor, for real property tax and
insurance expenses on the Premises which are payable by Lessee under the terms
of this Lease. Such fund shall be established to insure payment when due,
before delinquency, of any or all such real property taxes and insurance
premiums. If the amounts paid to Lessor by Lessee under the provisions of this
paragraph are insufficient to discharge the obligations of Lessee to pay such
real property taxes and insurance premiums as the same become due, Lessee shall
pay to Lessor, upon Lessor's demand, such additional sums necessary to pay such
obligations. All moneys paid to Lessor under this paragraph may be intermingled
with other moneys of Lessor and shall not bear interest. In the event of a
default in the obligation of Lessee to perform under this Lease, then any
balance remaining from funds paid to Lessor under the provisions of this
paragraph may, at the option of Lessor, be applied to the payment of any
monetary default of Lessee in lieu of being applied to the payment of real
property tax and insurance premiums.
19.6 CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain, or sold under the threat of the exercise of said
power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than 10% of the floor area
of the building on the Premises, or more than 25% of the land area of the
Premises which is not occupied by any building, is taken by condemnation, Lessee
may, at Lessee's option, to be exercised in writing only within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemnation authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the rent shall be
reduced in the proportion that the floor area of the building taken bears to the
total floor area of the building situated on the Premises. No reduction of rent
shall occur if the only area taken is that which does not have a building
located thereon. Any award for the taking of all or any part of the Premises
under the power of eminent domain or any payment made under threat of the
exercise of such power shall be the property of Lessor, whether such award shall
be made as compensation for diminution in value of the leasehold or for the
taking of the fee, or as severance damages; provided, however, that Lessee shall
be entitled to any award for loss of or damage to Lessee's trade fixtures and
removable personal property. In the event that this Lease is not terminated by
reason of such condemnation, Lessor shall to the extent of severance damages
received by Lessor in connection with such condemnation, repair any damage to
the Premises caused by such condemnation except to the extent that Lessee has
been reimbursed therefore by the condemning authority. Lessee shall pay any
amount in excess of such severance damages required to complete such repair.
20. ESTOPPEL CERTIFICATE.
(a) Lessee shall at any time upon not less than ten (10) days prior
written notice from Lessor execute, acknowledge and deliver to Lessor a
statement in writing (i) certifying that this Lease is unmodified and in full
force and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and
the date to which the rent and other charges are paid in advance, if any, and
(ii) acknowledging that there are not, to Lessee's knowledge, any uncured
defaults on the part of Lessor hereunder, or specifying such defaults if any
are claimed. Any such statement may be conclusively relied upon by any
prospective purchaser or encumbrancer of the Premises.
(b) At Lessor's option, Lessee's failure to deliver such statement
within such time shall be a material breach of this Lease or shall be
conclusive upon Lessee (i) that this Lease is in full force and effect, without
modification except as may be represented by Lessor, (ii) that there are no
uncured defaults in Lessor's performance, and (iii) that not more than one
month's rent has been paid in advance or such failure may be considered by
Lessor as a default by Lessee under this Lease.
(c) If Lessor desires to finance, refinance, or sell the Premises,
or any part thereof, Lessee hereby agrees to deliver to any lender or purchaser
designated by Lessor such financial statements of Lessee as may be reasonably
required by such lender of purchaser. Such statements shall include the past
three years financial statements of Lessee. All such financial statements shall
be received by Lessor and such lender or purchaser in confidence and shall be
used only for the purposes herein set forth.
21. LESSOR'S LIABILITY. The term "Lessor" as used herein shall mean only the
owner or owners at the time in question of the fee title or a lessee's interest
in a ground lease of the Premises, and except as expressly provided in
Paragraph 16, in the event of any transfer of such title or interest, Lessor
herein named (and in case of any subsequent transfers other then from the
grantor) shall be relieved from and after the date of such transfer of all
liability as respects Lessor's obligations thereafter to be performed, provided
that any funds in the hands of Lessor or the then grantor at the time of such
transfer, in which Lessee has an interest, shall be delivered to the grantee.
The obligations contained in this Lease to be performed by Lessor shall,
subject as aforesaid, be binding on Lessor's successors and assigns, only
during their respective periods of ownership.
22. SEVERABILITY. The invalidity of any provision of this Lease as determined
by a court of competent jurisdiction, shall in no way affect the validity of
any other provision hereof.
23. INTEREST ON PAST-DUE OBLIGATIONS. Except as expressly herein provided, any
amount due to Lessor not paid when due shall bear interest at the maximum rate
then allowable by law from the date due. Payment of such interest shall not
excuse or cure any default by Lessee under this Lease, provided, however, that
interest shall not be payable on late charges incurred by Lessee nor on any
amounts upon which late charges are paid by Lessee.
24. TIME OF ESSENCE. Time is of the essence.
25. ADDITIONAL RENT. Any monetary obligations of Lessee to Lessor under the
terms of this Lease shall be deemed to be rent.
26. INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS. This Lease contains all
agreements of the parties with respect to any matter mentioned herein. No prior
agreement or understanding pertaining to any such matter shall be effective.
This Lease may be modified in writing only, signed by the parties in interest
at the time of the modification. Except as otherwise stated in this Lease,
Lessee hereby acknowledges that neither the real estate broker listed in
Paragraph 10 hereof nor any cooperation broker on this transaction nor the
Lessor or any employees or agents of any of said persons has made any oral or
written warranties or representations to Lessee relative to the condition or
use by Lessee of said premises and Lessee acknowledges that Lessee assumes all
responsibility regarding the Occupational Safety Health Act, the legal use and
adaptability of the Premises and the compliance thereof with all applicable
laws and regulations in effect during the term of this Lease except as
otherwise specifically stated in this Lease.
27. NOTICES AND WAIVERS. Any notice required or permitted to be given
hereunder shall be in writing and may be given by personal delivery or by
certified mail, and if given personally or by mail, shall be deemed
sufficiently given if addressed to Lessee or to Lessor at the address noted
below the signature of the respective parties, as the case may be. Either party
may by notice to the other specify a different address for notice purposes
except that upon Lessee's taking possession of the Premises, the Premises shall
<PAGE> 8
constitute Lessee's address for notice purposes. A copy of all notices required
or permitted to be given to Lessor hereunder shall be concurrently transmitted
to such party or parties at such addresses as Lessor may from time to time
hereafter designate by notice to Lessee.
No waiver by Lessor or any provision hereof shall be deemed a waiver of
any other provision hereof or of any subsequent breach by Lessee of the same or
any other provision. Lessor's consent to, or approval of any act, shall not be
deemed to render unnecessary the obtaining of Lessor's consent to or approval of
any subsequent act by Lessee. The acceptance of rent hereunder by Lessor shall
not be a waiver of any preceding breach by Lessee of any provision hereof,
other than the failure of Lessee to pay the particular rent so accepted,
regardless of Lessor's knowledge of such preceding breach at the time of
acceptance of such rent.
28. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a "short form" memorandum of this
Lease for recording purposes.
29. HOLDING OVER. If Lessee, with Lessor's consent, remains in possession of
the Premises or any part thereof after the expiration of the term hereof, such
occupancy shall be a tenancy from month to month upon all the provisions of
this Lease pertaining to the obligations of Lessee, but all options and rights
of first refusal, if any, granted under the terms of this Lease shall be deemed
terminated and be of no further effect during said month to month tenancy.
30. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
31. COVENANTS AND CONDITIONS. Each provision of this Lease performable by
Lessee shall be deemed both a covenant and a condition.
32. BINDING EFFECT; CHOICE OF LAW. Subject to any provisions hereof
restricting assignment or subletting by Lessee and subject to the provisions of
Paragraph 21, this Lease shall bind the parties, their personal
representatives, successors and assigns. This Lease shall be governed by the
laws of the State wherein the Premises are located.
33. SUBORDINATION.
(a) This Lease, at Lessor's option, shall be subordinate to any
ground lease, mortgage, deed of trust, or any other hypothecation or security
now or hereafter placed upon the real property of which the Premises are a part
and to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Premises shall not be disturbed if Lessee is not in default and so long as
Lessee shall pay the rent and observe and perform all of the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust or ground lease, and shall give written notice thereof to Lessee,
this Lease shall be deemed prior to such mortgage, deed of trust, or ground
lease, whether this Lease is dated prior or subsequent to the date of said
mortgage, deed of trust or ground lease or the date of recording thereof.
(b) Lessee agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. Lessee's failure
to execute such documents within 10 days after written demand shall constitute
a material default by Lessee hereunder, or, at Lessor's option, Lessor shall
execute such documents on behalf of Lessee as Lessee's attorney-in-fact. Lessee
does hereby make, constitute and irrevocably appoint Lessor as Lessee's
attorney-in-fact and in Lessee's name, place and stead, to execute such
documents in accordance with this paragraph 33(b).
34. LESSOR'S ACCESS. Lessor and Lessor's agents shall have the right to enter
the Premises at reasonable times for the purpose of inspecting the same,
showing the same to prospective purchasers, lenders, or lessees, and making
such alterations, repairs, improvements or additions to the Premises or to the
building of which they are a part as Lessor may deem necessary or desirable.
Lessor may at any time place on or about the Premises any ordinary
"For Sale" signs and Lessor may at any time during the last 120 days of the
term hereof place on or about the Premises any ordinary "For Lease" signs, all
without rebate of rent or liability to Lessee.
35. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
36. SIGNS. Lessee shall not place any sign upon the premises without Lessor's
prior written consent except that Lessee shall have the right, without the
prior permission of Lessor to place ordinary and usual for rent or sublet signs
thereon.
37. MERGER. The voluntary or other surrender of this Lease by Lessee, or a
mutual cancellation thereof, or a termination by Lessor, shall not work a
merger, and shall, at the option of Lessor, terminate all or any existing
subtenancies or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subtenancies.
38. CONSENTS. Except for paragraph 35 hereof, wherever in this Lease the
consent of one party is required to an act of the other party, such consent
shall not be unreasonably withheld.
39. GUARANTOR. In the event that there is a guarantor of this Lease, said
guarantor shall have the same obligations as Lessee under this Lease.
40. QUIET POSSESSION. Upon Lessee paying the rent for the Premises and
observing and performing all of the covenants, conditions and provisions on
Lessee's part to be observed and performed hereunder, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease. The individuals executing this Lease on behalf of
Lessor represent and warrant to Lessee that they are fully authorized and
legally capable of executing this Lease on behalf of Lessor and that such
execution is binding upon all parties holding an ownership interest in the
Premises.
41. OPTIONS.
41.1 DEFINITION. As used in this paragraph the word "Options" has the
following meaning: (1) the right or option to extend the term of this Lease or
to renew this Lease or to extend or renew any lease that Lessee has on other
property of Lessor; (2) the option or right of first refusal to lease the
Premises or the right of first offer to lease the Premises or the right of
first refusal to lease other property of Lessor or the right of first offer to
lease other property of Lessor.
41.2 OPTIONS PERSONAL. Each Option granted to Lessee in this Lease
are personal to Lessee and may not be exercised or be assigned, voluntarily or
involuntarily, by or to any person or entity other than Lessee, provided,
however, the Option may be exercised by or assigned to any Lessee Affiliate as
defined in paragraph 18.2 of this Lease. The Options herein granted to Lessee
are not assignable separate and apart from this Lease.
<PAGE> 9
4.13 MULTIPLE OPTIONS. In the event that Lessee has any multiple options
to extend or renew this Lease a later option cannot be exercised unless the
prior option to extend or renew this Lease has been so exercised.
4.14 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary, (i) during the time
commencing from the date Lessor gives to Lessee a notice of default pursuant to
paragraph 19.1(b) or 19.1(c) and continuing until the default alleged in said
notice of default is cured, or (ii) at any time after an event of default
described paragraphs 19.1(a), 19.1(d), or 19.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) in the event that
Lessor has given to Lessee three or more notices of default under paragraph
19.1(b), where a late charge becomes payable under paragraph 19.4 for each of
such defaults, or paragraph 19.1,(c), whether or not the defaults are cured,
during the 12 month period prior to the time the Lessee intends to exercise the
subject Option.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provision of paragraph 41.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of 30 days after such obligation becomes due (without any necessity
of Lessor to give notice thereof to Lessee), or (ii) Lessee fails to commence to
cure a default specified in paragraph 19.1(c) within 30 days after the date that
Lessor gives notice to Lessee of such default and/or Lessee fails thereafter to
diligently prosecute said cure to completion, or (iii) lessee commits a default
described in paragraph 19.1(a), 19.1(d), or 19.1(e) (without any necessity of
Lessor to give notice of such default to Lessee), or (iv) Lessor gives to Lessee
three or more notices of default under paragraph 19.1(b), where a late charge
becomes payable under paragraph 19.4 for each such default, or paragraph
19.1(c), whether or not the defaults are cured.
42. MULTIPLE TENANT BUILDING. In the event that the Premises are part of a
larger building or group of buildings then Lessee agrees that it will abide by,
keep and observe all reasonable rules and regulations which Lessor may make from
time to time for the management, safety, care, and cleanliness of the building
and grounds, the parking of vehicles and the preservation of good order therein
as well as for the convenience of other occupants and tenants of the building.
The violation of any such rules and regulations shall be deemed a material
breach of this Lease by Lessee.
43. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of Lessee, its agents and
invitees from acts of third parties.
44. EASEMENTS. Lessor reserves to itself the right, from time to time, to grant
such easements, rights and dedications that Lessor deems necessary or desirable,
and to cause the recordation of Parcel Maps and restrictions, so long as such
easements, rights, dedications, Maps and restrictions do not unreasonably
interfere with the use of the Premises by Lessee. Lessee shall sign any of the
aforementioned documents upon request of Lessor and failure to do so shall
constitute a material breach of this Lease.
45. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one party to the other under the provisions
hereof, the party against whom the obligation to pay the money is asserted shall
have the right to make payment "under protest" and such payment shall not be
regarded as a voluntary payment, and there shall survive the right on the part
of said party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said party to pay
such sum or any part thereof, said party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
46. AUTHORITY. If Lessee is a corporation, trust, or general or limited
partnership, each individual executing this Lease on behalf of such entity
represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of said entity. If Lessee is a corporation, trust
or partnership, Lessee shall, within thirty (30) days after execution of this
Lease, deliver to Lessor evidence of such authority satisfactory to Lessor.
47. CONFLICT. Any conflict between the printed provisions of this Lease and
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
48. ADDENDUM. Following is an addendum containing paragraphs 49 through 60
which constitutes a part of this Lease.
ADDENDUM
--------
49. The attached composite floor plan (Exhibit "A"), master Lease
(Exhibit "B"), Horizon Real Estate Group, Inc. Notice and Waiver of Liability
Rider (Exhibit "C"), and Corporate Resolution (Exhibit "D"), shall constitute
a part of this Lease.
50. Terry Dunlap is an authorized signator on this Lease as evidenced by
attached Corporate Resolution, (Exhibit "D").
51. SCHEDULE OF RENTS:
<TABLE>
<CAPTION>
YEAR BASE **MONTHLY TOTAL
RENT BASE RENT ANNUAL
RENT
<S> <C> <C> <C>
1 $.4532/s.f. $ 9,355.00 $112,260.00
2 $.4759/s.f. $ 9,824.00 $117,888.00
3 $.5000/s.f. $10,322.00 $123,864.00
4 $.5246/s.f. $10,829.00 $129,948.00
5 $.5500/s.f. $11,354.00 $136,248.00
*6 $.4691/s.f. $ 9,684.00 $116,208.00
*7 $.4926/s.f. $10,169.00 $122,028.00
</TABLE>
* Years 6 & 7 are part of a two (2) year option.
** Plus Rental Tax (Current rental tax of 1.5%, is subject to change).
52. PERSONAL GUARANTY. N/A.
53. Pursuant to Article 4 of the Lease Agreement, Lessee shall pay to Lessor
in addition to, and at the time of the rental payable hereunder, any excise,
sales, rental or transaction privilege taxes of any nature, other than income
and estate taxes, now or hereafter imposed by any governmental body or agency
upon, against, or in any way payable by Lessor and attributed to or measured by
rent or
<PAGE> 10
other charges or prorations payable by lessee hereunder or as a result of this
Lease, which is currently levied at the rate of one and one half percent (1.5%).
54. Notwithstanding the provisions as outlined in Article 6.2. Compliance
with Law, Lessee hereby agrees not to do or permit anything to be done in or
about the Premises which will increase the existing rate of insurance upon the
Premises or cause the cancellation of any insurance policy covering Premises or
any building of which the Premises may be a part, nor shall Lessee sell or
permit to be kept, used or sold in or about said Premises any articles which may
be prohibited by a standard form policy of fire or other hazard insurance. If
Lessee's use of Premises results in any increase in premiums for insurance,
Lessee will promptly reimburse lessor for the cost of such increase. Lessee's
acts which might result in insurance premium increases include without limiting
the generality of the foregoing, such things as storing or using flammable
substances, stocking materials too close to the ceiling or sprinklers, failure
to maintain adequate aisles, or failure to impose or enforce smoking rules. Any
conduct of Lessee which causes an increase in fire or other hazard insurance
premiums, or which is in violation of recommendations by Lessor's insurance
carrier or failure by Lessee to promptly take any corrective action recommended
by Lessor's insurance carrier shall be a material default under this Lease and
Lessor shall be entitled to all of the remedies in Paragraph 19.2 of this Lease.
Lessee further agrees not to use the Premises or permit to be done in or about
the Premises which will in any way conflict with any law, statute, zoning
restriction, ordinance or governmental rule or regulation or requirements of
duly constituted public authorities now in force or which may hereafter be
enacted or promulgated. Lessee shall, at its sole cost and expense, promptly
comply with all applicable laws, statues, ordinances, and governmental rules,
regulations, or requirements now in force or which may hereafter be in force,
and with the requirements of any board of fire underwriters or other similar
body now or hereafter constituted relating to or affecting the condition, use or
occupancy of the Premises. The judgment of any court of competent jurisdiction
or the admission of Lessee in any action against Lessee, whether Lessor be a
party thereto or not, that Lessee has violated any law, statute, ordinance or
governmental rule, regulation or requirement, shall be conclusive of that fact
as between Lessor and Lessee. This applies particularly and specifically,
without limiting the generality thereof, to any act which is in violation of the
body of law generally referred to as the Hazardous Substances law. At the time
this lease is made, such body of law includes, but is not limited to, the Atomic
Energy Act, the Clean Air Act, the Comprehensive Environmental Response
Compensation and Liability Act (of 1980) known as "Superfund:, the Clean Water
Act, the Occupational Safety and Health Act, the Resource Conservation and
Recovery Act (of 1976 amended), the Solid Waste Disposal Act, the Toxic
Substances control Act, and Uses Oil Recycling Act. Lessee will indemnify Lessor
against all cost, expense, or loss, including attorney's fees, which Lessor may
sustain as a result of Lessee's violation of his obligations under this
paragraph. Any violation by Lessee of its duties under this paragraph shall be a
material default under this lease which will entitle Lessor to all of its
remedies under this Lease. The obligations of Lessee under Paragraph 51 shall
survive termination of this Lease.
55. Lessor shall indemnify Lessee against any claims arising from the presence
of use of hazardous materials in or around the demised premises prior to the
commencement of this lease and Lessee shall indemnify Lessor against all claims
arising from the use of hazardous materials in or around the demised premises
during the lease term or any extension or renewal thereof.
56. Lessee acknowledges that Lessee has read paragraph 40 of this Lease.
Lessee understands that the recessed truck dock and adjacent inside loading
platform is common area and is used by various tenants in the building. This
area is for the expedient loading and unloading of tenant's property and is not
to be used for storage of trucks, trailers or other vehicles not in the process
of loading or unloading. The truck dock and loading platform shall be used only
for loading or unloading, which shall be accomplished as expeditiously as can
reasonably be done. After which, trucks, trailers and other vehicles used in the
loading or unloading shall be promptly removed from the truck dock.
57. CONDITION OF PREMISES UPON COMMENCEMENT OF LEASE. The leased premises
is part of an older building. Lessee has inspected the premises and is familiar
with its age, construction, and general condition and accepts the premises in an
"as is" condition except for certain things Lessor has agreed to do, at the
inception of the Lease term, as follows:
- Ensuring that existing electrical and lighting systems serving
the leasehold premises are in working order;
- Ensuring that existing restrooms serving the demised premises are
in compliance with current ADA standards;
- Ensuring that all plumbing in the demised premises is in working
order;
- Ensuring that the sprinkler system serving the entire building
has been inspected and is in working order;
- Ensuring that existing doors and door hardware serving the
demised premises are in working order;
- Ensuring that the existing roof above the demised premises is
leak free;
- Ensuring that the existing structural components within the
demised premises are sound;
- Ensuring that the demised premises is clean and ready for
occupancy;
- Ensuring that all interior walls, doors, etc within the demised
premises are painted;
- Ensuring that existing carpeting and floor tile within the
demised premises are replaced with new industrial grade
carpeting;
- Ensuring that existing air-conditioning equipment serving the
demised premises is in working order. Sublessor reserves the
right to repair, refurbish and/or replace existing equipment as
needed.
58. TENANT IMPROVEMENTS. The following tenant improvements are to be
accomplished by Lessor the cost of which is included in the Base Rental Rate:
- Installation of 200 lineal feet of new demising wall within the
leasehold premises;
- Installation of new demising wall between sublessee's
manufacturing warehouse area and adjoining manufacturing
warehouse area to the west;
- Installation of seven (7) new doors and relocation of three (3)
existing doors within the office area of the leasehold premises;
- Installation of three (3) 6' x 4' interior windows within the
office area of the leasehold premises;
- Provision of water supply and drain in proposed 600 s.f. break
room and 720 s.f. manufacturing office;
- Installation of new door at main entry;
- Provision of 1400 amp electrical service consisting of two (2)
600 amp and one (1) 200 amp service sections;
- Installation of a new truck well south of the south wall of
leasehold premises;
- Installation of Levelor Blinds on office windows along east
outside wall of leasehold premises;
- Installation of one (1) exhaust fan on roof above manufacturing
area. Cost not to exceed $500.00;
- Installation of a new 10' x 12' roll up door at south entry into
manufacturing warehouse area of the leasehold premises;
<PAGE> 11
59. COMPLETION OF TENANT IMPROVEMENTS. It is the intent of Sublessor to
complete said Tenant Improvements by no later than January 1, 1999. However,
Sublessor's ability to do so is contingent on an expeditious city approval of
Sublessor's plans. Sublessor, therefore, cannot guarantee completion by January
1, 1999 unless Sublessor receives immediate approval of its plans from the city.
60. OPTION. Sublessor shall grant Sublessee an option to extend its lease an
additional two (2) years at the aforementioned dates. Sublessee shall notify
Sublessor in writing 90 days prior to expiration of the 5 year term of its
intention to exercise the option. Assuming that Sublessee is in good standing,
Sublessor shall not unreasonably withhold approval of the two (2) year
extension.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS LEASE, SHOW THEIR INFORMED
AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS
LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND
EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT,
OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. LESSEE UNDERSTANDS THAT
HORIZON REAL ESTATE GROUP, INC. REPRESENTS THE LESSOR AND NOT THE LESSEE IN
THIS LEASE TRANSACTION.
THE PARTIES HERETO HAVE EXECUTED THIS LEASE ON THE DATES SPECIFIED IMMEDIATELY
ADJACENT TO THEIR RESPECTIVE SIGNATURES.
Executed at Tempe, Arizona 234 South Extension L.L.C., an Arizona Limited
-------------- ----------------------------------------------
Liability Company
----------------------------------
on 11-16-98 By /s/ Ted Lindeken
-------- --------------------------------
Ted Lindeken (Managing Partner)
Address 7329 Los Feliz By /s/ Larry Young
-------------- --------------------------------
Larry Young (Managing Partner)
Tempe, Arizona 85283 "Sublessor" (Corporate Seal)
- --------------------
Executed at Mesa, Arizona DuraSwitch Industries, Inc.
------------- ---------------------------------
on October 21, 1998 By /s/ Terry Dunlap
---------------- --------------------------------
Terry Dunlap
Address 333 South Nina Drive Its CEO/President
-------------------- ------------------------------
Mesa, Arizona 85210 "Sublessee" (Corporate Seal)
--------------------
<PAGE> 12
ADDENDUM TO STANDARD SUBLEASE
This Addendum, dated, for reference purposes only, February 22, 1999, to that
certain sublease agreement dated October 15, 1998 made by and between 234 South
Extension L.L.C., an Arizona Limited Liability Company ("Sublessor") and
Duraswitch Industries, Inc. ("Sublessee") is made by and between the same
parties for the purpose of adding 13,007 square feet to the originally
subleased 20,643 square feet of office manufacturing area. The new total shall
be 33,650 square feet as shown on the attached revised composite floor plan
(Exhibit "A").
TERM. The Term of the sublease for the additional space shall be for Four (4)
years and Ten (10) months with a Two (2) year option at rates stipulated in the
original sublease and herein commencing on March 1, 1999 and ending on December
31, 2003 unless sooner terminated pursuant to any provision of the original
sublease.
RENT. (ADDITIONAL 1,920 SQUARE FOOT OFFICE AREA)
Sublessee shall pay to Sublessor as rent for the additional 1,920 square foot
office portion of the premises for year 1, equal monthly payments of $887.57
($870.14 Base Rent + $17.43 Rental Tax), in advance on the 1st day of each
month of the term hereof. Sublessee shall pay Sublessor upon the execution
hereof $887.57 for the month of April, 1999. Said payment shall be due upon
completion of the tenant improvement work in the added space. Completion of
said tenant improvement work is anticipated for April 1, 1999. Refer to
Schedule of Rents herein for an itemization of rental payments applicable to
Years 1 through 7 of the sublease.
RENT. (ADDITIONAL 11,087 SQUARE FOOT MANUFACTURING AREA)
Sublessee shall pay to Sublessor as rent for the additional 11,087 square foot
manufacturing portion of the premises for Year 1, equal monthly payments of
$5,125.12 ($5,024.63 Base Rent + $100.49 Rental Tax), in advance on the 1st
day of each month of the term hereof, except that there shall be no rent
charged for the first Three (3) months of the sublease. Sublessee shall pay
sublessor after the execution hereof and prior to June 1, 1999 $5,125.12 for
the month of June, 1999. Refer to the Schedule of Rents herein for an
itemization of rental payments applicable to Years 1 through 7 of the sublease.
SCHEDULE OF RENTS.
a) 1,920 SF Office Area
<TABLE>
<CAPTION>
**MONTHLY TOTAL ANNUAL
YEAR MONTHS **BASE RENT BASE RENT RENT
---- ------ ----------- --------- ----
<S> <C> <C> <C> <C>
1 4-12 $0.4532/SF $870.14 $8,701.40
2 13-24 $0.4759/SF $913.73 $10,964.76
3 25-36 $0.5000/SF $960.00 $11,520.00
4 37-48 $0.5246/SF $1,007.23 $12,086.76
5 49-60 $0.5500/SF $1,056.00 $12,672.00
* 6 61-72 $0.4691/SF $900.67 $10,808.04
* 7 73-84 $0.4926/SF $945.79 $11,349.48
----------
TOTAL $78,102.44
</TABLE>
b) 11,087 SF Manufacturing Area
<TABLE>
<CAPTION>
**MONTHLY TOTAL ANNUAL
YEAR MONTHS **BASE RENT BASE RENT RENT
---- ------ ----------- --------- ----
<S> <C> <C> <C> <C>
1 3-5 $0.0000/SF $0.00 $0.00
1 6-12 $0.4532/SF $5,024.63 $35,172.41
2 13-24 $0.4759/SF $5,276.30 $63,315.64
3 25-36 $0.5000/SF $5,543.50 $66,522.00
4 37-48 $0.5246/SF $5,816.24 $69,794.88
5 49-60 $0.5500/SF $6,097.85 $73,174.20
* 6 61-72 $0.4691/SF $5,200.91 $62,410.92
* 7 73-84 $0.4926/SF $5,461.46 $65,537.52
----------
TOTAL $435,927.57
TOTAL OFFICE & MANUFACTURING AREA $514,030.01
</TABLE>
Page 1 of 2 Initials /s/ BB
--------
/s/ L.Y. /s/ T.L.
<PAGE> 13
* Years 6 and 7 are part of a Two (2) year option.
** Plus Rental Tax (Current Rental Tax of 2% is subject to change).
ADDITIONAL SECURITY DEPOSIT. Waived. None required
USE. The additional space shall be used and occupied only for Manufacturing,
storage, and wholesaling of integrated electronic panels and for no other
purpose.
AUTHORIZED SIGNATURE. The corporate resolution dated October 21, 1998,
identified as Exhibit "D" to the original sublease shall be amended to include
Bob Brilon, CFO and President as an authorized signature on this addendum.
All other terms and conditions of the original sublease agreement shall
remain the same.
The attached revised composite floor plan, sheets 1 and 2 (Exhibit "A") shall
constitute a part of this addendum to the original sublease dated October 15,
1998.
SUBLESSOR AND SUBLESSEE HAVE CAREFULLY READ AND REVIEWED THIS ADDENDUM AND EACH
TERM AND PROVISION CONTAINED HEREIN AND, BY EXECUTION OF THIS ADDENDUM, SHOW
THEIR INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT
THE TIME THIS ADDENDUM IS EXECUTED, THE TERMS OF THIS ADDENDUM ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF SUBLESSOR AND SUBLESSEE
WITH RESPECT TO THE PREMISES.
IF THIS ADDENDUM HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR SUBMISSION TO
YOUR ATTORNEY FOR HIS APPROVAL. NO REPRESENTATION OR RECOMMENDATION IS MADE
BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE
BROKER OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFCIENCY, LEGAL EFFECT,
OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION RELATING THERETO; THE
PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN LEGAL COUNSEL AS TO
THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE, SUBLESSEE UNDERSTANDS THAT
NAI HORIZON REPRESENTS THE SUBLESSOR AND NOT THE SUBLESSEE IN THIS ADDENDUM
TO SUBLEASE TRANSACTION.
THE PARTIES HERETO HAVE EXECUTED THIS ADDENDUM ON THE DATES SPECIFIED
IMMEDIATELY ADJACENT TO THEIR RESPECTIVE SIGNATURES.
Executed at Tempe, Arizona 234 South Extension L.L.C.,
--------------------- ------------------------------------
An Arizona Limited Liability Company
------------------------------------
On 2-26-99 By /s/ Ted Lindeken
------------------------------- ----------------------------------
Ted Lindeken (Managing Partner)
Address 7229 Los Feliz By /s/ Larry Young
-------------------------- ----------------------------------
Larry Young (Managing Partner)
Tempe, Arizona 85283
- ---------------------------------
"Sublessor" (Corporate Seal)
Executed at Mesa, Arizona DuraSwitch Industries, Inc.
--------------------- ------------------------------------
On 2/26/99 By /s/ Bob Brilon
------------------------------- ----------------------------------
Bob Brilon
Address 234 South Extension Its CFO/President
-------------------------- ----------------------------------
Mesa, Arizona 85210
- ---------------------------------
"Sublessee" (Corporate Seal)
Page 2 of 2 Initials /s/ BB
--------
/s/ L.Y. /s/ T.L.
<PAGE> 14
EXHIBIT A
INDUSTRIAL BUILDING
AVAILABLE FOR SUBLEASE (2-4-98)
+/-78,816 S.F. DIVISIBLE TO 10,000 S.F.
234 South Extension Road, Mesa
[GRAPHIC OF FLOOR PLAN]
[GRAPHIC OF BUSINESS LOCATION]
<PAGE> 15
[GRAPHIC OF FLOOR PLAN]
<PAGE> 16
EXHIBIT A
INDUSTRIAL BUILDING
AVAILABLE FOR SUBLEASE (2-4-98)
+/-78,816 S.F. DIVISIBLE TO 10,000 S.F.
234 South Extension Road, Mesa
[GRAPHIC OF FLOOR PLAN]
<PAGE> 17
[GRAPHIC OF FLOOR PLAN]
<PAGE> 18
EXHIBIT B
MASTER LEASE CONSISTING OF:
- Lease Agreement dated 11/1/64
- Amendment to Lease dated 3/1/98
- Lease Assignment and Assumption Agreement dated 4/1/98
- Lessor's Consent to Assignment and Estoppel Certificate dated 4/1/98.
<PAGE> 19
EXHIBIT B
MASTER LEASE CONSISTING OF:
---------------------------
- Lease Agreement dated 11/1/64
- Amendment to Lease dated 3/1/98
- Lease Assignment & Assumption Agreement dated 4/1/98
- Lessor's Consent to Assignment and Estoppel Certificate dated 4/1/98
<PAGE> 1
Exhibit 10.16
MANAGEMENT SERVICES AGREEMENT
THIS MANAGEMENT SERVICES AGREEMENT IS MADE AND ENTERED INTO AS OF MAY 1, 1997 by
and between the Total Switch, Inc., an Arizona corporation, herein referred to
as "TSI", and VanDun, LLC, an Arizona limited liability company, herein referred
to as "VanDun".
WHEREAS, TSI has acquired the rights and title to various patents, continuing
improvements and related technology for switches (e.g. CIP Patent Serial No.
08/646,083), herein called "Patents"; Whereas, VanDun through its members
(Anthony Van Zeeland, the inventor and R. Terren Dunlap, an inventor) has
experience, information, expertise, written records, recollection of
background, special knowledge and other skills regarding such patents, the
protection of patents and related intellectual property knowledge; Whereas it
is recognized that valuable patents are subject to reckless attempts by
competitors or others to infringement upon the technology and by challenges
from competitors to supersede the rights of the Patent Holders; Therefore TSI
wishes to contract for the services of VanDun to preserve the patent history,
including backup records and to consult with TSI for the protection of the
associated intellectual property both domestically and internationally.
IT IS HEREBY AGREED THAT VANDUN WILL PERFORM THE FOLLOWING SERVICES:
Consult with TSI, its agents and legal counsel regarding the patents and
continuing applications for the patents; preserve related engineering notes and
records; be available as witnesses for any prosecution, defense or
infringement testimony regarding the patents; consult with TSI and its legal
counsel regarding strategies for protecting the patents and intellectual
property; and generally preserve existing documentation for protection of the
intellectual property concerning the patents.
IN CONSIDERATION OF THE ABOVE SERVICES, TSI agrees to pay VanDun a management
service fee in the amount of 1.1% of the invoiced sales price for all component
switches and integrated component switch panels sold by TSI. Further TSI agrees
to pay to VanDun an equivalent percentage of any license or sublicense fees or
other revenue received by TSI from the patented technology. TSI further agrees
to pay all out-of-pocket expenses incurred by VanDun such as but not limited to
travel, room and board, witness fees, telephone, fax, copying, and other such
expenses if as the result of requested services, appearances or consultation
under this agreement.
TERM: The agreement shall continue in full force and effect until the
expiration of the last patents which may issue on the aforesaid switch
technology.
PAYMENTS: Payments shall be made quarterly to VanDun, LLC and within 75 days of
the end of the previous reported quarter. TSI shall furnish a quarterly
financial statement to VanDun with each payment.
Signed /s/ R. Terren Dunlap Signed /s/ Anthony J. Van Zeeland
---------------------------- ----------------------------
for Total Switch, Inc. for VanDun, LLC
<PAGE> 1
Exhibit 10.17
AGREEMENT FOR ASSIGNMENT OF PRESENT
AND FUTURE INVENTIONS ON CERTAIN SUBJECT MATTER
This agreement made and entered into this 1st day of May, 1997, by and
between the Total Switch, Inc., a corporation existing under and by virtue of
the laws of the State of Arizona, having its principal place of business at
8655 E. Via De Ventura, Suite G-224, Scottsdale, Arizona, 85258, hereinafter
referred to as ("Company"), and Anthony J. Van Zeeland of Mesa, Arizona,
hereinafter referred to as ("Inventor"), witnesseth:
Whereas, Inventor has conceived of and produced inventions relating to
"Switches with Magnetically-Coupled Armature," as more particularly set forth
in applications filed in the United States Patent Office and identified as
follows:
(1) U.S. Patent No. 5,523,730;
Allowed June 4, 1997.
(2) Serial No. 08/646,083;
Allowed February 26, 1997
Whereas, Inventor has filed applications for patents, relating to the
above referenced switches (with Magnetically-Coupled Armature), throughout the
World, and specifications in the following countries:
Canada Great Britain
China Italy
France Mexico
Germany Taiwan
Whereas, Inventor has, or may have, other new and useful improvements and
ideas relating to switches;
Whereas, Company desires to secure assignment of the inventions and
proprietary rights of Inventor in and to the above-identified applications for
United States and Worldwide patents, and in and to the inventions set forth
therein, and to any inventions relating to switches which the Inventor may
hereafter make;
Now, therefore, for and in consideration of the issuance of fifty-five
thousand (55,000) shares of the Company's Common Stock, plus a note payable due
September 1, 1997 in the amount of $20,568.70 to Miller and Heymann; and the
issuance of nine hundred thirty-five thousand (935,000) shares to the Inventor
by the Company, and other good and valuable considerations hereinafter
mentioned, it is mutually understood and agreed as follows:
ARTICLE 1. Inventor agrees at Company's request, to execute in
Company's favor, all papers which may be necessary for the transfer, by
1
<PAGE> 2
complete assignment, of all of Inventor's proprietary rights in and to
the above-identified applications for letters patent in the United States
and throughout the World, and of all proprietary rights in and to any
inventions which Inventor may now or make in the future relating to
switches; on the terms and under the conditions as hereinafter provided.
Inventor agrees to assign any and all licensing rights to the Company
(including the April 10, 1996 Monopanel Agreement).
ARTICLE 2. Inventor agrees at Company's request and at the Company's
expense, to make and execute and have filed in the United States Patent
Office, and in the respective offices of foreign countries, applications
for patents on such of Inventor's inventions relating to switches, as may
be deemed advisable by Company.
ARTICLE 3. Inventor agrees that Company shall have the complete
control and regulation as to filing and prosecution of application for
patents in the United States and foreign countries, upon any of Inventor's
present or future inventions relating to switches.
ARTICLE 4. Company agrees to assume all financial expenditures
necessary to prepare and prosecute Inventor's patent applications as
herein outlined, and agrees to bear all expenses incidental to the
upkeep of patent applications and patents issued thereon, such as
payment of government taxes, fees, maintenance and normal working
expenses.
ARTICLE 5. Company hereby agrees that it will defend the title to
the applications and patents and will protect and save harmless, at its
own expense, Inventor from and against any and all claims or legal
proceedings brought against Inventor for infringement of patent rights
where the claim of infringement grows out of, or relates to, the
manufacture, use or sale, or other act or thing done under the
applications or patents or this license.
ARTICLE 6. It is understood that Company shall have exclusive
control of the prosecution of suits against infringers, and shall be
entitled to retain all proceeds as a result of such suits, subject to
timely payment of any monies due to Inventor by the Company.
/s/ Anthony J. Van Zeeland
---------------------------------------
Anthony J. Van Zeeland, Inventor
/s/ R. Terren Dunlap
---------------------------------------
R. Terren Dunlap for Total Switch, Inc.
2
<PAGE> 1
EXHIBIT 10.18
PURCHASE ORDER Page 1(2)
ERICSSON [LOGO] ------------------------
Date Our purchase order Rev
1999-04-07 Q02052 000
------------------------
Buyer/Phone Your reference
Brian Cunningham TERRY DUNLAP
(804) 592-7166
Material Planner Supplier
Brian Cunningham 504-592-3578 333 S. NINA DRIVE
MESA
Mail acknowledgement to: AZ
Ericsson Inc.
RMOT Purchasing Dept.
Mountain View Road
Lynchburg, VA 24502 Mail invoice to:
Delivery address Ericsson Inc.
Ericsson Inc. P.O. Box 40003
314 Jefferson Ridge Parkway Lynchburg, VA 24502
Lynchburg, VA 24501
ATTN: RECEIVING
Terms of Delivery
FOB DESTINATION, SELLER'S DOCK
Transportation method Terms of payment
UPS GROUND SERVICE NET PAY 30 DAYS
Box marking Currency Terms of freight
ERICSSON Q02052 USD PREPAID & ALLOWED
- -------------------------------------------------------------------------------
Item Product no. Qty Unit price
Description UOM Amount
Rev/Supplier product no.
1 RMF356202/1 15,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Jun 15, 1999
2 RMF356202/1 15,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Jul 01, 1999
3 RMF356202/1 30,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Jul 30, 1999
4 RMF356202/1 30,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Sep 01, 1999
- -------------------------------------------------------------------------------
1. We order according to conditions and specification above. For the order our
general purchaser conditions are valid as enclosed.
2. Please acknowledge order by signing below and mailing or faxing a copy of
acknowledged order to above material planner.
3. P.O. Number, Line Item Number, and Part Number must appear on all invoices,
correspondence, packages and shipping memorand.
4. Issue in duplicate (separate invoice for each order or partial shipment.
5. Do not insure or declare value unless for precious metals or jewels.
6. All packing lists must be attached to exterior of shipping containers.
- -------------------------------------------------------------------------------
ERICSSON INC.
PO Accepted with
- ------------------------------- ---------------------------- no changes [ ]
Approved - Ericsson Acknowledgement - Supplier. changes noted [ ]
/s/ Brian D. Cunningham 4/7/99
- ------------------------------- ----------------------------
*** The omitted information has been filed separately with the Securities and
Exchange Commission pursuant to a Confidential Treatment Request.
<PAGE> 2
PURCHASE ORDER Page 2 (2)
ERICSSON [LOGO] -------------------------
Date Our Purchase order Rev
1999-04-07 002052 000
-------------------------
Buyer/Phone Your reference
Brian Cunningham TERRY DUNLAP
(804)592-7166
Material planner Supplier
Brian Cunningham 804-592-3578 333 S. NINA DRIVE
- -------------------------------------------------------------------------------
Item Product no. Qty Unit price
Description UOM Amount
Rev/Supplier product no.
5 RMF356202/1 30,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Oct 01, 1999
6 RMF356202/1 30,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Nov 01, 1999
7 RMF356202/1 30,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Dec 01, 1999
8 RMF356202/1 60,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Dec 30, 1999
9 RMF356202/1 60,000 ***
MODE/VOLUME SWITCH EA ***
Rev: Similar to:
Mfgr:
DELIVERY TIME Feb 01, 2000
Grand Total is: ***
These switches are to conform to level 3 REV D
design per Tony Van Zeeland and Dwight Smith.
- -------------------------------------------------------------------------------
1. We order according to conditions and specification above. For the order our
general purchaser conditions are valid as enclosed.
2. Please acknowledge order by signing below and mailing or faxing a copy of
acknowledged order to above material planner.
3. P.O. Number, Line Item Number, and Part Number must appear on all invoices,
correspondence, packages and shipping memorand.
4. Issue in duplicate separate invoice for each order or partial shipment.
5. Do not insure or declare value unless for precious metals or jewels.
6. All packing lists must be attached to exterior of shipping containers.
- -------------------------------------------------------------------------------
ERICSSON INC.
PO Accepted with
- ------------------------------- ---------------------------- no changes [ ]
Approved - Ericsson Acknowledgement - Supplier. changes noted [ ]
/s/ Brian D. Cunningham 4/7/99
- ------------------------------- ----------------------------
#207375
*** The omitted information has been filed separately with the Securities and
Exchange Commission pursuant to a Confidential Treatment Request.
<PAGE> 1
Exhibit 16.1
[McGLADREY & PULLEN, LLP LETTERHEAD]
Securities and Exchange Commission
Washington, DC 20549
We were previously the independent accountants for Duraswitch Industries, Inc.
and on October 1, 1998, we reported on the financial statements of Duraswitch
Industries, Inc. as of and for the period ended December 31, 1997. On December
28, 1998 we were dismissed as independent accountants of Duraswitch Industries,
Inc.
We have read Duraswitch Industries, Inc.'s statements included in their
Registration Statement Form SB-2, and we agree with such statements.
/s/ McGladrey & Pullen, LLP
McGLADREY & PULLEN, LLP
<PAGE> 1
EXHIBIT 21.1
DuraSwitch Industries, Inc.
SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction of Name Under Which Subsidiary
Subsidiary Incorporation Does Business
- ---------- ------------- -------------
<S> <C> <C>
Aztec Industries, Inc. Arizona DuraSwitch Industries, Inc.
Total Switch, Inc. Arizona DuraSwitch Industries, Inc.
</TABLE>
<PAGE> 1
Exhibit 23.1
[McGLADREY & PULLEN, LLP LETTERHEAD]
INDEPENDENT AUDITOR'S CONSENT
To the Board of Directors
Duraswitch Industries, Inc.
Mesa, Arizona
We hereby consent to the use in this Registration Statement Form SB-2 filed on
or about June 3, 1999, of our report, dated October 1, 1998, relating to the
consolidated financial statements of Duraswitch Industries, Inc. We also
consent to the reference of our Firm under the caption "Experts" in the
prospectus.
/s/ McGladrey & Pullen, LLP
Phoenix, Arizona
June 3, 1999
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement on Form SB-2 of DuraSwitch
Industries, Inc. of our reports dated February 26, 1999 (expect for Note 2, as
to which the date is , 1999) appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Phoenix, Arizona
June 3, 1999
<PAGE> 1
Exhibit 24.1
SELLING STOCKHOLDER'S POWER OF ATTORNEY
74,266 Shares
DURASWITCH INDUSTRIES, INC.
Common Stock
($0.001 Par Value)
This Power of Attorney is executed in connection with a proposed
underwritten public offering of shares of the Common Stock, $0.001 par value
(the "Common Stock"), of DuraSwitch Industries, Inc., a Nevada corporation
(the "Company"). The proposed underwritten public offering will be effected
pursuant to an underwriting agreement (the "Underwriting Agreement") among the
Company, the undersigned Blackwater Capital Partners, L.P. (the "Selling
Stockholder"), and Cruttenden Roth Incorporated, as the underwriter (the
"Underwriter"). Unless otherwise defined herein or except as the context may
otherwise require, capitalized terms used herein shall have the meanings
ascribed to them in the Underwriting Agreement.
The proposed offering includes 2,000,000 shares of Common Stock to be
sold by the Company (the "Offered Shares"). In addition, the Company and Selling
Stockholder have granted the Underwriter an option to acquire up to an aggregate
of 300,000 additional shares of the Common Stock (the "Optional Shares") to
cover over-allotments, if any, in connection with the sale of the Offered
Shares. The undersigned proposes to sell such number of shares of Common Stock
as part of the Optional Shares, as set forth next to the signature of the
undersigned at the end of this Power of Attorney. The Optional Shares to be sold
by the undersigned in accordance with the terms of the Underwriting Agreement
are hereinafter collectively referred to as the "Undersigned's Shares."
1. The undersigned hereby irrevocably constitutes and appoints R.
Terren Dunlap and Robert J. Brilon, or any of them, as the undersigned's true
and lawful attorneys-in-fact (hereinafter, the "Attorneys"), with full power to
act in the name and on behalf of the undersigned:
A. To negotiate and reach an agreement with the Underwriter
upon the price at which the Undersigned's Shares shall be sold to the
Underwriter and to the public.
B. To negotiate, execute and deliver the Underwriting
Agreement, with full power to insert the price at which the
Undersigned's Shares shall be sold to the Underwriter and to carry out
and comply with all the provisions of the Underwriting Agreement. Such
Underwriting Agreement shall, with respect to obligations of the
Selling Stockholders, be substantially in the form attached hereto as
Exhibit A, with such changes, additions and amendments, including the
insertion of dates and purchase price, as the Attorneys in their sole
discretion shall deem advisable.
<PAGE> 2
C. To exercise any power conferred upon, and to take any
action authorized to be taken by, the Selling Stockholder under the
Underwriting Agreement in the sole and absolute discretion of the
Attorneys.
D. To receive, in the name of the undersigned, from
_______________ (the "Custodian"), any checks (or other funds) payable
to the undersigned representing the balance of the proceeds, after
deduction of the underwriting discounts and commissions and expenses,
as provided in the Underwriting Agreement, from the sale of the
Undersigned's Shares, and to issue receipts therefor.
E. To receive from the Company or the undersigned the
certificates for the Undersigned's Shares; to deliver or cause to be
delivered to the Custodian the certificates for the Undersigned's
Shares; to endorse or execute stock powers, assignments or other
documents necessary or expedient in order that the Undersigned's Shares
may be sold, assigned and transferred to the Underwriter and to deposit
or cause to be deposited with the Custodian certificates representing
the Undersigned's Shares; to instruct the Custodian with respect to the
delivery and surrender of the certificates for the Undersigned's
Shares; to negotiate, execute and deliver such further agreements with
the Custodian as the Attorneys may deem proper; to cause the Company's
transfer agent to issue and register a certificate or certificates
representing the Undersigned's Shares in accordance with the directions
of the Underwriter, and to permit inspection and packaging of such
certificates by the Underwriter.
F. To sell and deliver to the Underwriter the Undersigned's
Shares in accordance with the Underwriting Agreement, and to deliver or
cause to be delivered by the Custodian certificates representing the
Undersigned's Shares to the Underwriter at the closing to be held on
the Closing Date and, if applicable, at the closing to be held on the
Option Closing Date, each as established in accordance with the
Underwriting Agreement, against receipt by the Custodian, on behalf of
the undersigned, of the check(s)(or other funds) for the purchase price
of the Undersigned's Shares; and to ask, demand, sue for, levy, recover
and receive payment for and acknowledge receipt of, on behalf and for
the account of the undersigned, of the purchase price payable by the
Underwriter for the Undersigned's Shares.
G. To approve, in the sole discretion of the Attorneys, the
actual fees and expenses allocable to the undersigned under Section 6
of the Underwriting Agreement, and to authorize the Custodian (i) to
disburse from the balance of the proceeds full payment of such approved
fees and expenses and thereafter (ii) to disburse the remaining balance
of the proceeds to the undersigned.
H. To take all necessary action with respect to the
Registration Statement on Form SB-2 under the Securities Act of 1933,
as amended (the "Act"), covering the
2
<PAGE> 3
offering and sale of the Shares and all amendments thereto, and to
execute all such documents, letters and consents as may be necessary or
desirable in connection therewith including, without limiting the
generality of the foregoing, requests that the effectiveness of said
registration statement be accelerated.
I. To employ such legal counsel to act for the undersigned as
the Attorneys in their sole discretion deem appropriate, such counsel
being hereby authorized to rely upon the statements and representations
contained herein in connection with the offering and sale of the
Undersigned's Shares.
J. To make any assurances, communications and reports for and
on behalf of the undersigned to the Underwriter, or to various state
authorities, which may be requisite or proper to facilitate the sale or
resale of the Undersigned's Shares or to effect the registration or
qualification of the Undersigned's Shares under state securities or
Blue Sky laws or regulations.
K. Otherwise to do all things, including effecting amendments
to the Custody Agreement with the Custodian, and to execute and deliver
all documents which may be deemed necessary or advisable by the
Attorneys, and generally to act for and in the name of the undersigned,
with respect to the sale of the Undersigned's Shares to the Underwriter
and the resale of the Undersigned's Shares by the Underwriter, as fully
as could the undersigned if then personally present and acting.
The Attorneys each are hereby empowered to determine in their sole
discretion the time or times when, and the purposes for and the manner in which,
any power herein conferred upon him shall be exercised and the terms and
condition of any instrument or document which may be executed by either of them
pursuant hereto, and it is understood that the Attorneys may in their sole and
absolute discretion determine that such action is in the best interest of the
undersigned.
It is understood that the Attorneys shall serve entirely without
compensation, but will be entitled to reimbursement for all reasonable
out-of-pocket expenses incurred by them hereunder.
2. The Attorneys shall not be liable for any action taken pursuant to
this Power of Attorney, or failure to act hereunder, or for any other reason
except for gross negligence or willful misconduct. The undersigned agrees to
indemnify and hold the Attorneys harmless against all losses, suits, damages,
attorneys' fees, expenses or liabilities, which they may incur or sustain,
directly or indirectly, in connection with this Power of Attorney or any claim
or court action relating thereto and will pay such items upon demand.
3. This Power of Attorney and all authority hereby conferred is granted
and conferred with the understanding that the Undersigned's Shares are rendered
hereby subject to the interests of the Company and the Underwriter for the
purpose of completing such sales and other transactions contemplated by the
Underwriting Agreement and this Power of Attorney; the powers
3
<PAGE> 4
and authority hereby granted shall be irrevocable and shall not terminate by any
act of the undersigned, or by operation of law, or by the death, disability,
incompetency or incapacity of the undersigned, or by the occurrence of any other
event other than as expressly set forth herein. If, after the execution hereof,
the undersigned shall die or if any other such event shall occur, before the
completion of the sale of the Undersigned's Shares and the other transactions
contemplated by the Underwriting Agreement and this Power of Attorney, the
Attorneys each are nevertheless authorized and directed to complete such sales
and other transactions as if such death or other event had not occurred and
regardless of notice thereof. This Power of Attorney shall be binding upon the
heirs, executors, successors and assigns of the undersigned.
4. Notwithstanding any of the foregoing provisions, if all of the
transactions contemplated by the Underwriting Agreement and this Power of
Attorney are not completed prior to October 31, 1999, then from and after such
date, the undersigned shall have the power upon written notice delivered to the
Attorneys in care of Stephen W. Fillet, Principal, Cruttenden Roth Incorporated,
to terminate this Power of Attorney, and in any event this Power of Attorney
shall automatically terminate if the Underwriting Agreement shall be terminated
prior to October 31, 1999. Any such termination of this Power of Attorney shall
be subject, however, to all lawful actions done or performed pursuant hereto
prior to the receipt of actual notice or such automatic termination.
5. The undersigned hereby represents and warrants to, and agrees with,
the Attorneys, and authorizes the Attorneys to warrant and represent to counsel
for the Company and counsel to the Underwriter, that:
A. The undersigned is familiar with the Registration Statement
on Form SB-2, as amended (the "Registration Statement") containing the
Company's Preliminary Prospectus dated _____________, 1999 (the
"Preliminary Prospectus"). The undersigned verifies that the
information set forth in all thereof respecting the undersigned is true
and complete.
B. All representations, warranties and agreements of the
undersigned set forth in Section 3(a) of the Underwriting Agreement
are, and will be at the effective date of the Registration Statement
and at the closing to be held on the Closing Date and, if applicable,
the closing to be held on the Option Closing Date, true and correct and
will, as provided in the Underwriting Agreement, survive the
termination of the Underwriting Agreement and the delivery of and
payment for the Undersigned's Shares.
C. The undersigned is not affiliated with or associated with
any member of the National Association of Securities Dealers, Inc. The
undersigned has not entered into any financial consulting agreement or
any arrangement contemplating the payment of advisory or finder's fees
that would result in additional compensation to the Underwriter. The
undersigned has not sold (i) any warrants, options or other securities
of the Company to
4
<PAGE> 5
any Underwriter during the last 12 months or (ii) any securities of the
Company in a private placement transaction during the last 18 months.
D. The undersigned has not taken and will not take, directly
or indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Undersigned's Shares pursuant to the
distribution contemplated by the Underwriting Agreement; and the
undersigned has not distributed and will not distribute any prospectus
or other offering material in connection with the offering and sale of
the Undersigned's Shares.
E. After the date hereof and prior to 180 days after the later
of the Closing Date or the latest Option Closing Date, the undersigned
will not, directly or indirectly, sell, offer to sell, or otherwise
dispose of any equity securities of the Company or any securities
convertible into or exchangeable for such equity securities without the
prior written consent of Cruttenden Roth Incorporated, except for the
sale of the Undersigned's Shares pursuant to the Underwriting
Agreement. A statement to such effect may be included in the
Registration Statement and any prospectus relating to the sale of the
Shares.
6. Until payment of the purchase price for the shares to be sold by the
undersigned to the Underwriter has been made by the Custodian pursuant to the
Custody Agreement by or for the account of the Underwriter, the undersigned
shall remain the owner of such shares and shall have the right to vote such
shares and all other shares, if any, represented by the certificates deposited
and to receive all dividends and distribution thereon.
7. All notices, requests and other communications hereunder shall be in
writing and shall be deemed to have been duly given at the time of delivery or
mailing if delivered or mailed by first class mail, postage prepaid and
addressed: if to the undersigned, at the undersigned's address of record as a
holder of Common Stock of the Company or such other address as the undersigned
shall designate by notice hereunder; and if to the Attorneys, at the Company's
address of record.
8. Upon the execution and delivery of the Underwriting Agreement on
behalf of the undersigned by the Attorneys, the undersigned agrees to be bound
by and to perform each and every covenant and agreement therein of the
undersigned as a Selling Stockholder (including, without limitation, the
indemnity and contribution agreements). The undersigned will immediately notify
the Attorneys of the occurrence of any event which shall cause the
representations, warranties, covenants and agreements of the undersigned set
forth herein or in the Underwriting Agreement not to be true and correct and in
full force and effect at the effective date of the Registration Statement or at
the closing to be held on the Closing Date and, if applicable, the closing to be
held on the Option Closing Date.
5
<PAGE> 6
9. This Power of Attorney shall be governed by, and construed in
accordance with, the laws of the State of Arizona.
The undersigned has executed this Power of Attorney this ____ day of
__________, 1999.
Number of Offered
Shares to be sold . . . . . . . . -0-
Maximum number of
Optional Shares to be sold. . . . 74,266
Maximum total number
of Shares to be sold. . . . . . . 74,266
Witnesses: BLACKWATER CAPITAL PARTNERS, L.P.
____________________________ By:______________________________
Steven R. Green
____________________________ Managing Director
(Print Name)
(Please sign exactly as your name appears on the
(s) representing the shares to be sold under the
____________________________ Underwriting Agreement)
____________________________
(Print Name)
SUBSCRIBED AND SWORN TO
before me this ____ day
of ____________, 1999
____________________________
Notary Public
My Commission Expires:
____________________
6
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 144 412
<SECURITIES> 0 0
<RECEIVABLES> 145 326
<ALLOWANCES> 9 9
<INVENTORY> 236 365
<CURRENT-ASSETS> 592 1,326
<PP&E> 223 413
<DEPRECIATION> 55 73
<TOTAL-ASSETS> 1,528 2,391
<CURRENT-LIABILITIES> 618 1,088
<BONDS> 158 184
0 0
0 0
<COMMON> 5 5
<OTHER-SE> 747 1,114
<TOTAL-LIABILITY-AND-EQUITY> 1,528 2,391
<SALES> 1,355 468
<TOTAL-REVENUES> 1,355 468
<CGS> 1,300 464
<TOTAL-COSTS> 1,300 464
<OTHER-EXPENSES> 1,604 472
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,599) (450)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,599) (450)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (740) 0
<CHANGES> 0 0
<NET-INCOME> (2,339) (450)
<EPS-BASIC> (0.55) (0.09)
<EPS-DILUTED> (0.55) (0.09)
</TABLE>
<PAGE> 1
EXHIBIT 99.1
DURASWITCH INDUSTRIES, INC.
LOCK-UP LETTER
________ ___, 1999
CRUTTENDEN ROTH INCORPORATED
24 Corporate Plaza
Newport Beach, California 92660
Dear Sirs:
The undersigned understands that you, as Representative of the several
underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") providing for the purchase by the
Underwriters, including yourself, of shares (the "Shares") of Common Stock,
$0.01 par value (the "Common Stock"), of DuraSwitch Industries, Inc., a Nevada
corporation (the "Company"), and that the Underwriters, including yourselves,
propose to reoffer the Shares to the public (the "Public Offering") pursuant to
the Company's Registration Statement on Form SB-2 to be filed with the
Securities and Exchange Commission (the "Registration Statement").
In consideration of the Underwriter's Agreement to purchase and make
the Public Offering of the Common Stock, and for other good and valuable
consideration, receipt and sufficiency of which is hereby acknowledged, the
undersigned hereby irrevocably agrees that, without the prior written consent of
the Representative (which consent may be withheld in its sole discretion), the
undersigned will not sell, offer to sell, solicit an offer to buy, contract to
sell, loan, pledge, grant any option to purchase, or otherwise transfer or
dispose of (collectively, a "Disposition"), any shares of Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock
(collectively, "Securities"), now owned or hereafter acquired by the undersigned
or with respect to which the undersigned has or hereafter acquires the power of
disposition, for a period of 270 days after the date of the final Prospectus
relating to the offering of the Shares to the public by the Underwriters (the
"Lock-Up Period"). The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging, pledge or other
transaction which is designed to, or which may reasonably be expected to lead to
or result in a Disposition of Securities during the Lock-Up Period even if such
Securities would be disposed of by someone other than the undersigned. Such
prohibited hedging, pledge or other transactions would include without
limitation any short sale (whether or not against the box), any pledge of shares
covering an obligation that matures, or could reasonably mature during the
Lock-Up Period, or any purchase, sale or grant of any right (including without
limitation any put or call option ) with respect to any Securities or with
respect to any security that includes, relates to or derives any significant
part of its value from Securities.
<PAGE> 2
Notwithstanding the foregoing, the undersigned may (i) exercise (on a
cash or cashless basis, whether in a traditional cashless exercise or in a
"brokers" cashless exercise), Common Stock options or warrants outstanding on
the date hereof, it being understood, however, that the shares of Common Stock
received (net of shares sold by or on behalf of the undersigned in a "brokers"
cashless exercise or shares delivered to the Company in a traditional cashless
exercise thereof) by the undersigned upon exercise thereof shall be subject to
the terms of this agreement, (ii) transfer shares of Common Stock or Securities
during the undersigned's lifetime by bona fide gift or upon death by will or
intestacy, provided that any transferee agrees in writing to be bound by the
terms of this agreement, and (iii) transfer or otherwise dispose of shares of
Common Stock or Securities as a distribution to limited partners or shareholders
of the undersigned, provided that the distributees thereof agree in writing to
be bound by the terms of this Agreement.
The undersigned also hereby irrevocably agrees that the Representative
shall have the right of first refusal for a period of two years after the
expiration of the Lock-Up period to be the sole broker/dealer for any sales made
under Rule 144 of the Securities Act by the undersigned so long as the price and
execution offered by the Representative is in conformity with the then market
conditions.
The undersigned understands that the Underwriters will rely upon the
representations set forth in this Lock-Up Agreement in proceeding with the
Public Offering. The undersigned agrees that the provisions of this agreement
shall be binding upon the successors, assigns, heirs, personal and legal
representatives of the undersigned. Furthermore, the undersigned hereby agrees
and consents to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by the undersigned
except in compliance with this Lock-Up Agreement.
It is understood that, if the Underwriting Agreement does not become
effective prior to _________________ ___, 1999, or if the Underwriting Agreement
(other than the provisions thereof which survive termination) shall terminate or
be terminated prior to payment for and delivery of the Shares, the obligations
under this letter agreement shall automatically terminate and be of no further
force and effect.
Very truly yours,
By:_______________________________
Signature
__________________________________
Printed name of person/entity
__________________________________
Title if applicable
2
<PAGE> 3
__________________________________
Additional signature(s), if stock
jointly held
Accepted as of the date first set forth above:
Cruttenden Roth Incorporated
By: __________________________
Name: ________________________
Title: _______________________
3
