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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
VIRTUAL TECHNOLOGY CORPORATION
Minnesota IRS EIN #41-1639011
3100 West Lake Street, Suite 400 Minneapolis, MN 55416
(612) 915-1122
Securities to be registered under Section 12(b) of the Act: None.
Securities to be registered under Section 12(g) of the Act: Common Stock, no
par value.
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COMMON STOCK OTC BULLETIN BOARD
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. This Registration Statement on
Form 10-SB contains forward-looking statements, which reflect the Company's
views with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and uncertainties,
including those identified below, which could cause actual results to differ
materially from historical results or those anticipated. The words "aim,"
"believe," "expect," "anticipate," "intend," "estimate" and other expressions
which indicate future events and trends identify forward-looking statements.
Actual future results and trends may differ materially from historical results
or those anticipated depending upon a variety of factors, including, but not
limited to: the Company's ability to successfully and profitably integrate GTI
into the Company's business operations, competition in the internet resale of
computer products, the Company's vendor relationships, the Company's ability to
obtain additional equity or debt financing on acceptable terms in order to
finance its planned growth and to retire the debt incurred in connection with
the GTI acquisition and the impact of Year 2000 issues on the Company and its
operations.
PART I
ITEM 6. DESCRIPTION OF BUSINESS
CORPORATE BACKGROUND
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In June 1996, International Gold Marketing, Inc., ("IGM"), a Minnesota
corporation, acquired Network Storage Corporation ("NSC"), a Minnesota
corporation formed in February 1996 and changed its name to Virtual Technology
Corporation ("VTC" or the "Company"). IGM was a publicly traded company listed
on the OTC Bulletin Board and was originally incorporated in March 1966 as
MarSan Inc. Since the acquisition and name change, the Company has traded on
the OTC Bulletin Board under the symbol VTCO.
At the time of the NSC acquisition, IGM was a non-operating entity. NSC
was in the business of providing an online data storage system via the Internet
with a software product known as Virtual Storage.
In October 1996, VTC acquired Ashmount Research Ltd. ("ARL"), a private
London-based software firm for $18,000 cash and 427,500 shares of the Company.
VTC then launched a web site for commercial marketing of Ashmount's Virtual
Access email and newsgroup software. Although the Virtual Access marketing
campaign was not economically successful, management generated up to 1 million
"hits" of traffic to its internet site. Realizing that VTC had gained
experience at learning which internet advertising sites could drive traffic to
VTC's own web site, management refocused the Company's business on electronic
commerce ("E-Comm"). Specifically, VTC's internal customer research indicated a
symbiosis between the buyers visiting the Company's web site for software
products and the type of technology those buyers were interested in. Concluding
that sophisticated computer users seek speed, power, and graphics in their
latest technology and upgrades, VTC identified sources for such products and
enhanced and launched its E-Comm site, virtual-world.com, in October 1997.
Consistent with its change of business strategy, VTC sold the Virtual Access
software source code, rights and licenses in July 1998 to Atlantic Coast, a
British company for approximately $15,000.
BUSINESS OVERVIEW
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VTC is now an internet retailer of high performance computer hardware,
software and peripheral products to sophisticated computer and internet users.
Through its E-Comm web site at www.virtual-world.com, the Company offers more
than 42,000 units of selective high-performance, brand name computer equipment.
Such web site and its contents are expressly not incorporated by reference into
this Form 10-SB. VTC offers an online specialized store that is intended to
provide one-stop shopping for its targeted domestic and international customers,
24 hours a day, seven days a week. The Company's online store features a fun,
easy to navigate interface, competitive pricing, extensive product information
and powerful search capabilities.
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The Company began online marketing of its proprietary email and newsgroup
software in January 1997. In October 1997, the Company launched its E-Comm site
offering a range of selective high-performance brand names for computer
equipment and software programs. In December 1998, the Company's site generated
an estimated 5 million hits or approximately 175,000 unique visits per month.
To facilitate its expansion, the Company formed alliances with Herold Marketing
Associates, Inc., dba Graphics Technologies, Inc. ("GTI"), Ingram Micro, Inc.
("Ingram") and Tech Data Corporation ("Tech Data") to provide the Company with a
"virtual inventory" of hardware and software products. These three entities
provide order fulfillment, shipping, and post sale customer support.
GTI is a 12 year old company with seven offices nationally and 1998 net
sales of $65 million. It specializes in high end premium computers and graphics
products such as notebooks, scanners, graphics cards, monitors and other
peripherals. Some of GTI's vendor relationships are with companies such as
Hitachi, Sony, IBM, Umax, Diamond Multimedia, Matrox and Creative Labs. With a
customer base of over 1,000 corporations, GTI specializes in
business-to-business sales and offers unique purchase programs,
solution-oriented sales, integration and configuration services and post-sales
support.
On January 28, 1999, the Company, through its wholly-owned subsidiary, GTI
Acquisition Corporation ("GAC"), acquired substantially all of GTI's assets and
assumed certain liabilities. Greg Appelhof, VTC's President and Chief Executive
Officer, formerly was with GTI for 11 years, most recently as Vice President of
Sales.
The purchase price for $9,200,000 of GTI's assets and $7,100,000 of GTI's
liabilities was $10,142,740, paid as follows: $1,000,000 by wire transfer at
closing, $1,642,740 payable by the issuance of 228,571 shares of the Company's
restricted Common Stock, subject to resale under Rule 144 of the Act; $4,000,000
payable by a promissory note of GAC due February 27, 1999; $3,300,000 payable by
a promissory note from the Company due April 28, 1999 and $200,000 placed into
escrow to be held for three years to secure post-closing purchase price
adjustments and indemnification obligations. The purchase price is subject to
post-closing dollar-for-dollar reduction to the extent that GTI's stockholders'
equity as of the closing date, as determined upon post-closing audit, was less
than $2.1 million and to the extent that certain funded debt of GTI as of the
closing date exceeded $1.7 million. In the event GAC is unable to pay its
obligations under the $4,000,000 promissory note within sixty (60) days of the
closing date thereof, the acquisition will be cancelled in the entirety unless
the parties otherwise agree. If the transaction is cancelled, there is a
$200,000 break-up fee owed by GAC. The Company simultaneously entered into a
three-year consulting agreement with Stephan Herold, GTI's Chairman and founder,
in consideration of 145,000 shares of the Company's Common Stock valued at
$1,042,115. The Company has agreed to register the resale of such shares under
the Securities Act of 1933, as amended (the "Act"), as soon as practicable. Mr.
Herold has agreed not to compete against the Company for three years. The
Company and GAC intend to pay off the aforementioned promissory notes through
the use of a combination of current cash, the Company's credit agreement and
additional equity.
The Company believes that the acquisition of GTI will position the Company
for growth and expansion. Through increased buying power as a result of the
acquisition, the Company believes it will be able to procure various products
for less cost. The Company also expects to benefit from GTI's many long term
relationships with manufacturers, assuming that GTI's various suppliers agree to
GAC's assumption of the GTI distribution agreements (of which there can be no
assurance). In
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addition, GTI has established a successful co-marketing plan whereby GTI
receives payments for cooperative marketing, rebates and other incentives which
also provide potential for greater margins.
Ingram is the leading wholesale distributor of computer-based technology
products and services worldwide. Ingram markets microcomputer hardware,
networking equipment, and software products to more than 100,000 reseller
customers in more than 120 countries. As a wholesale distributor, Ingram
markets its products to resellers as opposed to marketing directly to end-user
customers.
Ingram offers one-stop shopping to the Company by providing a comprehensive
inventory, which in the aggregate on a global basis, consists of more than
145,000 products (as measured by distinct manufacturer's part numbers) from over
1,400 suppliers, including most of the microcomputer industry's leading hardware
manufacturers, networking equipment suppliers and software publishers. Ingram's
broad product offerings include: desktop and notebook PCs, servers,
and workstations; mass storage devices; CD-ROM drives; monitors; printers;
scanners; modems; networking hubs, routers, and switches; network interface
cards; business application software; entertainment software; and computer
supplies. In addition, to enhance sales and to support the Company, Ingram
provides a wide range of outsourcing and value-added programs, such as order
fulfillment, tailored financing programs, channel assembly, systems
configuration and marketing programs.
Tech Data is the world's second largest distributor of microcomputer
hardware and software products to value-added resellers ("VARs"), corporate
resellers, retailers and direct marketers (collectively with VARs, "customers").
Tech Data distributes products throughout the United States, Canada, Latin
America, Germany, France, Switzerland and Austria. Tech Data purchases its
products directly from more than 900 manufactures of microcomputer hardware and
publishers of software in large quantities, maintains a stocking inventory of
more than 45,000 products and sells to an active base of over 70,000 customers.
Tech Data's broad assortment of vendors and products meets the Company's need
for a cost effective link to those vendors' products offered through a single
source.
Tech Data provides the Company with leading products including systems,
peripherals, networking, and software. Tech Data offers products from
manufacturers and publishers such as Bay Networks, Cisco, Compaq, Corel,
Creative Labs, Digital Equipment, Epson, Hewlett-Packard, IBM, Intel, Microsoft,
Novell, Okidata, Seagate, Symantec, 3Com, Toshiba, Viewsonic and Western
Digital. Tech Data generally ships products the same day the orders are
received from regionally located distribution centers.
ELECTRONIC COMMERCE
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The internet is an increasingly significant global medium for
communication, information and commerce. The Company believes that growth in
internet usage and web commerce has been fueled by a number of factors,
including (i) a large and growing installed base of PCs in the workplace and
home, (ii) advances in the performance and speed of PCs and modems,
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(iii) improvements in network infrastructure, (iv) easier and cheaper access to
the internet and (v) increased awareness of the internet. International Data
Corporation ("IDC"), a market research firm, has estimated that there were 69
million web users worldwide at the end of 1997 and anticipates that number will
grow to approximately 320 million by the end of 2002. In addition, IDC
estimates that the total value of goods and services purchased over the internet
will grow from $12 billion in 1997 to approximately $425 billion by the end of
2002.
The Company believes that its target market represents an attractive and
rapidly growing segment of the E-Commerce industry. According to Jupiter, a
market research firm, domestic online consumer purchases of goods and services
(excluding cars and real estate) are expected to grow from an estimated $2.6
billion in 1997 to approximately $37.5 billion by 2002. Jupiter also estimates
that the single largest web retail opportunity for the consumer and small
office/home office market is online sales of computer products (including
hardware, software and consumer electronics). By 2002, the online market for
computer products is estimated to reach approximately $10.5 billion in the
United States alone, which compares to an estimated domestic online market for
travel, books and music of $8.6 billion, $2.2 billion and $1.2 billion,
respectively. IDC estimates the worldwide consumer and small office/home office
end market for computer hardware alone (excluding peripherals) will grow from
approximately $50 billion in 1997 to approximately $80 billion in 2001.
TRADITIONAL COMPUTER RETAILING
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The traditional computer retail industry includes both store and
catalog-based companies. The Company believes that these retailers face
inherent structural limitations that may not allow them to take full advantage
of the growing worldwide market for computer hardware and software. The
computer industry is characterized by a broad array of products, rapid product
obsolescence and continuous new product introductions.
Store-based retailers have limited shelf space due to costly inventory and
real estate investment considerations that limit the number of SKUs they can
offer to their customers. The Company believes that large store-based retailers
typically carry only 4,000 SKUs. As a result, hardware and software
manufacturers compete for scarce retail shelf space and access to the large
distributors who supply the store-based retailers. Thus, manufacturers incur a
significant expense to gain this access, and retailers face the risk of carrying
inventory that may quickly become obsolete. In addition, the store-based
retailers' merchandising process, which requires that the retailer physically
obtain, set up and display the product, limits the speed at which these
retailers can change their merchandise mix and offer new products. Further,
because store-based retailers must make significant investments in inventory,
real estate and personnel at each location, they are not quickly able to expand
into new geographic regions. Personnel costs also limit the hours during which
store-based retailers may operate, thereby limiting customer convenience.
Moreover, store-based retailers face challenges in hiring, training and
maintaining knowledgeable sales staff conversant and up to date on the broad
array of hardware and software products.
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While catalog retailers provide customers with the convenience of shopping
from home or the office at flexible times, the number of SKUs they can feature
and the product information they can provide are limited due to catalog mailing,
printing and other related expenses. The Company believes that a typical
catalog retailer carries between 15,000 and 20,000 active SKUs, but only
features between 2,000 and 3,000 SKUs in any single catalog. Further, the
catalog shopping experience is, in general, neither interactive nor
personalized, yet requires extensive personnel support and manual intervention
on behalf of the retailer to take and process orders. The Company also believes
that many catalog retailers focus primarily on the corporate market.
The Company believes that the business model of the traditional computer
retail industry results in inefficiencies that are exacerbated by, among other
things, the broad array of products and the rapid change that characterize the
computer industry. The Company believes that internet-based computer retailers
are well positioned to solve these inefficiencies.
VTC DIFFERENCE
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The Company understands the key business challenges of the computer
retailing industry and uses the unique environment of the internet to address
those challenges. The key operating advantages of the Company's online store
are:
o Attractive Economics of the "Virtual" Store. As an internet-only
merchant, the Company enjoys structural economic advantages relative to
traditional retailers including:
(i) lower-cost and essentially unlimited "shelf space,"
(ii) flexible advertising and affordable merchandising opportunities,
(iii) lower personnel requirements,
(iv) scaleable technology and systems that can serve a fast-growing
customer base and
(v) the ability to serve a worldwide customer base from a single,
domestic location.
o Leverage. The Company's investments in its web site, content,
marketing and technology will be leveraged over a growing global sales base
resulting in substantial economics of scale that the Company believes should
enable it to achieve greater operating margins than traditional computer
retailers.
o One-Stop Shopping. Because the Company's "shelf space" is low-cost and
essentially unlimited, the Company offers a broad selection that would be
economically or physically impractical to stock in a store or to include in a
typical mail-order catalog. The Company currently offers more than 42,000
hardware, software and peripheral SKUs. The Company's product selection
includes computer hardware such as PC desktops and laptops, personal digital
assistants ("PDAs"), printers, modems, memory and accessories, packaged software
for both home and office use, games and utilities. These products are produced
by a wide variety of manufacturers that include
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IBM, Toshiba, Hewlett Packard, 3Com, Connectix, Intel, Symantec, Epson,
Electronic Arts, Acer, Compaq and Broderbund.
o Global Customer Base. With its global reach, the Company can deliver a
broad selection of products to customers in international, rural or other
locations that cannot support large-scale physical stores. Orders for in-stock
items are generally processed for next morning delivery throughout the United
States and delivery within 72 hours internationally. In addition, the
accessibility of the site 24 hours a day, seven days per week, enables the
Company to offer the same retail experience to customers around the world.
o Value-Added Online Content. In addition to offering the products
themselves, VTC's site delivers value-added content, including extensive product
descriptions and free shipping of all merchandise.
o Convenient 24-Hour Shopping. Purchasing items from VTC is more
convenient than shopping in a physical store or through a catalog. The VTC web
site is open 24 hours a day, seven days per week, and may be reached from the
buyer's home or office. The Company has found that its customers access the
site around the clock. The Company believes that customers may buy more items
because they have more hours to shop, can act immediately on impulse purchases
and can more easily locate items that are hard to find in stores or catalogs.
o Customer Service. In addition to the product and order tracking
information that is available on VTC's web site, the Company provides pre- and
post-sales support via both email and toll-free telephone service. For the
three and nine months ended October 31, 1998, approximately 50% and 40% of
orders, respectively, were placed directly on the Company's web site. Customers
contact the Company to obtain guidance for product selection, learn about
product compatibility and availability and, if they wish, place orders. Once an
order is placed, customers can view order tracking information on the web or
contact the Company's customer service department to obtain the status of their
order and, when necessary, resolve order and product questions. The Company
trains its sales and customer service representatives to offer solutions and
extend the level of service needed to satisfy the customer.
o On-Site Service. VTC offers its customers on-site service for most
products in the United States. For a nominal fee based upon the amount of
purchase, the consumer may extend the manufacturer's warranty to provide on-site
service at the customer's home or office location. VTC contracts with several
third party vendors to provide such service. The Company generally guarantees a
service call within 24 hours in most metropolitan areas. The Company creates an
additional revenue stream with the sales of service contracts.
o Lower-Cost, Alternative Distribution Channel for Manufacturers. VTC
offers manufacturers a direct, lower-cost retail channel. In contrast to
store-based retailers that often charge for shelf space and catalog retailers
that often require up-front payments, all of VTC's products are carried free of
charge. In addition, the Company can offer manufacturers special merchandising
opportunities, such as bundling of products and advance demand information on
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new product introductions, at very low or no cost. These programs can be
introduced with minimal lead time because of the flexibility of the internet as
a marketing medium in publishing and disseminating new information.
o Free Shipping. VTC provides free shipping on most domestic orders.
The Company believes that this program generates substantial good will and
consumer loyalty. To date, the Company's vendors generally have absorbed such
shipping charges. There is no assurance that VTC's vendors will continue to
offer this program to the Company.
STRATEGY
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VTC's objective is to operate the premier internet web site for speed,
power and graphics through its innovative and focused marketing strategy, depth
of product selection, competitive pricing and high quality content. The
Company's niche market focus is based upon the premise that consumers are
generally overwhelmed by the information available to them through different
media, including the internet. Research conducted by International Data
Corporation ("IDC") has found that people searching for information about
computer hardware and software generally have a very difficult time even getting
close to articles about the products they care about. By offering consumers an
array of selective, high-performance brand name computing equipment, easy
navigation, around the clock shopping convenience and competitive pricing, the
Company believes it can achieve a preeminent niche position among computer
retailers. Key elements of VTC's strategy include the following:
o Niche-Oriented Strategy. A number of traditional computer retailers
and manufacturers have created web sites to sell various computer equipment over
the internet. However, most of these sites are targeted towards the mass
market, much like the phenomenon observed in the physical retail world. The
Company's strategy is to target sophisticated computer and internet users who
demand high performance from their systems and are constantly seeking upgrades
for their equipment.
o Product Availability. The Company believes that its targeted customers
have varied and unique needs for computer hardware and software products.
Through VTC's affiliation with Ingram, Tech Data and other suppliers, the
Company offers what management believes to be a broad product mix. By its
acquisition of GTI, the Company has further leveraged its increased buying power
to further increase the number of available products.
o Favored Demographics. VTC's initial target market is comprised of
individuals who are 26 years of age or older, predominately male, well educated
and are proficient with computers and the internet. According to New Century
Network's reader survey, over 55% of these internet users have an annual
household income of over $50,000 and are twice as likely to purchase over the
internet than the average internet user.
o Web-Based and Traditional Advertising. The Company utilizes aggressive
online advertising to promote both its brand name and specific merchandising
opportunities on a wide
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variety of web sites, including major content and service providers, targeted
computer-related sites and niche, special interest sites. As the Company grows,
it also intends to advertise in trade journals and magazines that are typically
read by its targeted customers.
o Linking and Affiliate Programs. To direct traffic to its web site, the
Company has created inbound links that connect directly to virtual-world.com
from other sites on the web. These links allow potential customers to simply
click on the link to become connected to the Company's web site. In addition,
the Company is developing private web sites for various user groups. For
example, the Company has recently entered into arrangements with the University
of Minnesota and with the Minnesota Service Cooperatives, a group comprising all
of Minnesota's elementary schools, to develop proprietary web sites offering
hardware and software products at special pricing for school students and
faculty.
THE VTC RETAIL EXPERIENCE
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The Company believes its web site is attractive, easy to navigate and
offers distinctive competitive advantages. The user interface is simple yet
professional and straightforward, designed to cater to the knowledgeable
technology consumer. Consumers may browse the database of over 42,000
items or may selectively search and view technical "notes" or product
specifications as desired prior to purchasing online. Once a product has been
selected, the consumer may simply click on the item, which then goes into a
"shopping cart" to be added to other items until the consumer's shopping trip is
complete. All of the Company's products may be reviewed and purchased "online"
without having to go to a retail location. The Company provides graphic detail
of products along with manufacturer specifications.
The Company has embarked on an initiative to implement "one click"
purchasing. This initiative will enable increased sales due to minimizing the
information the consumer will have to key in to make a purchase. Under the "one
click" system once a product is selected, a credit card holder may only have to
input their four-digit access number or a password in order to provide the
Company with all of the pertinent purchasing information. The "one click"
system will directly interface with the Company's E-Comm system to perform all
the processes in the background, transparent to the consumer, which will get the
order placed.
The Company enters into special agreements from time to time directly with
manufacturers to provide value added packages or special bargains. VTC is
currently working with manufacturers to establish cooperative marketing
agreements whereby VTC would receive funds from the manufacturers to reimburse
VTC for some marketing costs.
VTC offers a free shipping program for the domestic United States that it
believes has been favorably received. Overseas orders are shipped and fulfilled
via Ingram, which acts as the Company's customs agent and processor. Overseas
orders are handled the same as domestic orders, and the process of delivery is
transparent to the customer as well as VTC. Invoices and packing slips reflect
VTC's name so the customer can immediately identify VTC as the shipper.
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Currently, VTC encourages customers to phone in and use the Company's
inbound call center Monday through Friday from 7:30 a.m. - 7:30 p.m. and
Saturday from 9:00 a.m. to 2:00 p.m. The Company believes that having the
opportunity to speak with the customer will enhance the likelihood that the
customer will increase the size of the order and that the price point of the
average sale will also increase. The Company, by design, does not have an
automated inbound call system. The Company's philosophy is that consumers have
the ability to buy online or via an automated transaction at any time. The
assumption is that, once the customer has called, he or she has made the
decision to speak with someone directly at the Company for some sort of support.
The objective is to expedite that request and not subject the consumer to
further automation or digital routing systems. The Company augments its
customer service systems with various tracking software and contextual reference
databases.
Customer Service is provided via the web site 24 hours a day, 7 days a
week, and in person Monday through Friday from 7:30 a.m. to 7:30 p.m. CST.
Customers may track shipments via Federal Express or United Parcel Service
directly through VTC's web site or via hot links to the respective shippers'
sites.
MARKETING AND PROMOTION
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In order to reach its desired demographics, VTC utilizes a number of
internet-based marketing initiatives, including banner advertising, reciprocal
linking and participation in newsgroup posting. VTC is listed on CNET
(www.computershopper.com, www.computers.com and www.gamecenter.com)
www.pricewatch.com, ZDNet (www.zdnet.com) and PCWORLD (www.pcworld.com), as well
as with various web sites and search engines providing consumer price
comparisons. None of such web sites is incorporated by reference into this Form
10-SB. These web sites publish prices from multiple sellers along with
instructions to take consumers directly to the internet location where the
equipment can be purchased. The Company has direct links from various web
sites, including the CNET and ZDNet and PCWORLD sites. The ZDNet web site
currently provides VTC with exclusive advertising in the "hardware," "monitor"
and "printer" categories. Through January 1999, VTC has contracted for over 80%
of the ads on CNET's computers.com for the same categories and CNET also
provides certain exclusive advertising for the Company. In March 1998, VTC
contracted for certain exclusive advertising space at www.gamecenter.com. VTC
is also listed on several other "shopping guide" web sites, with plans to add
more in the near future. VTC is also listed on six other "shopping guide" web
sites, with plans to add more in the near future. The advertising on these
sites combined with secure ordering, technology reviews for users and same day
shipping constitute the core of the marketing program. In addition, the Company
plans to leverage its presence in the newsgroup and email arena to promote
additional brand awareness of its virtual-world.com web site. The Company also
intends to advertise in trade journals and magazines read by its targeted
customers.
WAREHOUSE AND FULFILLMENT
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VTC uses its subsidiary GAC and alliances with Ingram and Tech Data to
provide the Company with a "virtual inventory" of hardware and software products
for its site. As a result,
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the Company carries no inventory of products obtained through Ingram or Tech
Data and relies on both to fulfill customers' orders. In addition to providing
a "virtual inventory" and order fulfillment for the Company, Ingram and Tech
Data also provides VTC with shipping and post-sale customer support. GTI also
performed similar functions for VTC on an outsourced basis prior to the
Company's acquisition of all the assets of GTI on January 28, 1999. See
"Business Overview." The Company expects GTI to continue to perform inventory
management and fulfullment services for VTC in the future.
The Company utilizes a secure server to process all customer orders. After
a customer enters an order, an email is sent to the customer confirming the
purchase. Once the credit card information is authenticated, the order is
forwarded to one of the Company's suppliers. Orders that are placed before 5:00
p.m. (Pacific Time) are generally shipped the same day. An email confirmation
is sent to the customer immediately following the shipment of the products.
Customers may check the shipping status and the inventory availability directly
through the web site. VTC's transaction-processing system is integrated with
its accounting and financial system through a common Microsoft Access-based
database. The integrated system allows management to more effectively manage
its operations.
TECHNOLOGY
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The Company has implemented a broad array of site management, search,
customer interaction, transaction-processing and fulfillment services systems
using a combination of its own proprietary technologies and commercially
available, licensed technologies. The Company's current strategy is to license
commercially available technology whenever possible rather than seek internally
developed solutions. VTC intends to focus its efforts primarily in enhancing
and promoting its web site.
The Company hosts its web site in a Verio facility, located in Viena, VA.
The Company currently employs four individuals to design and maintain its
virtual-world.com web site. In addition, the Company uses Verio's National
Network for its web site back-up.
Verio provides VTC access to high-capacity, dynamic and dedicated Internet
connectivity at the complete range of commercial strength bandwidths through its
high-performance national network. Management believes that Verio's high
performance national network is fast, reliable and scalable. It combines key
components that are critical to the operation of a state-of-the-art Internet
service: a high capacity national backbone, a 24 hour National Operating Center
(NOC) and superior engineering support services. The national network links
members of the Verio group of Internet Service Providers to each other and to
the key national exchange points - MAE West, MAE East and NY NAP - as well as to
the Digital Internet Exchange, located in Palo Alto, California. The network
features OC3 and DS3 links, as well as Cisco 7500 series router technology,
which connect the national exchange points and Verio access points.
In January, 1999, VTC and Ingram jointly developed and implemented a system
to fully integrate the front and back office functions of the two companies.
The system is intended to
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provide for a seamless throughput of customers' orders, credit authorization,
posting of the sale in the accounting system and placing the order with the
"least-cost" supplier, all within 30 seconds of each sale. This system utilizes
Secure Socket Layer (SSL) of the HTTP protocol for all transactions involving
credit card information. Utilizing this standard and CyberSource IVS technology,
the Company protects against fraudulent transactions. The system is designed to
enable real-time and price availability from the least cost vendor and to
facilitate "one-click" ordering, processing and fulfillment.
RISK MANAGEMENT
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Year 2000 Compliance. The Company has developed, implemented and deployed
its internal computing systems, including those for order taking, processing and
fulfillment, within the past twelve months and believes that such systems have
been designed to properly recognize and process transactions into the year 2000.
The Company is currently developing a plan to address Year 2000 compliance
issues with GTI. The Company cannot assure that its banks, vendors and others
with whom it conducts business have Year 2000 compliance systems.
Contingency Plan. VTC has a disaster recovery and contingency plan
designed to restore Company operations within 24 hours of incurring a major
disaster to one of its facilities. The Company's internet servers are hosted
off site by Verio, a major Internet Service Provider headquartered in Englewood
Colorado. In the event of a server failure at one of Verio's facilities, Verio
can activate redundant systems, which are separated by different power and
telephone grids.
Key Personnel. The Company's performance is substantially dependent on
the continued services and performance of its senior management and other key
personnel, particularly Ken Israel and Greg Appelhof, its Chairman and CEO,
respectively. The Company's performance also depends on the Company's ability to
retain and motivate its other officers and key employees. The loss of the
services of any of its executive officers or other key employees could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Taxation of Internet Transactions. The Company does not currently collect
sales or other similar taxes in respect of shipments of goods into states other
than Minnesota. However, one or more states may seek to impose sales tax
collection obligations on out-of-state companies such as the Company that engage
in online commerce. In addition, any new operation by the Company in other
states, and the operations of GAC in jurisdictions where it was a physical
presence, could subject Company shipments into such states to state sales taxes
under current or future laws. A successful assertion by one or more states or
any foreign country that the Company should collect sales or other taxes on the
sale of merchandise could have a material adverse effect on the Company's
business, financial condition and results of operations.
-12-
<PAGE> 13
COMPETITION
- -----------
The online commerce market is new, rapidly evolving and intensely
competitive. Current and new competitors can launch new sites at a relatively
low cost. In addition, the computer products retail industry is intensely
competitive. The Company currently or potentially competes with a variety of
other companies. These competitors include:
(i) various traditional computer retailers, including CompUSA and
MicroCenter;
(ii) various mail-order retailers, including CDW, MicroWarehouse,
Insight, PC Connection, and Creative Computers;
(iii) various internet-focused computer retailers, including
Egghead.com, software.net Corporation, NECX Direct, and Cyberian
Outpost;
(iv) various manufacturers that sell directly over the Internet,
including Dell, Gateway, Apple and many software companies;
(v) a number of online service providers, including America Online
and the Microsoft Network that offer computer products directly
or in partnership with other retailers;
(vi) some non-computer retailers, such as Wal-Mart, that sell a
limited selection of computer products in their stores; and
(vii) computer products distributors that may develop direct channels
to the consumer market.
Increased competition from these and other sources could require the
Company to respond to competitive pressures by establishing pricing, marketing
and other programs or seeking out additional strategic alliances or
acquisitions, any of which could have a material adverse effect on the business,
prospects, financial condition and results of operations of the Company.
The Company believes that the principal competitive factors in its market
are brand recognition, selection, price, variety of value-added services, ease
of use, site content, fulfillment, reliability, quality of search tools,
customer service and technical expertise. Many of the Company's current and
potential competitors have longer operating histories, larger customer bases,
greater brand recognition and significantly greater financial, marketing and
other resources than the Company. In addition, online retailers may be acquired
by, receive investments from or enter into other commercial relationships with
larger, well-established and well-financed companies as use of the internet and
other online services increases. The Company is aware that certain of its
competitors have and may continue to adopt aggressive pricing or inventory
availability policies and devote substantially more resources to web site and
systems development than the Company. Increased competition may result in
reduced operating margins, loss of market share and a diminished brand
franchise, any of which would have a material adverse effect on the Company.
Moreover, companies that control access to transactions through network access
or web browsers currently promote, and will likely continue to promote,
competitors of the Company. There can be no assurance that the Company will be
able to respond effectively to increasing competitive pressures or to compete
successfully with current and future competitors.
-13-
<PAGE> 14
SUPPLIERS
- ---------
The Company purchases a substantial portion of its products from GTI,
Ingram and Tech Data. Prior to the GTI acquisition, the Company carried no
inventory and relied to a large extent on rapid fulfillment from these and other
vendors. As a result of the GTI acquisition, the Company expects that GTI will
continue to be a substantial supplier of products to VTC. The Company has no
long-term contracts or arrangements with Ingram, Tech Data or any of its other
vendors that guarantee the availability of merchandise, the continuation of
particular payment terms, or the extension of credit limits. There can be no
assurance that the Company's current vendors will continue to sell merchandise
to the Company on current terms or that the Company will be able to establish
new or extend current vendor relationships to ensure acquisition of merchandise
in a timely and efficient manner and on acceptable commercial terms. If the
Company were unable to develop and maintain relationships with vendors that
would allow it to obtain sufficient quantities of merchandise on acceptable
commercial terms, its business, prospects, financial condition and results of
operations would be materially adversely affected.
TRADEMARKS AND PROPRIETARY RIGHTS
- ---------------------------------
The Company regards its copyrights, service marks, trademarks, trade dress,
trade secrets and similar intellectual property as critical to its success and
relies on trademark and copyright law, trade secret protection, and
confidentiality, and/or license agreements with its employees, customers,
partners, and others to protect its proprietary rights. The Company intends to
apply for Federal trademark registration of its name and logo. There is no
assurance that such applications will be granted. Further, effective trademark,
service mark, copyright, and trade secret protection may not be available in
every country in which the Company's products and services are made available
online. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate or that third parties will not
infringe or misappropriate the Company's copyrights, trademarks, trade dress,
and similar proprietary rights. In addition, there can be no assurance that
other parties will not assert infringement claims against the Company.
EMPLOYEES
- ---------
As of February 8, 1999, the Company employed 58 full-time employees,
including the GAC operations.
FINANCING MATTERS
- -----------------
In February 1999, the Company and GAC entered into a Loan and Security
Agreement with Coast Business Credit ("CBC"), a division of Southern Pacific
Bank (the "Coast Agreement"). Under the Coast Agreement, the Company and GAC
may borrow up to $10,000,000 based upon eligible receivables and inventory at an
interest rate equal to 1.5% in excess of the bank's reference rate. As part of
the overall credit facility, the Company and GAC may borrow up to $250,000 for
capital expenditure purchases at an interest rate equal to 2% in excess to the
bank's reference rate, not subject to eligible receivables and inventory.
Further, the
-14-
<PAGE> 15
Company and GAC may borrow up to $500,000 at an interest rate equal to 2% in
excess of the bank's reference rate, payable in 24 equal monthly installments,
also not based on eligible receivables and inventory. As of February 12, 1999,
the Company and GAC owed $0 under the Coast Agreement. The Company and GAC
intend to use $3,500,000 of the proceeds from the Coast Agreement to retire a
portion of the promissory notes due to GTI in connection with the acquisition of
its assets. In consideration of the Coast Agreement, the Company has granted CBC
a three-year warrant to purchase 500,000 shares of the Company's Common Stock at
an exercise price equal to the average stock price of the previous thirty
trading days immediately proceeding the closing date. The Company has agreed to
register under the Act the resale of the shares underlying the warrant upon
CBC's demand.
-15-
<PAGE> 16
ITEM 7. DESCRIPTION OF PROPERTY
FACILITIES
- ----------
The Company leases approximately 1,500 square feet of office space at 3100
West Lake Street, Suite 400, Minneapolis, Minnesota pursuant to a 5-year lease
with payments of approximately $2,500 per month. In addition, the Company
leases approximately 1,500 square feet of office space at 1422 West Lake Street,
Minneapolis, Minnesota pursuant to a month-to-month lease with payments of
approximately $2,000 per month. The Company anticipates locating to a larger
facility in 1999.
GTI's executive offices and principal warehouse space is located at 7615
Golden Triangle Drive, Suite G, Eden Prairie, Minnesota. Additional GTI
facilities are located at 4685 S Ashe Ave, Tempe, Arizona, and 233 Needham
Street, Newton, Massachusetts.
GTI leases approximately 11,000 square feet of space in Minnesota with
payments of approximately $8,600 per month. In addition, GTI's facility in
Arizona is approximately 11,000 square feet with payments of approximately
$8,600 per month and the facility in Massachusetts approximately 3,000 square
feet with payments of approximately $3,300 per month. All of the
GTI leases have expiration dates of within 13 months from February
12, 1999. GTI has obtained the consent of the landlords of such facilities to
the assignment of the leases to GAC.
ITEM 8. EXECUTIVE OFFICERS, DIRECTORS AND ADVISORS
EXECUTIVE OFFICERS AND DIRECTORS
- --------------------------------
KENNETH M. ISRAEL, 47. Mr. Israel has been Chairman and a director of the
Company since February 1996 and was Chief Executive Officer between February
1996 and November 1998. Between March 1989 and January 1996, Mr. Israel served
as Chairman of Exchange Resources, Inc. ("ERI"), a company specializing in
disaster recovery services and facilities. Between 1981 and 1987, Mr. Israel
was the Regional Manager of Lanier Business Products, a company that was later
acquired by Harris Corporation, where he became Director of R&D. From 1979 to
1981, Mr. Israel was the General Manager of Pi Engineering, where he was the
Project Manager for the redesigning and rebuilding of the security and
communications systems for Northern States Power nuclear plants. Prior to 1979,
Mr. Israel served for five years as a Regional Service Manager with Raytheon
Data Systems with responsibility for the Southeastern United States and Central
and South America.
GREGORY A. APPELHOF, 36. Mr. Appelhof became President of the Company in
October 1998 and became Chief Executive Officer and a director in November 1998.
Prior to joining the Company, he served eleven years with GTI, most recently as
Vice President of Sales.
-16-
<PAGE> 17
JOHN L. HARVATINE, 48. Mr. Harvatine became Chief Financial Officer of the
Company in January 1999. Between 1997 and 1998, he served as Chief Financial
Officer of CyberStar Computer Corporation. Between 1987 and 1996, he served in
a variety of financial positions with AmeriData Technologies, Inc., most
recently as Chief Financial Officer. From 1986 to 1987, he served as Controller
of Fisher Cheese Co. From 1973 to 1986, Mr. Harvatine served in various
management positions with The Pillsbury Company, most recently as Accounting
Manager - Marketing.
STEVEN M. MIHM, 47. Mr. Mihm became Vice President of Sales and Marketing
for the Company in October 1998. Between 1996 and 1998, he was a Vice President
of Product Marketing with GE Capital, Inc. Between 1993 and 1996, Mr. Mihm was
Vice President of Sales of AmeriData Technologies, Inc. Mr. Mihm served as a
corporate account executive with Apple Computer, Inc. between 1987 and 1993 and
in a similar capacity with Nynex between 1986 and 1987. Prior thereto, Mr. Mihm
was a corporate account executive with IBM Corp. for 13 years.
JEFFREY MAYNARD, 54. Mr. Maynard has been Executive Vice President of
Technology and a director of the Company since February 1996. Mr. Maynard has
more than 30 years of experience as an information technologist. Between 1990
and 1993, he was Development Director for Mercury Communications. Mr. Maynard
served as Managing Director for Mtel Corp. and SkyTel Ltd. between 1989 and
1990. Between 1993 and 1996, Mr. Maynard was the Chief Executive Officer of
Secure Backup Systems, a company he formed to deliver the first public data
vaulting service.
JOHN BAKER WELCH, 44. Mr. Welch has been a director of the Company since
November 1998. He has been a Vice President since 1988 of Rothschild Investment
Corporation, an independent registered investment advisor in Chicago. A
graduate of Carthage College and the New York Institute of Finance, Mr. Welch
was previously an investment officer with Bear Stearns & Co., Inc. and Bach
Halsey Stuart Shields.
REUBEN S. TATZ, 55. Mr. Tatz has been a director of the Company since
1998. Since 1987, he has served in a variety of positions with National
Westminster Bank plc, currently as Executive Vice President and Managing
Director of the New York branch. Between 1973 and 1987, Mr. Tatz worked in the
U.S. Department of Treasury where he headed the international and domestic
banking programs for the Internal Revenue Service and served as a Senior
Regional Analyst to the U.S. Department of Treasury Assistant Regional
Commissioner (North Atlantic Region) on International Tax matters and frequently
served as a member of U.S. delegations dealing in treaty exchanges.
-17-
<PAGE> 18
ADVISORS
- --------
JERRE L. STEAD, 56. Mr. Stead became Chairman of the Board and Chief
Executive Officer of Ingram in August 1996. Mr. Stead served as Chief Executive
Officer and Chairman of the Board at LEGENT Corporation, a software development
company, from January 1995 to August 1995. Prior to that, Mr. Stead was
Executive Vice President, Chairman and Chief Executive Officer of AT&T Corp.
Global Information Solutions (NCR Corporation) from May 1993 to December 1994
and President and Chief Executive Officer of AT&T Corp. Global Business
Communication Systems from September 1991 to April 1993. He was Chairman,
President and Chief Executive Officer of Square D Co., an electronics
manufacturer, from September 1988 to August 1991. He is on the Board of
Directors of Armstrong World Industries, Inc., American Precision Industries,
Inc. and TJ International, Inc. Mr. Stead is Chairman of the Board of the
Center of Ethics and Values at Garrett Seminary on the Northwestern University
campus.
PAUL BARRY-WALSH, 43. Mr. Barry-Walsh has served since 1986 as the
Co-Chairman and Managing Director of SafetyNet plc, a London-based firm
specializing in disaster recovery services. He is on the board of directors of
Odyssey, a Luxembourg Software house and a start-up leasing company in London.
J. PHILLIP SAMPER, 64. Mr. Samper currently serves as Chief Executive
Officer and President of AVISTAR Systems Corp., a video collaboration company.
Mr. Samper was previously Chairman, Chief Executive Officer and President of
Quadlux, Inc., a commercial and residential cooking appliances company from 1996
to 1997, Chairman and Chief Executive Officer of Cray Research, Inc., a computer
products company, from May 1995 to March 1996, President and Chief Executive of
Sun Microsystems Computer Corporation from January 1994 to March 1995, and
Managing Partner of FRN Group, a private investment consulting firm, from
February 1991 until January 1994. He also serves as a Director of Ingram,
Armstrong World Industries, Inc., The Interpublic Group of Companies and Sylvan
Learning Systems, Inc.
ITEM 9. REMUNERATION OF DIRECTORS AND OFFICERS
Executive Compensation
- ----------------------
The following table summarizes the amount of compensation paid to the
Company's executive officers for the fiscal years ended January 31, 1997 and
1998. No other executive officers had aggregate salaries and bonuses that
exceeded $100,000.
-18-
<PAGE> 19
NAME AND PRINCIPAL POSITION YEAR SALARY
--------------------------- ---- ------
Kenneth Israel, Chief Executive Officer 1997 $ 50,000 (1)
1998 $150,000 (1)
Jeff Maynard, Executive VP-Technology 1997 $50,000 (2)
1998 $20,000 (2)
____________________
(1) Mr. Israel received 909,091 and 600,000 shares of the Company's Common
Stock in lieu of salary for the fiscal years ended January 31, 1997 and 1998,
respectively.
(2) Mr. Maynard received 300,000 and 200,000 shares of the Company's Common
Stock in lieu of salary for the fiscal years ended January 31, 1997 and 1998,
respectively.
EMPLOYMENT AGREEMENTS
- ---------------------
In October 1998, the Company and Mr. Appelhof agreed, in principal, to
enter into an employment agreement whereby Mr. Appelhof will receive an annual
salary of $150,000, with a quarterly guaranteed $25,000 bonus and a quarterly
performance bonus awarded based upon the Company reaching certain performance
goals. Under the negotiated agreement, Mr. Appelhof is to be granted options to
purchase 250,000 shares of the Company Common Stock at $1.00 per share. One-half
of such options vested immediately upon Mr. Appelhof's employment and the other
half vests in April 1999, assuming Mr. Appelhof's continued employment with the
Company. Mr. Appelhof is to be granted options to purchase an additional
1,000,000 shares of the Company's Common Stock at 75% of the average closing bid
price of the Company's Common Stock for the 10 trading days immediately
preceding (and excluding) the vesting date of the shares. 250,000 of such
options vest in each of April 1999, October 1999, April 2000 and October 2000.
All vested options granted pursuant to the employment agreement will be
exercisable until October 2003. The Company also has agreed to provide Mr.
Appelhof with a monthly vehicle allowance of $500.
In January 1999, the Company and Mr. Harvatine agreed, in principal, to
enter into an employment agreement whereby Mr. Harvatine will receive an annual
salary of $100,000, with a $25,000 bonus awarded based upon the Company reaching
certain performance goals. Mr. Harvatine is to be granted options to purchase
250,000 shares of the Company Common Stock at 75% of the average closing bid
price of the Company's Common Stock for the 10 trading days immediately
preceding (and excluding) the vesting date of the shares. One-quarter of such
options vested immediately upon Mr. Harvatine's employment; one-quarter vests in
July 1999; one-quarter vests in January 2000; and the remaining one-quarter
vests in January 2001, assuming Mr. Harvatine's continued employment by the
Company. All vested options granted pursuant to the employment agreement will
be exercisable until January 2004. The Company also has agreed to provide Mr.
Harvatine with a monthly vehicle allowance of $400.
-19-
<PAGE> 20
DIRECTOR COMPENSATION
- ---------------------
The Company intends to compensate each director, including directors who
are executive officers, employees and affiliates of the Company, with a grant of
a five-year option to purchase 30,000 shares of the Company's Common Stock. The
options will vest at the rate of 10,000 shares per year over three years
commencing on the date of grant and will be exercisable at $1.00 per share for
those directors appointed before 1998 and exercisable at $1.50 per share for
those appointed in 1998. In addition to the grant of options, a Compensation
Committee will be formed to determine the amount of fees, if any, that will be
paid to directors for their participation on the Board of Directors. The
Compensation Committee will consist solely of non-affiliated independent
directors. All directors will be reimbursed for expenses incurred in connection
with attendance at Board and Committee meetings.
BENEFIT PLANS
- -------------
Other than establishing a medical insurance plan and stock incentive plan
for employees, the Board of Directors has not taken action with respect to the
establishment of any other employee benefit plans, such as bonus, profit
sharing, pension, retirement and life and disability insurance, or similar plans
and programs. It is presently contemplated that the Board of Directors will
take action to institute one or more of such plans and programs in the near
future.
MR. ISRAEL'S HEALTH ISSUES
- --------------------------
In June 1998, Mr. Israel was diagnosed with large cell B lymphoma. He
received chemotherapy treatments between June 1998 and January 1999. Although
to date, Mr. Israel's cancer has not materially affected his ability to perform
his duties for the Company, there can be no assurance that Mr. Israel's illness
will not affect the Company in the future.
ITEM 10. PRINCIPAL SHAREHOLDERS
The following table sets forth information as of February 9, 1999
regarding the ownership of the Company's common stock by officers and directors
and those persons known by the Company to be beneficial owners of 5% or more of
such stock. Each shareholder has sole voting and investment power with respect
to the shares shown as beneficially owned, except as otherwise indicated in a
footnote.
-20-
<PAGE> 21
Name No. of Shares (1) Percentage of Shares(1)
---- ----------------- -----------------------
Kenneth Israel (2) 2,224,748(3) 8.7%
Jeff Maynard (2) 850,000(4) 3.3%
Mary Joy Stead 1,494,000(5) 5.9%
Harry Lowell 7,716,100(6) 30.1%
John Welch (2) 610,000(7) 2.4%
Greg Appelhof (2) 606,666(8),(9) 2.3%
John Harvatine (2) 62,500(9) *
Reuben Tatz (2) 10,000 *
Stephan Herold 2,133,564(10) 8.4%
Fontenelle, LLC 1,725,000 6.9%
All Officers and Directors
as a group (6 persons) 4,363,914(11) 16.9%
* Denotes less than 1%
(1) Shares issuable upon the exercise of outstanding stock options and
warrants that are currently exercisable or become exercisable within 60 days
from the date hereof are considered outstanding for the purpose of calculating
the percentage of Common Stock owned by such person and owned by a group, but
not for the purpose of calculating the percentage of Common Stock owned by any
other person.
(2) The address of each of these executive officers or directors is: c/o
Virtual Technology Corporation, 3100 West Lake Street, Suite 400, Minneapolis,
Minnesota 55416.
(3) Includes 366,000 shares issuable pursuant to options and warrants which
are currently exercisable.
(4) Includes 260,000 shares issuable pursuant to options and warrants which
are currently exercisable.
(5) Includes 50,000 shares issuable pursuant to warrants which are
currently exercisable.
(6) Includes 158,800 shares issuable pursuant to warrants which are
currently exercisable. Includes shares owned by Laurel Management Co., a company
owned entirely by Mr. Lowell.
(7) Includes 50,000 shares issuable pursuant to warrants which are
currently exercisable.
(8) Includes 53,333 shares issuable pursuant to warrants which are
currently exercisable.
(9) Includes 500,000 and 62,500 shares issuable pursuant to options that
will be granted to Mr. Appelhof and Mr. Harvatine, respectively, pursuant to
their yet-to-be signed employment agreements.
(10) Includes 213,330 shares issuable pursuant to warrants which are
currently exercisable.
(11) Includes 729,000 shares issuable pursuant to options and warrants
which are currently exercisable.
-21-
<PAGE> 22
OPTIONS/WARRANTS
- ----------------
The following table sets forth information as of February 12, 1999
regarding outstanding options and warrants to executive officers and directors:
<TABLE>
<CAPTION>
Exercise Price per
Name Options/Warrants Date Issued Term Share
- -------------- ---------------- ----------- ---- -----
<S> <C> <C> <C> <C>
Kenneth Israel 30,000 June 17, 1996 5 years $1.00
56,000 June 27, 1996 5 years $1.00
30,000 March 31, 1998 5 years $0.25
200,000 March 18, 1996 5 years $0.25
50,000 June 15, 1996 5 years $1.00
Greg Appelhof 53,333 August 19, 1998 2 years $1.00
250,000 October 8, 1998 5 years $1.00
1,000,000 October 8, 1998 5 years To be determined
John Welch 50,000 June 23, 1997 3 years $0.25
Jeff Maynard 80,000 June 17, 1996 5 years $1.00
30,000 March 31, 1998 5 years $0.25
150,000 March 18, 1996 5 years $0.25
50,000 June 15, 1996 5 years $1.00
John Harvatine 62,500 January 4, 1999 5 years $2.28
187,500 January 4, 1999 5 years To be determined
</TABLE>
In addition to the options and warrants held by executive officers and
directors as described above, the Company currently has outstanding an aggregate
of 4,207,933 options and warrants to purchase Common Stock at exercise prices
ranging between $0.25 and $5.00 per share. Such options and warrants expire at
various times through January 2004. The Company has agreed to register the
resale of an aggregate of 2,170,000 of the shares underlying such options and
warrants under the Act either upon the demand of the holders or coincident with
certain other registrations under the Act.
ITEM 11. CERTAIN TRANSACTIONS
GTI ACQUISITION
- ---------------
Greg Appelhof, VTC's President and Chief Executive Officer, formerly was
with GTI for 11 years, most recently as Vice President of Sales. The Company
acquired substantially all of the assets and assumed certain liabilities of GTI
on January 28, 1999 for an aggregate purchase price of $10,142,740. Mr.
Appelhof purchased the right to be treated as though he were a 20% owner of
GTI's stock in the event of a sale of GTI for purposes of distributing the
proceeds of such sale to GTI's stockholders. Mr. Appelhof entered into this
agreement with GTI's sole stockholder Stephan G. Herold.
LOANS FROM RELATED PARTIES
- --------------------------
Between March 1997 and June 1998, the Company received loans from Kenneth
Israel, its CEO, Kate Israel, his daughter and certain companies under his
control for loans in the total
-22-
<PAGE> 23
amount of $371,543. These loans bear interest at 10% per annum and are due in
fiscal year 2001. As of January 31, 1999, the total outstanding balance,
including interest, was $427,766. On February 9, 1999, the Company repaid Mr.
Israel $147,300 of the total amount due. Mr. Israel and the Company have agreed
to convert the balance outstanding, including any interest, into the Company's
Common Stock at some future date.
In October 1998, the Company issued a promissory note to Harry Lowell,
a major shareholder of the Company, in the amount of $40,000 with an interest
rate of 10%, due on November 20, 1998. The Company and Mr. Lowell have agreed
to extend the due date of the note to April 14, 1999.
In October 1998, the Company issued a promissory note to John Welch, a
Director and major shareholder of the Company, in the amount of $5,000 with an
interest rate of 10%, due on November 20, 1998. The Company and Mr. Welch have
agreed to extend the due date of the note to April 14, 1999.
LOANS FROM STOCKHOLDERS (CONVERTIBLE DEBENTURES)
- ------------------------------------------------
Between January and March 1997, the Company issued two Convertible
Debentures to Jerry Stead, a member of the Company's Advisory Board, in the
aggregate amount of $150,000 with an interest rate of 12%. The Debentures,
along with the outstanding interest, were converted in May 1998 into an
aggregate of 694,000 shares of the Company's Common Stock, issued in the name of
his wife, Mary Joy Stead, a major shareholder of the Company.
Between June and July 1997, the Company issued two Convertible Debentures
to Harry Lowell, a major shareholder of the Company, in the aggregate amount
of $150,000 with an interest rate of 12%. These Convertible Debentures, along
with all outstanding interest were converted in January 1999 into an aggregate
of 177,443 shares of the Company's Common Stock.
CONSULTING AGREEMENT
- --------------------
In November 1998, the Company entered into an agreement with Fontenelle
LLC, a principal stockholder, to provide certain business and public relations
consulting services to the Company. In exchange for such services, the Company
issued 225,000 shares of its Common Stock and granted 1,000,000 warrants to
purchase shares of its Common Stock, at an exercise price of $1.00 per share
with a three year term. In 1999, Fontenelle exercised their warrants for
$1,000,000.
Additional Issuances of Common Stock
- ------------------------------------
In 1996 Ken Israel received an aggregate 1,300,000 shares for cash,
expenses and 12 months salary. In 1998, he received 600,000 shares in lieu of
$150,000 salary for services performed in fiscal year 1998 and converted $45,000
in Convertible Debentures, plus $8,912 of accrued interest into 175,648 shares.
In 1996 Jeff Maynard received 300,000 shares in lieu of $50,000 salary for
services performed for fiscal year 1997. In 1998, he received 200,000 shares in
lieu of $50,000 salary for services performed in fiscal year 1998.
In 1997 Mary Joy Stead purchased 500,000 shares for $50,000 cash. In 1998
she received 250,000 shares for $250,000 cash. In 1998 she converted $150,000
in Convertible Debentures, plus $23,500 in accrued interest, to 694,000 common
shares.
In 1997 Harry Lowell purchased 275,000 shares for $65,000 cash. In 1997
Laurel Center purchased 318,800 shares for $57,000 cash. In 1998 he purchased
6,405,000 shares for $582,500 cash. In 1998 Laurel Center purchased 100,000
shares for $10,000. In 1999, he converted $150,000 in Convertible Debentures,
plus $27,493 in accrued interest, to 177,443 shares.
In 1997 John Welch purchased 50,000 shares of $5,000 cash. In 1998 he
purchased 460,000 shares for $52,250 cash.
In 1998 Ken Israel, Jeff Maynard, and Reuben Tatz each received 10,000
shares as directors' compensation.
In 1998, Greg Appelhof purchased 53,333 shares for $20,000 cash.
In 1998 Stephan Herold purchased 1,333,000 shares for $500,000 cash. Also
in 1998, Mr. Herold exercised 213,333 options for $159,999 cash. In 1999, he
received 373,571 shares in connection with the Company's acquisition of GTI.
In 1998, Fontenelle, LLC purchased 500,000 shares of the Company's Common
Stock for $500,000 cash.
ITEM 12. SECURITIES BEING OFFERED
None.
-23-
<PAGE> 24
PART II
ITEM 1. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's common stock is currently traded on the OTC Bulletin Board
under the symbol VTCO.
The following table sets forth, for the periods indicated, the range of
high and low bid prices of the Company's common stock as provided by Metro Data
Company. The prices represent quotations between dealers without adjustment for
retail markups, markdowns, or commissions and may not represent actual
transactions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JANUARY 31, 1997 JANUARY 31, 1998 JANUARY 31, 1999
- ------------------------------------------------------------------------------------------------
High Low High Low High Low
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
FIRST QUARTER (END APRIL) 13/8 1 19/32 1/2
SECOND QUARTER (END JULY) No data No data 11/4 3/4 2 7/16 1/2
THIRD QUARTER (END OCTOBER) available available 11/2 5/8 1 3/4 13/16
FOURTH QUARTER (END JANUARY) 1/4 15/16 9 13/16
- ------------------------------------------------------------------------------------------------
</TABLE>
The Company has never paid a cash dividend on its capital stock and does
not expect to pay a cash dividend in the foreseeable future.
As of February 3, 1999, the Company had approximately 435 shareholders of
record.
ITEM 2. LEGAL PROCEEDINGS
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
In January 1998, the Company engaged Lurie, Besikof, Lapidus & Co., LLP as
its independent public accountants to audit the financial statements as of
January 31, 1998 and for the year then ended. The decision to dismiss
Copeland, Buhl and Company, PLLP and engage Lurie, Besikof, Lapidus & Co., LLP
as the Company's independent public accountants was approved by the Board of
Directors. The report of Copeland, Buhl and Company, PLLP as of January 31,
1997 and for the year then ended does not contain an adverse opinion or a
disclaimer of opinion, but was qualified with respect to the Company's ability
to continue operations as a going concern. Such report was not otherwise
qualified or modified as to uncertainty, audit scope or accounting principles.
There were no disagreements with the former auditors on any matters of
accounting principles or practices, financial statement disclosure or auditing
scope or procedures which, if not resolved to the former auditor's
satisfaction, would have caused them to make reference to the subject matter in
their report. Prior to retaining Lurie, Besikof, Lapidus & Co., LLP, the
Company did not consult with Lurie, Besikof, Lapidus & Co., LLP regarding the
application of accounting principles to a specified transaction, the type of
audit opinion that might be rendered on the Company's financial statements or
any other matter.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES (LAST THREE YEARS, ENDING
FEBRUARY 12, 1999)
A. Sales for cash consideration to accredited investors only pursuant to
Rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as
amended (the "Act"):
In 1996, the Company issued 425,969 shares of its Common Stock for
$102,378 to six investors.
-24-
<PAGE> 25
In 1997, the Company issued 1,243,800 shares of its Common Stock for
$308,250 to fourteen investors.
In 1998, the Company issued 11,362,147 shares of its Common Stock for
$2,452,024 to thirteen investors.
Year to date 1999, the Company issued 3,388,008 shares of its Common Stock
for $8,558,478 to thirty-one investors.
B. Sales made solely in exchange for services rendered pursuant to Rule 504
of Regulation D and Section 4(2) of the Act:
In 1996, the Company issued 2,675,121 shares of its Common Stock to six
individuals (all of whom were accredited investors) in exchange for $64,360 of
services rendered to the Company.
In 1997, the Company issued 140,539 shares of its Common Stock to six
individuals and entities (three of whom were accredited investors) in exchange
for $127,494 of services rendered to the Company.
In 1998, the Company issued 2,083,532 shares of its Common Stock to thirty
three individuals and entities (eight of whom were accredited investors) in
exchange for $961,897 of services rendered to the Company.
C. Issuance of options and warrants involving no sale of securities:
Between March 1996 and February 1999, the Company granted 39 accredited
investors an aggregate of 8,095,099 options and warrants to purchase shares of
the Company's Common Stock, exercisable at prices ranging between $.25 and
$7.50.
D. Sales made pursuant to Regulation S of the Act.
On October 31, 1996, the Company issued 427,500 shares to three individuals
in connection with the acquisition of ARL.
No underwriter was involved in any of the above transactions.
-25-
<PAGE> 26
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
INDEMNIFICATION
- ---------------
The Bylaws of the Company and the statutes of the State of Minnesota give
the Company the power to indemnify any director, officer, employee, or agent who
was or is a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, against
certain liabilities and expenses incurred in connection with the action, suit,
or proceeding. The Bylaws of the Company provide that the Company shall
indemnify any such directors, officers, employees, or agents to the full extent
provided under applicable provisions of the Minnesota Statutes. These
provisions do not affect the availability of equitable remedies, such as an
action to enjoin or rescind a transaction involving a breach of fiduciary duty,
although, as a practical matter, equitable relief may not be available. In the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act. As a result, the
above provisions may not limit liability of the directors for violations of, or
relieve them from the necessity of complying with, the federal securities laws.
LIMITATIONS ON DIRECTOR LIABILITY
- ---------------------------------
The Company's Articles of Incorporation provide, as permitted by governing
Minnesota law, directors of the Company shall not be personally liable to the
Company or its shareholders for monetary damages for certain breaches of
fiduciary duty. These provisions may discourage shareholders from bringing suit
against directors for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by shareholders on behalf of the Company against
directors.
-26-
<PAGE> 27
PART F/S
Included are (i) audited financial statements of the Company for the
fiscal years ended January 31, 1998 and 1997 and unaudited financial statements
for the nine months ended October 31, 1998 and 1997, (ii) audited financial
statements of GTI for the fiscal year ended December 31, 1997 and unaudited
financial statements for the fiscal year ended December 31, 1996 and the nine
months ended September 30, 1998 and 1997 and (iii) pro forma unaudited financial
statements of the Company and GTI combined for the year ended January 31, 1997
and the nine months ended October 31, 1998.
-27-
<PAGE> 28
(i)
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Virtual Technology Corporation and Subsidiary
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of VIRTUAL
TECHNOLOGY CORPORATION AND SUBSIDIARY as of January 31, 1998, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of VIRTUAL TECHNOLOGY
CORPORATION AND SUBSIDIARY as of January 31, 1998, and the results of their
operations and their cash flows for the year then ended.
The accompanying consolidated financial statements have been prepared assuming
that VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY will continue as a going
concern. As discussed in Note 3 to the consolidated financial statements, the
Company requires additional financing to support operations and has accumulated
a deficit during the development stage. These matters raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
May 13, 1998
<PAGE> 29
[COPELAND BUHL & CO LETTERHEAD]
Report of Independent Certified Public Accountants
Board of Directors and Stockholders
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARIES
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheet of Virtual
Technology Corporation and Subsidiaries (A Development Stage Enterprise) as of
January 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the period from inception (February 7,
1996) to January 31, 1997. These financial statements are the responsibility of
the Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audit. We did not audit the financial
statements of Ashmount Research Limited (a subsidiary), which statements reflect
4% of consolidated total assets at January 31, 1997, and 0% of consolidated
operations for the period ended January 31, 1997. Such financial statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for such subsidiary, is
based solely on the report of such other auditors.
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 and the report of other auditors provides a reasonable
basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Virtual Technology Corporation and Subsidiaries as of
January 31, 1997, and the results of their operations and their cash flows for
the period from inception (February 7, 1996) to January 31, 1997, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Companies will continue as a going concern. As discussed in Note A to the
financial statements, the Companies require additional financing to support
operations and have accumulated a deficit during the development stage. These
matters raise substantial doubt about the Companies' ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ COPELAND BUHL & COMPANY P.L.L.P.
April 11, 1997
<PAGE> 30
- 3 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
------------------------------ October 31,
ASSETS 1997 1998 1998
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash $ 26,986 $ 3,649 $ 136,770
Accounts receivable 11,764 672 767,227
Advances to subsidiary 60,000 -- --
Inventories -- 8,287 17,664
Prepaid expenses and deferred costs 6,662 3,906 606,029
----------- ----------- -----------
TOTAL CURRENT ASSETS 105,412 16,514 1,527,690
----------- ----------- -----------
EQUIPMENT, net of accumulated depreciation
of $2,599, $32,303, and $23,786, respectively 53,416 42,895 166,583
----------- ----------- -----------
INTANGIBLE ASSETS
Software development costs, net of accumulated
amortization of $30,000 570,000 -- --
Trademarks, patents, and copyrights, net of
accumulated amortization of $4,167 245,833 -- --
Goodwill, net of accumulated amortization of $833 49,167 -- --
Deferred costs -- -- 140,600
----------- ----------- -----------
865,000 -- 140,600
----------- ----------- -----------
$ 1,023,828 $ 59,409 $ 1,834,873
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 32,814 $ 256,637 $ 734,174
Accrued expenses and other current liabilities 46,053 479,797 658,350
Notes payable 37,965 -- 129,148
Current amount of capital lease obligations 1,020 1,202 11,810
Loans from related parties -- -- 45,000
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 117,852 737,636 1,578,482
----------- ----------- -----------
OTHER LIABILITIES
Loans from related parties -- 341,543 371,543
Convertible debentures 135,000 372,000 150,000
Capital lease obligations, net of current amount 3,102 1,799 55,025
----------- ----------- -----------
138,102 715,342 576,568
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - 5,000,000 shares authorized; none issued -- -- --
Common stock - no par value; 50,000,000 shares authorized;
shares issued and outstanding - 6,792,098, 8,489,937,
and 20,518,751, respectively 1,632,017 1,975,013 4,690,913
Accumulated deficit (829,421) (3,368,582) (5,011,090)
Unearned compensation (34,722) -- --
----------- ----------- -----------
767,874 (1,393,569) (320,177)
----------- ----------- -----------
$ 1,023,828 $ 59,409 $ 1,834,873
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements
<PAGE> 31
- 4 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
February 7,
1996 Year Nine Months Ended
(Inception) to Ended October 31,
January 31, January 31, -------------------------------
1997 1998 1997 1998
----------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ -- $ 174,669 $ 151,497 $ 3,092,941
COST OF SALES -- -- -- 3,049,460
----------- ----------- ----------- ------------
GROSS PROFIT -- 174,669 151,497 43,481
----------- ----------- ----------- ------------
OPERATING EXPENSES
Selling, general, and administrative 544,765 1,698,869 1,285,112 1,693,321
Write-off of Ashmount Research Limited -- 925,000 925,000 --
Purchased research and development costs 284,576 -- -- --
----------- ----------- ----------- ------------
829,341 2,623,869 2,210,112 1,693,321
----------- ----------- ----------- ------------
LOSS FROM OPERATIONS (829,341) (2,449,200) (2,058,615) (1,649,840)
----------- ----------- ----------- ------------
OTHER INCOME (EXPENSE)
Interest expense (1,699) (58,254) (37,841) (56,768)
Other 1,619 (31,707) (6,867) 64,100
----------- ----------- ----------- ------------
(80) (89,961) (44,708) 7,332
----------- ----------- ----------- ------------
NET LOSS $ (829,421) $(2,539,161) $(2,103,323) $ (1,642,508)
=========== =========== =========== ============
NET LOSS PER COMMON SHARE - BASIC and DILUTED $ (.13) $ (.36) $ (.31) $ (.11)
=========== =========== =========== ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC and DILUTED 6,380,084 7,068,687 6,831,891 15,297,029
</TABLE>
See notes to consolidated financial statements.
<PAGE> 32
- 5 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
- Subsidiary Common Stock - Parent Stockholders'
--------------------- --------------------- Accumulated Unearned Equity
Shares Amount Shares Amount Deficit Compensation (Deficit)
---------- --------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - February 7, 1996, prior to
acquisition of subsidiary -- $ -- 3,213,008 $ 1,112,286 $(1,112,286) $ -- $ --
February 7, 1996:
Initial issuance of stock for cash, fair
value of investments, and reimbursement
of expenses - $.01 to $.167 per share 3,014,030 226,500 -- -- -- (100,000) 126,500
May 4, 1996:
Stock issued in private placement for
cash - $2.46 to $2.50 per share 27,560 68,877 -- -- -- -- 68,877
Acquisition of Network Storage, Inc.
on June 17, 1996 (3,041,590) (295,377) 3,041,590 295,377 -- -- --
Reorganization of Virtual Technology
Corporation upon acquisition of subsidiary -- -- -- (1,112,286) 1,112,286 -- --
August 27, 1996 to January 18, 1997:
Stock issued in private placement:
Stock issued for cash - $2.50 per share -- -- 44,000 110,000 -- -- 110,000
Stock issued for services - $2.00 per
share -- -- 66,000 132,000 -- -- 132,000
Acquisition of Ashmount Research Limited
on October 31, 1996 - $2.56 per share -- -- 427,500 1,094,640 -- -- 1,094,640
Compensation expense -- -- -- -- -- 65,278 65,278
Net loss -- -- -- -- (829,421) -- (829,421)
---------- --------- --------- ----------- ----------- --------- -----------
Balance - January 31, 1997 -- $ -- 6,792,098 $ 1,632,017 $ (829,421) $ (34,722) $ 767,874
========== ========= ========= =========== =========== ========= ===========
</TABLE>
(continued)
See notes to consolidated financial statements.
<PAGE> 33
- 6 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common Stock
- Subsidiary Common Stock - Parent Stockholders'
------------------ ---------------------- Accumulated Unearned Equity
Shares Amount Shares Amount Deficit Compensation (Deficit)
------ --------- --------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 31, 1997 -- $ -- 6,792,098 $1,632,017 $ (829,421) $(34,722) $ 767,874
March 21, 1997 to May 5, 1997:
Stock issued for cash - $2.50 per share -- -- 18,800 47,000 -- -- 47,000
May 8, 1997 to June 17, 1997:
Stock issued for services - $1.25 per share -- -- 36,539 45,674 -- -- 45,674
September 25, 1997:
Stock issued for cash - $.40 per share -- -- 25,000 10,000 -- -- 10,000
Stock issued for cash - $.25 per share -- -- 200,000 50,000 -- -- 50,000
Stock issued for services - $1.50 per share -- -- 15,000 22,500 -- -- 22,500
November 12, 1997:
Stock issued for cash - $.125 per share -- -- 50,000 6,250 -- -- 6,250
December 3, 1997 to December 19, 1997:
Stock issued for cash - $.10 per share -- -- 900,000 90,000 -- -- 90,000
Stock issued for services - $.50 per share -- -- 25,000 12,500 -- -- 12,500
Stock issued for services - $.375 per share -- -- 50,000 18,750 -- -- 18,750
December 19, 1997:
Stock issued for cash - $.50 per share -- -- 10,000 5,000 -- -- 5,000
January 26, 1998:
Stock issued for cash - $.10 per share -- -- 350,000 35,000 -- -- 35,000
Stock issued for services - $.018 per share -- -- 17,500 322 -- -- 322
Compensation expense -- -- -- -- -- 34,722 34,722
Net loss -- -- -- -- (2,539,161) -- (2,539,161)
----- --------- --------- ---------- ----------- -------- -----------
Balance - January 31, 1998 -- $ -- 8,489,937 $1,975,013 $(3,368,582) $ -- $(1,393,569)
===== ========= ========= ========== =========== ======== ===========
</TABLE>
(continued)
See notes to consolidated financial statements.
<PAGE> 34
- 7 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common Stock
- Subsidiary Common Stock - Parent Stockholders'
------------------ ----------------------- Accumulated Unearned Equity
Shares Amount Shares Amount Deficit Compensation (Deficit)
------ ------- --------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - January 31, 1998 -- $ -- 8,489,937 $1,975,013 $(3,368,582) $ -- $(1,393,569)
February 25 to March 10, 1998 (unaudited):
Stock issued for cash - $.10 per share -- -- 250,000 25,000 -- -- 25,000
Stock issued for services - $.10 per share -- -- 240,000 24,000 -- -- 24,000
March 10, 1998 (unaudited):
Stock issued for cash - $.25 per share -- -- 30,000 7,500 -- -- 7,500
March 18 to March 23, 1998 (unaudited):
Stock issued for cash - $.10 per share -- -- 1,000,000 100,000 -- -- 100,000
Stock issued for services - $.10 per share -- -- 70,000 7,000 -- -- 7,000
March 23, 1998 (unaudited):
Stock issued for services - $.25 per share -- -- 600,000 150,000 -- -- 150,000
April 2 to April 29, 1998 (unaudited):
Stock issued for cash - $.10 per share -- -- 1,690,000 169,000 -- -- 169,000
Stock issued for services - $.10 per share -- -- 135,000 13,500 -- -- 13,500
May 12, 1998 (unaudited):
Stock issued for conversion of
debentures - $.25 per share -- -- 694,000 173,500 -- -- 173,500
</TABLE>
(continued)
See notes to consolidated financial statements.
<PAGE> 35
- 8 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common Stock
- Subsidiary Common Stock - Parent Stockholders'
------------------- ----------------------- Accumulated Unearned Equity
Shares Amount Shares Amount Deficit Compensation (Deficit)
------ ------- --------- -------- ----------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
May 14 to May 15, 1998 (unaudited):
Stock issued for cash - $.10 per share -- $ -- 660,000 $ 66,000 $ -- $ -- $ 66,000
May 18, 1998 (unaudited):
Stock issued for cash - $.25 per share -- -- 100,000 25,000 -- -- 25,000
May 19 to May 21, 1998 (unaudited):
Stock issued for cash - $.10 per share -- -- 50,000 5,000 -- -- 5,000
Stock issued for services - $.10 per share -- -- 50,000 5,000 -- -- 5,000
May 23, 1998 (unaudited):
Stock issued for cash - $.08 per share -- -- 1,250,000 100,000 -- -- 100,000
June 22, 1998 (unaudited):
Stock issued for cash - $.08 per share -- -- 625,000 50,000 -- -- 50,000
July 3, 1998 (unaudited):
Stock issued for cash - $.125 per share -- -- 200,000 25,000 -- -- 25,000
July 6, 1998 (unaudited):
Stock issued for cash - $.08 per share -- -- 1,250,000 100,000 -- -- 100,000
July 14, 1998 (unaudited):
Stock issued for services - $.10 per share -- -- 50,000 5,000 -- -- 5,000
</TABLE>
(continued)
See notes to consolidated financial statements.
<PAGE> 36
- 9 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued)
<TABLE>
<CAPTION>
Common Stock
- Subsidiary Common Stock - Parent Stockholders'
------------------ ------------------------ Accumulated Unearned Equity
Shares Amount Shares Amount Deficit Compensation (Deficit)
------ ------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
July 9 to July 20, 1998 (unaudited):
Stock issued for cash - $.125 per share -- $ -- 50,000 $ 6,250 $ -- $ -- $ 6,250
Stock issued for cash - $.375 per share -- -- 705,500 264,563 -- -- 264,563
Stock issued for conversion of
debentures - $.25 per share -- -- 126,000 31,500 -- -- 31,500
Stock issued for services - $.375 per share -- -- 5,000 1,875 -- -- 1,875
July 29 to July 31, 1998 (unaudited):
Stock issued for cash - $.80 per share -- -- 56,000 44,800 -- -- 44,800
Stock issued for conversion of
debentures - $.25 per share -- -- 175,648 43,912 -- -- 43,912
July 31, 1998 to October 31, 1998 (unaudited):
Stock issued for cash - $.375 per share -- -- 1,386,666 520,000 -- -- 520,000
Stock issued for services - $.375 per share -- -- 580,000 217,500 -- -- 217,500
Value of warrants issued for services -- -- -- 535,000 -- -- 535,000
(unaudited)
Net loss (unaudited) -- -- -- -- (1,642,508) -- (1,642,508)
---- ------- ---------- ---------- ----------- -----------
Balance - October 31, 1998 (unaudited) -- $ -- 20,518,751 $4,690,913 $(5,011,090) $ -- $ (320,177)
==== ======= ========== ========== =========== ======= ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 37
- 10 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 7,
1996 Year Nine Months Ended
(Inception) to Ended October 31,
January 31, January 31, ------------------------------
1997 1998 1997 1998
--------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(829,421) $(2,539,161) $(2,103,323) $(1,642,508)
Adjustments to reconcile net loss to net cash
used by operating activities:
Stock issued for compensation and services incurred 232,778 134,468 89,771 423,875
Purchased research and development 284,576 -- -- --
Depreciation 2,599 19,649 5,228 13,531
Loss on disposal of equipment -- 10,054 10,054 --
Amortization of intangible assets 35,000 -- -- --
Write-off of Ashmount Research Limited -- 925,000 925,000 --
Gain on sale of investments (202) -- -- --
Interest on notes converted to stock -- -- -- 26,912
Changes in operating assets and liabilities:
Accounts receivable -- 11,092 150 (766,555)
Inventories -- (8,287) -- (9,377)
Prepaid expenses and deferred costs -- 2,756 (5,076) (207,723)
Accounts payable 17,981 223,823 227,473 477,537
Accrued expenses and other current liabilities 1,350 433,744 134,215 178,553
--------- ----------- ----------- -----------
Net cash used by operating activities (255,339) (786,862) (716,508) (1,505,755)
--------- ----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of furniture and equipment (29,248) (19,061) -- (73,385)
Proceeds from sale of investments 50,202 -- -- --
Purchase of subsidiary, net of cash acquired (15,787) -- -- --
Advances to subsidiary (77,000) -- -- --
--------- ----------- ----------- -----------
Net cash used by investing activities (71,833) (19,061) -- (73,385)
--------- ----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 219,877 243,251 157,000 1,508,113
Payments on capital lease obligation (719) (1,121) (845) --
Net proceeds from (payments on) notes payable -- (37,965) (37,965) 174,148
Loans from related parties -- 341,543 341,543 30,000
Proceeds from convertible debentures 135,000 237,000 237,000 --
--------- ----------- ----------- -----------
Net cash provided by financing activities 354,158 782,708 696,733 1,712,261
--------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH -- (122) (3,777) --
--------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 26,986 (23,337) (23,552) 133,121
CASH
Beginning of period -- 26,986 26,986 3,649
--------- ----------- ----------- -----------
End of period $ 26,986 $ 3,649 $ 3,434 $ 136,770
========= =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 349 $ 3,835 $ 2,876 $ 2,990
</TABLE>
See notes to consolidated financial statements.
<PAGE> 38
- 11 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies -
The Company
Virtual Technology Corporation (VTC) is a technology sales company
specializing in electronic commerce of computer hardware and software
sales via the internet. Ashmount Research Limited (ARL), a wholly-owned
subsidiary located in the U.K., developed software. The Company is in the
process of closing ARL's operations. Since inception, the Company was
devoted to the development of products and raising capital. In fiscal
1999, the Company commenced operations, as such, the consolidated
financial statements no longer reflect those of a development stage
enterprise.
Principles of Consolidation
The consolidated financial statements include the accounts of Virtual
Technology Corporation and its wholly-owned subsidiary ARL, acquired
October 31, 1996. During 1998, the Company decided to close the ARL
operations. All significant intercompany accounts and transactions were
eliminated.
ARL had an October 31 fiscal year and is included in the 1998
consolidated financial statements for the fifteen months ended January
31, 1998 and in the 1997 consolidated financial statements for the year
ended October 31, 1997. The results of operations of ARL for the period
November 1, 1997 to January 31, 1998, are not material.
Unaudited Interim Financial Statements
The consolidated financial statements as of October 31, 1998, and for the
nine-month period ended October 31, 1998 and the period from February 7,
1996 (inception) to October 31, 1997, are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of the
consolidated financial position, results of operations and cash flows for
the above periods were made and are of a normal, recurring nature.
Accounting measurements at interim dates inherently involve greater
reliance on estimates than at year end. The results of the interim
periods are not necessarily indicative of the results for the full year.
Use of Estimates
The preparation of these consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect reported amounts and disclosures in
the financial statements and accompanying notes. Actual results could
differ from these estimates.
Equipment
Depreciation is provided in amounts sufficient to relate the cost of
equipment to operations over their estimated service lives, generally 3
to 7 years. The straight-line method of depreciation is used for
financial reporting and accelerated methods for tax reporting.
(continued)
<PAGE> 39
- 12 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company and Summary of Significant Accounting Policies - (continued)
Intangible Assets
The cost of purchased software is capitalized when related to a product
which has achieved technological feasibility or that has an alternative
future use, in accordance with Statement of Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased, or Otherwise Marketed."
Amortization of intangible assets was recognized on the straight-line
method over estimated lives of 5-15 years.
The Company recorded a $925,000 write-off of the intangible assets and
advances due to the termination of ARL operations in fiscal 1998.
Deferred costs represents future services to be performed by investment
banking firms. Such costs are being amortized over their contract period
of 1 to 5 years, or in the event of an equity offering, the remaining
balance will be charged against the proceeds.
Net Loss Per Common Share
Basic net loss per common share is based on the weighted average number
of shares outstanding. Diluted net loss per common share is the same as
basic as the stock options, warrants, and convertible debt are
antidilutive.
New Accounting Pronouncements
In 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
(SFAS 128). SFAS 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the SFAS
128 requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in the financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods for
comparative purposes is required. The adoption of SFAS No. 130 will have
no significant impact on the Company's consolidated results of
operations, financial position or cash flows.
<PAGE> 40
- 13 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Acquisitions -
On June 17, 1996, the stockholders of International Gold Marketing, Inc.
(IGM) approved the acquisition of Network Storage, Inc. (NSI). IGM, a
nonoperating entity, exchanged its common stock for all the common stock
of NSI and subsequently changed its name to Virtual Technology
Corporation (VTC). The merger was accounted for as a
pooling-of-interests. Combined and separate operations of NSI and IGM
during the periods preceding the merger are not disclosed as NSI was not
incorporated until 1996 and previous operations of IGM are unrelated to
current operations and immaterial. In conjunction with the acquisition,
VTC adopted fresh-start reporting. Accordingly, the deficit accumulated
from previous nonrelated operations was offset against the remaining
equity. No gain or loss resulted from the reorganization.
On October 31, 1996, VTC acquired all the outstanding common stock of ARL
for $18,000 in cash and 427,500 shares of common stock. The acquisition
was accounted for using the purchase method of accounting. Accordingly,
the purchase price was allocated to the net assets acquired based on
their estimated fair values. The balance of the purchase price was
allocated to software development costs ($600,000), trademarks, patents
and copyrights ($250,000), and goodwill ($50,000). Also, certain research
and development projects totaling $284,576 were determined to have no
alternative future use and were charged to operations.
The following unaudited pro forma financial information gives effect to
the ARL acquisition as if it had occurred at the beginning of the period
ended January 31, 1997, and includes one year of operations. The pro
forma result was prepared for comparative purposes only and does not
purport to be indicative of the results of operations which actually
would result had the acquisition occurred on the date indicated, or which
may result in the future and includes $140,000 of amortization expense
from the intangible assets described above.
<TABLE>
<CAPTION>
Period
Ended
January 31,
1997
-----------
<S> <C>
Net sales $ 196,788
Operating expenses (1,446,303)
Other expenses, net (11,540)
-----------
Net loss $(1,261,055)
===========
</TABLE>
3. Going Concern -
The accompanying consolidated financial statements were prepared assuming
the Company will continue as a going concern. VTC has not commenced its
planned principal operations and, therefore, has not generated revenues
to support operations, has an accumulated deficit, and requires
additional financing to fund activities in fiscal 1999. These matters
raise substantial doubt about the Company's ability to continue as a
going concern. Management plans to pursue additional equity financing in
fiscal 1999. These financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
<PAGE> 41
- 14 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Capital Lease Obligation -
The Company leases office equipment under a capital lease expiring June
2000. Equipment capitalized under this lease is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Office equipment $ 4,842 $ 4,842
Less accumulated depreciation 1,614 646
-------- --------
$ 3,228 $ 4,196
======== ========
</TABLE>
A schedule of future minimum lease payments under the capital lease
together with the present value of the net minimum lease payments is as
follows:
<TABLE>
<CAPTION>
Year Ending
January 31 Amount
-------------------------------------------- -------
<S> <C>
1999 $ 1,598
2000 1,598
2001 531
-------
Total minimum lease payments 3,727
Less amount representing interest 726
-------
Present value of net minimum lease payments 3,001
Less current amount 1,202
-------
$ 1,799
=======
</TABLE>
5. Loans from Related Parties -
Related party loans bear interest at 10% and are due in fiscal year 2001.
Interest expense was approximately $0, $20,300, $15,200, and $26,000 in
fiscal 1997 and 1998 and for the nine months ended October 31, 1997 and
1998, respectively, and is included in accrued expenses.
6. Convertible Debentures -
Loans from stockholders consist of two convertible debentures which bear
interest at 12% and mature on December 31, 1998. The debentures are
convertible into common shares at a conversion price subject to
adjustment from time to time ($.25 to $2.00 per share at January 31,
1998). Interest expense in fiscal 1997 and 1998 and for the nine months
ended October 31, 1997 and 1998 was approximately $1,400, $35,500,
$24,300, and $22,400, respectively, and is included in accrued expenses.
7. Unearned Compensation -
Two directors were issued stock in lieu of salary for the 18 months from
inception. Compensation expense was $65,278, $34,722, $21,579, and $ -0-
for fiscal 1997 and 1998 and for the nine months ended October 31, 1997
and 1998, respectively.
<PAGE> 42
- 15 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Options and Warrants -
At January 31, 1998, the Company had granted 1,931,100 of options and
warrants at prices ranging from $1.00 to $5.00.
Transactions related to outstanding options and warrants during the last
two years are summarized as follows:
<TABLE>
<CAPTION>
Number Weighted Average
of Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance at January 31, 1996 - $ -
Granted 1,341,100 1.47
---------
Balance at January 31, 1997 1,341,100 1.47
Granted 590,000 1.31
---------
Balance at January 31, 1998 1,931,100 1.42
Granted 3,993,999 1.16
Forfeited (390,500) 2.40
---------
Balance at October 31, 1998 5,534,599 1.16
=========
</TABLE>
The weighted average fair value of options and warrants granted during
fiscal 1997 and 1998 were $.13 and $.59, respectively.
The following table summarizes information about stock options and
warrants at January 31, 1998.
<TABLE>
<CAPTION>
Outstanding Exercisable
------------------------------------------------- ----------------------------------
Weighted Average
--------------------------------
Remaining
Range of Contractual Weighted Average
Exercise Prices Options Life-Years Exercise Price Options Exercise Price
--------------- ----------- ----------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 1.00 1,418,000 3.63 $ 1.00 1,358,000 $ 1.00
1.25 50,000 2.67 1.25 50,000 1.25
2.00 350,000 .75 2.00 350,000 2.00
5.00 113,100 .58 5.00 113,100 5.00
----------- -----------
1,931,100 $ 1.42 1,871,100 $ 1.42
=========== ===========
</TABLE>
(continued)
<PAGE> 43
- 16 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Stock Options and Warrants - (continued)
As permitted by SFAS 123, "Accounting for Stock-Based Compensation", the
Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees", to measure
compensation cost for stock options and warrants. Under APB 25, if the
exercise price of the Company's stock options and or warrants equals the
market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net loss and net loss per share is
required by SFAS 123, and was determined as if the Company had accounted
for its stock options and warrants under the fair value method of that
Statement. The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
assumptions for the periods ended January 31, 1997 and 1998: dividend
yield - 0%, volatility factor - 0%, risk-free interest rates ranging from
5.04% to 5.66%, and expected lives ranging from .33 years to 4.67 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restriction and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options and
warrants have characteristics significantly different from those of
traded options and warrants, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a
reliable measure of the fair value of its stock options and warrants.
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized over the option's vesting period. The pro forma
information is as follows:
<TABLE>
<CAPTION>
1997 1998
---------- -------------
<S> <C> <C>
Net loss:
As reported ($ 829,421) ($ 2,539,161)
Pro forma ( 948,422) ( 2,820,496)
Net loss per share - basic and diluted:
As reported ( .13) ( .36)
Pro forma ( .15) ( .40)
</TABLE>
9. Income Taxes -
The Company provides income taxes based on income reported for financial
reporting purposes. Deferred taxes are recognized for temporary
differences between the bases of assets and liabilities for financial
statement and income tax purposes. Deferred tax assets were reduced by a
valuation allowance until their realization is reasonably assured. No
income taxes are currently payable due to the net operating losses.
(continued)
<PAGE> 44
- 17 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Income Taxes - (continued)
The significant components of deferred income tax assets and liabilities,
all of which are long-term, are as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------------------- ---------------------------------------
Total Federal State Total Federal State
--------- --------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards $ 191,300 $ 148,500 $ 42,000 $ 606,900 $ 471,100 $ 135,800
Write-off of ARL - - - 457,600 355,200 102,400
--------- --------- ----------- ----------- --------- ---------
191,300 148,500 42,800 1,064,500 826,300 238,200
Valuation allowance (176,700) (133,900) (42,800) (983,500) (745,300) (238,200)
--------- --------- ----------- ----------- --------- ---------
14,600 14,600 - 81,000 81,000 -
Deferred tax liabilities:
Other 14,600 14,600 - 81,000 81,000 -
--------- --------- ----------- ----------- --------- ---------
Net $ - $ - $ - $ - $ - $ -
========= ========= =========== =========== ========= =========
</TABLE>
Approximately $437,000 and $949,000 of the net operating losses expire in
2012 and 2013, respectively. The change in the valuation allowance was an
increase of $176,700 and $806,800 in fiscal 1997 and 1998, respectively.
10. Commitment -
The Company conducts operations in leased facilities under a
noncancellable operating lease expiring in July 2001. The lease is
renewable for three additional years. Rent expense for fiscal 1997 and
1998 and for the nine months ended October 31, 1997 and 1998, totalled
$9,035, $31,338, $23,870, and $26,623, respectively.
Approximate future minimum rental commitments under all operating leases
are as follows:
<TABLE>
<CAPTION>
Year Ending
January 31 Amount
---------- ---------
<S> <C>
1999 $ 19,898
2000 21,355
2001 22,811
2002 11,648
---------
$ 75,712
=========
</TABLE>
11. Shareholder Lawsuit -
A shareholder threatened a lawsuit against the Company related to the
acquisition of ARL and certain employment matters. The Company is trying
to settle these matters with the shareholder and accrued $150,000 for
estimated settlement costs. Although the current accrual represents
management's best estimate of the Company's liability related to these
matters, the actual liability could differ materially in the near term.
<PAGE> 45
- 18 -
VIRTUAL TECHNOLOGY CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Economic Dependency -
The Company is dependent on one supplier. A shareholder of VTC is a
related party to this supplier. Cancellation of this arrangement could
have an adverse impact on the Company.
13. Subsequent Event -
The following events occurred subsequent to January 31, 1998:
- Convertible debentures totaling $150,000 plus accrued interest were
converted into 694,000 shares of common stock at a conversion price of
$.25 per share.
- Liabilities totaling $170,000 at January 31, 1998, were settled by
issuing 800,000 shares (200,000 shares at $.10 per share and 600,000
shares at $.25 per share) of common stock.
- Services performed in fiscal 1999 totaling $54,375 were settled by
issuing 160,000 shares ($.34 per share) of common stock.
- Common shares of 1,995,000 were issued for cash of $201,000 ($.10 per
share).
<PAGE> 46
(ii)
HEROLD MARKETING ASSOCIATES, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1997 (AUDITED)
AND 1996 (REVIEWED)
<PAGE> 47
SAMUEL T. KANTOS & ASSOCIATES
Certified Public Accountants
1080 West County Road E
Shoreview, Minnesota 55126
Phone (612) 482-9994
FAX (612) 482-9532
ACCOUNTANTS' REPORT
To the Board of Directors
and Stockholders of
Herold Marketing Associates, Inc.
We have audited the accompanying balance sheet of Herold Marketing
Associates, Inc., as of December 31, 1997, and the related statements of income,
retained earnings 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, the financial statements referred to above present fairly,
in all material respects, the financial position of Herold Marketing Associates,
Inc. as of December 31, 1997, and the results of operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
The 1996 financial statements were reviewed by us, and our report thereon,
dated May 22, 1997, stated that we were not aware of any material modifications
that should be made to those statements for them to be in conformity with
generally accepted accounting principles. However, a review, is substantially
less in scope than an audit and does not provide a basis for the expression of
an opinion on the financial statements taken as a whole.
/s/ Samuel T. Kantos & Associates
SAMUEL T.KANTTOS & ASSOCIATES
March 4, 1998
<PAGE> 48
HEROLD MARKETING ASSOCIATES, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
<TABLE>
<CAPTION>
ASSETS
1997 1996
----------- -----------
<S> <C> <C>
Current Assets
Cash $ 1,429,583 $ 1,330,970
Accounts Receivable, Net
of Allowance For Doubtful
Accounts of $ 37,000 and
$ 46,000 in 1997 and 1996 5,358,144 7,531,008
Inventory 4,205,896 1,818,738
Employee Advances 12,988 5,534
Prepaid Expenses 27,342 28,261
----------- -----------
Total Current Assets 11,033,953 10,714,511
----------- -----------
Property and Equipment
Furniture and Fixtures 106,746 134,316
Leasehold Improvements 8,836 8,836
Computer Equipment 83,356 95,160
----------- -----------
Total Property and Equipment 198,938 238,312
Less Accumulated Depreciation 143,749 185,212
----------- -----------
Net Property and Equipment 55,189 53,100
----------- -----------
Other Assets
Note Receivable 85,000 85,000
Loan Receivable Other 500,000 486,012
Security Deposits 14,622 16,707
----------- -----------
Total Other Assets 599,622 587,719
----------- -----------
Total Assets $11,688,764 $11,355,330
=========== ===========
</TABLE>
The accompanying notes and accountants' report
should be read with these financial statements.
<PAGE> 49
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------- -----------
<S> <C> <C>
Current Liabilities
Accounts Payable $ 8,491,643 $ 8,616,681
Accrued and Withheld
Payroll Taxes 2,661 4,028
Accrued Expenses 252,089 398,237
Accrued Warranty 12,020 24,412
Loan Payable, Stockholder 482,079 276,674
Note Payable, Line of Credit 10,780 0
----------- -----------
Total Current Liabilities 9,251,272 9,320,032
----------- -----------
Long-Term Liabilities
Accrued Warranty 155,068 158,531
----------- -----------
Total Long-Term Liabilities 155,068 158,531
----------- -----------
Stockholders' Equity
Common Stock, no par Value, 2,500 Shares Authorized, 595 Shares
Issued and Outstanding 1,000 1,000
Retained Earnings 2,281,424 1,875,767
----------- -----------
Total Stockholders' Equity 2,282,424 1,876,767
----------- -----------
Total Liabilities and Stockholders' Equity $11,688,764 $11,355,330
=========== ===========
</TABLE>
<PAGE> 50
HEROLD MARKETING ASSOCIATES, INC.
STATEMENT OF INCOME
FOR THE YEARS ENDED
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Sales $83,767,758 $87,832,805
Cost of Sales 75,218,638 80,101,466
----------- -----------
Gross Profit on Sales 8,549,120 7,731,339
Other Operating Income
Sales Commissions 1,547 8,385
----------- -----------
Gross Profit 8,550,667 7,739,724
Operating Expenses 7,519,567 6,749,520
----------- -----------
Income From Operations 1,031,100 990,204
----------- -----------
Other Income
Miscellaneous 9,212 3,455
Interest 95,345 112,469
Gain on Sale of Other Assets 0 3,148
----------- -----------
Total Other Income 104,557 119,072
----------- -----------
Income Before Taxes 1,135,657 1,109,276
Provision for Income Taxes 5,000 34,000
----------- -----------
Net Income $ 1,130,657 $ 1,075,276
=========== ===========
</TABLE>
The accompanying notes and accountants' report
should be read with these financial statements.
<PAGE> 51
HEROLD MARKETING ASSOCIATES, INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEARS ENDED
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Retained Earnings Beginning $ 1,875,767 $ 800,491
Stockholder Distribution (725,000) 0
Net Income 1,130,657 1,075,276
----------- -----------
Retained Earnings Ending $ 2,281,424 $ 1,875,767
=========== ===========
</TABLE>
The accompanying notes and accountants' report
should be read with these financial statements.
<PAGE> 52
HEROLD MARKETING ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Cash Flow From Operating Activities
Net Income $ 1,130,657 $ 1,075,276
Adjustments to Reconcile Net
Income to Net Cash Provided by
Operating Activities:
Depreciation and Amortization 19,027 18,094
Gain on Sale of Other Assets 0 (3,148)
(Increase) Decrease in:
Accounts Receivable 2,172,864 2,774,105
Inventory (2,387,158) (386,430)
Employee Advances (7,454) 7,461
Prepaid Expenses 919 (13,357)
Deferred Income Taxes 0 29,000
Increase (Decrease) in:
Accounts Payable (125,038) (2,314,187)
Accrued and Withheld
Payroll Taxes (1,367) 1,649
Accrued Expenses (146,148) 66,003
Accrued Warranty (15,855) 182,943
Income Taxes Payable 0 (54,747)
----------- ------------
Net Cash Provided (Used)
by Operating Activities 640,447 1,382,662
----------- ------------
Cash Flow From Investing Activities
Purchase of Property and Equipment (21,113) (25,956)
Loan Receivable Other (13,988) (486,012)
Note Receivable 0 (85,000)
Sale of Other Assets 0 26,898
Security Deposits 2,085 6,555
----------- ------------
Net Cash Provided (Used)
by Investing Activities (33,016) (563,515)
----------- ------------
</TABLE>
The accompanying notes and accountants' report
should be read with these financial statements.
<PAGE> 53
HEROLD MARKETING ASSOCIATES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
STATEMENT OF CASH FLOWS (CONTINUED)
Cash Flow From Financing Activities
Proceeds From Short-Term
Borrowing $ 2,880,917 0
Proceeds From Stockholder
Borrowing Short-Term 2,770,132 426,233
Payments on Short-Term Borrowing (2,870,137) (655,005)
Payments on Short-Term Stockholder
Borrowing (2,564,730) (800,000)
Stockholder Distribution (725,000) 0
----------- ------------
Net Cash Provided (Used)
by Financing Activities (508,818) (1,028,772)
----------- ------------
Net Increase
(Decrease) in Cash 98,613 (209,625)
Cash at Beginning of Year 1,330,970 1,540,595
----------- ------------
Cash at End of Year $ 1,429,583 $ 1,330,970
=========== ============
Supplemental disclosures of cash flow information:
Cash Paid Interest $ 121,672 $ 69,938
=========== ============
Income Taxes Paid $ 5,000 $ 59,747
=========== ============
</TABLE>
The accompanying notes and accountants' report
should be read with these financial statements.
<PAGE> 54
HEROLD MARKETING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
Note 1 - Summary of Significant Accounting Policies
This summary of significant accounting policies of Herold Marketing
Associates, Inc. is presented to assist in understanding the Company's
financial statements. The financial statements and notes are
representations of the Company's management who are responsible for their
integrity and objectivity. These accounting policies conform to generally
accepted accounting principles and have been consistently applied in the
preparation of the financial statements.
Business Activity
The Company sells computer peripheral products to wholesale and retail
outlets throughout the nation. In 1995 the Company began the assembly and
sale of complete computer systems through its current sales outlets.
Cash and Cash Equivalents
For purposes of preparing the statement of cash flows, unrestricted
currency, demand deposits, and money market accounts are considered cash
and cash equivalents.
Concentration of Credit Risk
The Company grants credit to its customers during the normal course of
business. The Company performs ongoing credit evaluations and generally
requires no collateral from its customers. At times throughout the year the
Company does maintain certain bank accounts and money market accounts in
excess of the FDIC and SPIC insured limits.
Inventory
Inventory consists primarily of computer peripheral products held for
resale. Inventory is stated at the lower of cost or market on a first in
first out basis.
Property and Equipment
Property and equipment are stated at cost. Expenditures for
maintenance and repairs are charged against operations. Depreciation is
computed for financial statement purposes on a straight line basis over the
estimated useful lives of the assets and amounted to $19,027 and $18,094
respectively. The cost and related accumulated depreciation of property and
equipment sold or
<PAGE> 55
HEROLD MARKETING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
Note 1 - Summary of Significant Accounting Policies (Continued)
otherwise disposed of are removed from the accounts and any gain or loss is
reported as current year's revenue or expense. For Federal income tax
purposes depreciation is computed using the accelerated cost recovery
system with certain assets being expensed in the year of purchase.
Warranties
Revenues derived from warranty contracts are recognized ratably over
the terms of the contracts. Accrued warranty liabilities recognize the
estimated current and long-term future costs associated with fulfilling the
warranty contract obligations.
Income Taxes
The Company with the consent of its shareholders, has elected under
the Internal Revenue Code to be an S corporation for the year beginning
January 1, 1996. In lieu of corporation income taxes, the shareholders of
an S corporation are taxed on their proportionate share of the Company's
taxable income. Some states require a minimum tax of corporations doing
business in their state. Any minimum tax required is included in the
provision for income taxes for 1997 and 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principals 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.
Advertising
The Company follows the policy of charging the net cost of advertising
to expense as incurred. Advertising expense was $28,335 and $29,606 in 1997
and 1996 respectively.
<PAGE> 56
HEROLD MARKETING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
Note 2 - Note Payable Line of Credit and Stockholder
Note Payable Line of Credit
The Company's loan agreement provides the Company with a revolving
line of credit of up to $5,000,000. The line of credit requires monthly
payments of accrued interest at 1% over prime. The loan agreement is
reviewed annually. This loan is secured by substantially all assets of the
Company.
Note Payable Stockholder
The stockholder also advances funds when required to during the course
of business and is paid the same interest as the financial institutions and
is unsecured. Interest expense was $ 121,672 in 1997 and $ 69,938 in 1996.
Note 3 - Long-Term Liabilities.
<TABLE>
<CAPTION>
<S> <C> <C>
Accrued Warranty
(see warranty in Note 1) $ 155,068 $ 158,511
============== ==============
</TABLE>
Maturities of long-term liabilities are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ -----------------
<S> <C>
1997 $ 52,843
1998 52,844
1999 49,382
-----------------
$ 155,068
=================
</TABLE>
Note 4 - Lease Commitments
The Company's Minnesota location is leased under a 36 month
non-cancelable operating lease commencing March 1, 1997. The lease requires
monthly base rent payments of $ 5,405 payable through February 2000. The
Company leases other facilities in Arizona, Florida, Illinois,
Massachusetts and Missouri under non-cancelable operating leases into 1998.
The majority of the leases are for 1 year with automatic renewals with
minor adjustments. The total lease expense for all facilities for 1997 and
1996 was $ 232,321 and $ 205,008 respectively.
<PAGE> 57
HEROLD MARKETING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
Note 4 - Lease Commitments (Continued)
In addition, the Company leases vehicles under non-cancelable
operating leases having lease terms of 36 to 48 months. The vehicle lease
expense for 1997 and 1996 was $ 32,763 and $ 16,988 respectively.
At December 31, 1997, future minimum lease payments under all
operating leases were as follows:
<TABLE>
<CAPTION>
Year Ending
December 31, Amount
------------ ------------
<S> <C>
1998 160,959
1999 160,959
2000 160,959
2001 96,099
2002 96,099
------------
Total $ 675,075
============
</TABLE>
Note 5 - Income Taxes
The provision for Federal and State income taxes consists of the
following:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
<S> <C> <C>
Current taxes $ 5,000 $ 5,000
Deferred taxes 0 29,000
------------- --------------
Total provision
for income taxes $ 5,000 $ 34,000
============= =============
</TABLE>
The Company's 1995 deferred tax liabilities represent the tax effects
of taxable temporary differences in book and tax reporting. The temporary
differences primarily consist of elections made to expense specific
property and equipment for tax purposes, allowances for doubtful accounts
and accrued warranty expenses. The 1995 deferred tax asset was expensed in
1996 because the Company elected to be an S corporation for 1996.
<PAGE> 58
HEROLD MARKETING ASSOCIATES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 (AUDITED) AND 1996 (REVIEWED)
Note 6 - Related Party Transactions
The Company has balances due from a related party, Technology
Marketing Unlimited, LLC which is owned 50% by the sole stockholder of
Herold Marketing Associates, Inc. On December 31, 1997 and 1996, the amount
of receivables from this related party were $ 500,000 and $ 486,012.
Also see Note 2 relating to loans from the stockholder and terms
accordingly.
Note 7 - Note Receivable
This note was issued on July 16, 1996 in the amount of $ 85,000 with
an interest rate of 9.25%, with a maturity date of December 31, 1996. This
note is currently in default.
Note 8 - Contingencies
1. The Company is currently in litigation with the Commissioner of
Internal Revenue regarding the tax years 1992 and 1993. According
to the Commissioner, the Company owes additional taxes of $245,508
and $247,829 respectively for the years mentioned. The ultimate
outcome of the above litigation is unknown at the present time.
Accordingly, no provision for any liability that might result has
been made in the accompanying financial statements.
2. The Company is currently involved in other litigation that has been
properly provided for in the accompanying financial statements.
<PAGE> 59
VIRTUAL TECHNOLOGY CORPORATION
Unaudited Pro Forma Combined Condensed Financial Statements
The Unaudited Pro Forma Combined Condensed Statement of Operations of the
Company for the year ended January 31, 1998 and the nine-month period ended
October 31, 1998 ("Pro Forma Statements of Operations"), and the Unaudited Pro
Forma Combined Condensed Balance Sheet of the Company as of October 31, 1998
("Pro Forma Balance Sheet" and, together with the Pro Forma Statements of
Operations, the "Pro Forma Financial Statements"), were prepared to illustrate
the estimated effect of the acquisition of Herold Marketing Associates, Inc. dba
Graphics Technologies, Inc. (GTI or Graphics Technologies, Inc.) The Pro Forma
Financial Statements do not reflect any anticipated cost savings from the GTI
acquisition, or any synergies that are anticipated to result from the
acquisition, and there can be no assurance that any such cost savings or
synergies will occur. The Pro Forma Statements of Operations give pro forma
effect to the GTI acquisition as if it had occurred on February 1, 1997. The Pro
Forma Balance Sheet gives pro forma effect to the GTI acquisition as if it had
occurred on October 31, 1998. The Pro Forma Financial Statements do not purport
to be indicative of the results of operations or financial position of Virtual
Technology Corporation (VTC) that would have actually been obtained had such
transactions been completed as of the assumed dates and for the periods
presented, or which may be obtained in the future. The pro forma adjustments
described in the accompanying notes are based upon available information and
certain assumptions that VTC believes are reasonable. The Pro Forma Financial
Statements should be read in conjunction with the separate historical financial
statements of GTI and notes thereto.
A preliminary allocation of the purchase price has been made to major categories
of assets and liabilities in the accompanying Pro Forma Financial Statements
based on available information. The actual allocation of purchase price and the
resulting effect on income from operations may differ significantly from the pro
forma amounts included herein. These pro forma adjustments represent VTC's
preliminary determination of purchase accounting adjustments and are based upon
available information and certain assumptions that VTC believes to be
reasonable. Consequently, the amounts reflected in the Pro Forma Financial
Statements are subject to change, and the final amounts may differ
substantially.
<PAGE> 60
VIRTUAL TECHNOLOGY CORPORATION
Unaudited Pro Forma Condensed Combined Balance Sheet
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------- ------------------------------
Virtual Graphics
Technology Technologies,
Corporation Inc.
October 31, September 30,
ASSETS 1998 1998 Adjustments Adjusted
------------ ------------ -------------- ------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 136,770 $ 825,706 $ 1,000,000 (A)
(1,000,000)(B) $ 962,476
Accounts receivable 767,227 6,609,482 (119,239)(D) 7,257,470
Inventory 17,664 4,525,884 -- 4,543,548
Prepaid expenses and
deferred costs 606,029 68,614 -- 674,643
----------- ------------ ------------ ------------
TOTAL CURRENT ASSETS 1,527,690 12,029,686 (119,239) 13,438,137
----------- ------------ ------------ ------------
EQUIPMENT, net 166,583 46,596 -- 213,179
INTANGIBLE ASSETS, net 140,600 -- 8,399,286 (B)
1,042,115 (C) 9,582,001
----------- ------------ ------------ ------------
307,183 46,596 9,441,401 9,795,180
----------- ------------ ------------ ------------
$ 1,834,873 $ 12,076,282 $ 9,322,162 $ 23,233,317
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 734,174 $ 8,547,416 $ (119,239)(D) $ 9,162,351
Accrued liabilities 658,350 241,358 -- 899,708
Notes, loans, and
capital lease obligations 185,958 -- 7,500,000 (B) 7,685,958
Line of credit - bank -- 1,389,982 -- 1,389,982
----------- ------------ ------------ ------------
TOTAL CURRENT LIABILITIES 1,578,482 10,178,756 7,380,761 19,137,999
----------- ------------ ------------ ------------
OTHER LIABILITIES
Accrued warranty -- 154,072 -- 154,072
Loans, convertible debentures,
and capital lease obligations 576,568 -- -- 576,568
----------- ------------ ------------ ------------
576,568 154,072 -- 730,640
----------- ------------ ------------ ------------
STOCKHOLDERS'
EQUITY (DEFICIT) (320,177) 1,743,454 1,000,000 (A)
1,642,740 (B)
(1,743,454)(B)
1,042,115 (C) 3,364,678
----------- ------------ ------------ ------------
(320,177) 1,743,454 1,941,401 3,364,678
----------- ------------ ------------ ------------
$ 1,834,873 $ 12,076,282 $ 9,322,162 $ 23,233,317
=========== ============ =========== ============
</TABLE>
<PAGE> 61
VIRTUAL TECHNOLOGY CORPORATION
Notes to Unaudited Pro Forma Condensed Combined Balance Sheet
(A) Record the sale of 666,667 shares of Virtual Technology Corporation
(VTC) common stock to fund the cash payment amount of the acquisition.
(B) Record the acquisition of Herold Marketing Associates, Inc. dba
Graphics Technologies, Inc. (GTI or Graphics Technologies, Inc.) for
$1,000,000 cash, $4,000,000 short-term note payable due 30 days after
closing, $3,300,000 short-term note payable due 90 days after closing,
$200,000 escrow note payable due 90 days after closing, and 228,571
shares of VTC common stock valued at $1,642,740.
(C) Record three-year consulting agreement with the former stockholder of
GTI for 145,000 shares of VTC common stock valued at $1,042,115.
(D) Eliminate intercompany balances.
<PAGE> 62
VIRTUAL TECHNOLOGY CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Operations
Nine Months Ended
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------------------- --------------------------------------
Virtual Graphics
Technology Technologies,
Corporation Inc.
October 31, September 30,
1998 1998 Adjustments Adjusted
------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 3,092,941 $ 49,627,236 $ (376,317)(A) $ 52,343,860
COST OF SALES 3,049,460 45,048,482 (376,317)(A) 47,721,625
------------- -------------- ------------- -------------
GROSS PROFIT 43,481 4,578,754 -- 4,622,235
OPERATING EXPENSES 1,693,321 4,040,821 681,752 (B) 6,415,894
------------- -------------- ------------- -------------
INCOME (LOSS)
FROM OPERATIONS (1,649,840) 537,933 (681,752) (1,793,659)
OTHER INCOME (EXPENSE) 7,332 (76,903) -- (69,571)
------------- -------------- ------------- -------------
INCOME (LOSS) BEFORE
INCOME TAXES (1,642,508) 461,030 (681,752) (1,863,230)
PROVISION FOR
INCOME TAXES (C) -- -- -- --
------------- -------------- ------------- -------------
NET INCOME (LOSS) $ (1,642,508) $ 461,030 $ (681,752) $ (1,863,230)
============= ============== ============= =============
NET LOSS PER COMMON
SHARE - BASIC and DILUTED (0.11) $ (0.11)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC and DILUTED (D) 15,297,029 16,337,267
</TABLE>
<PAGE> 63
VIRTUAL TECHNOLOGY CORPORATION
Unaudited Pro Forma Condensed Combined Statement of Operations
Year Ended
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------- -----------------------------
Virtual Graphics
Technology Technologies,
Corporation Inc.
January 31, December 31,
1998 1998 Adjustments Adjusted
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 174,669 $ 83,769,305 $ -- $ 83,943,974
COST OF SALES -- 75,218,638 -- 75,218,638
----------- ------------ ------------ ------------
GROSS PROFIT 174,669 8,550,667 -- 8,725,336
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 1,698,869 7,519,567 909,003 (B) 10,127,439
Write-off of subsidiary 925,000 -- -- 925,000
------------ ------------ ------------ ------------
2,623,869 7,519,567 909,003 11,052,439
------------ ------------ ------------ ------------
INCOME (LOSS) FROM
OPERATIONS (2,449,200) 1,031,100 (909,003) (2,327,103)
OTHER INCOME (EXPENSE) (89,961) 99,557 -- 9,596
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (2,539,161) 1,130,657 (909,003) (2,317,507)
PROVISION FOR
INCOME TAXES (C) -- -- -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $(2,539,161) $ 1,130,657 $ (909,003) $ (2,317,507)
============ ============ ============ ============
NET LOSS PER COMMON
SHARE - BASIC AND DILUTED $ (0.36) $ (0.29)
============ ============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING BASIC
AND DILUTED (D) 7,068,687 8,108,925
</TABLE>
<PAGE> 64
VIRTUAL TECHNOLOGY CORPORATION
Notes to Unaudited Pro Forma Condensed Combined Statements of Operations
(A) Eliminate intercompany sales and purchases.
(B) To record the amortization of the intangible assets acquired in the
acquisition based on the following amounts and amortization
periods:
<TABLE>
<CAPTION>
Description Amount Amortization Period (Years)
----------- ------------- ---------------------------
<S> <C> <C>
Goodwill $ 7,899,286 20
Noncompete agreement 500,000 3
Consulting agreement 1,042,115 3
-------------
$ 9,441,401
=============
</TABLE>
(C) VTC is in a loss carryforward position.
(D) The pro forma common shares outstanding includes the following
issuances of VTC common stock:
666,667 Shares issued to fund the cash payment amount of the
acquisition.
228,571 Shares issued pursuant to the purchase agreement.
145,000 Shares issued pursuant to a 3-year consulting agreement.
<PAGE> 65
HEROLD MARKETING ASSOCIATES, INC.
dba GRAPHICS TECHNOLOGIES, INC.
BALANCE SHEET
September 30, 1998
(Unaudited)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash $ 825,706
Accounts receivable 6,609,482
Inventory 4,525,884
Prepaid expenses and other current assets 68,614
-----------
TOTAL CURRENT ASSETS 12,029,686
EQUIPMENT, NET 46,596
-----------
$12,076,282
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,547,416
Accrued expenses 241,358
Line of credit - bank 1,389,982
-----------
TOTAL CURRENT LIABILITIES 10,178,756
ACCRUED WARRANTY 154,072
STOCKHOLDERS' EQUITY 1,743,454
-----------
$12,076,282
===========
</TABLE>
See notes to unaudited financial statements.
<PAGE> 66
HEROLD MARKETING ASSOCIATES, INC.
dba GRAPHICS TECHNOLOGIES, INC.
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
NET SALES $49,627,236 $59,891,837
COST OF SALES 45,048,482 54,300,087
----------- -----------
GROSS PROFIT 4,578,754 5,591,750
OPERATING EXPENSES 4,040,821 3,675,152
----------- -----------
INCOME FROM OPERATIONS 537,933 1,916,598
OTHER EXPENSE 76,903 37,390
----------- -----------
INCOME BEFORE INCOME TAXES 461,030 1,879,208
PROVISION FOR INCOME TAXES (S Corporation) -- --
----------- -----------
NET INCOME $ 461,030 $ 1,879,208
=========== ===========
</TABLE>
See notes to unaudited financial statements.
<PAGE> 67
HEROLD MARKETING ASSOCIATES, INC.
dba GRAPHICS TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 461,030 $ 1,879,208
Adjustments to reconcile net income to net
cash used by operating activities
Depreciation and amortization 8,594 9,986
Write-off related party loan 393,253 --
(Increase) decrease in:
Accounts receivable (1,246,806) 1,150,516
Inventory (319,988) (3,120,971)
Prepaid expenses and other current assets (1,043) (22,852)
Increase (decrease) in:
Accounts payable 55,773 (510,538)
Accrued warranty (13,016) 15,401
Accrued expenses (13,392) (93,684)
---------- -----------
Net cash used by operating activities (675,595) (692,934)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Loan advances (12,994) (13,988)
Payment received on note receivable 85,000 --
Payment received on related party loan 102,214 --
Security deposit refunds 375 2,085
---------- -----------
Net cash provided (used) by investing activities 174,595 (11,903)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term borrowings 1,379,202 9,764
Proceeds from stockholder borrowings short-term -- 1,478,961
Payments on short-term stockholder borrowings (482,079) --
Stockholder distributions (1,000,000) (725,000)
----------- -----------
Net cash provided (used) by financing activities (102,877) 763,725
----------- -----------
NET INCREASE (DECREASE) IN CASH (603,877) 58,888
CASH
Beginning of Period 1,429,583 1,330,970
----------- -----------
End of Period $ 825,706 $ 1,389,858
=========== ===========
</TABLE>
See notes to unaudited financial statements.
<PAGE> 68
HEROLD MARKETING ASSOCIATES, INC.
dba GRAPHICS TECHNOLOGIES, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
1. Basis of Presentation -
The accompanying unaudited financial statements reflect all normal and
recurring adjustments that are, in the opinion of management, necessary
to present fairly the financial position of Herold Marketing Associates,
Inc. (Company) as of September 30, 1998 and the results of their
operations and their cash flows for the nine months ended September 30,
1998 and 1997. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted. These financial
statements should be read in conjunction with the audited financial
statements and notes thereto of Herold Marketing Associates, Inc. as of
and for the year ended December 31, 1997.
2. Related Party Transactions -
During the nine months ended September 30, 1998, the Company wrote-off a
receivable from an insolvent related party totaling $393,253.
3. Subsequent Event -
On January 28, 1999, Virtual Technology Corporation (VTC) through its
wholly-owned subsidiary GTI Acquisition Corporation (GAC) acquired
substantially all the assets and liabilities of the Company. The purchase
price was $10,142,740, paid as follows: $1,000,00 cash at closing,
$1,642,740 payable by the issuance of 228,571 shares of VTC common stock,
$4,000,000 payable by a promissory note from GAC due February 27, 1999,
$3,300,000 payable by a promissory note from VTC due April 28, 1999, and
$200,000 placed into escrow.
<PAGE> 69
PART III
ITEM 1. INDEX TO EXHIBITS
(2) Charter and Bylaws:
2(a) Restated Articles of Incorporation of Virtual Technology
Corporation
2(b) Bylaws of Virtual Technology Corporation
(3) Instruments Defining the Rights of Security Holders:
3(a) Form of Common Stock certificate
3(b) Form of Warrant
(5) Voting Trust Agreement: None
(6) Material Contracts:
6(a) Asset Purchase Agreement dated January 28, 1999,
by and among GTI Acquisition Corporation, Herald Marketing
Associates, Incorporated dba Graphics Technology, Inc. and
Stephan G. Herold
6(b) Consulting Agreement dated January 28, 1999,
between GTI Acquisition Corporation and Stephan G. Herold
6(c) Loan and Security Agreement dated February 11,
1999, by and among Virtual Technology Corporation, GTI
Acquisition Corporation and Coast Business Credit
6(d) Fontenelle, L.L.C. Consulting Agreement
(7) Material Foreign Patents: None
(12) Additional Exhibits:
12(a) Consent of Lurie, Besikof, Lapidus & Co., LLP
12(b) Consent of Copeland, Buhl and Company, PLLP.
12(c) Consent of Samuel T. Kantos & Associates, CPA.
12(d) Copeland, Buhl & Company, PLLP letter to Securities
and Exchange Commission.
-28-
<PAGE> 70
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIRTUAL TECHNOLOGY CORPORATION
Date: February 12, 1999. By: /s/ Ken Israel
----------------------------------
Ken Israel
Chairman of the Board of Directors
-29-
<PAGE> 1
Exhibit 99.2(a)
VIRTUAL TECHNOLOGY CORPORATION
RESTATED ARTICLES OF INCORPORATION
Virtual Technology Corporation desires that following Restated Articles of
Incorporation take the place of and supersede the existing Articles of
Incorporation and all amendments thereto, as follows:
ARTICLE I
The name of the corporation shall be Virtual Technology Corporation.
ARTICLE II
The address of this corporation shall be 3100 W. Lake Street, Suite
400, Minneapolis, MN 55416.
ARTICLE III
The authorized capital stock of this corporation shall be Fifty Million
(50,000,000) shares of common stock, no par value, and Five Million (5,000,000)
shares of preferred stock, to be held, sold and paid for at such times and in
such manner as the Board of Directors may from time to time determine, in
accordance with the statutes of Minnesota. No shareholder of the Corporation
shall have any preemptive rights or other preferential rights to subscribe for
any or to purchase any shares of any series or any other securities or
obligations of the Corporation, whether here or hereafter authorized. No
shareholder shall be entitled to any cumulative voting.
ARTICLE IV
Powers
The Corporation shall have all powers provided or not prohibited by law
under the Statutes of the State of Minnesota, and shall, in addition and without
limitation to all other power, have the power to acquire, hold, mortgage, pledge
or dispose of the shares, bonds, securities and other evidences of indebtedness
of any domestic or foreign corporation.
ARTICLE V
Duration
The duration of this Corporation shall be perpetual.
ARTICLE VI
Each holder of common stock issued shall be entitled to cast one vote
for each share of record. The shareholders of this corporation shall not have
the preemptive right to subscribe for or to purchase any of the shares of the
corporation now or hereafter authorized. The shareholders of this corporation
are hereby denied the right of cumulative voting.
<PAGE> 2
ARTICLE VII
By-Laws
The Board of Directors of this Corporation shall adopt such By-Laws as
are suitable for the proper regulation of the Corporation's affairs, and such
By-Laws shall be of full force and effect unless and until changed or repealed
by a majority vote of the shareholders present and represented at any Annual
Meeting or any Special Meeting called for such purpose, or unless and until
amended by the Board of Directors of the Corporation by such procedure as they
may prescribe in the By-Laws of the Corporation.
ARTICLE VIII
Powers of Majority
In addition to the other powers of the majority of the shareholders,
the affirmative vote of the holders of a majority of the voting power of all
shareholders entitled to vote on the issues shall be sufficient to authorize:
(1) an amendment to or the restating of the Articles of Incorporation of the
Corporation; or (2) the sale, lease, exchange or other disposition of all, or
substantially all of the property and assets of the Corporation, including its
good will; or (3) the adoption of an agreement of consolidation or merger.
ARTICLE IX
No director shall have personal liability to the Corporation or its
shareholders for monetary damages for breach of fiduciary duty as a director.
Nothing in these Articles shall eliminate or limit the liability of a director:
(a) for any breach of the director's duty of loyalty to the
corporation or its shareholders;
(b) for acts or omissions not in good faith or that involves
intentional misconduct or a knowing violation of law;
(c) under Section 302A.559 or 80A.23;
(d) for any transaction from which the director derived an improper
personal benefit; or
(e) for any act or omission occurring prior to the date when the
provision in the articles eliminating or limiting liability becomes effective.
ARTICLE X
The corporation shall have power to issue, in any manner now or
hereafter permitted by law, bonds, debentures and other evidences of
indebtedness convertible into stock of the corporation, and warrants to purchase
stock of the corporation, upon the terms, in the manner, and under the
conditions, if any, fixed or authorized by the Board of Directors.
<PAGE> 3
ARTICLE XI
One third (1/3) of the total outstanding shares represented in person
or by proxy entitled to vote shall constitute a quorum to conduct business at
any annual or special meeting of shareholders.
IN WITNESS WHEREOF, I have subscribed my name to these Restated Articles of
Incorporation effective the 18th day of January, 1999.
/s/ Jeffrey Robbins
--------------------------------------
By: Jeffrey Robbins
Its: Secretary
<PAGE> 1
EXHIBIT 99.2(b)
BY-LAWS
OF
NETWORK STORAGE
CORPORATION
ARTICLE I
Offices
Section 1. Registered Office. The address of the registered office of
the corporation in 808 Westwood Drive South, Golden Valley, Minnesota 55416. The
registered office need not be identical with the principal office of the
corporation and may be changed from time to time by the Board of Directors.
Section 2. Other Offices. The corporation may have such other
offices at such other places within and without the State of Minnesota as the
Board of Directors may from time to time determine.
ARTICLE II
Meetings of Shareholders
Section 1. Place of Meeting. All meetings of the shareholders of this
corporation shall be held at its principal office unless some other place for
any such meeting within or without the State of Minnesota is designated by the
Board of Directors in the written notice of meeting.
Section 2. Annual Meeting. The annual meeting of the shareholders of
this corporation shall be held on the first Monday in April of each year or on
such other date during the calendar year as may be designated by the Board of
Directors in the written notice of meeting, which written notice of meeting
shall designate the time of meeting and place of meeting if other than the
1
<PAGE> 2
corporation's principal office. At the annual meeting the shareholders shall
elect a Board of Directors and transact such other business as may be properly
brought before the meeting. If the annual meeting is not held during any
calendar year, or if the directors are not elected thereat, the directors may be
elected at a special meeting of the shareholders called for that purpose, which
special meeting shall be called upon the demand of any shareholder entitled to
vote, which demand for and call of said special meeting shall be in accordance
with the provisions of Section 3 of this Article relating to demands for call of
a special meeting of the shareholders.
Section 3. Special Meetings. Special meetings of shareholders, for any
purpose or purposes, may be called by the President and in his absence by the
Vice President or by the Board of Directors or any two or more members thereof,
or in the manner hereinafter provided by one or more shareholders holding not
less than one tenth of the voting power of the shareholders. Upon request in
writing by registered mail or by any person or persons entitled to call a
meeting of shareholders, it shall be the duty of such officer forthwith to cause
notice to be given to the shareholders entitled to vote, of a meeting to be held
at such time as such officer shall fix, not less than one (1) or more than sixty
(60) days after the receipt of such request. The officer shall not fix a date
which unduly delays the meeting or shall have the effect of defeating the
purpose of the meeting. Business transacted at any special meeting of
shareholders shall be limited to the purpose
2
<PAGE> 3
or purposes stated in the notice of meeting.
Section 4. Notice of Meeting. Written notice of the annual meeting
stating the time and place thereof shall be given to each shareholder of record
entitled to vote at such meeting at least ten (10) days prior to the date of
such annual meeting. Written notice of all special meetings of shareholders
stating the time, place and purposes thereof shall also be given to each
shareholder of record entitled to vote at such meeting at least one (1) day
before the date fixed for such meeting. All notices of meeting shall be mailed
to each shareholder at his address as it appears on the stock transfer books of
the corporation and shall be deemed delivered when deposited in the United
States mail, with postage thereon prepaid. Notices given by telegram shall be
deemed delivered when the telegram is delivered to the telegraph company
properly addressed and prepaid. Any shareholder may waive notice of any meeting.
Section 5. Record Date. For the purposes of determining shareholders
entitled to notice of or to vote at any meeting of shareholders or any
adjournment thereof, or shareholders entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the Board of Directors of the corporation may but need not fix
a date as the record date for any such determination of shareholders, which
record date, however, shall in no event be more than sixty (60) days prior to
any such intended action or meeting.
Section 6. Quorum. A majority of the outstanding shares of
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<PAGE> 4
the corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of shareholders. If less than a majority of the
outstanding shares are represented at a meeting a majority of the shares so
represented may adjourn the meeting from time to time without further notice.
Any business may be transacted at the meeting held pursuant to the adjournment
and at which a quorum shall be present or represented which might have been
transacted at the adjourned meeting. The shareholders present at a duly
organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
Section 7. Voting and Proxies. At each meeting of the shareholders
every shareholder shall be entitled to one vote in person or by proxy for each
share of capital stock held by such shareholder but no proxy shall be entitled
to vote after eleven (11) months from the date of its execution, unless
otherwise provided in the proxy. Every proxy shall be in writing (which shall
include telegraphing, cabling or telephotographic transmission), and shall be
filed with the Secretary of the corporation before or at the time of the
meeting. All questions regarding the qualification of voters, the validity of
proxies and the acceptance or rejection of votes shall be decided by the
presiding officer of the meeting. When a quorum is present at any meeting, the
votes of the holders of the majority of the shares having voting power present
in person or represented by proxy shall decide any questions brought before such
meeting, unless the
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question is one upon which by express provision of the statutes or the Articles
of incorporation or these By-laws a different vote is required, in which case
such express provision shall govern and control the decision of such question.
Section 8. Informal Action By Shareholders. Any action required to be
taken at a meeting of the shareholders, or any other action which may be taken
at a meeting of the shareholders, may be taken without a meeting if a consent in
writing setting forth the action so taken shall be signed by all the
shareholders of record entitled to vote as of the date of such resolution.
ARTICLE III
Directors
Section 1. General Powers. The business and the property of the
corporation shall be managed and controlled by the Board of Directors. The
directors may exercise all such powers and do all such things as may be
exercised or done by the corporation subject to the provisions of the Articles
of Incorporation, these By-laws and all applicable law.
Section 2. Number. Tenure and Qualification. The number of directors
which shall constitute the whole Board of Directors shall be three or as
otherwise fixed from time to time by resolution of the shareholders subject to
increase by resolution of the Board of Directors. No decrease in the number of
directors pursuant to this section shall effect the removal or any director then
in office except upon compliance with the provisions of Section 8 of this
Article. Each director shall be elected at the annual meeting of
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<PAGE> 6
shareholders, except as provided in Section 7 of this Article, and shall hold
office until the next annual meeting of shareholders and thereafter until his
successor is duly elected and qualified, unless a prior vacancy shall occur by
reason of his death, resignation or removal from office. Directors need not be
shareholders.
Section 3. Regular Meetings. A regular meeting of the Board of
Directors shall be held immediately after, and at the same place as, the annual
meeting of shareholders. Other regular meetings of the Board of Directors may be
held at such time and at such place as shall from time to time be determined by
the Board of Directors.
Section 4. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of the President, or in his absence by the
Vice-President, or shall be called by the Secretary on the written request of
any three (3) directors. The person or persons authorized to call special
meetings may fix the time and place, either within or without the State of
Minnesota, for any such special meeting.
Section 5. Notice of Meetings. Ten (10) day written notice of the
annual meeting of directors and of all regular meetings of directors shall be
given to all directors. Such notices shall be deemed delivered when deposited in
the United States mail properly addressed, with postage thereon prepaid.
Ten (10) days written notice of all special meetings of the Board of
Directors shall be given to each director. In the event that notice is given by
mail, such notice shall be mailed at least
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two (2) days prior to the special meeting and shall be deemed delivered when
deposited in the United States mail properly addressed with postage thereon
prepaid.
Notice given by telegram shall be deemed to be delivered when the
telegram is delivered to the telegraph company properly addressed and prepaid.
Any director may waive notice of any meeting. The attendance of a
director at any meeting shall constitute a waiver of notice of such meeting,
unless his attendance is for the express purpose of objecting to the transaction
of business on grounds that the meeting is not lawfully called or convened.
Section 6. Quorum and Voting. A majority of the directors then in
office shall constitute a quorum for the transaction of business at any regular
or special meeting of the Board of Directors. If a quorum shall not be present
at any meeting of the Board of Directors any of the directors present may
adjourn the meeting from time to time without further notice. The act of a
majority of the directors present at any meeting at which there is a quorum
shall be the act of the Board of Directors except as to any question upon which
any different or greater vote is required by the Articles of Incorporation,
these By-laws or Minnesota Statutes.
Section 7. Vacancies and Newly Created Directorships. Any vacancy
occurring in the Board of Directors may be filled by the affirmative vote of a
majority of the directors remaining in office even though said remaining
directors may be less than a quorum; any
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newly created directorship resulting from an increase in the authorized number
of directors by action of the Board of Directors may be filled by a two-thirds
vote of the directors serving at the time of such increase; or said vacancy or
newly created directorship may be filled by resolution of the shareholders at
any annual meeting or at any special meeting called for that purpose. Unless a
prior vacancy occurs by reason of his death, resignation or removal from office
any director so elected shall hold office until the next annual meeting of
shareholders or until his successor is duly elected and qualified.
Section 8. Removal of Directors. The entire Board of Directors or any
director or directors may be removed from office with or without cause, at any
special meeting of the shareholders duly called for that purpose as provided in
these By-laws, by a vote of the shareholders holding a majority of the shares
entitled to vote at an election of directors. At such meeting a successor or
successors may be elected by the vote of the holders of the shares having voting
power present in person or represented by proxy, or if any vacancy is not so
filled, it may be filled by the directors an provided in Section 7 of this
Article.
Section 9. Executive Committee. The Board of Directors may, by
unanimous resolution of all directors then in office, appoint an Executive
Committee of three or more directors to meet and act on behalf of the Board of
Directors between meetings of the board. The Executive Committee shall advise
and aid the officers of the corporation in all matters concerning management of
its business,
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and between meetings of directors the Executive Committee shall possess and may
exercise all the powers of the Board of Directors with reference to the conduct
of the business of the corporation, except the power to fill vacancies in their
own membership, which vacancies shall be filled by the Board of Directors. The
Executive Committee shall meet at stated times or on notice to all members. it
shall fix its own rules of procedure. A majority of the committee shall
constitute a quorum but the affirmative vote of a majority of the whole
committee shall be necessary on every item of business. The Executive Committee
shall keep regular minutes of its proceedings and report the same to the Board
of Directors.
Section 10. Other Committees. The Board of Directors may appoint such
other committees and delegate to such committees such powers and
responsibilities as it may from time to time deem appropriate.
Section 11. Action In Writing. Any action which might be taken at a
meeting of the Board of Directors or of a lawfully constituted Executive
Committee thereof may be taken without a meeting if such action is taken in
writing and signed by all of the directors then in office or by all of the
members of such committee as the case may be.
Section 12. Meeting By Means of Conference Telephone. Members of the
Board of Directors of the corporation, or any committee designated by such
Board, may participate in a meeting of such Board or committee by means of
conference telephone or similar communications equipment by means of which all
persons
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participating in the meeting can hear each other, and participation in a meeting
pursuant to this section shall constitute presence in person at such meeting.
ARTICLE IV
OFFICERS
Section 1. Number. The officers of the corporation shall be elected by
the Board of Directors and shall include a President, one or more
Vice-Presidents, a Secretary and a Treasurer. The Board of Directors may also
appoint such other officers and assistant officers as it may deem necessary.
Except as provided in these By-laws, the Board of Directors shall fix the
powers, duties and compensation of all officers. Officers may, but need not, be
directors of the corporation.
Section 2. Election and Term of Office. Officers shall be elected at
each annual meeting of the Board of Directors and shall hold office at the
pleasure of the Board. An officer shall hold office until his successor shall
have been duly elected unless prior thereto he shall have resigned or been
removed from office as hereinafter provided.
Section 3. Removal and Vacancies. Any officer or agent elected or
appointed by the Board of Directors may be removed with or without cause at any
time by the vote of a majority of the Board of Directors. Any vacancy in any
office of the corporation shall be filled by the Board of Directors.
Section 4. President. The President shall be chief executive officer
of the corporation, shall preside at all meetings of the
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shareholders and the Board of Directors, shall have general and active
management of the business of the corporation, and shall see that all orders and
resolutions of the Board of Directors are carried into effect. He shall have the
general powers and duties usually vested in the office of the President and
shall have such other powers and perform such other duties as the Board of
Directors may from time to time prescribe.
Section 5. Vice-Presidents. The Vice-President, or Vice-Presidents in
case there are more than one, shall have such powers and perform such duties as
the President or the Board of Directors may from time to time prescribe. In the
absence of the President or in the event of his death, inability or refusal to
act, the Vice-President, or in the event there be more than one Vice-President,
the Vice Presidents in the order designated at the time of their election, or in
the absence of any designation, then in the order of their election, shall
perform the duties of the President and when so acting, shall have all the
powers of and be subject to all of the restrictions upon the President.
Section 6. The Secretary shall attend all meetings of the Board of
Directors and of the shareholders and record all votes and the minutes of all
proceedings of the Board of Directors and of the shareholders in a book to be
kept for that purpose. He shall keep the stock books of the corporation. He
shall give or cause to be given notice of all meetings of the shareholders and
of special meetings of the Board of Directors, and shall perform such other
duties and have such other powers as the
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President or the Board of Directors may from time to time prescribe
Section 7. Treasurer. The Treasurer shall have the care and custody of
the corporate funds and securities of the corporation and shall disburse the
funds of the corporation as may be ordered from time to time by the President or
the Board of Directors. He shall keep full and accurate account of all receipts
and disbursements in books belonging to the corporation and shall have such
other powers and perform such other duties as the President or the Board of
Directors may from time to time prescribe.
Section 8. Other Officers. The Assistant Secretaries and Assistant
Treasurers in the order of their seniority, unless otherwise determined by the
Board of Directors, shall, in the absence or disability of the Secretary or
Treasurer, perform the duties and exercise the powers of the Secretary and
Treasurer respectively. Such Assistant Secretaries and Assistant Treasurers
shall have other powers and perform such other duties as the President or the
Board of Directors may from time to time prescribe. Any other officers appointed
by the Board of Directors shall hold office for the term established by the
Board of Directors and shall have such powers, perform such duties and be
responsible to such other officer as the Board of Directors may from time to
time prescribe.
ARTICLE V
Certificates of Stock
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Section. 1. Certificates. Certificates representing shares of the
corporation shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by the President or a Vice
President and by the Secretary or an Assistant Secretary. If a certificate is
signed (1) by a transfer agent or an assistant transfer agent or (2) by a
transfer clerk acting on behalf of the corporation and a registrar, the
signature of any such President, Vice-President, Secretary or Assistant
Secretary may be a facsimile. In case any officer or officers who have signed,
or whose facsimile signature or signatures have been used on any such
certificate or certificates, shall cease to be an officer or officers of the
corporation, whether because of death, resignation or otherwise, before such
certificate or certificates have been delivered by the corporation such
certificate or certificates may nevertheless be adopted by the corporation and
be issued and delivered as though the person or persons who signed such
certificate or certificates or whose facsimile signature or signatures have been
used thereon had not ceased to be such officer or officers of the corporation.
All certificates for shares shall be consecutively numbered or otherwise
identified. The name and address of the person to whom the shares represented
thereby are issued with the number of shares and date of issue shall be entered
on the stock transfer books of the corporation. All certificates surrendered to
the corporation or the transfer agent for transfer shall be canceled and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been
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surrendered and canceled. Except that in case of a lost, destroyed or mutilated
certificate, a new one may be issued therefor upon such terms and indemnity to
the corporation as the Board of Directors may prescribe.
Section 2. Transfer of Shares. Transfer of shares of the corporation
shall be made only on the stock transfer books of the corporation by the holder
of record thereof or by his legal representative who shall furnish proper
evidence of authority to transfer, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary of State of the
corporation and on surrender of such shares to the corporation or the transfer
agent of the corporation. The person in whose name shares stand on the books of
the corporation shall be deemed by the corporation to be the owner thereof for
all purposes.
ARTICLE VI
Contracts, Loans, Checks and Deposits
Section 1. Contracts. The Board of Directors may authorize any officer
or officers, agent or agents, to enter into any contract or execute and deliver
any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.
Section 2. Loans. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name unless
authorized by a resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
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Section 3. Checks, Drafts, etc. All checks, drafts or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the corporation shall be signed by such officer or officers, agent or
agents of the corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
Section 4. Deposits. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such banks, trust companies or other depositories as the Board of Directors
may select.
ARTICLE VII
Indemnification
Section 1. Indemnification. The corporation acting through its Board of
Directors, or as otherwise provided in this By-Law, shall as fully as may be
permitted from time to time by the statutes and decisional law of the State of
Minnesota or by any other applicable rules or principles of law, indemnify each
officer of the corporation against the expense of any action to which he was or
is a party or is threatened to be made a party by reason of the fact that he is
or was an officer of the corporation. Any provision in these By-Laws which would
prevent the indemnification of an officer to the full extent permitted by law as
it may from time be expanded by statute, decision of court or otherwise, shall
be deemed amended to conform to such expanded right of indemnification without
formal action by the Board of Directors or shareholders.
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Section 2. Definitions. As used in this By-Law: (i) the term "officer"
means any person who is, was or may hereafter be a director, officer, employee
or agent of this corporation or, at the request of this corporation, of any
other corporation or of any partnership, joint venture, trust or other
enterprise and the rights of indemnification under this By-Law shall inure to
the benefit of the heirs, executors and administrators of any of such persons,
(ii) the term "action" means any threatened, pending or completed action, suit
or proceeding, wherever brought, whether civil, criminal, administrative or
investigative including those by or in the right of the corporation and whether
or not involving an act or omission of an officer in his capacity as such, and
whether or not he is an officer, at the time of such action, and (iii) the term
"expenses of any action" shall include attorney's fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with an action.
Section 3. Standard of Conduct. An officer shall be indemnified with
respect to any action (other than an action by or in the right of the
corporation to procure a judgement in its favor) 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, if it is a criminal action, he had no reasonable cause
to believe his conduct was unlawful. If the action be one by or in the right of
the corporation to procure a judgement in its favor, then in addition to the
requirements of the preceding sentence, an officer shall be indemnified only if
he is not
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adjudged to be liable for negligence or misconduct in the performance of his
duty to the corporation or, if he is adjudged to be liable for negligence or
misconduct in the performance of his duty to the corporation, then he shall be
indemnified only to the extent that the court in which such action was brought
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person in fairly and
reasonably entitled to indemnity for such expenses incurred which such court
shall deem proper. If he is successful on the merits or otherwise in defense of
any action, an officer shall be indemnified for expenses actually and
reasonably incurred by him in connection with such action. In all other cases
(other than an action in which the officer is successful on the merits or
otherwise in defense of such action or in an action by or in the right of the
corporation to procure a judgement in its favor where the officer has been
adjudged to be liable for negligence or misconduct in the performance of his
duty to the corporation), an officer shall be indemnified, unless ordered by a
court, only an authorized in the specific case upon a determination that
indemnification of the officer is proper in the circumstances because he has met
the applicable standard of conduct set forth above. Such determination shall be
made by the Board of Directors by a majority vote or a quorum consisting of
directors who were not parties to such action or if such quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or by the
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shareholders. The determination may be made that he is entitled to
indemnification as to some matters even though not so entitled as to others. The
termination of any action by judgement, order, settlement, conviction or upon a
plea of nolo contendre or its equivalent shall not, of itself, create a
presumption that the officer did not act in a manner entitling him to
indemnification under this By-law.
Section 4. Determination of Conduct. Except where an officer is
successful on the merits or otherwise in the defense of an action and except
where a court determination is required by law for indemnification in an action
by or in the right of the corporation an officer shall first seek a
determination that he met the applicable standard of conduct act forth above
from the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action or if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
shareholders, it being the belief of this corporation that the best judges of an
officer's conduct are those familiar with the business activities of the
corporation. In the event that it is determined that the officer partially or
completely failed to meet the applicable standard of conduct, or if no
determination is reached within a reasonable time, the officer may apply to the
District Court of the State of Minnesota for a determination of his right to
indemnification and the result of any prior determination of that right by
disinterested directors or by
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independent legal counsel or by the shareholders shall not be entered into
evidence or considered by the court in its independent determination.
SECTION 5. Expenses Advance. Expenses incurred in defending an action
may be paid by the corporation in advance of the final disposition of such
action as authorized by the Board of Directors in the manner provided in Section
3 of this Article VII upon receipt of an undertaking by or on behalf of such
officers to repay such amount unless it shall ultimately be determined that he
is entitled to be indemnified by the corporation as authorized by law.
Section 6. Nonexclusivity. The indemnification provided by this By-Law
shall not exclude any other right to which an officer may be entitled under any
agreement, vote of shareholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding office, and shall not imply that the corporation may not provide lawful
indemnification not expressly provided for by this By-law.
Section 7. Insurance. The corporation may purchase and maintain
insurance on behalf of any officer against any liability asserted against him
and incurred by him in any such capacity to the full extent as may from time to
time be permitted by law.
Section 8. Notice to Shareholders. If an officer is indemnified by the
corporation other than by court order or action by the shareholders, the
corporation shall, not later than the next annual meeting of shareholders unless
such meeting is held within
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three months from the date of such payment, and, in any event, within fifteen
months from the date of such payment, mail to its shareholders of record at the
time entitled to vote for the election of directors a statement specifying the
officers paid, the amount paid and the nature and status of the litigation or
threatened litigation at the time of such payment.
ARTICLE VIII
MISCELLANEOUS
Section 1. Dividends. The Board of Directors may from time to time
declare, and the corporation may pay, dividends on its outstanding shares in the
manner and upon the terms and conditions provided by law.
Section 2. Reserve. There may be set aside out of any funds of the
corporation available for dividends such sum or sums as the directors may from
time to time, in their absolute discretion, deem proper as a reserve or reserves
to meet contingencies, or for equalizing dividends, or for repairing or
maintaining any property of the corporation, or for the purchase of additinoal
property, or for such other purpose as the directors shall deem to be consistent
with the interests of the corporation, and the directors may modify or abolish
such reserve.
Section 3. Fiscal Year. The fiscal year of the corporation shall begin
on the 1st day of March and end on the last day of February in each year.
Section 4. No Seal. This corporation shall have no corporate seal.
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SECTION 5. Amendments. Except as limited by the Articles of
Incorporation of the corporation, these by-laws may be altered or amended by the
Board of Directors at any regular or special meeting of directors to the full
extent permitted by law, subject however to the power of the shareholders of
this corporation to alter or repeal such by-laws.
We, the undersigned, President and Secretary of Network Storage
Corporation does hereby certify that the foregoing by-laws are the by-laws
adopted for the corporation by its Board of Directors at a meeting held on the
7th day of February 1996.
/s/ Kenneth Israel
- ------------------------------
KENNETH ISRAEL
PRESIDENT
/s/ Kenneth Israel
- ------------------------------
KENNETH ISRAEL
SECRETARY
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<PAGE> 1
EXHIBIT 99.3(a)
INCORPORATED UNDER THE LAWS OF THE
NUMBER STATE OF MINNESOTA SHARES
****
CUSIP NO. 92824Q 10 3
VIRTUAL TECHNOLOGY CORPORATION
50,000,000 AUTHORIZED SHARES NO PAR VALUE NON-ASSESSABLE
THIS CERTIFIES THAT
**NAME**
IS THE RECORD HOLDER OF
****
SHARES OF VIRTUAL TECHNOLOGY CORPORATION COMMON STOCK TRANSFERABLE ON THE BOOKS
OF THE CORPORATION IN PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF
THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS NOT VALID UNTIL
COUNTERSIGNED BY THE TRANSFER AGENT AND REGISTERED BY THE REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE
SIGNATURES OF ITS DULY AUTHORIZED OFFICERS.
DATED:
, TH 199
-------- ----- -
[VIRTUAL TECHNOLOGY CORPORATION MINNESOTA CORPORATE SEAL]
COUNTERSIGNED AND REGISTERED
FIDELITY TRANSFER COMPANY (SALT LAKE CITY, UTAH)
By [SIG]
TRANSFER AGENT AND REGISTRAR - AUTHORIZED SIGNATURE
[SIG]
CHIEF EXECUTIVE OFFICER/SECRETARY
<PAGE> 1
EXHIBIT 99.3(b)
Virtual Technology Corporation
STOCK PURCHASE WARRANT
Date: Issued to:
------------------------- -------------------
To Purchase Common Stock of Virtual Technology Corporation
This certifies that, for value received, ____________, or registered
assigns is entitled to purchase from Virtual Technology Corporation (the
"Company") ________ shares of the Company's Common Stock, no par value (the
"Shares"), at any time and from time to time after ______________ until
________________, for $1.00 (One Dollar) per share. The warrant shall be in
effect until______________,______, provided the Company may call the warrant at
anytime after ____________,______, upon payment of a redemption price of $___per
share. In the event the Company shall elect to redeem the warrant before
exercise of said warrant, the Company shall give the holder of the warrant
written notice, 30 days in advance of the Company's intention to redeem the
warrant.
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE OF WARRANT. The rights represented by this Warrant may be
exercised by the holder hereof, in whole or in part (but not as to a fractional
share of Common Stock) by the surrender of this Warrant (properly endorsed, if
required, at the Company's principal office in Minneapolis, Minnesota or such
other office or agency of the Company as the Company may designate by notice in
writing to the holder hereof at the address of such holder appearing on the
books of the Company at any time within the period above named) and upon payment
to it by certified check or bank draft of the purchase price for such Shares.
The Company agrees that the Shares so purchased shall have and are deemed to be
issued to the holder hereof as the record owner of such Shares as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made for such Shares as aforesaid. Certificates for the shares of stock
so purchased shall be delivered to the holder hereof within a reasonable time,
not exceeding fifteen (15) days, after the rights represented by this Warrant
shall have been so exercised, and, unless this Warrant has expired, a new
Warrant representing the number of Shares, if any, with respect to which this
Warrant shall not then have been exercised, shall also be delivered to the
holder hereof within such time.
2. TRANSFERABILITY OF THIS WARRANT. This Warrant and the Shares underlying
this Warrant shall not be transferable except in compliance with all applicable
state and federal securities laws, regulations and orders, and with all other
applicable laws, regulations and orders. The Company understands that
____________ is acquiring the Warrant for investment purposes only and has no
present intention to transfer all or part of the Warrant. The Warrant may not be
transferred without the holder hereof obtaining an opinion of counsel
satisfactory in form and substance to the Company's counsel stating that the
proposed transaction will not result in a prohibited transaction under the
Securities Act of 1933 and the applicable Blue Sky laws. Neither this Warrant
nor the Shares underlying this Warrant have been registered under the Securities
Act of 1933 as amended.
3. CERTAIN COVENANTS OF THE COMPANY. The Company covenants and agrees that
all Shares which may be
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issued upon the existence of the rights represented by this Warrant will, upon
issuance, be duly authorized and issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue hereof; and without
limiting the generality of the foregoing, the Company covenants and agrees that
it will from time to time take all such actions as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the effective purchase price per share of the Common Stock issuable
pursuant to this Warrant. 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 free of preemptive or
other rights for the exclusive purpose of issue upon exercise of the purchase
rights evidenced by this Warrant, a sufficient number of shares of its Common
Stock to provide for the exercise of the rights represented by this Warrant.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The above provisions
are, however, subject to the following:
(a) ADJUSTMENT OF PURCHASE PRICE. The Purchase Price shall be subject to
the following adjustments. In the event that:
(i) any dividends on any class of stock of the Company payable in
Common Stock or securities convertible into Common Stock shall be paid by the
Company;
(ii) the Company shall subdivide its then outstanding shares of Common
Stock into a greater number of shares; or
(iii) the Company shall combine its outstanding shares of Common Stock,
by reclassification or otherwise; then, in any such event, the Purchase Price in
effect immediately prior to such event shall (until adjusted again pursuant
hereto) be adjusted immediately after such event to a price (calculated to the
nearest full cent) determined by dividing (a) the number of shares of Common
Stock outstanding immediately prior to such event, multiplied by the then
existing Purchase Price, by (b) the total number of shares of Common Stock
outstanding immediately after such event (including the maximum number of shares
of Common Stock issuable in respect of any securities convertible into Common
Stock) and the resulting quotient shall be the adjusted Purchase Price per
share.
No adjustment of the Purchase Price shall be made if the amount of such
adjustments shall be less than $.05 per share, but in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time and together with the next subsequent adjustment
which, together with any adjustment or adjustments so carried forward, shall
amount to not less than $.05 per share.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE ON EXERCISE OF WARRANTS.
Upon each adjustment of the Purchase Price, pursuant to Section 4(a) above, the
registered holder of each Warrant shall thereafter (until another such
adjustment) be entitled to purchase at the adjusted Purchase Price the number of
shares, calculated to the nearest full share, obtained by multiplying the number
of shares specified in such Warrant (as adjusted as a result of all adjustments
in the Purchase Price in effect prior to such adjustment) be entitled to
purchase at the adjusted Purchase Price the number of shares, calculated to the
nearest full share, obtained by multiplying the number of shares specified in
such Warrant (as adjusted as a result of all adjustments in the Purchase Price
in effect prior to such adjustment) by the Purchase Price in effect prior to
such adjustment and dividing the product so obtained by the adjusted Purchase
Price.
(c) NOTICE AS TO ADJUSTMENT. Upon any adjustment of the Purchase Price and
an increase or decrease in the number of shares of Common Stock purchasable upon
the exercise of the Warrant, then, and in each such case, the Company within ten
(10) days thereafter shall give written notice thereof, by first class mail,
postage prepaid, addressed to each registered Warrantholder as shown on the
books of the Company, which notice shall state the adjusted Purchase Price and
the increased or decreased number of shares purchasable upon the exercise of the
Warrants, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
(d) EFFECT OF REORGANIZATION, RECLASSIFICATION, MERGER, ETC. If at any time
while any Warrant is outstanding there should be any capital reorganization of
the capital stock of the Company other than the issue of any shares of Common
Stock in subdivision of outstanding shares of Common Stock by reclassification
or otherwise and other
2
<PAGE> 3
than a combination of shares provided for in Section 4(a) hereof or any
consolidation or merger of the Company with another corporation or any sale,
conveyance, lease or other transfer by the Company of all or substantially all
of its property to any other corporation, the holder of any Warrant shall
thereafter be entitled to receive the number of shares of stock or other
securities or property of the Company, or of the successor corporation resulting
from such consolidation or merger, or of the corporation to which the property
of the Company has been sold, conveyed, leased or otherwise transferred, as the
case may be, to which the Common Stock (any other securities and property) of
the Company, deliverable upon the exercise of such Warrant, would have been
entitled upon such capital reorganization, reclassification of capital stock,
consolidation, merger, sale, conveyance, lease or other transfer if such Warrant
had been exercised immediately prior to such capital reorganization,
reclassification of capital stock, consolidation, merger, sale, conveyance,
lease or other transfer; and in any such case appropriate adjustments (as
determined by the Board of Directors of the Company) shall be made in the
application of the provisions set forth in this Warrant Agreement (including the
adjustment of the Purchase Price and the number of shares issuable upon the
exercise of the Warrants) shall thereafter be applicable, as near as reasonably
may be, in relation to any shares or other property thereafter deliverable upon
the exercise of the Warrants as if the Warrants had been exercised immediately
prior to such capital reorganization, reclassification of capital stock, such
consolidation, merger, sale, conveyance, lease or other transfer and the
Warrantholders had carried out the terms of the exchange as provided for by such
capital reorganization, consolidation or merger. The Company shall not effect
any such capital reorganization, consolidation, merger or transfer unless, upon
or prior to the consummation thereof, the successor corporation or the
corporation to which the property of the Company has been sold, conveyed, leased
or otherwise transferred shall assume by written instrument the obligation to
deliver to the holder of each Warrant such shares of stock, securities, cash or
property as in accordance with the foregoing provisions such holder shall be
entitled to purchase.
(e) PRIOR NOTICE AS TO CERTAIN EVENTS. In case at any time:
(1) the Company shall pay any dividends upon its Common Stock
payable in stock or make any distribution (other than cash dividends) to holders
of its Common Stock;
(2) the Company shall offer for subscription pro rata to
holders of its Common Stock any additional shares of stock of any class or any
other rights;
(3) 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, conveyance, lease or other transfer of all or
substantially all of its assets to another corporation; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; then in any one or more of such cases,
the Company shall give prior written notice, by first class mail, postage
prepaid, addressed to each registered Warrantholder at the address of such
Warrantholder as on the books of the Company, of the date on which (a) the books
of the Company shall close or a record shall be taken for such stock dividend,
distribution or subscription rights or (b) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Such written notice shall be
given at least twenty (20) days prior to the record date or the date on which
the Company's transfer books are closed in respect thereto.
5. DEFINITION OF COMMON STOCK. As used herein the term "Common Stock" shall
mean and include the Company's authorized Common Stock as constituted as of the
date hereof, and shall also include any capital stock of any class of the
Company hereafter authorized which shall not be limited to a fixed sum or
percentage of par value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Company; provided that
the Shares purchasable pursuant to this Warrant shall include shares designated
as Common Stock of the Company on this date hereof or, in the case of any
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in paragraph 4 above.
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<PAGE> 4
6. NO RIGHTS AS STOCKHOLDERS. This Warrant shall not entitle the holder as
such to any voting rights or other rights as a stockholder of the Company.
IN WITNESS WHEREOF, Virtual Technology Corporation has caused this Warrant
to be signed by its duly authorized officer in the date set forth above.
VIRTUAL TECHNOLOGY CORPORATION
By
--------------------------
Kenneth Israel, Secretary
4
<PAGE> 1
EXHIBIT 99.3(c)
[VIRTUAL TECHNOLOGY LOGO]
Virtual Technology Corporation
STOCK PURCHASE OPTION
Date: Issued to:
------------------------ --------------------
To Purchase Common Stock of Virtual Technology Corporation
This certifies that, for value received, ____________, or registered
assigns is entitled to purchase from Virtual Technology Corporation (the
"Company") ________ shares of the Company's Common Stock, no par value (the
"Shares"), at any time and from time to time after __________, ____ until
____________, ____ for $___ (_________) per share.
This Option is subject to the following provisions, terms and conditions:
1. EXERCISE OF OPTION. The rights represented by this Option may be
exercised by the holder hereof, in whole or in part (but not as to a fractional
share of Common Stock) by the surrender of this Option (properly endorsed, if
required, at the Company's principal office in Minneapolis, Minnesota or such
other office or agency of the Company as the Company may designate by notice in
writing to the holder hereof at the address of such holder appearing on the
books of the Company at any time within the period above named) and upon payment
to it by certified check or bank draft of the purchase price for such Shares.
The Company agrees that the Shares so purchased shall have and are deemed to be
issued to the holder hereof as the record owner of such Shares as of the close
of business on the date on which this Option shall have been surrendered and
payment made for such Shares as aforesaid. Certificates for the shares of stock
so purchased shall be delivered to the holder hereof within a reasonable time,
not exceeding fifteen (15) days, after the rights represented by this Option
shall have been so exercised, and, unless this Option has expired, a new Option
representing the number of Shares, if any, with respect to which this Option
shall not then have been exercised, shall also be delivered to the holder hereof
within such time.
2. TRANSFERABILITY OF THIS OPTION. This Option and the Shares underlying
this Option shall not be transferable except in compliance with all applicable
state and federal securities laws, regulations and orders, and with all other
applicable laws, regulations and orders. The Company understands that
____________ is acquiring the Option for investment purposes only and has no
present intention to transfer all or part of the Option. The Option may not be
transferred without the holder hereof obtaining an opinion of counsel
satisfactory in form and substance to the Company's counsel stating that the
proposed transaction will not result in a prohibited transaction under the
Securities Act of 1933 and the applicable Blue Sky laws. Neither this Option nor
the Shares underlying this Option have been registered under the Securities Act
of 1933 as amended.
3. CERTAIN COVENANTS OF THE COMPANY. The Company covenants and agrees that
all Shares which may be issued upon the existence of the rights represented by
this Option will, upon issuance, be duly authorized and issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue hereof; and without limiting the generality of the foregoing, the Company
covenants and agrees that it will from time to time take all such actions as may
be requisite to assure that the par value per share of the Common Stock is at
all times equal to or less than the effective
1
<PAGE> 2
purchase price per share of the Common Stock issuable pursuant to this Option.
The Company further covenants and agrees that during the period within which the
rights represented by this Option may be exercised, the Company will at all
times have authorized and reserved free of preemptive or other rights for the
exclusive purpose of issue upon exercise of the purchase rights evidenced by
this Option, a sufficient number of shares of its Common Stock to provide for
the exercise of the rights represented by this Option.
4. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES. The above provisions
are, however, subject to the following:
(a) ADJUSTMENT OF PURCHASE PRICE. The Purchase Price shall be subject to
the following adjustments. In the event that:
(i) any dividends on any class of stock of the Company payable in
Common Stock or securities convertible into Common Stock shall be paid by the
Company;
(ii) the Company shall subdivide its then outstanding shares of Common
Stock into a greater number of shares; or
(iii) the Company shall combine its outstanding shares of Common Stock,
by reclassification or otherwise; then, in any such event, the Purchase Price in
effect immediately prior to such event shall (until adjusted again pursuant
hereto) be adjusted immediately after such event to a price (calculated to the
nearest full cent) determined by dividing (a) the number of shares of Common
Stock outstanding immediately prior to such event, multiplied by the then
existing Purchase Price, by (b) the total number of shares of Common Stock
outstanding immediately after such event (including the maximum number of shares
of Common Stock issuable in respect of any securities convertible into Common
Stock) and the resulting quotient shall be the adjusted Purchase Price per
share.
No adjustment of the Purchase Price shall be made if the amount of such
adjustments shall be less than $.05 per share, but in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at he time and together with the next subsequent adjustment which,
together with any adjustment or adjustments so carried forward, shall amount to
not less than $.05 per share.
(b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE ON EXERCISE OF OPTIONS. Upon
each adjustment of the Purchase Price, pursuant to Section 4(a) above, the
registered holder of each Option shall thereafter (until another such
adjustment) be entitled to purchase at the adjusted Purchase Price the number of
shares, calculated to the nearest full share, obtained by multiplying the number
of shares specified in such Option (as adjusted as a result of all adjustments
in the Purchase Price in effect prior to such adjustment) be entitled to
purchase at the adjusted Purchase Price the number of shares, calculated to the
nearest full share, obtained by multiplying the number of shares specified in
such Option (as adjusted as a result of all adjustments in the Purchase Price in
effect prior to such adjustment) by the Purchase Price in effect prior to such
adjustment and dividing the product so obtained by the adjusted Purchase Price.
(c) NOTICE AS TO ADJUSTMENT. Upon any adjustment of the Purchase Price and
an increase or decrease in the number of shares of Common Stock purchasable upon
the exercise of the Option, then, and in each such case, the Company within ten
(10) days thereafter shall give written notice thereof, by first class mail,
postage prepaid, addressed to each registered Optionholder as shown on the books
of the Company, which notice shall state the adjusted Purchase Price and the
increased or decreased number of shares purchasable upon the exercise of the
Options, setting forth in reasonable detail the method of calculation and the
facts upon which such calculation is based.
(d) EFFECT OF REORGANIZATION, RECLASSIFICATION, MERGER, ETC. If at any time
while any Option is outstanding there should be any capital reorganization of
the capital stock of the Company other than the issue of any shares of Common
Stock in subdivision of outstanding shares of Common Stock by reclassification
or otherwise and other than a combination of shares provided for in Section 4(a)
hereof or any consolidation or merger of the Company with another corporation or
any sale, conveyance, lease or other transfer by the Company of all or
substantially all of its property to any other corporation, the holder of any
Option shall thereafter be entitled to receive the number of shares of stock or
other securities or property of the Company, or of the successor corporation
resulting from such consolidation or merger, or
2
<PAGE> 3
of the corporation to which the property of the Company has been sold, conveyed,
leased or otherwise transferred, as the case may be, to which the Common Stock
(any other securities and property) of the Company, deliverable upon the
exercise of such Option, would have been entitled upon such capital
reorganization, reclassification of capital stock, consolidation, merger, sale,
conveyance, lease or other transfer if such Option had been exercised
immediately prior to such capital reorganization, reclassification of capital
stock, consolidation, merger, sale, conveyance, lease or other transfer; and in
any such case appropriate adjustments (as determined by the Board of Directors
of the Company) shall be made in the application of the provisions set forth in
this Option Agreement (including the adjustment of the Purchase Price and the
number of shares issuable upon the exercise of the Options) shall thereafter be
applicable, as near as reasonably may be, in relation to any shares or other
property thereafter deliverable upon the exercise of the Options as if the
Options had been exercised immediately prior to such capital reorganization,
reclassification of capital stock, such consolidation, merger, sale, conveyance,
lease or other transfer and the Optionholders had carried out the terms of the
exchange as provided for by such capital reorganization, consolidation or
merger. The Company shall not effect any such capital reorganization,
consolidation, merger or transfer unless, upon or prior to the consummation
thereof, the successor corporation or the corporation to which the property of
the Company has been sold, conveyed, leased or otherwise transferred shall
assume by written instrument the obligation to deliver to the holder of each
Option such shares of stock, securities, cash or property as in accordance with
the foregoing provisions such holder shall be entitled to purchase.
(e) PRIOR NOTICE AS TO CERTAIN EVENTS. In case at any time:
(1) the Company shall pay any dividends upon its Common Stock
payable in stock or make any distribution (other than cash dividends) to holders
of its Common Stock;
(2) the Company shall offer for subscription pro rata to
holders of its Common Stock any additional shares of stock of any class or any
other rights;
(3) 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, conveyance, lease or other transfer of all or
substantially all of its assets to another corporation; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; then in any one or more of such cases,
the Company shall give prior written notice, by first class mail, postage
prepaid, addressed to each registered Optionholder at the address of such
Optionholder as on the books of the Company, of the date on which (a) the books
of the Company shall close or a record shall be taken for such stock dividend,
distribution or subscription rights or (b) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of the Common Stock of record shall participate
in said dividend, distribution or subscription rights or shall be entitled to
exchange their Common Stock for securities or other property deliverable upon
such reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, as the case may be. Such written notice shall be
given at least twenty (20) days prior to the record date or the date on which
the Company's transfer books are closed in respect thereto.
5. DEFINITION OF COMMON STOCK. As used herein the term "Common Stock" shall
mean and include the Company's authorized Common Stock as constituted as of the
date hereof, and shall also include any capital stock of any class of the
Company hereafter authorized which shall not be limited to a fixed sum or
percentage of par value in respect to the rights of the holders thereof to
participate in dividends or in the distribution of assets upon the voluntary or
involuntary liquidation, dissolution or winding up of the Company; provided that
the Shares purchasable pursuant to this Option shall include shares designated
as Common Stock of the Company on this date hereof or, in the case of any
reclassification of the outstanding shares thereof, the stock, securities or
assets provided for in paragraph 4 above.
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<PAGE> 4
6. NO RIGHTS AS STOCKHOLDERS. This Option shall not entitle the holder as
such to any voting rights or other rights as a stockholder of the Company.
IN WITNESS WHEREOF, Virtual Technology Corporation has caused this Option
to be signed by its duly authorized officer in the date set forth above.
VIRTUAL TECHNOLOGY CORPORATION
By
--------------------------
Kenneth Israel, Secretary
4
<PAGE> 1
EXHIBIT 99.6(a)
ASSET PURCHASE AGREEMENT
DATED: January 28, 1999
PARTIES: GTI Acquisition Corporation ("Buyer")
7615 Golden Triangle Drive, Suite G
Eden Prairie, MN 55344
Herold Marketing Associates, Incorporated ("Seller")
d/b/a Graphics Technologies, Inc.
7615 Golden Triangle Drive
Eden Prairie, MN 55344
Stephan G. Herold ("Shareholder")
c/o Daniel J. Boivin, Esq.
Meshbesher & Spence
1616 Park Avenue South
Minneapolis, MN 55404
RECITALS:
A. Seller has been engaged in the business of developing, manufacturing,
distributing and selling various computer related products and services
(the "Business").
B. Seller leases certain real estate from which it conducts the Business.
C. The parties mutually desire that Seller shall sell to Buyer
substantially all of the assets which Seller uses in the Business upon
the terms and subject to the conditions set forth in this Agreement.
AGREEMENTS:
In consideration of the mutual provisions, representations, warranties,
covenants and agreements contained herein, the parties hereto agree as follows:
ARTICLE 1.
PURCHASE OF ASSETS; ASSUMPTION OF LIABILITIES
1.1. Purchase of Assets from Seller. Subject to the terms and
conditions hereof, Seller agrees on the Closing Date (as hereinafter defined) to
assign, sell, transfer, convey, and deliver to Buyer, and Buyer agrees on the
Closing Date to purchase from Seller, all of the assets and personal property of
Seller (excepting only the assets specifically identified as "Excluded Assets"
in Section 1.2 herein) related to or used in the operation of the Business,
wherever the same may be located (collectively referred to as the "Purchased
Assets"), including, without limitation, the following:
<PAGE> 2
(a) All cash and cash equivalents on hand or on deposit with
any financial institution related to the Business;
(b) All furniture, equipment, machinery, tooling, trade
fixtures and leasehold improvements reflected on Seller's books and
records for the business, including those items identified on Exhibit
1.1(b) ("Equipment");
(c) All vehicles including those vehicles identified on
Exhibit 1.1(c) hereto ("Vehicles");
(d) All intangible personal property, business records,
customer lists and goodwill ("Intangible Property"), including the
following:
(i) All assumed names under which Seller conducts the
Business, including those identified on Exhibit 1.1(d)(i)
hereto;
(ii) All tradenames, trademarks or service mark
registrations and applications, common law trademarks,
including those identified on Exhibit 1.1(d)(ii) hereto, and
all goodwill associated therewith ("Trademarks");
(iii) All domestic and foreign letters patent, patent
applications, and patent and know-how licenses, including
those identified on Exhibit 1.1(d)(iii) hereto ("Patents");
and
(iv) All technology, know-how, trade secrets,
manufacturing processes, formulae, drawings, designs, computer
programs, copyrights (including registrations and applications
therefor identified on Exhibit 1.1(d)(iv) hereto), related to
the Business, and all documentary evidence thereof
("Technology").
(e) All notes receivable, rights to payment and accounts
receivable of the Business as of the Closing Date including those
identified on Exhibit 1.1(e) ("Accounts Receivable");
(f) All inventory, including raw materials, supplies, work in
process and finished inventory of the Business as of the Closing Date
identified in Exhibit 1.1(f) ("Inventory");
(g) All permits, licensing approvals and notifications,
governmental or otherwise, relating to the Business ("Licenses and
Permits");
(h) INTENTIONALLY OMITTED;
(i) All of Seller's contract rights and benefits under its
real estate leases ("Real Estate Leases") used in the Business,
including leases identified in Exhibit 1.1(i) hereto, subject to the
terms and conditions thereof;
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<PAGE> 3
(j) All of Seller's contract rights and benefits under all of
its personal property leases for tangible personal property used in the
Business, including those leases identified in Exhibit 1.1(j) hereto, subject to
the terms and conditions thereof ("Personal Property Leases");
(k) All other contract rights related to the Business, subject
to the terms and conditions thereof ("Contracts"); and
(l) All instruments, including stock certificates, owned by
Seller, including those identified in Exhibit 1.1(l) hereto.
1.2. Excluded Assets. Notwithstanding anything herein to the
contrary, Buyer does not purchase, and Seller does not sell, any of the
following assets ("Excluded Assets"):
(a) Seller's corporate minute book and corporate records
(provided that Seller will provide copies thereof relating to the
Business to Buyer upon request by Buyer for reasonable business
purposes).
(b) Any repayments or deposits of obligations which Buyer does
not assume under Paragraph 1.3 below.
(c) Any pending litigation, claims and related matters
identified on Exhibit 1.2(c) hereto.
(d) Leased vehicles identified on Exhibit 1.2(d) hereto.
1.3. Liabilities and Obligations Assumed. Subject to the terms and
conditions hereof, upon the Closing Date, Seller hereby assigns, transfers, and
conveys to Buyer, and Buyer hereby assumes from Seller and agrees to pay
according to their terms, all of the liabilities and obligations of Seller
related to the Purchased Assets or the operation of the Business, as the same
shall exist on the Closing Date, including all liabilities accruing in the
ordinary course of business after the effective date of this Agreement
(excepting, without limitation, the liabilities specifically identified as
"Excluded Liabilities" in Section 1.4 herein) (collectively referred to herein
as the "Assumed Liabilities"), including only those identified in Exhibit 1.3
hereto.
1.4. Excluded Liabilities and Obligations. Notwithstanding anything
herein to the contrary, without limitation, Buyer does not assume and Seller
does not transfer or assign any of the following liabilities or obligations
related to the Business ("Excluded Liabilities"):
(a) Any fee, extraordinary bonus or incentive payments payable
to key management personnel of Seller based upon a successful
completion of the transaction contemplated herein;
(b) Any federal, state or local taxes based upon or measured
by income or profits from operation of the Business through the Closing
Date; and
(c) Any obligation for accounting, legal or other professional
fees which are related to the consummation of the transaction
contemplated herein.
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<PAGE> 4
(d) Any contingent or other liabilities not otherwise
identified in Exhibit 1.3 hereto.
1.5. Sales, Use and Deed Taxes. Seller shall be responsible for payment
of any sales, use or deed taxes assessable with respect to the transfer of the
Purchased Assets contemplated herein.
ARTICLE 2.
PURCHASE PRICE AND PAYMENT
2.1. Purchase Price. The purchase price for the Purchased Assets
and Non-Compete Agreement (as described in Section 2.5(b) herein) shall be the
sum of Ten Million One Hundred Thousand and no/100 Dollars ($10,100,000) subject
to the Post-Closing Adjustment described in Section 2.4 herein ("Purchase
Price").
2.2. Payment of Purchase Price. The Purchase Price shall be paid as
follows:
(a) Cash Payment. Buyer shall deliver to Seller at the Closing
One Million and no/100 Dollars ($1,000,000) by wire transfer to a bank
account designated by Seller.
(b) Stock Payment. Buyer shall deliver to Seller at the
Closing One Million Six Hundred Thousand and no/100 Dollars
($1,600,000), such amount payable by the issuance of a total of Two
Hundred Twenty Eight Thousand Five Hundred Seventy One (228,571) shares
of Buyer's parent company (Virtual Technology Corporation) Common
Stock, such shares to be non-registered and restricted from transfer
for one (1) year, pursuant to Rule 144 of the Securities Act of 1933,
as amended.
(c) Promissory Notes.
(i) Promissory Note From Buyer. Buyer shall execute and
deliver to Seller at Closing a Promissory Note from
Buyer to Seller in the amount of Four Million and
no/100 Dollars ($4,000,000), to be paid within thirty
(30) days after the Closing Date, without the payment
of interest. The Promissory Note from Buyer shall be
subject to offset by Buyer against any breach by
Seller and/or Shareholder of the representations,
warranties, agreements and indemnity obligations of
Seller and/or Shareholder, and any Post-Closing
Adjustment as described in Section 2.4 herein. The
Promissory Note from Buyer is attached hereto as
Exhibit 2.2(c)(i).
(ii) Promissory Note From Buyer's Parent Company. Buyer
shall deliver to Seller at the Closing a Promissory
Note from Buyer's parent company (Virtual Technology
Corporation) to Seller in the amount of Three Million
Three Hundred Thousand and no/100 Dollars
($3,300,000) to be paid within ninety (90) days of
the Closing Date, without the payment of interest.
The Promissory Note from Buyer's Parent shall be
subject to offset by Buyer against any breach by
Seller and/or Shareholder of the representations,
warranties, agreements and indemnity obligations of
Seller
-4-
<PAGE> 5
and/or Shareholder, and any Post-Closing Adjustment
as described in Section 2.4 herein. The Promissory
Note from Buyer's Parent is attached hereto as
Exhibit 2.2(c)(ii).
(d) Payment into Escrow. Ninety (90) days after the Closing
Date, Buyer shall deliver a certified, cashier's or bank check, or
equivalent instrument or funds, in the amount of Two Hundred Thousand
and no/100 Dollars ($200,000) to Messerli & Kramer P.A.
("Escrowholder"), pursuant to an Escrow Agreement attached hereto as
Exhibit 2.2(d). Such escrowed funds shall be held for a period of three
(3) years following the Closing Date as security against any breach of
the representations, warranties and agreements of Seller and
Shareholder contained herein and as security against any Post-Closing
Adjustment as described in Section 2.4 herein, one third (1/3) of which
shall be released on each of the first, second and third anniversaries
of the Closing Date.
2.3. Allocation of Purchase Price. The Purchase Price is hereby
allocated among the Purchased Assets and Non-Compete Agreement as set forth in
Exhibit 2.3. The parties agree to report this transaction for tax purposes in
accordance with the allocations set forth in Exhibit 2.3.
2.4. Post-Closing Adjustment.
(a) The Purchase Price shall be adjusted down dollar for
dollar following the Closing Date to the extent that the Actual Stockholder's
Equity (as hereinafter defined) is less than $2.1 million, the Funded Debt (as
hereinafter defined) is greater than $1.7 million or Shareholder/Seller fail(s)
to perform his/its indemnification obligations and/or other representations,
warranties and agreements pursuant to this Agreement. If the Purchase Price is
adjusted down pursuant to the foregoing, then Seller shall pay to Buyer an
amount equal to the difference, which may be done by Buyer as an offset against
amounts owing to Seller, at Buyer's sole discretion. Seller's "Actual
Stockholders' Equity" is the stockholders equity appearing on Seller's balance
sheet as of the Closing Date, to be computed within ninety (90) days after the
Closing Date at Buyer's expense by Buyer's independent auditors in accordance
with generally accepted accounting principles consistently applied, after (i)
forgiveness by Shareholder of any loans made to Seller, (ii) the writeoff of all
accounts receivable outstanding for more than ninety (90) days (including the
writeoff of approximately $400,000 owed by ATM), (iii) the writeoff of all notes
receivable in default for more than ninety (90) days, (iv) the writeoff of
inventory that is not saleable in the ordinary course of Seller's business in
Buyer's sole discretion, (including the writeoff of approximately $500,000 of
obsolete Sylvania inventory) and (v) payoff to Seller on or prior to the Closing
Date of all the sums owed by Technology Marketing Unlimited, LLC or any other
affiliate of Shareholder/Seller. "Funded Debt" is the sum of any short or
long-term bank or other third party debt, capital lease obligations.
(b) Within ninety (90) days after the Closing Date, Buyer
shall prepare and deliver to Seller a determination (the "Determination") of the
actual amount of the Purchase Price Post-Closing Adjustment as of the Closing
Date (which actual amount is referred to herein as the "Actual Amount")
including the basis for such Determination. If, within thirty (30) days after
the date on which a Determination is delivered to Seller, Seller shall not have
given written notice to the Buyer setting forth in detail any objection of
Seller to such Determination, then such Determination shall be final and binding
on the parties hereto. In the event Seller gives written notice of any objection
to such Determination within such 30-day period, Buyer and Seller shall
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use all reasonable efforts to resolve the dispute within thirty (30) days
following the receipt by Buyer of the written notice from Seller. If the parties
are unable to reach an agreement within such 30-day period, the matter shall be
submitted to a mutually agreed upon certified public account firm for
determination of the Actual Amount which shall be final and binding upon Buyer
and Seller. If the parties cannot mutually agree on a firm to make such
determination, each shall select a firm and these two firms shall select
together an independent firm of certified public accountants for the
determination of the Actual Amount which shall be final and binding upon Buyer
and Seller. Buyer and Seller shall contribute equally to all costs (including
fees and expenses charged by the selected firm of certified public accountants)
in connection with the resolution of any such dispute. The Actual Amount shall
be paid to Buyer by Seller within ten (10) business days of the date the
Determination has become final by virtue of Seller's failure to have given
written notice of objection, mutual agreement of the parties or binding
resolution of the dispute and shall be deemed to be indemnifiable. In the event
of Seller's failure to pay within the time frame provided, Buyer may take any
action or exercise any remedy available to it to recover such amount.
2.5. Payment for Business Agreements. Buyer and Seller and/or
Shareholder shall enter into the following agreements and/or arrangements
(collectively referred to as the "Business Agreements"):
(a) Consulting Agreement. On the Closing Date, Seller will
enter into an agreement to provide consulting services to Buyer as
requested during the three (3) year period after the Closing date
("Consulting Agreement"). The Consulting Agreement will require Buyer
to pay to Shareholder for his services an aggregate of $1,015,000, such
amount payable by the issuance of a total of One Hundred Forty Five
Thousand (145,000) shares of Buyer's parent company (Virtual Technology
Corporation) Common Stock, which would be delivered on the Closing
Date. The public resale of such shares will be registered on Form S-8
or other available form as soon as reasonably possible with the
Securities and Exchange Commission.
The Consulting Agreement is attached hereto as Exhibit 2.5(a).
(b) Non-Compete Agreement. On the Closing Date, Shareholder
and Seller will enter into an agreement not to compete against Buyer
(which shall include an agreement of non-solicitation of Buyer's
employees) during the three (3) years after the Closing Date
("Non-Compete Agreement"). The consideration to be paid to Shareholder
by Buyer for this Non-Compete Agreement shall be set forth in the
Allocation of Purchase Price, Exhibit 2.3.
(c) Employment Agreements. On the Closing Date, each of the
Seller's employees, as required by Buyer, will agree to become
employees of the Buyer on the terms and conditions acceptable to Buyer
and each of the employees. However nothing herein obligates Buyer to
employ all of Seller's employees.
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ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF SELLER
3.1. Organization. Seller is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota, has all
requisite power and authority, corporate and otherwise, to own its properties
and assets and to conduct the Business as it is now conducted.
3.2. Qualification. Seller is qualified to do business and is in
good standing as a foreign corporation in all states in which qualification is
required by the nature of the Business and in which the failure to so qualify
and be in good standing would have a material adverse effect on the Business.
3.3. Financial Statements.
(a) Financial Statements. Seller has furnished Buyer with a
true and complete copy of its balance sheets, statement of changes in
financial condition and statements of income for fiscal years ending
December 31, 1996, December 31, 1997, December 31, 1998 and for interim
periods ending January 28, 1999, together with all notes and schedules
related thereto, all of which are attached hereto as Exhibit 3.3(a).
Such financial statements, together with the Audited Financial
Statements (as defined in Section 5.4) have been and will be prepared
in conformance with generally accepted accounting principles and
procedures applied on a basis consistent with prior periods and fairly
present and will fairly present in all material respects the financial
condition of the Business as of the represented dates thereof and the
results of the Business' operations for the period covered thereby. For
purposes of this Agreement the foregoing financial statements and the
Audited Financial Statements shall be deemed to include any notes
thereto.
(b) Books and Records. Seller's books of account and records
(including customer order files, employment records and production and
manufacturing records) for the Business are complete, true and correct
in all material respects.
3.4. Tax Reports, Returns and Payment.
(a) Tax Reports and Returns. Except as disclosed in Exhibit
3.4(a) hereto, Seller has accurately prepared and timely filed all
federal and applicable state, local, and foreign tax or assessment
reports and returns of every kind required to be filed by Seller with
relation to the Business, including, without limitation, income tax,
sales and use tax, real estate tax, personal property tax and
unemployment tax, and has duly paid all taxes and other charges
(including interest and penalties) due to or claimed to be due by any
taxing authorities. Where required, timely estimated payments or
installment payments of tax liabilities have been made to all
governmental agencies in amounts sufficient to avoid underpayment
penalties or late payment penalties applicable thereto.
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(b) Tax Payments. Except as disclosed in Exhibit 3.4(b)
hereto, the provisions for taxes shown in the Financial Statements are and will
be adequate to cover the aggregate liability of Seller as of the Closing date
for all taxes, duties and charges based on the income, purchases, sales,
business, real estate ownership, capital stock or surplus, or assets of Seller
relating to the Business.
3.5. Title to Assets. Except as disclosed on Exhibit 3.5 hereto,
Seller holds title to the Purchased Assets free and clear of all liens,
encumbrances, licenses or leases.
3.6. Tangible Personal Property. Except as stated in Exhibit 3.6
hereto, all material assets described in Sections 1.1(b), (c) and (f) are in
good repair and operating condition and will be maintained in good repair and
operating condition, ordinary wear and tear excepted, from the date hereof until
the Closing Date. Seller hereby assigns to Buyer as of the Closing Date, to the
extent possible, any and all warranties covering such property existing as of
the Closing Date.
3.7. Trademarks. Seller has good title to the assumed names and the
Trademarks listed on Exhibits 1.1(d)(ii), free and clear of all liens and
encumbrances except as set forth on Exhibit 3.5. Except as disclosed in Exhibit
3.7 hereto, such Trademarks are not licenses to or licenses from any other
person or entity.
3.8. Patents. Seller has good title to the Patents listed on
Exhibit 1.1(d)(iii) hereto, free and clear of all liens and encumbrances except
as set forth on Exhibit 3.5. Except as disclosed in Exhibit 3.8 hereto, such
Patents are not licensed to or licensed from any other person or entity.
3.9. Accounts Receivable. Except to the extent reserved against in
the Audited Financial Statements, all accounts receivable of Seller related to
the Business are collectable at the aggregate face amounts of such receivables
recorded on Seller's books. All such accounts, notes or other receivables are
valid, legal, and binding obligations owing to Seller, enforceable against the
parties to be charged thereby.
3.10. Inventory. The Inventory represents the normal supplies and
stock in trade of Seller on hand as of the close of business on the Closing
Date. Except to the extent reserved against in the Audited Financial Statements,
the Inventory is and will be, as of the Closing Date, good, merchantable and
saleable at customary prices in the ordinary course of business and is and will
be, as of the Closing Date, of a quality, quantity and mix consistent with
Seller's past business practices and the demands of its customers.
3.11. Licenses and Permits. Seller possesses all permits, licenses,
approvals and notifications, governmental or otherwise, the absence of which
would have a material adverse effect on the Business. Except as disclosed in
Exhibit 3.11, all of such licenses and permits are freely assignable and
transferable to Buyer at the Closing and will continue to be in full force and
effect after such transfer.
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3.12. Real Property. Exhibit 1.1(i) is an accurate and complete list
of all real property leased by Seller for operation of the Business. Seller has
not received notice of the initiation of any condemnation proceeding with
respect to such real property, or offer of sale in lieu thereof, nor has Seller
breached (or received any claim that it has breached) any of the terms or
conditions of such leases.
3.13. Personal Property Leases. Exhibit 1.1(j) contains and accurate
and complete list of all leases of material personal property necessary in the
operation of the Business. Seller has not breached, nor has it received in
writing any claim or threat that it has breached, any of the terms or conditions
of such personal property leases.
3.14. Agreements, Contracts and Commitments.
(a) Material Contracts. Except as disclosed on Exhibit 3.14(a)
or on other Exhibits attached hereto, Seller is not a party to or bound
by any written agreement listed below relating to the Business:
(i) dealer, distributorship or sales agent agreement,
excluding purchase orders for sales of products in the
ordinary course of business;
(ii) advertising contract;
(iii) contract commitment, or arrangement for capital
expenditures having a remaining balance in excess of
Twenty--Five Thousand and no/100 Dollars ($25,000);
(iv) lease with respect to any property, real or personal.
(v) contract, commitment, or arrangement containing
covenants by Seller not to compete in any lines of business or
with any person or business entity;
(vi) franchise agreement;
(vii) loan, credit, promissory note or other evidence
of indebtedness, including all agreements for any commitments
for future loans, credit, or financial, excluding
inter-company loans and credit extended by the Business to its
customers;
(viii) guarantee;
(ix) agreement, contract or commitment for the purchase of
any services, raw materials, supplies or equipment involving
payments of more than One Hundred and no/100 Dollars ($100)
per annum or an aggregate of more than One Thousand and no/100
Dollars ($1,000), excluding of purchase orders for the
purchase of products or services required in the ordinary
course of business; or
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(x) agreement, contract or commitment for the sale of the
Business' assets, products or services involving a value
estimated at more than Five Hundred and no/100 Dollars ($500),
excluding purchase orders for the sale of the Business
products in the ordinary course of business.
Except as specifically set forth in Exhibit 3.14(a), each contract,
commitment, or arrangement referred to in such Exhibit is terminable
pursuant to the terms of the contract without penalty, costs, or
liability on notice not exceeding sixty (60) days. Seller is not in
material breach (nor has it received notice of a claim that it is in
material breach) of any contracts identified on Exhibit 3.14(a) as not
terminable on a sixty (60) days notice. All such contracts, commitments
or other arrangements are assignable without consent of any person
other than as listed on Exhibit 3.14(a) and such consents, if any, as
are required shall be obtained by Seller prior to the Closing.
(b) Employee Plans. Except as set forth on Exhibit 3.14(b)
hereto, Seller does not maintain any "Employee Plans" covering
employees working in the Business. "Employee Plans" mean any pension,
retirement, disability, medical, dental, or other health insurance
plan, life insurance or other death benefit plan, profit sharing,
deferred compensation, stock option, or severance plan including,
without limitation, any "pension plan" as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and any "welfare plan" as defined in Section 3(l) or ERISA,
whether or not any of the foregoing is funded.
(c) Union and Employment Contracts and Other Employment
Matters.
(i) Except as set forth in Exhibit 3.14(c)(i) hereto,
Seller is not a party to any collective bargaining agreement
or any other written employment agreement with employees
working in the Business, nor is Seller a party to any other
written contract or understanding that contains any severance
pay liabilities or obligations, except for accrued, unused
vacation pay or accrued and unused sick leave pay for
employees working in the Business.
(ii) During the last three (3) years Seller has not
experienced any work stoppages, walkouts or strikes or
attempts by employees working the Business to organize a
union.
(iii) Except as disclosed in Exhibit 3.14(c)(iii) hereto,
in the past three (3) years no claims have been made against
Seller by any former or present employee who worked in the
Business based on employment discrimination, wrongful
discharge, or unfair labor practices.
(iv) Seller has received no claim asserting (and has no
knowledge of) any failure of Seller to comply with applicable
federal and state laws and regulations relating to employment
of labor, including laws and regulations relating to wages,
hours, collective bargaining, withholding taxes, and employee
health and benefits.
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3.15. Predominant Customers. Except as disclosed in Exhibit 3.15
hereto, no single customer of the Business accounted for over five percent (5%)
of the Business' revenues during the fiscal year ending prior to the date of
this Agreement.
3.16. Change In Customers. Except as disclosed in Exhibit 3.16
hereto, no significant customer has indicated to Seller that it intends to cease
doing business with Seller or materially alter the amount of business with
Seller.
3.17. Product Liability Claims. All products which Seller has sold
through the Business have been merchantable and free from material defects in
material or workmanship for the term and under the conditions set forth in the
Business' standard written limited product warranties. Except as set forth on
Exhibit 3.17 hereto, during the last three (3) years Seller has not received a
claim exceeding $25,000 based upon an alleged breach of product warranty,
arising from Seller's manufacture or sale of its products (hereafter
collectively referred to as "Product Liability Claims"). Seller has no
reasonable grounds to believe that future Product Liability Claims with respect
to products of Seller sold through the Business prior to the Closing Date will
be different from Seller's past experience with respect thereto as set forth
herein.
3.18. Insurance. Seller has maintained and will continue to maintain
until the Closing Date the insurance described in Exhibit 3.18, including
insurance on Seller's tangible real and personal property and assets, whether
owned or leased, against loss or damage by fire and other casualty, in amounts
equal to or in excess of one hundred percent (100%) of the replacement value
thereof. All such insurance is in full force on the date of this Agreement and
is carried with reputable insurers. Seller has promptly and adequately notified
Seller's insurance carriers of any and all claims known to Seller with respect
to the operations or products of Seller for which Seller is insured. At the
Closing, Seller shall have in effect the product liability insurance policy
described in Exhibit 3.18 and will use Seller's best efforts to obtain extended
coverage, satisfactory to Purchaser, for product liability for at least three
(3) years. The cost of such extended coverage shall be borne by Seller.
3.19. Litigation, Adverse Claims and Related Matters. Except as
disclosed on Exhibit 3.19 hereto, there is no pending or threatened litigation
(nor, to Seller's knowledge, any claim which may lead to a threat of
litigation), proceeding, or investigation (including any environmental, building
or safety investigation) relating to any material aspect of the Business or the
Purchased Assets, nor is Seller subject to any existing judgment, order or
decree which would prevent, impede, or make illegal the consummation of the
transactions contemplated in this Agreement or which would have a material
adverse effect on the Business.
3.20. Laws and Regulations. Seller has complied, and is in
compliance on the Closing Date, with all applicable laws, statutes, orders,
rules, regulations and requirements promulgated by governmental or other
authorities relating to the Business or the Purchased Assets, the failure of
which would have a material adverse effect on the Business. Seller has not
received any notice of any sort of alleged violation of any such statute, order,
rule, regulation or requirement.
3.21. Breaches of Contracts; Required Consents. Neither the
execution and delivery of this Agreement by Seller, nor compliance by Seller
with the terms and provisions of this Agreement will:
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(a) Conflict with or result in a breach of (i) any of the
terms, conditions or provisions of the Articles of Incorporation,
Bylaws or other governing instruments of Seller; (ii) any judgment,
order, decree or ruling to which the Seller is a party; (iii) any
injunction of any court or governmental authority to which Seller is
subject; or (iv) any agreement, contract or commitment which is
material to the Business; or
(b) Except as disclosed in Exhibit 3.21(b) hereto, require the
affirmative consent or approval of any third party, the absence of
which would have a material adverse effect on the Business.
3.22. Binding Obligation. This Agreement constitutes the legal,
valid and binding obligation of Seller in accordance with the terms hereof.
Seller has all requisite corporate power and authority, including the approval
of its Shareholders and Board of Directors, to execute, perform, carry out the
provisions of and consummate the transactions contemplated in this Agreement.
3.23. Banks and Other Depositories. Exhibit 3.23 hereto is an
accurate and complete list of the names and account numbers of each of Seller's
bank accounts, brokerage accounts, savings accounts, certificates of deposit and
similar cash investments, and safe-deposit boxes relating to the Business,
together with the identification of persons authorized to withdraw or otherwise
deal with them.
3.24. Commissions or Finder's Fees. There is no obligation,
commission, or fees Seller has incurred or will incur to any broker or finder in
connection with the transactions contemplated herein.
3.25. Completeness of Disclosure. No representation in this Article
contains any untrue statement of a material fact or omits to state any material
facts or omissions of which would be misleading.
ARTICLE 4.
REPRESENTATION AND WARRANTIES OF BUYER
4.1. Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the State of Minnesota, has all
requisite power and authority, corporate and otherwise, to own its properties
and assets and to conduct the Business as it is now conducted.
4.2. Corporate Authority. Buyer has all requisite power and
authority, including the approval of its Board of Directors, to execute,
perform, carry out the provisions of this Agreement.
4.3. Breaches of Contracts; Required Consents. Neither the
execution and deliver of this Agreement by Buyer, nor compliance by Buyer with
the terms and provisions of this Agreement, will:
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(a) Conflict with or result in a breach of: (i) any of the
terms, conditions or provisions of the Articles of Incorporation,
Bylaws or other governing instruments of Buyer; (ii) any judgment,
order, decree or ruling to which the Buyer is a party; (iii) any
injunction of any court or governmental authority to which it is
subject; or (iv) any agreement, contract or commitment which is
material to the financial condition of Buyer; or
(b) Require the affirmative consent or approval of any third
party.
4.4. Binding Obligation. This Agreement constitutes the legal,
valid and binding obligation of Buyer in accordance with the terms hereof. Buyer
is not subject to any charge, mortgage, lien, lease, agreement, contract,
instrument, law, rule, regulation, order, judgment or decree, or any other
restriction of any kind or character, which would prevent the consummation of
the transactions contemplated in this Agreement.
4.5. Commissions or Finder's Fees. The only obligation, commissions
or fees Buyer has incurred or will occur to any broker or finder in connection
with the transactions contemplated herein is to NONE, which amounts shall be
paid in full on the Closing Date.
4.6. Completeness of Disclosure. No representation in this Article
contains any untrue statement of a material fact or omits to state any material
fact the omission of which would be misleading.
ARTICLE 5.
CONDUCT AND TRANSACTIONS OF BUSINESS PRIOR TO CLOSING
5.1. Access to Information. During the period prior to the
Closing, Seller shall give to Buyer and its attorneys, accountants or other
authorized representatives, full access to all of the property, books,
contracts, commitments and records relating to the Business and shall furnish to
Buyer during such period all such information concerning the Business, or the
Purchased Assets as Buyer reasonably may request. Buyer shall have the right to
conduct on site inspections of the Business' premises.
5.2. Restrictions in Operation of the Business. Seller
represents and covenants that during the period from the date of this Agreement
to the Closing (except as Buyer otherwise has consented in writing):
(a) The Business will be conducted only in the usual and
ordinary manner.
(b) Seller will not sell, dispose, transfer, assign or
otherwise remove any of the Purchased Assets except inventory in the
ordinary course of business and at regular prices.
(c) Seller will timely pay and discharge all bills and
monetary obligations and timely and properly perform all of its
obligations and commitments under all existing contracts and agreements
pertaining to the Business, except as to amounts or obligations which
Seller contests in good faith.
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(d) Seller shall use its best efforts to preserve the business
organization and assets of the Business and to keep available to Buyer
the services of the Business' present employees, and not to impair
relationships with suppliers, customers and other having business
relations with the Business.
5.3. No Solicitation of Other Offers. Seller agrees that, prior to
the later of the Closing Date, the termination of this Agreement pursuant to
Section 6.4 or February 28, 1999, neither Seller nor any of Seller's
representatives will enter into any negotiations with or solicit any offer,
inquiry or proposal from any other person with respect to the sale, merger or
other acquisition of the Business.
5.4. Audit and Comfort Letter. Seller shall cause its certified
public accounts, Sam Kantos, CPA, to prepare and certify an audited balance
sheet and statement of operations for the Business for the twelve (12) month
periods ending December 31, 1996, December 31, 1997, December 31, 1998 and the
one (1) month period ending January 28, 1999 (the "Audited Financial
Statements") and to deliver a comfort letter dated thirty (30) days after the
Closing Date certifying that the warranty provided in Section 3.3 is true as of
the date of such letter, in the form attached hereto as Exhibit 5.4 (the
"Comfort Letter"). Buyer's certified public accountants shall have the right to
review the audit of the Audited Financial Statements.
5.5. Hart-Scott-Rodino Act Filings. Seller and Buyer will promptly
prepare and file with the Federal Trade Commission and with the United States
Department of Justice any notification and report forms required, with respect
to the purchase of the Purchased Assets and the Stock by Buyer, under the
provisions of the Hart-Scott-Rodino Anti-trust Improvements Act of 1976 (the
"HSR Act"). The parties shall each promptly notify the other party of any
request by any governmental agency for additional information with respect to
such filings, and shall use reasonable efforts to cooperate in responding
promptly to any such request.
5.6. Confidentiality Agreement.
(a) Definition of Confidential Information. For purposes of
this Section, "Confidential Information" means any information or
compilation of information not generally known, which is proprietary to
a business, and includes, without limitation, trade secrets,
inventions, and information pertaining to development, marketing,
sales, accounting and licensing of the business' products and services,
customer information, customer lists, and any customer information
contained in customer records, working papers or correspondence files
and all financial information, including financial statements, notes
thereto and information contained in federal and state tax returns.
Information shall be treated as Confidential Information irrespective
of its source and all information which is identified as being
"confidential", "trade secret", or is identified or marked with any
similar reference shall be presumed to be Confidential Information.
(b) Covenants by Parties. Buyer, on the one hand, and Seller,
on the other, each agree and covenant with respect to all Confidential
Information of the other received or learned by either of them as
follows:
(i) It will treat as confidential all Confidential
Information made available to it or any of its employees,
agents or representatives;
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(ii) It will maintain the same in a secure place and limit
access to the Confidential information to those employees,
agents and representatives to whom it is necessary to disclose
the Confidential Information in furtherance of the
transactions contemplated by this Agreement;
(iii) It and its employees, agents and representatives
will not copy any Confidential Information, disclose any
Confidential Information to any unauthorized party, or use any
Confidential Information for any purpose including competition
with the other party or solicitation of the other party's
customers; and
(iv) It will assume liability for any breach of this
Section 5.6 by it or any of its employees, agents or
representatives.
(c) Applicability; Limitations. The obligations imposed by
this Section shall apply (i) to Buyer forever with respect to any
Confidential Information relating to the business or operations of
Seller other than the Business, and until the Closing with respect to
the Business or, if such Closing does not occur, forever with respect
to the Business; and (ii) to Seller, forever with respect to the
operations of Buyer and forever with respect to the Business after the
Closing; provided, however, that the obligations imposed by this
Section 5.6 shall not apply to any Confidential Information:
(i) which was known to the receiving party prior to
receipt from the disclosing party;
(ii) which, was publicly divulged prior to receipt from
the disclosing party;
(iii) which, through no act on the part of the receiving
party, thereafter becomes publicly divulged;
(iv) which was received in good faith by the receiving
party from any third party without breach of any obligations
of confidentiality; or
(v) which was independently developed (without access to
or use of any Confidential Information of the other party) by
an employee or agent of the receiving party subsequent to
receipt of the Confidential Information under this Agreement.
(d) Injunctive Relief. The parties agree that the nonbreaching
party would not have an adequate remedy at law for any breach or
nonperformance of the terms of this Section 5.6 by the other party or
any of its employees, agents and representatives and that this
Agreement, therefore, may be enforced in equity by specific
performance, temporary restraining order and/or injunction. The
nonbreaching party's right to such equitable remedies shall be in
addition to all other rights and remedies which the nonbreaching party
may have hereunder or under applicable law, including a right to
damages.
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(e) Unconditional Obligation. The obligations set forth in
this Section 5.6 to maintain the confidentiality of and not wrongfully
use the Conditional Information are unconditional and shall not be
excused by any conduct on the part of a party except as specifically
set forth in Section 5.6(c).
ARTICLE 6.
CONDITIONS OF CLOSING; ABANDONMENT OF TRANSACTION
6.1. Conditions to Obligations of Buyer to Proceed on the Closing
Date. The obligations of Buyer to proceed on the Closing Date shall be subject
(at its discretion) to the satisfaction, on or prior to the Closing, of all of
the following conditions:
(a) Truth of Representations and Warranties and Compliance
with Obligations. The representations and warranties of Seller herein
shall be true in all material respects on the Closing Date with the
same effect as though made at such time. Seller shall have performed
all material obligations and complied with all material covenants and
conditions prior to or as of the Closing Date. Seller shall have
delivered to Buyer a certificate of Seller in form and substance
satisfactory to Buyer dated as of the Closing Date and executed by the
President of Seller to all such effects.
(b) Opinion of Counsel. Buyer shall have received a duly
executed opinion letter from Seller's legal counsel dated as of the
Closing Date, in form and substance reasonably satisfactory to Buyer
and its counsel, to the effect that:
(i) Seller is a corporation duly organized and validly
existing and in good standing in the State of Minnesota; has
all necessary corporate power to own the property it now owns
and to operate the Business as it is now operated; and is
qualified to do business in all states in which qualification
is required by the nature of the Business and where the
failure to so qualify would have a material adverse effect on
the Business;
(ii) This Agreement and all collateral documents have been
duly and validly authorized, executed and delivered by Seller,
constitute the valid and binding obligations of Seller and are
enforceable in accordance with their terms, except as limited
by bankruptcy and insolvency laws and by other laws affecting
the rights of creditors generally;
(iii) To the best of such counsel's knowledge, after
reasonable inquiry, no suit, action, arbitration, legal or
administrative proceeding is pending against the Business or
the Purchased Assets;
(iv) Neither the execution nor delivery of this Agreement,
nor the consummation of the transactions contemplated in this
Agreement, will constitute a violation of Seller's Articles of
Incorporation or Bylaws, or, to the best of such counsel's
knowledge, a default under, or violation or breach of, any
material agreement listed on an Exhibit to this Agreement; and
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(v) To the best of such counsel's knowledge, Seller has
good and marketable title to the Purchased Assets.
In giving such opinion, such counsel may rely, as to matters of fact,
upon certificates of officers of Seller or public officials, and as to
matters of law solely upon the laws of the State of Minnesota.
(c) Assignments. Seller shall have executed and delivered to
Buyer documents assigning all of its right, title and interest in the
Real Estate Leases, Personal Property Leases, Trademarks, Copyrights
and Patents to Buyer.
(d) INTENTIONALLY OMITTED
(e) Release Secured Claims and Mortgages. Seller shall have
obtained full and complete releases of all security interest, mortgages
or other encumbrances upon the Purchased Assets, including those set
forth in Exhibit 6.1(e).
(f) Required Consents. All required consents shall have been
received from governmental agencies whose approval is required to
consummate the transaction contemplated herein and from each person or
entity listed on Exhibit 3.21(b).
(g) Change of Name. Seller shall have prepared and filed
suitable documents amending its Articles of Incorporation and
Certificate of Assumed Name to change Seller's legal and assumed names
to a legal and assumed name dissimilar to its present legal and assumed
name.
(h) Comfort Letter. Seller's certified public accountants
shall have delivered the Comfort Letter as required under Section 5.4.
(i) Hart-Scott-Rodino Act Filing. The parties shall have filed
all notification and report forms required to be filed under the
provisions of the HSR Act and supplied all additional information
requested by any governmental agency relating thereto. All waiting
periods provided under the HSR Act shall have expired.
(j) Delivery of Documents. Seller shall have delivered all
documents required to be delivered at Closing pursuant to Section 7.2
hereof.
(k) Litigation Affecting Closing. No suit, action or other
proceeding shall be pending or threatened by or before any court or
governmental agency in which it is sought to restrain or prohibit or to
obtain damages or other relief in connection with this Agreement or the
consummation of the transaction contemplated by this Agreement, and no
investigation that may result in any suit, action or other proceeding
shall be pending or threatened.
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(l) Legislation. No statute, rule, regulation or order shall
have been enacted, entered or deemed applicable by any domestic or
foreign government or governmental or administrative agency or court
which would make the transaction contemplated by this Agreement illegal
or otherwise materially adversely affect the Purchased Assets or the
use and operation of the Business in the hands of Buyer.
(m) Review of Records of the Business. Buyer shall have had
the opportunity prior to the Closing Date to review the business
records of the Business and to take such other actions as specified in
Section 5.1. Buyer shall not have discovered during such review any
substantial liabilities relating to the Business which were not
previously disclosed to Buyer in the Audited Financial Statements or
otherwise by Seller.
(n) Employment Contracts. Buyer shall have reached agreement
or contracts or commitments of continued employment reasonably
satisfactory to Buyer with those current employees of Seller named in
Exhibit 6.1(n) hereto.
6.2. Conditions to Obligation of Seller to Proceed on the Closing
Date. The obligation of Seller to proceed on the Closing Date shall be
subject (at its discretion) to the satisfaction, on or before the
Closing, of the following conditions:
(a) Truth of Representations and Warranties and Compliance
with Obligations. The representations and warranties of Buyer herein
contained shall be true in all material respects on the Closing Date
with the same effect as though made at such time. Buyer shall have
performed all material obligations and complied with all material
covenants and conditions prior to or as of the Closing Date. Buyer
shall have delivered to Seller a certificate in form and substance
reasonably satisfactory to Seller dated as of the Closing Date and
executed by their respective Presidents to all such effects.
(b) Opinion of Counsel. Seller shall have received a duly
executed opinion letter from Buyer's legal counsel dated as of the
Closing Date, in form and substance reasonably satisfactory to Seller
and its counsel, to the effect that:
(i) Buyer is a corporation duly organized and validly
existing and in good standing in the State of Minnesota and
has all necessary corporate power to own the property it now
owns and to operate its business as it is now operated;
(ii) This Agreement and all collateral documents have been
duly and validly authorized, executed and delivered by Buyer,
constitute the valid and binding obligations of Buyer, and are
enforceable in accordance with their terms, except as limited
by bankruptcy and insolvency laws and by other laws affecting
the rights of creditors generally;
(iii) To the best of such counsel's knowledge, after
reasonable inquiry, no suit, action, arbitration, legal or
administrative proceeding, or any governmental investigation,
is pending or threatened against Buyer, or any of their
businesses or properties; and
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<PAGE> 19
(iv) Neither the execution nor delivery of this agreement,
nor the consummation of the transactions contemplated in this
Agreement, will constitute a violation of the Articles of
Incorporation or Bylaws of Buyer, or, to the best of such
counsel's knowledge, after reasonable inquiry, a default
under, or violation or breach of, any indenture, license,
lease, mortgage, instrument, or other agreement to which Buyer
is a party, or by which either of their properties may be
bound.
In giving such opinion, such counsel may rely, as to matters of fact,
upon certificates of officers of Buyer or public officials.
(c) Delivery of Documents. Buyer shall have delivered all
documents required to be delivered at Closing pursuant to Section 7.3
hereof.
(d) Required Consents. All required consents shall have been
received from governmental agencies whose approval is required to
consummate the transaction contemplated herein and from each person or
entity listed on Exhibit 3.21(b).
(e) Comfort Letter. Seller's certified public accountants
shall have delivered the Comfort Letter as required under Section 5.4.
(f) Hart-Scott-Rodino Act Filings. The parties shall have
filed all notification and report forms required to be filed under the
provisions of the HSR Act and supplied all additional information
requested by any governmental agency relating thereto. All waiting
periods provided under the HSR Act shall have expired.
(g) Litigation Affecting Closing. No suit, action or other
proceeding shall be pending or threatened by or before any court or
governmental agency in which it is sought to restrain or prohibit or to
obtain damages or other relief in connection with this Agreement or the
consummation of the transaction contemplated by this Agreement, and no
investigation that might eventuate in any such suit, action or other
proceeding shall be pending or threatened.
(h) Legislation. No statute, rule, regulation or other shall
have been enacted, entered or deemed applicable by any domestic or
foreign governmental or governmental or administrative agency or court
which would make the transaction contemplated by this Agreement
illegal.
6.3. Absence of Exhibits. The parties acknowledge that Exhibit 5.4
is not attached hereto and that Exhibit 1.3 is only a preliminary version of
Exhibit 1.3 has been attached hereto. The parties agree to use their best
efforts to negotiate in good faith the final form of such Exhibits, and no party
may decline to proceed at the Closing unless the other party has failed to
negotiate in good faith concerning a material portion of any such Exhibit.
6.4. Termination of Agreement. This Agreement and the transactions
contemplated herein may be terminated at or prior to the Closing Date as
follows:
(a) By mutual written consent of all parties.
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<PAGE> 20
(b) By Buyer pursuant to written notice delivered at or prior
to the Closing if Seller has failed in any material respect to satisfy
all of the conditions to Closing set forth in Section 6.1 or if the
parties have been unable after good faith efforts to reach agreement on
any issues arising under paragraph 6.2.
(c) By Seller pursuant to written notice delivered at or prior
to the Closing if Buyer has failed in any material respect to satisfy
the conditions set forth in Section 6.2 or if the parties have been
unable after good faith efforts to reach agreement on any issue arising
under paragraph 6.2.
6.5. Consequences of Termination. In the event of termination of
this Agreement, each party will return to the other all documents and materials
obtained from the other in connection with the transaction contemplated by this
Agreement and will not use and will keep confidential all Confidential
Information about the other party obtained pursuant to this Agreement pursuant
to the terms of Section 5.6 hereof.
6.6 Cancellation of Transaction. Notwithstanding anything to the
contrary herein or elsewhere to the contrary, Seller, Buyer and Shareholder
acknowledge and agree that Buyer is relying on the availability of reasonable
financing sources, terms and conditions, in order to fully consummate the
transaction contemplated by this Agreement, including but not limited to, the
payment of the Purchase Price to Seller and/or Shareholder, and in the event
that Buyer is unable to obtain such financing with respect to the Promissory
Note from Buyer to Seller in the amount of Four Million and no/100 Dollars
($4,000,000) within sixty (60) days of the Closing Date, the parties hereto
hereby agree that the transaction contemplated by this Agreement shall be
canceled in its entirety (unless otherwise agreed to in writing by the Buyer,
Seller and Shareholder), and any and all consideration paid to any party
pursuant to this Agreement shall be returned to the respective parties so that
Buyer, Seller and Shareholder shall be placed in the same position as that party
was in prior to this Agreement, all without the payment of any damages or
penalty unless it is determined that such party acted in bad faith, except that
Shareholder shall be entitled to retain Two Hundred Thousand and No/100 Dollars
($200,000) of consideration paid by Buyer as a break-up fee.
ARTICLE 7.
CLOSING
7.1. Closing. The closing of the transaction contemplated by this
Agreement ("Closing") shall be held at the offices of Messerli & Kramer P.A.,
1800 Fifth Street Towers, 150 South Fifth Street, Minneapolis, Minnesota
55402-4218, on January 28, 1999, at 9:00 a.m., or at such later date or time as
the parties may mutually agree upon in writing. Such date of Closing is referred
to herein as the Closing Date.
7.2. Documents to be Delivered by Seller. Seller agrees to deliver
the following documents, duly executed as appropriate, to Buyer at the Closing:
(a) Articles of Incorporation of Seller certified by the
Secretary of State of Minnesota.
(b) Bylaws of Seller certified by the Seller's Secretary.
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(c) Certificate of Good Standing of Seller dated no earlier
than ten (10) days prior to the Closing Date.
(d) Certified copies of corporate resolutions of Seller
authorizing it to enter into this Agreement and to consummate the
transactions contemplated herein.
(e) The Audited Financial Statements.
(f) A Bill of Sale for the assignment and transfer of the
Purchased Assets.
(g) Certificates of title and assignment thereof for all motor
vehicles transferred by Seller to Buyer as part of the Purchased
Assets.
(h) Appropriate assignment documents assigning Seller's title
and interest in the Real Estate Leases, Personal Property Leases,
Trademarks, Copyrights and Patents.
(i) Real Estate Purchase Agreements and all conveyances and
related documents referenced therein.
(j) Certificate of Seller's President regarding
representations and warranties as required under Section 6.1(a).
(k) Opinion of Seller's Counsel as required under Section
6.1(b).
(l) Documentation of receipt and consents from all persons
listed on Exhibit 3.21(b).
(m) The Comfort Letter from Sam Kantos, CPA, as required under
Section 5.4.
(n) Such other documents as Buyer may reasonably request for
the purpose of assigning, transferring, granting, conveying, and
confirming to Buyer or reducing to its possession any and all of the
Purchased Assets.
7.3. Documents Delivered by Buyer. Buyer agrees to deliver the
following documents, duly executed as appropriate, to Seller at the Closing:
(a) Articles of Incorporation of Buyer certified by the
Secretary of State of Minnesota.
(b) Bylaws of Buyer certified by Buyer's Secretary.
(c) Certificate of Good Standing of Buyer dated no earlier
than ten (10) days prior to the Closing Date.
(d) Certified copies of corporate resolutions of Buyer
authorizing it to enter into this Agreement and to consummate the
transactions contemplated herein.
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<PAGE> 22
(e) Wire transfer of $1,000,000 to Seller's bank.
(f) Certified or cashier's check, or equivalent instrument or
funds, from Buyer, made payable to Escrowholder in the amount of
$200,000.
(g) Certificate of Buyer's President as required under Section
6.2(a).
(h) Opinion of Buyer's counsel as required under Section
6.2(b).
(i) Such other documents as Seller reasonably may request to
carry out the transactions contemplated under this Agreement.
7.4. Assignment and Assumption of Certain Contracts. Effective upon
consummation of all transactions herein on the Closing Date, Seller hereby
assigns to Buyer all of Seller's rights, title and benefit under the Real Estate
Leases described in Exhibit 1.1(i), the Personal Property Leases described in
Exhibit 1.1(j) and the Contracts. Buyer hereby assumes all liabilities or
obligations with respect thereto. Seller shall execute such forms of assignment
and provide such other reasonable cooperation as may be necessary to effect the
assignments herein.
ARTICLE 8.
POST CLOSING OBLIGATIONS
8.1. Further Documents and Assurances. At any time and from time to
time after the Closing Date, each party shall, upon request of another party,
execute, acknowledge and deliver all such further and other assurances and
documents, and will take such action consistent with the terms of this
Agreement, as may be reasonably requested to carry out the transactions
contemplated herein and to permit each party to enjoy its rights and benefits
hereunder. If requested by Buyer, Seller further agrees to prosecute or
otherwise enforce in its own name for the benefit of Buyer, any claim, right or
benefit transferred by this Agreement that may require prosecution or
enforcement in Seller's name. Any prosecution or enforcement of claims, rights,
or benefits under this provision shall be solely at Buyer's expense, unless the
prosecution or enforcement is made necessary by a breach of this Agreement on
the part of Seller.
ARTICLE 9.
BULK TRANSFER ACT
9.1. Waiver of Compliance. The parties hereby waive compliance with
the provisions of the Bulk Transfer Act, Seller and Shareholder hereby agree to
indemnify and hold Buyer harmless from any damages, losses or expenses
(including reasonable attorneys' fees) suffered by Buyer from any claims which
may be asserted against Buyer by creditors of Seller for obligations not assumed
by Buyer hereunder which result from such non-compliance.
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ARTICLE 10.
INDEMNIFICATION
10.1. Indemnification by Seller. Subject to the limitations set
forth in Section 10.2, Seller and Shareholder shall indemnify and hold Buyer
harmless at all times from and after the date of this Agreement, against and in
respect of all damages, losses, costs and expense (including reasonably
attorneys' fees) which Buyer may suffer or incur in connection with any of the
following matters:
(a) Any claim, demand, action or proceeding asserted by a
creditor of Seller under the provisions of any applicable Bulk Transfer
Act or asserted by any other person respecting any liabilities of
Seller which are not expressly assumed by Buyer under this Agreement.
(b) The breach by Seller of any of its representations,
warranties or covenants in this Agreement.
10.2. Seller's Limitation of Liability.
(a) Buyer shall not assert any claim under Section 10.1 unless
and until such claims exceed an aggregate of $ 0.
(b) Buyer shall assert any claim under Section 10.1(b) within
three (3) year(s) from the Closing Date or be forever barred from
asserting such claim.
(c) The rights of Buyer with respect to any claims arising
under Section 10.1 shall be limited to recovery of actual losses, costs
and expenses (including reasonable attorneys' fees).
10.3. Indemnification by Buyer. Buyer shall indemnify and hold
Seller harmless at all times from and after the date of this Agreement, against
and in respect of all losses, damages, costs and expenses (including reasonable
attorneys fees) which Seller may suffer or incur in connection with any of the
following matters:
(a) The breach by Buyer of any representations, warranties or
covenants in this Agreement.
(b) Any claim, demand, action or proceeding asserted by any
person against Seller relating to any obligation or liability assumed
by Buyer hereunder, or to any obligation or liability relating to the
Purchased Assets or the Business accruing after the Closing Date.
10.4. Buyer's Limitation of Liability.
(a) Seller shall not assert any such claim under Section 10.3
unless and until the claims exceed an aggregate of $ 0.
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(b) Seller shall assert any such claim under Section 10.3(a)
within three (3) year(s) of the Closing Date or be forever barred from
asserting such claim.
10.5. Third Party Claims. If a claim by a third party is made
against any of the indemnified parties, and if any of the indemnified parties
intends to seek indemnity with respect to such claim under this Article, such
indemnified party shall promptly notify the indemnifying party of such claim.
The indemnifying party shall have thirty (30) days after receipt of the
above-mentioned notice to undertake, conduct and control, through counsel of
such party's own choosing (subject to the consent of the indemnified party, such
consent not to be unreasonably withheld) and at such party's expense, the
settlement or defense of it, and the indemnified party shall cooperate with the
indemnifying party in connection with such efforts; provide that: (i) the
indemnifying party shall not by this Agreement permit to exist any lien,
encumbrance or other adverse charge upon any asset of any indemnified party,
(ii) the indemnifying party shall permit the indemnified party to participate in
such settlement or defense through counsel chosen by the indemnified party,
provided that the fees and expenses of such counsel shall be borne by the
indemnified party, and (iii) the indemnified party shall agree promptly to
reimburse the indemnified party for the full amount of any loss resulting from
such claim and all related expense incurred by the indemnified party pursuant to
this Article. So long as the indemnifying party is reasonably contesting any
such claim in good faith, the indemnified party shall not pay or settle any such
claim. If the indemnifying party does not notify the indemnified party within
thirty (30) days after receipt of the indemnified party's notice of a claim or
indemnity under this Article that such party elects to undertake the defense of
such claim, the indemnified party shall have the right to contest, settle or
compromise the claim in the exercise of the indemnified party's exclusive
discretion at the expense of the indemnifying party.
10.6. Escrow Fund. In the event Buyer has a claim against Seller for
indemnification pursuant to this Article, such claim may be made by Buyer and
disposed of in accordance with, the provisions of the Escrow Agreement.
ARTICLE 11.
GENERAL
11.1. Counterparts. This Agreement may be executed in counterparts
and by different counterparts with the same effect as if the signatures thereto
were on the same instrument. This Agreement shall be effective and binding upon
all parties hereto as of Closing when all parties have executed a counterpart of
this Agreement.
11.2. Exhibits. Each Exhibit delivered pursuant to the terms of this
Agreement shall be in writing and shall constitute a part of this Agreement.
11.3. Notices. Any notice or other communication required or
permitted hereunder shall in writing and shall be deemed to have been given,
when received, if delivered by hand, telegram, telex or telecopy, and, when
deposited, if placed in the mails for delivery by air mail, postage prepaid,
addressed to the appropriate party as specified on the first page of this
Agreement. Addresses may be changed by written notice given pursuant to this
Section, however any such notice shall not be effective, if mailed, until three
(3) working days after depositing in the mails or when actually received,
whichever occurs first.
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11.4. Successors and Assigns. Neither Seller, Buyer or Shareholder
shall assign or transfer any of its rights or obligations hereunder without the
prior written consent of the other party which consent shall not be reasonably
withheld.
11.5. Expenses. Except as otherwise provided herein, each party
hereto shall each bear and pay for its own costs and expenses incurred by it or
on its behalf in connection with the transactions contemplated hereby,
including, without limitation, all fees and disbursements of attorneys,
accountants and financial consultants incurred through the Closing Date.
11.6. Entire Agreement. This Agreement, together with the Exhibits
and the related written agreements specifically referred to herein, represents
the only agreement among the parties concerning the subject matter hereof and
supersedes all prior agreements whether written or oral, relating thereto.
11.7. Modification and Waiver. No purported amendment, modification
or waiver of any provision hereof shall be binding unless set forth in a written
document signed by all parties (in the case of amendments or modifications) or
by the party to be charged thereby (in the case of waivers). Any waiver shall be
limited to the circumstance or event specifically referenced in the written
waiver document and shall not be deemed a waiver of any other term hereof or of
the same circumstance or event upon any recurrence thereof.
11.8. Publicity. Seller, Buyer and Shareholder each represent and
warrant that it will make no announcement to public officials or the press in
any way relating to the transaction described herein without the prior written
consent of all parties.
11.9. Governing Law. This Agreement and the legal relations between
the parties shall be governed by and construed in accordance with the laws of
the State of Minnesota.
11.10. Knowledge. Knowledge, as used in this Agreement or the
instruments, certificates or other documents required under this Agreement,
means actual knowledge of a fact or constructive knowledge if a reasonably
prudent person in a like position would have known, or should have known, the
fact.
11.11. Benefit. Nothing in this Agreement, expressed or implied, is
intended to confer on any person other than the parties to this Agreement or
their permitted successors or assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
11.12. Dispute Resolution. Unless otherwise agreed to herein or
elsewhere in writing to the contrary by the parties, any dispute, controversy or
claim arising out of or relating to this Agreement or the breach thereof, shall
be settled by binding arbitration, venued in Hennepin County, Minnesota, and
administered by the American Arbitration Association, and judgment or the award
rendered by the arbitrator(s) may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, any party to this Agreement shall not be
subject to binding arbitration in the event it is seeking injunctive relief to
enforce its rights under the Non-Compete Agreement or the confidentiality
provisions of this Agreement, in which case such party shall have the right to
seek immediate and direct injunctive relief from any court having jurisdiction
thereof.
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IN WITNESS WHEREOF, each of the parties hereto has caused this Asset
Purchase Agreement to be executed in the manner appropriate to each, to be
effective as of the day and year first above written.
BUYER: GTI ACQUISITION CORPORATION,
A MINNESOTA CORPORATION
By: /s/ Greg Appelhof
--------------------------------------------
Its:President
-------------------------------------------
SELLER: HEROLD MARKETING ASSOCIATES, INCORPORATED
D/B/A GRAPHICS TECHNOLOGIES, INC.
A MINNESOTA CORPORATION
By: /s/ Stephan G. Herold
--------------------------------------------
Its:Chief Executive Officer
-------------------------------------------
SHAREHOLDER: STEPHAN G. HEROLD
/s/ Stephan G. Herold
-----------------------------------------------
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<PAGE> 1
Exhibit 99.6(b)
CONSULTING AGREEMENT
THIS AGREEMENT, is made and entered into as of the 28th day of January,
1999, by and between GTI ACQUISITION CORPORATION, a Minnesota corporation
(hereinafter referred to as the "Company"), and STEPHAN G. Herold (hereinafter
referred to as "Consultant").
RECITALS:
A. The Company wishes to retain the Consultant as an independent
contractor consultant.
B. The Consultant represents and warrants that he has no prior legally
binding obligations that are in conflict with his entering into this
Consulting Agreement.
C. The Consultant is willing to be so retained on the terms and conditions
of this Agreement.
NOW, THEREFORE, in consideration of the promises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
1. RETAINER. The Company hereby retains Consultant as an independent
contractor consultant, and Consultant hereby accepts such retainer on the terms
and conditions hereinafter set forth.
2. TERM. The term of this Consulting Agreement shall be for the period
commencing on January 28, 1999, and continuing until January 28, 2002, at which
time it shall terminate, unless terminated earlier as provided elsewhere in this
Consulting Agreement. This Consulting Agreement may be continued for a period
beyond the term by the mutual written agreement of the parties.
3. DUTIES OF CONSULTANT. The Company retains Consultant as a general
advisor and consultant to management on all matters pertaining to the business
of the Company and to assist with the contacting of customers of the Company and
with marketing of the Company's products and services. Consultant shall further
render such additional services as are pertinent and related to the foregoing
duties.
In his capacity as a general advisor and consultant to management of
the Company, Consultant shall not be required to devote his full time and
efforts to the business of the Company; provided, however, in addition to other
duties, Consultant shall be available for such periods of time as are reasonably
required to adequately perform the required tasks. Consultant shall also be
available, at the mutual convenience of the parties, to study specific matters
or problems submitted to Consultant by management of the Company.
Consultant shall render the services required in this Consulting
Agreement as an independent contractor. Deadlines in respect of the service and
functions of Consultant shall be mutually agreed upon. Consultant shall have no
authority or power of decision over any of the Company's activities or
employees.
<PAGE> 2
Consultant shall be required to provide transportation with respect to
the duties and functions of Consultant under this Consulting Agreement and the
Company shall have no responsibility to furnish supplies and/or office
availability to Consultant.
Consultant shall be responsible for all employment related taxes and
withholdings from amounts paid pursuant to this Consulting Agreement and the
Company shall not be liable or responsible for any such taxes and withholdings.
Consultant shall use his best efforts to advance the business and
welfare of the Company, and shall not intentionally take any action against the
best interests of the Company.
4. CONSIDERATION. As full and complete consideration for any and all
services (except out-of-pocket expenses approved by the Company) which
Consultant may render to the Company, the Company shall pay Consultant an
aggregate of One Million Fifteen Thousand and 00/Dollars ($1,015,000), such
amount payable solely by the issuance of a total of One Hundred Forty Five
Thousand (145,000) shares of the Company's parent company (Virtual Technology
Corporation) Common Stock upon execution of this Agreement. The public resale of
such shares will be registered on Form S-8 or other available form as soon as
reasonably practical with the Securities and Exchange Commission.
5. RESTRICTIVE COVENANT. During the term of this Consulting Agreement
for any reason whatsoever, Consultant will not, on his own account or as an
employee, consultant, partner, officer, director, or stock holder of any other
person, firm, partnership, or corporation, conduct, engage in, be connected
with, have any interest in, or aid or assist anyone else engaging in the
business conducted by the Company, except that Consultant shall be permitted to
own, for himself, shares of the common stock of any company engaged in a
business similar to that business conducted by the Company, whose shares are
regularly traded on the New York Stock Exchange or NASDAQ exchange or any other
similar exchange provided that the ownership of Consultant in such company is
not in excess of three percent (3%) of the total issued and outstanding shares
of any such company. Consultant agrees that the limitation in this Section 5 is
the minimum period of time necessary to protect the Company, its successors and
assigns, in the use or employment of the goodwill of the businesses conducted by
the Company. Consultant agrees and acknowledges that in his capacity as
Consultant, he will be contacting customers of the Company and as such, the
Company is entitled to the protection afforded by this restriction to preserve
the benefits which are to be acquired pursuant to the Agreement. In the event
this Consulting Agreement is terminated prior to the close of the anticipated
term, this restrictive covenant shall be continued for what would have been the
remaining term of this Consulting Agreement. Consultant agrees that damages
cannot compensate the Company in the event of a violation of this noncompetitive
covenant, and that injunction relief would be essential for the protection of
the Company, its successors and assigns. Consultant, therefore, agrees and
consents that in case of any such breach or violation, the Company may have such
injunctive relief, without bond, but upon due notice, in addition to such
further or other relief as may appertain at equity or law. No waiver of any
breach or violation hereof shall be implied from forbearance or failure by the
Company to take action under this Section 5. It is the desire and intent of the
parties that the provisions of this Section 5 be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular portion of this
Section 5 is determined and adjudicated to be invalid or unenforceable, this
Section 5 shall be
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<PAGE> 3
deemed amended to delete therefrom that portion thus determined and adjudicated
to be invalid or unenforceable, such deletion to apply only with respect to the
operation of this Section 5 and the particular jurisdiction in which such
adjudication is made; provided, further, to the extent any provision of this
Section 5 is deemed unenforceable by virtue of its scope, but may be made
enforceable by limitation thereof, the parties agree that the same shall,
nevertheless, be enforceable to the fullest extent permissible under the laws
and public policies applied in such jurisdiction in which enforcement is sought.
6. DISCLOSURE OF INFORMATION. Consultant recognizes and acknowledges as
a result of his employment by the Company, he will have access to discover
information which is of a proprietary nature to the Company, including methods,
inventions, improvements, trade secrets, or discoveries, whether patentable or
not, and similar information relating to the Company's products. In addition,
information will or has been disclosed to Consultant, or has been discovered by
Consultant, concerning marketing plans, processes, products, apparatus,
techniques, know-how, trade secrets, strategies, customer lists, and technical
requirements of customers of the Company. Consultant agrees that he will not,
without the prior written approval of the Company, disclose any such proprietary
information of the Company to anyone not in the employ of the Company, or use
any such information other than for the purposes of this Consulting Agreement.
Consultant agrees that he will not allow any other person engaged by him to have
access to any of the proprietary information unless he first obtains such
person's agreement not to disclose or use such information, and such agreement
is binding upon the Company, Consultant, and such third person. These
obligations shall not apply, however, to information which is or becomes
generally available to the public through no fault of Consultant.
7. TERMINATION. This Agreement shall terminate:
a. On January 28, 2002.
b. At the Company's option, upon the breach by Consultant of any
of the terms and conditions contained herein.
c. At Consultant's option, upon failure of the Company to make
timely payments under paragraph 4 hereof.
d. Upon mutual written agreement of the parties hereto.
e. At Consultant's option in the event that Company is in default
under the terms and conditions of the Asset Purchase Agreement
entered into by and between the Company and Consultant of even
date herewith.
f. At Consultant's option including the Restrictive Covenant in
Section 5, in the event the Company is in default under the
terms and conditions of the promissory notes given by the
Company to Herold Marketing Associates, Incorporated d/b/a
Graphics Technology, Inc., in the principal amounts of
$4,000,000 and $3,300,000, dated of even date herewith.
-3-
<PAGE> 4
8. NOTICES. Any notice required or permitted to be given under this
Consulting Agreement shall be sufficient if in writing and personally delivered,
or if sent by certified mail, postage prepaid, to his residence in the case of
Consultant, its principal office in the case of the Company and shall be
effective upon deposit into the United States Postal Service, or in the case of
personal delivery when actually delivered.
9. WAIVER. The waiver by the Company of a breach of any provision of
this Consulting Agreement by Consultant shall not operate or be construed as a
waiver of any subsequent breach by Consultant.
10. BINDING EFFECT. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto, their respective heirs,
representatives, successors, and assigns, but shall not be assignable by
Consultant without the prior written consent of the Company.
11. SEVERABILITY. If any provision of this Consulting Agreement is held
to be contrary to law, that provision shall be deemed severable from the balance
of this Consulting Agreement, and the balance of this Consulting Agreement shall
remain in force between the parties to the fullest extent permitted by law.
12. ENTIRE AGREEMENT. This Agreement shall be deemed to express,
embody, and supersede all previous understandings, agreements and commitments,
whether written or oral, between the parties hereto with respect to the subject
matter hereof and to fully and finally set forth the entire agreement between
the parties hereto. No modifications shall be binding unless stated in writing
and signed by both parties hereto with the approval of the President of the
Company.
13. GOVERNING LAW/VENUE. This Agreement shall be governed by the laws
of the State of Minnesota. Any action involving or affecting this Consulting
Agreement or the services to be performed shall be determined by arbitration in
the County of Hennepin, State of Minnesota, in accordance with the Commercial
Arbitration Rules of the American Arbitration Association.
14. PRIOR AGREEMENTS. This Agreement supersedes and renders null and
void all prior written or oral agreements by and between the Company or its
affiliates and Consultant, except as provided herein or in any amendments or
addendums hereto.
15. SURVIVAL OF COVENANTS. Upon termination of this Agreement for any
reason, the covenants contained in Section 5 and Section 6 shall survive such
termination.
16. COUNTERPARTS. This Agreement may be signed in one or more
counterparts but all of which taken together shall constitute one instrument.
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<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day, month and year first above written.
COMPANY:
GTI ACQUISITION CORPORATION
By:/s/ Greg Appelhof
-----------------------------------------
Its:President
CONSULTANT:
/s/ Stephan G. Herold
--------------------------------------------
Stephan G. Herold
-5-
<PAGE> 1
EXHIBIT 99.6(c)
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
by and between
VIRTUAL TECHNOLOGY CORPORATION AND GTI ACQUISITION CORPORATION
and
COAST BUSINESS CREDIT,
a division of Southern Pacific Bank
Dated as of February 11, 1999
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<PAGE> 2
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. DEFINITIONS........................................................... 1
Account Debtor................................................... 1
Affiliate........................................................ 1
Audit ........................................................... 1
Borrower......................................................... 1
Borrower's Address............................................... 1
Business Day..................................................... 1
Change of Control................................................ 1
Closing Date..................................................... 2
Coast............................................................ 2
Code ............................................................ 2
Collateral....................................................... 2
Credit Limit..................................................... 2
Debt Service Coverage Ratio...................................... 2
Default.......................................................... 2
Deposit Account.................................................. 2
Dollars or $..................................................... 2
Early Termination Fee............................................ 2
EBIT ............................................................ 2
EBITDA........................................................... 2
Eligible Foreign Receivables..................................... 2
Eligible Inventory............................................... 2
Eligible Receivables............................................. 2
Equipment........................................................ 4
Equipment Acquisition Loans...................................... 4
Event of Default................................................. 4
GAAP ............................................................ 4
General Intangibles.............................................. 4
Inventory........................................................ 4
Inventory Loans.................................................. 4
Investment Property.............................................. 4
Loan Documents................................................... 4
Loans............................................................ 4
Material Adverse Effect.......................................... 4
Maturity Date.................................................... 4
Maximum Dollar Amount............................................ 4
Minimum Monthly Interest......................................... 4
Obligations...................................................... 4
Permitted Liens.................................................. 5
Person........................................................... 5
Prime Rate....................................................... 5
Real Property.................................................... 5
Receivable Loans................................................. 5
Receivables...................................................... 5
Renewal Date..................................................... 5
Renewal Fee...................................................... 6
Solvent.......................................................... 6
Tangible Net Worth............................................... 6
Term Loan........................................................ 6
Year 2000 Problem................................................ 6
Other Terms...................................................... 6
2. CREDIT FACILITIES................................................... 6
2.1 Loans......................................................... 6
3. INTEREST AND FEES................................................... 6
3.1 Interest...................................................... 6
3.2 Fees.......................................................... 6
4. SECURITY INTEREST................................................... 6
5. CONDITIONS PRECEDENT................................................ 7
5.1 Status of Accounts at Closing................................. 7
5.2 Minimum Availability.......................................... 7
5.3 Landlord Waiver............................................... 7
5.4 Real Property................................................. 7
5.5 Executed Agreement............................................ 7
5.6 Opinion of Borrower's Counsel................................. 7
5.7 Priority of Coast's Liens..................................... 7
5.8 Insurance..................................................... 7
5.9 Borrower's Existence.......................................... 7
5.10 Organizational Documents...................................... 7
5.11 Taxes......................................................... 7
5.12 Due Diligence................................................. 7
5.13 Year 2000 Problem Assessment Certificate...................... 8
5.14 Other Documents and Agreements................................ 8
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER........... 8
6.1 Existence and Authority....................................... 8
6.2 Name; Trade Names and Styles.................................. 8
6.3 Place of Business; Location of Collateral..................... 8
6.4 Title to Collateral; Permitted Liens.......................... 8
6.5 Maintenance of Collateral..................................... 9
6.6 Books and Records............................................. 9
6.7 Financial Condition, Statements and Reports................... 9
</TABLE>
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<PAGE> 3
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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<TABLE>
<S> <C> <C>
6.8 Tax Returns and Payments; Pension Contributions............... 9
6.9 Compliance with Law........................................... 9
6.10 Litigation.................................................... 9
6.11 Use of Proceeds............................................... 9
6.12 Year 2000 Problem............................................. 9
7. RECEIVABLES......................................................... 10
7.1 Representations Relating to Receivables....................... 10
7.2 Representations Relating to Documents and Legal Compliance.... 10
7.3 Schedules and Documents relating to Receivables............... 10
7.4 Collection of Receivables..................................... 10
7.5 Remittance of Proceeds........................................ 10
7.6 Disputes...................................................... 10
7.7 Returns....................................................... 11
7.8 Verification.................................................. 11
7.9 No Liability.................................................. 11
8. ADDITIONAL DUTIES OF THE BORROWER................................... 11
8.1 Financial and Other Covenants................................. 11
8.2 Insurance..................................................... 11
8.3 Reports....................................................... 11
8.4 Access to Collateral, Books and Records....................... 11
8.5 Negative Covenants............................................ 12
8.6 Litigation Cooperation........................................ 12
8.7 Further Assurances............................................ 12
9. TERM................................................................ 12
9.1 Maturity Date................................................. 12
9.2 Early Termination............................................. 13
9.3 Payment of Obligations........................................ 13
10. EVENTS OF DEFAULT AND REMEDIES...................................... 13
10.1 Events of Default............................................. 13
10.2 Remedies...................................................... 14
10.3 Standards for Determining Commercial Reasonableness........... 15
10.4 Power of Attorney............................................. 16
10.5 Application of Proceeds....................................... 17
10.6 Remedies Cumulative........................................... 17
11. GENERAL PROVISIONS.................................................. 17
11.1 Interest Computation.......................................... 17
11.2 Application of Payments....................................... 17
11.3 Charges to Accounts........................................... 17
11.4 Monthly Accountings........................................... 17
11.5 Notices....................................................... 17
11.6 Severability.................................................. 18
11.7 Integration................................................... 18
11.8 Waivers....................................................... 18
11.9 No Liability for Ordinary Negligence.......................... 18
11.10 Amendment..................................................... 18
11.11 Time of Essence............................................... 18
11.12 Attorneys Fees, Costs and Charges............................. 18
11.13 Benefit of Agreement.......................................... 19
11.14 Publicity..................................................... 19
11.15 Paragraph Headings; Construction.............................. 19
11.16 Governing Law; Jurisdiction; Venue............................ 19
11.17 Mutual Waiver of Jury Trial................................... 20
</TABLE>
ii
<PAGE> 4
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COAST BUSINESS CREDIT(R)
LOAN AND SECURITY AGREEMENT
BORROWER: VIRTUAL TECHNOLOGY CORPORATION
ADDRESS: 3100 WEST LAKE STREET, STE., 410
MINNEAPOLIS, MN 55416
BORROWER: GTI ACQUISITION CORPORATION
ADDRESS: 7615 GOLDEN TRIANGLE DRIVE, STE., G
MINNEAPOLIS, MN 55344
DATE: FEBRUARY 11, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Bank ("Coast"), a California
corporation, with offices at 12121 Wilshire Boulevard, Suite 1400, Los Angeles,
California 90025, and the borrowers named above (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 1 below.)
1. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable or General Intangible.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Audit" means to inspect, audit and copy Borrower's books and records and
the Collateral.
"Borrower" has the meaning set forth in the introduction to this
Agreement.
"Borrower's Address" has the meaning set forth in the introduction to this
Agreement.
"Business Day" means a day on which Coast is open for business.
"Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current holders of the
ownership interests in any Borrower) becomes the "beneficial owner" (as defined
in Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, as a result of any single transaction, of more than thirty-five
1
<PAGE> 5
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
percent (35%) of the total voting power of all classes of stock or other
ownership interests then outstanding of any Borrower normally entitled to vote
in the election of directors or analogous governing body.
"Closing Date" means the date of the initial funding under this Agreement.
"Coast" has the meaning set forth in the introduction to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 4 hereof.
"Credit Limit" means the maximum amount of Loans that Coast may make to
Borrower pursuant to the amounts and percentages shown on the Schedule.
"Debt Service Coverage Ratio" is defined as EBITDA less non-financed
capital expenditures, divided by all principal (including payments on capital
leases) and all interest.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Dollars or $" means United States dollars.
"Early Termination Fee" means the amount set forth on the Schedule that
Borrower must pay Coast if this Agreement is terminated by Borrower or Coast
pursuant to Section 9.2 hereof.
"EBIT" means, in any fiscal period, Borrower's consolidated net income
(other than extraordinary or non-recurring items of Borrower for such period),
plus (i) the amount of all interest expense and income tax expense of Borrower
for such period, on a consolidated basis, and plus or minus (as the case may be)
(ii) any other non-cash charges which have been added or subtracted, as the case
may be, in calculating Borrower's consolidated net income for such period.
"EBITDA" means EBIT computed without deduction of any amount for
depreciation or amortization.
"Eligible Foreign Receivables" means Receivables arising from Borrower's
customers located outside the United States that are not in excess of one
hundred twenty (120) days past invoice date and which Coast otherwise approves
for borrowing in its sole and absolute discretion. Without limiting the
foregoing, Coast will consider the following in determining the eligibility of
such receivables: (i) whether the Borrower's goods are shipped backed by an
irrevocable letter of credit satisfactory to Coast (as to form, substance, and
issuer or domestic confirming bank) that has been delivered to Coast and is
directly drawable by Coast, or (ii) whether the Borrower's customer is a large
or rated company having a verifiable credit history, or (iii) whether Borrower's
customer is a foreign subsidiary of a customer of Borrower that is a company
that was formed and has its primary place of business within the United States,
or (iv) whether Borrower's customer is a large foreign corporation, or (v)
whether Borrower's customer is a foreign company with a Dun & Bradstreet rating
acceptable to Coast, or (vi) whether Borrower's goods are shipped to a company
that has credit insurance.
"Eligible Inventory" means Inventory which Coast, in its sole judgment,
deems eligible for borrowing, based on such considerations as Coast may from
time to time deem appropriate. Without limiting the fact that the determination
of which Inventory is eligible for borrowing is a matter of Coast's discretion,
Inventory which does not meet the following requirements will not be deemed to
be Eligible Inventory: Inventory which (i) consists of finished goods and raw
materials, in good, new and salable condition which is not perishable, not
obsolete or unmerchantable, and is not comprised work in process, packaging
materials or supplies; (ii) meets all applicable governmental standards; (iii)
has been manufactured in compliance with the Fair Labor Standards Act; (iv)
conforms in all respects to the warranties and representations set forth in this
Agreement; (v) is at all times subject to Coast's duly perfected, first priority
security interest; and (vi) is situated at a one of the locations set forth on
the Schedule.
"Eligible Receivables" means Receivables and Eligible Foreign Receivables
arising in the ordinary course of Borrower's business from the sale of goods or
rendition of services, which Coast, in its sole judgment, shall deem eligible
for borrowing, based on such considerations as
2
<PAGE> 6
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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Coast may from time to time deem appropriate. Eligible Receivables shall not
include the following:
(a) Receivables that the Account Debtor has failed to pay
within ninety (90) days of invoice date;
(b) Receivables owed by an Account Debtor or its Affiliates
where twenty-five percent (25%) or more of all Receivables owed by that Account
Debtor (or its Affiliates) are deemed ineligible under clause (a) above;
(c) Receivables with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower;
(d) Receivables with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(e) Receivables, other than Eligible Foreign Receivables, that
are not payable in Dollars or with respect to which the Account Debtor: (i) does
not maintain its chief executive office in the United States, or (ii) is not
organized under the laws of the United States or any State thereof, or (iii) is
the government of any foreign country or sovereign state, or of any state,
province, municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality thereof, unless
(y) the Receivable is supported by an irrevocable letter of credit satisfactory
to Coast (as to form, substance, and issuer or domestic confirming bank) that
has been delivered to Coast and is directly drawable by Coast, or (z) the
Receivable is covered by credit insurance in form and amount, and by an insurer,
satisfactory to Coast;
(f) Receivables with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Coast, with the Assignment of
Claims Act, 31 U.S.C. ss. 3727), or (ii) any State of the United States
(exclusive, however, of Receivables owed by any State that does not have a
statutory counterpart to the Assignment of Claims Act);
(g) Receivables with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Receivables;
(h) Receivables with respect to an Account Debtor whose total
obligations owing to Borrower exceed twenty-five percent (25%) of all Eligible
Receivables, to the extent of the obligations owing by such Account Debtor in
excess of such percentage, with the exception of Receivables from Comtrade whose
total obligations owing to Borrower may not exceed forty percent (40%) of all
Eligible Receivables and Receivables from Entex Information Systems ("Entex")
whose total obligations owing to Borrower may not exceed fifty percent (50%) of
all Eligible Receivables, subject, however, to Coast's satisfactory credit
review of Comtrade and the IBM Credit Corp. floor plan agreement for Entex;
(i) Receivables with respect to which the Account Debtor is
subject to any reorganization, bankruptcy, insolvency, arrangement, readjustment
of debt, dissolution or liquidation proceeding, or becomes insolvent, or goes
out of business;
(j) Receivables the collection of which Coast, in its
reasonable credit judgment, believes to be doubtful by reason of the Account
Debtor's financial condition;
(k) Receivables with respect to which the goods giving rise to
such Receivable have not been shipped and billed to the Account Debtor, the
services giving rise to such Receivable have not been performed and accepted by
the Account Debtor, or the Receivable otherwise does not represent a final sale;
(l) Receivables with respect to which the Account Debtor is
located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or
any other state that requires a creditor to file a Business Activity Report or
similar document in order to bring suit or otherwise enforce its remedies
against such Account Debtor in the courts or through any judicial process of
such state), unless Borrower has qualified to do business in New Jersey,
Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice
of Business Activities Report with the applicable division of taxation, the
department of revenue, or with such other state offices, as appropriate, for the
then-current year, or is exempt from such filing requirement; and
(m) Receivables that represent progress payments or other
advance billings that are due prior to the
3
<PAGE> 7
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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completion of performance by Borrower of the subject contract for goods or
services.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dies, jigs, goods and
other goods (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Equipment Acquisition Loans" means the Loans described in Section 2(c) of
the Schedule.
"Event of Default" means any of the events set forth in Section 10.1 of
this Agreement.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States, consistently applied.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choices in action, causes of action, corporate or other business
records, Deposit Accounts, investment property, inventions, designs, drawings,
blueprints, patents, patent applications, trademarks and the goodwill of the
business symbolized thereby, names, trade names, trade secrets, goodwill,
copyrights, registrations, licenses, franchises, customer lists, security and
other deposits, rights in all litigation presently or hereafter pending for any
cause or claim (whether in contract, tort or otherwise), and all judgments now
or hereafter arising therefrom, all claims of Borrower against Coast, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation life
insurance, key man insurance, credit insurance, liability insurance, property
insurance and other insurance), tax refunds and claims, computer programs,
discs, tapes and tape files, claims under guaranties, security interests or
other security held by or granted to Borrower, all rights to indemnification and
all other intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Inventory Loans" means the Loans described in Section 2(b) of the
Schedule.
"Investment Property" has the meaning set forth in Section 9115 of the
Code as in effect as of the date hereof.
"Loan Documents" means this Agreement, the agreements and documents listed
on Section 5 of the Schedule, and any other agreement, instrument or document
executed in connection herewith or therewith.
"Loans" has the meaning set forth in Section 2.1 hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower or any guarantor of any of the
Obligations, (ii) the ability of Borrower or any guarantor of any of the
Obligations to perform its obligations under this Agreement (including, without
limitation, repayment of the Obligations as they come due) or (iii) the validity
or enforceability of this Agreement or any other agreement or document entered
into by any party in connection herewith, or the rights or remedies of Coast
hereunder or thereunder.
"Maturity Date" means the date that this Agreement shall cease to be
effective, as set forth on the Schedule, subject to the provisions of Section
9.1 and 9.2 hereof.
"Maximum Dollar Amount" has the meaning set forth in Section 2 of the
Schedule.
"Minimum Monthly Interest" has the meaning set forth in Section 3 of the
Schedule.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorneys'
fees (including attorneys' fees and expenses incurred in bankruptcy), expert
witness fees, audit fees, letter of credit fees, collateral monitoring fees,
closing fees, facility fees, termination fees, minimum interest charges and any
other sums chargeable to Borrower under this Agreement or under any other
present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following:
(a) purchase money security interests in specific items of
Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently
with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or
other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above in
clauses (a) or (b) above, provided that any extension, renewal or replacement
lien is limited to the property encumbered by the existing lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase; or
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest or
lien sign an intercreditor agreement on Coast's then standard form, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, general partnership,
limited partnership, limited liability partnership, limited liability company,
joint venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Prime Rate" means the actual "Reference Rate" or the substitute therefor
of the Bank of America NT & SA whether or not that rate is the lowest interest
rate charged by said bank. If the Prime Rate, as defined, is unavailable, "Prime
Rate" shall mean the highest of the prime rates published in the Wall Street
Journal on the first business day of the applicable month, as the base rate on
corporate loans at large U.S. money center commercial banks.
"Real Property" means Borrower's Address and the real property set forth
in the Schedule in Section 6.3.
"Receivable Loans" means the Loans described in Section 2(a) of the
Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents, securities accounts,
security entitlements, commodity contracts, commodity accounts, investment
property and all other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, all merchandise returned to or
repossessed by Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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"Renewal Date" shall mean the Maturity Date if this Agreement is renewed
pursuant to Section 9.1 hereof, and each anniversary thereafter that this
Agreement is renewed pursuant to Section 9.1 hereof.
"Renewal Fee" means the fee that Borrower must pay Coast upon renewal of
this Agreement pursuant to Section 9.1 hereof, in the amount set forth on the
Schedule.
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
"Tangible Net Worth" means consolidated Borrower's equity plus
subordinated debt otherwise permitted hereunder, less, goodwill, patents,
trademarks, copyrights, franchises, formulas, leasehold interests, leasehold
improvements, non-compete agreements, engineering plans, deferred tax benefits,
organization costs, prepaid items, and any other assets of Borrower that would
be treated as intangible assets on Borrower's balance sheet prepared in
accordance with GAAP.
"Term Loan" means the Loans described in Section 2(c) of the Schedule.
"Year 2000 Problem" means the risk that computer systems, software and
applications, used by a Person may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any dates after
December 31, 1999.
"Other Terms." All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. CREDIT FACILITIES.
2.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts and
in percentages to be determined by Coast in its good faith discretion, up to the
Credit Limit, provided no Default or Event of Default has occurred and is
continuing. In addition, Coast may create reserves against or reduce its advance
rates based upon Eligible Receivables or Eligible Inventory without declaring a
Default or an Event of Default if it determines that there has occurred a
Material Adverse Effect.
3. INTEREST AND FEES.
3.1 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast Minimum Monthly Interest during the
term of this Agreement with respect to the Loans in the amount set forth on the
Schedule.
3.2 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are deemed
fully earned and are nonrefundable.
4. SECURITY INTEREST.
To secure the payment and performance of all of the Obligations when due,
Borrower hereby grants to Coast a security interest in all of Borrower's
interest in the following, whether now owned or hereafter acquired, and
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wherever located: All Receivables, Inventory, Equipment, Investment Property,
and General Intangibles, including, without limitation, all of Borrower's
Deposit Accounts, and all money, and all property now or at any time in the
future in Coast's possession (including claims and credit balances), and all
proceeds of any of the foregoing (including proceeds of any insurance policies,
proceeds of proceeds, and claims against third parties), all products of any of
the foregoing, and all books and records related to any of the foregoing (all of
the foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral")
5. CONDITIONS PRECEDENT.
The obligation of Coast to make the Loans is subject to the satisfaction,
in the sole discretion of Coast, at or prior to the first advance of funds
hereunder, of each, every and all of the following conditions:
5.1 STATUS OF ACCOUNTS AT CLOSING. No account payable shall be due and
unpaid ninety (90) days past its invoice date except for such accounts payable
being contested in good faith in appropriate proceedings and for which adequate
reserves have been provided.
5.2 MINIMUM AVAILABILITY. Borrower shall have minimum availability
immediately following the initial funding in the amount set forth on the
Schedule.
5.3 LANDLORD WAIVER. Coast shall have received duly executed
(a) landlord waivers and access agreements in form and substance
satisfactory to Coast, in Coast's sole and absolute discretion, and, when deemed
appropriate by Coast, in form for recording in the appropriate recording office,
with respect to all leased locations where Borrower maintains any inventory or
equipment.
(b) warehouse waivers in form and substance satisfactory to Coast, in
Coast's sole and absolute discretion, and when deemed appropriate by Coast, in
form for recording in the appropriate recording office, with respect to all
warehouse locations where Borrower maintains any inventory or equipment.
5.4 REAL PROPERTY. Coast shall have received duly executed mortgages
and/or deeds of trust in form and substance satisfactory to Coast, in Coast's
sole and absolute discretion, in form for recording in the appropriate recording
office, with respect to the real property owned by Borrower.
5.5 EXECUTED AGREEMENT. Coast shall have received this Agreement duly
executed and in form and substance satisfactory to Coast in its sole and
absolute discretion.
5.6 OPINION OF BORROWER'S COUNSEL. Coast shall have received an opinion
of Borrower's counsel, in form and substance satisfactory to Coast in its sole
and absolute discretion.
5.7 PRIORITY OF COAST'S LIENS. Coast shall have received the results of
"of record" searches satisfactory to Coast in its sole and absolute discretion,
reflecting its Uniform Commercial Code filings against Borrower indicating that
Coast has a perfected, first priority lien in and upon all of the Collateral,
subject only to Permitted Liens.
5.8 INSURANCE. Coast shall have received copies of the insurance binders
or certificates evidencing Borrower's compliance with Section 8.2 hereof,
including lender's loss payee endorsements.
5.9 BORROWER'S EXISTENCE. Coast shall have received copies of Borrower's
articles or certificate of incorporation and all amendments thereto, and a
Certificate of Good Standing, each certified by the Secretary of State of the
state of Borrower's organization, and dated a recent date prior to the Closing
Date, and Coast shall have received Certificates of Foreign Qualification for
Borrower from the Secretary of State of each state wherein the failure to be so
qualified could have a Material Adverse Effect.
5.10 ORGANIZATIONAL DOCUMENTS. Coast shall have received copies of
Borrower's By-laws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing the
execution and delivery of this Agreement and the other documents contemplated
hereby, and authorizing the transactions contemplated hereunder and thereunder,
and authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date.
5.11 TAXES. Coast shall have received evidence from
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Borrower that Borrower has complied with all tax withholding and Internal
Revenue Service regulations, in form and substance satisfactory to Coast in its
sole and absolute discretion.
5.12 DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower.
5.13 YEAR 2000 PROBLEM ASSESSMENT CERTIFICATE. Coast shall have received a
certificate from the relevant officer of Borrower to the effect that, as the
result of a comprehensive assessment undertaken by Borrower of Borrower's
computer systems, software and applications and after due inquiry made to
Borrower's material suppliers, vendors and customers, Borrower knows of no facts
that would cause Borrower to reasonably believe that the Year 2000 Problem will
cause a Material Adverse Effect.
5.14 OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such other
agreements, instruments and documents as Coast may require in connection with
the transactions contemplated hereby, all in form and substance satisfactory to
Coast in Coast's sole and absolute discretion, and in form for filing in the
appropriate filing office, including, but not limited to, those documents listed
in Section 5 of the Schedule.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
6.1 EXISTENCE AND AUTHORITY. Borrower is and will continue to be, duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Borrower is and will continue to be qualified
and licensed to do business in all jurisdictions in which any failure to do so
would have a Material Adverse Effect. The execution, delivery and performance by
Borrower of this Agreement, and all other documents contemplated hereby (a) have
been duly and validly authorized, (b) are enforceable against Borrower in
accordance with their terms (except as enforcement may be limited by equitable
principles and by bankruptcy, insolvency, reorganization, moratorium or similar
laws relating to creditors' rights generally), and (c) do not violate Borrower's
articles or certificate of incorporation, or Borrower's by-laws, or any law or
any material agreement or instrument which is binding upon Borrower or its
property, and (d) do not constitute grounds for acceleration of any material
indebtedness or obligation under any material agreement or instrument which is
binding upon Borrower or its property.
6.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under a
fictitious business name.
6.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least thirty (30) days'
prior written notice before opening any additional place of business, changing
its chief executive office, or moving any of the Collateral to a location other
than Borrower's Address or one of the locations set forth on the Schedule.
6.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Coast now has, and will continue
to have, a first-priority perfected and enforceable security interest in all of
the Collateral, subject only to the Permitted Liens, and Borrower will at all
times defend Coast and the Collateral against all claims of others. None of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or
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otherwise), Borrower shall, whenever requested by Coast, use its best efforts to
cause such third party to execute and deliver to Coast, in form acceptable to
Coast, such waivers and subordinations as Coast shall specify, so as to ensure
that Coast's rights in the Collateral are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and effect,
and will comply with all the terms of, any lease of real property where any of
the Collateral now or in the future may be located.
6.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower shall file a patent application on all patentable
material and register any trademarks, copyrights and copyrightable material
which comprises the Collateral and advise Coast of the acquisition, existence,
filing and/or registration thereof. Borrower will immediately advise Coast in
writing of any material loss or damage to the Collateral.
6.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address or at 1422 Westlake Street, Minneapolis, MN 55416 complete
and accurate books and records, comprising an accounting system in accordance
with GAAP.
6.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with GAAP (except, in the case of unaudited financial statements, for
the absence of footnotes and subject to normal year-end adjustments) and now and
in the future will fairly reflect the financial condition of Borrower, at the
times and for the periods therein stated. Between the last date covered by any
such statement provided to Coast and the date hereof, there has been no Material
Adverse Effect. Borrower is now and will continue to be Solvent.
6.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
6.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, the Fair Labor Standards Act, and those relating to Borrower's ownership of
real or personal property, the conduct and licensing of Borrower's business, and
environmental matters.
6.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in a Material Adverse Effect.
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving an amount set forth on the Schedule.
6.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
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6.12 YEAR 2000 COMPLIANCE. As the result of a comprehensive review and
assessment undertaken by Borrower of Borrower's computer systems, software and
applications and after due inquiry made of Borrower's material suppliers,
vendors and customers, Borrower represents and warrants that the Year 2000
Problem will not result in a Material Adverse Effect.
7. RECEIVABLES.
7.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business.
7.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
7.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast via facsimile, unless otherwise directed by Coast, at such
locations and at such intervals as Coast may request, transaction reports and
loan requests, schedules of Receivables, and schedules of collections, all on
Coast's standard forms; provided, however, that Borrower's failure to execute
and deliver the same shall not affect or limit Coast's security interest and
other rights in all of Borrower's Receivables, nor shall Coast's failure to
advance or lend against a specific Receivable affect or limit Coast's security
interest and other rights therein. Loan requests received after 10:30 A.M. Los
Angeles, California time, will not be considered by Coast until the next
Business Day. Together with each such schedule, or later if requested by Coast,
Borrower shall furnish Coast with copies (or, at Coast's request, originals) of
all contracts, orders, invoices, and other similar documents, and all original
shipping instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing.
Borrower shall also furnish to Coast an aged accounts receivable trial balance
in such form and at such intervals as Coast shall request. In addition, Borrower
shall deliver to Coast the originals of all instruments, chattel paper, security
agreements, guarantees and other documents and property evidencing or securing
any Receivables, upon receipt thereof and in the same form as received, with all
necessary endorsements, all of which shall be with recourse. Borrower shall also
provide Coast with copies of all credit memos as and when requested by Coast.
7.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one (1)
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables.
7.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one (1) Business Day after
receipt by Borrower, in their original form, duly endorsed to Coast, to be
applied to the Obligations in such order as Coast shall determine. Borrower
agrees that it will not commingle proceeds of Collateral with any of Borrower's
other funds or property, but will hold such proceeds separate and apart from
such other funds and property and in an express trust for Coast. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
7.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or
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settle any Receivable for less than payment in full, or agree to do any of the
foregoing, except that Borrower may do so, provided that: (a) Borrower does so
in good faith, in a commercially reasonable manner, in the ordinary course of
business, and in arm's length transactions, which are reported to Coast on the
regular reports provided to Coast; (b) no Default or Event of Default has
occurred and is continuing; and (c) taking into account all such discounts
settlements and forgiveness, the total outstanding Loans will not exceed the
Credit Limit. Coast may, at any time after the occurrence of an Event of
Default, settle or adjust disputes or claims directly with Account Debtors for
amounts and upon terms which Coast considers advisable in its reasonable credit
judgment and, in all cases, Coast shall credit Borrower's Loan account with only
the net amounts received by Coast in payment of any Receivables.
7.7 RETURNS. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (a) hold the returned Inventory in trust for
Coast, (b) segregate all returned Inventory from all of Borrower's other
property, (c) conspicuously label the returned Inventory as subject to Coast's
security interest, and (d) immediately notify Coast of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on Coast's request deliver such returned Inventory
to Coast.
7.8 VERIFICATION. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
7.9 NO LIABILITY. Coast shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Coast be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Coast from liability for its
own gross negligence or willful misconduct.
8. ADDITIONAL DUTIES OF THE BORROWER.
8.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply
with the financial and other covenants set forth in the Schedule.
8.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lender's loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance, Coast shall apply such
proceeds in reduction of the Obligations as Coast shall determine in its sole
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Coast shall release to Borrower insurance proceeds with
respect to Equipment totaling less than the amount set forth in Section 8 of the
Schedule, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Coast may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Coast may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Coast copies of all reports made to insurance companies.
8.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in Section 8 of the Schedule, and such other written
reports with respect to Borrower (including budgets, sales projections,
operating plans and other financial documentation), as Coast shall from time to
time reasonably specify.
8.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times but not
less frequently than quarterly and on one (1) Business Day's notice, Coast, or
its agents, shall have the right to perform Audits. Coast shall take reasonable
steps to keep confidential all confidential
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information obtained in any Audit, but Coast shall have the right to disclose
any such information to its auditors, regulatory agencies, and attorneys, and
pursuant to any subpoena or other legal process. The Audits shall be at
Borrower's expense and the charge for the Audits shall be Seven Hundred Fifty
Dollars ($750) per person per day (or such higher amount as shall represent
Coast's then current standard charge for the same), plus reasonable
out-of-pocket expenses. Borrower will not enter into any agreement with any
accounting firm, service bureau or third party to store Borrower's books or
records at any location other than Borrower's Address, without first notifying
Coast of the same and obtaining the written agreement from such accounting firm,
service bureau or other third party to give Coast the same rights with respect
to access to books and records and related rights as Coast has under this Loan
Agreement. Borrower shall also take all necessary steps to assure that this
material accounting and software systems and applications, and those of its
accounting firm, service bureau or any other third party vendor or supplier,
will, on a timely basis, adequately and completely address the Year 2000 Problem
in all material respects.
8.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent, do any of the following:
(a) merge or consolidate with another entity, except in a transaction
in which (i) the owners of the Borrower hold at least fifty percent (50%) of the
ownership interest in the surviving entity immediately after such merger or
consolidation, and (ii) the Borrower is the surviving entity;
(b) acquire any assets, except (i) in the ordinary course of business,
or (ii) in a transaction or a series of transactions not involving the payment
of an aggregate amount in excess of the amount set forth in Section 8 of the
Schedule;
(c) enter into any other transaction outside the ordinary course of
business;
(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(e) store any Inventory or other Collateral with any warehouseman or
other third party;
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis;
(g) make any loans of any money or other assets, except (i) advances
to customers or suppliers in the ordinary course of business, (ii) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(h) incur any debts, outside the ordinary course of business, which
would have a Material Adverse Effect;
(i) guarantee or otherwise become liable with respect to the
obligations of another party or entity;
(j) pay or declare any dividends or distributions on the ownership
interests in Borrower (except for dividends or distributions payable solely in
stock form of ownership interests in Borrower and dividends or distributions
payable by GTI Acquisition Corp. provided it is wholly owned by Virtual
Technology Corporation );
(k) make any change in Borrower's capital structure which would have a
Material Adverse Effect; or
(l) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are
only permitted if no Default or Event of Default is continuing or would occur as
a result of such transaction.
8.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
8.7 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully
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consummate the transactions contemplated by this Agreement.
9. TERM.
9.1 MATURITY DATE. This Agreement shall continue in effect until the
Maturity Date; provided that the Maturity Date shall automatically be extended,
and this Agreement shall automatically and continuously renew, for successive
additional terms of one year each, unless one party gives written notice to the
other, not less than ninety (90) days prior to the Maturity Date or the next
Renewal Date, that such party elects to terminate this Agreement effective on
the Maturity Date or such next Renewal Date. If this Agreement is renewed under
this Section 9.1, Borrower shall pay to Coast a Renewal Fee in the amount shown
in Section 3 of the Schedule. The Renewal Fee shall be due and payable on the
Renewal Date and thereafter shall bear interest at a rate equal to the rate
applicable to the Receivable Loans.
9.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 9.2, Borrower shall pay to Coast an Early Termination Fee in the amount
shown in Section 3 of the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the rate applicable to the Receivable Loans.
9.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Notwithstanding any termination of this Agreement, all of Coast's security
interests in all of the Collateral and all of the terms and provisions of this
Agreement shall continue in full force and effect until all Obligations have
been paid and performed in full; provided that, without limiting the fact that
Loans are subject to the discretion of Coast, Coast may, in its sole discretion,
refuse to make any further Loans after termination. No termination shall in any
way affect or impair any right or remedy of Coast, nor shall any such
termination relieve Borrower of any Obligation to Coast, until all of the
Obligations have been paid and performed in full. Upon payment and performance
in full of all the Obligations and termination of this Agreement, Coast shall
promptly deliver to Borrower termination statements, requests for reconveyances
and such other documents as may be required to fully terminate Coast's security
interests.
10. EVENTS OF DEFAULT AND REMEDIES.
10.1 EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an "Event of Default" under this Agreement, and Borrower shall
give Coast immediate written notice thereof:
(a) Any warranty, representation, statement, report or certificate
made or delivered to Coast by Borrower or any of Borrower's officers, employees
or agents, now or in the future, shall be untrue or misleading and results in a
Material Adverse Effect; or
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit; or
(d) Borrower shall fail to deliver the proceeds of Collateral to Coast
as provided in Section 7.5 above, or shall fail to give Coast access to its
books and records or Collateral as provided in Section 8.4 above, or shall
breach any negative covenant set forth in Section 8.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within five (5) Business Days after the date due; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within ten (10) days after the occurrence of the same; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is
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not cured within any applicable cure period or waived in writing by the holder
of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower or any guarantor of any of the Obligations; or appointment
of a receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect; or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is (i) not
timely controverted, or (ii) not cured by the dismissal thereof within thirty
(30) days after the date commenced; or
(l) revocation or termination of, or limitation or denial of
liability upon, any guaranty of the Obligations or any attempt to do any of the
foregoing, or commencement of proceedings by any guarantor of any of the
Obligations under any bankruptcy or insolvency law; or
(m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or
(n) Borrower or any guarantor of any of the Obligations makes any
payment on account of any indebtedness or obligation which has been subordinated
to the Obligations, other than as permitted in the applicable subordination
agreement, or if any Person who has subordinated such indebtedness or
obligations terminates or in any way limits his subordination agreement; or
(o) Except as permitted under Section 8.5(a), Borrower shall suffer
or experience any Change of Control without Coast's prior written consent, which
consent shall be in the discretion of Coast in the exercise of its reasonable
business judgment; or
(p) Borrower shall generally not pay its debts as they become due, or
Borrower shall conceal, remove or transfer any part of its property, with intent
to hinder, delay or defraud its creditors, or make or suffer any transfer of any
of its property which may be fraudulent under any bankruptcy, fraudulent
conveyance or similar law; or
(q) Borrower shall fail to file a patent application on any
patentable material or register any trademark, copyright or copyrightable
material which is part of the Collateral and is of sufficient value to warrant
such protection or advise Coast of the acquisition, creation, existence, filing
on or registration of any such Collateral.
(r) there shall be any Material Adverse Effect.
Coast may cease making any Loans or extending any credit hereunder during any of
the above cure periods.
10.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following:
(a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes Coast without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store or remove any of the Collateral, and remain
on the premises or cause a custodian to remain on the premises in exclusive
control thereof, without charge for so long as Coast deems it reasonably
necessary in order to complete the enforcement of its rights under this
Agreement or any other agreement;
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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provided, however, that should Coast seek to take possession of any of the
Collateral by Court process, Borrower hereby irrevocably waives:
(i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession;
(ii) any demand for possession prior to the commencement of
any suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and
make it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such locations
as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge. Coast is hereby granted a license or other right to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall inure to Coast's
benefit;
(f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; and
(h) Demand and receive possession of any of Borrower's federal and
state income tax returns and the books and records utilized in the preparation
thereof or referring thereto.
All attorneys' fees, expenses, costs, liabilities and obligations incurred
by Coast (including attorneys' fees and expenses incurred in connection with
bankruptcy) with respect to the foregoing shall be due from the Borrower to
Coast on demand. Coast may charge the same to Borrower's loan account, and the
same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate applicable to
the Obligations shall be increased by an additional three percent per annum.
10.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
(a) Notice of the sale is given to Borrower at least ten (10) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least ten (10) days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m Los
Angeles, California time;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required; and
(f) With respect to any sale of any of the Collateral, Coast may (but
is not obligated to) direct any prospective purchaser to ascertain directly from
Borrower any and all information concerning the same.
Coast shall be free to employ other methods of noticing and selling the
Collateral, in its discretion, if they are commercially reasonable.
10.4 POWER OF ATTORNEY. Borrower grants to Coast an irrevocable power of
attorney coupled with an interest, authorizing and permitting Coast (acting
through any of its employees, attorneys or agents) at any time, at its option,
but without obligation, with or without notice to Borrower, and at Borrower's
expense, to do any or all of the following, in Borrower's name or otherwise, but
Coast agrees to exercise the following powers in a commercially reasonable
manner:
(a) Execute on behalf of Borrower any documents that Coast may, in
its sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of Borrower
or Coast, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same;
(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and execute all
releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to secure
the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim that
relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books
or records belonging to, or relating to, Borrower to give Coast the same rights
of access and other rights with respect thereto as Coast has under this
Agreement; and
(k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other present or future agreements.
Any and all sums paid and any and all costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast (including attorneys' fees and
expenses incurred pursuant to bankruptcy) with respect to the foregoing shall be
added to and become part of the Obligations, and shall be payable on demand.
Coast may charge the foregoing to Borrower's loan account and the foregoing
shall thereafter bear interest at the same rate applicable to the Receivable
Loans. In no event shall Coast's rights under the foregoing power of attorney or
any of Coast's other rights under this Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
Borrower shall pay, indemnify, defend, and hold Coast and each of its
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
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officers, directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all attorneys fees and disbursements and other
costs and expenses actually incurred in connection therewith (as and when they
are incurred and irrespective of whether suit is brought), at any time asserted
against, imposed upon, or incurred by any of them in connection with or as a
result of or related to the execution, delivery, enforcement, performance, and
administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any Indemnified Person is a party thereto), or any act, omission, event
or circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person hereunder with respect to any Indemnified Liability that a
court of competent jurisdiction finally determines to have resulted from the
gross negligence or willful misconduct of such Indemnified Person. This
provision shall survive the termination of this Agreement and the repayment of
the Obligations.
10.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the costs, expenses,
liabilities, obligations and attorneys' fees incurred by Coast in the exercise
of its rights under this Agreement, second to the interest due upon any of the
Obligations, and third to the principal of the Obligations, in such order as
Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
10.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Coast shall have all the other rights and remedies accorded a
secured party in equity, under the Code, and under all other applicable laws,
and under any other instrument or agreement now or in the future entered into
between Coast and Borrower, and all of such rights and remedies are cumulative
and none is exclusive. Exercise or partial exercise by Coast of one or more of
its rights or remedies shall not be deemed an election, nor bar Coast from
subsequent exercise or partial exercise of any other rights or remedies. The
failure or delay of Coast to exercise any rights or remedies shall not operate
as a waiver thereof, but all rights and remedies shall continue in full force
and effect until all of the Obligations have been indefeasibly paid and
performed.
11. GENERAL PROVISIONS.
11.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations two (2) Business Days after
receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM Los Angeles, California time,
on any day shall be deemed received on the next Business Day. Coast shall be
entitled to charge Borrower's account for such two (2) Business Days of
"clearance" or "float" at the rate(s) set forth in Section 3 of the Schedule on
all checks, wire transfers and other items received by Coast, regardless of
whether such two (2) Business Days of "clearance" or "float" actually occur, and
shall be deemed to be the equivalent of charging two (2) Business Days of
interest on such collections. This across-the-board two (2) Business Day
clearance or float charge on all collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Coast's financing of Borrower.
Coast shall not, however, be required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to Coast in its sole
discretion, and Coast may charge Borrower's loan account for the amount of any
item of payment which is returned to Coast unpaid.
11.2 APPLICATION OF PAYMENTS. Subject to Section 10.5 hereof, all payments
with respect to the Obligations may be applied, and in Coast's sole discretion
reversed and re-applied, to the Obligations, in such order and manner as Coast
shall determine in its sole discretion.
11.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest from the date due to the
date paid at the same rate applicable to the Loans.
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11.4 MONTHLY ACCOUNTINGS. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or omissions.
11.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered, faxed (at time of confirmation of
transmission), or at the expiration of one (1) Business Day following delivery
to the private delivery service, or two (2) Business Days following the deposit
thereof in the United States mail, with postage prepaid.
11.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
11.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
11.8 WAIVERS. The failure of Coast at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any Default shall not waive or affect any other
Default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
11.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
11.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
11.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
11.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast
for all attorneys' fees (including attorneys' fees and expenses incurred
pursuant to bankruptcy) and all filing, recording, search, title insurance,
appraisal, audit, and other costs incurred by Coast, pursuant to, or in
connection with, or relating to this Agreement (whether or not a lawsuit is
filed), including, but not limited to, any attorneys' fees and costs (including
attorneys' fees and expenses incurred pursuant to bankruptcy) Coast incurs
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in order to do the following: prepare and negotiate this Agreement and the
documents relating to this Agreement; obtain legal advice in connection with
this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's
security interest in, the Collateral; and otherwise represent Coast in any
litigation relating to Borrower. If either Coast or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its costs and attorneys' fees
(including attorneys' fees and expenses incurred pursuant to bankruptcy),
including (but not limited to) attorneys' fees and costs incurred in the
enforcement of, execution upon or defense of any order, decree, award or
judgment. Borrower shall also pay Coast's standard charges for returned checks
and for wire transfers, in effect from time to time. All attorneys' fees, costs
and charges (including attorneys' fees and expenses incurred pursuant to
bankruptcy) and other fees, costs and charges to which Coast may be entitled
pursuant to this Agreement may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.
11.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations. Coast may assign its rights and
delegate its duties hereunder by the sale of assignment or participation
interests, all without the consent of Borrower. Coast reserves the right to
syndicate all or a portion of the transaction created herein or sell, assign
transfer, negotiate, or grant participations in all or any part of, or any
interest in Coast's rights and benefits hereunder. In connection with any such
syndication, assignment or participation, Coast may disclose all documents and
information which Coast now or hereafter may have relating to Borrower or
Borrower's business. To the extent that Coast assigns its rights and obligations
hereunder to a third Person, Coast thereafter shall be released from such
assigned to Borrower.
11.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
11.15 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used
in this Agreement for convenience. Borrower and Coast acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise.
11.16 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the internal laws of the State of California, without
regard to its conflicts of law principles. As a material part of the
consideration to Coast to enter into this Agreement, Borrower (a) agrees that
all actions and proceedings relating directly or indirectly to this Agreement
shall, at Coast's option, be litigated in courts located within California, and
that the exclusive venue therefor shall be Los Angeles County; (b) consents to
the jurisdiction and venue of any such court and consents to service of process
in any such action or proceeding by personal delivery or any other method
permitted by law; and (c) waives any and all rights Borrower may have to object
to the jurisdiction of any such court, or to transfer or change the venue of any
such action or proceeding.
Remainder of page intentionally left blank
19
<PAGE> 23
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
11.17 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE
THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT
OF, OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
VIRTUAL TECHNOLOGY CORPORATION
By: /s/ Gregory Appelhof
------------------------
Name: Gregory Appelhof
Title: President
And by: /s/ John L. Harvatine
------------------------
Name: John L. Harvatine
Title: Chief Financial Officer
GTI ACQUISITION CORPORATION
By: /s/ Gregory Appelhof
------------------------
Name: Gregory Appelhof
Title: President
And by: /s/ John L. Harvatine
------------------------
Name: John L. Harvatine
Title: Chief Financial Officer
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific
Bank
By: /s/ John Steiner
--------------------------
Name: John Steiner
Title: Vice President
20
<PAGE> 24
- --------------------------------------------------------------------------------
COAST BUSINESS CREDIT(R)
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: VIRTUAL TECHNOLOGY CORPORATION
ADDRESS: 3100 WEST LAKE STREET, STE., 410
MINNEAPOLIS, MN 55416
BORROWER: GTI ACQUISITION CORPORATION
ADDRESS: 7615 GOLDEN TRIANGLE DRIVE, STE., G
MINNEAPOLIS, MN 55344
DATE: FEBRUARY 11, 1999
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Bank, and the
above-borrower of even date.
================================================================================
SECTION 2 - CREDIT FACILITIES
SECTION 2.1 - CREDIT LIMIT: Loans in a total amount at any time
outstanding not to exceed the lesser of a
total of TEN MILLION DOLLARS
($10,000,000.00) at any one time outstanding
(the "Maximum Dollar Amount"), or the sum of
(a), (b), (c), (d) and (e) below:
(a) Receivable Loans in an amount not
to exceed 80% of the amount of
Borrower's Eligible Receivables (as
defined in Section 1 of the
Agreement) which amount shall be
increased to 85% of Borrower's
Eligible Receivables (as defined in
Section 1 of the Agreement) in the
event Borrower's dilution is less
than 5%, plus
(b) Inventory Loans, subject to an
appraisal acceptable to Coast, in
an amount not to exceed the lesser
of:
(1) fifty percent (50%) of the
value of Borrower's Eligible
21
<PAGE> 25
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
Inventory (as defined in
Section 1 of the Agreement),
calculated at the lower of
cost or market value and
determined on a first-in,
first-out basis, or
(2) Five Million Dollars
($5,000,000.00), plus
(c) Equipment Acquisition Loans, to be
drawn within two and one-half (2.5)
years from the date hereof, in
minimum advances of Fifty Thousand
Dollars ($50,000), followed by a
twenty-four (24) month monthly
amortization of principal
commencing April 1, 1999 plus
interest commencing March 1, 1999
with the remaining balance due on
February 28, 2002, in a total
amount not to exceed the lesser of:
(1) eighty percent (80%) of the
cost of new Equipment (after
subtracting taxes and
installation charges), or
(2) Two Hundred Fifty Thousand
Dollars ($250,000.00), plus,
(d) A Term Loan in the original
principal amount of Five Hundred
Thousand Dollars ($500,000.00) (the
"Term Loan"). The Term Loan will be
repayable in twenty-four (24) equal
monthly installments of principal
commencing April 1, 1999 plus
interest commencing March 1, 1999,
plus
(e) Acquisition Loans secured by the
assets of the target company as
reasonably needed by Borrower in
furtherance of its business plan
subject to Coast's standard
approval process, including but not
limited to, appraisals, analysis,
business judgment, fees, due
diligence and documentation, in
form and substance acceptable to
Coast.
The availability of the Equipment Acquisition Loans will be subject to Borrower
maintaining a Debt Service Coverage Ratio (as defined in Section 1 of the
Agreement) of not less than 1.25 : 1.00 at all times during the Term hereof.
================================================================================
22
<PAGE> 26
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
SECTION 3 - INTEREST AND FEES
SECTION 3.1 - INTEREST RATE ON
RECEIVABLE AND
INVENTORY LOANS: A rate equal to the Prime
Rate plus 1.50% per annum,
calculated on the basis of a
360-day year for the actual
number of days elapsed. The
interest rate applicable to the
Receivable Loans and Inventory
Loans shall be adjusted monthly
as of the first day of each
month, and the interest to be
charged for each month shall be
based on the highest Prime Rate
in effect during the prior month,
but in no event shall the rate of
interest charged on any Loans in
any month be less than 9.0% per
annum.
SECTION 3.1 - INTEREST RATE ON
EQUIPMENT
ACQUISITION
LOANS AND
TERM LOAN: A rate equal to the Prime
Rate plus 2.0% per annum,
calculated on the basis of a
360-day year for the actual
number of days elapsed. The
interest rate applicable to the
Equipment Acquisition Loans and
Term Loan shall be adjusted
monthly as of the first day of
each month, and the interest to
be charged for each month shall
be based on the highest Prime
Rate in effect during the prior
month, but in no event shall the
rate of interest charged on any
Loans in any month be less than
9.0% per annum.
SECTION 3.1 - MINIMUM MONTHLY
INTEREST: An amount equal to the Interest
Rate applicable to the Term Loan
described above charged against
an outstanding daily loan balance
of forty percent (40%) of the
Maximum Dollar Amount.
SECTION 3.1 - UNUSED LINE FEE: An amount equal to 0.375% will
be charged against the difference
between the greater of the daily
outstanding loan balance or the
Minimum Monthly Interest, and the
Maximum Dollar Amount.
SECTION 3.2 - LOAN FEE: One Hundred Fifty Thousand
Dollars ($150,000.00), such
amount being fully earned on
the Closing Date, and payable One
Hundred Thousand Dollars
($100,000.00) on the Closing Date
and Twenty-five Thousand Dollars
($25,000.00) on each of the first
and second anniversaries of the
Closing Date.
SECTION 3.2 - FACILITY FEE: $5,000.00 per quarter, payable on
the Closing Date (prorated for
any partial quarter at the
beginning of the term of this
Agreement).
23
<PAGE> 27
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
SECTION 9.1 - RENEWAL FEE: 0.50% of the Maximum Dollar
Amount per year commencing Year
4.
SECTION 9.2 - EARLY TERMINATION
FEE: An amount equal to three percent
(3%) of the Maximum Dollar Amount
(as defined in the Schedule), if
termination occurs on or before
the first anniversary of the
Closing Date of this Agreement;
two percent (2%) of the Maximum
Dollar Amount, if termination
occurs after the first
anniversary and on or before the
second anniversary of the Closing
Date of this Agreement; and one
percent (1%) of the Maximum
Dollar Amount, if termination
occurs thereafter.
================================================================================
SECTION 5 - CONDITIONS PRECEDENT
SECTION 5.2 - MINIMUM
AVAILABILITY: $750,000.00 at funding
SECTION 5.13 - OTHER DOCUMENTS
AND AGREEMENTS: 1. Joint and Several Borrower
Rider;
2. Landlord Waivers and
Agreements;
3. UCC-1 financing statements,
fixture filings and
termination statements;
4. Security Agreements
(including those covering
copyrights, patents and
trademarks);
5. Shareholders' subordination
agreements;
6. Warrants;
7. Warehouse Agreements; and
8. Stock Pledge Agreement.
================================================================================
SECTION 6 - REPRESENTATIONS, WARRANTIES AND COVENANTS
SECTION 6.2 - PRIOR NAMES OF
BORROWER: Herold Marketing Association,
Inc.
SECTION 6.2 - PRIOR TRADE NAMES
OF BORROWER: GTZ
SECTION 6.2 - EXISTING TRADE NAMES
OF BORROWER: GTZ, Graphics Technologies, Inc.,
ETC, Emerging Technoligies
Corporation
24
<PAGE> 28
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
SECTION 6.3 - OTHER LOCATIONS AND
ADDRESSES: 4685 South Ash Ave., Tempe, AZ
85282
233 Needham Street, Newton, MA
02464
1422 Westlake Street,
Minneapolis, MN 55416
SECTION 6.10 - MATERIAL ADVERSE
LITIGATION: None.
SECTION 6.10 - FUTURE CLAIMS AND
LITIGATION: Borrower will promptly inform
Coast in writing of any claim,
proceeding, litigation or
investigation in the future
threatened or instituted by or
against Borrower involving any
single claim of Fifty Thousand
Dollars ($50,000.00) or more, or
involving One Hundred Thousand
Dollars ($100,000.00) or more in
the aggregate.
===============================================================================
SECTION 8 - ADDITIONAL DUTIES OF BORROWER
SECTION 8.1 - OTHER PROVISIONS: 1. Daily remittances shall be
collected via a lockbox in
form and substance approved
by Coast.
2. Borrower shall have no
accounts payable over
ninety (90) days past
invoice date at the time of
funding.
3. All of Borrower's
applicable taxes shall be
paid and current at the
time of funding and at all
times during the Term of
the Loan and Security
Agreement.
4. Borrower shall ensure that
Coast is granted a first
priority perfected security
interest on all of
Borrower's, and Borrower's
subsidiaries', tangible and
intangible assets
including, without
limitation, accounts
receivables, inventory,
machinery and equipment,
and all other tangible and
intangible assets including
patents, trademarks and/or
copyrights.
5. Borrower shall have
received additional
subordinated debt or equity
of not less than Four
Million Dollars
($4,000,000.00) prior to
the Closing Date.
6. Subordination of
shareholders' debt, in form
and substance acceptable to
Coast.
7. Eligible Inventory shall
include the Inventory
located at Kintetsu
California and
Massachusetts warehouse
locations
25
<PAGE> 29
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
provided that (i) Coast
receives Warehouseman
agreements, in form and
substance acceptable to
Coast, from Kintetsu, and
(ii) Borrower , Hitachi and
Kintetsu enter into a
written agreement in
connection with these
locations satisfactory to
Coast and it's counsel.
8. Each Borrower shall be
jointly and severally
liable for each of the
other Borrower's Loans
under the Loan and Security
Agreement.
9. Each Borrower shall
guarantee all amounts due
and owing of each and every
other Borrower under the
Loan and Security
Agreement.
10. The Collateral of each of
Borrower shall not only
secure all amounts due and
owing by that Borrower, but
shall secure all amounts
due and owing by each and
every other Borrower under
the Loan and Security
Agreement.
11. Virtual Technology
Corporation ("VTC") shall
execute and issue a warrant
to Coast with respect to
shares of voting common
stock of VTC representing
500,000 shares of common
stock with a term of three
(3) years and an aggregate
exercise price equal to the
average stock price of the
past thirty (30) trading
days immediately preceding
the Closing Date. The
warrant shall include
standard and customary
issuer representations,
warranties and such other
provisions as Coast shall
require, in form and
substance acceptable to
Coast.
12. Coast shall receive, on or
before the Closing Date, an
opinion of Borrower's
counsel with respect to the
warrant, in form and
substance acceptable to
Coast.
13. Borrower shall at all times
during the Term hereof,
maintain a minimum
consolidated Tangible Net
Worth of not less than 80%
of the proforma net worth
prior to funding.
14. Review of stock balancing
agreements satisfactory to
Coast.
15. Credit check on Account
Debtor Comtrade acceptable
to Coast.
16. Satisfactory review by
Coast and its counsel of
the IBM
26
<PAGE> 30
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
Credit Corporation
floor plan agreement
covering Entex purchases.
SECTION 8.2 - INSURANCE: Subject to the limitations set forth in
Section 8.2 of the Agreement, Coast
shall release to Borrower insurance
proceeds with respect to Equipment
totaling less than Fifty Thousand
Dollars ($50,000.00).
SECTION 8.3 - REPORTING: Borrower shall provide Coast with the
following:
1. Monthly Receivable agings, aged by
invoice date, within five (5) days
after the end of each month.
2. Monthly accounts payable agings,
aged by invoice date, and
outstanding or held check registers
within five (5) days after the end
of each month.
3. Weekly perpetual inventory reports
for the Inventory valued on a
first-in, first-out basis at the
lower of cost or market (in
accordance with GAAP), which
reports shall also report by SKU
listing, products on hand, cost,
extended cost, and amount sold, and
such other inventory reports as are
reasonably requested by Coast, all
within one (1) Business Day
following the end of each week.
4. Monthly internally prepared
financial statements, as soon as
available, and in any event within
thirty (30) days after the end of
each month.
5. Quarterly internally prepared
financial statements, as soon as
available, and in any event within
forty-five (45) days after the end
of each fiscal quarter of Borrower.
6. Quarterly customer lists, including
customer name, address, and phone
number.
7. Annual financial statements, as
soon as available, and in any event
within ninety (90) days following
the end of Borrower's fiscal year,
containing the unqualified opinion
of, and certified by, an
independent certified public
accountant acceptable to Coast.
SECTION 8.5 - NEGATIVE COVENANTS
(ACQUIRED ASSETS): Fifty Thousand Dollars ($50,000.00).
================================================================================
27
<PAGE> 31
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
- ------------------------------------------------------------------------------
SECTION 9 - TERM
SECTION 9.1 - MATURITY DATE: March 31, 2002 subject to automatic
renewal as provided in Section 9.1 of
the Agreement, and early termination
as provided in Section 9.2 of the
Agreement.
28
<PAGE> 1
EXHIBIT 99.6(d)
November 16, 1998
Steven Antebi
Fontenelle, L.L.C.
345 North Maple Drive #358
Beverly Hills, CA 90210
Dear Steven:
This letter outlines a proposed relationship between our companies. Effective
immediately, Fontenelle, L.L.C. will serve as adviser to Virtual Technology
Corporation for a period of one year. Accordingly, Fontenelle, L.L.C. will
provide analysis and advice for capital structure, acquisitions and capital
markets. In exchange for these services, Virtual Technology Corporation shall
issue 225,000 unrestricted common shares to Fontenelle, L.L.C. and 1,000,000
three-year warrants to purchase additional shares at $1.00 per share.
If the terms outlined above are consistent with your understanding, please sign
and return this agreement. We look forward to a mutually rewarding association.
/s/ Kenneth Israel
---------------------------------------------------
Kenneth Israel (for Virtual Technology Corporation)
/s/ Steven Antebi
--------------------------------------------------
Steven Antebi (for Fontenelle, L.L.C.)
<PAGE> 1
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in this Registration Statement of Virtual Technology
Corporation on Form 10-SB of our report dated May 13, 1998, appearing in this
Registration Statement.
/s/ LURIE, BESIKOF, LAPIDUS & CO., LLP
Minneapolis, Minnesota
February 11, 1999
<PAGE> 1
INDEPENDENT AUDITOR'S CONSENT
We consent to the inclusion in this registration statement of Virtual
Technology Coporation on Form 10-SB of our report dated April 11, 1997.
/s/ COPELAND BUHL & COMPANY P.L.L.P.
Wayzata, Minnesota
February 11, 1999
<PAGE> 1
EXHIBIT 99.12(c)
[SAMUEL T. KANTOS & ASSOCIATES LETTERHEAD]
February 11, 1998
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form 10-SB of our
reports dated March 4, 1998, on our audits of the financial statements of
Herold Marketing Associates in the financial statement schedules of Virtual
Technology Corporation. We also consent to the references to our firm under
the captions "Experts" and "Selected Historical and Pro Forma Financial Data."
/s/ Samuel T. Kantos
<PAGE> 1
EXHIBIT 12(d)
February 12, 1999
U.S. Securities and Exchange Commission
450 Fifth Street N.W.
Washington, D.C. 20549
Re: Virtual Technology Corporation
Ladies and Gentlemen:
We are writing pursuant to Rule 304(a)(3) of Regulation S-B to advise you that,
as the firm that audited the financial statements of Virtual Technology
Corporation ("VTC") as of and for the fiscal year ended January 31, 1997, we
have reviewed the disclosures in VTC's Registration Statement on Form 10-SB
under Part II, Item 3 and that we agree with the statements made by VTC
thereunder.
Very truly yours,
/s/ Copeland, Buhl and Company, PLLP
