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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 12(g) of
The Securities Exchange Act of 1934
I/OMAGIC CORPORATION
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(Name of Small Business Issuer in its charter)
Nevada 86-0359523
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(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
6 Autry, Irvine, California 92618
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(Address of principal executive offices) (Zip Code)
(949) 727-7466
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(Issuer's Telephone Number, Including Area Code)
Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
------------------- ------------------------------
None None
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Securities to be registered pursuant to section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001
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(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
A. BUSINESS DEVELOPMENT
1. FORM AND YEAR OF ORGANIZATION
I/OMagic Corporation, a California corporation ("I/OMagic
California") was incorporated under the laws of the State of California on
September 30, 1993. I/OMagic offers products in both the personal computer
and the consumer electronics marketplace. These products include a variety of
peripheral upgrades for desktop and portable applications. I/OMagic's
customers include many of the largest North American personal computer mass
merchants and consumer electronic retailers, including, but not limited to,
Comp USA, Inc., Circuit City and OfficeMax.
2. ACQUISITION AGREEMENT
I/OMagic California entered into a Plan of Exchange and Acquisition
Agreement (the "Acquisition Agreement") with Silvercrest International, Inc.,
a Nevada corporation ("Silvercrest") on March 18, 1996. Pursuant to the
Acquisition Agreement, Silvercrest issued 6,570,583 shares of common stock in
exchange for 6,570,583 shares of common stock of I/OMagic California, which
constituted 100% of the issued and outstanding shares of I/OMagic California.
Prior to the execution of the Acquisition Agreement, Silvercrest was a public
company with dormant operations. Silvercrest's common stock was listed on the
Over-The-Counter Bulletin Board market as of March 1, 1996. Silvercrest
changed its name to I/OMagic Corporation, a Nevada corporation, on March 20,
1996. Effective as of the date of the Acquisition Agreement, the board of
directors of Silvercrest resigned and I/OMagic's directors were appointed as
the new Board of Directors. The acquisition has been treated as a
recapitalization of I/O Magic California, with I/OMagic California as the
accounting acquirer (reverse acquisition). As a result of the acquisition,
I/OMagic California, became a wholly-owned subsidiary of I/OMagic
Corporation, a Nevada corporation. I/OMagic is traded publicly on the
Over-The-Counter Bulletin Board under the symbol "IOMC."
Unless otherwise indicated, all references to the "Company" and
I/OMagic include the consolidated operations and business of I/OMagic
Corporation, a Nevada corporation, and I/OMagic Corporation, a California
corporation.
B. BUSINESS OF ISSUER
1. PRINCIPAL PRODUCTS AND THEIR MARKETS
I/OMagic offers products in both the personal computer ("PC") and
the consumer electronics marketplace. These products include a variety of
peripheral upgrades for desktop and portable applications. I/OMagic's
customers include many of the largest North American personal computer mass
merchants and consumer electronic retailers, including, but not limited to,
Comp USA, Inc., Circuit City and OfficeMax.
The Company's product mix is constantly adjusted to reflect current
market conditions. Currently, the Company' s products include: CD Read Only
Memory ("ROM") drives, CD-Read/Write drives, Digital Video Disc ("DVD") drives,
audio cards, video display cards, modems, video conferencing cameras, and other
peripheral accessories. The Company's strategy is to constantly monitor market
demand and to update its product mix to reflect after-market conditions.
a. OPTICAL STORAGE DRIVES
Approximately 50% of the Company's gross revenues generated from
January 1, 1999 through June 30, 1999 were generated through the sale of a
variety of CD ROM drives. These drives include CD-ROM playback, CD
Readable/Writable ("CDRW") and DVD Playback for DVD format movies and other
applications. The primary function of all of these products is to provide an
interface, or link, between reading (playback) and writing (storing)
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various data formats that are interfaced with both desktop and portable
computer architecture. These products are sold throughout North America to
virtually all of the Company's customers. This market segment tends to
constantly shift toward greater speed and functionality. The Company believes
that this shift has historically been created due to market opportunities as
consumers constantly search for the most advanced features and standards
available.
b. AUDIO PERIPHERAL UPGRADE CARDS
Approximately 10% of the Company's gross revenues during the first six
months of calendar 1999 were generated through the sale of its audio peripheral
upgrade cards. I/OMagic developed the Tempo PC Card, which was launched during
the fourth quarter of 1993 as one of the first Personal Computer Memory Card
Industry Association ("PCMCIA") audio peripheral upgrade cards to provide audio
upgrade functionality for the portable marketplace. While this product was
discontinued due to technical obsolescence, the Company changed its marketplace
position by introducing a variety of peripheral audio cards for desktop
applications to address specific marketplace demands, including computer games,
business applications and other audio applications. The Company's audio product
mix provides a range of technologies based upon specifications geared too the
specific application. These applications include the basic standard video
conferencing application to a full range of audio intensive gaming features.
I/OMagic's key suppliers constitute a number of high volume computer peripheral
manufacturers. Two key suppliers of the Company are also large shareholders of
the Company. I/OMagic believes that it is provided extended interest free trade
credit, favorable pricing and early access to key technologies.
c. VIDEO PERIPHERAL UPGRADE CARDS
Approximately 12% of the Company's gross revenues during the first
six months of calendar 1999 were generated through the sale of its video
peripheral upgrade cards and video capture cameras. I/OMagic developed the
Focus Video Capture Card, which was launched during the first quarter of 1994
as one of the first PCMCIA video capture cards to address the portable
computer market. While this product was eventually discontinued due to
technical obsolescence, the Company changed its marketplace position by
offering a variety of video display cards addressing the business and gaming
market segments. The Company's product mix currently includes three different
video cards addressing the various technological needs of the end user. In
addition, the Company markets MagicVision which is a camera intended to
facilitate video conferencing and other applications that provide video
capture capabilities.
d. MODEMS, FLOPPY DISK DRIVES, SCANNERS, KEYBOARDS
AND OTHER PERIPHERALS
The balance of the Company's gross revenues during the first six
months of calendar 1999 (approximately 28%) were generated through the sale
of a variety of products including modems, floppy disk drives, scanners,
keyboards and other peripherals. As of the date of this filing, the Company
is one of the first distributors of scanners designed specifically for
portable computers by the name of MobileScan. The composition of this product
mix varies according to market demands.
The Company believes that its primary strategic advantage is its
ability to expeditiously identify and adjust to an ever-evolving marketplace.
This ability was evidenced in its quick adjustment to changes in the CD ROM
and the video and audio card markets from 1993-1999. As retail mass merchants
consolidate, the Company believes that its ability to offer a wide assortment
of peripheral products addressing current technological needs provides it
with a competitive advantage. As noted more fully below, the Company's major
shareholders provide substantial Asian manufacturing capacity in a majority
of its product lines. These relationships provide primarily three benefits:
(i) cost advantages associated with a reduction in unit costs brought about
by increased size of production facilities; (ii) substantial capacity well in
excess of the Company's current needs and (iii) favorable trade financing
terms.
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e. INDUSTRY OVERVIEW
The Company believes that the recent emergence of the Internet,
coupled with the ready availability of basic, low priced personal computers
and personal device applications ("PDA") provides consumers with the platform
to technologically improve utilizing, among other things, the products
provided by the Company. In the aggregate, the Company's product mix focuses
upon the enhancement of the functionality of personal computers.
The lower priced PC market had a substantial impact on the U.S.
consumer segment, as 50 percent of all U.S. households had a PC in 1998,
according to DataQuest, Inc. The PC industry has made great strides into the
home market. In 1995, just 27 percent of U.S. households had a PC. The PC
industry received a boost in the second quarter of 1999 as worldwide PC
shipments grew 26.4 percent over the second quarter of 1998, primarily
because of lower system prices, economic recovery, and the Internet,
according to DataQuest, Inc.
In 2003, the portables market is projected to generate $99.91
billion in worldwide revenues. (Frost & Sullivan, Report 5680-71, Publication
Date: June 1997.)The total revenues for the market for portable computers,
pen computers, palmtops, peripherals, and PC Cards (the "portables market")
was $33.52 billion in 1996. In 2003, the portables market is projected to
generate $99.91 billion in worldwide revenues. (Frost & Sullivan, Report
5680-71, Publication Date: June 1997.) The total revenues for the market for
portable computers, pen computers, palmtops, peripherals, and PC Cards (the
"portables market") was $33.52 billion in 1996. In 2003, the portables market
is projected to generate $99.91 billion in worldwide revenues. (Frost &
Sullivan, Report 5680-71, Publication Date: June 1997).
As noted below under 2. Distribution Methods, many of the Company's
competitors specialize in providing specific horizontal applications such as
mass data storage, communications, multimedia and networking. The Company has
focused upon a comprehensive vertical solution strategy , providing a
technologically diverse product mix designed to address many of the critical
peripheral upgrade needs of consumers.
2. DISTRIBUTION METHODS
a. MANUFACTURING
All of the Company's products are manufactured in Asia. Two of the
Company's major shareholders, Behavioral Technology Corporation ("BTC") and
Lung Hwa Electronics Co., Ltd. ("Lung Hwa") provide in excess of 60% of the
Company's current product mix. The combined capacity of these manufacturers
is well in excess of the current needs of the Company. Both of these
manufacturers also expend substantial sums in research and development of new
computer peripheral products.
BTC has provided a credit line for inventory purchases in the amount
of $5 million, non-interest bearing over the initial sixty days, subordinated
to any institutional financing. As of the date of this filing, the Company
has not entered into any institutional debt financing.
Lung Hwa has provided a credit line for inventory purchases in the
amount of $2 million, non-interest bearing over the initial sixty days.
Both BTC and Lung Hwa have not encumbered any assets of the Company
in connection with the foregoing credit lines.
I/OMagic provides less than 10% of the aggregate revenues of each
BTC and Lung Hwa.
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b. DISTRIBUTION
Most product sales are currently conducted through purchase orders
placed by large retail customers. The Company has a variety of agreements
with a number of these retailers. These agreements include terms related to
pricing and orders, advertising and marketing, returns and rebates, if
applicable. These agreements are considered industry standard and are not
issued by all retailers. Customers have previously submitted, and are
expected to continue to submit, purchase orders to the Company for its
products. The Company believes that it has the opportunity to build strategic
alliances with these and other channels. Retail customers include Micro
Center, Fry's Electronics, Circuit City, COMPUSA, OfficeMax, ABC Warehouse,
Navy Exchange Service Command, PC Mall, and Midwest Micro.
In addition, the Company has developed an electronic commerce site
entitled MagicBuys.com which is currently in beta test. While there is no
assurance, the Company intends to officially launch this site during the
first quarter of 2000. The Company intends that this Internet site will
provide a wide variety of peripheral applications and brands.
3. STATUS OF NEW PRODUCTS.
The Company believes that its close relationship with its Asian
manufacturers, coupled with its extensive retail presence, allows it to
continuously monitor technological developments as well as market trends. The
Company is currently focusing upon the following market trends:
a. OPTICAL STORAGE DRIVES
The Company anticipates the continued release of higher performance
CD ROM drives incorporating improved functionality. For example, the Company
anticipates during the next 12 months that it will introduce faster DVD
drives with multiple functionality. During this same period, the Company
further intends to release CD read/writable drives capable of writing and
rewriting at an accelerated pace relative to currently available technology.
There is no assurance that the Company will be successful in achieving the
foregoing introduction of products. Further, there is no assurance that in
the event the Company does introduce such technologies that revenues will be
generated from such introductions.
b. AUDIO PERIPHERAL UPGRADE CARDS AND SOLUTIONS
During the 18 month period commencing June 30, 1999 the Company
plans to introduce audio cards supportive of the Dolby digital (AC-3)
standard. This is the standard which has been established for many DVD movie
titles for decoding the five channel audio signal generated by such movies.
The Company believes that this standard will eventually also be adopted by
the game software industry. During this same 18 month period, the Company
intends to: (i) introduce a line of speaker systems that integrate the
functionality of audio cards into the speaker, thereby eliminating the need
for a separate audio card and (ii) introduce MP-3 players that allows
end-users to digitally record audio data over the Internet, such as music
titles. There is no assurance that the Company will be successful in
achieving the foregoing introduction of products. Further, there is no
assurance that in the event the Company does introduce such technologies that
revenues will be generated from such introductions.
c. VIDEO PERIPHERAL UPGRADE CARDS AND SOLUTIONS
During the 12 month period commencing June 30, 1999 the Company
intends to introduce a line of digital "still-shot" cameras providing the
transportation of images from a camera to a computer. During this same 12
month period the Company intends to introduce a number of video display cards
addressing specific marketplace demands. In June, 1999 the Company introduced
a 32 megabyte video display card providing increased speed, resolution and
color depth relative to previous technology. There is no assurance that the
Company will be successful in achieving the foregoing introduction of
products. Further, there is no assurance that in the event the Company does
introduce such technologies that revenues will be generated from such
introductions.
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4. COMPETITION
In general, there are three key competitive factors which impact
upon the success of personal computer peripheral distribution companies: (i)
time to market; (ii) product value and technology and (iii) market
penetration typically measured by retail "shelf-space"and after sales service.
The Company's competitors include virtually all hardware multi-media
firms selling into North American retail channels. These companies include
Creative Labs (NASDAQ: CREAF) with sales mainly in CD-ROMS, DVD and Sound
Cards and speakers; Hauppage (NASDAQ:HAUP) sales mainly in Multimedia cards;
3Com (NASDAQ: COMS) sales mainly in card LAN; Xircom (NASDAQ: XIRC) sales
mainly in Notebook Netrade Solutions; 3 DFX (NASDAQ: TDFX) sales mainly in
Graphics cards; and Pinnacle Systems, Inc. (NASDAQ: PCLE) sales mainly in
Multi Media cards. In addition, there are private companies, such as Smart
and Friendly, Inc., Hi-Val, Inc., and Digital Research Technologies which
directly compete with portions of the Company's product line.
A number of these companies are better financed and have a longer
operating history then I/OMagic. The market for computer peripherals is
extremely price sensitive and competitive. The composition and identity of
I/OMagic's competitors is constantly changing based upon marketplace
conditions and changes.
While the Company is continuing its development efforts to meet the
requirements of the marketplace, management of the Company believes that the
key to its success will be providing a full line of PC peripheral products,
including those outlined above as well as other products in development.
5. SOURCES OF RAW MATERIAL AND PRINCIPAL SUPPLIERS
The Company does not maintain its own manufacturing or production
facilities, and does not intend to do so in the foreseeable future. The
Company anticipates that its products will be manufactured, and its raw
materials and components will be supplied, by independent companies.
Typically, the purchase order is the Company's "agreement" with the
manufacturer. Therefore, any of these companies could terminate its
relationship with the Company at any time. In the event the Company were to
have difficulties with its present manufacturers and suppliers, the Company
could experience delays in supplying products to its customers. The company
has 100% of its products manufactured overseas. Presently, the Company is
dependent upon BTC and Lung Hwa for manufacture of more than 60% of the
Company's products. Any negative change in the Company's relationship with
BTC or Lung Hwa could have a material adverse impact on the Company's
business, financial condition, and results of operations unless the Company
could quickly find a replacement supplier at the price points provided by the
BTC and Lung Hwa.
6. DEPENDENCE ON MAJOR CUSTOMERS.
In calendar 1998, the Company had sales with three major
customers that each represented approximately 32% (COMPUSA), 26% (Fry's
Electronics) and 17% (Micro Center) of net sales. Similarly, as of December
31, 1998, the Company had three customers that accounted for 47% (COMPUSA),
25% (Fry's Electronics) and 15% (Electronics Boutique) of accounts
receivable. As the Company grows and increases its marketing, its dependence
on its major customers will decrease.
During the six month period ended June 30, 1999, the
Company had sales with three major customers that each represented 46%
(Circuit City), 39% (COMPUSA) and 12% (Fry's Electronics). As of June 30,
1999, the Company had three customers that accounted for 41% (Circuit City),
31% (COMPUSA) and 10%(OFFICEMAX) of accounts receivable. In June, 1999 the
Company engaged OfficeMax as a national retailer of the Company's products.
While there is no assurance, the Company anticipates that the addition of
OfficeMax will diversify the Company's gross revenues among its top customers.
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7. PATENTS, TRADEMARKS, LICENSES, FRANCHISES,
CONCESSIONS, ROYALTY AGREEMENTS AND/OR LABOR CONTRACTS.
a. PATENTS.
The Company does not have any issued or pending patents.
There can be no assurance that the Company will in fact apply for patents
and, even if it were to do so, that such patents would be awarded. Currently,
the Company does not hold patents on any of its products or processes under
development. The Company does, however, treat its technical data as
confidential and relies on internal nondisclosure safeguards, as well as on
laws protecting trade secrets, to protect its proprietary information. There
can be no assurance that these measures will adequately protect the
confidentiality of the Company's proprietary information or that others will
not independently develop products or technology that are equivalent or
superior to those of the Company. The Company may receive in the future
communications from third parties asserting that the Company's products
infringe the proprietary rights of third parties. There can be no assurance
that any such claims would not result in protracted and costly litigation.
Furthermore, the Company has not filed for patent law protection in foreign
countries.
b. TRADEMARKS
The Company has provided substantial sums to establish its brand
identification in the marketplace. While it is difficult to estimate the
exact amount expended since the Company's inception in 1993, during the 18
month period terminating upon June 30, 1999, the Company expended in excess
of $2 million in supporting its brand identification and market presence.
These expenditures have included, but are not limited to, participation in
industry trade shows such as Comdex, RetailVision and Retail Exchange, rebate
programs, promotional advertisements through national retail outlets,
slotting fees which reserve shelf space for the Company's products and
participation in various customer marketing programs and events. The Company
does not have any registered trademark at this time.
8. GOVERNMENT APPROVAL.
No government approval is required for any of the Company's current
products or services.
9. EFFECT OF ANY EXISTING OR PROPOSED GOVERNMENT
REGULATIONS.
Other than normal government regulations that any business encounters,
the Company's business is not effected by government regulations.
10. RESEARCH AND DEVELOPMENT COSTS
The research and development efforts underlying the technology
comprising the eventual products sold by the Company are funded by the
Company's manufacturers. The Company's research and development efforts focus
upon the development of driver software providing a user friendly
installation, user manuals, installation guides, product packaging, marketing
literature and market and sales research. The Company estimates that it
expended approximately $185,000 in connection with these efforts during the
18 month period ending June 30, 1999.
11. COST AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL
LAWS AND REGULATIONS
I/OMagic's business does not involve the use of materials in a
manufacturing process where such materials are likely to result in the
violation of any existing environmental rules and/or regulations. Further,
I/OMagic does not own any real property which would lead to liability as a
land owner. Therefore, I/OMagic does not anticipate any costs associated with
the compliance of environmental laws and regulations.
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12. EMPLOYEES
As of the date hereof, the Company has approximately 50 employees.
The Company hires independent contractors on an "as needed" basis only. The
Company has no collective bargaining agreements with its employees. The
Company believes that its employee relationships are satisfactory. The
Company does not anticipate any further hirings during this fiscal year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information below and elsewhere contains certain
forward-looking statements which reflect the current view of I/OMagic with
respect to future events and financial performance. Wherever used, the words
"expect," "plan," "anticipate," "believe" and similar expressions identify
forward-looking statements.
Any such forward-looking statements are subject to risks
and uncertainties and the Company's future result of operations could differ
materially from historical results or current expectations. Some of these
risks include, without limitation, technical development of products, market
for such products and ongoing competitive pressures in the computer hardware
industry. The Company does not undertake to publicly update or reuse its
forward-looking statements even if experience or future changes make it clear
that any projected results expressed or implied therein will not be realized.
The following information was derived from the Company's
historical financials statements incorporated herein.
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Year Ended Year Ended Six Months Six Months
December 31, December 31, Ended Ended
1998 1997 June 30, June 30,
(audited) (audited) 1999 1998
(unaudited) (unaudited)
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Statement of Operations
Data
Revenue $ 10,714,363 $ 4,034,701 $ 13,083,869 $ 3,799,971
(Net Loss)/Net Profit
per share (338,018) (1,459,527) 348,429 (15,963)
(Net Loss)/Net Profit
per share (0.02) (0.12) 0.01 0.00
Balance Sheet Data
Current Assets 5,973,859 1,931,750 10,416,986 2,696,475
Total Property &
Equipment, Net 133,231 120,007 171,638 123,907
Total Assets 6,128,250 2,072,917 10,618,512 2,841,542
Total Current
Liabilities 5,344,407 1,197,567 4,414,600 1,734,632
Accumulated Deficit (4,350,541) (4,012,523) (4,002,112) (4,028,489)
Stockholder's Equity
(Capital Deficiency) 777,120 (875,350) 6,198,455 (1,098,420)
</TABLE>
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A. SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) COMPARED TO SIX MONTHS
ENDED JUNE 30, 1998 (UNAUDITED)
Revenue for the period ended June 30, 1999 ("1999") was $13,083,869,
compared to revenue for the period ended June 30, 1998 ("1998") of
$3,799,971. The $9,283,898 increase in revenues is primarily attributable to
securing larger retail customers including COMPUSA in July 1998, Circuit City
in April 1999 and Office Max in June 1999, resulting in additional revenues
of approximately $11,105,000 for 1999, offset slightly by a reduction in
sales to smaller retail outlets.
Cost of sales as a percentage of revenue increased from $2,801,298,
or 73.72% in 1998 to $9,905,027, or 75.70% in 1999. Materials purchases as a
percentage of revenue decreased from $2,737,890, or 72.05% in 1998 to
$9,348,056, or 71.45% in 1999. The decrease was primarily due to decreased
product costs that were secured by obtaining overseas vendors. Freight
expenses as a percentage of revenue increased from $63,408, or 1.67% in 1998
to $556,971, or 4.26% in 1999. This increase was primarily due to more
expensive air freight of products in (as opposed to ocean freight) due to
late production by a major overseas vendor. Management of the Company
believes that this situation has been resolved at this time, as production
needs and timing have now been established with overseas vendors, which
should result in lower future freight expenses.
Operating expenses as a percentage of revenue decreased from
$1,269,964, or 33.42% in 1998 to $2,826,729, or 21.61% in 1999. The decrease
is partially due to the fact that most general and administrative expenses
are indirect, and thus increases only slightly as revenues increase, with the
exception of salaries which did increase, but increased less than sales.
Overall, general and administrative expenses increased from $549,895 or
14.47% of revenue in 1998 to $1,287,818, or 9.84% of revenue in 1999.
Selling, marketing and advertising as a percentage of revenue decreased from
$720,069 or 18.95% in 1998 to $1,538,911 or 11.76% in 1999. The decrease is
primarily due to a reduction in the number of rebate programs and the fact
that marketing expenses are not a direct function of sales.
Other income (expense) decreased as a percentage of revenue from
$256,128, or 6.74% in 1998 to ($3,284), or (0.03%) in 1999. Included in 1998,
was one-time other income of $250,000 from the sale of a modem design.
Income taxes for both periods ended June 30, 1999 and 1998,
represent minimum state income taxes. This is due to the fact the Company has
net operating loss carry forwards expiring through 2018 to offset taxable
income for both federal and state purposes.
FISCAL YEAR ENDED DECEMBER 31, 1998 (AUDITED) COMPARED TO FISCAL YEAR ENDED
DECEMBER 31, 1997 (AUDITED)
Revenue for the year ended December 31, 1998 ("1998") was
$10,714,363 compared to revenue for the year ended December 31, 1997 ("1997")
of $4,034,701. The $6,679,662 increase in revenue is primarily attributable
to the addition of COMPUSA in July 1998 and the increase in sales to existing
customers. Part of the increase to existing customers was due to the
Company's expanded product line.
Cost of sales as a percentage of revenue decreased from $3,417,984,
or 84.71% in 1997 to $7,927,533, or 73.99% in 1998. This decrease was
primarily due to decreased product costs from vendors.
Operating expenses as a percentage of revenue decreased from
$2,059,066, or 51.03% in 1997 to $3,376,021, or 31.51% in 1998. The decrease
is primarily due to most general and administrative expenses being indirect
and thus increasing only slightly as sales increase, with the exception of
salaries which did increase, but increased less than sales. In addition, bad
debt decreased by $227,517 in 1998 compared to 1997 due to improved
collection efforts, and the shift in customer base to larger retailers. In
addition, audit expense decreased by $151,030 in 1998 compared to 1997 due to
the change in the Company's outside auditors during the 1997 audit. Selling,
marketing and advertising as a percentage of revenue increased from $642,274,
or 15.92% in 1997 to $2,112,631, or 19.72% in 1998. The increase is primarily
due to significant rebate programs in 1998. The Company did not begin any
rebate programs until the end of December 1997 thus 1997 rebate expense is
negligible.
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Other income (expense) as a percentage of revenue increased from
($16,378), or (0.41%) in 1997 to $251,993, or 2.35% in 1998. Included in 1998
is one-time other income of $250,000 from the sale of a modem design.
Income taxes for both years ended December 31, 1998 and 1997,
represent minimum state income taxes due to the loss position of the Company
at that time.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations and
capital expenditures primarily with cash provided by operating activities,
private securities issuances and securities issuances for product (see
"Private Placement Offerings"). The Company believes that working capital
generated from operations is sufficient to meet current activity. However,
should the Company grow significantly in size through additional large
customers or acquisitions, securities issuances or other financing
arrangements may be necessary.
As the Company expands its distribution activities, it may
experience net negative cash flows from operations, pending an increase in
gross margins, and may be required to obtain additional financing to fund
operations through proceeds from offerings, to the extent available, or to
obtain additional financing to the extent necessary to augment its working
capital through public or private issuance of equity or debt securities.
Although the Company had an increase in revenues and receivables in
1998 compared with 1997, the Company experienced a net loss of $338,018 for
the year ended December 31, 1998 as compared to a net loss of $1,459,527 for
the year ended December 31, 1997. The decrease in the net loss is due to
improved sales, expansion of marketing activities, improved product costs and
the fact that the operating expenses did not increase at the same rate as
sales.
(2) PREVIOUS PRIVATE OFFERINGS
During the fourth quarter of 1995, I/OMagic California conducted an
offering of Units (the "Bridge Units"). Each Bridge Unit consisted of a
$25,000 9% secured promissory note (the "Bridge Notes"), 25,000 warrants
containing an exercise price of $0.05 per share (the "A Bridge Warrants"),
and 25,000 warrants containing an exercise price of $0.95 per share (the "B
Bridge Warrants"). The exercise price of the B Bridge Warrants was reduced by
the amount of $0.04 per month for every 30 days after the first six months
that the Bridge Notes were outstanding to a minimum of $0.50. The Bridge
Notes were due at the earlier of: (i) one year from issuance or (ii) upon the
completion of certain subsequent offerings of securities. The Bridge Notes
were secured by all tangible and intangible assets of the Company with a
first lien, perfected UCC-1 Financing Statement. The Company raised $805,000
in connection with its sale of the Bridge Units. As of the date hereof,
488,868 A Bridge Warrants are outstanding and zero B Bridge Warrants are
outstanding having been called and canceled by the Company on September 11,
1998. The Bridge Notes have been repaid in full and all UCC filings
terminated.
On May 6, 1996, the Company entered into a strategic Alliance
Agreement with Lung Hwa whereby for a consideration of $342,000 from Lung
Hwa, the Company issued 1,000,000 shares of restricted Company common stock.
For this agreement, Lung Hwa also agreed to establish a $1,000,000 line of
unsecured credit in favor of I/OMagic, later increased to $2,000,000. As of
December 1998 and 1997, there were no outstanding borrowings under this
agreement.
During the first half of 1996, the Company conducted an offering of
Units (the "Secondary Units"). Each Secondary Unit consisted of one share of
Common Stock (the "Common Stock") and one Warrant exercisable for one share
of Common Stock at an exercise price of $2.50 per share, subject to
adjustment (the "Secondary Warrants"). The minimum investment was 16,667
Units at $1.50 per Unit ($25,000). The Company raised $853,500 in connection
with its sale of the Secondary Units. In addition, the Company offered each
of the holders of the Bridge Notes the right to exchange their Bridge Notes
for Secondary Units at a price of $1.05 per Unit. $627,500 worth of Bridge
Notes were converted into Secondary Units, leaving $177,500 due and payable
by the Company on the Bridge Notes by October 31, 1996. The full amount due
on the Bridge Notes has been paid by the Company, no balance remains and all
UCC-1 Financing Statements have been terminated.
9
<PAGE>
On December 16, 1996, the Company entered into a private Stock
Purchase Agreement whereby the Company sold 250,000 units. Each unit
consisted of one share of common stock and one warrant the purchase Company
stock exercisable at a price of $1.00 per share for a term of two years. The
warrants have not been exercised and have expired.
On January 8, 1997, the Company commenced a private offering through
Pellett Investments, Inc. under the following terms:
A private offering of a minimum of $600,000 and a maximum of
$2,000,000. The Company offered a maximum of 20 Units at $100,000 each, each
Unit consisting of 20,000 Class A Convertible Preferred Shares (9% coupon,
payable quarterly), convertible into common shares at $2.50 per share; 20,000
Class B Convertible Preferred Shares (9% coupon, payable quarterly),
redeemable and convertible into common shares at $2.50 per share; 20,000
Class A Warrants exercisable for 20,000 common shares at $4.50 per share; and
in the event the Class B Preferred Shares are converted into common shares,
10,000 Class B Warrants exercisable for 10,000 common shares at $5.00 per
share. The Company appointed Pellett Investments, Inc. as the Placement Agent
for the offering at the following compensation: A commission equal to 10% of
the gross proceeds realized from the sale of the Shares; warrants exercisable
for Common Shares at an exercise price of $2.75 per share - the number of
warrants to be issued shall be calculated by dividing the dollars raised into
$3,000,000 and multiplying the quotient by 150,000 warrants; 3% of the gross
proceeds of the subject Offering as nonaccountable expenses; and, upon the
exercise of any Unit Warrants, a solicitation fee equal to 2.5% of the
exercise price of the Unit Warrants.
That offering terminated on March 13, 1997 and no securities were
issued under that offering.
On February 27, 1997, the Company commenced a private offering of a
minimum of $250,000 and a maximum of $1,500,000 (the "February 1997
Offering"). The Company offered for sale a minimum of 100,000 and a maximum
of 600,000 of the Company's Units (the "Units") at $2.50 per Unit. Each Unit
was comprised of one share of Common Stock (the "Common Stock") and one
Warrant exercisable for one share of Common Stock for three years at an
exercise price of $4.50 per share (the "Warrant" or "Unit Warrant" and,
collectively with the Common Stock, the "Units" or "Unit Securities"). The
Offering terminated on May 19, 1997 and the Company received investments in
the February 1997 Offering for 110,000 Units ($275,000 gross proceeds). No
commissions were paid nor warrants issued to brokers in connection with the
February 1997 Offering as no brokers participated.
On June 16, 1997, the Company commenced a private offering of a
minimum of $200,000 and a maximum of $1,500,000 (the "1997 Share Offering").
The Company offered for sale a minimum of 160,000 shares of its Common Stock
(the "Common Stock" or the "Shares") and a maximum of 1,200,000 Shares at
$1.25 each. The minimum purchase was 20,000 Shares ($25,000). The investors
in the February 1997 Offering were offered the opportunity to convert their
investments into this 1997 Share Offering at the lower per share price. The
1997 Share Offering terminated on September 18, 1997. All investors in the
February 1997 Share Offering converted their shares for a total of 220,000
shares being issued pursuant to conversions. Additionally, the Company
received $180,000 in new investments for a total of 144,000 shares. Last, the
Company issued 13,200 shares to a consultant in exchange for services
rendered in connection with the 1997 Share Offering.
On September 19, 1997, the Company entered into a Strategic
Alliance Agreement with Hou Electronics, Inc., a California corporation
("Hou"), whereby for a contribution of $1,250,000 in inventory, $2,000,000
unsecured line of credit, and $250,000 in cash, the Company issued two
million shares of the Company's stock subject to a two year trading
prohibition. The Company also agreed to make a seat available on its board of
directors for a nominee of Hou. As of December 1998 and 1997, there were no
outstanding borrowings under this agreement. During the six months ended June
30, 1999, the unsecured line was mutually terminated.
On June 1, 1998, the Company offered up to $250,000 worth of units
of its securities with each unit consisting of a $10,000 note bearing
interest at a rate of 10% per annum, repayable in full ninety days after the
declaration of effectiveness of a registration statement, as defined, or
twelve months from the date of sale whichever comes first; and, one warrant
exercisable at $1.00 of 30% of the face value of the note and then divided by
the price per share as set forth
10
<PAGE>
in the registration statement, as defined. Through June 1998, the Company
sold units to accredited investors to raise $250,000. As of June 30, 1999,
the Company repaid $205,000 of the notes, plus accrued interest and all
warrants have expired. The remaining $45,000 and accrued interest was paid in
July 1999.
Effective February 3, 1999, I/OMagic entered into a Subscription
Agreement with BTC wherein BTC received 16,666,667 shares of restricted
Common Stock valued at $0.30 per share (based on a closing price of $0.31 on
February 3, 1999) in exchange for $5 million in inventory.
(3) INDEBTEDNESS
The Company issued an 8% convertible promissory note to M.T. Hong in
the principal amount of $345,500, dated March 14, 1995, in consideration for
the purchase by the Company of certain inventory. It is the position of the
Company that this amount is not due and owing as the Company did not receive
the inventory. At no time has any legal cause of action been commenced
against the company in connection with this debt.
YEAR 2000
The Company has developed and acquired its computer systems with an objective
to be Year 2000 compliant. The Company has engaged the services of qualified
technicians to determine the extent to which it may be vulnerable to third
party Year 2000 issues. All computer equipment purchased recently are Year
2000 compliant. The internal software written by the Company's programmers is
written with the long-date format included and consequently is Year 2000
compliant. The Company uses Microsoft software and has installed all the
available "patches" to up-date this software. Further, Microsoft "patches"
will be installed as they become available from Microsoft in 1999, but this
affects the Company's software and does not impact on the on-going operation
of the Company. The Company has assessed and continues to asses whether its
information and non-information technology systems will be effected by the
Year 2000 issues. The Company has investigated its third party communications
suppliers such as the telephone company and its Internet service provider and
found that all are in the process of becoming Year 2000 compliant in 1999.
Based upon current information, management believes that the necessary
modifications have been made internally to effectively continue the Company
into the Year 2000, however, management is continuing to monitor internal
systems, and to assess the readiness of its systems, to ensure Year 2000
compliance. As a contingency, the Company has identified other communication
suppliers who could provide the necessary service at a minimal cost to the
Company, and a minimal effect on the operations of the Company. In the event
no other communication suppliers can be found, there could be a material
adverse effect on the Company and its operations. Based upon current
information, the Company does not believe that the costs associated with Year
2000 compliance is material for the Company.
ITEM 3. DESCRIPTION OF PROPERTY
As of July 1, 1999 the Company leases approximately 22,000
square feet located at a facility in Irvine, California, which includes
offices, storage, and package assembly space. All of the Company's operations
are conducted from this facility. The lease expires June 30, 2002, and
requires monthly payments of approximately $14,288 per month.
11
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
<CAPTION>
PERCENTAGE
NAME NUMBER OF SHARES (1) BENEFICIALLY OWNED
- ---- ------------------- ------------------
<S> <C> <C>
Tony Shahbaz(2) 2,000,000 6%
Lung Hwa Electronics Co., Ltd. 1,000,000 3%
3F, No. 59 Tsao Ti Wei
Shen Keng Shiang
Taipei Hsein, Taiwan
Anthony Andrews(2) 74,999 *
Daniel Hou(3)(2) -0- *
Susha LLC(4) 20,766,667 66%
Hou Electronics Inc.(2) 2,000,000 6%
All officers and directors as a group (3 persons) 2,074,999 6%
</TABLE>
- ---------------
* Less than one percent
(1) Except as otherwise indicated, the Company believes that the beneficial
owners of Common Stock listed above, based on information furnished by
such owners, have sole investment and voting power with respect to such
shares, subject to community property laws where applicable. Beneficial
ownership is determined in accordance with the rules of the Securities
and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of Common Stock subject to
options or warrants currently exercisable, or exercisable within 60
days, are deemed outstanding for purposes of computing the percentage
of the person holding such options or warrants, but are not deemed
outstanding for purposes of computing the percentage of any other
person.
(2) c/o Company's address: 6 Autry, Irvine, CA 92618; all options granted
have been exercised.
(3) Pursuant to a written agreement, Hou Electronics, Inc. has a Board seat
on the Board of Directors of the Company.
(4) Susha LLC is a California Limited Liability Company. The members of
Susha, LLC are BTC and Tony Shahbaz, President of I/OMagic. Susha owns
20,166,667 shares and 300,000 options for common stock of the Company
with an exercise price of $1.13 and another 300,000 options for common
stock of the Company with an exercise price of $1.82. Mr. Shahbaz has
complete discretion to vote all Susha shares.
The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of the date of this
Statement by: (i) each stockholder known by the Company to be the beneficial
owner of more than five percent of the outstanding Common Stock, (ii) each
director of the Company and (iii) all directors and officers as a group.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------- --- -------------------------------------------------
<S> <C> <C>
Tony Shahbaz 37 Chairman, President, Chief Executive Officer
Daniel Hou 50 Director
Anthony Andrews 37 Vice President, Director of Engineering, Director
</TABLE>
12
<PAGE>
MR. TONY SHAHBAZ, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER, is the
Company's founder. In addition, he has played a key role in developing the
Company's multimedia strategy. Mr. Shahbaz has a technical background with
over 15 years experience in sales and marketing of computer peripheral
products. He was employed by Western Digital Corporation from September 1986
to March 1993. At Western Digital Corporation, he held several positions
including Vice President of Worldwide Sales for Western Digital Paradise, and
Regional Director of Asia Pacific Sales and Marketing Operations. While at
Western Digital Paradise's business unit, he established a multichannel world
wide retail distribution structure, with a full line of multimedia products.
As Regional Director of Asia Pacific Sales, he managed two of the company's
wholly owned subsidiaries that developed chip sets and peripherals for the
marketplace. He has held other management positions with Tandon Corporation
and Lapin Technology.
DANIEL HOU, DIRECTOR, Mr. Hou is the Founder of Hou Electronic, Inc. a
computer peripheral supplier. The company was formed in 1986 and has
continually grown to have revenues of $45 million in 1998. Mr. Hou is active
in related organizations such as holding the office of President with the
Southern California Chinese Computer Association as well as a membership in
American Chemistry Society. Mr. Hou received his Masters in Science from
University of Utah.
MR. ANTHONY ANDREWS, VICE PRESIDENT, DIRECTOR OF ENGINEERING, joined the
Company in February 1994. Mr. Andrews has over 12 years of experience in the
computer industry. His background includes product and software design, with
his most recent position as Principal Engineer at Western Digital Corporation
from March 1988 to February 1994. As Principal Engineer, he pioneered the
development of portable notebook designs for companies such as IBM and AST.
He also played a lead role in developing power management features that are
being commonly used in the industry today. Mr. Andrews has his own software
design company which has developed embedded system designs as well as game
software. He received a Bachelor of Science in Math and Computer Science from
the University of California at Los Angeles.
ITEM 6. EXECUTIVE COMPENSATION
Set forth below is a summary of compensation for the Company's
officers for fiscal years 1999, 1998 and 1997. There are no annuity, pension
or retirement benefits proposed to be paid to officers, directors or
employees of the Company in the event of retirement at normal retirement date
pursuant to any presently existing plan provided or contributed to by the
Company or its subsidiary.
13
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
--------------------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ------ -------
Other All
Name Annual Restricted Other
and Compen- Stock Options LTIP Compen-
Principal Position Year Salary Bonus sation Awards SARs Payouts sation
- ------------------ ---- ------ ----- ------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tony Shahbaz 1999 $140,000 -0- -0- 6,000 (auto)
CEO, President, 1998 $140,000 -0- 300,000(2) 6,000 (auto)
Secretary & CFO 1997 $140,000 11,500(1) -0- 300,000(3) 6,000 (auto)
-0-
Anthony Andrews 1999 $74,286 -0- -0- -0- -0- -0- -0-
Vice President 1998 $70,269 3,000 -0- -0- -0- -0- -0-
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's By-laws state that Directors of the Company shall not receive
any stated salary for their services, but, by resolution of the Board of
Directors, a fixed sum and expense of attendance, if any, may be allowed for
attendance at each regular and special meeting of the Board of Directors. The
Company maintains directors and officers liability insurance.
- -------------
(1) Mr. Shahbaz received a bonus of $11,500 for Design Sale of a modem to
Hewlett Packard in May 1998.
(2) On January 2, 1997 the Company issued 300,000 warrants to purchase
common stock of the Company at an exercise price of $1.82 for a term of five
years to Mr. Shahbaz under the Company's 1997 Incentive and Nonstatutory Stock
Option Plan.
(3) On January 2, 1998 the Company issued 300,000 warrants to purchase
common stock of the Company at an exercise price of $1.13 for a term of five
years to Mr. Shahbaz under the Company's 1998 Incentive and Nonstatutory Stock
Option Plan.
14
<PAGE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Tony Shahbaz, its
Chairman, President and Chief Executive Officer on October 22, 1993 pursuant to
which the Company has agreed to pay Mr. Shahbaz an annual salary of $140,000 per
year payable in twelve equal payments on the first day of each month. The
agreement provides for a bonus based on the "net profits" of the Company as
defined. The bonus amount ranges from $20,000 to $70,000 for net profits up to
$500,000. For net profits in excess of $500,000, the bonus is 7%. No bonuses
have been paid.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE BTC ACQUISITION
Effective February 3, 1999, I/OMagic entered into a subscription agreement
with Behavior Technology Corporation (USA), a California corporation ("BTC"). In
this transaction, BTC: (i) contributed $5 million worth of inventory in exchange
for 16,666,667 shares of restricted Common Stock of I/OMAGIC and (ii) provided a
$5 million credit line for the purchase of additional inventory. Borrowings are
non-interest bearing and are due 75 days from the date of borrowing. As of
December 31, 1998, the Company had no debt outstanding, other than its trade
payables generated in the ordinary course of business.
ITEM 8. DESCRIPTION OF SECURITIES
The authorized capital stock of the company currently consists of
50,000,000 shares of common stock, $.001 par value, and 10,000,000 shares of
preferred stock. No preferred shares have been issued.
The following summary of certain terms of the common stock does not
purport to be complete and is subject to, and qualified in its entirety by, the
provisions of the company's Articles of Incorporation and By-laws which are
attached to this Statement.
THE EXCHANGE TRANSACTION
I/OMAGIC Corporation, a California corporation ("I/OMAGIC California")
entered into a Plan of Exchange and Acquisition Agreement (the "Acquisition
Agreement") with Silvercrest International, Inc., a Nevada corporation
("Silvercrest") on March 18, 1996. Pursuant to the Acquisition Agreement,
Silvercrest issued 6,570,583 shares of common stock in exchange for 6,570,583
shares of common stock of I/OMAGIC California, which constituted 100% of the
issued and outstanding shares of I/OMAGIC California. Prior to the execution of
the Acquisition Agreement, Silvercrest was a public company with dormant
operations and had 625,000 shares of common stock outstanding. Silvercrest's
common stock was listed on the Over-the-Counter Bulletin Board System as of
March 1, 1996. Silvercrest changed its name to I/OMAGIC Corporation, a Nevada
corporation, on March 20, 1996. Effective as of the date of the Acquisition
Agreement, the board of directors of Silvercrest resigned and I/OMAGIC's
directors were appointed as the new Board of Directors. The acquisition has been
treated as a recapitalization of I/O Magic California, with I/OMagic California
as the accounting acquirer (reverse acquisition). As a result of the
acquisition, I/OMagic California, became a wholly-owned subsidiary of I/OMagic
Corporation, a Nevada corporation.
COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of
50,000,000 shares of Common Stock, $.001 par value per share, of which
31,369,026 shares of are outstanding as of August 6, 1999. In addition, there
are 550,000 treasury shares. As of August 6, 1999, assuming the exercise of all
currently outstanding Options and Warrants, 33,673,084 shares would be
outstanding.
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Holders of common
stock are entitled to receive ratably such dividends as may be declared by the
15
<PAGE>
Board of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in all assets remaining after payment of
liabilities. Holders of Common Stock have no right to convert their Common Stock
into any other securities. The Common Stock has no preemptive or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are duly
authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of
10,000,000 shares of preferred stock with a par value of $.001. The Company's
Board of Directors has authority, without action by the shareholders, to
issue all or any portion of the shares of authorized but unissued preferred
stock in one or more series and to determine the voting rights, preferences
as to dividends and liquidation, conversion rights, and other rights of such
series. The preferred stock, if and when issued, may carry rights superior to
those of common stock, however, no preferred stock may be issued with rights
equal or senior to the preferred stock without the consent of a majority of
the holders of preferred stock.
The Company has designated Series A and Series B Cumulative Convertible
Preferred Stock. On October 31, 1996, the Company created a series of preferred
stock consisting of 1,000,000 shares and designated as the Series A Cumulative
Preferred Stock, having the voting powers, preferences, participating, optional
and other special rights and the qualifications, limitations and restrictions
thereof. Convertible Series A shall be convertible into shares of Common Stock
at $2.50 per share. On October 31, 1996, the Company created a series of
preferred stock consisting of 1,000,000 shares and designated as the Series B
Cumulative Preferred Stock, having the voting powers, preferences,
participating, optional and other special rights and the qualifications,
limitations and restrictions thereof. Convertible Series B shall be convertible
into shares of Common Stock at $2.00 per share. There have been no issuance of
either Series A or Series B Preferred Stock.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Certificate of Incorporation would avoid the possible delay and
expense of a shareholder's meeting, except as may be required by law or
regulatory authorities. Issuance of the preferred stock could result, however,
in a series of securities outstanding that will have certain preferences with
respect to dividends and liquidation over the common stock which would result in
dilution of the income per share and net book value of the common stock.
Issuance of additional common stock pursuant to any conversion right which may
be attached to the terms of any series of preferred stock may also result in
dilution of the net income per share and the net book value of the common stock.
The specific terms of any series of preferred stock will depend primarily on
market conditions, terms of a proposed acquisition or financing, and other
factors existing at the time of issuance. Therefore, it is not possible at this
time to determine in what respect a particular series of preferred stock will be
superior to the Company's common stock or any other series of preferred stock
which the Company may issue. The Board of Directors does not have any specific
plan for the issuance of preferred stock at the present time and does not intend
to issue any preferred stock, except on terms which it deems to be in the best
interest of the Company and its shareholders.
The issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. Further, certain provisions of Nevada law could delay or
make more difficult a merger, tender offer or proxy contest involving the
Company. While such provisions are intended to enable the Board of Directors to
maximize stockholder value, they may have the effect of discouraging takeovers
which could be in the best interest of certain stockholders. There is no
assurance that such provisions will not have an adverse effect on the market
value of the Company's stock in the future.
On October 31, 1996, the Board of Directors of the Company authorized and
approved the designation of 1,000,000 shares of Class A Convertible Preferred
Stock and 1,000,000 shares of Class B Convertible Preferred Stock to be sold in
a previous offering. The Class A Convertible Preferred Shares have a 9% coupon
attached, which interest is payable
16
<PAGE>
quarterly, and are convertible into shares of Common Stock of the Company at
$2.50 per share. The Class B Convertible Preferred Shares have a 9% coupon
attached, which interest is payable quarterly, and are redeemable by the
investor only after one year from date of issuance and convertible into
Common Shares at $2.00 per share. The offering was terminated and there were
no sales under the offering and, therefore, no preferred stock is issued or
outstanding.
WARRANTS AND OPTIONS
During the fourth quarter of 1995, the Company conducted an offering of
Units (the "Bridge Units"). Each Bridge Unit consisted of a $25,000 9%
secured promissory note (the "Bridge Notes"), 25,000 warrants to purchase
Common Stock at an exercise price of $0.05 per share (the "A Bridge
Warrants") and 25,000 warrants to purchase Common Stock at an exercise price
of $0.95 per share (the "B Bridge Warrants"). The exercise price of the B
Bridge Warrants was reduced by the amount of $0.04 per month, for every 30
days after the first six months that the Notes were outstanding. As of the
date hereof, 400,000 A Bridge Warrants are outstanding and zero B Bridge
Warrants are outstanding. The Bridge Notes were repaid in full.
As consideration for placement agent services rendered in connection with the
1995 offering of Bridge Units, the Company issued 125,125 A Bridge Warrants to
purchase shares of the Common Stock of the Company at $0.10 per share and
125,125 B Bridge Warrants to purchase shares of Common Stock of the Company at
$1.10 per share to the placement agents. The terms of these A and B Bridge
Warrants issued to the placement agents are the same as the A and B Bridge
Warrants issued to the investors. 97,206 A Bridge Warrants issued to placement
agents are currently outstanding.
On October 30, 1995, the Company entered into a Consulting Agreement with
Redfield Miller, Inc. whereby Redfield Miller earned cash compensation of $6,000
per month and 5,000 warrants per month, each exercisable for one share of Common
Stock at an exercise price of $1.65 per share for a three year term, for every
month of the Agreement which continues on a month-to-month basis. As of the date
of this Memorandum, Redfield Miller earned 100,000 warrants under the Consulting
Agreement, 30,000 of which were exercised, leaving Redfield Miller with 70,000
warrants. All shares earned under the Consulting Agreement may qualify for S-8
Registration Rights. Edward Hanson, former Chief Financial Officer of the
Company, is a principal of Redfield Miller. The Consulting Agreement was
terminated effective June 1, 1997.
During the first half of 1996, the Company conducted an offering of Units
(the "Secondary Units"). Each Secondary Unit consisted of one share of Common
Stock (the "Common Stock") and one Warrant exercisable for one share of Common
Stock at an exercise price of $2.50 per share, subject to adjustment (the
"Secondary Warrants"). The minimum investment was 16,667 Units at $1.50 per Unit
($25,000). The Company raised $853,500 in connection with its sale of the
Secondary Units. In addition, the Company offered each of the holders of the
Bridge Notes the right to exchange their Bridge Notes for Secondary Units at a
price of $1.05 per Unit. $627,500 worth of Bridge Notes were converted, leaving
$177,500 due and payable by the Company on the Bridge Notes by October 31, 1996.
The Bridge Notes were paid in full.
As consideration for placement agent services rendered in connection with
the 1996 Secondary Offering, the Company issued to the placement agents the
following warrants: 58,000 warrants to purchase Common Stock at an exercise
price of $0.70 per share; 131,850 warrants to purchase Common Stock at an
exercise price of $0.01 per share; and 151,850 warrants to purchase Common Stock
at an exercise price of $1.65 per share. The terms of these warrants are the
same as the Secondary Warrants.
On April 1, 1996, the Company enacted the 1996 Incentive and Nonstatutory
Stock Option Plan (the "Plan") which has reserved for issuance 750,000 options
to purchase shares of Common Stock of the Company at an exercise price of $0.01
for key employees and consultants. To date, 750,000 options have been issued
under the plan and 650,000 options have been exercised.
17
<PAGE>
Anthony Andrews, Vice President of the Company, holds 50,000 options, each
exercisable for one share of Common Stock at an exercise price of $0.01 per
share for a period of five years from April 1, 1996, issued pursuant to the
Plan.
Michael Cone, an employee of the Company, holds 50,000 warrants, each
exercisable for one share of Common Stock at an exercise price of $0.01 per
share for a period of five years from April 1, 1996, issued pursuant to the
Plan.
On January 2, 1997, the Company enacted the 1997 Incentive and Nonstatutory
Stock Option Plan (the "Plan") which has reserved for issuance 1,000,000 options
to purchase shares of Common Stock of the Company at a minimum exercise price of
$1.65 for key employees and consultants. To date, 300,000 options have been
issued under the plan with an exercise price of $1.82 per share.
In connection with the February 27, 1997 and the June 16, 1997 offerings
(see Item 2.B[2] Previous Private Offerings), the Company issued warrants to
purchase 364,000 shares of common stock at $4.50 per share for three years.
On January 2, 1998, the Company enacted the 1998 Incentive and
Nonstatutory Stock Option Plan (the "Plan") which has reserved for issuance
1,401,976 options to purchase shares of Common Stock of the Company at a
minimum exercise price of $1.03 for key employees and consultants. To date,
300,000 options have been issued under the Plan with an exercise price of
$1.13 per share.
18
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANTS' COMMON
EQUITY AND OTHER STOCKHOLDERS MATTERS
A. MARKET INFORMATION
The Common Stock is currently quoted on the Over-the-Counter Bulletin Board
under the Symbol "IOMC". Set forth below is the trading history of the Company's
Common Stock without retail mark up, mark-down or commissions:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Bid Prices Ask Prices
---------------------- -----------------------
1997 HIGH LOW HIGH LOW
- ---- ---- --- ---- ---
<S> <C> <C> <C> <C>
January 1 - January 31 $4 1/4 $2 3/8 $4 5/8 $2 7/8
February 1 - February 28 $3 3/4 $3 1/4 $4 1/8 $3 5/8
March 1 - March 31 $3 1/4 $2 1/8 $3 5/8 $2 7/8
April 1 - April 30 $2 3/4 $2 $3 $2 3/4
May 1 - May 31 $2 5/8 $1 5/32 $3 $1 1/2
June 1 - June 30 $1 3/8 $1 $1 13/16 $1 1/2
July 1 - July 31 $0 3/4 $1 3/4
August 1 - August 31 $0 13/32 $1 3/8
September 1 - September 30 $0 11/16 $1 15/32
October 1 - October 31 $1 1/4 $3 3/8
November 1 - November 30 $1 7/16 $2 1/2
December 1 - December 31 $0 3/4 $1 15/16
1998
- ----
January 1 - January 31 $1 5/8 $0 11/16 $1 5/8
February 1 - February 28 1 5/16 0 3/4 1 5/16
March 1 - March 31 1 1/2 0 3/8
April 1 - April 30 1 3/16 0 7/16
May 1 - May 31 0 13/16 0 3/8
June 1 - June 30 1 1/2 0 3/8
July 1 - July 31 1 1/4 5/8
August 1 - August 31 11/16 3/8
September 1 - September 30 11/16 7/32
October 1 - October 31 9/16 5/16
November 1 - November 30 1/2 11/32
December 1 - December 31 1/2 9/32
1999
- ----
January 1 - January 31 7/16 1 5/64
February 1 - February 28 1 1/8 0 5/16
March 1 - March 31 3 1/8 0 7/8
April 1 - April 30 2 5/8 1 1/2
May 1 - May 31 2 1/2 1 7/8
June 1 - June 30 2 5/16 1 3/4
July 1 - July 31 1 31/32 1 21/32
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The above quotations are inter-dealer quotations, and the actual retail
transactions may involve dealer retail mark ups, mark downs, or commissions for
market makers of the Company's stock.
Except for 7,170,807 free trading shares, all shares issued by the
Company are "restricted securities" within the meaning of Rule 144 under the
1933 Act. Ordinarily, under Rule 144, a person holding restricted securities for
a period of one year may, every three months, sell in ordinary brokerage
transactions or in transactions directly with a market maker an amount equal to
the greater of one percent of the Company's then-outstanding Common Stock or the
average weekly trading volume
19
<PAGE>
during the four calendar weeks prior to such sale. Future sales of such shares
and sales of shares purchased by holders of options or warrants could have an
adverse effect on the market price of the Common Stock.
B. HOLDERS
As of August 6, 1999, there were approximately 70 registered holders of
Company's restricted Common Stock, as reported by the Company's transfer agent.
This figure does not include the free trading shareholders.
C. DIVIDENDS
The Company has not paid any dividends on its Common Stock. The Company
currently intends to retain any earnings for use in its business, and therefore
does not anticipate paying cash dividends in the foreseeable future.
ITEM 2. LEGAL PROCEEDINGS
In April 1999, the Company filed for an arbitration proceeding against
its former accountants and auditors, Ernst & Young, LLP, for failure to complete
the contracted work in a timely fashion and excessive billing. Arbitration
proceedings are anticipated to take place in Fall 1999.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
(1) DISMISSAL OF PRINCIPAL ACCOUNTANTS.
The Company dismissed Ernst & Young LLP, Certified Public Accountants
("Ernst & Young") as its principal accountants during the fourth quarter of
1998. The principal accountants' report on the financial statements for either
of the past two years contained no adverse opinion or a disclaimer of opinion,
nor was qualified nor modified as to uncertainty, audit scope, or accounting
principles. The decision to change principal accountants of the Company was
approved by the Board of Directors of the Company.
During the Company's two most recent fiscal years and any subsequent
interim period preceding such dismissal, there were no disagreements with the
former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. There is nothing
to report under Item 304(a)(1)(iv)(B) through (E).
(2) ENGAGEMENT OF NEW PRINCIPAL ACCOUNTANTS.
The Company has engaged Singer, Lewak, Greenbaum & Goldstein, LLP,
("SLGG") as its principal accountants. SLGG's business address is 2700 North
Main Street, Suite 200, Santa Ana, California. SLGG replaces Ernst & Young. SLGG
conducted both the 1997 and 1998 audit which are attached. Neither the Company
nor anyone on its behalf has consulted SLGG during the two most recent past
fiscal years regarding any matter for which reporting is required under
Regulation S-B, Item 304(a)(2)(i) or (ii) and the related instructions. The
decision to engage SLGG was approved by the Board of Directors.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The following information is furnished with regard to all securities
issued by the Company within the past three years which were not registered
under the Securities Act of 1933, as amended (the "Act"). Each of the following
transactions was exempt from under the Act by virtue of the provisions of
Section 4(2) of the Act. Each purchaser of the securities described below
represented prior to the purchase of the securities that he or she understood
that the securities acquired may not be sold or otherwise transferred absent
registration under the Act or the availability of an exemption from the
registration requirements of the Act, and each certificate evidencing the
securities owned by each purchaser bears or will bear upon issuance the legend
to that effect. None of the foregoing transactions involved a distribution or
public offering.
PREVIOUS PRIVATE OFFERINGS. During the fourth quarter of 1995,
I/OMagic California conducted an offering of Units (the "Bridge Units"). Each
Bridge Unit consisted of a $25,000 9% secured promissory note (the "Bridge
Notes"), 25,000 warrants containing an exercise price of $0.05 per share (the
"A Bridge Warrants") and 25,000 warrants containing an exercise price of
$0.95 per share (the "B Bridge Warrants"). The exercise price of the B Bridge
Warrants was reduced by the amount of $0.04 per month, for every 30 days
after the first six months that the Notes were outstanding to a minimum of
$0.50. The Unit Notes were due at the earlier of: (i) one year from issuance
or (ii) upon the completion of certain subsequent offerings of securities.
The Notes were secured by all tangible and intangible assets of the Company
with a first lien, perfected UCC-1
20
<PAGE>
Financing Statement. The Company raised $805,000 in connection with its sale
of the Bridge Units. The Bridge Notes were repaid in full and all UCC filings
terminated.
During the first half of 1996, the Company conducted an offering of
Units (the "Secondary Units"). Each Secondary Unit consisted of one share of
Common Stock (the "Common Stock") and one Warrant exercisable for one share of
Common Stock at an exercise price of $2.50 per share, subject to adjustment (the
"Secondary Warrants"). The minimum investment was 16,667 Units at $1.50 per Unit
($25,000). The Company raised $853,500 in connection with its sale of the
Secondary Units. In addition, the Company offered each of the holders of the
Bridge Notes the right to exchange their Bridge Notes for Secondary Units at a
price of $1.05 per Unit. $627,500 worth of Bridge Notes were converted, leaving
$177,500 due and payable by the Company on the Bridge Notes by October 31, 1996.
The Bridge Notes were paid in full and all UCC filings terminated.
On May 6, 1996, the Company entered into a strategic Alliance Agreement
with Lung Hwa Electronics Co., Ltd., whereby for a consideration of $342,000
from Lung Hwa, the Company issued 1,000,000 shares of restricted Company common
stock. For this agreement, Lung Hwa also agreed to establish a $2,000,000 line
of unsecured credit as amended in favor of I/OMagic. As of December 1998 and
1997, there were no outstanding borrowings under this agreement.
On December 16, 1996, the Company entered into a private Stock Purchase
Agreement whereby the Company sold 250,000 units. Each unit consisted of one
share of common stock and one warrant the purchase Company stock exercisable at
a price of $1.00 per share for a term of two years. The warrants have not been
exercised and have expired.
On January 8, 1997, the Company commenced a private offering through
Pellett Investments, Inc. under the following terms:
A private offering of a minimum of $600,000 and a maximum of
$2,000,000. The Company offered a maximum of 20 Units at $100,000 each, each
Unit consisting of 20,000 Class A Convertible Preferred Shares (9% coupon,
payable quarterly), convertible into common shares at $2.50 per share; 20,000
Class B Convertible Preferred Shares (9% coupon, payable quarterly), redeemable
and convertible into common shares at $2.50 per share; 20,000 Class A Warrants
exercisable for 20,000 common shares at $4.50 per share; and in the event the
Class B Preferred Shares are converted into common shares, 10,000 Class B
Warrants exercisable for 10,000 common shares at $5.00 per share. The Company
appointed Pellett Investments, Inc. as the Placement Agent for the offering at
the following compensation: A commission equal to 10% of the gross proceeds
realized from the sale of the Units; warrants exercisable for Common Stock at an
exercise price of $2.75 per share - the number of warrants to be issued to be
calculated by dividing the dollars raised into $3,000,000 and multiplying the
quotient by 150,000 warrants; 3% of the gross proceeds of the subject Offering
as nonaccountable expenses; and, upon the exercise of any Unit Warrants, the
Placement Agent will be entitled to receive a solicitation fee equal to 2.5% of
the exercise price of the Unit Warrants.
That offering terminated on March 13, 1997 and no securities were
issued under that offering.
On February 27, 1997, the Company commenced a private offering of a
minimum of $250,000 and a maximum of $1,500,000 (the "February 1997 Offering").
The Company offered for sale a minimum of 100,000 and a maximum of 600,000 of
the Company's Units (the "Units") at $2.50 per Unit. Each Unit was comprised of
one share of Common Stock (the "Common Stock") and one Warrant exercisable for
one share of Common Stock for three years at an exercise price of $4.50 per
share (the "Warrant" or "Unit Warrant" and, collectively with the Common Stock,
the "Units" or "Unit Securities"). The Offering terminated on May 19, 1997 and
the Company received investments in the February 1997 Offering for 110,000 Units
($275,000 gross proceeds).
On June 16, 1997, the Company commenced a private offering of a minimum
of $200,000 and a maximum of $1,500,000 (the "1997 Share Offering"). The Company
offered for sale a minimum of 160,000 shares of its Common Stock (the "Common
Stock" or the "Shares") and a maximum of 1,200,000 Shares at $1.25 each. The
minimum purchase was 20,000 Shares ($25,000). The securities purchased in the
February 1997 Offering were not yet issued at the commencement of this
Offering and the investors in the February 1997 Offering were offered the
opportunity to convert their investments into this Offering at the lower per
share price. The 1997 Share Offering terminated on September 18, 1997. All
investors in the February 1997 Share Offering converted their shares for a total
of 220,000 shares being issued pursuant to conversions. Additionally, the
Company received $180,000 in new investments for a total of 144,000 Shares.
Last, the Company issued 13,200 shares to a consultant in exchange for services
rendered in connection with the 1997 Share Offering.
On September 19, 1997, the Company entered into a Strategic Alliance
Agreement with Hou Electronics, Inc., a California corporation ("Hou"), whereby
for a contribution of $1,250,000 in inventory, 2,000,000 unsecured line of
credit, and
21
<PAGE>
$250,000 in cash, the Company issued Two million shares of the
Company's stock subject to a two year restriction. The Company also agreed to
make a seat available on its board of directors for a nominee of Hou. As of
December 1998 and 1997, there were no outstanding borrowings under this
agreement. During the six months ended June 30, 1999 such agreement was mutually
terminated.
On June 1, 1998, the Company offered up to $250,000 worth of units of
its securities with each unit consisting of a $10,000 note bearing interest at a
rate of 10% per annum, repayable in full ninety days after the declaration of
effectiveness of a registration statement, as defined, or twelve months from the
date of sale whichever comes first; and, one warrant exercisable at $1.00 of 30%
of the face value of the note and then divided by the price per share as set
forth in the registration statement, as defined. Through June 1998, the Company
sold units to accredited investors to raise $250,000. As of December 31, 1998,
the warrants were all outstanding. As of June 30, 1999, the Company repaid
$205,000 of the notes plus all accrued interest and all warrants have expired.
The remaining $45,000 and accrued interest was paid in July 1999.
Effective February 3, 1999, I/OMagic entered into a subscription
agreement with Behavior Technology Corporation, a Taipei, Taiwan corporation
("BTC"). In this transaction, BTC contributed $5 million worth of inventory in
exchange for 16,666,667 shares of restricted Common Stock.
On February 3, 1999, the Company issued 200,000 warrants valued at the
closing price of $0.30 per shares on the date of sale to Horwitz & Beam, the
Company's law firm. On April 1, 1999, Horwitz & Beam exercised all 200,000
warrants for $60,000 cash paid to the Company.
ITEM 5. TERMS OF INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company has adopted provisions in its Articles of Incorporation and
bylaws that limit the liability of its directors and provide for indemnification
of its directors and officers to the full extent permitted under the Nevada
General Corporation Law. Under the Company's Articles of Incorporation, and as
permitted under the Nevada General Corporation Law, directors are not liable to
the Company or its stockholders for monetary damages arising from a breach of
their fiduciary duty of care as directors. Such provisions do not, however,
relieve liability for breach of a director's duty of loyalty to the Company or
its stockholders, liability for acts or omissions not in good faith or involving
intentional misconduct or knowing violations of law, liability for transactions
in which the director derived as improper personal benefit or liability for the
payment of a dividend in violation of Nevada law. Further, the provisions do not
relieve a director's liability for violation of, or otherwise relieve the
Company or its directors from the necessity of complying with, federal or state
securities laws or affect the availability of equitable remedies such as
injunctive relief or recision.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding that may result in a claim for indemnification by any director or
officer.
22
<PAGE>
PART F/S
FINANCIAL STATEMENTS
The following financial statements are included herein:
Audited Financial Statements for the Years ended December 31, 1998 and 1997
Unaudited Financial Statements for the Six Months Ended June 30, 1999 and 1998
PART III
ITEM 1 AND
ITEM 2. INDEX TO EXHIBITS AND DESCRIPTION OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT DESCRIPTION
<S> <C>
3.1 Articles of Incorporation of Asian-Inter American Development Corporation, dated October 20, 1992
3.2 Certificate of Amendment to Articles of Incorporation of Asian-Inter American Development Corporation
changing name to Silvercrest International, Inc., dated August 30, 1993
3.3 Restated Articles of Incorporation of Silvercrest International, Inc., dated January 10, 1996
3.4 Certificate of Amendment to the Articles of Incorporation of Silvercrest International, Inc.
changing name to I/OMagic Corporation, Inc. dated March 19, 1996
3.5 Bylaws of Asian-Inter American Development Corporation, dated October 20, 1992, adopted by I/OMagic
Corporation, Inc.
3.6 Amendment to the Bylaws of I/OMagic Corporation, Inc. dated November 13, 1996
4.1 Certificate of Designation of Preferred Stock, dated October 31, 1996
10.1 Employment Agreement by and between I/OMagic Corporation, Inc., a California Corporation, and Tony
Shahbaz, dated October 22, 1993
10.2 I/OMagic Corporation 1997 Incentive and Nonstatutory Stock Option Plan
dated January 2, 1997
10.3 Plan of Exchange and Acquisition Agreement by and between Silvercrest International and I/OMagic
Corporation, a California corporation, dated March 8, 1996
10.4 I/OMagic Corporation 1998 Incentive and Nonstatutory Stock Option Plan, dated January 2, 1998
10.5 Strategic Alliance Agreement between I/OMagic Corporation and Hou Electronics, Inc., dated September
19, 1997
10.6 Macola Software Agreement between I/OMagic Corporation and Enterprise Wide Computing, Inc., dated
October 13, 1997
10.7 I/OMagic Corporation 1996 Incentive and Nonstatutory Stock Option Plan, dated February 1, 1996
10.8 BTC Acquisition Agreement, dated February 3, 1999
10.9 Lease Agreement by and between I/OMagic Corporation and Autry Properties.
23.1 Consent of Horwitz & Beam
24.1 Power of Attorney (see signature page)
</TABLE>
23
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: September 3, 1999 I/OMAGIC CORPORATION
/s/ TONY SHAHBAZ
----------------------------------------
BY: Tony Shahbaz
ITS: Chief Executive Officer, President
Secretary and Chief Financial Officer
POWER OF ATTORNEY
Each person whose signature appears appoints Tony Shahbaz, as his
agents and attorneys-in-fact, with full power of substitution to execute for him
and in his name, in any and all capacities, all amendments (including
post-effective amendments) to this Registration Statement to which this power of
attorney is attached.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/TONY SHAHBAZ Chief Executive Officer, President September 3, 1999
- ------------------ Secretary and Chief Financial Officer
Tony Shahbaz
/s/ TONY ANDREWS Vice President September 3, 1999
- ------------------
Anthony Andrews
</TABLE>
<PAGE>
I/O MAGIC CORPORATION
FINANCIAL STATEMENTS
FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 (UNAUDITED)
<PAGE>
<TABLE>
<CAPTION>
I/O MAGIC CORPORATION
CONTENTS
DECEMBER 31, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C>
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheets F-2 to F-3
Statements of Operations F-4
Statements of Stockholders' Equity F-5 to F-7
Statements of Cash Flows F-8 to F-10
Notes to Financial Statements F-11 to F-34
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
I/O Magic Corporation
We have audited the accompanying balance sheets of I/O Magic Corporation as of
December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for each of the two years 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 audits.
We conducted our audits 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 audits provide 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 I/O Magic Corporation as of
December 31, 1998, and the results of its operations and its cash flows for each
of the two years then ended in conformity with generally accepted accounting
principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
April 28, 1999
<PAGE>
<TABLE>
<CAPTION>
I/O MAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
ASSETS
December 31, June 30,
1998 1999
---------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $1,402,904 $ 2,894,603
Accounts receivable, net of allowance for doubtful
accounts of $46,372 and $54,906 3,776,413 5,449,384
Inventory 733,834 1,963,832
Prepaid expenses and other current assets 60,708 109,167
---------- -----------
Total current assets 5,973,859 10,416,986
FURNITURE AND EQUIPMENT, net 133,231 171,638
OTHER ASSETS 21,160 29,888
---------- -----------
TOTAL ASSETS $6,128,250 $10,618,512
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
I/O MAGIC CORPORATION
BALANCE SHEETS
DECEMBER 31, 1998 AND JUNE 30, 1999 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1998 1999
---------- -----------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 250,000 $ 45,000
Accounts payable and accrued expenses 1,540,643 2,658,774
Current portion of capital lease obligations 208 581
Accounts payable to related parties 2,984,677 1,261,571
Note payable to related party 345,500 -
Reserves for customer returns and allowances 223,379 448,674
---------- -----------
Total current liabilities 5,344,407 4,414,600
CAPITAL LEASE OBLIGATIONS, net of current portion 6,723 5,457
---------- -----------
Total liabilities 5,351,130 4,420,057
---------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value
10,000,000 shares authorized
none issued and outstanding -- --
Class A common stock, $0.001 par value
50,000,000 shares authorized
14,879,546 and 31,919,026 (unaudited) shares issued
and outstanding 14,880 31,919
Additional paid-in capital 5,305,681 10,355,348
Deferred compensation (27,900) (21,700)
Treasury stock, 550,000 shares, at cost (165,000) (165,000)
Accumulated deficit (4,350,541) (4,002,112)
---------- -----------
Total stockholders' equity 777,120 6,198,455
---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,128,250 $10,618,512
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
I/O MAGIC CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended For the Six Months Ended
DECEMBER 31, JUNE 30,
----------------------------- -----------------------------
1998 1997 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
NET SALES $10,714,363 $ 4,034,701 $13,083,869 $ 3,799,971
COST OF SALES 7,927,553 3,417,984 9,905,027 2,801,298
----------- ----------- ----------- -----------
GROSS PROFIT 2,786,810 616,717 3,178,842 998,673
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, marketing, and advertising 2,112,631 642,274 1,538,911 720,069
General and administrative 1,263,390 1,416,792 1,287,818 549,895
----------- ----------- ----------- -----------
Total operating expenses 3,376,021 2,059,066 2,826,729 1,269,964
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS (589,211) (1,442,349) 352,113 (271,291)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest income 17,232 6,445 6,000 6,174
Interest expense (16,674) (22,823) (11,384) (1,454)
Other income 251,435 -- 2,100 251,408
----------- ----------- ----------- -----------
Total other income (expense) 251,993 (16,378) (3,284) 256,128
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (337,218) (1,458,727) 348,829 (15,163)
PROVISION FOR INCOME TAXES 800 800 400 800
----------- ----------- ----------- -----------
NET INCOME (LOSS) $ (338,018) $(1,459,527) $ 348,429 $ (15,963)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE $ (0.02) $ (0.12) $ 0.01 $ --
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED-AVERAGE SHARES
OUTSTANDING 14,130,105 11,923,028 25,058,544 13,910,534
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
<TABLE>
I/O MAGIC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
CLASS A COMMON STOCK PAID-IN SUBSCRIPTIONS DEFERRED TREASURY ACCUMULATED
--------------------
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION STOCK DEFICIT TOTAL
---------- ------- ---------- ---------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 11,013,010 $11,013 $3,275,936 $ -- $(105,400) $ -- $(2,552,996) $ 628,553
COMMON STOCK ISSUED FOR
CASH 364,000 364 454,636 455,000
OFFERING COSTS (25,000) (25,000)
COMMON STOCK ISSUED FOR
CASH AND INVENTORY 2,000,000 2,000 1,498,000 (324,240) 1,175,760
COMMON STOCK ISSUED FOR
SERVICES 38,201 38 38,163 38,201
COMMON STOCK PURCHASED
FROM CERTAIN OFFICERS FOR
CASH (19,800) (19,800)
TREASURY STOCK SOLD BY THE
COMPANY FOR FURNITURE
AND EQUIPMENT 6,158 19,800 25,958
AMORTIZATION AND ADJUSTMENT
OF DEFERRED COMPENSATION (62,000) 65,100 3,100
WARRANTS ISSUED FOR LEGAL AND
MARKETING SERVICES 42,465 (6,495) 35,970
ISSUANCE OF COMMON STOCK IN
CONNECTION WITH THE EXERCISE
OF WARRANTS 338,739 339 16,796 17,135
NET LOSS (1,459,527) (1,459,527)
---------- ------- ---------- ---------- ------------ ---------- ----------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
<TABLE>
I/O MAGIC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK ADDITIONAL
-------------------- PAID-IN SUBSCRIPTIONS DEFERRED TREASURY ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION STOCK DEFICIT TOTAL
---------- ------- ---------- ---------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 13,753,950 $13,754 $5,245,154 $(330,735) $(40,300) $ -- $(4,012,523) $ 875,350
ISSUANCE OF COMMMON STOCK IN
CONNECTION WITH THE EXERCISE
OF WARRANTS 1,105,596 1,106 24,445 25,551
PAYMENT RECEIVED IN 1998 IN
THE FORM OF INVENTORY 324,240 324,240
PAYMENT RECEIVED IN 1998 IN
THE FORM OF LEGAL SERVICES 6,495 6,495
COMMON STOCK ISSUED FOR
SERVICES 20,000 20 7,480 7,500
AMORTIZATION OF DEFERRED
COMPENSATION 12,400 12,400
COMMON STOCK PURCHASED
FOR CASH (165,000) (165,000)
WARRANTS ISSUED FOR LEGAL AND
CONSULTING SERVICES 28,602 28,602
NET LOSS (338,018) (338,018)
---------- ------- ---------- ---------- ------------ ---------- ----------- ---------
BALANCE, DECEMBER 31, 1998 14,879,546 14,880 5,305,681 -- (27,900) (165,000) (4,350,541) 777,120
ISSUANCE OF COMMON STOCK IN
CONNECTION WITH THE EXERCISE
OF WARRANTS (unaudited) 372,813 372 66,334 66,706
COMMON STOCK ISSUED FOR
INVENTORY (unaudited) 16,666,667 16,667 4,983,333 5,000,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
<TABLE>
I/O MAGIC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK ADDITIONAL
-------------------- PAID-IN SUBSCRIPTIONS DEFERRED TREASURY ACCUMULATED
SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION STOCK DEFICIT TOTAL
---------- ------- ---------- ---------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
AMORTIZATION OF DEFERRED
COMPENSATION (unaudited) $ $ $ $ 6,200 $ $ $ 6,200
NET INCOME (unaudited) 348,429 348,429
---------- ------- ---------- ---------- ------------ ---------- ----------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED) 31,919,026 $31,919 $10,355,348 $ -- $(21,700) $(165,000) $(4,002,112) $6,198,455
---------- ------- ---------- ---------- ------------ ---------- ----------- ----------
---------- ------- ---------- ---------- ------------ ---------- ----------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
<TABLE>
I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended For the Six Months Ended
DECEMBER 31, JUNE 30,
----------------------------- ----------------------------
1998 1997 1999 1998
----------- ----------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (338,018) $(1,459,527) $ 348,429 $ (15,963)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities
Depreciation and amortization 38,721 28,670 22,998 18,172
Amortization of deferred
compensation 12,400 12,400 6,200 6,200
Adjustment of deferred
compensation -- (9,300) -- --
Provision for allowance for
doubtful accounts (192,238) 133,670 8,534 (55,882)
Compensation in connection
with stock options and warrants
granted 28,602 38,201 -- --
Note payable to related party -- -- (240,000) --
Issuance of common stock for
services 7,500 35,970 -- --
(Increase) decrease in
Accounts receivable (2,992,319) (377,616) (1,681,505) (436,107)
Inventory 193,733 1,283,718 3,770,002 471,282
Prepaid expenses and other
current assets (31,115) (12,059) (48,459) (57,925)
Other assets -- (8,304) (8,728) --
Increase (decrease) in
Accounts payable and accrued
expenses 1,097,481 199,299 1,012,630 491,329
Accounts payable to related
parties 2,984,677 -- (1,723,106) 82,537
Reserves for customer returns and
allowances 20,347 203,032 225,295 (124,491)
--------------- ---------------- --------------- ----------------
Net cash provided by operating
activities 829,771 68,154 1,692,290 379,152
--------------- ---------------- --------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of furniture and equipment (51,945) (46,079) (61,405) (22,072)
--------------- ---------------- --------------- ----------------
Net cash used in investing activities (51,945) (46,079) (61,405) (22,072)
--------------- ---------------- --------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
<TABLE>
I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended For the Six Months Ended
DECEMBER 31, JUNE 30,
----------------------------- ----------------------------
1998 1997 1999 1998
----------- ----------- ----------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on bridge loans $ -- $ (177,500) $ -- $ --
Payments on capital lease
obligations (5,960) (2,307) (892) (3,820)
Advances due to related parties (192,982) (763,391) -- --
Proceeds from issuance of notes
payable 250,000 -- -- 100,000
Payments on notes payable -- -- (205,000) --
Proceeds from issuance of common
stock -- 705,000 66,706 2,001
Offering costs on issuance of
common stock -- (25,000) -- --
Purchase of treasury stock (165,000) (19,800) -- (99,900)
Proceeds from exercise of warrants 25,551 17,135 -- --
----------- ----------- ----------- ----------
Net cash used in financing activities (88,391) (265,863) (139,186) (1,719)
----------- ----------- ----------- ----------
Net increase (decrease) in cash 689,435 (243,788) 1,491,699 355,361
CASH, BEGINNING OF PERIOD 713,469 957,257 1,402,904 713,469
----------- ----------- ----------- ----------
CASH, END OF PERIOD $ 1,402,904 $ 713,469 $ 2,894,603 $1,068,830
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
INTEREST PAID $ 2,299 $ 22,823 $ 11,384 $ 1,454
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
INCOME TAXES PAID $ 800 $ 800 $ -- $ 800
----------- ----------- ----------- ----------
----------- ----------- ----------- ----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 1998, the Company entered into the following
non-cash transactions:
- - Received $324,240 in inventory subscribed during the year ended December 31,
1997.
- - Received $6,495 in legal services subscribed during the year ended
December 31, 1997.
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
I/O MAGIC CORPORATION
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
- -------------------------------------------------------------------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
During the year ended December 31, 1997, the Company entered into the following
non-cash transactions:
- - Issued 9,000 shares of common stock for software valued at $25,958.
- - Issued 2,000,000 shares of common stock for a $324,240 subscription
receivable, $925,760 in inventory, and $250,000 in cash.
- - Issued common stock for a subscription receivable valued at $6,495 for legal
services to be provided.
- - Purchased certain furniture and equipment under a capital lease obligation
totaling $15,198.
During the six months ended June 30, 1999, the Company entered into the
following non-cash transactions:
- - Received $5,000,000 (unaudited) in inventory for 16,666,667 (unaudited)
shares of common stock.
- - Reflected the reduction of a related party as a reduction to cost of
sales of $240,000 (unaudited) and increased reserves of $154,388
(unaudited) (see Note 9).
During the six months ended June 30, 1998, the Company entered into the
following non-cash transactions:
- - Received $330,735 (unaudited) in inventory subscribed during the six months
ended June 30, 1998.
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND BUSINESS
I/O Magic Corporation (the "Company"), a Nevada corporation, develops,
manufactures through subcontractors, markets, and distributes
multimedia and communication card devices for portable and desktop
computers. The Company sells its products in the United States to
distributors and retail customers.
In March 1996, I/O Magic Corporation, a California corporation ("I/O
Magic California"), originally incorporated on September 30, 1993
entered into a Plan of Exchange and Acquisition Agreement (the
"Acquisition Agreement") with Silvercrest International, Inc.
("Silvercrest"), a Nevada corporation. Pursuant to the Acquisition
Agreement, Silvercrest acquired all of the outstanding stock of I/O
Magic California totaling 6,570,583 shares in exchange for an aggregate
6,570,583 shares of newly-issued common stock. In connection with the
Acquisition Agreement, the Company issued 624,704 shares of common
stock. For accounting purposes, the acquisition has been treated as a
recapitalization of I/O Magic California, with I/O Magic California as
the accounting acquirer (reverse acquisition). Prior to the execution
of the Acquisition Agreement, Silvercrest was a public company listed
on NASDAQ's over-the-counter market with dormant operations and no
assets or liabilities. Silvercrest subsequently changed its name to I/O
Magic Corporation, a Nevada corporation.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosures of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts
of revenues and expenses during the reporting period. Significant
estimates made by management include, but are not limited to, the
provisions for allowance of doubtful accounts and price protection on
accounts receivable, the net realizability of inventory, the evaluation
of potential impairment of furniture and equipment, and the provision
for sales returns and warranties. Actual results could materially
differ from those estimates.
F-11
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. For certain of the
Company's financial instruments, including cash, accounts receivable,
and accounts payable and accrued expenses, the carrying amounts
approximate fair value due to their short maturities. The amounts shown
for capital lease obligations also approximate fair value because
interest rates offered to the Company for capital lease obligations of
similar maturities are substantially the same.
INVENTORY
---------
Inventory is stated at the lower of cost, using the weighted-average
method, which approximates the first-in, first-out method or market.
FURNITURE AND EQUIPMENT
-----------------------
Furniture and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation and amortization are
provided using the straight-line method over estimated useful lives as
follows:
Computer equipment and software 5 years
Warehouse equipment 7 years
Office furniture and equipment 5 to 7 years
Equipment under capital lease 5 years
Leasehold improvements Estimated useful life or
lease term whichever is shorter
Maintenance and minor replacements are charged to expense as incurred.
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
--------------------------------------------------
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." SFAS No. 121 requires
impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Management determined that there
was no impairment of long-lived assets for all periods presented.
F-12
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes
and encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined
as of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation issued to employees. The Company has elected to use the
implicit value based method and has disclosed the pro forma effect of
using the fair value based method to account for its stock-based
compensation. For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions
of SFAS No. 123.
REVENUE RECOGNITION
-------------------
For transactions satisfying the conditions for revenue recognition
under SFAS No. 48, "Revenue Recognition when Right of Return Exists,"
product revenue is recorded at the time of shipment, net of estimated
allowances and returns. For transactions not satisfying the conditions
for revenue recognition under SFAS No. 48, product revenue is deferred
until the conditions are met, net of an estimate for cost of sales. As
of December 31, 1998 and June 30, 1999, the Company had reserves for
sales returns totaling $69,146 and $86,326 (unaudited), respectively.
EARNINGS (LOSS) PER SHARE
-------------------------
The Company calculates earnings (loss) per share in accordance with
SFAS No. 128, "Earnings Per Share." SFAS No. 128 replaced the
presentation of primary and fully diluted earnings (loss) per share
with the presentation of basic and diluted earnings (loss) per share.
Basic earnings (loss) per share excludes dilution and is calculated by
dividing income (loss) available to common stockholders by the
weighted-average number of common shares outstanding for the period.
Diluted earnings (loss) per share includes the potential dilutive
effects that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock that would
then share in the earnings (loss) of the Company.
F-13
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (Continued)
------------------
As of June 30, 1999, the Company had common equivalents as follows:
Weighted-average common shares outstanding during the
period (unaudited) 25,058,544
Incremental shares assumed to be outstanding since the
beginning of the period related to stock options and
warrants outstanding (unaudited) 549,709
----------
FULLY DILUTED WEIGHTED-AVERAGE COMMON SHARES AND
EQUIVALENTS OUTSTANDING (unaudited) 25,608,253
----------
----------
As of December 31, 1998 and 1997 and June 30, 1998, the Company had
common stock equivalents including options and warrants. The effects of
such common stock equivalents were not included in diluted earnings per
share as their effects would have been anti-dilutive.
INCOME TAXES
------------
The Company accounts for its income taxes under the provisions of SFAS
No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax basis of assets and liabilities and their
financial reporting amounts at each period end, based on enacted tax
laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The provision for income taxes
represents the tax payable for the period, if any, and the change
during the period in deferred tax assets and liabilities.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 130, "Reporting Comprehensive Income." This statement is not
applicable to the Company.
F-14
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
-----------------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information," is effective for financial
statements with fiscal years beginning after December 15, 1997. This
statement establishes standards for the way that public entities report
selected information about operating segments, products and services,
geographic areas, and major customers in interim and annual financial
reports. During the years ended December 31, 1998 and 1997 and the six
months ended June 30, 1999 and 1998, the Company operated in one
segment.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement is
not applicable to the Company.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is not applicable
to the Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." This
statement is not applicable to the Company.
In February 1999, the FASB issued SFAS No. 135, "Recession of FASB
Statement No. 75 and Technical Corrections." This statement is not
applicable to the Company.
NOTE 3 - RISKS AND UNCERTAINTIES
TECHNOLOGICAL OBSOLESCENCE
--------------------------
The computer industry is characterized by rapid technological
advancement and change. Should demand for the Company's products prove
to be significantly less than anticipated, the ultimate realizable
value of such products could be substantially less than the amounts
reflected in the accompanying balance sheet.
F-15
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 3 - RISKS AND UNCERTAINTIES (CONTINUED)
RELIANCE ON INDEPENDENT AND RELATED PARTY MANUFACTURERS/SUBCONTRACTORS
----------------------------------------------------------------------
The Company does not maintain its own manufacturing or production
facilities and does not intend to do so in the foreseeable future. The
Company anticipates that its products will be manufactured and its raw
materials and components will be supplied by independent companies,
some of which are stockholders of the Company. Many of these
independent companies may manufacture and supply products for the
Company's existing and potential competitors. As is customary in the
manufacturing industry, the Company does not have any material ongoing
licensing or other supply agreement with its manufacturers and
suppliers. Typically, the purchase order is the Company's "agreement"
with the manufacturer. Therefore, any of these companies could
terminate its relationship with the Company at any time. In the event
the Company were to have difficulties with its present manufacturers
and suppliers, the Company could experience delays in supplying
products to its customers.
RELIANCE ON ORIGINAL EQUIPMENT MANUFACTURING ("OEM") CUSTOMERS AND
RETAIL DISTRIBUTORS
------------------------------------------------------------------
The Company's success will depend to a significant extent upon the
ability to develop and maintain a multi-channel distribution system
with OEM customers and retail distributors to sell the Company's
products in the marketplace. There can be no assurance that the
Company will be successful in obtaining and retaining the OEM
customers and retail distributors it requires to continue to grow
and expand its marketing and sales efforts.
LISTING AND MAINTENANCE CRITERIA FOR NASDAQ SECURITIES
------------------------------------------------------
The Company intends to apply for listing of its common stock on NASDAQ
for the Small-Cap Market. The initial listing standards for the NASDAQ
Small-Cap Market require that the Company have total assets of at least
$4,000,000, total stockholders' equity of at least $2,000,000, a public
float of at least 100,000 shares with a market value of at least
$1,000,000, at least 300 stockholders, a minimum bid price for its
common stock of $4 per share, and at least three market makers. To
maintain its listing on the NASDAQ Small-Cap Market, the Company must
continue to be registered under Section 12(g) of the Securities and
Exchange Act of 1934 and have total assets of at least $2,000,000,
total stockholders' equity of at least $1,000,000, a public float of at
least 100,000 shares with a market value of at least $200,000, at least
300 stockholders, a minimum bid price for its common stock of $1 per
share, and at least three market makers. There is no assurance that the
Company will be able to obtain or maintain the standards for NASDAQ
Small-Cap Market listing.
F-16
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 4 - CONCENTRATIONS OF RISK
CASH
----
As of December 31, 1998 and June 30, 1999, the Company maintained cash
balances with a national bank totaling $1,398,596 and $2,907,464
(unaudited), respectively, in excess of federally insured amounts of
$100,000.
CUSTOMERS
---------
During the year ended December 31, 1998, the Company had sales to three
major customers that represented approximately 32%, 26%, and 17% of net
sales. As of December 31, 1998, the Company had three customers that
accounted for 47%, 25% and 15% of accounts receivable.
During the year ended December 31, 1997, the Company had sales to two
major customers that each represented approximately 27% of net sales.
During the six months ended June 30, 1999, the Company had sales to
three major customers that represented approximately 46% (unaudited),
39% (unaudited), and 12% (unaudited) of net sales. As of June 30, 1999,
the Company had three customers that accounted for 41% (unaudited), 31%
(unaudited) and 10% (unaudited) of accounts receivable.
During the six months ended June 30, 1998, the Company had sales to two
major customers that each represented approximately 36% (unaudited) and
15% (unaudited) of net sales.
SUPPLIERS
---------
During the year ended December 31, 1998, the Company purchased
inventory from three related party vendors that represented
approximately 42%, 27%, and 11% of purchases. As of December 31, 1998,
no one supplier represented 10% or more of accounts payable.
During the year ended December 31, 1997, the Company purchased
inventory from one related party vendor that represented approximately
33% of purchases.
During the six months ended June 30, 1999, the Company purchased
inventory from two related-party vendors that represented approximately
60% (unaudited) and 20% (unaudited) of purchases. As of June 30, 1999,
two suppliers represented 37% (unaudited) and 25% (unaudited) of
accounts payable.
During the six months ended June 30, 1998, the Company purchased
inventory from two related-party vendors that represented approximately
73% (unaudited) and 23% (unaudited) of purchases.
F-17
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 5 - INVENTORY
Inventory consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Raw materials $ 440,887 $ 457,921
Finished goods 292,947 1,505,911
----------- -----------
TOTAL $ 733,834 $ 1,963,832
----------- -----------
----------- -----------
</TABLE>
NOTE 6 - FURNITURE AND EQUIPMENT
Furniture and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Computer equipment and software $ 120,082 $ 166,080
Warehouse equipment 20,893 36,549
Office furniture and equipment 66,655 62,135
Equipment under capital lease 15,198 15,198
Leasehold improvements 16,679 20,949
----------- -----------
239,507 300,911
Less accumulated depreciation
and amortization 106,276 129,273
----------- -----------
TOTAL $ 133,231 $ 171,638
----------- -----------
----------- -----------
</TABLE>
Depreciation and amortization expense for the years ended December 31,
1998 and 1997 and the six months ended June 30, 1999 and 1998 was
$38,721, $28,160, $22,998 (unaudited), and $18,171 (unaudited),
respectively.
F-18
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 7 - NOTES PAYABLE
In May 1998, the Company engaged an agent to assist in a private
placement (the "1998 Private Placement") to sell up to $250,000 of
units, as amended. Each unit consists of a $10,000 note (the "Note")
bearing interest at 10% per annum, repayable in full 90 days after the
declaration of effectiveness of a Registration Statement, as defined,
or 12 months from the date of issue, whichever comes first, and one
warrant, exercisable at $1 for 30% of the face value of the Note, and
then divided by the price per share as set forth in the Registration
Statement, as defined. Through June 1998, the Company sold 25 units for
proceeds of $250,000. As of December 31, 1998 and June 30, 1999,
accrued interest totaled $14,375 and $4,500 (unaudited), respectively,
and is included in accounts payable and accrued expenses on the
accompanying balance sheets.
No expense was recorded for these warrants as such were issued with an
exercise price greater than fair market value (see Note 11). In
addition, the Company paid $25,000 to the agent for services provided.
Such is included in prepaid expenses and other current assets on the
accompanying balance sheet and is being amortized over the term of the
Notes.
NOTE 8 - CREDIT LINES FROM RELATED PARTIES
The Company has available a $2,000,000 credit line from a stockholder
and supplier for inventory purchases. Borrowings are non-interest
bearing and are due 60 days from the date of borrowing. Borrowings are
subordinated to bank financings. The credit agreement can be mutually
terminated at any time. As of December 31, 1998, no borrowings were
outstanding under this agreement. During the six months ended June 30,
1999 (unaudited), such agreement was mutually terminated.
In connection with a 1997 Strategic Alliance Agreement (the "1997
Strategic Alliance Agreement") (see Notes 10 and 11), the Company also
has available a second line of credit through another stockholder and
supplier for borrowings up to $2,000,000. Borrowings are non-interest
bearing and are due 75 days from the date of borrowing. The credit
agreement can be mutually terminated at any time. As of December 31,
1998 and June 30, 1999 (unaudited), there were no outstanding
borrowings under this arrangement.
In connection with an April 1999 subscription agreement, the Company
also has available an additional line of credit through a stockholder
and vendor that provides a trade credit facility of up to $5,000,000
carrying net 75 day terms, as defined (see Note 11).
F-19
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 9 - NOTE PAYABLE TO RELATED PARTY
As of December 31, 1998, the note payable to related party represents a
convertible promissory note to a stockholder for inventory purchases.
The note bore interest at 8% and matured March 1, 1997. Accrued
interest related to this note totaling $48,888 is included in accounts
payable and accrued expenses on the accompanying balance sheet as of
December 31, 1998. As of December 31, 1998, the Company was in default
under the agreement and disputes any obligation as no consideration was
received. The Company ceased accruing interest as of August 1997. In
March 1999, the statute of limitations for collection on this note
expired.
During the six months ended June 30, 1999, the Company has reflected as
a reduction to cost of sales $240,000 (unaudited) of the total debt and
related interest. The remaining $154,388 (unaudited) is included as a
reserve for any potential litigation that may arise from this matter.
Management does not believe any litigation will arise and has had no
contact with the counter-party.
Pursuant to the terms of the note payable, in the event the Company or
its assets are sold or the Company commences an offering of common
stock, as defined, the note holder had the right to convert the
outstanding balance, including all accrued interest thereon, into
shares of the Company's common stock. The conversion factor was defined
as either the price per share in the event of sale or the initial
public offering price, as defined, divided by 1.5.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
LEASES
------
The Company leases its facilities and certain equipment under
non-cancelable, operating lease agreements, expiring through May 2003.
The Company also leases certain manufacturing equipment under a capital
lease obligation expiring January 2001.
F-20
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
LEASES (Continued)
------
Future aggregate minimum annual lease payments under capital and
operating lease arrangements are as follows as of December 31, 1998:
<TABLE>
<CAPTION>
Year Ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
<S> <C> <C>
1999 $ 5,247 $ 126,728
2000 5,247 171,456
2001 437 171,456
2002 -- 171,456
2003 -- 71,440
-------- ---------
10,931 $ 712,536
---------
Less amount representing interest 4,000 ---------
--------
Present value of minimum lease payments 6,931
Less current portion 208
--------
TOTAL $ 6,723
--------
--------
</TABLE>
Interest expense was insignificant for the years ended December 31,
1998 and 1997 and for the six months ended June 30, 1999 (unaudited)
and 1998 (unaudited).
Rent expense was $68,480, $64,069, $48,677 (unaudited), and $34,160
(unaudited) for the years ended December 31, 1998 and 1997 and the six
months ended June 30, 1999 and 1998, respectively, and is included in
general and administrative expenses in the accompanying statements of
operations.
F-21
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
SERVICE AGREEMENTS
------------------
Periodically, the Company enters into various agreements for services
including, but not limited to, public relations, financial consulting,
and manufacturing consulting. The agreements generally are ongoing
until such time they are terminated, as defined. Compensation for
services is paid either on a fixed monthly rate or based on a
percentage, as specified. As of December 31, 1998, the Company was
party to one such agreement. During the year ended December 31, 1998,
the Company incurred $140,498 in connection with such arrangements.
Amounts incurred during the year ended December 31, 1997 were
insignificant. During the six months ended June 30, 1999 and 1998, the
Company incurred $96,839 (unaudited) and $17,805 (unaudited),
respectively, in connection with such agreements.
EMPLOYMENT CONTRACT
-------------------
The Company has entered into an employment contract with one of its
officers which expires upon written termination. The agreement calls
for a minimum base salary and provides for certain expense allowances.
In addition, the agreement provides for a bonus based on the "net
profits" of the Company, as defined. The bonus amount ranges from
$20,000 to $70,000 for net profits up to $500,000. For net profits in
excess of $500,000, the bonus is 7% of such excess. No bonus amounts
were paid during the years ended December 31, 1998 and 1997 or during
the six months ended June 30, 1999 (unaudited) and 1998 (unaudited)
under the terms of this agreement.
RETAIL AGREEMENTS
-----------------
In connection with certain retail agreements, the Company has agreed to
pay for certain marketing development and advertising on an ongoing
basis. Marketing development and advertising costs are generally agreed
upon at the time of the event. The Company also records a liability for
co-op marketing based on management's evaluation of historical
experience and current industry and Company trends. During the years
ended December 31, 1998 and 1997 and the six months ended June 30, 1999
and 1998, the Company incurred $369,679, $287,398, $172,955
(unaudited), and $184,950 (unaudited), respectively, related to these
agreements. Such is included in selling, marketing, and advertising in
the accompanying statements of operations.
F-22
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
RELATED PARTY LICENSE AND DISTRIBUTION AGREEMENT
------------------------------------------------
In connection with the 1997 Strategic Alliance Agreement (see Notes 8
and 11), the Company entered into a definitive license agreement with a
stockholder and lender, whereby the Company will license all of its
current and future products for nonexclusive distribution into all
countries other than the United States and Canada and to mutually
agreed-upon OEM's for royalties, as defined. During the years ended
December 31, 1998 and 1997 and during the six months ended June 30,
1999 (unaudited), the Company earned no royalties under the terms of
this agreement.
In addition, the Company had two-year exclusive rights through retail
channels and select OEMs, as defined, in the North American market to
sell products purchased from such stockholder and supplier. This
agreement expired May 1998 and was renewable by written agreement. The
agreement was not renewed.
NOTE 11 - CAPITAL TRANSACTIONS
1996 PRIVATE PLACEMENT OF COMMON STOCK
--------------------------------------
In connection with a March 1996 private placement of units consisting
of common stock and warrants, the Company issued 577,335 shares of
common stock for cash at $1.45 per share and 568,002 warrants for cash
at $0.05 per warrant, or $1.50 per unit totaling $853,500. Concurrent
with this offering, the Company converted $627,500 of notes payable
into 598,328 shares of common stock at $1 per share and 598,328
warrants at $0.05 per warrant. These warrants allow the holder to
purchase common stock at $2.50 per share, exercisable for a period of
three years from the date of issuance. The Company is obligated to
register the common stock issuable upon exercise of these warrants in
any subsequent Registration Statement filed with the Securities and
Exchange Commission ("Piggyback Registration Rights"). These units also
carry demand registration rights, as defined. Through December 31,
1998, none of these warrants have been exercised.
F-23
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
1996 PRIVATE PLACEMENT OF COMMON STOCK (Continued)
--------------------------------------
As consideration for placement agent services rendered in connection
with the March 1996 private placement, the Company issued to the
placement agents the following warrants: 58,000 warrants to purchase
common stock at an exercise price of $0.70 per share, 131,850 warrants
to purchase common stock at an exercise price of $0.01 per share, and
151,850 warrants to purchase common stock at an exercise price of $1.65
per share. The term of these warrants is three years from the date of
issuance, and these warrants carry Piggyback Registration Rights. As of
December 31, 1998 and 1997, none of these warrants have been exercised.
1997 PRIVATE PLACEMENT OF COMMON STOCK
--------------------------------------
In February 1997, the Company commenced an offering of up to 600,000
units, consisting of one share of restricted common stock for cash at
$1.24 per share and one warrant for cash of $0.01 per warrant for a
total price of $1.25 per unit ("Unit"), as amended. The warrants are
exercisable in whole or in part at any time during the three years from
date of issuance at an exercise price of $4.50 and are callable by the
Company, as defined. The Units carry registration rights, as defined,
as the common stock and the common stock underlying the warrants have
not been registered under the Securities Act of 1933. The offering
closed in September 1997, at which time the Company had sold 364,000
Units for total proceeds of $455,000. Offering costs related to this
private placement totaled approximately $25,000.
As consideration for placement services rendered in connection with the
February 1997 private placement, the Company issued to a placement
agent 13,200 warrants carrying the same terms as the warrants discussed
in the preceding paragraph.
COMMON STOCK ISSUED FOR CASH
----------------------------
Through December 31, 1996, the Company issued an aggregate 7,809,998 of
shares of common stock for cash totaling $1,528,384, or ranging from
$0.01 to $1.00 per share, net of costs of $55,216. Such issuances are
net of a 1995 buyback and retirement of 15,783,392 shares of common
stock at $0.03 per share, or $459,000 in aggregate.
COMMON STOCK ISSUED FOR SERVICES
--------------------------------
Through December 31, 1996, the Company issued 16,666 restricted shares
of common stock for consulting services valued at $166, or $0.01 per
share. No compensation expense was charged to operations as the value
of the shares and the services was insignificant.
In February and June 1997, the Company issued an aggregate 38,201
restricted shares of common stock for services to a consultant valued
at $38,201, or $1 per share.
F-24
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
COMMON STOCK ISSUED FOR SERVICES (Continued)
--------------------------------
During the year ended December 31, 1998, the Company issued 20,000
restricted shares of common stock to an officer in exchange for 20,000
freely tradable shares. The freely tradable shares were issued to a
consultant for public relations services valued at the fair market
value of $7,500, or $0.375 per share. The freely tradable shares issued
carried a 90-day lock-up.
COMMON STOCK ISSUED IN CONNECTION WITH THE EXERCISE OF WARRANTS
---------------------------------------------------------------
Through December 31, 1996, the Company issued an aggregate of 1,395,312
restricted shares of common stock in connection with the exercise of
warrants for cash totaling $100,566, or at a per share price ranging
from $0.01 to $0.25 per share.
During the year ended December 31, 1997, the Company issued an
aggregate of 338,739 restricted shares of common stock in connection
with the exercise of warrants for cash of $17,135, or at a per share
price of $0.05 or $0.10 per share.
During the year ended December 31, 1998, the Company issued an
aggregate of 1,105,596 restricted shares of common stock in connection
with the exercise of warrants for cash of $25,551, or at a per share
price ranging from $0.05 to $0.55 per share.
During the six months ended June 30, 1999, the Company issued an
aggregate of 372,813 (unaudited) restricted shares of common stock in
connection with the exercise of warrants for cash totaling $66,706
(unaudited), or at a per share price ranging from $0.01 (unaudited)
to $0.30 (unaudited) per share.
OTHER COMMON STOCK TRANSACTIONS
-------------------------------
In March 1996, in connection with the Acquisition Agreement, the
Company issued 624,704 shares of common stock (see Note 1).
In December 1997, the Company purchased from three officers an
aggregate 9,000 freely tradable shares of common stock for cash of
$19,800, or at $2.20 per share. Such treasury shares were sold to an
outside third party pursuant to an October 1997 agreement for software
valued at $25,958, or at $2.88 per share.
F-25
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
1997 STRATEGIC ALLIANCE AGREEMENT
---------------------------------
On September 19, 1997, the Company entered into a strategic alliance
agreement with an electronics manufacturer, whereby the Company issued
2,000,000 restricted shares of common stock in exchange for $250,000 in
cash and $1,250,000 of inventory for a total value of $1,500,000, or
$0.75 per share. Of the $1,250,000, $481,260 was credited toward
inventory purchased prior to the agreement. The remaining $768,740 was
to be applied to future inventory purchases. As of December 31, 1998,
all of the inventory had been received by the Company. These shares
carry registration rights, as defined. In connection with this
agreement, this electronics manufacturer has established a line of
credit for the Company and has certain license and distribution
agreements (see Notes 8 and 10).
During the six months ended June 30, 1999, the Company issued
16,666,667 shares of restricted common stock to a stockholder and
vendor valued at $0.30 per share for $5,000,000 of inventory, as
defined. In connection with this transaction, the stockholder and
vendor established a $5,000,000 line of credit (see Note 8).
Generally, all new issuances of common stock made by the Company carry
registration rights.
WARRANTS
--------
In connection with an October 1995 private placement of notes payable
and warrants, the Company issued 805,000 A Warrants to purchase common
stock for $0.05 per share exercisable for five years from the date of
issuance, and 805,000 B Warrants to purchase common stock for $0.95 per
share exercisable for five years from the date of issuance. For every
30 days the B Warrants were outstanding, commencing six months from the
date of issuance, the B Warrant holders were entitled to a $0.04
discount on the exercise price per month to a minimum exercise price of
$0.50 per share. Interest expense ascribed to the warrants was
insignificant. During the years ended December 31, 1998 and 1997, A
Warrants aggregating 25,000 and 316,132, respectively, have been
exercised. Through December 31, 1996, A Warrants aggregating 63,868
have been exercised. During the year ended December 31, 1998, B
Warrants aggregating 25,001 were exercised for cash of $0.55 per share,
as adjusted. These units carry Piggyback Registration Rights, as
defined.
F-26
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
WARRANTS (Continued)
--------
In September 1998, the Company effected the B Warrant call. Pursuant to
the terms of the private placement, the B Warrants were callable at the
option of the Company, on or after the date that its common stock is
registered, in the event its common stock market price equals or
exceeds $2.00 per share for 30 consecutive days. The common stock of
the Company has not been registered. The B Warrant holders who elected
to exercise their warrants were given freely-tradable shares held by an
officer/stockholder. The Company issued restricted shares to the
officer/stockholder to replace the shares transferred in connection
with the exercise of the B Warrants.
In connection with an October 1995 private placement for placement
agent services, the Company issued 125,125 A Warrants to purchase
common stock for $0.10 per share exercisable for five years from the
date of issue and 125,125 B Warrants to purchase common stock for $1.10
per share exercisable for five years from the date of issue. During the
year ended December 31, 1998, no A or B Warrants were exercised. During
the years ended December 31, 1997 and 1996, 25,107 and 2,812 A Warrants
were exercised, respectively.
In October 1995, the Company issued to an officer 340,000 warrants to
purchase restricted shares of common stock for $0.01 per share
exercisable for five years from the date of grant. No compensation
expense was charged to operations as the value of the shares was
nominal. These warrants carry Piggyback Registration Rights, as
defined. During the year ended December 31, 1998, 200,000 of these
warrants were exercised.
During the years ended December 31, 1996 and 1995, the Company issued
an aggregate 100,000 warrants to purchase restricted shares of common
stock for $1.65 per share exercisable five years from date of grant to
a consultant for services provided. Compensation expense related to
these warrants was insignificant. Through December 31, 1998, 30,000 of
these warrants have been exercised. These warrants carry registration
rights, as defined.
During the year ended December 31, 1996, the Company issued to outside
consultants for services received 257,500 warrants to purchase
restricted shares of common stock for a per share price of $0.75 or
$1.00 exercisable for up to five years from the date of grant. The
Company recorded $36,833 of consulting expense to reflect the fair
value of the services received. During the years ended December 31,
1998 and 1997, warrants to purchase 250,000 and 7,500 shares of common
stock, respectively, expired.
F-27
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
WARRANTS (Continued)
--------
During the year ended December 31, 1996, the Company issued to an
officer 190,000 warrants to purchase restricted shares of common stock
for $0.01 per share exercisable for five years from the date of grant.
Compensation expense was charged to operations totaling $9,500,
representing the value of the bonus for additional services rendered to
the Company. These warrants carry Piggyback Registration Rights, as
defined. During the year ended December 31, 1998, all of these warrants
were exercised.
During the year ended December 31, 1997, the Company issued to outside
parties 162,465 warrants to purchase restricted shares of common stock
at a per share price ranging from $1.00 to $2.24 per share exercisable
up to five years from the date of grant. These warrants carry
registration rights, as defined. The Company recorded $42,465 of legal
and consulting expense to reflect the fair value of the services
received. During the year ended December 31, 1998, warrants to purchase
35,000 shares of common stock at $1.68 per share expired. None of these
warrants have been exercised.
During the year ended December 31, 1998, the Company issued to outside
consultants 30,000 warrants to purchase restricted shares of common
stock at a per share price of $0.01 or $1.00 per share exercisable up
to five years from the date of grant. These warrants carry registration
rights, as defined. The Company recorded $21,163 of consulting expense
to reflect the fair value of the services received. During the year
ended December 31, 1998, warrants to purchase 15,000 shares of common
stock at $0.01 were exercised.
In February 1999, the Company issued options to purchase 200,000
(unaudited) shares of restricted common stock to the Company's law
firm. The options are exercisable at $0.30 (unaudited) per share for
one year. During the six months ended June 30, 1999, such options were
exercised.
STOCK OPTION PLANS
------------------
The Company has incentive stock option and non-qualified stock option
plans (the "Plans") for directors, officers, key employees, and
consultants. The Plans provide for the granting of options for common
shares at exercise prices equal to or exceeding the fair market value
at the date of grant, as determined by the Board of Directors. Options
generally become exercisable over a period of up to five years from the
date of grant and no less than 20% shall become exercisable annually,
as determined by the Board of Directors.
F-28
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
STOCK OPTION PLANS (Continued)
------------------
None of the options granted are exercisable prior to one year from the
date of grant, unless specified by the Board of Directors. In no event
are options to be exercisable after 10 years from the date of grant.
The Board of Directors has authorized a total of 3,751,976 shares to be
available for grant under the Company's stock option Plans.
Options granted under the Plans may be either "incentive stock
options," within the meaning of Section 422 of the Internal Revenue
Code, or "non-qualified stock options," as determined by the Committee
at the time of grant. No incentive stock option may be granted to any
person who owns stock possessing more than 10% of the combined voting
power of all classes of the Company's stock or of its parent ("10%
Stockholders") unless the exercise price is at least equal to 110% of
fair market value on the date of grant. Options may be granted under
the Plans for terms of up to 10 years, except for incentive stock
options granted to 10% Stockholders, which are limited to five-year
terms.
The exercise price in the case of incentive stock options granted under
the Plans must be at least equal to the fair market value of the common
stock as of the date of grant. No incentive stock options may be
granted to an optionee under the Plans if the aggregate fair market
value (determined on the date of grant) of the stock with respect to
which incentive stock options are exercisable by such optionee in any
calendar year under all such plans of the Company and its affiliates
exceeds $100,000.
In February 1996, the Company issued options to an officer to purchase
650,000 restricted shares of common stock at $0.01 per share
exercisable five years from the date of grant. Compensation expense was
charged to operations totaling $6,500, representing the fair value of a
bonus for additional services rendered to the Company. These options
vested on the date of grant. Additional compensation expense was not
deemed appropriate by management as the value of the Company was
nominal prior to the effective date of the Acquisition Agreement, the
consummation of which was not assured.
In April 1996, the Company issued options to purchase restricted shares
of common stock at $0.01 per share to two employees below market,
resulting in the Company recording deferred compensation of $124,000,
which was being amortized over five years, the vesting period of the
options. During the year ended December 31, 1997, one of the employees
left the Company and forfeited his options. Accordingly, the Company
reversed the deferred compensation relating to this employee.
F-29
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
STOCK OPTION PLANS (Continued)
------------------
The balance of deferred compensation as of December 31, 1998 and 1997
and as of June 30, 1999 and 1998 totaled $27,900 and $40,300,
respectively, and $21,700 (unaudited) and $34,100 (unaudited),
respectively.
During the years ended December 31, 1998 and 1997, the Board of
Directors granted options to purchase 350,000 and 300,000,
respectively, shares of common stock to an officer and to an employee
at exercise prices ranging from $1.13 to $1.82. The options vested
immediately and expire over two to five years.
The following summarizes options and warrants granted and outstanding
through June 30, 1999:
<TABLE>
<CAPTION>
Number of Shares Weighted-
---------------- Average
Non- Exercise
Employee Employee Total Price
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31,
1996 750,000 4,181,633 4,931,633 $ 0.99
Granted 350,000 526,465 876,465 $ 2.74
Exercised -- (341,239) (341,239) $ 0.05
Expired, cancelled (50,000) (7,500) (57,500) $ 0.11
---------- ---------- ----------
Balance, December 31,
1997 1,050,000 4,359,359 5,409,359 $ 1.31
Granted 300,000 30,000 330,000 $ 1.07
Exercised (650,000) (455,001) (1,105,001) $ 0.03
Expired, called -- (1,190,124) (1,190,124) $ 1.11
---------- ---------- ----------
Balance, December 31,
1998 700,000 2,744,234 3,444,234 $ 1.80
Granted -- 200,000 200,000 $ 0.30
Exercised (50,000) (322,813) (372,813) $ 0.18
Expired, cancelled (unaudited) -- (1,517,363) (1,517,363) $ 2.13
---------- ---------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED) 650,000 1,104,058 1,754,058 $ 1.70
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-30
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
STOCK OPTION PLANS (Continued)
------------------
The following table sets forth the exercise prices, the number of
warrants and stock options exercisable and outstanding and the
remaining contractual lives of such warrants and stock options as of
December 31, 1998:
<TABLE>
<CAPTION> Weighted-
Number of Average
Range of Options and Remaining
Exercise Prices Warrants Contractual Life
--------------- ----------- ----------------
<S> <C> <C>
$ 0.01 to 0.50 869,056 1.5 years
$ 0.51 to 1.00 105,465 1.2 years
$ 1.13 to 1.25 360,000 3.4 years
$ 1.65 to 1.82 521,850 0.6 years
$ 2.24 to 2.50 1,210,663 0.2 years
$ 4.50 377,200 1.1 years
---------
3,444,234
---------
---------
</TABLE>
Pro forma information regarding net income (loss) and earnings (loss)
per share is required by SFAS No. 123 and has been determined as if the
Company had accounted for its employee stock options under the fair
value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions for the years
ended December 31, 1998 and 1997: risk free interest rate of 5.25%;
dividend yield of 0%; expected life of five years; and expected
volatility of 92%.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions 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 employee stock
options have characteristics significantly different from those of
traded options, 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 single
measure of the fair value of its employee stock options.
F-31
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 11 - CAPITAL TRANSACTIONS (CONTINUED)
STOCK OPTION PLANS (Continued)
------------------
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period.
Adjustments are made for options forfeited prior to vesting. The effect
on compensation expense, net income (loss) and net income (loss) per
common share had compensation costs for the Company's stock option
plans been determined based on a fair value at the date of grant
consistent with the provisions of SFAS No. 123 for the years ended
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Net loss
As reported $ (338,018) $ (1,459,527)
Pro forma $ (569,014) $ (1,845,027)
Basic and diluted loss per common share
As reported $ (0.02) $ (0.12)
Pro forma $ (0.04) $ (0.16)
</TABLE>
NOTE 12 - INCOME TAXES
The components of the income tax provision were as follows:
<TABLE>
<CAPTION>
For the Years Ended For the Six Months Ended
December 31, June 30,
------------------------ --------------------------
1998 1997 1999 1998
---------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Current $ 800 $ 800 $ 400 $ 800
Deferred -- -- -- --
---------- ----------- ----------- -----------
TOTAL $ 800 $ 800 $ 400 $ 800
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
</TABLE>
F-32
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES (CONTINUED)
Income tax expense (benefit) for the years ended December 31, 1998 and
1997 differed from the amounts computed applying the federal statutory
rate of 34% to pre-tax income as a result of:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Computed "expected" tax benefit $ (114,654) $ (495,967)
Income (reduction) in income taxes resulting from
Expenses not deductible for tax purposes 17,999 9,062
Change in beginning of the year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense 96,927 487,177
State and local income taxes, net of tax benefit 528 528
----------- -----------
TOTAL $ 800 $ 800
----------- -----------
----------- -----------
</TABLE>
Significant components of the Company's deferred tax assets and
liabilities for federal income taxes for the year ended December 31,
1998 and the six months ended June 30, 1999 consisted of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
Deferred tax assets
Net operating loss $ 1,259,000 $ 1,716,000
Allowance for doubtful accounts 19,000 22,000
Allowances for sales returns 28,000 34,000
Allowances for price protection 62,000 145,000
Other 13,000 20,000
Valuation allowance (1,306,000) (1,816,000)
----------- -----------
Total deferred tax assets 75,000 121,000
Deferred tax liabilities
State tax 75,000 121,000
----------- -----------
TOTAL $ -- $ --
----------- -----------
----------- -----------
</TABLE>
F-33
<PAGE>
I/O MAGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(THE INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED
JUNE 30, 1999 AND 1998 IS UNAUDITED.)
- -------------------------------------------------------------------------------
NOTE 12 - INCOME TAXES (CONTINUED)
The valuation allowance for deferred tax assets as of December 31, 1998
and 1997 totaled approximately $1,306,000 and $1,218,000, respectively.
The net change in the valuation allowance for the years ended December
31, 1998 and 1997 was an increase of approximately $88,000 and
$411,000, respectively.
As of December 31, 1998, the Company had net tax operating loss
carryforwards of approximately $3,142,000 available to offset future
federal taxable income and tax liabilities. The federal carryforwards
expire in varying amounts from 2008 to 2018. The Company also had net
tax operating loss carryforwards of approximately $2,157,000 available
to offset future California taxable income and tax liabilities. The
state carryforwards expire in 2003 and 2009.
NOTE 13 - YEAR 2000 ISSUE (UNAUDITED)
The Company is conducting a comprehensive review of its computer
systems, is inquiring of its major customers and suppliers to identify
systems that could be affected by the Year 2000 Issue, and is
developing an implementation plan to resolve the Issue.
The Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Company is dependent on computer
processing in the conduct of its business activities.
Based on the review of the computer systems, management does not
believe the cost of implementation will be material to the Company's
financial position and results of operations.
F-34
<PAGE>
EXHIBIT 3.1
ARTICLES OF INCORPORATION OF
ASIAN-INTER AMERICAN DEVELOPMENT CORPORATION
DATED OCTOBER 20, 1992
<PAGE>
FILING FEE: $125.00 K.K.
RECEIPT #C 61195
ASIAN-INTER AMERICAN DEVELOPMENT
1700 EAST DESERT INN ROAD #100
LAS VEGAS, NEVADA 89109
ARTICLES OF INCORPORATION
of
ASIAN-INTER AMERICAN DEVELOPMENT CORPORATION
11412-92
Know all men by these present;
That the undersigned, have this day voluntarily associated ourselves together
for the purpose of forming a corporation under and pursuant to the provisions of
the Nevada Revised Statutes 78.010. to Nevada Revised Statutes 78.090 inclusive,
as amended, and certify that;
1. The name of this corporation is:
Asian-Inter American Development Corporation
2. Offices for the transaction of any business of the Corporation, and
where meetings of the Board of Directors and of Stockholders may be
held, may be established and maintained in any part of the State of
Nevada, or in any other state, territory, or possession of the United
States.
3. The nature of the business is to engage in any lawful activity.
4. The Capital Stock shall consist of 2,000,000 shares of common stock,
$0.001 par value.
5. The members of the governing board of the corporation shall be styled
directors, of which there shall be no more than five. The Directors of
this corporation need not be stockholders. The first Board of Directors
is: Raymond Girard, 1700 E. Desert Inn Rd., Suite 100, Las Vegas, NV
89109.
6. This corporation shall have perpetual existence.
7. This Corporation shall have a president, a secretary, a treasurer, and
a resident agent, to be chosen by the Board of Directors, any person
may hold two or more offices.
8. The resident agent of this Corporation shall be Raymond Girard, 1700 E.
Desert Inn Rd., Suite 100, Las Vegas, NV 89109.
9. The Capital Stock of the corporation, after the fixed consideration
thereof has been paid or performed, shall not be subject to assessment,
and the individual liable for the debts and liabilities of the
Corporation, and the Articles of Incorporation shall never be amended
as the aforesaid provisions.
10. No director or officer of the corporation shall be personally liable to
the corporation of any of its stockholders for damages for breach of
fiduciary duty as a director or officer involving any act or omission
of any such director of officer provided, however, that the foregoing
provision shall not eliminate or limit the liability of a director or
officer for acts or omissions which involve intentional misconduct,
fraud or a knowing violation of law, or the payment of dividends in
violation of Section 78.300 of the Nevada Revised Statutes. Any repeal
or modification of this Article of the Stockholders of the Corporation
shall be prospective only, and shall not adversely affect any
limitation on the personal liability or a director of officer of the
Corporation for acts or omissions prior to such repeal or modification.
11. Except to the extent limited or denied by Nevada Revised Statutes
78.265 Shareholders have a preemptive right to acquire
1
<PAGE>
unissued shares, treasury shares or securities convertible into such
shares, of this corporation.
I, the undersigned, being the incorporator herein above named for the purpose of
forming a corporation pursuant to the general corporation law of the State of
Nevada, do make and file these Articles of Incorporation, hereby declaring and
certifying that the facts within stated are true, and accordingly have hereunto
set my hand this 19TH day of OCTOBER, 1992.
/s/ RAYMOND GIRARD
------------------
Raymond Girard
1700 E. Desert Inn Rd., Suite 100
Las Vegas, NV 89109
State of NEVADA)
)ss.
County of CLARK)
On OCTOBER 19, 1992, personally appeared before me, a notary public, personally
known to me to be the person whose name is subscribed to the above instrument
who acknowledged that he/she executed the instrument.
/s/ KELLEY JONES
----------------
2
<PAGE>
EXHIBIT 3.2
CERTIFICATE OF AMENDMENT TO
ARTICLES OF INCORPORATION OF
ASIAN-INTER AMERICAN DEVELOPMENT CORPORATION
CHANGING NAME TO SILVERCREST INTERNATIONAL, INC.
DATED AUGUST 30, 1993
<PAGE>
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
ASIAN-INTER AMERICAN DEVELOPMENT CORPORATION
Name of Corporation
We the undersigned PETER E. BERNEY and WHITNEY D. LUND of ASIAN-INTER AMERICAN
DEVELOPMENT CORPORATION do hereby certify:
That the Board of Directors of said corporation at a meeting
duly convened and held on the 27th day of August, 1993,
adopted a resolution to amend the original articles as
follows:
Article 1 is hereby amended to read as follows:
The name of this corporation is: Silvercrest International, Inc.
The number of share of the corporation outstanding and entitled to vote on an
amendment to the Articles of Incorporation are 2,000,000; that the said
change(s) and amendment has been consented to and approved by a majority vote of
the stockholders holding at least a majority of each class of stock outstanding
and entitled to vote thereon.
/s/ PETER E. BERNEY, PRESIDENT
---------------------------------
President or Vice President
/s/ ANDREW W. BERNEY, SECRETARY
---------------------------------
Secretary or Assistant Secretary
State of Nevada )
) ss
County of Clark )
On August 27, 1993, personally appeared before me, a Notary Public,
Andrew W. and Peter E. Berney, who acknowledged that they executed the above
instrument.
/s/ E.V. STAMBRO, NOTARY PUBLIC
--------------------------------
(Notary Stamp or Seal)
<PAGE>
EXHIBIT 3.3
RESTATED ARTICLES OF INCORPORATION OF
SILVERCREST INTERNATIONAL, INC.
DATED JANUARY 10, 1996
<PAGE>
RESTATED
ARTICLES OF INCORPORATION
OF
SILVERCREST INTERNATIONAL, INC.
On the 27th day of October, 1995, at the Annual Meeting of
Shareholders, there being shares validly issued and outstanding and entitled to
vote, with a total voting power of 2,000,000 shares, shareholders voted either
by proxy or in person 2,000,000 shares FOR, representing 100.00% being a
majority and 0 shares AGAINST, to RESTATE THE ARTICLES OF INCORPORATION OF
SILVERCREST INTERNATIONAL, INC.
Therefore, the Corporation does by these presents Restate its Articles
of Incorporation as follows:
FIRST: Name.
The name of the corporation is SILVERCREST INTERNATIONAL, INC. (the
"Corporation").
SECOND: Registered Office and Agent.
The address of the registered office of the Corporation in the State of
Nevada is 4056 Elkridge Drive, Las Vegas, NV 89129, in the City of Las Vegas,
County of Clark. The name and address of the Corporation's registered agent in
the State of Nevada is Andrew W. Berney, at said address, until such time as
another agent is duly authorized and appointed by the Corporation.
THIRD: Purpose and Business.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may now or hereafter be organized under the
Nevada Revised Statutes of the State of Nevada, including, but not limited to
the following:
(a) The Corporation may at any time exercise such rights,
privileges and powers, when not inconsistent with the
powers, when not inconsistent with the purposes and
object for which this Corporation is organized;
(b) The Corporation shall have power to have succession
by its corporate name in perpetuity, or until
dissolved and its affairs wound up according to law;
(c) The Corporation shall have power to sue and be sued
in any court of law or equity;
(d) The Corporation shall have power to make contracts;
(e) The Corporation shall have power to hold, purchase
and convey real and personal estate and to mortgage
or lease any such real and personal estate with its
franchises. The power to hold real and personal
estate shall include the power to take the same by
devise or bequest in the State of Nevada, or in any
other state, territory or country;
(f) The Corporation shall have power to appoint such
officers and agents as the affairs of the Corporation
shall require and allow them suitable compensation;
(g) The Corporation shall have power to make bylaws not
inconsistent with the constitution or laws of the
United States, or of the State of Nevada, for the
management, regulation and government of its affairs
and property, the transfer of its stock, the
transaction of its business and the calling and
holding of meetings of stockholders;
1
<PAGE>
(h) The Corporation shall have the power to wind up and
dissolve itself, or be wound up or dissolved;
(i) The Corporation shall have the power to adopt and use
a common seal or stamp, or not to use such seal or
stamp and if one is used, to alter the same. The use
of a seal or stamp by the Corporation on any
corporate documents is not necessary. The Corporation
may use a seal or stamp, if it desires, but such use
or non-use shall not in any way affect the legality
of the document;
(j) The Corporation shall have the power to borrow money
and contract debts when necessary for the transaction
of its business, or for the exercise of its corporate
rights, privileges or franchises, or for any other
lawful purpose of its incorporation; to issue bonds,
promissory notes, bills of exchange, debentures and
other obligations and evidence of indebtedness,
payable at a specified time or times, or payable upon
the happening of a specified event or events, whether
secured by mortgage, pledge or otherwise, or
unsecured, for money borrowed, or in payment for
property purchased, or acquired, or for another
lawful object;
(k) The Corporation shall have the power to guarantee,
purchase, hold, sell, assign, transfer, mortgage,
pledge or otherwise dispose of the shares of the
capital stock of, or any bonds, securities or
evidence of indebtedness created by any other
corporation or corporations of the State of Nevada,
or any other state or government and, while the owner
of such stock, bonds, securities or evidence of
indebtedness, to exercise all the rights, powers and
privileges of ownership, including the right to vote,
if any;
(l) The Corporation shall have the power to purchase,
hold, sell and transfer shares of its own capital
stock and use therefor its capital, capital surplus,
surplus or other property or fund;
(m) The Corporation shall have the power to conduct
business, have one or more offices and hold,
purchase, mortgage and convey real and personal
property in the State of Nevada and in any of the
several states, territories, possessions and
dependencies of the United States, the District of
Columbia and any foreign country;
(n) The Corporation shall have the power to do all and
everything necessary and proper for the
accomplishment of the objects enumerated in its
articles of incorporation, or any amendments thereof,
or necessary or incidental to the protection and
benefit of the Corporation and, in general, to carry
on any lawful business necessary or incidental to the
attainment of the purposes of the Corporation,
whether or not such business is similar in nature to
the purposes set forth in the articles of
incorporation of the Corporation, or any amendment
thereof;
(o) The Corporation shall have the power to make
donations for the public welfare or for charitable,
scientific or educational purposes;
(p) The Corporation shall have the power to enter
partnerships, general or limited, or joint ventures,
in connection with any lawful activities.
FOURTH: Capital Stock.
1. CLASSES AND NUMBER OF SHARES. The total number of shares of all classes
of stock, which the Corporation shall have authority to issue is Sixty Million
(60,000,000), consisting of Fifty Million (50,000,000) shares of Common Stock,
par value of $0.001 per share (the "Common Stock") and Ten Million (10,000,000)
shares of Preferred Stock, par value of $.001 per share (the
<PAGE>
"Preferred Stock").
2. POWERS AND RIGHTS OF COMMON STOCK
(a) PREEMPTIVE RIGHT. No shareholders of the Corporation holding common
stock shall have any preemptive or other right to subscribe for any additional
un-issued or treasury shares of stock or for other securities of any class, or
for rights, warrants or options to purchase stock, or for scrip, or for
securities of any kind convertible into stock or carrying stock purchase
warrants or privileges unless so authorized by the Corporation.
(b) VOTING RIGHTS AND POWERS. With respect to all matters upon which
stockholders are entitled to vote or to which stockholders are entitled to give
consent, the holders of the outstanding shares of the common Stock shall be
entitled to cast thereon one (1) vote in person or by proxy for each share of
the Common Stock standing in his name.
(c) DIVIDENDS AND DISTRIBUTIONS.
(i) CASH DIVIDENDS. Subject to the rights of holders
of Preferred Stock, holders of Common Stock shall be entitled
to receive such cash dividends as may be declared thereon by
the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor;
(ii) OTHER DIVIDENDS AND DISTRIBUTIONS. The Board of
Directors may issue shares of the Common Stock in the form of
a distribution or distributions pursuant to a stock dividend
or split-up of the shares of the Common Stock;
(iii) OTHER RIGHTS. Except as otherwise required by
the Nevada Revised Statutes and as may otherwise be provided
in these Articles of Incorporation, each share of the Common
Stock shall have identical powers, preferences and rights,
including rights in liquidation.
3. PREFERRED STOCK. The powers, preferences, rights, qualifications,
limitations and restrictions pertaining to the Preferred Stock, or any series
thereof, shall be such as may be fixed, from time to time, by the Board of
Directors in its sole discretion, authority to do so being hereby expressly
vested in such Board.
4. ISSUANCE OF THE COMMON STOCK AND THE PREFERRED STOCK. The Board of
Directors of the Corporation may from time to time authorize by resolution
the issuance of any or all shares of the Common Stock and the Preferred Stock
herein authorized in accordance with the terms and conditions set forth in
these Articles of Incorporation for such purposes, in such amounts, to such
persons, corporations, or entities, for such consideration and in the case of
the Preferred Stock, in one or more series, all as the Board of Directors in
its discretion may determine and without any vote or other action by the
stockholders, except as otherwise required by law. The Board of Directors,
from time to time, also may authorize, by resolution, options, warrants and
other rights convertible into Common or Preferred stock (collectively
"securities"). The securities must be issued for such consideration,
including cash, property, or services, as the Board of Directors may deem
appropriate, subject to the requirement that the value of such consideration
be no less than the par value of the shares issued. Any shares issued for
which the consideration so fixed has been paid or delivered shall be fully
paid stock and the holder of such shares shall not be liable for any further
call or assessment or any other payment thereon, provided that the actual
value of such consideration is not less than the par value of the shares so
issued. The Board of Directors may issue shares of the Common Stock in the
form of a distribution or distributions pursuant to a stock dividend or
split-up of the shares of the Common Stock only to the then holders of the
outstanding shares of the Common Stock.
5. CUMULATIVE VOTING. Except as otherwise required by applicable law,
there shall be no cumulative voting on any matter brought to a vote of
stockholders of the Corporation.
FIFTH: Adoption of Bylaws.
In the furtherance and not in limitation of the powers conferred by
statute and subject to Article Sixth hereof, the Board of Directors is expressly
authorized to adopt, repeal, rescind, alter or amend in any respect the Bylaws
of the Corporation (the "Bylaws").
SIXTH: Shareholder Amendment of Bylaws.
<PAGE>
Notwithstanding Article Fifth hereof, the Bylaws may also be adopted,
repealed, rescinded, altered or amended in any respect by the stockholders of
the Corporation, but only by the affirmative vote of the holders of not less
than seventy-five percent (75%) of the voting power of all outstanding shares of
voting stock, regardless of class and voting together as a single voting class.
SEVENTH: Board of Directors.
The business and affairs of the Corporation shall be managed by and
under the direction of the Board of Directors. Except as may otherwise be
provided pursuant to Section 4 of Article Fourth hereof in connection with
rights to elect additional directors under specified circumstances, which may
be granted to the holders of any class or series of Preferred Stock, the
exact number of directors of the Corporation shall be determined from time to
time by a Bylaw or amendment thereto, providing that the number of directors
shall not be reduced to less than one (1). The directors holding office at
the time of the filing of these Articles of Incorporation shall continue as
directors until the next annual meeting and/or until their successors are
duly chosen.
EIGHTH: Term of Board of Directors.
Except as otherwise required by applicable law, each director shall
serve for a term ending on the date of the third Annual Meeting of Stockholders
of the Corporation (the "Annual Meeting") following the Annual Meeting at which
such director was elected. All directors, shall have equal standing.
Notwithstanding the foregoing provisions of this Article Eighth each
director shall serve until his successor is elected and qualified or until his
death, resignation or removal; no decrease in the authorized number of directors
shall shorten the term of any incumbent director; and additional directors,
elected pursuant to Section 4 of Article Fourth hereof in connection with rights
to elect such additional directors under specified circumstances, which may be
granted to the holders of any class or series of Preferred Stock, shall not be
included in any class, but shall serve for such term or terms and pursuant to
such other provisions as are specified in the resolution of the Board of
Directors establishing such class or series.
NINTH: Vacancies on Board of Directors.
Except as may otherwise be provided pursuant to Section 4 of Article
Fourth hereof in connection with rights to elect additional directors under
specified circumstances, which may be granted to the holders of any class or
series of Preferred Stock, newly created directorships resulting from any
increase in the number of directors, or any vacancies on the Board of Directors
resulting from death, resignation, removal or other causes, shall be filled
solely by the affirmative vote of a majority of the remaining directors then in
office even though less than a quorum of the Board of Directors. Any direct
elected in accordance with the preceding sentence shall hold office for the
remainder of the full term of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified or until such director's death, resignation or
removal, whichever first occurs.
TENTH: Removal of Directors.
Except as may otherwise be provided pursuant to Section 4 of Article
Fourth hereof in connection with rights to elect additional directors under
specified circumstances, which may be granted to the holders of any class or
series of Preferred Stock, any director may be removed from office only for
cause and only by the affirmative vote of the holders of not less than a
majority of the voting power of all outstanding shares of voting stock entitled
to vote in connection with the election of such director, provided, however,
that where such removal if approved by a majority of the Directors, the
affirmative vote of a majority of the voting power of all outstanding shares of
voting stock entitled to vote in connection with the election of such director
shall be required for approval of such removal. Failure of an incumbent director
to be nominated to serve an additional term of office shall not be deemed a
removal from office requiring any stockholder vote.
ELEVENTH: Stockholder Action.
Any action required or permitted to be taken by the stockholders of the
Corporation must be effective at a duly called Annual Meeting or at a special
meeting of stockholders of the Corporation, unless such action requiring or
permitting stockholder approval is approved by a majority of the Directors, in
which case such action may be authorized or taken by the written consent of the
holders of outstanding shares of Voting Stock having not less than the minimum
voting power that would be necessary to authorize or take such action at a
meeting of stockholders at which all shares entitled to vote thereon were
present and voted, provided all other requirements of applicable law and these
Articles have been satisfied.
TWELFTH: Special Stockholder Meeting.
Special meetings of the stockholders of the Corporation for any purpose
or purposes may be called at any time by a
<PAGE>
majority of the Board of Directors or by the Chairman of the Board or the
President. Special meetings may not be called by any other person or persons.
Each special meeting shall be held at such date and time as is requested by
the person or persons calling the meeting, within the limits fixed by law.
THIRTEENTH: Location of Stockholder Meetings.
Meetings of stockholders of the Corporation may be held within or
without the State of Nevada, as the Bylaws may provide. The books of the
Corporation may be kept (subject to any provision of the Nevada Revised
Statutes) outside the State of Nevada at such place or places as may be
designated from time to time by the Board of Directors or in the Bylaws.
FOURTEENTH: Private Property of Stockholders.
The private property of the stockholders shall not be subject to the
payment of corporate debts to any extent whatever and the stockholders shall not
be personally liable for the payment of the corporation's debts.
FIFTEENTH: Stockholder Appraisal Rights in Business Combinations.
To the maximum extent permissible under the Nevada Revised Statutes of
the State of Nevada, the stockholders of the Corporation shall be entitled to
the statutory appraisal rights provided therein, with respect to any Business
Combination involving the Corporation and any stockholder (or any affiliate or
associate of any stockholder), which requires the affirmative vote of the
Corporation's stockholders.
SIXTEENTH: Other Amendments.
The Corporation reserves the right to adopt, repeal, rescind, alter or
amend in any respect any provision contained in these Articles of Incorporation
in the manner now or hereafter prescribed by applicable law and all rights
conferred on stockholders herein are granted subject to this reservation.
SEVENTEENTH: Term of Existence.
The Corporation is to have perpetual existence.
EIGHTEENTH: Liability of Directors.
No director of this Corporation shall have personal liability to the
Corporation or any of its stockholders, for monetary damages for breach of
fiduciary duty as a director or officers involving any act or omission of any
such director or officer. The foregoing provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or, which involve intentional misconduct or a knowing violation of law,
(iii) under applicable Sections of the Nevada Revised Statutes, (iv) the payment
of dividends in violation of Section 78.300 of the Nevada Revised Statutes or,
(v) for any transaction from which the director derived an improper personal
benefit. Any repeat or modification of this Article by the stockholders of the
Corporation shall be prospective only and shall not adversely affect any
limitation on the personal liability of a director or officer of the Corporation
for acts or omissions prior to such repeal or modification.
NINETEENTH: Name and Address of Incorporator.
The name and address of the incorporator of the Corporation is:
Raymond Girard, 1700 E. Desert Inn Road, Suite 100, Las Vegas,
NV 89109
I, ANDREW W. BERNEY, President of Silvercrest International, Inc., do
hereby swear and affirm that the Restated Articles of Incorporation as contained
herein are true and correct as adopted by a majority of shareholders on October
27th, 1995. Dated this 10th day of January, 1996.
BY: /s/ ANDREW W. BERNEY
-------------------------------
ANDREW W. BERNEY, PRESIDENT
STATE OF NEVADA )
) ss.
COUNTY OF CLARK )
The undersigned Notary Public certified, deposes and states that ANDREW
W. BERNEY, personally appeared before me and executed the foregoing on behalf of
the Corporation as its President, this 10TH day of January, 1996.
/s/ KRISTIN D. PAYNE
-----------------------------
Notary Public in and for said
County and State (SEAL)
<PAGE>
THIS FORM SHOULD ACCOMPANY AMENDED AND RESTATED
ARTICLES OF INCORPORATION FOR A NEVADA CORPORATION
1. Name of Corporation: SILVERCREST INTERNATIONAL, INC. (Corp.
No. 11412-92)
2. Date of adoption of Amended and Restated Articles: October 27, 1995
3. If the articles were amended, please indicate what changes have been
made.
(a) Was there a name change? Yes___ No X. If yes, what is the new
name?
(b) Did you change the resident agent? No X. If yes, please
indicate the new resident agent and address.
(c) Did you change the purposes. Yes X No___. Did you add
Banking___? Gaming___? Insurance___? None of these? X
(d) Did you change the capital stock? Yes X. No___. If yes,
indicate the change?
<TABLE>
<CAPTION>
OLD NEW
----- -----
<S> <C>
200,000 Common Shares 50,000,000 Common Shares
par value per share $.001 par value $.001 per share:
10,000,000 Preferred Shares
par value $.001 per share
</TABLE>
(e) Did you change the directors? No X . If yes, indicate the
change.
(f) Did you add the directors liability provisions? YES___ No___
(g) Did you change the period of existence? Yes___ No X . If yes,
what is the new existence?
(h) If one of the above apply and you have amended or modified the
articles, how did you change your articles?
By: /s/ ANDREW W. BERNEY
----------------------------
Andrew W. Berney, President
Dated this 10th day of January, 1996.
STATE OF NEVADA )
) ss.
COUNTY OF CLARK )
The undersigned Notary Public certified, deposes and states that ANDREW
W. BERNEY, personally appeared before me and executed the foregoing on behalf of
the Corporation as its President, this 10TH day of January, 1996.
/s/ KRISTIN D. PAYNE
---------------------------------------------
Notary Public in and for said County and State
(SEAL)
<PAGE>
EXHIBIT 3.4
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
SILVERCREST INTERNATIONAL, INC. CHANGING NAME TO
I/OMAGIC CORPORATION, DATED MARCH 19, 1996
<PAGE>
CERTIFICATE OF AMENDMENT TO THE
ARTICLES OF INCORPORATION OF
SILVERCREST INTERNATIONAL, INC.
- -------------------------------------------------------------------------------
Pursuant to the applicable provisions of Chapter 78 of the Nevada
General Corporation Law, the undersigned Corporation adopts the following
Articles of Amendment to its Articles of Incorporation by stating the following:
FIRST The present name of the Corporation is Silvercrest
International,Inc.
SECOND The following amendment to its Articles of Incorporation was
adopted by the shareholders of the corporation on March 11, 1996, in the manner
prescribed by Nevada law. Article I is amended as follows:
ARTICLE I - NAME
----------------
The name of the corporation is I/OMagic Corporation
THIRD The number of shares of the Corporation outstanding and
entitled to vote at the time of the adoption of said Amendment was 2,000,000.
FOURTH The number of shares voted for such amendment was 1,750,000
(87.5%) and the number voted against such amendment was 0 (0%).
Dated this 13 day of March, 1996.
SILVERCREST INTERNATIONAL, INC.
By: /s/ ANDREW W. BERNEY
--------------------
Andrew W. Berney
Chairman/President
ATTEST:
/s/ BOBBY COMBS
- ----------------------
Bobby Combs, Secretary
<PAGE>
EXHIBIT 3.5
BYLAWS OF
ASIAN-INTER AMERICAN DEVELOPMENT CORPORATION
DATED OCTOBER 20, 1992 ADOPTED BY
I/OMAGIC CORPORATION
<PAGE>
BYLAWS
OF
ASIAN-INTER AMERICAN DEVELOPMENT CORPORATION
(the "Corporation")
Article I.
Office
The Board of Directors shall designate and the Corporation shall
maintain a principal office. The location of the principal office may be changed
by the Board of Directors. The Corporation also may have offices in such other
places as the Board may from time to time designate. The location of the initial
principal office of the Corporation shall be designated by resolution.
Article II.
Shareholders Meetings
1. Annual Meetings
The annual meeting of the shareholders of the Corporation shall be held
at such place within or without the State of Nevada as shall be set forth in
compliance with these Bylaws. The meeting shall be held on the third Friday of
March of each year. If such day is a legal holiday, the meeting shall be on the
next business day. This meeting shall be for the election of Directors and for
the transaction of such other business as may properly come before it.
2. Special Meetings
Special meetings of shareholders, other than those regulated by
statute, may be called by the President upon written request of the holders of
50% or more of the outstanding shares entitled to vote at such special meeting.
Written notice of such meeting stating the place, the date and hour of the
meeting, the purpose or purposes for which it is called, and the name of the
person by whom or at whose direction the meeting is called shall be given.
3. Notice of Shareholders Meetings
The Secretary shall give notice stating the place, day, and hour of the
meeting, and in the case of a special meeting, the purpose or purposes for which
the meeting is called, which shall be delivered not less than ten or more than
fifty days before the date of the meeting, either personally or by mail to each
shareholder of record entitled to vote at such meeting. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail,
addressed to the shareholder at his address as it appears on the books of the
Corporation, with postage thereon prepaid. Attendance at the meeting shall
constitute a waiver of notice thereof.
4. Place of Meeting
The Board of Directors may designate any place, either within or
without the State of Nevada, as the place of meeting for any annual meeting or
for any special meeting called by the Board of Directors. A waiver of notice
signed by all shareholders entitled to vote at a meeting may designate any
place, either within or without the State of Nevada, as the place for the
holding of such meeting. If no designation is made, or if a special meeting is
otherwise called, the place of meeting shall be the principal office of the
Corporation.
5. Record Date
The Board of Directors may fix a date not less than ten nor more than
fifty days prior to any meeting as the record date for the purpose of
determining shareholders entitled to notice of and to vote at such meetings of
the shareholders. The transfer books may be closed by the Board of Directors for
a stated period not to exceed fifty days for the purpose of determining
shareholders entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other purpose.
6. Quorum
A majority of the outstanding shares of the Corporation entitled to
vote, represented in person or by proxy, shall constitute
1
<PAGE>
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.
At a meeting resumed after any such adjournment at which a quorum shall be
present or represented, any business may be transacted, which might have been
transacted at the meeting as originally noticed.
7. Voting
A holder of an outstanding share, entitled to vote at a meeting, may
vote at such meeting in person or by proxy. Except as may otherwise be provided
in the currently filed Articles of Incorporation, every shareholder shall be
entitled to one vote for each share standing in his name on the record of
shareholders. Except as herein or in the currently filed Articles of
Incorporation otherwise provided, all corporate action shall be determined by a
majority of the votes cast a meeting of shareholders by the holders of shares
entitled to vote thereon.
8. Proxies
At all meetings of shareholders, a shareholder may vote in person or by
proxy executed in writing by the shareholder or by his duly authorized
attorney-in-fact. Such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
eleven months from the date of its execution, unless otherwise provided in the
proxy.
9. Informal Action by Shareholders
Any action required to 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 a majority of the shareholders entitled to vote with
respect to the subject matter thereof.
Article III.
Board of Directors
1. General Powers
The business and affairs of the Corporation shall be managed by its
Board of Directors. The Board of Directors may adopt such rules and regulations
for the conduct of their meetings and the management of the Corporation as they
deem appropriate under the circumstances. The Board shall have authority to
authorize changes in the Corporation's capital structure.
2. Number, Tenure and Qualification
The number of Directors of the Corporation shall be a number between
one and five, as the Directors may be resolution determined from time to time.
Each of the Directors shall hold office until the next annual meeting of
shareholders and until his successor shall have been elected and qualified.
3. Regular Meetings
A regular meeting of the Board of Directors shall be held without other
notice than by this Bylaw, immediately after and, at the same place as the
annual meeting of shareholders. The Board of Directors may provide, by
resolution, the time and place for the holding of additional regular meetings
without other notice than this resolution.
4. Special Meetings
Special meetings of the Board of Directors may be called by order of
the Chairman of the Board or the President. The Secretary shall give notice
of the time, place and purpose or purposes of each special meeting by mailing
the same at least two days before the meeting or by telephone, telegraphing
or telecopying the same at least one day before the meeting to each Director.
Meeting of the Board of Directors may be held by telephone conference call.
5. Quorum
A majority of the members of the Board of Directors shall constitute
a quorum for the transaction of business, but less than a quorum may adjourn
any meeting from time to time until a quorum shall be present, whereupon the
meeting may be held, as adjourned, without further notice. At any meeting at
which every Director shall be present, even though without any formal notice,
any business may be transacted.
2
<PAGE>
6. Manner of Acting
At all meetings of the Board of Directors, each Director shall have one
vote. The act of a majority of Directors present at a meeting shall be the act
of the full Board of Directors, provided that a quorum is present.
7. Vacancies
A vacancy in the Board of Directors shall be deemed to exist in the
case of death, resignation, or removal of any Director, or if the authorized
number of Directors is increased, or if the shareholders fail, at any meeting of
the shareholders, at which any Director is to be elected, to elect the full
authorized number of Directors to be elected at that meeting.
8. Removals
Directors may be removed, at any time, by a vote of the shareholders
holding a majority of the shares outstanding and entitled to vote. Such vacancy
shall be filled by the Directors then in office, though less than a quorum, to
hold office until the next annual meeting or until his successor is duly elected
and qualified, except that any directorship to be filled by election by the
shareholders at the meeting at which the Director is removed. No reduction of
the authorized number of Directors shall have the effect of removing any
Director prior to the expiration of his term of office.
9. Resignation
A Director may resign at any time by delivering written notification
thereof to the President or Secretary of the Corporation. A resignation shall
become effective upon its acceptance by the Board of Directors; provided,
however, that if the Board of Directors has not acted thereon within ten days
from the date of its delivery, the resignation shall be deemed accepted.
10. Presumption of Assent
A Director of the Corporation who is present at a meeting of the Board
of Directors at which action on any corporate matter is taken shall be presumed
to have assented to the action(s) taken unless his dissent shall be placed in
the minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
Secretary of the Corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a Director who voted in favor of such
action.
11. Compensation
By resolution of the Board of Directors, the Directors may be paid
their expenses, if any, or attendance at each meeting of the Board of Directors
or a stated salary as Director. No such payment shall preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor.
12. Emergency Power
When, due to a national disaster or death, a majority of the Directors
are incapacitated or otherwise unable to attend the meetings and function as
Directors, the remaining members of the Board of Directors shall have all the
powers necessary to function as a complete Board, and for the purpose of doing
business and filling vacancies shall constitute a quorum, until such time as all
Directors can attend or vacancies can be filled pursuant to these Bylaws.
13. Chairman
The Board of Directors may elect from its own number a Chairman of the
Board, who shall preside at all meetings of the Board of Directors, and shall
perform such other duties as may be prescribed from time to time by the Board of
Directors. The Chairman may by appointment fill any vacancies on the Board of
Directors.
3
<PAGE>
Article IV.
Officers
1. Number
The Officers of the Corporation shall be a President, one or more Vice
Presidents, and a Secretary Treasurer, each of whom shall be elected by a
majority of the Board of Directors. Such other Officers and assistant Officers
as may be deemed necessary may be elected or appointed by the Board of
Directors. In its discretion, the Board of Directors may leave unfilled for any
such period as it may determine any office except those of President and
Secretary. Any two or more offices may be held by the same person. Officers may
or may not be Directors or shareholders of the Corporation.
2. Election and Term of Office
The Officers of the Corporation to be elected by the Board of Directors
shall be elected annually by the Board of Directors at the first meeting of the
Board of Directors held after each annual meeting of the shareholders. If the
election of Officers shall not be held at such meeting, such election shall be
held as soon thereafter as convenient. Each Officer shall hold office until his
successor shall have been duly elected and shall have qualified or until his
death or until he shall resign or shall have been removed in the manner
hereinafter provided.
3. Resignations
Any Officer may resign at any time by delivering a written resignation
either to the President or the Secretary. Unless otherwise specified therein,
such resignation shall take effect upon delivery.
4. Removal
Any Officer or agent may be removed by the Board of Directors whenever
in its judgment the best interests of the Corporation will be served thereby,
but such removal shall be without prejudice to the contract rights, if any, of
the person so removed. Election or appointment of an Officer or agent shall not
of itself create contract rights. Any such removal shall require a majority vote
of the Board of Directors, exclusive of the Officer in question if he is also a
Director.
5. Vacancies
A vacancy if an office because of death, resignation, removal,
disqualification or otherwise, or if a new office shall be created, may be
filled by the Board of Directors for the unexpired portion of the term.
6. President
The President shall be the chief executive and administrative Officer
of the Corporation. He shall preside at all meetings of the stockholders and, in
the absence of the Chairman of the Board, at meetings of the Board of Directors.
He shall exercise such duties as customarily pertain to the office of President
and shall have general and active supervision over the property, business, and
affairs of the Corporation and over its several Officers, agents, or employees
other than those appointed by the Board of Directors. He may sign, execute and
deliver in the name of the Corporation powers of attorney, contracts, bonds and
other obligations, and shall perform such other duties as may be prescribed from
time to time by the Board of Directors or by the Bylaws.
7. Vice President
The Vice President shall have such powers and perform such duties as
may be assigned to him by the Board of Directors or the President. In the
absence or disability of the President, the Vice President designated by the
Board or the President shall perform the duties and exercise the powers of the
President. A Vice President may sign and execute contracts and other obligations
pertaining to the regular course of his duties.
8. Secretary
The Secretary shall keep the minutes of all meetings of the
stockholders and all of the Board of Directors and, to the extent ordered by the
Board of Directors or the President, the minutes of meetings of all committees.
He shall cause notice to be given of meetings of stockholders, of the Board of
Directors, and of any committee appointed by the Board. He shall have custody of
the corporate seal and general charge of the records, documents and papers of
the Corporation not pertaining to the performance of the duties vested in other
Officers, which shall at all reasonable times be open to the examination of any
Directors. He may sign or execute contracts with the President or a Vice
President thereunder authorized in the name of the Corporation and affix the
seal of the Corporation thereto. He shall perform such other duties as may be
prescribed from time to time by the Board of Directors or by the Bylaws.
4
<PAGE>
9. Treasurer
The Treasurer shall have general custody of the collection and
disbursement of funds of the Corporation. He shall endorse on behalf of the
Corporation for collection checks, notes and other obligations, and shall
deposit the same to the credit of the Corporation in such bank or banks or
depositories as the Board of Directors may designate. He may sign, with the
President or such other persons as may be designated for the purpose of the
Board of Directors, all bills of exchange or promissory notes of the
Corporation. he shall enter or cause to be entered regularly in the books of
the Corporation full and accurate account of all monies received and paid by
him on account of the Corporation; shall at all reasonable times exhibit his
books and accounts to any Director of the Corporation upon application at the
office of the Corporation during business hours; and, whenever required by
the Board of Directors or the President, shall render a statement of his
accounts. He shall perform such other duties as may be prescribed from time
to time by the Board of Directors or by the Bylaws.
10. Other Officers
Other Officers shall perform such duties and shall have such powers as
may be assigned to them by the Board of Directors.
11. Salaries
The salaries or other compensation of the Officers of the Corporation
shall be fixed from time to time by the Board of Directors, except that the
Board of Directors may delegate to any person or group of persons the power to
fix the salaries or other compensation of any subordinate Officers or agents. No
Officer shall be prevented from receiving any such salary or compensation by
reason of the fact that he is also a Director of the Corporation.
12. Surety Bonds
In case the Board of Directors shall so require, any Officer or agent
of the Corporation shall execute to the Corporation a bond in such sums and with
such surety or sureties as the Board of Directors may direct, conditioned upon
the faithful performance of his duties to the Corporation, including
responsibility for negligence and for the accounting for all property, monies or
securities of the Corporation, which may come into his hands.
Article V.
Contracts, Loans, Checks and Deposits
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.
2. Loans
No loan or advance shall be contracted on behalf of the Corporation, no
negotiable paper or other evidence of its obligation under any loan or advance
shall be issued in its name, and no property of the Corporation shall be
mortgaged, pledged, hypothecated or transferred as security for the payment of
any loan, advance, indebtedness or liability of the Corporation unless and
except as authorized by the Board of Directors. Any such authorization may be
general or confined to specific instances.
3. 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,
or as may be selected by an Officer or agent of the Corporation authorized to
do so by the Board of Directors.
4. Checks and Drafts
All notes, drafts, acceptances, checks, endorsements and evidence of
indebtedness of the Corporation shall be signed by such Officer or Officers or
such agent or agents of the Corporation and in such manner as the Board of
Directors from time to time may determine. Endorsements for deposits to the
credit of the Corporation in any of its duly authorized depositories shall be
made in such manner as the Board of Directors may from time to time determine.
5
<PAGE>
5. Bonds and Debentures
Every bond or debenture issued by the Corporation shall be in the form
of an appropriate legal writing, which shall be signed by the President or Vice
President and by the Treasurer or by the Secretary, and sealed with the seal of
the Corporation. The seal may be facsimile, engraved or printed. Where such bond
or debenture is authenticated with the manual signature of an authorized Officer
of the Corporation or other trustee designated by the indenture of trust or
other agreement under which such security is issued, the signature of any of the
Corporation's Officers named thereon may be facsimile. In case any Officer who
signed, or whose facsimile signature has been used on any such bond or
debenture, shall cease to be an Officer of the Corporation for any reason before
the same has been delivered by the Corporation, such bond or debenture may
nevertheless be adopted by the Corporation and issued and delivered as though
the person who signed it or whose facsimile signature has been used thereon had
not ceased to be such Officer.
Article VI
Capital Stock
1. Certificate of Share
The shares of the Corporation shall be represented by certificates
prepared by the Board of Directors and signed by the President. The signatures
of such Officers upon a certificate may be facsimiles if the certificate is
countersigned by a transfer agent or registered by a registrar other than the
Corporation itself or one of its employees. 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 for transfer shall
be 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.
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 the Corporation, and on surrender for
cancellation of the certificate for such shares. 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.
3. Transfer Agent and Registrar
The Board of Directors shall have the power to appoint one or more
transfer agents and registrars for the transfer and registration of certificates
of stock of any class, and may require that stock certificates shall be
countersigned and registered by one or more of such transfer agents and
registrars.
4. Lost or Destroyed Certificates
The Corporation may issue a new certificate to replace any certificate
therefore issued by it alleged to have been lost or destroyed. The Board of
Directors may require the owner of such a certificate or his legal
representative to give the Corporation a bond in such sum and with such sureties
as the Board of Directors may direct to indemnify the Corporation as transfer
agents and registrars, if any, against claims that may be made on account of the
issuance of such new certificates. A new certificate may be issued without
requiring any bond.
5. Consideration for Shares
The capital stock of the Corporation shall be issued for such
consideration as shall be fixed from time to time by the Board of Directors. In
the absence of fraud, the determination of the Board of Directors as to the
value of any property or services received in full or partial payment of shares
shall be conclusive.
6. Registered Shareholders
The Corporation shall be entitled to treat the holder of record of
any share or shares of stock as the holder thereof, in fact, and shall not be
bound to recognize any equitable or other claim to or on behalf of this
Corporation to any and all of the rights and powers incident to the ownership
of such stock at any such meeting, and shall have power and authority to
execute and deliver proxies and consents on behalf of this Corporation in
connection with the exercise by this Corporation of the rights and powers
6
<PAGE>
incident to the ownership of such stock. The Board of Directors, from time to
time, may confer like powers upon any other person or persons.
Article VII.
Indemnification
No Officer of Director shall be personally liable for any obligations
of the Corporation or for any duties or obligations arising out of any acts or
conduct of said Officer of Director performed for or on behalf of the
Corporation. The Corporation shall and does hereby indemnify and hold harmless
each person and his heirs and administrators who shall serve at any time
hereafter as a Director or Officer of the Corporation from and against any and
all claims, judgments and liabilities to which such persons shall become subject
by reason of his having heretofore or hereafter been a Director or Officer of
the Corporation, and shall reimburse each such person for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability, including power to defend such persons from all suits or claims as
provided for under the provisions of the Nevada Revised Statues; provided,
however, that no such persons shall be indemnified against, or be reimbursed
for, any expense incurred in connection with any claim or liability arising out
of his own negligence or willful misconduct. The rights accruing to any person
under the foregoing provisions of this section shall not exclude any other right
to which he may lawfully be entitled, nor shall anything herein contained
restrict the right of the Corporation to indemnify or reimburse such person in
any proper case, even though not specifically herein provided for. The
Corporation, its Directors, Officers, employees and agents shall be dully
protected in taking any action or making any payment, or in refusing so to do in
reliance upon the advice of counsel.
Article VIII.
Notice
Whenever any notice is required to be given to any shareholder or
Director of the Corporation under the provisions of the Articles of
Incorporation, or under the provisions of the Nevada Statutes, a waiver thereof
in writing signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Attendance at any meeting shall constitute a waiver of
notice of such meetings, except where attendance is for the express purpose of
objecting to the holding of that meeting.
Article IX.
Amendments
These Bylaws may be altered, amended, repealed, or new Bylaws adopted
by a majority of the entire Board of Directors at any regular or special
meeting. Any Bylaw adopted by the Board may be repealed or changed by the action
of the shareholders.
Article X.
Fiscal Year
The fiscal year of the Corporation shall be fixed and may be varied by
resolution of the Board of Directors.
Article XI.
Dividends
The Board of Directors may at any regular or special meeting, as they
deem advisable, declare dividends payable out of the surplus of the Corporation.
Article XII.
Corporate Seal
The seal of the Corporation shall be in the form of a circle and
shall bear the name of the Corporation and the year of incorporation per
sample affixed hereto.
Date: October 20, 1992
/s/ PETER E. BERNEY
- --------------------------
Peter E. Berney, Secretary
7
<PAGE>
EXHIBIT 3.6
AMENDMENT TO THE BYLAWS OF
I/OMAGIC CORPORATION
DATED NOVEMBER 13, 1996
<PAGE>
AMENDMENT TO THE
BYLAWS OF
I/OMAGIC CORPORATION,
A NEVADA CORPORATION
Pursuant to approval of the Shareholders of I/OMAGIC CORPORATION, a
Nevada corporation (the "Company"), given on November 11, 1996, the Company's
Bylaws are hereby amended as follows, effective this 13th day of
November, 1996:
Article III, Section 2 of the Bylaws of the Company is hereby amended
to delete such Section in its entirety and to replace such Section with the
following:
Section 2. NUMBER, TENURE AND QUALIFICATION. The authorized
number of Directors of the Corporation shall be not less than
three (3) nor more than seven (7) and the exact number of
directors shall be six (6) until changed, within the limits
specified above, by a resolution amending such exact number,
duly adopted by the Board of Directors or by the shareholders.
The minimum and maximum number of directors may be changed, or
a definite number may be fixed without provision for an
indefinite number, by a duly adopted vote or written consent
of a majority of the outstanding shares entitled to vote;
provided, however, that an amendment reducing the fixed number
or the minimum number of directors to less than five (5)
cannot be adopted if the votes cast against its adoption at a
meeting, or the shares not consenting in the case of an action
by written consent, are equal to more than sixteen and
two-thirds (16-2/3%) of the outstanding shares entitled to
vote thereon. Each of the Directors shall hold office until
the next annual meeting of shareholders and until his
successor shall have been elected and qualified.
/s/ TONY SHAHBAZ
-------------------------
TONY SHAHBAZ, SECRETARY
<PAGE>
EXHIBIT 4.1
CERTIFICATE OF DESIGNATION OF
PREFERRED STOCK
DATED OCTOBER 31, 1996
<PAGE>
CERTIFICATE OF DESIGNATION
TONY SHAHBAZ certifies that he is the President and Secretary of
I/OMAGIC CORPORATION, a Nevada corporation (hereinafter referred to as the
"Corporation" or the "Company"); that, pursuant to the Corporation's Articles of
Incorporation, as amended, and Nevada General Corporation Law, the Board of
Directors of the Corporation adopted the following resolutions on October 31,
1996; at which point none of the Series Class A Cumulative Convertible Preferred
Stock had been issued.
1. CREATION AND DESIGNATION OF SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK. On October 31, 1996, the Company created a series of preferred
stock consisting of 1,000,000 shares and designated as the Series A Cumulative
Preferred Stock, having the voting powers, preferences, relative, participating,
optional and other special rights and the qualifications, limitations and
restrictions thereof that are set forth below.
2. DIVIDEND PROVISIONS. The holders of shares of Series A Cumulative
Convertible Preferred Stock shall be entitled to receive, when and as declared
by the Board of Directors out of any funds at the time legally available
therefor, dividends accruing at the rate of nine percent (9.0%) per year from
the date of issuance through the date of conversion (the "Coupon Dividend"), as
well as dividends paid with respect to each share of common stock for each share
of Series A Cumulative Convertible Preferred Stock at the same time and on a
parity with dividends paid on each share of common stock (the "Common Dividend")
less any Coupon Dividend paid for any such period. Each share of Series A
Cumulative Convertible Preferred Stock shall rank on a parity with each other
share of Series A Cumulative Convertible Preferred Stock with respect to
dividends. Dividend payments to the holders of shares of Series A Cumulative
Convertible Preferred Stock shall be payable quarterly, in cash by delivery of a
check to each entitled holder's address which is registered with the Secretary
of the Company. Any Coupon Dividend on the Series A Cumulative Convertible
Preferred Stock which has accrued pursuant to this Section 2 but which, for any
reason whatsoever, (a) has not been declared, or (b) has been declared but has
not been timely paid, shall be deemed in arrears and shall accumulate until
paid.
3. CONVERSION PROVISIONS. Each Series A Cumulative Convertible
Preferred Share is convertible into one (1) share of the Company's Common Stock
at any time after the date of issuance Each Series A Cumulative Convertible
Preferred Share shall be convertible into shares of Common Stock of the Company
at $2.50 per Share. Any holder of the Series A Cumulative Convertible Preferred
Shares may elect conversion (the "Conversion Right") of any number of the Shares
so held by remitting the Certificate evidencing ownership of the Shares together
with a signed irrevocable stock transfer power, with signature guaranteed, to
the Company requesting and specifying the number of Shares that the Holder seeks
to convert into the Company's Common Stock (the "Conversion Request").
4. REGISTRATION RIGHTS.
(a) All Common Shares into which the Preferred Shares are
convertible have the following registration rights:
(i) The Company is obligated to register the shares of Common
Stock into which the Preferred Shares are convertible (the "Offered
Securities") in any subsequent registration statement filed by the Company
with the Securities and Exchange Commission, so that holders of such Common
Stock shall be entitled to sell the same simultaneously with and upon the
terms and conditions as the securities sold for the account of the Company
are being sold pursuant to any such registration statement, subject to such
lock-up provisions as may be proposed by the underwriter and agreed to by the
investors (the "Piggyback Registration Right").
(ii) If the Piggyback Registration has not occurred within
one year from the Final Closing Date of the offering of the Preferred Shares
(the "Offering"), then the holders of the Common Stock, representing
fifty-one percent (51%) of such Common Stock, shall have the right,
exercisable by written notice to the Company, to have the Company prepare,
file and use its best efforts to have declared effective by the Securities
and Exchange Commission, a registration statement and such other documents,
including a prospectus, as may be necessary in order to permit a public
offering and sale of their shares of Common Stock, as well as Common Stock
purchased in the Offering by other holders, as the case may be, subject to a
subsequent 25% monthly trading restriction in that 25% of the shares will
become freely tradeable within 30 days after registration; 25% of the shares
will become freely tradeable within 60 days after registration (for a total
of 50% of freely trading shares); 25% of the shares will become freely
tradeable within 90 days after registration (for a total of 75% of freely
trading shares); and 25% of the shares will become freely tradeable within
120 days after registration (for a total of 100% of freely trading shares)
(the "Demand Registration Right"). The holders of Common Stock purchased in
the Offering shall be notified of such Demand Registration Right. The Company
shall not be required to honor any Demand Registration Right received five
years after the Final Closing Date.
5. MISCELLANEOUS PROVISIONS. The Series A Cumulative Convertible
Preferred Shares have no voting rights and no sinking fund has or will be
established to provide for dividends or the repurchase of the Series A
Cumulative Convertible Preferred Shares.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation of Series A Cumulative Convertible Preferred Stock to be duly
executed by its President and attested to by its Secretary and has caused its
corporate seal to be affixed hereto, this 17th day of January, 1997.
/s/ TONY SHAHBAZ
--------------------------------------
Tony Shahbaz, President and Secretary
State of California }
}
County of Orange }
On January 17, 1997, before me, Laurie J. Cruz, personally appeared
Tony Shahbaz, personally known to me or proved to me on the basis of
satisfactory evidence, to be the person whose name is subscribed to the within
instrument and acknowledged to me that he executed the same in his authorized
capacity, and that by his signature on the instrument, the person, or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal
/s/ LAURIE J. CRUZ
-----------------------------
(Signature of Notary Public)
Commission Expires: 2/28/97
--------
<PAGE>
CERTIFICATE OF DESIGNATION
TONY SHAHBAZ certifies that he is the President and Secretary of
I/OMAGIC CORPORATION, a Nevada corporation (hereinafter referred to as the
"Corporation" or the "Company"); that, pursuant to the Corporation's Articles of
Incorporation, as amended, and Nevada General Corporation Law, the Board of
Directors of the Corporation adopted the following resolutions on October 31,
1996; at which point none of the Series Class B Cumulative Convertible Preferred
Stock had been issued.
1. CREATION AND DESIGNATION OF SERIES B CUMULATIVE CONVERTIBLE
PREFERRED STOCK. On October 31, 1996, the Company created a series of preferred
stock consisting of 1,000,000 shares and designated as the Series B Cumulative
Preferred Stock, having the voting powers, preferences, relative, participating,
optional and other special rights and the qualifications, limitations and
restrictions thereof that are set forth below. Each Series B Cumulative
Preferred Share has a face value of $2.00 per share (the "Face Value").
2. DIVIDEND PROVISIONS. The Holders of shares of Series B Cumulative
Convertible Preferred Stock (collectively, "Holders", each a "Holder") shall be
entitled to receive, when and as declared by the Board of Directors out of any
funds at the time legally available therefor, dividends accruing at the rate of
nine percent (9.0%) per year from the date of issuance through the date of
conversion (the "Coupon Dividend"), as well as dividends paid with respect to
each share of common stock for each share of Series B Cumulative Convertible
Preferred Stock at the same time and on a parity with dividends paid on each
share of common stock (the "Common Dividend") less any Coupon Dividend paid for
any such period. Each share of Series B Cumulative Convertible Preferred Stock
shall rank on a parity with each other share of Series B Cumulative Convertible
Preferred Stock with respect to dividends. Dividend payments to the Holders of
shares of Series B Cumulative Convertible Preferred Stock shall be payable
quarterly, in cash by delivery of a check to each entitled Holder's address
which is registered with the Secretary of the Company. Any Coupon Dividend on
the Series B Cumulative Convertible Preferred Stock which has accrued pursuant
to this Section 2 but which, for any reason whatsoever, (a) has not been
declared, or (b) has been declared but has not been timely paid, shall be deemed
in arrears and shall accumulate until paid.
3. REDEMPTION. The Holder has the right to require the Company to
redeem the Series B Cumulative Convertible Preferred Shares (the "Right of
Redemption"). The Series B Cumulative Convertible Preferred Shares shall be
redeemable, in whole or in part, by the Holder, at any time within one (1) year
after the date such Shares were issued to Holder, upon thirty (30) calendar days
written notice (the "Redemption Notice") to the Company, at a redemption price
equal to the Face Value per Share. For purposes of establishing the date of the
Redemption Notice, the date of the Redemption Notice shall be deemed the date of
the post-mark, by prepaid mail, of the Holder's notice of its intention to
redeem the Series B Cumulative Convertible Preferred Shares as addressed to the
Company, at the Company's principal place of business. The redemption of the
Shares shall be subject to any reasonable procedures the Company establishes in
connection with the redemption.
4. CONVERSION PROVISIONS. Subject to the Company's Right of
Redemption as provided above, each Series B Cumulative Convertible Preferred
Share is convertible into one (1) share of the Company's Common Stock at any
time after the date of issuance. Each Series B Cumulative Preferred Share
shall be convertible into shares of Common Stock of the Company at $2.50 per
Share. Any Holder of the Series B Cumulative Convertible Preferred Share may
elect conversion (the "Conversion Right") of any number of the Shares so held
by remitting the Certificate evidencing ownership of the Shares together with
a signed irrevocable stock transfer power, with signature guaranteed, to the
Company requesting and specifying the number of Shares that the Holder seeks
to convert into the Company's Common Stock (the "Conversion Request").
5. REGISTRATION RIGHTS.
(a) All Common Shares into which the Preferred Shares are
convertible have the following registration rights:
(i) The Company is obligated to register the shares of Common
Stock into which the Preferred Shares are convertible (the "Offered
Securities") in any subsequent registration statement filed by the Company
with the Securities and Exchange Commission, so that holders of such Common
Stock shall be entitled to sell the same simultaneously with and upon the
terms and conditions as the securities sold for the account of the Company
are being sold pursuant to any such registration statement, subject to such
lock-up provisions as may be proposed by the underwriter and agreed to by the
investors (the "Piggyback Registration Right").
(ii) If the Piggyback Registration has not occurred within
one year from the Final Closing Date of the offering of the Preferred Shares
(the "Offering"), then the holders of the Common Stock, representing
fifty-one percent (51%) of such Common Stock, shall have the right,
exercisable by written notice to the Company, to have the Company prepare,
file and use its best efforts to have declared effective by the Securities
and Exchange Commission, a registration statement and such other documents,
including a prospectus, as may be necessary in order to permit a public
offering and sale of their shares of Common
<PAGE>
Stock, as well as Common Stock purchased in the Offering by other holders, as
the case may be, subject to a subsequent 25% monthly trading restriction in
that 25% of the shares will become freely tradeable within 30 days after
registration; 25% of the shares will become freely tradeable within 60 days
after registration (for a total of 50% of freely trading shares); 25% of the
shares will become freely tradeable within 90 days after registration (for a
total of 75% of freely trading shares); and 25% of the shares will become
freely tradeable within 120 days after registration (for a total of 100% of
freely trading shares) (the "Demand Registration Right"). The holders of
Common Stock purchased in the Offering shall be notified of such Demand
Registration Right. The Company shall not be required to honor any Demand
Registration Right received five years after the Final Closing Date.
6. MISCELLANEOUS PROVISIONS. The Series B Cumulative Convertible
Preferred Shares have no voting rights and no sinking fund has or will be
established to provide for dividends or the repurchase of the Series B
Cumulative Convertible Preferred Shares.
IN WITNESS WHEREOF, the Company has caused this Certificate of Designation of
Series B Cumulative Convertible Preferred Stock to be duly executed by its
President and attested to by its Secretary and has caused its corporate seal
to be affixed hereto, this 17th day of January, 1997.
/s/ TONY SHAHBAZ
-------------------------------------
Tony Shahbaz, President and Secretary
State of California }
}
County of Orange }
On January 17, 1997, before me, Laurie J. Cruz, personally appeared
Tony Shahbaz, personally known to me or proved to me on the basis of
satisfactory evidence, to be the person whose name is subscribed to the within
instrument and acknowledged to me that he executed the same in his authorized
capacity, and that by his signature on the instrument, the person, or the entity
upon behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal
/s/ LAURIE J. CRUZ
-----------------------------
(Signature of Notary Public)
Commission Expires: 2/28/97
-------
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT BY AND BETWEEN
I/OMAGIC CORPORATION, A CALIFORNIA CORPORATION
AND TONY SHAHBAZ, DATED OCTOBER 22, 1993
<PAGE>
EMPLOYMENT AGREEMENT
AGREEMENT made this 22nd day of October, 1993, by and between I/OMagic
Corporation, a California corporation, having its principal place of business at
41 LaCosta Court, Laguna Beach, Ca 92651, hereinafter referred to as the
employer, and Mr. Tony Shahbaz, residing at 41 LaCosta Court, Laguna Beach, Ca
92651, hereinafter referred to as employee:
1. TERM OF EMPLOYMENT: The employer hereby employs the employee and the
employee hereby accepts employment with the employer as President and CEO of
company on permanent basis beginning on October 22, 1993. If agreement
provides for termination under particular circumstances, this agreement may
be terminated as hereinafter provided.
2. EMPLOYMENT AND TITLE: The employer hereby employs the employee and the
employee accepts employment as President and CEO for the employer.
3. DUTIES OF EMPLOYEE:
3.a GENERAL DUTIES: The employee shall serve as the President and CEO of the
employer. He shall do and perform all services, acts, or things necessary or
advisable to manage and conduct the business of the employer, subject always to
the policies set by the Board of Directors.
3.b MATTERS REQUIRING CONSENT OF THE BOARD OF DIRECTORS: The employee shall not
without specific approval of the Board of Directors of the employer, do or
contract for any of the following:
a) Borrow on behalf of the Employer during one fiscal year an amount in
excess of $500,000.00.
b) Permit any customer of the employer to become indebted to the employer in
an amount in excess of $250,000.00.
c) Purchase capital equipment in excess of expenditures budgeted by the
Board of Directors.
d) Sell any single capital asset of the employer having a market value in
excess of $20,000, or a total of capital assets during a fiscal year
having a market value in excess of $100,000.00.
3.c DEVOTION OF ENTIRE TIME TO EMPLOYER'S BUSINESS: The employee shall devote
his entire productive time, ability, and attention to the business of the
employer during the term of this agreement. The employee shall not directly or
indirectly render any services of business, commercial, or professional nature
to any other person or organization, whether for compensation or otherwise,
related to the development of PCMCIA or Multimedia products that are considered
to be direct competitors of the employer, without prior written consent of the
Board of Directors of the employer.
3.d UNIQUENESS OF EMPLOYEE'S SERVICES: The employee hereby represents that the
services to be performed by him under the terms of this contract are a special,
unique, unusual, extraordinary, and intellectual character which gives them a
peculiar value, the loss of which cannot reasonably or adequately be compensated
in damages in an action at law. The employee therefore, expressly agrees that
the employer may possess, shall be entitled to injunctive and other equitable
relief to prevent a breach of this contract by the employee.
4. ANNUAL SALARY: The employer shall pay the employee an annual salary of One
hundrde forty thousand and 00/100 Dollars ($140,000.00) payable in twelve equal
payments on the first day of each month.
5. PROFIT SHARING CASH BONIS: For each fiscal year of the employer in which
the net profits of the employer exceed $100,000.00, the employer agrees to
pay the employee, within two months of the close of the fiscal year, an
annual bonus of $20,000.00, for each fiscal year in which the net profits of
the employer exceed $200,000.00, the employer agrees to pay the employee,
within two months of the close of such fiscal year, an annual bonus of
$50,000.00, for each fiscal year of the employer in which the net profits of
the employer exceed $400,000.00, the employer agrees to pay the employee,
within two months after the close of such fiscal year, an annual bonus of
$70,000.00, for 7% additional bonus will apply on net profits that are
greater than $500,000.00 within two months after the close of such fiscal
year.
For the purpose of determining the amount of the bonus, the net profits of the
employer shall be determined by the firm of an independent certified public
accountants applying generally accepted accounting principles then employed by
the employer.
If the employment term is terminated by the employer for cause against the
employee, the employee shall not be entitled to any portion of the bonus for
such fiscal year. However, in the year for termination of the employment term
provided herein, or in any
<PAGE>
in any other fiscal year in which the employment term is terminated for
reasons other than cause against employee, the employee shall be entitled to
that portion of the bonus that the number of months during such fiscal year
that he was employed hereunder bears to twelve months.
6. EMPLOYEE BENEFITS:
6.A USE OF AUTOMOBILE: The employer agrees to pay the employee on the first of
each month a $500.00 automobile allowance during the term of this agreement.
6.B HOUSING ALLOWANCE: The employer agrees to pay the employee housing allowance
in the amount of $2,000.00 per month during the term of this agreement.
6.C MEDICAL AND DENTAL COVERAGE: The employer agrees to obtain a standard
medical and dental insurance policy covering the employee during the term of his
employment.
7. BUSINESS EXPENSES: The employee shall be entitled to receive, within ten
(10) days after delivery to the employer of an itemized statement thereof,
reimbursement for all justified and reasonable expenses incurred in
connection with the performance of employee's duties.
8. TERMINATION OF EMPLOYMENT: If the employee habitually neglects the duties
which is required to be performed under the terms of this agreement, the
employer may at its option terminate this employment provided evidence of
justifiable cause for such action. Only in and under this condition does the
employer maintain the right to terminate employee. In the event of employee
termination employer has the first option to purchase the outstanding shares and
options of the employee. Said purchase option is to be exercised within 30 days
of official notice and on or before the employee's termination. In the event the
employer does not exercise its right, then, the employee has an option to buy
the outstanding shares of stock within 60 days of official notice. The employee
payment schedule will be 20% down payment deposit and 80% installments due over
5 years.
The employer maintains the first right to buy the outstanding stocks and options
of the employee only under the conditions as set forth in Section 8, TERMINATION
OF EMPLOYMENT, under all other prevailing conditions including but not limited
to breach of contract, board of director strong arm tactics, habitually
neglecting duties, the employee maintains the first option to purchase the
outstanding shares of the employer under the same terms and conditions as
recited above for the employee and the employer.
The purchase price will be the prevailing market price at the time of
termination as described by an independent certified public accounting firm
applying generally accepted practices.
9. NOTICES: Any notice to be given hereunder by either party to the other
shall be in writing and may be transmitted by personal delivery or by mail,
registered or certified, postage prepaid with return receipt requested. Mail
notices shall be addressed to the parties at the addresses appearing in the
instructor paragraph of this agreement, but each party may change his address
by written notice in accordance with this paragraph.
10. ARBITRATION: Any controversy between the employer and the employee
involving the construction or application of any of the terms, provisions, or
conditions of this agreement shall on the written request of either party
served on the other by submitted to arbitration. Arbitration shall comply
with and be governed by the provisions of the State of California Arbitration
Act. The cost of the arbitration shall be borne by the losing party or in
such proportions as the arbitrators decide.
11. ATTORNEY'S FEES AND COSTS: If any action at law or in equity is
necessary to enforce or interpret the terms of this agreement, the prevailing
party shall be entitled to reasonable attorney's fees, costs and necessary
disbursements in addition to any other relief to which that party may be
entitled. This provision shall be construed as applicable to the entire
contract.
12. ENTIRE AGREEMENT: This agreement supersedes any and all other
agreements, either oral or in writing, between the parties hereto with
respect to the employment of the employee by the employer and contains all of
the covenants and agreements between the parties with respect to that
employment in any manner whatsoever. Each party to this agreement
acknowledges that no representation, inducements, promises, or agreements,
orally or otherwise, have been made by either party, or anyone acting on
behalf of the other party, which are not embodied herein, and that no other
agreement, statement, or promise not contained in this agreement shall be
valid or binding on either party. Any modification of this statement will be
effective only if it is in writing and signed by the parties to be charged.
13. PARTIAL INVALIDITY: If any provision in this agreement is held by a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remaining provisions shall nevertheless continue in full force without being
impaired or invalidated in any way.
<PAGE>
14. LAW GOVERNING AGREEMENT: This agreement shall be governed by and construed
in accordance with the laws of the State of California.
15. DAMAGES FOR BREACH OF CONTRACT: In the event of a breach of this
agreement by either the employer or the employee resulting in damages to the
other party, that party may recover from the party breaching the agreement
any and all damages that may be sustained.
16. EFFECT OF WAIVER: The failure of either party to insist on strict
compliance with any terms, covenants, or conditions of this agreement by the
other party shall not be deemed a waiver of that term, covenant, or
condition, nor shall any waiver or relinquishment of that right or power for
any one time or times be deemed a waiver or relinquishment of that right or
power for all or any other times.
Executed on October 22, 1993 at IRVINE, California.
/s/ LEO CHANG /s/ TONY SHAHBAZ
- ---------------------------- ------------------------
Employer Employee
Leo Chang Tony Shahbaz
I/OMagic Corporation Officer
<PAGE>
EXHIBIT 10.2
I/OMAGIC CORPORATION
1997 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
DATED JANUARY 2, 1997
<PAGE>
I/OMAGIC CORPORATION
1997 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
1. PURPOSE
This Incentive and Nonstatutory Stock Option Plan (the "Plan") is
intended to further the growth and financial success of I/OMAGIC CORPORATION, a
Nevada corporation (the "Corporation") by providing additional incentives to
selected employees of and consultants to the Corporation or parent corporation
or subsidiary corporation of the Corporation as those terms are defined in
Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the
"Code") (such parent corporations and subsidiary corporations hereinafter
collectively referred to as "Affiliates") so that such employees and consultants
may acquire or increase their proprietary interest in the Corporation. Stock
options granted under the Plan (hereinafter "Options") may be either "Incentive
Stock Options", as defined in Section 422 of the Code and any regulations
promulgated under said Section, or "Nonstatutory Options" at the discretion of
the Board of Directors of the Corporation (the "Board") and as reflected in the
respective written stock option agreements granted pursuant hereto.
2. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the
Corporation; provided however, that the Board may delegate such administration
to a committee of not fewer than three (3) members (the "Committee"), at least
two (2) of whom are members of the Board and all of whom are disinterested
administrators, as contemplated by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended ("Rule 16b-3"); and provided further, that the
foregoing requirement for disinterested administrators shall not apply prior to
the date of the first registration of any of the securities of the Corporation
under the Securities Act of 1933, as amended.
Subject to the provisions of the Plan, the Board and/or the Committee
shall have authority to (a) grant, in its discretion, Incentive Stock Options in
accordance with Section 422 of the Code or Nonstatutory Options; (b) determine
in good faith the fair market value of the stock covered by an Option; (c)
determine which eligible persons shall be granted Options and the number of
shares to be covered thereby and the term thereof; (d) construe and interpret
the Plan; (e) promulgate, amend and rescind rules and regulations relating to
its administration, and correct defects, omissions, and inconsistencies in the
Plan or any Option; (f) consistent with the Plan and with the consent of the
optionee, as appropriate, amend any outstanding Option or amend the exercise
date or dates thereof; (g) determine the duration and purpose of leaves of
absence which may be granted to optionholders without constituting termination
of their employment for the purpose of the Plan; and (h) make all other
determinations necessary or advisable for the Plan's administration. The
interpretation and construction by the Board of any provisions of the Plan or of
any Option it shall be conclusive and final. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option.
3. ELIGIBILITY
The persons who shall be eligible to receive Options shall be key
employees of or consultants to the Corporation or any of its Affiliates
("Optionees"). The term consultant shall mean any person who is engaged by the
Corporation to render services and is compensated for such services, and any
director of the Corporation whether or not compensated for such services;
provided that, if the Corporation registers any of its securities pursuant to
the Securities Exchange Act of 1934, the term consultant shall thereafter not
include directors who are not compensated for their services or are paid only a
director fee by the Corporation.
(a) INCENTIVE STOCK OPTIONS. Incentive Stock Options may only
be issued to employees of the Corporation or its Affiliates. Incentive Stock
Options may be granted to officers, whether or not they are directors, but a
director shall not be granted an Incentive Stock Option unless such director is
also an employee of the Corporation. Payment of a director fee shall not be
sufficient to constitute employment by the Corporation. Any grant of option to
an officer or director of the Corporation subsequent to the first registration
of any of the securities of the Corporation under Securities Act of 1933, as
amended, shall comply with the requirements of Rule 16b-3. An optionee may hold
more than one Option.
The Corporation shall not grant an Incentive Stock Option
under the Plan to any employee if such grant would result in such employee
holding the right to exercise for the first time in any one calendar year, under
all options granted to such employee under the Plan or any other stock option
plan maintained by the Corporation or any Affiliate, with respect to shares of
stock having an aggregate fair market value, determined as of the date of the
Option is granted, in excess of $100,000. Should it be determined that an
Incentive Stock Option granted under the Plan exceeds such maximum for any
reason other than a failure in good faith to value the stock subject to such
option, the excess portion of such option shall be considered a Nonstatutory
Option. If, for any reason, an entire option does not qualify as an Incentive
Stock Option by reason of exceeding such maximum, such option shall be
considered a Nonstatutory Option.
<PAGE>
(b) NONSTATUTORY OPTION. The provisions of the foregoing
Section 3(a) shall not apply to any option designated as a "Nonstatutory Stock
Option Agreement" or which sets forth the intention of the parties that the
option be a Nonstatutory Option.
4. STOCK
The stock subject to Options shall be in the form of Corporation
warrants for common stock in the Corporation (the
"Stock").
(a) NUMBER OF SHARES. Subject to adjustment as provided in
Paragraph 5(i) of this Plan, the total number of shares of Stock which may be
purchased through exercise of Options granted under this Plan shall not exceed
one million (1,000,000) warrants with an exercise at fair market value. If any
Option shall for any reason terminate or expire, any shares allocated thereto
but remaining unpurchased upon such expiration or termination shall again be
available for the grant of Options with respect thereto under this Plan as
though no Option had been granted with respect to such shares.
(b) RESERVATION OF SHARES. The Corporation shall reserve and
keep available at all times during the term of the Plan such number of shares as
shall be sufficient to satisfy the requirements of the Plan. If, after
reasonable efforts, which efforts shall not include the registration of the Plan
or Options under the Securities Act of 1933, the Corporation is unable to obtain
authority from any applicable regulatory body, which authorization is deemed
necessary by legal counsel for the Corporation for the lawful issuance of shares
hereunder, the Corporation shall be relieved of any liability with respect to
its failure to issue and sell the shares for which such requisite authority was
so deemed necessary unless and until such authority is obtained.
5. TERMS AND CONDITIONS OF OPTIONS
Options granted hereunder shall be evidenced by agreements between the
Corporation and the respective Optionees, in such form and substance as the
Board or Committee shall from time to time approve. Such agreements need not be
identical, and in each case may include such provisions as the Board or
Committee may determine, but all such agreements shall be subject to and limited
by the following terms and conditions:
(a) NUMBER OF SHARES: Each Option shall state the number of
shares to which it pertains.
(b) OPTION PRICE: Each Option shall state the Option Price,
which shall be determined as follows:
(i) Any Option granted to a person who at the time
the Option is granted owns (or is deemed to own pursuant to Section
424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of value of all classes of stock of the
Corporation, or of any Affiliate, ("Ten Percent Holder") shall have an
Option Price of no less than 110% of the fair market value of the
common stock as of the date of grant; and
(ii) Incentive Stock Options granted to a person who
at the time the Option is granted is not a Ten Percent Holder shall
have an Option price of no less than 100% of the fair market value of
the common stock as of the date of grant. For the purposes of the Plan,
fair market value shall be at $1.03.
(iii) Nonstatutory Options granted to a person who at
the time the Option is granted is not a Ten Percent Holder shall have
an Option Price determined by the Board as of the date of grant.
For the purposes of this paragraph 5(b), the fair market value
shall be as determined by the Board, in good faith, which determination shall be
conclusive and binding; provided however, that if there is a public market for
such stock, the fair market value per share shall be the average of the bid and
asked prices (or the closing price if such stock is listed on the NASDAQ
National Market System) on the date of grant of the Option, or if listed on a
stock exchange, the closing price on such exchange on such date of grant.
(c) MEDIUM AND TIME OF PAYMENT: To the extent permissible by
applicable law, the Option price shall be paid, at the discretion of the
Board, at either the time of grant or the time of exercise of the Option (i)
in cash or by check, (ii) by delivery of other common stock of the
Corporation, provided such tendered stock was not acquired directly or
indirectly from the Corporation, or, if acquired from the Corporation, has
been held by the Optionee for more than six (6) months, (iii) by the
Optionee's promissory note in a form satisfactory to the Corporation and
bearing interest at a rate determined by the Board, in its sole discretion,
but in no event less than 6% per annum, or (iv) such other form of legal
consideration permitted by the California Corporations Code as may be
acceptable to the Board.
<PAGE>
(d) TERM AND EXERCISE OF OPTIONS: Any Option granted to an
Employee of the Corporation shall become exercisable over a period of no longer
than five (5) years, and no less than twenty percent (20%) of the shares covered
thereby shall become exercisable annually. No Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted unless the
Board shall specifically determine otherwise, as provided herein. In no event
shall any Option be exercisable after the expiration of ten (10) years from the
date it is granted, and no Incentive Stock Option granted to a Ten Percent
Holder shall, by its terms, be exercisable after the expiration of five (5)
years from the date of the Option. Unless otherwise specified by the Board or
the Committee in the resolution authorizing such option, the date of grant of an
Option shall be deemed to be the date upon which the Board or the Committee
authorizes the granting of such Option.
Each Option shall be exercisable to the nearest whole share,
in installments or otherwise, as the respective option agreements may provide.
During the lifetime of an Optionee, the Option shall be exercisable only by the
Optionee and shall not be assignable or transferable by the Optionee, and no
other person shall acquire any rights therein. To the extent not exercised,
installments (if more than one) shall accumulate, but shall be exercisable, in
whole or in part, only during the period for exercise as stated in the option
agreement, whether or not other installments are then exercisable.
(e) TERMINATION OF STATUS AS EMPLOYEE OR CONSULTANT: If
Optionee's status as an employee or consultant shall terminate for any reason
other than Optionee's disability or death, then the Optionee (or if the Optionee
shall die after such termination, but prior to exercise, Optionee's personal
representative or the person entitled to succeed to the Option) shall have the
right to exercise the portions of any such termination, in whole or in part, at
any time within three (3) months after such termination (or in the event of
"termination for good cause" as that term is defined under California Labor Code
and case law related thereto, such shorter period as the option agreement may
specify, but not less than 30 days) or the remaining term of the Option,
whichever is the lesser; provided, however, that with respect to Nonstatutory
Options, the Board may specify such longer period, not to exceed six (6) months,
for exercise following termination as the Board deems reasonable and
appropriate. The Option may be exercised only with respect to installments that
the Optionee could have exercised at the date of termination of employment.
Nothing contained herein or in any Option granted pursuant hereto shall be
construed to affect or restrict in any way the right of the Corporation to
terminate the employee of an Optionee with or without cause.
(f) DISABILITY OF OPTIONEE: If an Optionee dies while employed
or engaged as a consultant by the Corporation or an Affiliate, the portion of
such Optionee's Option or Options which were exercisable at the date of death
may be exercised, in whole or in part, by the estate of the decedent or by a
person succeeding to the right to exercise such Option or Options, at any time
within (i) a period, as determined by the Board and set forth in the Option, of
not less than six (6) months nor more than one (1) year after Optionee's death,
which period shall not be less, in the case of a Nonstatutory Option, than the
period for exercise following termination, or (ii) during the remaining term of
the Option, whichever is the lesser. The Option may be so exercised only with
respect to installments exercisable at the time of Optionee's death and not
previously exercised by the Optionee.
(g) NONTRANSFERABILITY OF OPTION: No Option shall be
transferable by the Optionee, except by will or by the laws of descent and
distribution.
(h) RECAPITALIZATION: Subject to any required action by the
stockholders, the number of shares of common stock covered by each outstanding
Option, and the price per share thereof set forth in each such Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of common stock of the Corporation resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, or any other
increase or decrease in the number of such shares affected without receipt of
consideration by the Corporation.
Subject to any required action by the stockholders, if the
Corporation shall be the surviving entity in any merger or consolidation, each
outstanding Option thereafter shall pertain to and apply to the securities to
which a holder of shares of common stock equal to the shares subject to the
Option would have been entitled by reason of such merger or consolidation. A
dissolution or liquidation of the Corporation or a merger or consolidation in
which the Corporation is not the surviving entity shall cause each outstanding
Option to terminate on the effective date of such dissolution, liquidation,
merger or consolidation. In such event, if the entity which shall be the
surviving entity does not tender to Optionee an offer, for which it has no
obligation to do so, to substitute for any unexercised Option a stock option or
capital stock of such surviving entity, as applicable, which on an equitable
basis shall provide the Optionee with substantially the same economic benefit as
such unexercised Option, then the Board may grant to such Optionee, but shall
not be obligated to do so, the right for a period commencing thirty (30) days
prior to and ending immediately prior to such dissolution, liquidation, merger
or consolidation or during the remaining term of the Option, whichever is the
lesser, to exercise any unexpired Option or Options, without regard to the
installment provisions of Paragraph 5(d) of this Plan; provided, that any such
right granted shall be granted to all Optionees not receiving an offer to
substitute on a consistent basis, and provided further, that any such exercise
shall be subject to the consummation of such dissolution, liquidation, merger
or consolidation.
In the event of a change in the common stock of the
Corporation as presently constituted, which is limited to a
<PAGE>
change of all of its authorized shares without par value into the same number
of shares with a par value, the shares resulting from any such change shall
be deemed to be the common stock within the meaning of this Plan.
To the extent that the foregoing adjustments relate to stock
or securities of the Corporation, such adjustments shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided in this Paragraph 5(i), the Optionee shall have no
rights by reason of any subdivision or consolidation of shares of stock or any
class or the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class, and the number or price of shares of
common stock subject to any Option shall not be affected by, and no adjustment
shall be made by reason of, any dissolution, liquidation, merger or
consolidation, or any issue by the Corporation of shares of stock of any class
or securities convertible into shares of stock of any class.
The grant of an Option pursuant to the Plan shall not affect
in any way the right or power of the Corporation to make any adjustments,
reclassifications, reorganizations or changes in its capital or business
structure or to merge, consolidate, dissolve, or liquidate or to sell or
transfer all or any part of its business or assets.
(i) RIGHTS AS A STOCKHOLDER: An Optionee shall have no rights
as a stockholder with respect to any shares covered by an Option until the date
of the issuance of a stock certificate to Optionee for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Paragraph 5(i) hereof.
(j) MODIFICATION, ACCELERATION, EXTENSION, AND RENEWAL OF
OPTIONS: Subject to the terms and conditions and within the limitations of the
Plan, the Board may modify an Option, or once an Option is exercisable,
accelerate the rate at which it may be exercised, and may extend or renew
outstanding Options granted under the Plan or accept the surrender of
outstanding Options (to the extent not theretofore exercised) and authorize the
granting of new Options in substitution for such Options, provided such action
is permissible under Section 422A of the Code and Section 260.140.41 of the
Corporate Securities Rules of the California Corporations Commissioner.
Notwithstanding the foregoing provisions of this Paragraph
5(k), however, no modification of an Option shall, without the consent of the
Optionee, alter to the Optionee's detriment or impair any rights or obligations
under any Option theretofore
granted under the Plan.
(k) INVESTMENT INTENT: Unless and until the issuance and sale
of the shares subject to the Plan are registered under the Securities Act of
1933, as amended (the "Act"), each Option under the Plan shall provide that the
purchases of stock thereunder shall be for investment purposes and not with a
view to, or for resale in connection with, any distribution thereof. Further,
unless the issuance and sale of the stock have been registered under the Act,
each Option shall provide that no shares shall be purchased upon the exercise of
such Option unless and until (i) any then applicable requirements of state and
federal laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Corporation and its counsel, and (ii) if requested to do so
by the Corporation, the person exercising the Option shall (i) give written
assurances as to knowledge and experience of such person (or a representative
employed by such person) in financial and business matters and the ability of
such person (or representative) to evaluate the merits and risks of exercising
the Option, and (ii) execute and deliver to the Corporation a letter of
investment intent, all in such form and substance as the Corporation may
require. If shares are issued upon exercise of an Option without registration
under the Act, subsequent registration of such shares shall relieve the
purchaser thereof of any investment restrictions or representations made upon
the exercise of such Options.
(l) EXERCISE BEFORE EXERCISE DATE: At the discretion of the
Board, the Option may, but need not, include a provision whereby the Optionee
may elect to exercise all or any portion of the Option prior to the stated
exercise date of the Option or any installment thereof. Any shares so purchased
prior to the stated exercise date shall be subject to repurchase by the
Corporation upon termination of Optionee's employment as contemplated by
Paragraphs 5(3), 5(f) and 5(g) hereof prior to the exercise date stated in the
Option and such other restrictions and conditions as the Board or Committee may
deem advisable.
(m) OTHER PROVISIONS: The Option agreements authorized under
this Plan shall contain such other provisions, including, without limitation,
restrictions upon the exercise of the Options, as the Board or the Committee
shall deem advisable. Shares shall not be issued pursuant to the exercise of an
Option, if the exercise of such Option or the issuance of shares thereunder
would violate, in the opinion of legal counsel for the Corporation, the
provisions of any applicable law or the rules or regulations of any applicable
governmental or administrative agency or body, such as the Act, the Securities
Exchange Act of 1934, the rules promulgated under the foregoing or the rules and
regulations of any exchange upon which the shares of the Corporation are listed.
<PAGE>
6. AVAILABILITY OF INFORMATION
During the term of the Plan and any additional period during which an
Option granted pursuant to the Plan shall be exercisable, the Corporation shall
make available, not later than one hundred and twenty (120) days following the
close of each of its fiscal years, such financial and other information
regarding the Corporation as is required by the bylaws of the Corporation and
applicable law to be furnished in an annual report to the stockholders of the
Corporation.
7. EFFECTIVENESS OF PLAN; EXPIRATION
Subject to approval by the stockholders of the Corporation, this Plan
shall be deemed effective as of the date it is adopted by the Board. The Plan
shall expire on December 31, 1997, but such expiration shall not affect the
validity of outstanding Options.
8. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, insofar as permitted by law, from time to time, with
respect to any shares at the time not subject to Options, suspend or terminate
the Plan or revise or amend it in any respect whatsoever, except that without
the approval of the stockholders of the Corporation, no such revision or
amendment shall (i) increase the number of shares subject to the Plan, (ii)
decrease the price at which Options may be granted, (iii) materially increase
the benefits to Optionees, or (iv) change the class of persons eligible to
receive Options under this Plan; provided, however, no such action shall alter
or impair the rights and obligations under any Option outstanding as of the date
thereof without the written consent of the Optionee thereunder. No Option may be
granted while the Plan is suspended or after it is terminated, but the rights
and obligations under any Option granted while the Plan is in effect shall not
be impaired by suspension or termination of the Plan.
9. INDEMNIFICATION OF BOARD
In addition to such other rights or indemnifications as they may have
as directors or otherwise, and to the extent allowed by applicable law, the
members of the Board and the Committee shall be indemnified by the
Corporation against the reasonable expenses, including attorneys' fees,
actually and necessarily incurred in connection with the defense of any
claim, action, suit or proceeding, or in connection with any appeal thereof,
to which they or any of them may be a party by reason of any action taken, or
failure to act, under or in connection with the Plan or any Option granted
thereunder, and against all amounts paid by them in settlement thereof
(provided such settlement is approved by independent legal counsel selected
by the Corporation) or paid by them in satisfaction of a judgment in any such
claim, action, suit or proceeding, except in any case in relation to matters
as to which it shall be adjudged in such claim, action, suit or proceeding
that such Board member is liable for negligence or misconduct in the
performance of his or her duties; provided that within sixty (60) days after
institution of any such action, suit or Board proceeding the member involved
shall offer the Corporation, in writing, the opportunity, at its own expense,
to handle and defend the same.
10. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of common stock
pursuant to the exercise of Options will be used for general corporate purposes.
11. NO OBLIGATION TO EXERCISE OPTION
The granting of an Option shall impose no obligation upon the Optionee
to exercise such Option.
12. NOTICES
All notice, requests, demand, and other communications pursuant this
Plan shall be in writing and shall be deemed to have been duly given on the date
of service if served personally on the party to whom notice is to be given, or
on the third day following the mailing thereof to the party to whom notice is to
be given, by first class mail, registered or certified, postage prepaid.
* * * * *
The foregoing Incentive Stock Option Plan was duly adopted and approved
by the Board of Directors on January 2, 1997, and approved by the shareholders
of the Corporation effective January 2, 1997.
/s/ TONY SHAHBAZ
------------------------------
Tony Shahbaz, Secretary
<PAGE>
I/OMAGIC CORPORATION
NONSTATUTORY STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made and entered into as of this ____
day of ______________, 1997, by and between I/OMAGIC CORPORATION, a Nevada
corporation ("Company"), and ________________________________ (referred to
herein as the "Optionee"), with reference to the following recitals of facts:
WHEREAS, the Board has authorized the granting to Optionee of a
nonstatutory stock option ("Option") to purchase shares of common stock of the
Company (the "Shares") upon the terms and conditions hereinafter stated; and
WHEREAS, the Board and stockholders of the Company have heretofore
adopted a 1997 Incentive and Nonstatutory Stock Option Plan (the "Plan"),
pursuant to which this Option is being granted;
WHEREAS, it is the intention of the parties that this Option be a
Nonstatutory Stock Option;
NOW, THEREFORE, in consideration of the covenants herein set forth, the
parties hereto agree as follows:
1. SHARES; PRICE. The Company hereby grants to Optionee the right
to purchase, upon and subject to the terms and conditions herein stated,
___________ Shares for cash (or other consideration acceptable to the Board
of Directors of the Company, in their sole and absolute discretion) at the
price of 1.03 per Share, such price being determined in accordance with the
Plan.
2. TERM OF OPTION; CONTINUATION OF EMPLOYMENT. This Option shall
expire, and all rights hereunder to purchase the Shares shall terminate, five
(5) years from the date hereof. This Option shall earlier terminate subject to
Paragraphs 5 and 6 hereof if, and as of the date, Optionee ceases to be an
employee of or consultant to the Company. Nothing contained herein shall be
construed to interfere in any way with the right of the Company to terminate the
employment or engagement, as applicable, of Optionee or to increase or decrease
the compensation of Optionee from the rate in existence at the date hereof.
3. VESTING OF OPTION. Subject to the provisions of Paragraphs 5
and 6 hereof, this Option shall become exercisable during the term of
Optionee's employment or engagement in whole or in part beginning on the date
of this Agreement.
4. EXERCISE. This Option shall be exercised by delivery to the
Company of (a) a written notice of exercise stating the number of Shares
being purchased (in whole shares only) and such other information set forth
on the form of Notice of Exercise attached hereto as Appendix A, (b) a check
or cash in the amount of the purchase price of the Shares covered by the
notice, and (c) a written statement as provided for in Paragraph 11 hereof.
This Option shall not be assignable or transferable, except by will or by the
laws of descent and distribution, and shall be exercisable only by Optionee
during his or her lifetime.
5. TERMINATION OF EMPLOYMENT OR ENGAGEMENT. If Optionee shall
cease to serve as an employee of or consultant to the Company for any reason,
whether voluntarily or involuntarily, other than by his or her death or the
conclusion of the term of a written consulting agreement, provided such term
exceeds one year, Optionee shall have the right at any time within thirty
(30) days after date Optionee ceases to be an employee of or consultant to
the Company, or the remaining term of this Option, whichever is the lesser,
to exercise in whole or in part this Option to the extent, but only to the
extent, that this Option was exercisable as of the last day of employment or
engagement, as applicable, and had not previously been exercised; provided,
however:
(i) if Optionee is permanently disabled (within the meaning
of Section 22(e)(3) of the Code) at the time of termination, the
foregoing thirty day period shall be extended to six (6) months; or
(ii) if Optionee is terminated "for good cause" as that
term is defined under the California Labor Code and case law related
thereto, the foregoing thirty day month period shall be reduced to
three (3) days.
Notwithstanding anything herein to the contrary, all rights under this Option
shall expire in any event on the date specified in Paragraph 2 hereof.
6. DEATH OF OPTIONEE. If the Optionee shall die while an employee
of or consultant to the Company, Optionee's personal representative or the
person entitled to Optionee's rights hereunder may at any time within three
(3) months after the date of Optionee's death, or during the remaining term
of this Option, whichever is the lesser, exercise this Option and purchase
Shares to the extent, but only to the extent, that Optionee could have
exercised this Option as of the date of Optionee's death; provided, in any
case, that this Option may be so exercised only to the extent that this
Option has not previously been exercised by Optionee.
<PAGE>
7. NO RIGHTS AS STOCKHOLDER. Optionee shall have no rights as a
stockholder with respect to the Shares covered by any installment of this Option
until the date of the issuance of a stock certificate to Optionee, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such stock certificate or certificates are issued except as
provided in Paragraph 8 hereof.
8. RECAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of Shares covered by this Option, and
the price per Share thereof, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares resulting from a
subdivision or consolidation of shares or the payment of a stock dividend, or
any other increase or decrease in the number of such shares affected without
receipt of consideration by the Company; provided however that the conversion
of any convertible securities of the Company shall not be deemed having been
"effected without receipt of consideration by the Company."
In the event of a proposed dissolution or liquidation of the Company, a
merger or consolidation in which the Company is not the surviving entity, or a
sale of all or substantially all of the assets of the Company, this Option shall
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board. The Board may, at its sole and absolute
discretion and without obligation, declare that this Option shall terminate as
of a date fixed by the Board and grant Optionee the right for a period
commencing thirty (30) days prior to and ending immediately prior to such date,
or during the remaining term of this Option, whichever occurs sooner, to
exercise this Option as to all or any part of the Shares, without regard to the
instalment provision of Paragraph 3; provided, however, that such exercise shall
be subject to the consummation of such dissolution, liquidation, merger,
consolidation or sale.
Subject to any required action by the stockholders of the Company, if
the Company shall be the surviving entity in any merger or consolidation, this
Option thereafter shall pertain to and apply to the securities to which a holder
of Shares equal to the Shares subject to this Option would have been entitled by
reason of such merger or consolidation, and the vesting provisions of Section 3
shall continue to apply.
In the event of a change in the Shares of the Company as presently
constituted, which is limited to a change of all of its authorized Shares
without par value into the same number of Shares with a par value, the Shares
resulting from any such change shall be deemed to be the Shares within the
meaning of this Agreement.
To the extent that the foregoing adjustments relate to shares or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
hereinbefore expressly provided, Optionee shall have no rights by reason of any
subdivision or consolidation of share of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class, and the number and price of shares subject to this Option
shall not be affected by, and no adjustments shall be made by reason of, any
dissolution, liquidation, merger or consolidation, or any issue by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class.
The grant of this Option shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure or to merge, consolidate, dissolve
or liquidate or to sell or transfer all or any part of its business or assets.
9. TAXATION UPON EXERCISE OF OPTION. Optionee understands that,
upon exercise of this Option, Optionee will recognize income, for federal and
state income tax purposes, in an amount equal to the amount by which the fair
market value of the Shares, determined as of the date of exercise, exceeds
the exercise price. The acceptance of the Shares by Optionee shall constitute
an agreement by Optionee to report such income in accordance with then
applicable law and to cooperate with Company in establishing the amount of
such income and corresponding deduction to the Company for its income tax
purposes. withholding for federal or state income and employment tax purposes
will be made, if and as required by law, from Optionee's then current
compensation, or, if such current compensation is insufficient to satisfy
withholding tax liability, the Company may require Optionee to make cash
payment to cover such liability as a condition of the exercise of this Option.
10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Board may
modify, extend or renew this Option or accept the surrender thereof (to the
extent not theretofore exercised) and authorize the granting of a new option in
substitution therefore (to the extent not theretofore exercised), subject at all
times to the Plan. Notwithstanding the foregoing provisions of this Paragraph
10, no modification shall, without the consent of the Optionee, alter to the
Optionee's detriment or impair any rights of Optionee hereunder.
11. INVESTMENT INTENT; RESTRICTIONS ON TRANSFER. Optionee
represents and agrees that if Optionee exercises this Option in whole or in
part, Optionee will in each case acquire the Shares upon such exercise for
the purpose of investment and not with a view to, or for resale in connection
with, any distribution thereof; and that upon such exercise of this Option in
whole or in part,
<PAGE>
Optionee (or any person or persons entitled to exercise this Option under the
provisions of Paragraphs 5 and 6 hereof) shall furnish to the Company a written
statement to such effect, satisfactory to the Company in form and substance. The
Company, at its option, may include a legend on each certificate representing
Shares issued pursuant to any exercise of this Option, stating in effect that
such Shares have not been registered under the Securities Act of 1933, as
amended (the "Act"), and that the transferability thereof is restricted. If the
Shares represented by this Option are registered under the Act, either before or
after the exercise of this Option in whole or in part, the Optionee shall be
relieved of the foregoing investment representation and agreement and shall not
be required to furnish the Company with the foregoing written statement.
Optionee further represents that optionee has had access to the
financial statements or books and records of the Company, has had the
opportunity to ask questions of the Company concerning its business, operations
and financial condition, and to obtain additional information reasonably
necessary to verify the accuracy of such information, and further represents
that Optionee (either such experience and knowledge in investment, financial and
business matters in investments similar to the stock of the Company that
Optionee is capable of evaluating to the merits and risks thereof and has the
capacity to protect his or her own interest in connection therewith. Optionee
acknowledges and agrees that the Commissioner of Corporations of the state of
California, as a condition to the issuance of the permit pursuant to which this
Option is granted, may impose restrictions on the transfer of Shares purchased
by Optionee pursuant hereto and may require that all certificates representing
such Shares bear restrictive legends substantially as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
12. REGISTRATION RIGHTS.
a. PIGGYBACK REGISTRATION RIGHTS. If the Company at any time
proposes to register any of its securities under the Act, including under an S-8
Registration Statement, an SB-2 Registration Statement or otherwise, it will
each such time give written notice to all holders of outstanding Shares and
Warrants of its intention so to do. Upon the written request of a holder or
holders of any such Shares or Warrants given within 30 days after receipt of any
such notice, the Company will use its best efforts to cause all such Shares, the
holders of which (or of the Warrants for which upon exercise thereof the Company
will issue Shares) shall have so requested registration thereof, to be
registered under the Act (with the securities which the Company at the time
propose to register), all to the extent requisite to permit the sale or other
disposition by the prospective Sellers of the Shares so registered; provided,
however, that the Company may, as a condition precedent to its effective such
registration, require each prospective Seller to agree with the Company and the
managing underwriter or underwriters of the offering to be made by the Company
in connection with such registration that such Seller will not sell any
securities of the same class or convertible into the same class as those
registered by the Company (including any class into which the securities
registered by the Company are convertible) for such reasonable period after such
registration becomes effective (not exceeding 30 days) as shall then be
specified in writing by such underwriter or underwriters if in the opinion of
such underwriter or underwriters the Company's offering would be materially
adversely affected in the absence of such an agreement.
b. PROCEDURES. In connection with the registration of the
Shares pursuant to Section 12.a. hereof, the Company and the Optionee covenant
and agree as follows:
(i) The Company shall pay all costs, fees, and expenses
incurred by the Company and the Optionee in connection with the
Registration Statement and the offering thereunder including,
without limitation, the Company's legal fees and expenses of counsel,
accounting fees, printing expenses, and blue sky fees and expenses (but
excluding discounts or selling commissions of any underwriter or broker
dealer acting on behalf of the company or the Optionee).
(ii) The Company shall take all necessary action which may
be reasonably required in qualifying or registering the Shares included
in the Registration Statement for offering and sale under the
securities or blue sky laws of all states reasonably requested by
Optionee, provided that the Company shall not be obligated to qualify
as a foreign corporation to do business under the laws of any such
jurisdiction.
(iii) The Company shall indemnify Optionee and each
person, if any, who controls Optionee within the meaning of Section 15
of the Act or Section 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing
or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act
<PAGE>
or otherwise, arising from the Registration Statement.
(iv) The Company shall, as soon as practicable after the
effective date of the Registration Statement, and in any event
within fifteen (15) months thereafter, make "generally available to its
security holders" (within the meaning of Rule 158 under the Act) an
earnings statement (which need not be audited) complying with Section
11(a) of the Act and covering a period of at least twelve (12)
consecutive months beginning after the effective date of the
Registration Statement.
(v) The Company shall (A) deliver promptly to Optionee and
its counsel, upon request, copies of all correspondence between the
Commission and the Company, its counsel, or auditors and all memoranda
relating to discussions with the Commission or its staff with respect
to the Registration Statement; and (B) permit Optionee and its counsel
to perform such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the Registration
Statement, as it deems reasonably necessary to comply with applicable
securities laws or rules of the National Association of Securities
Dealers, Inc. Such investigation shall include, but not be limited to,
access to financial and accounting information and opportunities to
discuss the business of the Company with the Company's officers and
independent auditors, all to such reasonable extent, at such reasonable
times and as often as Optionee and its counsel shall reasonably
request.
(vi) The Company shall cause all securities of
Optionee registered pursuant to a Registration Statement to be
listed on any national securities exchange or quoted on any
automated quotation system on which similar securities of the
Company are listed or quoted.
13. STAND-OFF AGREEMENT. Optionee agrees that in connection with
any registration of the Company's securities, that upon the request of the
Company or any underwriter managing an underwritten offering of the Company's
securities, that Optionee shall not sell, short any sale of, loan, grant an
option for, or otherwise dispose of any of the Shares (other than Shares
included in the offering) without the prior written consent of the Company or
such managing underwriter, as applicable, for a period of at least 120 days
following the effective date of registration of such offering.
14. NOTICES. Any notice required to be given pursuant to this
Option or the Plan shall be in writing and shall be deemed to be delivered upon
receipt or, in the case of notices by the Company, five (5) days after deposit
in the US. mail, postage prepaid, addressed to Optionee at the address last
provided to the Company by Optionee for his or her employee records.
15. AGREEMENT SUBJECT TO PLAN; APPLICABLE LAW. This Agreement
is made pursuant to the Plan and shall be interpreted to comply therewith. A
copy of such Plan is available to Optionee, at no charge, at the principal
office of the Company. Any provision of this Agreement inconsistent with the
Plan shall be considered void and replaced with the applicable provision of
the Plan. This Agreement has been granted, executed and delivered in the
State of California, and the interpretation and enforcement shall be governed
by the laws thereof and subject to the exclusive jurisdiction of the courts
therein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
I/OMAGIC CORPORATION
--------------------------------
BY: Tony Shahbaz
ITS: President
--------------------------------
, Optionee
<PAGE>
Appendix A
NOTICE OF EXERCISE
I/OMagic Corporation
6 Autry, Suite B
Irvine, California 92618
--------------------
(date)
Re: Nonstatutory Stock Option
Notice is hereby given pursuant to Section 4 of my Nonstatutory Stock
Option Agreement that I elect to purchase the number of shares set forth below
at the exercise price set forth in my option agreement:
Stock Option dated: ______________________
Number of shares being purchased: ______________________
Option Exercise Price: $_____________________
A check in the amount of the aggregate price of the shares being
purchased is attached.
I hereby confirm that such shares are being acquired by me for my own
account for investment purposes, and not with a view to, or for resale in
connection with, any distribution thereof.
Further, I understand that, as a result of this exercise of rights, I
will recognize income in an amount equal to the amount by which the fair market
value of the Shares exceeds the exercise price. I agree to report such income in
accordance with then applicable law and to cooperate with Company in
establishing the withholding and corresponding deduction to the Company for its
income tax purposes.
I agree to provide to the Corporation such additional documents or
information as may be required pursuant to the Corporation's 1997 Incentive and
Nonstatutory Stock Option Plan.
-------------------------
(Signature)
-------------------------
(Name of Optionee)
<PAGE>
I/OMAGIC CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT is made and entered into as of
this ____ day of ______________, 1997, by and between I/OMAGIC CORPORATION., a
Nevada corporation ("Company"), and ________________________________ (referred
to herein as the "Optionee"), with reference to the following recitals of facts:
WHEREAS, the Board has authorized the granting to Optionee of an
incentive stock option ("Option") to purchase shares of common stock of the
Company (the "Shares") upon the terms and conditions hereinafter stated; and
WHEREAS, the Board and stockholders of the Company have heretofore
adopted a 1997 Incentive and Nonstatutory Stock Option Plan (the "Plan"),
pursuant to which this Option is being granted;
WHEREAS, it is the intention of the parties that this Option be a
Incentive Stock Option (a Qualified Stock Option);
NOW, THEREFORE, in consideration of the covenants herein set forth, the
parties hereto agree as follows:
1. SHARES; PRICE. The Company hereby grants to Optionee the right
to purchase, upon and subject to the terms and conditions herein stated,
______ Shares for cash (or other consideration acceptable to the Board of
Directors of the Company, in their sole and absolute discretion) at the price
of $1.65 per Share, such price being not less than the fair market value per
share of the Shares covered by these Options as of the date hereof and as
determined by the Board of Directors of the Company.
2. TERM OF OPTION; CONTINUATION OF EMPLOYMENT. This Option shall
expire, and all rights hereunder to purchase the Shares shall terminate, five
(5) years from the date hereof. This Option shall earlier terminate subject to
Paragraphs 5 and 6 hereof if, and as of the date, Optionee ceases to be an
employee of or consultant to the Company. Nothing contained herein shall be
construed to interfere in any way with the right of the Company to terminate the
employment or engagement, as applicable, of Optionee or to increase or decrease
the compensation of Optionee from the rate in existence at the date hereof.
3. VESTING OF OPTION. Subject to the provisions of Paragraphs
5 and 6 hereof, this Option shall become exercisable during the term of
Optionee's employment or engagement in whole or in part beginning on the date
of this Agreement.
4. EXERCISE. This Option shall be exercised by delivery to the
Company of (a) a written notice of exercise stating the number of Shares
being purchased (in whole shares only) and such other information set forth
on the form of Notice of Exercise attached hereto as Appendix A, (b) a check
or cash in the amount of the purchase price of the Shares covered by the
notice, and (c) a written statement as provided for in Paragraph 11 hereof.
This Option shall not be assignable or transferable, except by will or by the
laws of descent and distribution, and shall be exercisable only by Optionee
during his or her lifetime.
5. TERMINATION OF EMPLOYMENT OR ENGAGEMENT. If Optionee shall
cease to serve as an employee of or consultant to the Company for any reason,
whether voluntarily or involuntarily, other than by his or her death or the
conclusion of the term of a written consulting agreement, provided such term
exceeds one year, Optionee shall have the right at any time within thirty
(30) days after date Optionee ceases to be an employee of or consultant to
the Company, or the remaining term of this Option, whichever is the lesser,
to exercise in whole or in part this Option to the extent, but only to the
extent, that this Option was exercisable as of the last day of employment or
engagement, as applicable, and had not previously been exercised; provided,
however:
(i) if Optionee is permanently disabled (within the meaning of
Section 22(e)(3) of the Code) at the time of termination, the
foregoing thirty day period shall be extended to six (6)
months; or
(ii) if Optionee is terminated "for good cause" as that term
is defined under the California Labor Code and case law
related thereto, the foregoing thirty day month period shall
be reduced to three (3) days.
Notwithstanding anything herein to the contrary, all rights under this Option
shall expire in any event on the date specified in Paragraph 2 hereof.
6. DEATH OF OPTIONEE. If the Optionee shall die while an employee
of or consultant to the Company, Optionee's personal representative or the
person entitled to Optionee's rights hereunder may at any time within three
(3) months after the date of Optionee's death, or during the remaining term
of this Option, whichever is the lesser, exercise this Option and purchase
Shares
<PAGE>
to the extent, but only to the extent, that Optionee could have exercised this
Option as of the date of Optionee's death; provided, in any case, that this
Option may be so exercised only to the extent that this Option has not
previously been exercised by Optionee.
7. NO RIGHTS AS STOCKHOLDER. Optionee shall have no rights as a
stockholder with respect to the Shares covered by any installment of this Option
until the date of the issuance of a stock certificate to Optionee, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such stock certificate or certificates are issued except as
provided in Paragraph 8 hereof.
8. RECAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of Shares covered by this Option, and
the price per Share thereof, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares resulting from a
subdivision or consolidation of shares or the payment of a stock dividend, or
any other increase or decrease in the number of such shares affected without
receipt of consideration by the Company; provided however that the conversion
of any convertible securities of the Company shall not be deemed having been
"effected without receipt of consideration by the Company."
In the event of a proposed dissolution or liquidation of the Company, a
merger or consolidation in which the Company is not the surviving entity, or a
sale of all or substantially all of the assets of the Company, this Option shall
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board. The Board may, at its sole and absolute
discretion and without obligation, declare that this Option shall terminate as
of a date fixed by the Board and grant Optionee the right for a period
commencing thirty (30) days prior to and ending immediately prior to such date,
or during the remaining term of this Option, whichever occurs sooner, to
exercise this Option as to all or any part of the Shares, without regard to the
instalment provision of Paragraph 3; provided, however, that such exercise shall
be subject to the consummation of such dissolution, liquidation, merger,
consolidation or sale.
Subject to any required action by the stockholders of the Company, if
the Company shall be the surviving entity in any merger or consolidation, this
Option thereafter shall pertain to and apply to the securities to which a holder
of Shares equal to the Shares subject to this Option would have been entitled by
reason of such merger or consolidation, and the vesting provisions of Section 3
shall continue to apply.
In the event of a change in the Shares of the Company as presently
constituted, which is limited to a change of all of its authorized Shares
without par value into the same number of Shares with a par value, the Shares
resulting from any such change shall be deemed to be the Shares within the
meaning of this Agreement.
To the extent that the foregoing adjustments relate to shares or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
hereinbefore expressly provided, Optionee shall have no rights by reason of any
subdivision or consolidation of share of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class, and the number and price of shares subject to this Option
shall not be affected by, and no adjustments shall be made by reason of, any
dissolution, liquidation, merger or consolidation, or any issue by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class.
The grant of this Option shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure or to merge, consolidate, dissolve
or liquidate or to sell or transfer all or any part of its business or assets.
9. TAXATION UPON EXERCISE OF OPTION. Optionee understands that,
upon exercise of this Option, Optionee will recognize income, for federal and
state income tax purposes, in an amount equal to the amount by which the fair
market value of the Shares, determined as of the date of exercise, exceeds
the exercise price. The acceptance of the Shares by Optionee shall constitute
an agreement by Optionee to report such income in accordance with then
applicable law and to cooperate with Company in establishing the amount of
such income and corresponding deduction to the Company for its income tax
purposes. withholding for federal or state income and employment tax purposes
will be made, if and as required by law, from Optionee's then current
compensation, or, if such current compensation is insufficient to satisfy
withholding tax liability, the Company may require Optionee to make cash
payment to cover such liability as a condition of the exercise of this Option.
10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Board may
modify, extend or renew this Option or accept the surrender thereof (to the
extent not theretofore exercised) and authorize the granting of a new option in
substitution therefore (to the extent not theretofore exercised), subject at all
times to the Plan. Notwithstanding the foregoing provisions of this Paragraph
10, no modification shall, without the consent of the Optionee, alter to the
Optionee's detriment or impair any rights of Optionee hereunder.
11. INVESTMENT INTENT; RESTRICTIONS ON TRANSFER. Optionee
represents and agrees that if Optionee exercises this Option
<PAGE>
in whole or in part, Optionee will in each case acquire the Shares upon such
exercise for the purpose of investment and not with a view to, or for resale in
connection with, any distribution thereof; and that upon such exercise of this
Option in whole or in part, Optionee (or any person or persons entitled to
exercise this Option under the provisions of Paragraphs 5 and 6 hereof) shall
furnish to the Company a written statement to such effect, satisfactory to the
Company in form and substance. The Company, at its option, may include a legend
on each certificate representing Shares issued pursuant to any exercise of this
Option, stating in effect that such Shares have not been registered under the
Securities Act of 1933, as amended (the "Act"), and that the transferability
thereof is restricted. If the Shares represented by this Option are registered
under the Act, either before or after the exercise of this Option in whole or in
part, the Optionee shall be relieved of the foregoing investment representation
and agreement and shall not be required to furnish the Company with the
foregoing written statement.
Optionee further represents that optionee has had access to the
financial statements or books and records of the Company, has had the
opportunity to ask questions of the Company concerning its business, operations
and financial condition, and to obtain additional information reasonably
necessary to verify the accuracy of such information, and further represents
that Optionee (either such experience and knowledge in investment, financial and
business matters in investments similar to the stock of the Company that
Optionee is capable of evaluating the merits and risks thereof and has the
capacity to protect his or her own interest in connection therewith. Optionee
acknowledges and agrees that the Commissioner of Corporations of the state of
California, as a condition to the issuance of the permit pursuant to which this
Option is granted, may impose restrictions on the transfer of Shares purchased
by Optionee pursuant hereto and may require that all certificates representing
such Shares bear restrictive legends substantially as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
12. REGISTRATION RIGHTS.
a. PIGGYBACK REGISTRATION RIGHTS. If the Company at any time
proposes to register any of its securities under the Act, including under an S-8
Registration Statement, an SB-2 Registration Statement or otherwise, it will
each such time give written notice to all holders of outstanding or exercised
options of its intention so to do. Upon the written request of a holder or
holders of any such outstanding or exercised options given within 30 days after
receipt of any such notice, the Company will use its best efforts to cause all
such outstanding or exercised options, the holders of which shall have so
requested registration thereof, to be registered under the Act (with the
securities which the Company at the time propose to register), all to the extent
requisite to permit the sale or other disposition by the prospective Sellers of
the outstanding or exercised options so registered; provided, however, that the
Company may, as a condition precedent to its effecting such registration,
require each prospective Seller to agree with the Company and the managing
underwriter or underwriters of the offering to be made by the Company in
connection with such registration that such Seller will not sell any securities
of the same class or convertible into the same class as those registered by the
Company (including any class into which the securities registered by the Company
are convertible) for such reasonable period after such registration becomes
effective (not exceeding 120 days) as shall then be specified in writing by such
underwriter or underwriters if in the opinion of such underwriter or
underwriters the Company's offering would be materially adversely affected in
the absence of such an agreement.
b. PROCEDURES. In connection with the registration of any
securities pursuant to Section 12.a. hereof, the Company and the Optionee
covenant and agree as follows:
(i) The Company shall pay all costs, fees, and
expenses incurred by the Company and the Optionee in connection with
the Registration Statement and the offering thereunder including,
without limitation, the Company's legal fees and expenses of counsel,
accounting fees, printing expenses, and blue sky fees and expenses (but
excluding discounts or selling commissions of any underwriter or broker
dealer acting on behalf of the company or the Optionee).
(ii) The Company shall take all necessary action
which may be reasonably required in qualifying or registering the
securities included in the Registration Statement for offering and sale
under the securities or blue sky laws of all states reasonably
requested by Optionee, provided that the Company shall not be obligated
to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(iii) The Company shall indemnify Optionee and each
person, if any, who controls Optionee within the meaning of Section 15
of the Act or Section 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act"),
<PAGE>
against all loss, claim, damage, expense or liability (including all
expenses reasonably incurred in investigating, preparing or defending
against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from the
Registration Statement.
(iv) The Company shall, as soon as practicable after
the effective date of the Registration Statement, and in any event
within fifteen (15) months thereafter, make "generally available to its
security holders" (within the meaning of Rule 158 under the Act) an
earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least twelve (12)
consecutive months beginning after the effective date of the
Registration Statement.
(v) The Company shall (A) deliver promptly to Optionee and
its counsel, upon request, copies of all correspondence between the
Commission and the Company, its counsel, or auditors and all
memoranda relating to discussions with the Commission or its staff
with respect to the Registration Statement; and (B) permit Optionee
and its counsel to perform such investigation, upon reasonable
advance notice, with respect to information contained in or omitted
from the Registration Statement, as it deems reasonably necessary to
comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. Such investigation shall
include, but not be limited to, access to financial and accounting
information and opportunities to discuss the business of the Company
with the Company's officers and independent auditors, all to such
reasonable extent, at such reasonable times and as often as Optionee
and its counsel shall reasonably request.
(vi) The Company shall cause all securities of Optionee
registered pursuant to a Registration Statement to be listed on any
national securities exchange or quoted on any automated quotation
system on which similar securities of the Company are listed or
quoted.
13. STAND-OFF AGREEMENT. Optionee agrees that in connection with
any registration of the Company's securities, that upon the request of the
Company or any underwriter managing an underwritten offering of the Company's
securities, that Optionee shall not sell, short any sale of, loan, grant an
option for, or otherwise dispose of any of the Shares (other than Shares
included in the offering) without the prior written consent of the Company or
such managing underwriter, as applicable, for a period of at least 120 days
following the effective date of registration of such offering.
14. NOTICES. Any notice required to be given pursuant to this
Option or the Plan shall be in writing and shall be deemed to be delivered
upon receipt or, in the case of notices by the Company, five (5) days after
deposit in the US. mail, postage prepaid, addressed to Optionee at the
address last provided to the Company by Optionee for his or her employee
records.
15. AGREEMENT SUBJECT TO PLAN; APPLICABLE LAW. This Agreement is
made pursuant to the Plan and shall be interpreted to comply therewith. A
copy of such Plan is available to Optionee, at no charge, at the principal
office of the Company. Any provision of this Agreement inconsistent with the
Plan shall be considered void and replaced with the applicable provision of
the Plan. This Agreement has been granted, executed and delivered in the
State of California, and the interpretation and enforcement shall be governed
by the laws thereof and subject to the exclusive jurisdiction of the courts
therein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
I/OMAGIC CORPORATION
--------------------------------
BY: Tony Shahbaz
ITS: President
--------------------------------
, Optionee
<PAGE>
Appendix A
NOTICE OF EXERCISE
I/OMagic Corporation
6B Autry
Irvine, CA 92618
--------------------
(date)
Re: Incentive Stock Option
Notice is hereby given pursuant to Section 4 of my Incentive Stock
Option Agreement that I elect to purchase the number of shares set forth below
at the exercise price set forth in my option agreement:
Stock Option dated: ______________________
Number of shares being purchased: ______________________
Option Exercise Price: $_____________________
A check in the amount of the aggregate price of the shares being
purchased is attached.
I hereby confirm that such shares are being acquired by me for my own
account for investment purposes, and not with a view to, or for resale in
connection with, any distribution thereof.
Further, I understand that, as a result of this exercise of rights, I
will recognize income in an amount equal to the amount by which the fair market
value of the Shares exceeds the exercise price. I agree to report such income in
accordance with then applicable law and to cooperate with Company in
establishing the withholding and corresponding deduction to the Company for its
income tax purposes.
I agree to provide to the Corporation such additional documents or
information as may be required pursuant to the Corporation's 1997 Incentive and
Nonstatutory Stock Option Plan.
-------------------------
(Signature)
-------------------------
(Name of Optionee)
<PAGE>
EXHIBIT 10.3
PLAN OF EXCHANGE AND ACQUISITION AGREEMENT
BY AND BETWEEN
SILVERCREST INTERNATIONAL AND
I/OMAGIC CORPORATION, A CALIFORNIA CORPORATION
DATED MARCH 8, 1996
<PAGE>
PLAN OF EXCHANGE AND ACQUISITION AGREEMENT
THROUGH AN EXCHANGE BY
SILVERCREST INTERNATIONAL
OF ITS VOTING STOCK FOR
100% OF THE ISSUED AND OUTSTANDING SHARES OF
I/OMAGIC CORPORATION
SILVERCREST INTERNATIONAL, INC., a Nevada corporation, hereinafter
sometimes called "SCI" and I/OMAGIC CORPORATION, a California corporation,
hereinafter sometimes called "I/O" agree as follows:
ARTICLE I. PLAN OF EXCHANGE
Plan Adopted
Section 1.0.1. The parties agree to adopt this Plan of Exchange through
an exchange of stock hereto pursuant to a tax free exchange according to the
provisions of Section 368 of the Internal Revenue Code of 1986 as amended, and
other applicable provisions as follows:
(a) SILVERCREST INTERNATIONAL, agrees to change its
corporate name to "I/OMAGIC, INC."
(b) I/O will exchange 6,570,583 shares, which constitutes 100%
of its issued and outstanding shares of stock held by the beneficial owners of
I/O to SCI in exchange for 6,570,583 shares of investment common stock of SCI,
to be issued to the exchange beneficial owner(s).
(c) This Plan of Exchange and Acquisition Agreement will be
executed by those appointed with authority to do so at the earliest possible
date, but will be subject to the approval and ratification by a majority of
shareholders of record of SCI, or their assignees, which represent more than 50%
of the shares of SCI issued and outstanding entitled to vote pursuant to Nevada
State statute and the By-Laws of the corporation. Such vote may be given by
written consent of the shareholders of record or their assignees, according to
Nevada Revised Statutes.
(d) Upon said ratification of this Agreement by a majority of
SCI's stockholders, the execution thereof, and the completion of other terms and
conditions of this Agreement between the parties, and any other agreements
pertaining thereto, the current board of directors of SCI will resign, and a new
board of directors consisting of three (3) or more nominees as nominated by I/O,
will serve as directors, effective March 13, 1996.
Closing Date
Section 1.0.2. Subject to the conditions precedent set forth herein to
the obligations of the parties to consummate the transaction, this Plan of
Exchange and Acquisition Agreement shall be effective upon ratification by a
majority of shareholders, being more than 50%, and shall be effective as of
March 13, 1996, for purposes of simplifying and consolidating the financial
statements of SCI.
ARTICLE II. COVENANTS, REPRESENTATIONS
AND WARRANTIES OF I/O
Section 2.0.1. I/O is a corporation duly organized, validly existing
and in good standing under the laws of the State of California and has the
corporate power and is duly authorized, qualified, franchised and licensed under
all applicable laws, regulations, ordinances and orders of public authorities to
own all of its properties and assets and to carry on its business in all
material respects as it is now being conducted, including qualification to do
business as a foreign corporation in the states in which the character and
location of the assets owned by it or the nature of the business transacted by
it requires qualification and where failure to qualify would have a materially
adverse effect on I/O. The execution and delivery of this Agreement does not and
the consummation of the transactions contemplated by this Agreement, in
accordance with the terms hereof will not, violate any provision of I/O's
articles of incorporation or bylaws. I/O has taken all action required by law,
its articles of incorporation, its bylaws, or otherwise to authorize the
execution and delivery of this Agreement, except for obtaining the formal
approval of the I/O shareholder, if necessary. Except for such approval, I/O has
full power, authority and legal right and has taken all action required
<PAGE>
by law, its articles of incorporation, bylaws and otherwise to consummate the
transactions herein contemplated.
Financial Statements
Section 2.0.2. I/O will supply to SCI, at the effective date of the
Acquisition, a certified audited financial statement prepared according to
Generally Acceptable Accounting Principles (GAAP), which will represent the
financial condition of I/O on a consolidated basis (post merger) between SCI and
I/O, which meet the accounting and disclosure standards of Securities and
Exchange Regulation SX, applied on a consistent basis, which will present fairly
the financial position of SCI at the date of the financial consolidation.
Activities Since Balance Sheet Date
Section 2.0.3. Except as previously disclosed to SCI, I/O has not:
(a) Sold, exchanged, or otherwise disposed of any of its
assets, contract rights, or any interest therein except as disclosed in the
letter of intent between the parties.
(b) Except in the ordinary course of business, entered into
any agreement or arrangement selling, exchanging, or otherwise disposing of any
of its assets or granting any preferential or other right to purchase any of its
assets or rights or requiring the consent of any party to the transfer and
assignment of such assets and rights.
(c) Discharged or satisfied any lien or encumbrance or paid
any obligation or liability, absolute or contingent, other than current
liabilities to be shown on its balance sheet, including non-current liabilities
so shown, which have become current by the passage of time, and current
liabilities incurred since that date in the ordinary course of business.
(d) Except current liabilities incurred or obligations under
contracts entered in the ordinary course of business, incurred or agreed to
incur any contractual obligation or liability, absolute or contingent.
(e) Issued any stock, bonds, or other corporate securities,
or any options with respect thereto.
(f) Except in the ordinary course of business, waived any
right of claim having value.
(g) Except to the extent consistent with past practice,
granted any increase in the compensation of, or paid any bonus to, any employee,
partner or principle.
(h) Declared or paid any dividends, or made, or agreed to
make, any other distribution to any officer or shareholder.
(i) Mortgaged or pledged or, except in the ordinary course of
business, subjected to lien, charge, or any other encumbrance of its assets,
tangible or intangible.
(j) Entered into any transaction or transactions the effect of
which, considered as a whole, would be to cause its net ownership in any of its
properties to be materially less than it was at the date of its Financial
Statement, as previously
disclosed.
(k) Sold, assigned, or transferred any patents, copyrights or
other intangible assets.
(l) Had any labor troubles other than routine grievance
matters, none of which is material.
(m) Enter in any transaction other than in the ordinary course
of business.
Compliance with Laws and Regulations
Section 2.0.4. I/O is in compliance with all laws, regulations, and orders
applicable to its business.
Agreement Does not Violate of Law or Instrument
Section 2.0.5. The execution and carrying out of this Agreement and
compliance with the provisions thereof by I/O will
<PAGE>
not violate, with or without the giving of notice or passage of time, any
provision of law applicable to the SCI, and will not conflict with, or result in
the breach or termination of any provision of, or constitute of default under,
or result in the creation of any lien, charge, or encumbrance upon any of the
properties, pursuant to any corporate charter, By-Laws, indenture, mortgage,
deed of trust, or other agreements or instrument to which I/O is a party or by
which I/O or any of its properties may be bound.
Taxes
Section 2.0.6. I/O hereby warrants that all federal, state, county and
local taxes, other than current "ad valorem" taxes, if any, have been paid, and
I/O has filed all federal, state, county, and other local tax returns, which are
required to be filed.
Not in Default
Section 2.0.7. I/O has not received any notice of default and, to the
knowledge of any of its stockholders or principles, is not in default under:
(a) Any order, writ, injunction, or decree of any court or of
any commission or other administrative agency.
Litigation
Section 2.0.8. There is no litigation, proceeding, or governmental
investigation pending, or, to the knowledge of any of the officers or directors
of SCI, threatened, affecting SCI or any of its properties, or its rights to
execute this Agreement or to perform its obligations hereunder, nor do any of
such officers or directors know of any ground for which litigation, proceeding,
or investigation.
Insurance
Section 2.0.9. I/O now has in force liability and other insurance with
respect to its business, properties, products, the reinsurance of mortgages,
etc., and except in accordance with written approval of SCI pending the closing
date, will not change, increase or decrease any such insurance.
Character of Statements
Section 2.10. The information provided by I/O and its officers and
directors to SCI pursuant to this Agreement for use in any financial statement,
proxy statement or listing or rating application, does not and will not contain
any statement, which at the time and in the light of the circumstances under
which it is made, is false or misleading with respect to any material fact, and
does not and will not omit to state any material fact in order to make the
statements therein not false and misleading.
ARTICLE III.
RESERVED.
ARTICLE IV. COVENANTS, REPRESENTATIONS
AND WARRANTIES OF SCI
Legal Status
Section 4.0.1. SCI is a corporation duly organized under the laws of
the State of Nevada with corporate power to own property and carry on its
business as it is now being conducted. SCI represents that it is in good
standing in its State of domicile and that SCI will be responsible for any tax
liabilities or penalties due or incurred by SCI prior to the closing of this
transaction on or before March 7, 1996 (the effective date, subject to
shareholder ratification) and as a result will warrant to I/O that it will be in
compliance with the laws applicable to its business.
(a) FEDERAL TAXES. SCI has not filed any federal income tax
returns for a number of years inasmuch as SCI has either had no activity or
income to report, and has incurred losses from time to time. If it is
determined that it is necessary for SCI to file such returns then it will do
so.
(b) STATE TAXES AND FRANCHISE FEES. SCI has paid all
corporate franchise fees due to the State of Nevada through 1996 in order to
remain in good standing.
<PAGE>
Capitalization and Outstanding Shares
Section 4.0.2. SCI currently has an authorized capital stock of
50,000,000 shares of single class common stock of $.01 par value. As of the date
of this Agreement 2,000,000 shares of common stock are validly issued and
outstanding, fully paid and non-assessable. The shareholders of SCI are not
entitled to cumulative voting in the election of directors.
Financial Statements
Section 4.0.3. SCI has supplied to I/O, a certified financial
statement, which was completed in accordance with GAAP reflecting no assets and
no known or asserted liabilities, encompassing the periods December 31, 1993,
1994 and 1995 and represents that there have been no substantial changes to its
financial statements since that date. Inasmuch as I/O board of directors will be
in control of SCI subsequent to the acquisition, it will be SCI's board as now
constituted who will have the responsibility to provide a consolidated audited
financial statement post merger of SCI and I/O in accordance with GAAP within 90
days after closing.
Activities Since Balance Sheet Date
Section 4.0.4. Except as previously disclosed to I/O, SCI has not:
(a) Suffered any change in the operations of its business.
(b) Except in the ordinary course of business, sold,
exchanged, or otherwise disposed of, or entered any agreement or arrangement to
sell, exchange, or otherwise dispose of, any asset, rights or any interest
therein, and SCI is not a party to or bound by any outstanding option, warrant,
right, call, commitment or other agreement or obligation to sell, issue, buy or
otherwise dispose of or acquire any shares of its capital stock or other
securities.
Litigation and Indemnification
Section 4.0.5. There are no actions or proceedings pending, or to the
knowledge of SCI, threatened against, by, or affecting the SCI in any court or
before any governmental agency, domestic or foreign, which, if decided adversely
to the SCI, would materially and adversely affect the condition or operations,
financial or otherwise of SCI, and SCI's current Board of Directors as now
constituted will agree by this agreement, to indemnify I/O and I/O's
shareholders against any litigation or asserted or contingent liability, which
may arise as a result of SCI's corporate activities prior to March 7, 1996.
Status of Shares Deliverable
Section 4.0.6. The shares of stock of SCI deliverable to I/O or I/O's
assignees pursuant to this Agreement, when issued and delivered as provided in
this Agreement, will be validly issued and outstanding shares of SCI, fully paid
and non-assessable, according to class, series and issue and privilege relating
to the same. Such shares if unregistered when deliverable will be restricted
shares under Rule 144 of the Securities Act of 1933, and bear a restrictive
legend reflecting the same.
Approval of Board
Section 4.0.7.
(a) The Board of Directors of SCI, has duly approved the
transactions contemplated hereby and has authorized the execution and delivery
of this Agreement by SCI, and the performance by SCI subject to ratification of
a majority of shareholders by written consent. (b) SCI has no knowledge that
either the execution or delivery of this Agreement or the consummation of the
transactions contemplated hereby or compliance with any of the provision hereof
will conflict with, result in a breach of any provision of, or constitute a
default (or an event, which with notice or lapse of time or both, would
constitute a default) under, or result in the creation of any lien, security
interest, charge or encumbrance upon any terms, conditions or provisions of
SCI's Articles of Incorporation, or under any agreement, other instrument or
obligation.
(c) Except as disclosed in this Agreement and the Exhibit
hereto, SCI does not know of any
(i) default (or event, which with notice or lapse of
time or both, would constitute a default) under any contract, note, mortgage,
loan agreement, lease, instrument or commitment, whether written or oral, to
which SCI is a party to or, which it is subject or under any governmental
license or permit or
(ii) breach of any provisions of its Articles of
Incorporation.
<PAGE>
ARTICLE V. CONDUCT OF BUSINESS OF I/O
PENDING CLOSING
Preservation of and Access to
Information and Documents
Section 5.0.1. I/O will:
(a) Use its best efforts to perform all its obligations under
contracts relating to or affecting its assets and shareholder equity.
(b) Exercise all due diligence in safeguarding and maintaining
its assets, reports and data, in its possession and relating to contracts,
rights and current negotiations pertaining to the same.
(c) Confer with SCI regarding all significant developments and
transactions relating to its business and give to SCI full access at any time to
all properties, books, tax returns, partnership agreements, contracts, and
documents of SCI.
(d) Permit SCI and its representatives to examine such
agreements and records as they relate to SCI's
business as SCI may request.
Submission to Shareholders and Principals
Section 5.0.2. I/O will submit to its stockholders, if necessary,
partners or principles, for their approval, this Agreement and the assignment
and plan of distribution contemplated by Section 1.0.1. hereof. I/O shall use
its best efforts to cause the approval of the same and to adopt this Agreement
and said plan of distribution.
Satisfy Conditions Precedent
Section 5.0.3. I/O will use its best efforts to cause the satisfaction
of all conditions precedent contained in this Agreement.
ARTICLE VI. CONDUCT OF BUSINESS OF SCI
PENDING CLOSING
Carry on Business as Usual
Section 6.0.1. SCI will carry on business as usual until such time as
this agreement is executed, then upon the consummation of the Plan of Exchange
and ratification by a majority of shareholders of SCI, SCI will operate the
business of I/O as described in Article II, section 2.0.2., herein.
Satisfy Conditions Precedent
Section 6.0.2. Except with the prior written consent of I/O, SCI will
not declare or pay any dividend, or declare or make any other distribution to
its shareholders.
ARTICLE VII. CONSUMMATION OF TRANSACTION
Consideration of I/O & SCI
Section 7.0.1. The consideration between I/O and SCI, SCI as described
herein, will be delivered by an exchange of stock between the parties as
described in Article I, Section 1.0.1., in exchange for SCI's interests upon
such conveyance, the execution of this agreement, and completions of the
exchange as herein contemplated.
(a) SCI shall not assume nor be responsible for any of the
following items:
(i) Fees, costs and expenses incurred by I/O in
carrying out the Plan of Exchange and Acquisition Agreement.
(ii) Any liability of I/O to its shareholders or
principals, whether or not arising from this Plan
<PAGE>
of Exchange and Acquisition Agreement.
(iii) Any taxes imposed upon I/O by reason of the Plan
of Exchange and Acquisition Agreement.
(iv) Any liability or obligation of I/O with respect to
taxes, assessments, or other governmental charge for periods prior to March 7,
1996, or any other liability not agreed to be assumed by SCI by previous
written agreement.
Delivery of Shares to SCI
Section 7.0.3.
(a) Promptly after the closing date, SCI shall proceed with
due diligence to deliver the shares of common stock of SCI to I/O or assignees;
(b) I/O shall proceed promptly after the closing date to
prepare and file all income tax returns and reports required under applicable
law, state or federal, if not already completed, covering all periods prior to
the closing date for which tax returns and reports have not previously been
filed, if required.
ARTICLE VIII. INTERPRETATION AND ENFORCEMENT
Indemnification
Section 8.0.1.
(a) Each party hereto agrees to protect, defend, indemnify and
hold harmless the other party, its successors and assigns, against and in
respect of all loss, damage, or expense by any breach by such indemnify party of
any of its representations, warranties, covenants, or agreements contained
herein.
(b) I/O expressly agrees to indemnify and hold harmless the
SCI from any loss, damage, or expenses, including reasonable counsel fees
sustained or incurred by SCI by reason of any claim asserted against SCI to
discharge any liability or obligation of I/O not expressly assumed by SCI under
the terms hereof.
(c) Each party hereto will indemnify and hold harmless the
other party against and in respect of any claim for any consulting fee, stock or
stock option relative to this Agreement or to the transactions contemplated
hereby, based in any way on agreements, arrangements, or understanding claimed
to have been made by such party with any third party as described in Article
III, Section 3.0.2.
Specific Performance
Section 8.0.2. The Board of Directors as nominated by SCI, which shall
become SCI's newly elected Board of Directors shall be responsible to maintain
and keep current financial statements of SCI on an annual or quarterly basis in
order to maintain listing or other blue sky trading exemptions with Moody's
Investors' Service and Standard and Poors and as required by applicable
reporting requirements of the Securities and Exchange Commission Rule 15-C-211
or such other filing requirements of each individual state wherein the
securities of SCI may trade.
Survival of Covenants, Representations and Warranties
Section 8.0.3. All covenants, agreements, representations and
warranties made hereunder and in any documents or certificates delivered at the
closing shall be deemed to be material and to have been relied upon by SCI and
SCI, notwithstanding any investigation made by SCI or I/O or on their respective
behalf, and shall survive the closing.
Assignment
Section 8.0.4. Except with the written consent of the other party, the
rights and obligations under this Agreement shall not be assignable by either
party. Nothing herein expressed or implied is intended to confer upon any
person, other than the parties hereto or their respective successors, assigns,
heirs and legal representatives, any rights, remedies, or liabilities under or
by reason of this Agreement.
Notices
<PAGE>
Section 8.0.5. Any notice or other communication required or
permitted hereunder shall be deemed to be properly given when deposited in
the United States mail for transmittal by certified or registered mail,
postage prepaid, or when deposited with public telegraph company for
transmittal, charges prepaid, if such communication is addressed:
(a) In the case of SCI: I/OMagic Corporation, 9272 Jeronimo,
No. 122, Irvine, CA 92718, or to such other address as I/O may from time to time
furnish to SCI for that purpose.
(b) In the case of I/O: Silvercrest International, Inc., 4056
Elkridge Drive, Las Vegas, NV 89129, USA or to such other address as SCI may
from time to time furnish to I/O for that purpose.
Entire Agreement Counterparts
Section 8.0.6. This instrument between the Parties, and the exhibits
attached hereto contain the entire Agreement between the parties with respect to
the transaction contemplated hereby. It may be executed in any number of
counterparts, each of which shall be deemed an original, but such counterparts
together constitute only one and the same instrument.
Controlling Law
Section 8.0.7. The validity, interpretation, and performance of this
Agreement shall be controlled by and construed under the laws of the State of
Nevada, within the venue and jurisdiction of Clark County, Nevada.
In accordance with the Uniform Commercial Code a fax copy of this
instrument shall be same as an original.
This Plan of Reorganization and Acquisition Agreement is agreed and
executed by and between the parties on March 8, 1996.
SILVERCREST INTERNATIONAL, INC. I/OMAGIC CORPORATION
BY: /s/ ANDREW W. BERNEY BY: /s/ TONY SHAHBAZ
--------------------- ------------------------------
Andrew W. Berney, Tony Shahbaz, on authority of
Its President Board of Directors
<PAGE>
MINUTES OF
A
SPECIAL MEETING OF SHAREHOLDERS
OF
SILVERCREST INTERNATIONAL, INC.
(the "Corporation")
A Special Meeting of Shareholders of the Corporation, who hold stock,
which is validly issued and outstanding on the books of the Corporation, was
held at the offices of the Corporation, 4056 Elkridge Drive, Las Vegas, NV
89129, at the hour of 9:00 AM, on March 11, 1996. Pursuant to NRS 78.320 and
other applicable statutes regarding matters to be voted upon, such shareholders
appointed Andrew W. Berney with full power of substitution, as attorney and
proxy to appear and vote all of the shares of stock of the Corporation validly
issued and outstanding in their names, to be voted at said Special Meeting of
Shareholders.
The meeting was called to order by Andrew W. Berney who chaired the
meeting and who represented persons voting by proxy, and Bobby Combs, was asked
to act as secretary for the meeting. The Chairman of the meeting then reported
that there were sufficient proxies representing more than 50% of the voting
power of the Corporation through shares validly issued entitled to vote
necessary to constitute a quorum.
1. The Chairman announced on March 8, 1996 the Corporation had entered
an agreement to acquire 100% of the issued and outstanding shares of I/OMagic
Corporation ("I/O") (or 6,570,583 common shares), a California corporation,
for and in consideration of 6,570,583 million shares of the Corporation's
restricted common stock. He further stated that the members of the Board of
Directors had informally discussed this acquisition and they all agreed it
was in the Corporation's interest to conclude this agreement with the various
shareholders of I/O.
2. The Chairman stated that as part of the acquisition of I/O the name
of the corporation would be changed to I/OMAGIC CORPORATION, to be effective
on the date the necessary documents are filed with the Secretary of State,
Nevada.
3. To reverse split all issued and outstanding common shares of the
corporation on a basis of 1:3.2, meaning for each 3.2 shares currently issued
and outstanding pre-reverse split, such shall equal one share post-reverse
split. All fractional shares shall be rounded up to equal one whole share.
Said reverse split of shares to be effective the 13th day of March, 1996, but
said shares shall begin to be quoted with bid and ask quotations reflecting,
said reverse upon notification to the Cuspic Service Bureau of Standard and
Poors Corporation, as well as the National Quotation Bureau ("NBQ") on March
14, 1996.
4. The Special Meeting of Shareholders then nominated Tony Shahbaz;
Tony Andrews and Edward Hanson, to serve as directors of the Corporation for
the ensuing year effective at 12:01 AM March 13, 1996.
5. The Chairman requested that with the nomination of the new
Directors, which are I/O Directors, as provided in the I/O acquisition
agreement, that the current Directors be removed from office. The Special
Meeting of Shareholders then removed, as Directors of the Corporation: Andrew
W. Berney; Bobby Combs and John M. Eckert, to be effective at 12 midnight
March 12, 1996.
There being 2,000,000 shares validly issued and outstanding entitled to
vote, upon completion of the discussion and upon motion duly made, seconded and
carried, a vote was then taken to approve and ratify the actions taken and
further actions and plans to be taken by the Board of Directors as stated in
items 1 through 5, as presented above.
A tally of the votes for the items stated above were tallied, there
being 2,000,000 common shares validly issued and outstanding entitled to vote,
there were 2,000,000, which constitutes 100.00% voting in the affirmative either
in person or by proxy for items 1 through 4 and 0 NAYS, there being a majority,
which voted in the affirmative for the above items, and there being no other
business to properly come before the meeting, the meeting was then adjourned.
Dated this 11th day of March, 1996.
/S/ BOBBY COMBS
- --------------------------
Bobby Combs, Secretary for
the Meeting
I , Andrew W. Berney, Chairman of the Meeting, do hereby swear and
affirm that said minutes of the Special Meeting of Shareholders are true and
accurate as signed by the Secretary for the Meeting of Shareholders.
Dated this 11th day of March, 1996.
/s/ ANDREW W. BERNEY
Andrew W. Berney, Chairman of
the Meeting
<PAGE>
WAIVER OF NOTICE OF AND SPECIAL MEETING OF
BOARD OF DIRECTORS
OF
SILVERCREST INTERNATIONAL, INC.
(the "Corporation")
The undersigned, being Directors of the Corporation, hereby agree and consent
that a Special Meeting of the Board of Directors of the Corporation be held on
March 12, 1996 at 11:00 O'clock AM, and at 4056 Elkridge Drive, Las Vegas, NV
89129, and do hereby waive all notice whatsoever of such meeting and of any
adjournment or adjournments thereof.
There were present the following, in person or telephonically:
Andrew W. Berney
Bobby Combs
John M. Eckert
being the Directors of the Corporation.
The meeting was called to order by Andrew W. Berney. It was moved, seconded and
unanimously carried that:
Andrew W. Berney act as Temporary Chairman and Bobby Combs act as temporary
Secretary.
The temporary chairman stated that on March 8, 1996 a Special Meeting of the
Majority of Stockholders was held and a majority of shareholders voted to ratify
and approved the following actions:
1. The Plan of Exchange and Acquisition Agreement dated March 6, 1996
between the Corporation and I/OMagic Corporation ("I/O"), a California
corporation, to acquire 100% of the issued and outstanding shares of I/O (or
6,570,583 common shares) for and in consideration of 6,570,583 million shares
of the Corporation's restricted common stock.
2. The Shareholders approved a name change to the Corporation to
I/OMagic Corporation, to be effective on the date the necessary documents are
filed with the Nevada Secretary of State.
3. The Shareholders approved a reverse split all issued and outstanding
common shares of the corporation on a basis of 1:3.2, meaning for each 3.2
shares currently issued and outstanding pre-reverse split, such shall equal
one share post-reverse split.
4. The Special Meeting of Shareholders nominated Tony Shahbaz, Tony
Andrews and Edward Hanson to serve as directors of the Corporation for the
ensuing year effective at 12:01 AM March 13, 1996.
5. The Special Meeting of Shareholders then removed, as directors of
the Corporation, Andrew W. Berney, Bobby Combs and John M. Eckert, to be
effective at 12 midnight March 12, 1996.
Upon motion duly made, seconded and unanimously carried it was
RESOLVED, that a copy of the Minutes of a Special Meeting of the
Stockholders be inserted in the Minute Book of the Corporation.
Upon motion duly made, seconded and unanimously carried it was
RESOLVED to reverse split all issued and outstanding common shares
of the corporation on a basis of 1:3.2, meaning for each 3.2
shares currently issued and outstanding pre-reverse split,
such shall equal one share postreverse split. All fractional
shares shall be rounded up to equal one whole share. Said
reverse split of shares to be effective this 7th day of
March, 1996, but said shares shall begin to be quoted with
bid and ask quotations reflecting, said reverse upon
notification to the Cuspic Service Bureau of Standard and Poors
Corporation, as well as the National Quotation Bureau ("NBQ") on
Monday, March 13, 1996. The Corporation shall immediately
notify its stock transfer agent and instruct it to reverse the
Corporation's common shares based on this Resolution.
The temporary chairman then stated under the Plan of Exchange and Acquisition
Agreement between the Corporation and I/O is to
<PAGE>
acquire 100% of the issued and outstanding shares of I/O in exchange for
6,570,583 restricted common shares of the Corporation. An agent of I/O has
provided a listing of individuals and/or entities and the number of restricted
common shares each shall receive. Upon motion duly made, seconded and
unanimously carried, it was
RESOLVED, that the Plan of Exchange and Acquisition Agreement between
the Corporation and I/O submitted to the meeting be, and the same is,
hereby approved and accepted by Corporation, and that a copy thereof be
placed in the Minute Book of the Corporation.
RESOLVED FURTHER, that the name of the Corporation be changed to
I/OMAGIC CORPORATION.
RESOLVED FURTHER, that the Corporation instruct its Transfer Agent to
issue 6,570,583 restricted Common Shares, effective March 13, 1996 to
the following individuals and/or entities, with the number of shares
issued to each be placed at the side of their names, as set forth in
Exhibit "A" attached hereto and made a part
hereof.
There being no further business to come before the meeting, upon motion duly
made, seconded and unanimously carried it was adjourned.
/s/ BOBBY COMBS
- ---------------
Bobby Combs
Attest:
Board of Directors:
/s/ ANDREW W. BERNEY
- ---------------------
Andrew W. Berney,
Chairman/President
<PAGE>
WAIVER OF NOTICE OF AND SPECIAL MEETING OF
BOARD OF DIRECTORS
OF
SILVERCREST INTERNATIONAL, INC.
(the "Corporation")
The undersigned, being Directors of the Corporation, hereby agree and consent
that a Special Meeting of the Board of Directors of the Corporation be held on
March 13, 1996 at 11:00 O'clock AM, and at 9272 Jeronimo, No. 122, Irvine, CA
92718, as designated hereunder, and do hereby waive all notice whatsoever of
such meeting and of any adjournment or adjournments thereof.
There were present the following, in person or telephonically:
Tony Shahbaz
Tony Andrews
Edward Hanson
being the Directors of the Corporation.
The meeting was called to order by Tony Shahbaz. It was moved, seconded and
unanimously carried that:
Tony Shahbaz act as Temporary Chairman and Edward Hanson act as
Temporary Secretary.
The temporary chairman stated that on March 11, 1996 a Special Meeting of the
Majority of Stockholders was held and Messrs. Shahbaz, Andrews and Hanson were
elected as Directors of the Corporation.
The meeting then proceeded to the election of officers. Upon nominations duly
made and seconded, the following were elected officers of the Corporation, to
serve for the ensuing year and until their successors are elected and qualify:
<TABLE>
<S> <C>
President: Tony Shahbaz
Vice President and Director of Engineering: Tony Andrews
Secretary-Treasurer and Chief Financial Officer: Edward Hanson
</TABLE>
The President of the Corporation then assumed the Chair and the Secretary then
assumed the duties of Secretary.
The Chair then stated that from an operational standpoint the
principal place of business of the Corporation should be changed. Upon
motion duly made it was moved, seconded and unanimously
RESOLVED, that the principal place of business of the Corporation is
9272 Jeronimo, No. 122, Irvine, California 92718.
There being no further business to come before the meeting, upon motion duly
made, seconded and unanimously carried it was adjourned.
/s/ EDWARD HANSON
- ------------------
Edward Hanson,
Temporary Secretary
Attest: Board of Directors:
/s/ TONY SHAHBAZ
- -----------------------
Tony Shahbaz, President
Chief Executive Officer and
Chairman of the Board of Directors
<PAGE>
EXHIBIT 10.4
I/OMAGIC CORPORATION
1998 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
DATED JANUARY 2, 1998
<PAGE>
I/OMAGIC CORPORATION
1998 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
1. PURPOSE
This Incentive and Nonstatutory Stock Option Plan (the "Plan") is
intended to further the growth and financial success of I/OMAGIC CORPORATION, a
Nevada corporation (the "Corporation") by providing additional incentives to
selected employees of and consultants to the Corporation or parent corporation
or subsidiary corporation of the Corporation as those terms are defined in
Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the
"Code") (such parent corporations and subsidiary corporations hereinafter
collectively referred to as "Affiliates") so that such employees and consultants
may acquire or increase their proprietary interest in the Corporation. Stock
options granted under the Plan (hereinafter "Options") may be either "Incentive
Stock Options", as defined in Section 422 of the Code and any regulations
promulgated under said Section, or "Nonstatutory Options" at the discretion of
the Board of Directors of the Corporation (the "Board") and as reflected in the
respective written stock option agreements granted pursuant hereto.
2. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the
Corporation; provided however, that the Board may delegate such administration
to a committee of not fewer than three (3) members (the "Committee"), at least
two (2) of whom are members of the Board and all of whom are disinterested
administrators, as contemplated by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended ("Rule 16b-3"); and provided further, that the
foregoing requirement for disinterested administrators shall not apply prior to
the date of the first registration of any of the securities of the Corporation
under the Securities Act of 1933, as amended.
Subject to the provisions of the Plan, the Board and/or the Committee
shall have authority to (a) grant, in its discretion, Incentive Stock Options in
accordance with Section 422 of the Code or Nonstatutory Options; (b) determine
in good faith the fair market value of the stock covered by an Option; (c)
determine which eligible persons shall be granted Options and the number of
shares to be covered thereby and the term thereof; (d) construe and interpret
the Plan; (e) promulgate, amend and rescind rules and regulations relating to
its administration, and correct defects, omissions, and inconsistencies in the
Plan or any Option; (f) consistent with the Plan and with the consent of the
optionee, as appropriate, amend any outstanding Option or amend the exercise
date or dates thereof; (g) determine the duration and purpose of leaves of
absence which may be granted to optionholders without constituting termination
of their employment for the purpose of the Plan; and (h) make all other
determinations necessary or advisable for the Plan's administration. The
interpretation and construction by the Board of any provisions of the Plan or of
any Option shall be conclusive and final. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option.
3. ELIGIBILITY
The persons who shall be eligible to receive Options shall be key
employees of or consultants to the Corporation or any of its Affiliates
("Optionees"). The term consultant shall mean any person who is engaged by the
Corporation to render services and is compensated for such services, and any
director of the Corporation whether or not compensated for such services;
provided that, if the Corporation registers any of its securities pursuant to
the Securities Exchange Act of 1934, the term consultant shall thereafter not
include directors who are not compensated for their services or are paid only a
director fee by the Corporation.
(a) INCENTIVE STOCK OPTIONS. Incentive Stock Options may only
be issued to employees of the Corporation or its Affiliates. Incentive Stock
Options may be granted to officers, whether or not they are directors, but a
director shall not be granted an Incentive Stock Option unless such director is
also an employee of the Corporation. Payment of a director fee shall not be
sufficient to constitute employment by the Corporation. Any grant of option to
an officer or director of the Corporation subsequent to the first registration
of any of the securities of the Corporation under Securities Act of 1933, as
amended, shall comply with the requirements of Rule 16b-3. An optionee may hold
more than one Option.
The Corporation shall not grant an Incentive Stock Option under the
Plan to any employee if such grant would result in such employee holding the
right to exercise for the first time in any one calendar year, under all
options granted to such employee under the Plan or any other stock option
plan maintained by the Corporation or any Affiliate, with respect to shares
of stock having an aggregate fair market value, determined as of the date of
the Option is granted, in excess of $100,000. Should it be determined that an
Incentive Stock Option granted under the Plan exceeds such maximum for any
reason other than a failure in good faith to value the stock subject to such
option, the excess portion of such option shall be considered a Nonstatutory
Option. If, for
1
<PAGE>
any reason, an entire option does not qualify as an Incentive Stock Option by
reason of exceeding such maximum, such option shall be considered a Nonstatutory
Option.
(b) NONSTATUTORY OPTION. The provisions of the foregoing
Section 3(a) shall not apply to any option granted pursuant to a "Nonstatutory
Stock Option Agreement" or which sets forth the intention of the parties that
the option be a Nonstatutory Option.
4. STOCK
The stock subject to Options shall be the shares of the Corporation's
authorized but unissued or reacquired Common Stock
(the "Stock").
(a) NUMBER OF SHARES. Subject to adjustment as provided in
Paragraph 5(h) of this Plan, the total number of shares of Stock which may be
purchased through exercise of Options granted under this Plan shall not exceed
one million four hundred and one thousand nine hundred seventy-six (1,401,976)
shares If for any reason terminate or expire, any shares allocated thereto but
remaining unpurchased upon such expiration or termination shall again be
available for the grant of Options with respect thereto under this Plan as
though no Option had been granted with respect to such shares.
(b) RESERVATION OF SHARES. The Corporation shall reserve and
keep available at all times during the term of the Plan such number of shares of
stock as shall be sufficient to satisfy the requirements of the Plan. If, after
reasonable efforts, which efforts shall not include the registration of the Plan
or Options under the Securities Act of 1933, the Corporation is unable to obtain
authority from any applicable regulatory body, which authorization is deemed
necessary by legal counsel for the Corporation for the lawful issuance of shares
hereunder, the Corporation shall be relieved of any liability with respect to
its failure to issue and sell the shares for which such requisite authority was
so deemed necessary unless and until such authority is obtained.
5. TERMS AND CONDITIONS OF OPTIONS
Options granted hereunder shall be evidenced by agreements between the
Corporation and the respective Optionees, in such form and substance as the
Board or Committee shall from time to time approve. Such agreements need not be
identical, and in each case may include such provisions as the Board or
Committee may determine, but all such agreements shall be subject to and limited
by the following terms and conditions:
(a) NUMBER OF SHARES: Each Option shall state the number of
shares to which it pertains.
(b) OPTION PRICE: Each Option shall state the "Option
Price," which shall be determined as follows:
(i) Any Option granted to a person who at the time
the Option is granted owns (or is deemed to own pursuant to Section
424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power or value of all classes of stock of the
Corporation, or of any Affiliate ("Ten Percent Holder") shall have an
Option Price of no less than 110% of the fair market value of the
common stock as of the date of grant. For the purposes of the Plan the
fair market value has been determined by the Board to be $1.13.
(ii) Incentive Stock Options granted to a person who
at the time the Option is granted is not a Ten Percent Holder shall
have an Option price of no less than 100% of the fair market value of
the common stock as of the date of grant.
(iii) Nonstatutory Options granted to a person who at
the time the Option is granted is not a Ten Percent Holder shall have
an Option Price determined by the Board as of the date of grant.
For the purposes of this paragraph 5(b), the fair market value
shall be as determined by the Board, in good faith, which determination shall be
conclusive and binding; provided however, that if there is a public market for
such stock, the fair market value per share shall be the average of the bid and
asked prices (or the closing price if such stock is listed on the NASDAQ
National Market System) on the date of grant of the Option, or if listed on a
stock exchange, the closing price on such exchange on such date of grant.
(c) MEDIUM AND TIME OF PAYMENT: To the extent permissible by
applicable law, the Option Price shall be paid, at the discretion of the Board,
at either the time of grant or the time of exercise of the Option (i) in cash or
by check, (ii) by delivery of other common stock of the Corporation, provided
such tendered stock was not acquired directly or indirectly from the
Corporation, or, if acquired from the Corporation, has been held by the Optionee
for more than six (6) months, (iii) by the Optionee's promissory
2
<PAGE>
note in a form satisfactory to the Corporation and bearing interest at a rate
determined by the Board, in its sole discretion, but in no event less than 6%
per annum, or (iv) such other form of legal consideration permitted by the
California Corporations Code as may be acceptable to the Board.
(d) TERM AND EXERCISE OF OPTIONS: Any Option granted to an
Employee of the Corporation shall become exercisable over a period of no longer
than five (5) years, and no less than twenty percent (20%) of the shares covered
thereby shall become exercisable annually. No Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted unless the
Board shall specifically determine otherwise, as provided herein. In no event
shall any Option be exercisable after the expiration of ten (10) years from the
date it is granted, and no Incentive Stock Option granted to a Ten Percent
Holder shall, by its terms, be exercisable after the expiration of five (5)
years from the date of the Option. Unless otherwise specified by the Board or
the Committee in the resolution authorizing such Option, the date of grant of an
Option shall be deemed to be the date upon which the Board or the Committee
authorizes the granting of such Option.
Each Option shall be exercisable to the nearest whole share,
in installments or otherwise, as the respective option agreements may provide.
During the lifetime of an Optionee, the Option shall be exercisable only by the
Optionee and shall not be assignable or transferable by the Optionee, and no
other person shall acquire any rights therein. To the extent not exercised,
installments (if more than one) shall accumulate, but shall be exercisable, in
whole or in part, only during the period for exercise as stated in the option
agreement, whether or not other installments are then exercisable.
(e) TERMINATION OF STATUS AS EMPLOYEE OR CONSULTANT: If
Optionee's status as an employee or consultant shall terminate for any reason
other than Optionee's disability or death, then the Optionee (or if the Optionee
shall die after such termination, but prior to exercise, Optionee's personal
representative or the person entitled to succeed to the Option) shall have the
right to exercise any Options held by such Optionee prior to such termination,
in whole or in part, at any time within three (3) months after such termination
(or in the event of "termination for good cause" as that term is defined under
California Labor Code and case law related thereto, such shorter period as the
option agreement may specify, but not less than 30 days) or the remaining term
of the Option, whichever is the lesser; provided, however, that with respect to
Nonstatutory Options, the Board may specify such longer period, not to exceed
six (6) months, for exercise following termination as the Board deems reasonable
and appropriate. The Option may be exercised only with respect to installments
that the Optionee could have exercised at the date of termination of employment.
Nothing contained herein or in any Option granted pursuant hereto shall be
construed to affect or restrict in any way the right of the Corporation to
terminate the employment of an Optionee with or without cause.
(f) DISABILITY OF OPTIONEE: If an Optionee dies while employed
or engaged as a consultant by the Corporation or an Affiliate, the portion of
such Optionee's Option or Options which were exercisable at the date of death
may be exercised, in whole or in part, by the estate of the decedent or by a
person succeeding to the right to exercise such Option or Options, at any time
within (i) a period, as determined by the Board and set forth in the Option, of
not less than six (6) months nor more than one (1) year after Optionee's death,
which period shall not be less, in the case of a Nonstatutory Option, than the
period for exercise following termination, or (ii) during the remaining term of
the Option, whichever is the lesser. The Option may be so exercised only with
respect to installments exercisable at the time of Optionee's death and not
previously exercised by the Optionee.
(g) NONTRANSFERABILITY OF OPTION: No Option shall be
transferable by the Optionee, except by will or by the laws of descent and
distribution.
(h) RECAPITALIZATION: Subject to any required action by the
stockholders, the number of shares of Stock covered by each outstanding Option,
and the price per share thereof set forth in each such Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of Stock of the Corporation resulting from a subdivision or consolidation
of shares or the payment of a stock dividend, or any other increase or decrease
in the number of such shares affected without receipt of consideration by the
Corporation.
Subject to any required action by the stockholders, if the
Corporation shall be the surviving entity in any merger or consolidation, each
outstanding Option thereafter shall pertain to and apply to the securities to
which a holder of shares of common stock equal to the shares subject to the
Option would have been entitled by reason of such merger or consolidation. A
dissolution or liquidation of the Corporation or a merger or consolidation in
which the Corporation is not the surviving entity shall cause each outstanding
Option to terminate on the effective date of such dissolution, liquidation,
merger or consolidation. In such event, if the entity which shall be the
surviving entity does not tender to Optionee an offer, for which it has no
obligation to do so, to substitute for any unexercised Option a stock option or
capital stock of such surviving entity, as applicable, which on an equitable
basis shall provide the Optionee with substantially the same economic benefit as
such unexercised Option, then the Board may grant to such Optionee, but shall
not be obligated to do so, the right for a period commencing thirty (30) days
prior to and ending immediately prior to such dissolution, liquidation, merger
or consolidation or during the remaining term of the Option, whichever is the
lesser, to exercise any unexpired Option or Options, without regard to the
installment provisions of Paragraph 5(d) of this Plan; provided,
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that any such right granted shall be granted to all Optionees not receiving an
offer to substitute on a consistent basis, and provided further, that any such
exercise shall be subject to the consummation of such dissolution, liquidation,
merger or consolidation.
In the event of a change in the common stock of the
Corporation as presently constituted, which is limited to a change of all of its
authorized shares without par value into the same number of shares with a par
value, the shares resulting from any such change shall be deemed to be the
common stock within the meaning of this Plan.
To the extent that the foregoing adjustments relate to stock
or securities of the Corporation, such adjustments shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided in this Paragraph 5(h), the Optionee shall have no
rights by reason of any subdivision or consolidation of shares of stock or any
class or the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class, and the number or price of shares of
common stock subject to any Option shall not be affected by, and no adjustment
shall be made by reason of, any dissolution, liquidation, merger or
consolidation, or any issue by the Corporation of shares of stock of any class
or securities convertible into shares of stock of any class.
The grant of an Option pursuant to the Plan shall not affect
in any way the right or power of the Corporation to make any adjustments,
reclassifications, reorganizations or changes in its capital or business
structure or to merge, consolidate, dissolve, or liquidate or to sell or
transfer all or any part of its business or assets.
(i) RIGHTS AS A STOCKHOLDER: An Optionee shall have no rights
as a stockholder with respect to any shares covered by an Option until the date
of the issuance of a stock certificate to Optionee for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Paragraph 5(h) hereof.
(j) MODIFICATION, ACCELERATION, EXTENSION, AND RENEWAL OF
OPTIONS: Subject to the terms and conditions and within the limitations of the
Plan, the Board may modify an Option, or once an Option is exercisable,
accelerate the rate at which it may be exercised, and may extend or renew
outstanding Options granted under the Plan or accept the surrender of
outstanding Options (to the extent not theretofore exercised) and authorize the
granting of new Options in substitution for such Options, provided such action
is permissible under Section 422A of the Code and Section 260.140.41 of the
Corporate Securities Rules of the California Corporations Commissioner.
Notwithstanding the foregoing provisions of this Paragraph
5(j), however, no modification of an Option shall, without the consent of the
Optionee, alter to the Optionee's detriment or impair any rights or obligations
under any Option theretofore granted under the Plan.
(k) INVESTMENT INTENT: Unless and until the issuance and sale
of the shares subject to the Plan are registered under the Securities Act of
1933, as amended (the "Act"), each Option under the Plan shall provide that the
purchases of stock thereunder shall be for investment purposes and not with a
view to, or for resale in connection with, any distribution thereof. Further,
unless the issuance and sale of the stock have been registered under the Act,
each Option shall provide that no shares shall be purchased upon the exercise of
such Option unless and until (i) any then applicable requirements of state and
federal laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Corporation and its counsel, and (ii) if requested to do so
by the Corporation, the person exercising the Option shall (i) give written
assurances as to knowledge and experience of such person (or a representative
employed by such person) in financial and business matters and the ability of
such person (or representative) to evaluate the merits and risks of exercising
the Option, and (ii) execute and deliver to the Corporation a letter of
investment intent, all in such form and substance as the Corporation may
require. If shares are issued upon exercise of an Option without registration
under the Act, subsequent registration of such shares shall relieve the
purchaser thereof of any investment restrictions or representations made upon
the exercise of such Options.
(l) EXERCISE BEFORE EXERCISE DATE: At the discretion of the
Board, the Option may, but need not, include a provision whereby the Optionee
may elect to exercise all or any portion of the Option prior to the stated
exercise date of the Option or any installment thereof. Any shares so purchased
prior to the stated exercise date shall be subject to repurchase by the
Corporation upon termination of Optionee's employment as contemplated by
Paragraphs 5(e) and 5(f) hereof prior to the exercise date stated in the Option
and such other restrictions and conditions as the Board or Committee may deem
advisable.
(m) OTHER PROVISIONS: The Option agreements authorized under
this Plan shall contain such other provisions, including, without limitation,
restrictions upon the exercise of the Options, as the Board or the Committee
shall deem advisable. Shares shall not be issued pursuant to the exercise of an
Option, if the exercise of such Option or the issuance of shares thereunder
would violate, in the opinion of legal counsel for the Corporation, the
provisions of any applicable law or the rules or regulations of any applicable
governmental or administrative agency or body, such as the Act, the Securities
Exchange Act of 1934, the rules
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promulgated under the foregoing or the rules and regulations of any exchange
upon which the shares of the Corporation are listed.
6. AVAILABILITY OF INFORMATION
During the term of the Plan and any additional period during which an
Option granted pursuant to the Plan shall be exercisable, the Corporation shall
make available, not later than one hundred and twenty (120) days following the
close of each of its fiscal years, such financial and other information
regarding the Corporation as is required by the bylaws of the Corporation and
applicable law to be furnished in an annual report to the stockholders of the
Corporation.
7. EFFECTIVENESS OF PLAN; EXPIRATION
Subject to approval by the stockholders of the Corporation, this Plan
shall be deemed effective as of the date it is adopted by the Board. The Plan
shall expire on December 31, 1998, but such expiration shall not affect the
validity of outstanding Options.
8. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, insofar as permitted by law, from time to time, with
respect to any shares at the time not subject to Options, suspend or terminate
the Plan or revise or amend it in any respect whatsoever, except that without
the approval of the stockholders of the Corporation, no such revision or
amendment shall (i) increase the number of shares subject to the Plan, (ii)
decrease the price at which Options may be granted, (iii) materially increase
the benefits to Optionees, or (iv) change the class of persons eligible to
receive Options under this Plan; provided, however, no such action shall alter
or impair the rights and obligations under any Option outstanding as of the date
thereof without the written consent of the Optionee thereunder. No Option may be
granted while the Plan is suspended or after it is terminated, but the rights
and obligations under any Option granted while the Plan is in effect shall not
be impaired by suspension or termination of the Plan.
9. INDEMNIFICATION OF BOARD
In addition to such other rights or indemnifications as they may have
as directors or otherwise, and to the extent allowed by applicable law, the
members of the Board and the Committee shall be indemnified by the Corporation
against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any claim, action, suit
or proceeding, or in connection with any appeal thereof, to which they or any of
them may be a party by reason of any action taken, or failure to act, under or
in connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such claim, action, suit or proceeding, except
in any case in relation to matters as to which it shall be adjudged in such
claim, action, suit or proceeding that such Board member is liable for
negligence or misconduct in the performance of his or her duties; provided that
within sixty (60) days after institution of any such action, suit or Board
proceeding the member involved shall offer the Corporation, in writing, the
opportunity, at its own expense, to handle and defend the same.
10. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of common Stock
pursuant to the exercise of Options will be used for general corporate purposes.
11. NO OBLIGATION TO EXERCISE OPTION
The granting of an Option shall impose no obligation upon the Optionee
to exercise such Option.
12. NOTICES
All notices, requests, demands, and other communications pursuant to
this Plan shall be in writing and shall be deemed to have been duly given on the
date of service if served personally on the party to whom notice is to be given,
or on the third day following the mailing thereof to the party to whom notice is
to be given, by first class mail, registered or certified, postage prepaid.
* * * * *
The foregoing Incentive and Nonstatutory Stock Option Plan was duly
adopted and approved by the Board of Directors on January 2, 1998, and approved
by the shareholders of the Corporation effective January 2, 1998.
5
/s/ TONY SHAHBAZ
-----------------------
Tony Shahbaz, Secretary
<PAGE>
I/OMAGIC CORPORATION
NONSTATUTORY STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made and entered into as of this ____
day of ______________, 1998, by and between I/OMAGIC CORPORATION, a Nevada
corporation ("Company"), and _______________________________ (referred to herein
as the "Optionee"), with reference to the following recitals of facts:
WHEREAS, the Board has authorized the granting to Optionee of a
nonstatutory stock option ("Option") to purchase shares of common stock of the
Company (the "Shares") upon the terms and conditions hereinafter stated; and
WHEREAS, the Board and stockholders of the Company have heretofore
adopted a 1998 Incentive and Nonstatutory Stock Option Plan (the "Plan"),
pursuant to which this Option is being granted;
WHEREAS, it is the intention of the parties that this Option be a
Nonstatutory Stock Option;
NOW, THEREFORE, in consideration of the covenants herein set forth, the
parties hereto agree as follows:
1. SHARES; PRICE. The Company hereby grants to Optionee the right to
purchase, upon and subject to the terms and conditions herein stated,
___________ Shares for cash (or other consideration acceptable to the Board of
Directors of the Company, in their sole and absolute discretion) at the price of
______per Share, such price being determined in accordance with the Plan.
2. TERM OF OPTION; CONTINUATION OF EMPLOYMENT. This Option shall
expire, and all rights hereunder to purchase the Shares shall terminate, five
(5) years from the date hereof. This Option shall earlier terminate subject to
Paragraphs 5 and 6 hereof if, and as of the date, Optionee ceases to be an
employee of or consultant to the Company. Nothing contained herein shall be
construed to interfere in any way with the right of the Company to terminate the
employment or engagement, as applicable, of Optionee or to increase or decrease
the compensation of Optionee from the rate in existence at the date hereof.
3. VESTING OF OPTION. Subject to the provisions of Paragraphs 5 and 6
hereof and subject to Board of Director's approval, this Option shall become
exercisable during the term of Optionee's employment or engagement in whole or
in part beginning on the date of this Agreement.
4. EXERCISE. This Option shall be exercised by delivery to the Company
of (a) a written notice of exercise stating the number of Shares being purchased
(in whole shares only) and such other information set forth on the form of
Notice of Exercise attached hereto as Appendix A, (b) a check or cash in the
amount of the purchase price of the Shares covered by the notice, and (c) a
written statement as provided for in Paragraph 11 hereof. This Option shall not
be assignable or transferable, except by will or by the laws of descent and
distribution, and shall be exercisable only by Optionee during his or her
lifetime.
5. TERMINATION OF EMPLOYMENT OR ENGAGEMENT. If Optionee shall cease to
serve as an employee of or consultant to the Company for any reason, whether
voluntarily or involuntarily, other than by his or her death or the conclusion
of the term of a written consulting agreement, provided such term exceeds one
year, Optionee shall have the right at any time within thirty (30) days after
date Optionee ceases to be an employee of or consultant to the Company, or the
remaining term of this Option, whichever is the lesser, to exercise in whole or
in part this Option to the extent, but only to the extent, that this Option was
exercisable as of the last day of employment or engagement, as applicable, and
had not previously been exercised; provided, however:
(i) if Optionee is permanently disabled (within the meaning of
Section 22(e)(3) of the Code) at the time of termination, the
foregoing thirty day period shall be extended to six (6)
months; or
(ii) if Optionee is terminated "for good cause" as
that term is defined under the California Labor Code and case
law related thereto, the foregoing thirty day month period
shall be reduced to three (3) days.
Notwithstanding anything herein to the contrary, all rights under this Option
shall expire in any event on the date specified in Paragraph 2 hereof.
6. DEATH OF OPTIONEE. If the Optionee shall die while an employee of or
consultant to the Company, Optionee's personal representative or the person
entitled to Optionee's rights hereunder may at any time within three (3) months
after the date of Optionee's death, or during the remaining term of this Option,
whichever is the lesser, exercise this Option and purchase Shares to the
extent, but only to the extent, that Optionee could have exercised this
Option as of the date of Optionee's death; provided, in
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any case, that this Option may be so exercised only to the extent that this
Option has not previously been exercised by Optionee.
7. NO RIGHTS AS STOCKHOLDER. Optionee shall have no rights as a
stockholder with respect to the Shares covered by any installment of this Option
until the date of the issuance of a stock certificate to Optionee, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such stock certificate or certificates are issued except as
provided in Paragraph 8 hereof.
8. RECAPITALIZATION. Subject to any required action by the stockholders
of the Company, the number of Shares covered by this Option, and the price per
Share thereof, shall be proportionately adjusted for any increase or decrease in
the number of issued Shares resulting from a subdivision or consolidation of
shares or the payment of a stock dividend, or any other increase or decrease in
the number of such shares affected without receipt of consideration by the
Company; provided however that the conversion of any convertible securities of
the Company shall not be deemed having been "effected without receipt of
consideration by the Company."
In the event of a proposed dissolution or liquidation of the Company, a
merger or consolidation in which the Company is not the surviving entity, or a
sale of all or substantially all of the assets of the Company, this Option shall
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board. The Board may, at its sole and absolute
discretion and without obligation, declare that this Option shall terminate as
of a date fixed by the Board and grant Optionee the right for a period
commencing thirty (30) days prior to and ending immediately prior to such date,
or during the remaining term of this Option, whichever occurs sooner, to
exercise this Option as to all or any part of the Shares, without regard to the
instalment provision of Paragraph 3; provided, however, that such exercise shall
be subject to the consummation of such dissolution, liquidation, merger,
consolidation or sale.
Subject to any required action by the stockholders of the Company, if
the Company shall be the surviving entity in any merger or consolidation, this
Option thereafter shall pertain to and apply to the securities to which a holder
of Shares equal to the Shares subject to this Option would have been entitled by
reason of such merger or consolidation, and the vesting provisions of Section 3
shall continue to apply.
In the event of a change in the Shares of the Company as presently
constituted, which is limited to a change of all of its authorized Shares
without par value into the same number of Shares with a par value, the Shares
resulting from any such change shall be deemed to be the Shares within the
meaning of this Agreement.
To the extent that the foregoing adjustments relate to shares or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
hereinbefore expressly provided, Optionee shall have no rights by reason of any
subdivision or consolidation of share of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class, and the number and price of shares subject to this Option
shall not be affected by, and no adjustments shall be made by reason of, any
dissolution, liquidation, merger or consolidation, or any issue by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class.
The grant of this Option shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure or to merge, consolidate, dissolve
or liquidate or to sell or transfer all or any part of its business or assets.
9. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon
exercise of this Option, Optionee will recognize income, for federal and state
income tax purposes, in an amount equal to the amount by which the fair market
value of the Shares, determined as of the date of exercise, exceeds the exercise
price. The acceptance of the Shares by Optionee shall constitute an agreement by
Optionee to report such income in accordance with then applicable law and to
cooperate with Company in establishing the amount of such income and
corresponding deduction to the Company for its income tax purposes. Withholding
for federal or state income and employment tax purposes will be made, if and as
required by law, from Optionee's then current compensation, or, if such current
compensation is insufficient to satisfy withholding tax liability, the Company
may require Optionee to make cash payment to cover such liability as a condition
of the exercise of this Option.
10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Board may
modify, extend or renew this Option or accept the surrender thereof (to the
extent not theretofore exercised) and authorize the granting of a new option in
substitution therefor (to the extent not theretofore exercised), subject at all
times to the Plan. Notwithstanding the foregoing provisions of this Paragraph
10, no modification shall, without the consent of the Optionee, alter to the
Optionee's detriment or impair any rights of Optionee hereunder.
11. INVESTMENT INTENT; RESTRICTIONS ON TRANSFER. Optionee represents
and agrees that if Optionee exercises this Option in whole or in part, Optionee
will in each case acquire the Shares upon such exercise for the purpose of
investment and not with a
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view to, or for resale in connection with, any distribution thereof; and that
upon such exercise of this Option in whole or in part, Optionee (or any
person or persons entitled to exercise this Option under the provisions of
Paragraphs 5 and 6 hereof) shall furnish to the Company a written statement
to such effect, satisfactory to the Company in form and substance. The
Company, at its option, may include a legend on each certificate representing
Shares issued pursuant to any exercise of this Option, stating in effect that
such Shares have not been registered under the Securities Act of 1933, as
amended (the "Act"), and that the transferability thereof is restricted. If
the Shares represented by this Option are registered under the Act, either
before or after the exercise of this Option in whole or in part, the Optionee
shall be relieved of the foregoing investment representation and agreement
and shall not be required to furnish the Company with the foregoing written
statement.
Optionee further represents that Optionee has had access to the
financial statements or books and records of the Company, has had the
opportunity to ask questions of the Company concerning its business, operations
and financial condition, and to obtain additional information reasonably
necessary to verify the accuracy of such information, and further represents
that Optionee (either alone or together with Optionee's financial advisor's) has
such experience and knowledge in investment, financial and business matters in
investments similar to the stock of the Company that Optionee is capable of
evaluating to the merits and risks thereof and has the capacity to protect his
or her own interest in connection therewith. Optionee acknowledges and agrees
that the Commissioner of Corporations of the state of California, as a condition
to the issuance of the permit pursuant to which this Option is granted, may
impose restrictions on the transfer of Shares purchased by Optionee pursuant
hereto and may require that all certificates representing such Shares bear
restrictive legends substantially as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
12. REGISTRATION RIGHTS.
a. PIGGYBACK REGISTRATION RIGHTS. If the Company at any time
proposes to register any of its securities under the Act, including under an S-8
Registration Statement, an SB-2 Registration Statement or otherwise, it will
each such time give written notice to all holders of outstanding Shares of its
intention so to do. Upon the written request of a holder or holders of any such
Shares given within 30 days after receipt of any such notice, the Company will
use its best efforts to cause all such Shares, the holders of which (or of the
Warrants for shall have so requested registration thereof, to be registered
under the Act (with the securities which the Company at the time propose to
register), all to the extent requisite to permit the sale or other disposition
by the prospective sellers of the Shares so registered; provided, however, that
the Company may, as a condition precedent to its effective such registration,
require each prospective seller to agree with the Company and the managing
underwriter or underwriters of the offering to be made by the Company in
connection with such registration that such seller will not sell any securities
of the same class or convertible into the same class as those registered by the
Company (including any class into which the securities registered by the Company
are convertible) for such reasonable period after such registration becomes
effective (not exceeding 30 days) as shall then be specified in writing by such
underwriter or underwriters if in the opinion of such underwriter or
underwriters the Company's offering would be materially adversely affected in
the absence of such an agreement.
b. PROCEDURES. In connection with the registration of the
Shares pursuant to Section 12.a. hereof, the Company and the Optionee
covenant and agree as follows:
(i) The Company shall pay all costs, fees, and
expenses incurred by the Company and the Optionee in connection with
preparation of the registration statement ( the "Registration
Statement") and the offering thereunder including, without limitation,
the Company's legal fees and expenses of counsel, accounting fees,
printing expenses, and blue sky fees and expenses (but excluding
discounts or selling commissions of any underwriter or broker dealer
acting on behalf of the Company or the Optionee).
(ii) The Company shall take all necessary action
which may be reasonably required in qualifying or registering the
Shares included in the Registration Statement for offering and sale
under the securities or blue sky laws of all states reasonably
requested by Optionee, provided that the Company shall not be obligated
to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(iii) The Company shall indemnify Optionee and each
person, if any, who controls Optionee within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934 (the "Exchange Act"), against all loss, claim, damage,
expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange
Act
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or otherwise, arising from the Registration Statement.
(iv) The Company shall, as soon as practicable after
the effective date of the Registration Statement, and in any event
within fifteen (15) months thereafter, make "generally available to its
security holders" (within the meaning of Rule 158 under the Act) an
earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least twelve (12)
consecutive months beginning after the effective date of the
Registration Statement.
(v) The Company shall (A) deliver promptly to
Optionee and its counsel, upon request, copies of all correspondence
between the Securities and Exchange Commission ("Commission") and the
Company, its counsel, or auditors and all memoranda relating to
discussions with the Commission or its staff with respect to the
Registration Statement; and (B) permit Optionee and its counsel to
perform such investigation, upon reasonable advance notice, with
respect to information contained in or omitted from the Registration
Statement, as it deems reasonably necessary to comply with applicable
securities laws or rules of the National Association of Securities
Dealers, Inc. Such investigation shall include, but not be limited to,
access to financial and accounting information and opportunities to
discuss the business of the Company with the Company's officers and
independent auditors, all to such reasonable extent, at such reasonable
times and as often as Optionee and its counsel shall reasonably
request.
(vi) The Company shall cause all securities of
Optionee registered pursuant to a Registration Statement to be listed
on any national securities exchange or quoted on any automated
quotation system on which similar securities of the Company are listed
or quoted.
13. STAND-OFF AGREEMENT. Optionee agrees that in connection with any
registration of the Company's securities, that upon the request of the Company
or any underwriter managing an underwritten offering of the Company's
securities, that Optionee shall not sell, short any sale of, loan, grant an
option for, or otherwise dispose of any of the Shares (other than Shares
included in the offering) without the prior written consent of the Company or
such managing underwriter, as applicable, for a period of at least 120 days
following the effective date of registration of such offering.
14. NOTICES. Any notice required to be given pursuant to this Option or
the Plan shall be in writing and shall be deemed to be delivered upon receipt
or, in the case of notices by the Company, five (5) days after deposit in the
US. mail, postage prepaid, addressed to Optionee at the address last provided to
the Company by Optionee for his or her employee records.
15. AGREEMENT SUBJECT TO PLAN; APPLICABLE LAW. This Agreement is made
pursuant to the Plan and shall be interpreted to comply therewith. A copy of
such Plan is available to Optionee, at no charge, at the principal office of the
Company. Any provision of this Agreement inconsistent with the Plan shall be
considered void and replaced with the applicable provision of the Plan. This
Agreement has been granted, executed and delivered in the State of California,
and the interpretation and enforcement shall be governed by the laws thereof and
subject to the exclusive jurisdiction of the courts therein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
I/OMAGIC CORPORATION
--------------------------------
BY: Tony Shahbaz
ITS: President
--------------------------------
, Optionee
4
<PAGE>
Appendix A
NOTICE OF EXERCISE
I/OMagic Corporation
6B Autry
Irvine, California 92618
--------------------
(date)
Re: Nonstatutory Stock Option
Notice is hereby given pursuant to Section 4 of my Nonstatutory Stock
Option Agreement that I elect to purchase the number of shares set forth below
at the exercise price set forth in my option agreement:
Stock Option dated: ______________________
Number of shares being purchased: ______________________
Option Exercise Price: $_____________________
A check in the amount of the aggregate price of the shares being
purchased is attached.
I hereby confirm that such shares are being acquired by me for my own
account for investment purposes, and not with a view to, or for resale in
connection with, any distribution thereof.
Further, I understand that, as a result of this exercise of rights, I
will recognize income in an amount equal to the amount by which the fair market
value of the Shares exceeds the exercise price. I agree to report such income in
accordance with then applicable law and to cooperate with Company in
establishing the withholding and corresponding deduction to the Company for its
income tax purposes.
I agree to provide to the Corporation such additional documents or
information as may be required pursuant to the Corporation's 1998 Incentive and
Nonstatutory Stock Option Plan.
-------------------------
(Signature)
-------------------------
(Name of Optionee)
5
<PAGE>
I/OMAGIC CORPORATION
INCENTIVE STOCK OPTION AGREEMENT
THIS INCENTIVE STOCK OPTION AGREEMENT is made and entered into as of
this ____ day of 1998, by and between I/OMAGIC CORPORATION., a Nevada
corporation ("Company"), and ________________________________ (referred to
herein as the "Optionee"), with reference to the following recitals of facts:
WHEREAS, the Board has authorized the granting to Optionee of an
incentive stock option ("Option") to purchase shares of common stock of the
Company (the "Shares") upon the terms and conditions hereinafter stated; and
WHEREAS, the Board and stockholders of the Company have heretofore
adopted a 1998 Incentive and Nonstatutory Stock Option Plan (the "Plan"),
pursuant to which this Option is being granted;
WHEREAS, it is the intention of the parties that this Option be a
Incentive Stock Option (a Qualified Stock Option);
NOW, THEREFORE, in consideration of the covenants herein set forth, the
parties hereto agree as follows:
1. SHARES; PRICE. The Company hereby grants to Optionee the right to
purchase, upon and subject to the terms and conditions herein stated, ______
Shares for cash (or other consideration acceptable to the Board of Directors of
the Company, in their sole and absolute discretion) at the price of $1.13 per
Share, such price being not less than the fair market value per share of the
Shares covered by these Options as of the date hereof and as determined by the
Board of Directors of the Company.
2. TERM OF OPTION; CONTINUATION OF EMPLOYMENT. This Option shall
expire, and all rights hereunder to purchase the Shares shall terminate, five
(5) years from the date hereof. This Option shall earlier terminate subject to
Paragraphs 5 and 6 hereof if, and as of the date, Optionee ceases to be an
employee of or consultant to the Company. Nothing contained herein shall be
construed to interfere in any way with the right of the Company to terminate the
employment or engagement, as applicable, of Optionee or to increase or decrease
the compensation of Optionee from the rate in existence at the date hereof.
3. VESTING OF OPTION. Subject to the provisions of Paragraphs 5 and 6
hereof, this Option shall become exercisable during the term of Optionee's
employment or engagement in whole or in part beginning on the date of this
Agreement.
4. EXERCISE. This Option shall be exercised by delivery to the Company
of (a) a written notice of exercise stating the number of Shares being purchased
(in whole shares only) and such other information set forth on the form of
Notice of Exercise attached hereto as Appendix A, (b) a check or cash in the
amount of the purchase price of the Shares covered by the notice, and (c) a
written statement as provided for in Paragraph 11 hereof. This Option shall not
be assignable or transferable, except by will or by the laws of descent and
distribution, and shall be exercisable only by Optionee during his or her
lifetime.
5. TERMINATION OF EMPLOYMENT OR ENGAGEMENT. If Optionee shall cease to
serve as an employee of or consultant to the Company for any reason, whether
voluntarily or involuntarily, other than by his or her death or the conclusion
of the term of a written consulting agreement, provided such term exceeds one
year, Optionee shall have the right at any time within thirty (30) days after
date Optionee ceases to be an employee of or consultant to the Company, or the
remaining term of this Option, whichever is the lesser, to exercise in whole or
in part this Option to the extent, but only to the extent, that this Option was
exercisable as of the last day of employment or engagement, as applicable, and
had not previously been exercised; provided, however:
(i) if Optionee is permanently disabled (within the meaning of
Section 22(e)(3) of the Code) at the time of termination, the
foregoing thirty day period shall be extended to six (6)
months; or
(ii) if Optionee is terminated "for good cause" as that term
is defined under the California Labor Code and case law
related thereto, the foregoing thirty day month period shall
be reduced to three (3) days.
Notwithstanding anything herein to the contrary, all rights under this Option
shall expire in any event on the date specified in Paragraph 2 hereof.
6. DEATH OF OPTIONEE. If the Optionee shall die while an employee of or
consultant to the Company, Optionee's personal representative or the person
entitled to Optionee's rights hereunder may at any time within three (3) months
after the date of Optionee's death, or during the remaining term of this
Option, whichever is the lesser, exercise this Option and purchase Shares
1
<PAGE>
to the extent, but only to the extent, that Optionee could have exercised
this Option as of the date of Optionee's death; provided, in any case, that
this Option may be so exercised only to the extent that this Option has not
previously been exercised by Optionee.
7. NO RIGHTS AS STOCKHOLDER. Optionee shall have no rights as a
stockholder with respect to the Shares covered by any installment of this Option
until the date of the issuance of a stock certificate to Optionee, and no
adjustment will be made for dividends or other rights for which the record date
is prior to the date such stock certificate or certificates are issued except as
provided in Paragraph 8 hereof.
8. RECAPITALIZATION. Subject to any required action by the stockholders
of the Company, the number of Shares covered by this Option, and the price per
Share thereof, shall be proportionately adjusted for any increase or decrease in
the number of issued Shares resulting from a subdivision or consolidation of
shares or the payment of a stock dividend, or any other increase or decrease in
the number of such shares affected without receipt of consideration by the
Company; provided however that the conversion of any convertible securities of
the Company shall not be deemed having been "effected without receipt of
consideration by the Company."
In the event of a proposed dissolution or liquidation of the Company, a
merger or consolidation in which the Company is not the surviving entity, or a
sale of all or substantially all of the assets of the Company, this Option shall
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board. The Board may, at its sole and absolute
discretion and without obligation, declare that this Option shall terminate as
of a date fixed by the Board and grant Optionee the right for a period
commencing thirty (30) days prior to and ending immediately prior to such date,
or during the remaining term of this Option, whichever occurs sooner, to
exercise this Option as to all or any part of the Shares, without regard to the
instalment provision of Paragraph 3; provided, however, that such exercise shall
be subject to the consummation of such dissolution, liquidation, merger,
consolidation or sale.
Subject to any required action by the stockholders of the Company, if
the Company shall be the surviving entity in any merger or consolidation, this
Option thereafter shall pertain to and apply to the securities to which a holder
of Shares equal to the Shares subject to this Option would have been entitled by
reason of such merger or consolidation, and the vesting provisions of Section 3
shall continue to apply.
In the event of a change in the Shares of the Company as presently
constituted, which is limited to a change of all of its authorized Shares
without par value into the same number of Shares with a par value, the Shares
resulting from any such change shall be deemed to be the Shares within the
meaning of this Agreement.
To the extent that the foregoing adjustments relate to shares or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
hereinbefore expressly provided, Optionee shall have no rights by reason of any
subdivision or consolidation of share of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class, and the number and price of shares subject to this Option
shall not be affected by, and no adjustments shall be made by reason of, any
dissolution, liquidation, merger or consolidation, or any issue by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class.
The grant of this Option shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure or to merge, consolidate, dissolve
or liquidate or to sell or transfer all or any part of its business or assets.
9. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon
exercise of this Option, Optionee will recognize income, for federal and state
income tax purposes, in an amount equal to the amount by which the fair market
value of the Shares, determined as of the date of exercise, exceeds the exercise
price. The acceptance of the Shares by Optionee shall constitute an agreement by
Optionee to report such income in accordance with then applicable law and to
cooperate with Company in establishing the amount of such income and
corresponding deduction to the Company for its income tax purposes. withholding
for federal or state income and employment tax purposes will be made, if and as
required by law, from Optionee's then current compensation, or, if such current
compensation is insufficient to satisfy withholding tax liability, the Company
may require Optionee to make cash payment to cover such liability as a condition
of the exercise of this Option.
10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Board may
modify, extend or renew this Option or accept the surrender thereof (to the
extent not theretofore exercised) and authorize the granting of a new option in
substitution therefore (to the extent not theretofore exercised), subject at all
times to the Plan. Notwithstanding the foregoing provisions of this Paragraph
10, no modification shall, without the consent of the Optionee, alter to the
Optionee's detriment or impair any rights of Optionee hereunder.
11. INVESTMENT INTENT; RESTRICTIONS ON TRANSFER. Optionee represents
and agrees that if Optionee exercises this Option in whole or in part, Optionee
will in each case acquire the Shares upon such exercise for the purpose of
investment and not with a
2
<PAGE>
view to, or for resale in connection with, any distribution thereof; and that
upon such exercise of this Option in whole or in part, Optionee (or any
person or persons entitled to exercise this Option under the provisions of
Paragraphs 5 and 6 hereof) shall furnish to the Company a written statement
to such effect, satisfactory to the Company in form and substance. The
Company, at its option, may include a legend on each certificate representing
Shares issued pursuant to any exercise of this Option, stating in effect that
such Shares have not been registered under the Securities Act of 1933, as
amended (the "Act"), and that the transferability thereof is restricted. If
the Shares represented by this Option are registered under the Act, either
before or after the exercise of this Option in whole or in part, the Optionee
shall be relieved of the foregoing investment representation and agreement
and shall not be required to furnish the Company with the foregoing written
statement.
Optionee further represents that optionee has had access to the
financial statements or books and records of the Company, has had the
opportunity to ask questions of the Company concerning its business, operations
and financial condition, and to obtain additional information reasonably
necessary to verify the accuracy of such information, and further represents
that Optionee (either such experience and knowledge in investment, financial and
business matters in investments similar to the stock of the Company that
Optionee is capable of evaluating the merits and risks thereof and has the
capacity to protect his or her own interest in connection therewith. Optionee
acknowledges and agrees that the Commissioner of Corporations of the state of
California, as a condition to the issuance of the permit pursuant to which this
Option is granted, may impose restrictions on the transfer of Shares purchased
by Optionee pursuant hereto and may require that all certificates representing
such Shares bear restrictive legends substantially as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
12. REGISTRATION RIGHTS.
a. PIGGYBACK REGISTRATION RIGHTS. If the Company at any time
proposes to register any of its securities under the Act, including under an S-8
Registration Statement, an SB-2 Registration Statement or otherwise, it will
each such time give written notice to all holders of outstanding or exercised
options of its intention so to do. Upon the written request of a holder or
holders of any such outstanding or exercised options given within 30 days after
receipt of any such notice, the Company will use its best efforts to cause all
such outstanding or exercised options, the holders of which shall have so
requested registration thereof, to be registered under the Act (with the
securities which the Company at the time propose to register), all to the extent
requisite to permit the sale or other disposition by the prospective Sellers of
the outstanding or exercised options so registered; provided, however, that the
Company may, as a condition precedent to its effecting such registration,
require each prospective Seller to agree with the Company and the managing
underwriter or underwriters of the offering to be made by the Company in
connection with such registration that such Seller will not sell any securities
of the same class or convertible into the same class as those registered by the
Company (including any class into which the securities registered by the Company
are convertible) for such reasonable period after such registration becomes
effective (not exceeding 120 days) as shall then be specified in writing by such
underwriter or underwriters if in the opinion of such underwriter or
underwriters the Company's offering would be materially adversely affected in
the absence of such an agreement.
b. PROCEDURES. In connection with the registration of any
securities pursuant to Section 12.a. hereof, the Company and the Optionee
covenant and agree as follows:
(i) The Company shall pay all costs, fees, and
expenses incurred by the Company and the Optionee in connection with
the Registration Statement and the offering thereunder including,
without limitation, the Company's legal fees and expenses of counsel,
accounting fees, printing expenses, and blue sky fees and expenses (but
excluding discounts or selling commissions of any underwriter or broker
dealer acting on behalf of the company or the Optionee).
(ii) The Company shall take all necessary action
which may be reasonably required in qualifying or registering the
securities included in the Registration Statement for offering and sale
under the securities or blue sky laws of all states reasonably
requested by Optionee, provided that the Company shall not be obligated
to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(iii) The Company shall indemnify Optionee and each
person, if any, who controls Optionee within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of
1934 (the "Exchange Act"), against all loss, claim, damage, expense
or liability (including all expenses reasonably incurred in
investigating, preparing
3
<PAGE>
or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising
from the Registration Statement.
(iv) The Company shall, as soon as practicable after
the effective date of the Registration Statement, and in any event
within fifteen (15) months thereafter, make "generally available to its
security holders" (within the meaning of Rule 158 under the Act) an
earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least twelve (12)
consecutive months beginning after the effective date of the
Registration Statement.
(v) The Company shall (A) deliver promptly to
Optionee and its counsel, upon request, copies of all correspondence
between the Commission and the Company, its counsel, or auditors and
all memoranda relating to discussions with the Commission or its staff
with respect to the Registration Statement; and (B) permit Optionee and
its counsel to perform such investigation, upon reasonable advance
notice, with respect to information contained in or omitted from the
Registration Statement, as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of
Securities Dealers, Inc. Such investigation shall include, but not be
limited to, access to financial and accounting information and
opportunities to discuss the business of the Company with the Company's
officers and independent auditors, all to such reasonable extent, at
such reasonable times and as often as Optionee and its counsel shall
reasonably request.
(vi) The Company shall cause all securities of
Optionee registered pursuant to a Registration Statement to be listed
on any national securities exchange or quoted on any automated
quotation system on which similar securities of the Company are
listed or quoted.
13. STAND-OFF AGREEMENT. Optionee agrees that in connection with any
registration of the Company's securities, that upon the request of the Company
or any underwriter managing an underwritten offering of the Company's
securities, that Optionee shall not sell, short any sale of, loan, grant an
option for, or otherwise dispose of any of the Shares (other than Shares
included in the offering) without the prior written consent of the Company or
such managing underwriter, as applicable, for a period of at least 120 days
following the effective date of registration of such offering.
14. NOTICES. Any notice required to be given pursuant to this Option or
the Plan shall be in writing and shall be deemed to be delivered upon receipt
or, in the case of notices by the Company, five (5) days after deposit in the
US. mail, postage prepaid, addressed to Optionee at the address last provided to
the Company by Optionee for his or her employee records.
15. AGREEMENT SUBJECT TO PLAN; APPLICABLE LAW. This Agreement is made
pursuant to the Plan and shall be interpreted to comply therewith. A copy of
such Plan is available to Optionee, at no charge, at the principal office of the
Company. Any provision of this Agreement inconsistent with the Plan shall be
considered void and replaced with the applicable provision of the Plan. This
Agreement has been granted, executed and delivered in the State of California,
and the interpretation and enforcement shall be governed by the laws thereof and
subject to the exclusive jurisdiction of the courts therein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
I/OMAGIC CORPORATION
--------------------------------
BY: Tony Shahbaz
ITS: President
--------------------------------
, Optionee
4
<PAGE>
Appendix A
NOTICE OF EXERCISE
I/OMagic Corporation
6B Autry
Irvine, CA 92618
--------------------
(date)
Re: Incentive Stock Option
Notice is hereby given pursuant to Section 4 of my Incentive Stock
Option Agreement that I elect to purchase the number of shares set forth below
at the exercise price set forth in my option agreement:
Stock Option dated: ______________________
Number of shares being purchased: ______________________
Option Exercise Price: $_____________________
A check in the amount of the aggregate price of the shares being
purchased is attached.
I hereby confirm that such shares are being acquired by me for my own
account for investment purposes, and not with a view to, or for resale in
connection with, any distribution thereof.
Further, I understand that, as a result of this exercise of rights, I
will recognize income in an amount equal to the amount by which the fair market
value of the Shares exceeds the exercise price. I agree to report such income in
accordance with then applicable law and to cooperate with Company in
establishing the withholding and corresponding deduction to the Company for its
income tax purposes.
I agree to provide to the Corporation such additional documents or
information as may be required pursuant to the Corporation's 1998 Incentive and
Nonstatutory Stock Option Plan.
-------------------------
(Signature)
-------------------------
(Name of Optionee)
5
<PAGE>
EXHIBIT 10.5
STRATEGIC ALLIANCE AGREEMENT BETWEEN
I/OMAGIC CORPORATION AND
HOU ELECTRONICS, INC.
DATED SEPTEMBER 19, 1997
<PAGE>
STRATEGIC ALLIANCE AGREEMENT
This Strategic Alliance Agreement ("Agreement") is entered into and
effective as of September 19, 1997 ("Effective Date") by and between I/OMagic
Corporation, a Nevada corporation ("IOM") and Hou Electronics, Inc., a
California corporation, having its primary place of business at 16815 Johnson
Drive, City of Industry, CA 91745 ("HEI") with respect to the
following:
A. HEI is desirous of entering into an agreement with IOM for the
purpose of creating an alliance to increase its sales, speculative investment
opportunity and develop a retail channel partner.
B. IOM is desirous of entering into an agreement with HEI for the
purpose of providing a strategic manufacturing alliance for product sourcing,
financial investment, and product supply financing.
Now, therefore, in consideration of the mutual promises contained
herein and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. ISSUANCE OF SHARES
As consideration for the obligations under this agreement, within
thirty (30) days after receiving One Million and Five Hundred Thousand Dollars
($1,500,000.00) from HEI, IOM agrees to issue to HEI Two Million (2,000,000
shares of IOM's common stock (the "shares") in proportion to each investment.
Share price will be calculated at $0.75 per share. HEI acknowledges and agrees
that the commencing upon the execution of this agreement and terminating (24)
months thereafter, HEI agrees that it will not (i) permit the shares,
individually or collectively, to be transferred, assigned, hypothecated,
pledged, or in any manner encumbered, whether direct or indirect or contingent;
or (ii) grant, issue, sell or make subject to any agreement to grant, issue or
sell such shares, or permit the granting, issuance, sale or entry into any
agreement to grant, issue or sell any portion, warrant or other contract right
with respect to such shares. However, HEI will have the right to make one (1)
block transfer of shares from HEI to Behavioral Technology Computers (BTC) or
any of its wholly owned affiliates provided that the recipient agree to the full
extent of this agreement and its restrictions. After twenty-four (24) months all
of the HEI shares will be registered as freely trading shares subject to SEC
Rule 144 trading restrictions.
2. CAPITAL/INVENTORY/CREDIT
Upon the Effective Date, HEI agrees to;
A. Deliver to IOM One Million Five Hundred Thousand Dollars
($1,500,000.00) in United States funds either by wire transfer or such means as
the parties shall agree within five (20) days of this agreement;
B. establish a Two Million Dollar ($2,000,000.00) trade credit
line in favor of IOM. Terms of payment will be sixty (60) days from receipt
of goods and will subordinate to banking financial indebtedness. Within the
terms and conditions of trade credit line, IOM agrees to use its best efforts
to make required payments and to make available to HEI and/or its
representatives, all financial information as reasonably required. On an
annual basis, or sooner upon written request of IOM, HEI, in its reasonable
opinion, may increase the line of credit based on IOM's credit history;
C. HEI agrees to make available to IOM certain of its products,
upon completion of this agreement, IOM agrees to place a stocking order fr
Seven Hundred Fifty Thousand Dollars ($750,000.00) of certain inventory,
within thirty (30) days IOM agrees to place an additional order for Five
Hundred Thousand Dollars ($500,000.00) of certain inventory. Payment terms
for the first two shipments will be C.O.D., thereafter, all shipments will be
subject to the terms and conditions of Section 2.B of this agreement.
D. IOM agrees to make available a seat on the Board of Directors
of the Company within 10 days after receipt of funds. HEI will have 45 days
from the date of this agreement to elect its nominee.
3. STRATEGIC ALLIANCE.
IOM agrees to use its best efforts to promote HEI products and services
under the IOM banner to all of its current and future accounts with the intent
of growing both IOM's and HEI's business together. IOM agrees to make available
to HEI all of its account information, contracts, pricing, and other information
that may be reasonably helpful in assisting HEI to understand the scope of the
business. HEI is willing to assist IOM in achieving sales and financial
milestones.
1
<PAGE>
4. SUPPLY RELATIONSHIP.
HEI agrees to serve as a manufacturer for IOM. HEI will make its best
efforts to provide early access to information, technology, and products. HEI
agrees to provide IOM with its most favored pricing policy for all of its
products. IOM further agrees to use its best efforts to provide marketing,
sales, technical support, and service to its channel.
5. FACSIMILE SIGNATURES.
For the purpose of the effectiveness of this agreement, the parties
hereto agree that the facsimile signatures shall be deemed originals. The
parties agree to the exchange of original signatures within fifteen (15) days
from the execution of this agreement.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the 19th day of September, 1997.
"HEI"
/s/ DANIEL HOU
- -------------------------
Hou Electronics, Inc.
By: Daniel Hou
Its: President
"IOM"
/s/ TONY SHAHBAZ
- -------------------------
I/OMagic Corporation
By: Tony Shahbaz
Its: President
2
<PAGE>
EXHIBIT 10.6
MACOLA SOFTWARE AGREEMENT
I/OMAGIC CORPORATION AND
ENTERPRISE WIDE COMPUTING, INC.
DATED OCTOBER 13, 1997
<PAGE>
MACOLA SOFTWARE AGREEMENT
THIS MACOLA SOFTWARE AGREEMENT (this "Agreement"), dated for references
purposes only as of October 13, 1997 is entered into by and between ENTERPRISE
WIDE COMPUTING, INC., a California corporation ("Enterprise"), and I/OMAGIC
CORPORATION, a Nevada corporation ("IOM").
WHEREAS, IOM would like to purchase a Macola Software program
("Software") to enhance its operations and inventory systems.
WHEREAS, Enterprise would like to sell licensing rights, train and
install the Macola Software for IOM.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein, the parties hereto agree as follows:
ARTICLE I
GRANT OF LICENSE
SECTION 1.1 GRANT OF LICENSE. Upon the terms and conditions set
forth herein, Enterprise hereby grants IOM and IOM hereby accepts a
worldwide, nonexclusive, perpetual license (the "Site License") to use the
Software.
SECTION 1.2 COPYING THE SOFTWARE IOM may copy the Software only
with the written consent of Enterprise, which consent may be withheld in
Enterprise' sole and absolute discretion.
SECTION 1.3 TITLE TO THE SOFTWARE. The Software and all Licensed
Materials related thereto shall be the sole property of Enterprise. IOM shall
not modify, copy decompile, reverse engineer or disassemble the Software, in
whole or in part, nor embed the Software into any other program or software
unless expressly authorized in writing by Enterprise.
SECTION 1.4 DEFAULT. If either party shall at any time commit any
material breach of this agreement and shall fail to commence to cure such breach
within thirty (30) days after written notice of such breach, the non-defaulting
party may terminate this Agreement upon notice to the defaulting party. Upon the
termination of this Agreement, the non-defaulting party may exercise all of its
rights and remedies under this Agreement, at law or in equity.
ARTICLE II
MAINTENANCE AND SUPPORT
Enterprise agrees to provide IOM with training and support assistance
pursuant to the terms of Exhibit "A" attached hereto.
ARTICLE III
FINANCIAL OBLIGATIONS
SECTION 3.1 FEES. As consideration for the granting of the
Licenses to IOM, IOM shall deliver to Enterprise as and for the final price
the sum of nine thousand (9,000) unrestricted and free trading shares of
I/OMagic Corporation common stock ("Shares"), which are traded on the
OTC/Bulletin Board, such consideration being the purchase price, payable upon
execution of this Agreement. These Shares shall be delivered to Enterprise
one hundred twenty (120) days from the date of this Agreement. The stock
certificate shall be issued and delivered to Enterprise within ten (10) days
of the date of this Agreement. The Shares shall be duly and validly issued,
fully paid and nonassessable and free of liens, encumbrances and restrictions
on transfers other than restrictions applicable by state and federal law. The
Shares acquired by Enterprise are derived from affiliates and/or insiders of
the Company and may be subject to certain restrictions under Federal or State
securities laws. The issuance of Shares to Enterprise shall constitute
payment in full by IOM.
SECTION 3.2 NO REPRESENTATIONS/DISCLAIMER. Enterprise acknowledges
and agrees that, except as expressly provided in this Agreement, neither IOM
nor any agents, representatives or employees of IOM have made any
representations or warranties, direct or indirect, oral or written, express
or implied to Enterprise or any agents, representatives, or employees of
Enterprise, with respect to the Shares of IOM, including without limitation
the current or future value of the Shares or the past, present or future
financial condition or performance of IOM. Enterprise acknowledges and agrees
that it not acquiring the Shares in reliance on any information provided by
IOM or IOM's agents, representatives, or employees. IOM specifically
disclaims any
1
<PAGE>
warranty, guaranty or representation, oral or written, past or present, express
or implied, concerning the Shares of IOM, except as expressly set forth in this
Agreement. Further Enterprise holds harmless from all liability, loss, cost,
claim, suit, judgment or expense (including, without limitation, reasonable
attorneys' fees and costs) arising out of or in any way related to these Shares.
SECTION 3.3 TAXES AND ASSESSMENTS. The parties agree that any
federal state or local sales or other taxes, levies or assessments (including
related interest and penalties) imposed, levied, assessed or arising by
virtue of Fees, other than taxes based upon the net income of Enterprise,
shall be the liability and responsibility of IOM.
ARTICLE IV
WARRANTIES, INDEMNIFICATION AND LIMITATION OF LIABILITY
SECTION 4.1 WARRANTY. Enterprise hereby assigns to IOM any and all
warranties with respect to the Software which it obtains from Macola including
without limitation the warranties that (i) all Software delivered hereunder is
free from material error, malfunctions and defects for thirty (30) days from the
date of this Agreement, (ii) the Software will execute without material error or
malfunction and (iii) the Software conforms in all material respects to the
Software's documentation. ENTERPRISE DISCLAIMS THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE CONCERNING THE SOFTWARE AND
THE LICENSED MATERIALS. NEITHER PARTY SHALL BE LIABLE FOR ANY OTHER LEGAL OR
EQUITABLE THEORY EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
SECTION 4.2 TITLE. Enterprise warrants that Enterprise and its
affiliated corporations have to right to sell the Software. Enterprise
represents and warrants that the Software is original and has not been used
prior to its sale to IOM.
SECTION 4.3 INDEMNITY. Enterprise agrees to hold IOM and its
agents, representatives, and employees harmless from all liability, loss,
cost, claim suit, judgment or expense (including, without limitation,
reasonable attorneys' fees and costs) arising out of or in any way related to
an infringement of any patent or copyright or a violation of any trade secret
or other proprietary right of any third party in the Software. Enterprise, at
its option, may obtain for IOM the right to continue using, or to replace or
modify the Software involved so that it becomes non-infringing; or, if such
remedies are not reasonably available, grant IOM a refund of all fees paid to
Enterprise under this Agreement. The provisions of this section and the
obligations of Enterprise set forth herein shall survive the expiration of
other termination of this Agreement.
SECTION 4.4 MISCELLANEOUS WARRANTIES. Enterprise and IOM each
represent (as to itself) to each other that:
(a) It is duly organized, validly existing and in good
standing under the laws of its state of formation.
(b) It has all requisite power and authority to execute
this Agreement and te the consummatransactions contemplated hereby.
(c) The execution of this Agreement and performance
hereunder shall not constitute a default or conflict with any agreement or
instrument to which it is a party.
ARTICLE V
GENERAL PROVISIONS
SECTION 5.1 CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
ACCORDANCE WITH AND ITS PERFORMANCE GOVERNED BY THE LAWS OF THE STATE OF
CALIFORNIA.
SECTION 5.2 NOTICES. All notices and communications required by or
relating to this Agreement shall be in writing and shall be deemed duly given
three (3) days after it is deposited, postage prepaid, return receipt
requested in the United States mail to the respective party at the following
addresses:
To Enterprise: Enterprise Wide Computing, Inc.
25219 S. Vermont Avenue, Suite 202
Harbor City, CA 90710
Attn: _____________________________
To IOM: I/OMagic Corporation
6B Autry
Irvine, CA 92618
Attn: Tony Shahbaz
2
<PAGE>
With copy to: Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine, CA 92618
Attn: Lawrence W. Horwitz, Esq.
SECTION 5.3 ASSIGNMENT. This Agreement shall not be assignable
without the express written consent of the non-assigning party.
SECTION 5.4 SEVERABILITY. If any provision of this Agreement is
declared invalid, such provision shall be modified to the extent necessary to
cure its invalidity and this Agreement shall otherwise remain in full force and
effect.
SECTION 5.5 NO AGENCY. Except as expressly provided herein, this
Agreement does not create any relationship of agency, partnership or employment
between the parties.
SECTION 5.6 CONFIDENTIALITY. Neither party shall disclose the
contents of this Agreement without the prior written consent of the other
party.
SECTION 5.7 HEADINGS. The descriptive headings are inserted for
reference only and do not limit, expand or otherwise affect the meaning or
construction of the language of this Agreement.
SECTION 5.8 COUNTERPARTS. This Agreement may be executed in
several counterparts and each executed counterpart shall be considered an
original of this Agreement.
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<PAGE>
SECTION 5.9 INTEGRATION. This Agreement and the attached Exhibit
constitute the entire Agreement between the parties and shall supersede all
proposals or prior Agreements, oral or written, and all other communications
between the parties relating to the subject matter of this Agreement. This
Agreement shall not be varied by any oral agreement or representation or by
other than an instrument in writing dated after this Agreement as signed by both
parties.
SECTION 5.10 FURTHER ASSURANCES. The parties agree that they will
execute and deliver such further documents and do such further acts as the other
party may reasonably request in order to accomplish the purposes of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed on the dates indicated below:
ENTERPRISE WIDE I/OMAGIC CORPORATION
COMPUTING, INC. a Nevada corporation
a Nevada corporation
By: /s/ Janel Johnson By: /s/ Tony Shahbaz
-------------------------- ---------------------
Name: Janel Johnson Name: Tony Shahbaz
------------------------ -------------------
Title: V.P. Finance Title: President
----------------------- ------------------
Date: 12/1/97 Date: 12/2/97
------------------------ -------------------
4
<PAGE>
EXHIBIT 10.7
I/OMAGIC CORPORATION
1996 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
DATED APRIL 1, 1996
<PAGE>
I/OMAGIC CORPORATION
1996 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
1. PURPOSE
This Incentive and Nonstatutory Stock Option Plan (the "Plan") is
intended to further the growth and financial success of I/OMAGIC CORPORATION, a
Nevada corporation (the "Corporation") by providing additional incentives to
selected employees of and consultants to the Corporation or parent corporation
or subsidiary corporation of the Corporation as those terms are defined in
Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended (the
"Code") (such parent corporations and subsidiary corporations hereinafter
collectively referred to as "Affiliates") so that such employees and consultants
may acquire or increase their proprietary interest in the Corporation. Stock
options granted under the Plan (hereinafter "Options") may be either "Incentive
Stock Options", as defined in Section 422 of the Code and any regulations
promulgated under said Section, or "Nonstatutory Options" at the discretion of
the Board of Directors of the Corporation (the "Board") and as reflected in the
respective written stock option agreements granted pursuant hereto.
2. ADMINISTRATION
The Plan shall be administered by the Board of Directors of the
Corporation; provided however, that the Board may delegate such administration
to a committee of not fewer than three (3) members (the "Committee"), at least
two (2) of whom are members of the Board and all of whom are disinterested
administrators, as contemplated by Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended ("Rule 16b-3"); and provided further, that the
foregoing requirement for disinterested administrators shall not apply prior to
the date of the first registration of any of the securities of the Corporation
under the Securities Act of 1933, as amended.
Subject to the provisions of the Plan, the Board and/or the Committee
shall have authority to (a) grant, in its discretion, Incentive Stock Options in
accordance with Section 422 of the Code or Nonstatutory Options; (b) determine
in good faith the fair market value of the stock covered by an Option; (c)
determine which eligible persons shall be granted Options and the number of
shares to be covered thereby and the term thereof; (d) construe and interpret
the Plan; (e) promulgate, amend and rescind rules and regulations relating to
its administration, and correct defects, omissions, and inconsistencies in the
Plan or any Option; (f) consistent with the Plan and with the consent of the
optionee, as appropriate, amend any outstanding Option or amend the exercise
date or dates thereof; (g) determine the duration and purpose of leaves of
absence which may be granted to optionholders without constituting termination
of their employment for the purpose of the Plan; and (h) make all other
determinations necessary or advisable for the Plan's administration. The
interpretation and construction by the Board of any provisions of the Plan or of
any Option it shall be conclusive and final. No member of the Board or the
Committee shall be liable for any action or determination made in good faith
with respect to the Plan or any Option.
3. ELIGIBILITY
The persons who shall be eligible to receive Options shall be key
employees of or consultants to the Corporation or any of its Affiliates
("Optionees"). The term consultant shall mean any person who is engaged by the
Corporation to render services and is compensated for such services, and any
director of the Corporation whether or not compensated for such services;
provided that, if the Corporation registers any of its securities pursuant to
the Securities Exchange Act of 1934, the term consultant shall thereafter not
include directors who are not compensated for their services or are paid only a
director fee by the Corporation.
(a) INCENTIVE STOCK OPTIONS. Incentive Stock Options may only
be issued to employees of the Corporation or its Affiliates. Incentive Stock
Options may be granted to officers, whether or not they are directors, but a
director shall not be granted an Incentive Stock Option unless such director is
also an employee of the Corporation. Payment of a director fee shall not be
sufficient to constitute employment by the Corporation. Any grant of option to
an officer or director of the Corporation subsequent to the first registration
of any of the securities of the Corporation under Securities Act of 1933, as
amended, shall comply with the requirements of Rule 16b-3. An optionee may hold
more than one Option.
The Corporation shall not grant an Incentive Stock Option
under the Plan to any employee if such grant would result in such employee
holding the right to exercise for the first time in any one calendar year, under
all options granted to such employee under the Plan or any other stock option
plan maintained by the Corporation or any Affiliate, with respect to shares of
stock having an aggregate fair market value, determined as of the date of the
Option is granted, in excess of $100,000. Should it be determined that an
Incentive Stock Option granted under the Plan exceeds such maximum for any
reason other than a failure in good
<PAGE>
faith to value the stock subject to such option, the excess portion of such
option shall be considered a Nonstatutory Option. If, for any reason, an entire
option does not qualify as an Incentive Stock Option by reason of exceeding such
maximum, such option shall be considered a Nonstatutory Option.
(b) NONSTATUTORY OPTION. The provisions of the foregoing
Section 3(a) shall not apply to any option designated as a "Non-statutory Stock
Option Agreement" or which sets forth the intention of the parties that the
option be a Nonstatutory Option.
4. STOCK
The stock subject to Options shall be in the form of Corporation
warrants for common stock in the Corporation (the "Stock").
(a) NUMBER OF SHARES. Subject to adjustment as provided in
Paragraph 5(i) of this Plan, the total number of shares of Stock which may be
purchased through exercise of Options granted under this Plan shall not exceed
Seven Hundred Fifty Thousand (750,000) warrants with an exercise price to be
determined by the Board of Directors. If any Option shall for any reason
terminate or expire, any shares allocated thereto but remaining unpurchased upon
such expiration or termination shall again be available for the grant of Options
with respect thereto under this Plan as though no Option had been granted with
respect to such shares.
(b) RESERVATION OF SHARES. The Corporation shall reserve and
keep available at all times during the term of the Plan such number of shares as
shall be sufficient to satisfy the requirements of the Plan. If, after
reasonable efforts, which efforts shall not include the registration of the Plan
or Options under the Securities Act of 1933, the Corporation is unable to obtain
authority from any applicable regulatory body, which authorization is deemed
necessary by legal counsel for the Corporation for the lawful issuance of shares
hereunder, the Corporation shall be relieved of any liability with respect to
its failure to issue and sell the shares for which such requisite authority was
so deemed necessary unless and until such authority is obtained.
5. TERMS AND CONDITIONS OF OPTIONS
Options granted hereunder shall be evidenced by agreements between the
Corporation and the respective Optionees, in such form and substance as the
Board or Committee shall from time to time approve. Such agreements need not be
identical, and in each case may include such provisions as the Board or
Committee may determine, but all such agreements shall be subject to and limited
by the following terms and conditions:
(a) NUMBER OF SHARES: Each Option shall state the number of
shares to which it pertains.
(b) OPTION PRICE: Each Option shall state the Option Price,
which shall be determined as follows:
(i) Any Option granted to a person who at the time
the Option is granted owns (or is deemed to own pursuant to Section
424(d) of the Code) stock possessing more than ten percent (10%) of the
total combined voting power of value of all classes of stock of the
Corporation, or of any Affiliate, ("Ten Percent Holder") shall have an
Option Price of no less than 110% of the fair market value of the
common stock as of the date of grant; and
(ii) Incentive Stock Options granted to a person who
at the time the Option is granted is not a Ten Percent Holder shall
have an Option price of no less than 100% of the fair market value of
the common stock as of the date of grant.
(iii) Nonstatutory Options granted to a person who at
the time the Option is granted is not a Ten Percent Holder shall have
an Option Price determined by the Board as of the date of grant.
For the purposes of this paragraph 5(b), the fair market value
shall be as determined by the Board, in good faith, which determination shall be
conclusive and binding; provided however, that if there is a public market for
such stock, the fair market value per share shall be the average of the bid and
asked prices (or the closing price if such stock is listed on the NASDAQ
National Market System) on the date of grant of the Option, or if listed on a
stock exchange, the closing price on such exchange on such date of grant.
(c) MEDIUM AND TIME OF PAYMENT: To the extent permissible by
applicable law, the Option price shall be paid, at the discretion of the Board,
at either the time of grant or the time of exercise of the Option (i) in cash or
by check, (ii) by delivery of other common stock of the Corporation, provided
such tendered stock was not acquired directly or indirectly from the
Corporation,
<PAGE>
or, if acquired from the Corporation, has been held by the Optionee for more
than six (6) months, (iii) by the Optionee's promissory note in a form
satisfactory to the Corporation and bearing interest at a rate determined by the
Board, in its sole discretion, but in no event less than 6% per annum, or (iv)
such other form of legal consideration permitted by the California Corporations
Code as may be acceptable to the Board.
(d) TERM AND EXERCISE OF OPTIONS: Any Option granted to an
Employee of the Corporation shall become exercisable over a period of no longer
than five (5) years, and no less than twenty percent (20%) of the shares covered
thereby shall become exercisable annually. No Option shall be exercisable, in
whole or in part, prior to one (1) year from the date it is granted unless the
Board shall specifically determine otherwise, as provided herein. In no event
shall any Option be exercisable after the expiration of ten (10) years from the
date it is granted, and no Incentive Stock Option granted to a Ten Percent
Holder shall, by its terms, be exercisable after the expiration of five (5)
years from the date of the Option. Unless otherwise specified by the Board or
the Committee in the resolution authorizing such option, the date of grant of an
Option shall be deemed to be the date upon which the Board or the Committee
authorizes the granting of such Option.
Each Option shall be exercisable to the nearest whole share,
in installments or otherwise, as the respective option agreements may provide.
During the lifetime of an Optionee, the Option shall be exercisable only by the
Optionee and shall not be assignable or transferable by the Optionee, and no
other person shall acquire any rights therein. To the extent not exercised,
installments (if more than one) shall accumulate, but shall be exercisable, in
whole or in part, only during the period for exercise as stated in the option
agreement, whether or not other installments are then exercisable.
(e) TERMINATION OF STATUS AS EMPLOYEE OR CONSULTANT: If
Optionee's status as an employee or consultant shall terminate for any reason
other than Optionee's disability or death, then the Optionee (or if the Optionee
shall die after such termination, but prior to exercise, Optionee's personal
representative or the person entitled to succeed to the Option) shall have the
right to exercise the portions of any such termination, in whole or in part, at
any time within three (3) months after such termination (or in the event of
"termination for good cause" as that term is defined under California Labor Code
and case law related thereto, such shorter period as the option agreement may
specify, but not less than 30 days) or the remaining term of the Option,
whichever is the lesser; provided, however, that with respect to Nonstatutory
Options, the Board may specify such longer period, not to exceed six (6) months,
for exercise following termination as the Board deems reasonable and
appropriate. The Option may be exercised only with respect to installments that
the Optionee could have exercised at the date of termination of employment.
Nothing contained herein or in any Option granted pursuant hereto shall be
construed to affect or restrict in any way the right of the Corporation to
terminate the employee of an Optionee with or without cause.
(f) DISABILITY OF OPTIONEE: If an Optionee dies while employed
or engaged as a consultant by the Corporation or an Affiliate, the portion of
such Optionee's Option or Options which were exercisable at the date of death
may be exercised, in whole or in part, by the estate of the decedent or by a
person succeeding to the right to exercise such Option or Options, at any time
within (i) a period, as determined by the Board and set forth in the Option, of
not less than six (6) months nor more than one (1) year after Optionee's death,
which period shall not be less, in the case of a Nonstatutory Option, than the
period for exercise following termination, or (ii) during the remaining term of
the Option, whichever is the lesser. The Option may be so exercised only with
respect to installments exercisable at the time of Optionee's death and not
previously exercised by the Optionee.
(g) NONTRANSFERABILITY OF OPTION: No Option shall be
transferable by the Optionee, except by will or by the laws of descent and
distribution.
(h) RECAPITALIZATION: Subject to any required action by the
stockholders, the number of shares of common stock covered by each outstanding
Option, and the price per share thereof set forth in each such Option, shall be
proportionately adjusted for any increase or decrease in the number of issued
shares of common stock of the Corporation resulting from a subdivision or
consolidation of shares or the payment of a stock dividend, or any other
increase or decrease in the number of such shares affected without receipt of
consideration by the Corporation.
Subject to any required action by the stockholders, if the
Corporation shall be the surviving entity in any merger or consolidation, each
outstanding Option thereafter shall pertain to and apply to the securities to
which a holder of shares of common stock equal to the shares subject to the
Option would have been entitled by reason of such merger or consolidation. A
dissolution or liquidation of the Corporation or a merger or consolidation in
which the Corporation is not the surviving entity shall cause each outstanding
Option to terminate on the effective date of such dissolution, liquidation,
merger or consolidation. In such event, if the entity which shall be the
surviving entity does not tender to Optionee an offer, for which it has no
obligation to do so, to substitute for any unexercised Option a stock option or
capital stock of such surviving entity, as applicable, which on an equitable
basis shall provide the Optionee with substantially the same economic benefit as
such unexercised Option, then the Board may grant to such Optionee, but shall
not be obligated to do so, the right for a period commencing thirty (30) days
prior to and ending immediately prior to such dissolution, liquidation, merger
or consolidation or during the remaining term of the Option, whichever is the
lesser,
<PAGE>
to exercise any unexpired Option or Options, without regard to the installment
provisions of Paragraph 5(d) of this Plan; provided, that any such right granted
shall be granted to all Optionees not receiving an offer to substitute on a
consistent basis, and provided further, that any such exercise shall be subject
to the consummation of such dissolution, liquidation, merger or consolidation.
In the event of a change in the common stock of the
Corporation as presently constituted, which is limited to a change of all of its
authorized shares without par value into the same number of shares with a par
value, the shares resulting from any such change shall be deemed to be the
common stock within the meaning of this Plan.
To the extent that the foregoing adjustments relate to stock
or securities of the Corporation, such adjustments shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided in this Paragraph 5(i), the Optionee shall have no
rights by reason of any subdivision or consolidation of shares of stock or any
class or the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class, and the number or price of shares of
common stock subject to any Option shall not be affected by, and no adjustment
shall be made by reason of, any dissolution, liquidation, merger or
consolidation, or any issue by the Corporation of shares of stock of any class
or securities convertible into shares of stock of any class.
The grant of an Option pursuant to the Plan shall not affect
in any way the right or power of the Corporation to make any adjustments,
reclassifications, reorganizations or changes in its capital or business
structure or to merge, consolidate, dissolve, or liquidate or to sell or
transfer all or any part of its business or assets.
(i) RIGHTS AS A STOCKHOLDER: An Optionee shall have no rights
as a stockholder with respect to any shares covered by an Option until the date
of the issuance of a stock certificate to Optionee for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such stock certificate is issued, except as
expressly provided in Paragraph 5(i) hereof.
(j) MODIFICATION, ACCELERATION, EXTENSION, AND RENEWAL OF
OPTIONS: Subject to the terms and conditions and within the limitations of the
Plan, the Board may modify an Option, or once an Option is exercisable,
accelerate the rate at which it may be exercised, and may extend or renew
outstanding Options granted under the Plan or accept the surrender of
outstanding Options (to the extent not theretofore exercised) and authorize the
granting of new Options in substitution for such Options, provided such action
is permissible under Section 422A of the Code and Section 260.140.41 of the
Corporate Securities Rules of the California Corporations Commissioner.
Notwithstanding the foregoing provisions of this Paragraph
5(k), however, no modification of an Option shall, without the consent of the
Optionee, alter to the Optionee's detriment or impair any rights or obligations
under any Option theretofore
granted under the Plan.
(k) INVESTMENT INTENT: Unless and until the issuance and sale
of the shares subject to the Plan are registered under the Securities Act of
1933, as amended (the "Act"), each Option under the Plan shall provide that the
purchases of stock thereunder shall be for investment purposes and not with a
view to, or for resale in connection with, any distribution thereof. Further,
unless the issuance and sale of the stock have been registered under the Act,
each Option shall provide that no shares shall be purchased upon the exercise of
such Option unless and until (i) any then applicable requirements of state and
federal laws and regulatory agencies shall have been fully complied with to the
satisfaction of the Corporation and its counsel, and (ii) if requested to do so
by the Corporation, the person exercising the Option shall (i) give written
assurances as to knowledge and experience of such person (or a representative
employed by such person) in financial and business matters and the ability of
such person (or representative) to evaluate the merits and risks of exercising
the Option, and (ii) execute and deliver to the Corporation a letter of
investment intent, all in such form and substance as the Corporation may
require. If shares are issued upon exercise of an Option without registration
under the Act, subsequent registration of such shares shall relieve the
purchaser thereof of any investment restrictions or representations made upon
the exercise of such Options.
(l) EXERCISE BEFORE EXERCISE DATE: At the discretion of the
Board, the Option may, but need not, include a provision whereby the Optionee
may elect to exercise all or any portion of the Option prior to the stated
exercise date of the Option or any installment thereof. Any shares so purchased
prior to the stated exercise date shall be subject to repurchase by the
Corporation upon termination of Optionee's employment as contemplated by
Paragraphs 5(3), 5(f) and 5(g) hereof prior to the exercise date stated in the
Option and such other restrictions and conditions as the Board or Committee may
deem advisable.
(m) OTHER PROVISIONS: The Option agreements authorized under
this Plan shall contain such other provisions, including, without limitation,
restrictions upon the exercise of the Options, as the Board or the Committee
shall deem advisable. Shares shall not be issued pursuant to the exercise of an
Option, if the exercise of such Option or the issuance of shares thereunder
would violate, in the opinion of legal counsel for the Corporation, the
provisions of any applicable law or the rules or regulations
<PAGE>
of any applicable governmental or administrative agency or body, such as the
Act, the Securities Exchange Act of 1934, the rules promulgated under the
foregoing or the rules and regulations of any exchange upon which the shares of
the Corporation are listed.
7. AVAILABILITY OF INFORMATION
During the term of the Plan and any additional period during which an
Option granted pursuant to the Plan shall be exercisable, the Corporation shall
make available, not later than one hundred and twenty (120) days following the
close of each of its fiscal years, such financial and other information
regarding the Corporation as is required by the bylaws of the Corporation and
applicable law to be furnished in an annual report to the stockholders of the
Corporation.
8. EFFECTIVENESS OF PLAN; EXPIRATION
Subject to approval by the stockholders of the Corporation, this Plan
shall be deemed effective as of the date it is adopted by the Board. The Plan
shall expire on December 31, 1996, but such expiration shall not affect the
validity of outstanding Options.
9. AMENDMENT AND TERMINATION OF THE PLAN
The Board may, insofar as permitted by law, from time to time, with
respect to any shares at the time not subject to Options, suspend or terminate
the Plan or revise or amend it in any respect whatsoever, except that without
the approval of the stockholders of the Corporation, no such revision or
amendment shall (i) increase the number of shares subject to the Plan, (ii)
decrease the price at which Options may be granted, (iii) materially increase
the benefits to Optionees, or (iv) change the class of persons eligible to
receive Options under this Plan; provided, however, no such action shall alter
or impair the rights and obligations under any Option outstanding as of the date
thereof without the written consent of the Optionee thereunder. No Option may be
granted while the Plan is suspended or after it is terminated, but the rights
and obligations under any Option granted while the Plan is in effect shall not
be impaired by suspension or termination of the Plan.
10. INDEMNIFICATION OF BOARD
In addition to such other rights or indemnifications as they may have
as directors or otherwise, and to the extent allowed by applicable law, the
members of the Board and the Committee shall be indemnified by the Corporation
against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any claim, action, suit
or proceeding, or in connection with any appeal thereof, to which they or any of
them may be a party by reason of any action taken, or failure to act, under or
in connection with the Plan or any Option granted thereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Corporation) or paid by them in
satisfaction of a judgment in any such claim, action, suit or proceeding, except
in any case in relation to matters as to which it shall be adjudged in such
claim, action, suit or proceeding that such Board member is liable for
negligence or misconduct in the performance of his or her duties; provided that
within sixty (60) days after institution of any such action, suit or Board
proceeding the member involved shall offer the Corporation, in writing, the
opportunity, at its own expense, to handle and defend the same.
11. APPLICATION OF FUNDS
The proceeds received by the Corporation from the sale of common stock
pursuant to the exercise of Options will be used for general corporate purposes.
12. NO OBLIGATION TO EXERCISE OPTION
The granting of an Option shall impose no obligation upon the Optionee
to exercise such Option.
13. NOTICES
All notice, requests, demand, and other communications pursuant this
Plan shall be in writing and shall be deemed to have been duly given on the date
of service if served personally on the party to whom notice is to be given, or
on the third day following the mailing thereof to the party to whom notice is to
be given, by first class mail, registered or certified, postage prepaid.
* * * * *
The foregoing Incentive Stock Option Plan was duly adopted and approved
by the Board of Directors on February 1, 1996, and approved by the shareholders
of the Corporation effective February 1, 1996.
-------------------------------
Tony Shahbaz, Secretary
<PAGE>
I/O MAGIC CORPORATION
NONSTATUTORY STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT is made and entered into as of this ____
day of ______________, 1996, by and between I/OMAGIC CORPORATION, a Nevada
corporation ("Company"), and _______________________________ (referred to herein
as the "Optionee"), with reference to the following recitals of facts:
WHEREAS, the Board has authorized the granting to Optionee of a
nonstatutory stock option ("Option") to purchase shares of common stock of the
Company (the "Shares") upon the terms and conditions hereinafter stated; and
WHEREAS, the Board and stockholders of the Company have heretofore
adopted a 1996 Incentive and Nonstatutory Stock Option Plan (the "Plan"),
pursuant to which this Option is being granted;
WHEREAS, it is the intention of the parties that this Option be a
Nonstatutory Stock Option;
NOW, THEREFORE, in consideration of the covenants herein set forth, the
parties hereto agree as follows:
1. SHARES; PRICE. The Company hereby grants to Optionee the
right to purchase, upon and subject to the terms and conditions herein
stated, ___________ Shares for cash (or other consideration acceptable to the
Board of Directors of the Company, in their sole and absolute discretion) at
the price of $0.01 per Share, such price being determined in accordance with
the Plan.
2. TERM OF OPTION; CONTINUATION OF EMPLOYMENT. This Option shall
expire, and all rights hereunder to purchase the Shares shall terminate, five
(5) years from the date hereof. This Option shall earlier terminate subject to
Paragraphs 5 and 6 hereof if, and as of the date, Optionee ceases to be an
employee of or consultant to the Company. Nothing contained herein shall be
construed to interfere in any way with the right of the Company to terminate the
employment or engagement, as applicable, of Optionee or to increase or decrease
the compensation of Optionee from the rate in existence at the date hereof.
3. VESTING OF OPTION. Subject to the provisions of Paragraphs
5 and 6 hereof, this Option shall become exercisable during the term of
Optionee's employment or engagement in whole or in part beginning on the date
of this Agreement.
4. EXERCISE. This Option shall be exercised by delivery to the
Company of (a) a written notice of exercise stating the number of Shares
being purchased (in whole shares only) and such other information set forth
on the form of Notice of Exercise attached hereto as Appendix A, (b) a check
or cash in the amount of the purchase price of the Shares covered by the
notice, and (c) a written statement as provided for in Paragraph 11 hereof.
This Option shall not be assignable or transferable, except by will or by the
laws of descent and distribution, and shall be exercisable only by Optionee
during his or her lifetime.
5. TERMINATION OF EMPLOYMENT OR ENGAGEMENT. If Optionee shall
cease to serve as an employee of or consultant to the Company for any reason,
whether voluntarily or involuntarily, other than by his or her death or the
conclusion of the term of a written consulting agreement, provided such term
exceeds one year, Optionee shall have the right at any time within thirty
(30) days after date Optionee ceases to be an employee of or consultant to
the Company, or the remaining term of this Option, whichever is the lesser,
to exercise in whole or in part this Option to the extent, but only to the
extent, that this Option was exercisable as of the last day of employment or
engagement, as applicable, and had not previously been exercised; provided,
however:
(i) if Optionee is permanently disabled (within the meaning of
Section 22(e)(3) of the Code) at the time of termination, the
foregoing thirty day period shall be extended to six (6)
months; or
(ii) if Optionee is terminated "for good cause" as that term
is defined under the California Labor Code and case law
related thereto, the foregoing thirty day month period shall
be reduced to three (3) days.
Notwithstanding anything herein to the contrary, all rights under this Option
shall expire in any event on the date specified in Paragraph 2 hereof.
6. DEATH OF OPTIONEE. If the Optionee shall die while an employee
of or consultant to the Company, Optionee's personal representative or the
person entitled to Optionee's rights hereunder may at any time within three
(3) months after the date of Optionee's death, or during the remaining term
of this Option, whichever is the lesser, exercise this Option and purchase
Shares to the extent, but only to the extent, that Optionee could have
exercised this Option as of the date of Optionee's death; provided, in any
case, that this Option may be so exercised only to the extent that this
Option has not previously been exercised by Optionee.
7. NO RIGHTS AS STOCKHOLDER. Optionee shall have no rights as a
stockholder with respect to the Shares covered by
<PAGE>
any installment of this Option until the date of the issuance of a stock
certificate to Optionee, and no adjustment will be made for dividends or
other rights for which the record date is prior to the date such stock
certificate or certificates are issued except as provided in Paragraph 8
hereof.
8. RECAPITALIZATION. Subject to any required action by the
stockholders of the Company, the number of Shares covered by this Option, and
the price per Share thereof, shall be proportionately adjusted for any
increase or decrease in the number of issued Shares resulting from a
subdivision or consolidation of shares or the payment of a stock dividend, or
any other increase or decrease in the number of such shares affected without
receipt of consideration by the Company; provided however that the conversion
of any convertible securities of the Company shall not be deemed having been
"effected without receipt of consideration by the Company".
In the event of a proposed dissolution or liquidation of the Company, a
merger or consolidation in which the Company is not the surviving entity, or a
sale of all or substantially all of the assets of the Company, this Option shall
terminate immediately prior to the consummation of such proposed action, unless
otherwise provided by the Board. The Board may, at its sole and absolute
discretion and without obligation, declare that this Option shall terminate as
of a date fixed by the Board and grant Optionee the right for a period
commencing thirty (30) days prior to and ending immediately prior to such date,
or during the remaining term of this Option, whichever occurs sooner, to
exercise this Option as to all or any part of the Shares, without regard to the
instalment provision of Paragraph 3; provided, however, that such exercise shall
be subject to the consummation of such dissolution, liquidation, merger,
consolidation or sale.
Subject to any required action by the stockholders of the Company, if
the Company shall be the surviving entity in any merger or consolidation, this
Option thereafter shall pertain to and apply to the securities to which a holder
of Shares equal to the Shares subject to this Option would have been entitled by
reason of such merger or consolidation, and the vesting provisions of Section 3
shall continue to apply.
In the event of a change in the Shares of the Company as presently
constituted, which is limited to a change of all of its authorized Shares
without par value into the same number of Shares with a par value, the Shares
resulting from any such change shall be deemed to be the Shares within the
meaning of this Agreement.
To the extent that the foregoing adjustments relate to shares or
securities of the Company, such adjustments shall be made by the Board, whose
determination in that respect shall be final, binding and conclusive. Except as
hereinbefore expressly provided, Optionee shall have no rights by reason of any
subdivision or consolidation of share of stock of any class or the payment of
any stock dividend or any other increase or decrease in the number of shares of
stock of any class, and the number and price of shares subject to this Option
shall not be affected by, and no adjustments shall be made by reason of, any
dissolution, liquidation, merger or consolidation, or any issue by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class.
The grant of this Option shall not affect in any way the right or power
of the Company to make adjustments, reclassifications, reorganizations or
changes in its capital or business structure or to merge, consolidate, dissolve
or liquidate or to sell or transfer all or any part of its business or assets.
9. TAXATION UPON EXERCISE OF OPTION. Optionee understands that,
upon exercise of this Option, Optionee will recognize income, for federal and
state income tax purposes, in an amount equal to the amount by which the fair
market value of the Shares, determined as of the date of exercise, exceeds
the exercise price. The acceptance of the Shares by Optionee shall constitute
an agreement by Optionee to report such income in accordance with then
applicable law and to cooperate with Company in establishing the amount of
such income and corresponding deduction to the Company for its income tax
purposes. withholding for federal or state income and employment tax purposes
will be made, if and as required by law, from Optionee's then current
compensation, or, if such current compensation is insufficient to satisfy
withholding tax liability, the Company may require Optionee to make cash
payment to cover such liability as a condition of the exercise of this Option.
10. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS. The Board may
modify, extend or renew this Option or accept the surrender thereof (to the
extent not theretofore exercised) and authorize the granting of a new option in
substitution therefore (to the extent not theretofore exercised), subject at all
times to the Plan. Notwithstanding the foregoing provisions of this Paragraph
10, no modification shall, without the consent of the Optionee, alter to the
Optionee's detriment or impair any rights of Optionee hereunder.
11. INVESTMENT INTENT; RESTRICTIONS ON TRANSFER. Optionee
represents and agrees that if Optionee exercises this Option in whole or in
part, Optionee will in each case acquire the Shares upon such exercise for
the purpose of investment and not with a view to, or for resale in connection
with, any distribution thereof; and that upon such exercise of this Option in
whole or in part, Optionee (or any person or persons entitled to exercise
this Option under the provisions of Paragraphs 5 and 6 hereof) shall furnish
<PAGE>
to the Company a written statement to such effect, satisfactory to the
Company in form and substance. The Company, at its option, may include a
legend on each certificate representing Shares issued pursuant to any
exercise of this Option, stating in effect that such Shares have not been
registered under the Securities Act of 1933, as amended (the "Act"), and that
the transferability thereof is restricted. If the Shares represented by this
Option are registered under the Act, either before or after the exercise of
this Option in whole or in part, the Optionee shall be relieved of the
foregoing investment representation and agreement and shall not be required
to furnish the Company with the foregoing written statement.
Optionee further represents that optionee has had access to the
financial statements or books and records of the Company, has had the
opportunity to ask questions of the Company concerning its business, operations
and financial condition, and to obtain additional information reasonably
necessary to verify the accuracy of such information, and further represents
that Optionee (either such experience and knowledge in investment, financial and
business matters in investments similar to the stock of the Company that
Optionee is capable of evaluating to the merits and risks thereof and has the
capacity to protect his or her own interest in connection therewith. Optionee
acknowledges and agrees that the Commissioner of Corporations of the state of
California, as a condition to the issuance of the permit pursuant to which this
Option is granted, may impose restrictions on the transfer of Shares purchased
by Optionee pursuant hereto and may require that all certificates representing
such Shares bear restrictive legends substantially as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF
THE COMMISSIONER OR CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
12. REGISTRATION RIGHTS.
a. PIGGYBACK REGISTRATION RIGHTS. If the Company at any
time proposes to register any of its securities under the Act, including
under an S-8 Registration Statement, an SB-2 Registration Statement or
otherwise, it will each such time give written notice to all holders of
outstanding Shares and Warrants of its intention so to do. Upon the written
request of a holder or holders of any such Shares or Warrants given within 30
days after receipt of any such notice, the Company will use its best efforts
to cause all such Shares, the holders of which (or of the Warrants for which
upon exercise thereof the Company will issue Shares) shall have so requested
registration thereof, to be registered under the Act (with the securities
which the Company at the time propose to register), all to the extent
requisite to permit the sale or other disposition by the prospective Sellers
of the Shares so registered; provided, however, that the Company may, as a
condition precedent to its effective such registration, require each
prospective Seller to agree with the Company and the managing underwriter or
underwriters of the offering to be made by the Company in connection with
such registration that such Seller will not sell any securities of the same
class or convertible into the same class as those registered by the Company
(including any class into which the securities registered by the Company are
convertible) for such reasonable period after such registration becomes
effective (not exceeding 30 days) as shall then be specified in writing by
such underwriter or underwriters if in the opinion of such underwriter or
underwriters the Company's offering would be materially adversely affected in
the absence of such an agreement.
b. PROCEDURES. In connection with the registration of the Shares
pursuant to Section 12.a. hereof, the Company and the Optionee covenant and
agree as follows:
(i) The Company shall pay all costs, fees, and expenses
incurred by the Company and the Optionee in connection with the
Registration Statement and the offering thereunder including,
without limitation, the Company's legal fees and expenses of
counsel, accounting fees, printing expenses, and blue sky fees and
expenses (but excluding discounts or selling commissions of any
underwriter or broker dealer acting on behalf of the company or the
Optionee).
(ii) The Company shall take all necessary action
which may be reasonably required in qualifying or registering the
Shares included in the Registration Statement for offering and sale
under the securities or blue sky laws of all states reasonably
requested by Optionee, provided that the Company shall not be obligated
to qualify as a foreign corporation to do business under the laws of
any such jurisdiction.
(iii) The Company shall indemnify Optionee and each
person, if any, who controls Optionee within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of
1934 (the "Exchange Act"), against all loss, claim, damage, expense
or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever)
to which any of them may become subject under the Act, the Exchange
Act or otherwise, arising from the Registration Statement.
<PAGE>
(iv) The Company shall, as soon as practicable after the
effective date of the Registration Statement, and in any event
within fifteen (15) months thereafter, make "generally available to
its security holders" (within the meaning of Rule 158 under the Act)
an earnings statement (which need not be audited) complying with
Section 11(a) of the Act and covering a period of at least twelve
(12) consecutive months beginning after the effective date of the
Registration Statement.
(v) The Company shall (A) deliver promptly to Optionee
and its counsel, upon request, copies of all correspondence between
the Commission and the Company, its counsel, or auditors and all
memoranda relating to discussions with the Commission or its staff
with respect to the Registration Statement; and (B) permit Optionee
and its counsel to perform such investigation, upon reasonable
advance notice, with respect to information contained in or omitted
from the Registration Statement, as it deems reasonably necessary to
comply with applicable securities laws or rules of the National
Association of Securities Dealers, Inc. Such investigation shall
include, but not be limited to, access to financial and accounting
information and opportunities to discuss the business of the Company
with the Company's officers and independent auditors, all to such
reasonable extent, at such reasonable times and as often as Optionee
and its counsel shall reasonably request.
(vi) The Company shall cause all securities of Optionee
registered pursuant to a Registration Statement to be listed on any
national securities exchange or quoted on any automated quotation
system on which similar securities of the Company are listed or
quoted.
13. STAND-OFF AGREEMENT. Optionee agrees that in connection with
any registration of the Company's securities, that upon the request of the
Company or any underwriter managing an underwritten offering of the Company's
securities, that Optionee shall not sell, short any sale of, loan, grant an
option for, or otherwise dispose of any of the Shares (other than Shares
included in the offering) without the prior written consent of the Company or
such managing underwriter, as applicable, for a period of at least 120 days
following the effective date of registration of such offering.
14. NOTICES. Any notice required to be given pursuant to this
Option or the Plan shall be in writing and shall be deemed to be delivered
upon receipt or, in the case of notices by the Company, five (5) days after
deposit in the US. mail, postage prepaid, addressed to Optionee at the
address last provided to the Company by Optionee for his or her employee
records.
15. AGREEMENT SUBJECT TO PLAN; APPLICABLE LAW. This Agreement is
made pursuant to the Plan and shall be interpreted to comply therewith. A
copy of such Plan is available to Optionee, at no charge, at the principal
office of the Company. Any provision of this Agreement inconsistent with the
Plan shall be considered void and replaced with the applicable provision of
the Plan. This Agreement has been granted, executed and delivered in the
State of California, and the interpretation and enforcement shall be governed
by the laws thereof and subject to the exclusive jurisdiction of the courts
therein.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
I/OMAGIC CORPORATION
--------------------------------
BY: Tony Shahbaz
ITS: President
--------------------------------
, Optionee
(ONE OF THE FOLLOWING, AS APPROPRIATE, SHALL BE SIGNED)
<TABLE>
<CAPTION>
<S> <C>
I certify that as of the date hereof I am unmarried By his or her signature, the spouse of Optionee hereby agrees
to be bound by the terms and conditions of foregoing
NONSTATUTORY STOCK OPTION AGREEMENT
- ------------------------------------- -------------------------------------
Optionee Spouse of Optionee
</TABLE>
<PAGE>
Appendix A
NOTICE OF EXERCISE
I/OMagic Corporation
9272 Jeronimo, Bldg. 122
Irvine, California 92718
--------------------
(date)
Re: Nonstatutory Stock Option
Notice is hereby given pursuant to Section 4 of my Nonstatutory Stock
Option Agreement that I elect to purchase the number of shares set forth below
at the exercise price set forth in my option agreement:
Stock Option dated: ______________________
Number of shares being purchased: ______________________
Option Exercise Price: $_____________________
A check in the amount of the aggregate price of the shares being
purchased is attached.
I hereby confirm that such shares are being acquired by me for my own
account for investment purposes, and not with a view to, or for resale in
connection with, any distribution thereof.
Further, I understand that, as a result of this exercise of rights, I
will recognize income in an amount equal to the amount by which the fair market
value of the Shares exceeds the exercise price. I agree to report such income in
accordance with then applicable law and to cooperate with Company in
establishing the withholding and corresponding deduction to the Company for its
income tax purposes.
I agree to provide to the Corporation such additional documents or
information as may be required pursuant to the Corporation's 1996 Incentive and
Nonstatutory Stock Option Plan.
-------------------------
(Signature)
-------------------------
(Name of Optionee)
<PAGE>
EXHIBIT 10.8
BTC ACQUISITION AGREEMENT DATED FEBRUARY 3, 1999
<PAGE>
INVENTORY CONTROL AGREEMENT
This Inventory Control Agreement (this "Agreement") is entered into and
is effective as of February 3, 1999 and is by and between I/OMagic Corporation
("I/OMagic") and Behavior Technology Company, a California corporation ("BTC").
I/OMagic and BTC have entered into that certain Subscription Agreement
dated February 3, 1999 providing for the contribution by BTC of $5 million in
inventory (the "Inventory") in exchange for 16,666,667 shares of the outstanding
common stock of I/OMagic. The purpose of this Agreement is to provide for
certain terms, pursuant to which, BTC shall provide I/OMagic the Inventory.
1. Effective upon execution of this Agreement, BTC agrees that it
shall transfer to I/OMagic $5 million in Inventory, at the preferred customer
price provided I/OMagic previously (the "Preferred Price"). The Inventory
shall be comprised of the various SKUs set forth in Exhibit A hereto.
2. I/OMagic shall have the right to adjust the composition of the
Inventory and to replace components comprising the Inventory with other
components of Inventory to be selected entirely at the discretion of I/OMagic
("Inventory"), so long as: (i) the Preferred Price of the old Inventory shall
equal the Preferred Price of the new Inventory; and (ii) the Inventory is
contained in a BTC facility. All Inventory is price protected by BTC until the
Inventory is released to I/OMagic, its representatives or its customers.
3. In the event I/OMagic desires to provide such an adjustment to
the Inventory it shall provide written notice to the principal United States
office of BTC, identifying the Inventory composition changes. Such adjustment
shall be effective immediately upon receipt by BTC.
4. It is agreed that: (a) this Agreement constitutes the entire
agreement between the parties hereto regarding the subject matter hereof; (b)
this Agreement is fully performable in the United States; and (c) in the event
of a dispute arising from this Agreement, the parties hereto agree to resolve
such dispute in Orange County, California according to the rules of the American
Arbitration Association.
IN WITNESS WHEREOF, the parties hereto hereby agree to be bound by the
terms of this Agreement by affixing their signature below.
I/OMAGIC CORPORATION
a Nevada corporation
By: /S/ TONY SHAHBAZ
- ------------------------------------
Tony Shahbaz, President
BEHAVIOR TECHNOLOGY CORPORATION
a California corporation
By: Steel Su
------------------------
Name: Steel Su
----------------------
Title: President
---------------------
<PAGE>
EXHIBIT 10.9
LEASE AGREEMENT BETWEEN I/OMAGIC CORPORATION AND
AUTRY PROPERTIES
<PAGE>
[LOGO] AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE -- NET
(DO NOT USE THIS FORM FOR MULTI-TENANT BUILDINGS)
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
February 1, 1999, is made by and between Autry Properties ("LESSOR") and
I/O Magic, Inc., a California corporation ("LESSEE"), (collectively the
"PARTIES," or individually a "PARTY").
1.2 PREMISES: That certain real property, including all improvements
therein or to be provided by Lessor under the terms of this Lease, and commonly
known as 6 Autry, Irvine, located in the County of Orange, State of California,
and generally described as (describe briefly the nature of the property and, if
applicable, the "PROJECT", if the property is located within a Project) An
approximately 20,707 square foot R&D facility ("PREMISES"). (See also
Paragraph 2)
1.3 TERM: three (3) years and -0- months ("ORIGINAL TERM") commencing
July 1, 1999* ("COMMENCEMENT DATE") and ending June 30, 2002 ("EXPIRATION
DATE"). (See also Paragraph 3) *If QIP vacates earlier than July 1, 1999, the
lease shall commence on the date Landlord delivers the premises to I/O Magic,
Inc.
1.4 EARLY POSSESSION: N/A ("EARLY POSSESSION DATE").
1.5 BASE RENT: $14,287.83 per month ("BASE RENT"), payable on the 1st
day of each month commencing July 1, 1999. (See also Paragraph 4)
/ / If this box is checked, there are provisions in this Lease for the Base
Rent to be adjusted.
1.6 BASE RENT PAID UPON EXECUTION: $14,287.83 as Base Rent for the period
July 1, 1999-July 31, 1999.
1.7 SECURITY DEPOSIT: $14,287.83 ("SECURITY DEPOSIT"). (See also
Paragraph 5)
1.8 AGREED USE: Corporate headquarters, administrative offices and
engineering of multi-media and communication desktop products and other related
legal uses (See also Paragraph 6)
1.9 INSURING PARTY: Lessor is the "INSURING PARTY" unless otherwise
stated herein. (See also Paragraph 8)
1.10 REAL ESTATE BROKERS: (See also paragraph 15)
(a) REPRESENTATION: The following real estate brokers (collectively,
the "BROKERS") and brokerage relationships exist in this transaction (check
applicable boxes):
/X/ Voit Commercial Brokerage represents Lessor exclusively ("LESSOR'S BROKER");
/ / ______________________ represents Lessee exclusively ("LESSEE'S BROKER"); or
/ / _________________________ represents both Lessor and Lessee ("DUAL AGENCY").
(b) PAYMENT TO BROKERS: Upon execution and delivery of this Lease by
both Parties, Lessor shall pay to the Broker the fee agreed to in their
separate written agreement (or if there is no such agreement, the sum of per
existing contract % of the total Base Rent for the brokerage services rendered
by said Broker).
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to be
guaranteed by ____________________ ("GUARANTOR"). (See also paragraph 37)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 50 through 55 and Exhibits _________________________,
all of which constitute a part of this Lease.
2. PREMISES.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all
of the terms, covenants and conditions set forth in this Lease. Unless
otherwise provided herein, any statement of size set forth in this Lease, or
that may have been used in calculating rental, is an approximation which the
Parties agree is reasonable and the rental based thereon is not subject to
revision whether or not the actual size is more or less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee broom
clean and free of debris on the Commencement Date or the Early Possession
Date, whichever first occurs ("START DATE"), and, so long as the required
service contracts described in Paragraph 7.1(b) below are obtained by Lessee
within thirty (30) days following the Start Date, warrants that the existing
electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air
conditioning systems ("HVAC"), loading doors, if any, and all other such
elements in the Premises, other than those constructed by Lessee, shall be in
good operating condition on said date and that the structural elements of the
roof, bearing walls and foundation of any buildings on the Premises (the
"BUILDING") shall be free of material defects. If a non-compliance with said
warranty exists as of the Start Date, Lessor shall, as Lessor's sole
obligation with respect to such matter, except as otherwise provided in this
Lease, promptly after receipt of written notice from the Lessee setting forth
with specificity the nature and extent of such non-compliance, rectify same
at Lessor's expense. If, after the Start Date, Lessee does not give Lessor
written notice of any non-compliance with this warranty within: (i) one year
as to the surface of the roof and the structural portions of the roof,
foundations and bearing walls, (ii) six (6) months as to the HVAC systems,
(iii) thirty (30) days as to the remaining systems and other elements of the
Building, correction of such non-compliance shall be the obligation of Lessee
at Lessee's sole cost and expense.
2.3 COMPLIANCE. Lessor warrants that the improvements on the
Premises comply with all applicable laws, covenants or restrictions of
record, building codes, regulations and ordinances ("APPLICABLE
REQUIREMENTS") in effect on the Start Date. Said warranty does not apply to
the use to which Lessee will put the Premises or to any Alterations or
Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by
Lessee. NOTE: Lessee is responsible for determining whether or not the zoning
is appropriate for Lessee's intended use, and acknowledges that past uses of
the Premises may no longer be allowed. If the Premises do not comply with
said warranty, Lessor shall, except as otherwise provided, promptly after
receipt of written notice from Lessee setting forth with specificity the
nature and extent of such non-compliance, rectify the same at Lessor's
expense. If Lessee does not give Lessor written notice of a non-compliance
with this warranty within six (6) months following the Start Date, correction
of that non-compliance shall be the obligation of Lessee at Lessee's sole
cost and expense. If the Applicable Requirements are hereafter changed (as
opposed to being in existence at the Start Date, which is addressed in
Paragraph 6.2(e) below) so as to require during the term of this Lease the
construction of an addition to or an alteration of the Building, the
remediation of any Hazardous Substance, or the reinforcement or other
physical modification of the Building ("CAPITAL EXPENDITURE"), Lessor and
Lessee shall allocate the cost of such work as follows:
(a) Subject to Paragraph 2.3(c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Lessee as compared with uses by tenants in general, Lessee shall be
fully responsible for the cost thereof, provided, however that if such Capital
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<PAGE>
Expenditure is required during the last two (2) years of this Lease and the
cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate
this Lease unless Lessor notifies Lessee, in writing, within ten (10) days
after receipt of Lessee's termination notice that Lessor has elected to pay
the difference between the actual cost thereof and the amount equal to six
(6) months' Base Rent. If Lessee elects termination, Lessee shall immediately
cease the use of the Premises which requires such Capital Expenditure and
deliver to Lessor written notice specifying a termination date at least
ninety (90) days thereafter. Such termination date shall, however, in no
event be earlier than the last day that Lessee could legally utilize the
Premises without commencing such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the specific
and unique use of the Premises by Lessee (such as, governmentally mandated
seismic modifications), then Lessor and Lessee shall allocate the obligation
to pay for such costs pursuant to the provisions of Paragraph 7.1(c)
provided, however, that if such Capital Expenditure is required during the
last two years of this Lease or if Lessor reasonably determines that it is
not economically feasible to pay its share thereof, Lessor shall have the
option to terminate this Lease upon ninety (90) days prior written notice to
Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after
receipt of Lessor's termination notice that Lessee will pay for such Capital
Expenditure. If Lessor does not elect to terminate, and fails to tender its
share of any such Capital Expenditure, Lessee may advance such funds and
deduct same, with interest, from Rent until Lessor's share of such costs have
been fully paid. If Lessee is unable to finance Lessor's share, or if the
balance of the Rent due and payable for the remainder of this Lease is not
sufficient to fully reimburse Lessee on an offset basis, Lessee shall have
the right to terminate this Lease upon thirty (30) days written notice to
Lessor.
(c) Notwithstanding the above, the provisions concerning Capital
Expenditures are intended to apply only to non-voluntary, unexpected, and new
Applicable Requirements. If the Capital Expenditures are instead triggered by
Lessee as a result of an actual or proposed change in use, change in
intensity of use, or modification to the Premises then, and in that event,
Lessee shall be fully responsible for the cost thereof, and Lessee shall not
have any right to terminate this Lease.
2.4 ACKNOWLEDGEMENTS. Lessee acknowledges that: (a) it has been
advised by Lessor and/or Brokers to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance
with Applicable Requirements), and their suitability for Lessee's intended
use; (b) Lessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises; and (c) neither Lessor, Lessor's
agents, nor any Broker has made any oral or written representations or
warranties with respect to said matters other than as set forth in this
Lease. In addition, Lessor acknowledges that: (a) Broker has made no
representations, promises or warranties concerning Lessee's ability to honor
the Lease or suitability to occupy the Premises; and (b) it is Lessor's sole
responsibility to investigate the financial capability and/or suitability of
all proposed tenants.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
Paragraph 2 shall be of no force or effect if immediately prior to the Start
Date Lessee was the owner or occupant of the Premises. In such event, Lessee
shall be responsible for any necessary corrective work.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of
this Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If Lessee totally or partially occupies the
Premises prior to the Commencement Date, the obligation to pay Base Rent
shall be abated for the period of such early possession. All other terms of
this Lease (including, but not limited to, the obligations to pay Real
Property Taxes and insurance premiums and to maintain the Premises) shall,
however, be in effect during such period. Any such early possession shall
not affect the Expiration Date.
3.3 DELAY IN POSSESSION. Lessor agrees to use its best commercially
reasonable efforts to deliver possession of the Premises to Lessee by the
Commencement Date. If, despite said efforts, Lessor is unable to deliver
possession as agreed, Lessor shall not be subject to any liability therefor,
nor shall such failure affect the validity of this Lease. Lessee shall not,
however, be obligated to pay Rent or perform its other obligations until it
receives possession of the Premises. If possession is not delivered within
sixty (60) days after the Commencement Date, Lessee may, at its option, by
notice in writing within ten (10) days after the end of such sixty (60) day
period, cancel this Lease, in which event the Parties shall be discharged
from all obligations hereunder. If such written notice is not received by
Lessor within said ten (10) day period, Lessee's right to cancel shall
terminate. Except as otherwise provided, if possession is not tendered to
Lessee by the Start Date and Lessee does not terminate this Lease, as
aforesaid, any period of rent abatement that Lessee would otherwise have
enjoyed shall run from the date of delivery of possession and continue for a
period equal to what Lessee would otherwise have enjoyed under the terms
hereof, but minus any days of delay caused by the acts or omissions of
Lessee. If possession of the Premises is not delivered within four (4)
months after the Commencement Date, this Lease shall terminate unless other
agreements are reached between Lessor and Lessee, in writing.
3.4 LESSEE COMPLIANCE. Lessor shall not be required to tender
possession of the Premises to Lessee until Lessee complies with its
obligation to provide evidence of insurance (Paragraph 8.5). Pending
delivery of such evidence, Lessee shall be required to perform all of its
obligations under this Lease from and after the Start Date, including the
payment of Rent, notwithstanding Lessor's election to withhold possession
pending receipt of such evidence of insurance. Further, if Lessee is
required to perform any other conditions prior to or concurrent with the
Start Date, the Start Date shall occur but Lessor may elect to withhold
possession until such conditions are satisfied.
4. RENT.
4.1 RENT DEFINED. All monetary obligations of Lessee to Lessor under
the terms of this Lease (except for the Security Deposit) are deemed to be
rent ("RENT").
4.2 PAYMENT. Lessee shall cause payment of Rent to be received by
Lessor in lawful money of the United States, without offset or deduction
(except as specifically permitted in this Lease), on or before the day on
which it is due. Rent for any period during the term hereof which is for
less than one (1) full calendar month shall be prorated based upon the actual
number of days of said month. Payment of Rent shall be made to Lessor at its
address stated herein or to such other persons or place as Lessor may from
time to time designate in writing. Acceptance of a payment which is less
than the amount then due shall not be a waiver of Lessor's rights to the
balance of such Rent, regardless of Lessor's endorsement of any check so
stating.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon execution
hereof the Security Deposit as security for Lessee's faithful performance of
its obligations under this Lease. If Lessee fails to pay Rent, or otherwise
Defaults under this Lease, Lessor may use, apply or retain all or any portion
of said Security Deposit for the payment of any amount due Lessor or to
reimburse or compensate Lessor for any liability, expense, loss or damage
which Lessor may suffer or incur by reason thereof. If Lessor uses or
applies all or any portion of said Security Deposit, Lessee shall within ten
(10) days after written request therefor deposit monies with Lessor sufficient
to restore said Security Deposit to the full amount required by this Lease.
If the Base Rent increases during the term of this Lease, Lessee shall, upon
written request from Lessor, deposit additional monies with Lessor so that
the total amount of the Security Deposit shall at all times bear the same
proportion to the increased Base Rent as the initial Security Deposit bore to
the initial Base Rent. Should the Agreed Use be amended to accommodate a
material change in the business of Lessee or to accommodate a sublessee or
assignee, Lessor shall have the right to increase the Security Deposit to the
extent necessary, in Lessor's reasonable judgment, to account for any
increased wear and tear that the Premises may suffer as a result thereof. If
a change in control of Lessee occurs during this Lease and following such
change the financial condition of Lessee is, in Lessor's reasonable
judgment, significantly reduced, Lessee shall deposit such additional monies
with Lessor as shall be sufficient to cause the Security Deposit to be at a
commercially reasonable level based on said change in financial condition.
Lessor shall not be required to keep the Security Deposit separate from its
general accounts. Within fourteen (14) days after the expiration or
termination of this Lease, if Lessor elects to apply the Security Deposit
only to unpaid Rent, and otherwise within thirty (30) days after the Premises
have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return
that portion of the Security Deposit not used or applied by Lessor. No part
of the Security Deposit shall be considered to be held in trust, to bear
interest or to be prepayment for any monies to be paid by Lessee under this
Lease.
6. USE.
6.1 USE. Lessee shall use and occupy the Premises only for the Agreed
Use, or any other legal use which is reasonably comparable thereto, and for
no other purpose. Lessee shall not use or permit the use of the Premises in
a manner that is unlawful, creates damage, waste or a nuisance, or that
disturbs owners and/or occupants of, or causes damage to neighboring
properties. Lessor shall not unreasonably withhold or delay its consent to
any written request for a modification of the Agreed Use, so long as the same
will not impair the structural integrity of the improvements on the Premises
or the mechanical or electrical systems therein, is not significantly more
burdensome to the Premises. If Lessor elects to withhold consent, Lessor
shall within five (5) business days after such request give written
notification of same, which notice shall include an explanation of Lessor's
objections to the change in use.
6.2 HAZARDOUS SUBSTANCES.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS
SUBSTANCE" as used in this Lease shall mean any product, substance, or waste
whose presence, use, manufacture, disposal, transportation, or release,
either by itself or in combination with other materials expected to be on
the Premises, is either: (i) potentially injurious to the public health,
safety or welfare, the environment or the Premises, (ii) regulated or
monitored by any
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governmental authority, or (iii) a basis for potential liability of Lessor
to any governmental agency or third party under any applicable statute or
common law theory. Hazardous Substances shall include, but not be limited
to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products,
by-products or fractions thereof. Lessee shall not engage in any activity
in or on the Premises which constitutes a Reportable Use of Hazardous
Substances without the express prior written consent of Lessor and timely
compliance (at Lessee's expense) with all Applicable Requirements.
"REPORTABLE USE" shall mean (i) the installation or use of any above or below
ground storage tank, (ii) the generation, possession, storage, use,
transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and/or (iii) the
presence at the Premises of a Hazardous Substance with respect to which any
Applicable Requirements requires that a notice be given to persons entering
or occupying the Premises or neighboring properties. Notwithstanding the
foregoing, Lessee may use any ordinary and customary materials reasonably
required to be used in the normal course of the Agreed Use, so long as such
use is in compliance with all Applicable Requirements, is not a Reportable
Use, and does not expose the Premises or neighboring property to any
meaningful risk of contamination or damage or expose Lessor to any liability
therefor. In addition, Lessor may condition its consent to any Reportable Use
upon receiving such additional assurances as Lessor reasonably deems
necessary to protect itself, the public, the Premises and/or the environment
against damage, contamination, injury and/or liability, including, but not
limited to, the installation (and removal on or before Lease expiration or
termination) of protective modifications (such as concrete encasements)
and/or increasing the Security Deposit.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under
or about the Premises, other than as previously consented to by Lessor,
Lessee shall immediately give written notice of such fact to Lessor, and
provide Lessor with a copy of any report, notice, claim or other
documentation which it has concerning the presence of such Hazardous
Substance.
(c) LESSEE REMEDIATION. Lessee shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under, or about the
Premises (including through the plumbing or sanitary sewer system) and shall
promptly, at Lessee's expense, take all investigatory and/or remedial action
reasonably recommended, whether or not formally ordered or required, for the
cleanup of any contamination of, and for the maintenance, security and/or
monitoring of the Premises or neighboring properties, that was caused or
materially contributed to by Lessee, or pertaining to or involving any
Hazardous Substance brought onto the Premises during the term of this Lease,
by or for Lessee, or any third party.
(d) LESSEE INDEMNIFICATION. Lessee shall indemnify, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises
by or for Lessee, or any third party (provided, however, that Lessee shall
have no liability under this Lease with respect to underground migration of
any Hazardous Substance under the Premises from adjacent properties).
Lessee's obligations shall include, but not be limited to, the effects of
any contamination or injury to person, property or the environment created or
suffered by Lessee, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or
termination of this Lease. NO TERMINATION, CANCELLATION OR RELEASE AGREEMENT
ENTERED INTO BY LESSOR AND LESSEE SHALL RELEASE LESSEE FROM ITS OBLIGATIONS
UNDER THIS LEASE WITH RESPECT TO HAZARDOUS SUBSTANCES, UNLESS SPECIFICALLY SO
AGREED BY LESSOR IN WRITING AT THE TIME OF SUCH AGREEMENT.
(e) LESSOR INDEMNIFICATION. Lessor and its successors and assigns
shall indemnify, defend, reimburse and hold Lessee, its employees and lenders,
harmless from and against any and all environmental damages, including the
cost of remediation, which existed as a result of Hazardous Substances on the
Premises prior to the Start Date or which are caused by the gross negligence
or willful misconduct of Lessor, its agents or employees. Lessor's
obligations, as and when required by the Applicable Requirements, shall
include, but not be limited to, the cost of investigation, removal,
remediation, restoration and/or abatement, and shall survive the expiration or
termination of this Lease.
(f) INVESTIGATIONS AND REMEDIATIONS. Lessor shall retain the
responsibility and pay for any investigations or remediation measures required
by governmental entities having jurisdiction with respect to the existence
of Hazardous Substances on the Premises prior to the Start Date, unless such
remediation measure is required as a result of Lessee's use (including
"Alterations", as defined in Paragraph 7.3(a) below) of the Premises, in
which event Lessee shall be responsible for such payment. Lessee shall
cooperate fully in any such activities at the request of Lessor, including
allowing Lessor and Lessor's agents to have reasonable access to the Premises
at reasonable times in order to carry out Lessor's investigative and remedial
responsibilities.
(g) LESSOR TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless Lessee is legally responsible
therefor (in which case Lessee shall make the investigation and remediation
thereof required by the Applicable Requirements and this Lease shall continue
in full force and effect, but subject to Lessor's rights under Paragraph
6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i)
investigate and remediate such Hazardous Substance Condition, if required, as
soon as reasonably possible at Lessor's expense, in which event this Lease
shall continue in full force and effect, or (ii) if the estimated cost to
remediate such condition exceeds twelve (12) times the then monthly Base Rent
or $100,000, whichever is greater, give written notice to Lessee, within
thirty (30) days after receipt by Lessor of knowledge of the occurrence of
such Hazardous Substance Condition, of Lessor's desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In
the event Lessor elects to give a termination notice, Lessee may, within ten
(10) days thereafter, give written notice to Lessor of Lessee's commitment to
pay the amount by which the cost of the remediation of such Hazardous
Substance Condition exceeds an amount equal to twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater. Lessee shall provide
Lessor with said funds or satisfactory assurance thereof within thirty (30)
days following such commitment. In such event, this Lease shall continue in
full force and effect, and Lessor shall proceed to make such remediation as
soon as reasonably possible after the required funds are available. If
Lessee does not give such notice and provide the required funds or assurance
thereof within the time provided, this Lease shall terminate as of the date
specified in Lessor's notice of termination.
6.3 LESSEE'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, Lessee shall, at Lessee's sole expense,
fully, diligently and in a timely manner, materially comply with all
Applicable Requirements, the requirements of any applicable fire insurance
underwriter or rating bureau, and the recommendations of Lessor's engineers
and/or consultants which relate in any manner to the Premises, without regard
to whether said requirements are now in effect or become effective after the
Start Date. Lessee shall, within ten (10) days after receipt of Lessor's
written request, provide Lessor with copies of all permits and other
documents, and other information evidencing Lessee's compliance with any
Applicable Requirements specified by Lessor, and shall immediately upon
receipt, notify Lessor in writing (with copies of any documents involved) of
any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving the failure of Lessee or the Premises to
comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE. Lessor and Lessor's "Lender" (as defined
in Paragraph 30 below) and consultants shall have the right to enter into
Premises at any time, in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Lessee with this Lease. The cost of any such
inspections shall be paid by Lessor, unless a violation of Applicable
Requirements, or a contamination is found to exist or be imminent, or the
inspection is requested or ordered by a governmental authority. In such
case, Lessee shall upon request reimburse Lessor for the cost of such
inspections, so long as such inspection is reasonably related to the
violation or contamination.
7. MAINTENANCE; REPAIRS, UTILITY INSTALLATIONS; TRADE FIXTURES AND
ALTERATIONS.
7.1 LESSEE'S OBLIGATIONS.
(a) IN GENERAL. Subject to the provisions of Paragraph 2.2
(Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable
Requirements), 7.2 (Lessor's Obligations), 9 (Damage or Destruction), and 14
(Condemnation), Lessee shall, at Lessee's sole expense, keep the Premises,
Utility Installations, and Alterations in good order, condition and repair
(whether or not the portion of the Premises requiring repairs, or the means of
repairing the same, are reasonably or readily accessible to Lessee, and
whether or not the need for such repairs occurs as a result of Lessee's use,
any prior use, the elements or the age of such portion of the Premises),
including, but not limited to, all equipment or facilities, such as plumbing,
heating, ventilating, air-conditioning, electrical, lighting facilities,
boilers, pressure vessels, fire protection system, fixtures, walls (interior
and exterior), foundations, ceilings, roofs, floors, windows, doors, plate
glass, skylights, landscaping, driveways, parking lots, fences, retaining
walls, signs, sidewalks and parkways located in, on, or adjacent to the
Premises. Lessee, in keeping the Premises in good order, condition and
repair, shall exercise and perform good maintenance practices, specifically
including the procurement and maintenance of the service contracts required
by Paragraph 7.1(b) below. Lessee's obligations shall include restorations,
replacements or renewals when necessary to keep the Premises and all
improvements thereon or a part thereof in good order, condition and state of
repair. Lessee shall, during the term of this Lease, keep the exterior
appearance of the Building in a first-class condition consistent with the
exterior appearance of other similar facilities of comparable age and size in
the vicinity, including, when necessary, the exterior repainting of the
Building.
(b) SERVICE CONTRACTS. Lessee shall, at Lessee's sole expense, procure
and maintain contracts, with copies to Lessor, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements, if any, if and when
installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure
vessels, (ii) fire extinguishing systems, including fire alarm and/or smoke
detection, (iv) landscaping and irrigation systems, (v) roof covering and
drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic
utility feed to the perimeter of the Building, and (ix) any other equipment,
if reasonably required by Lessor.
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(c) REPLACEMENT. Subject to Lessee's indemnification of
Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of
liability resulting from Lessee's failure to exercise and perform good
maintenance practices, if the Basic Elements described in Paragraph 7.1(b)
cannot be repaired other than at a cost which is in excess of 50% of the cost
of replacing such Basic Elements, then such Basic Elements shall be replaced
by Lessor, and the cost thereof shall be prorated between the Parties and
Lessee shall only be obligated to pay, each month during the remainder of the
term of this Lease, on the date on which Base Rent is due, an amount equal to
the product of multiplying the cost of such replacement by a fraction, the
numerator of which is one, and the denominator of which is the number of
months of the useful life of such replacement as such useful life is
specified pursuant to Federal income tax regulations or guidelines for
depreciation thereof (including interest on the unamortized balance as is
then commercially reasonable in the judgment of Lessor's accountants), with
Lessee reserving the right to prepay its obligation at any time.
7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14
(Condemnation), it is intended by the Parties hereto that Lessor have no
obligation, in any manner whatsoever, to repair and maintain the Premises, or
the equipment therein, all of which obligations are intended to be that of
the Lessee. It is the intention of the Parties that the terms of this Lease
govern the respective obligations of the Parties as to maintenance and repair
of the Premises, and they expressly waive the benefit of any statute now or
hereafter in effect to the extent it is inconsistent with the terms of this
Lease.
7.3 UTILITY INSTALLATIONS; TRADE FIXTURES; ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY
INSTALLATIONS" refers to all floor and window coverings, air lines, power
panels, electrical distribution, security and fire protection systems,
communication systems, lighting fixtures, HVAC equipment, plumbing, and
fencing in or on the Premises. The term "TRADE FIXTURES" shall mean Lessee's
machinery and equipment that can be removed without doing material damage to
the Premises. The term "ALTERATIONS" shall mean any modification of the
improvements, other than Utility Installations or Trade Fixtures, whether by
addition or deletion. "LESSEE OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS"
are defined as Alterations and/or Utility Installations made by Lessee that
are not yet owned by Lessor pursuant to Paragraph 7.4(a). Lessee shall not
make any Alterations or Utility Installations to the Premises without
Lessor's prior written consent. Lessee may, however, make non-structural
Utility Installations to the interior of the Premises (excluding the roof)
without such consent but upon notice to Lessor, as long as they are not
visible from the outside, do not involve puncturing, relocating or removing
the roof or any existing walls, and the cumulative cost thereof during this
Lease as extended does not exceed $50,000 in the aggregate or $10,000 in any
one year.
(b) CONSENT. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. Consent shall be
deemed conditioned upon Lessee's: (i) acquiring all applicable governmental
permits, (ii) furnishing Lessor with copies of both the permits and the plans
and specifications prior to commencement of the work, and (iii) compliance with
all conditions of said permits and other Applicable Requirements in a prompt and
expeditious manner. Any Alterations or Utility Installations shall be performed
in a workmanlike manner with good and sufficient materials. Lessee shall
promptly upon completion furnish Lessor with as-built plans and specifications.
For work which costs an amount equal to the greater of one month's Base Rent, or
$10,000, Lessor may condition its consent upon Lessee providing a lien and
completion bond in an amount equal to one and one-half times the estimated cost
of such Alteration or Utility Installation and/or upon Lessee's posting an
additional Security Deposit with Lessor.
(c) INDEMNIFICATION. Lessee shall pay, when due, all claims
for labor or materials furnished or alleged to have been furnished to or for
Lessee at or for use on the Premises, which claims are or may be secured by
any mechanic's or materialmen's lien against the Premises or any interest
therein. Lessee shall give Lessor not less than ten (10) days' notice prior
to the commencement of any work in, on or about the Premises, and Lessor
shall have the right to post notices of non-responsibility. If Lessee shall
contest the validity of any such lien, claim or demand, then Lessee shall, at
its sole expense defend and protect itself, Lessor and the Premises against
the same and shall pay and satisfy any such adverse judgment that may be
rendered thereon before the enforcement thereof. If Lessor shall require,
Lessee shall furnish a surety bond in an amount equal to one and one-half
times the amount of such contested lien, claim or demand, indemnifying Lessor
against liability for the same. If Lessor elects to participate in any such
action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4 OWNERSHIP; REMOVAL; SURRENDER; AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require removal or
elect ownership as hereinafter provided, all Alterations and Utility
Installations made by Lessee shall be the property of Lessee, but considered a
part of the Premises. Lessor may, at any time, elect in writing to be the owner
of all or any specified part of the Lessee Owned Alterations and Utility
Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all
Lessee Owned Alterations and Utility Installations shall, at the expiration or
termination of this Lease, become the property of Lessor and be surrendered by
Lessee with the Premises.
(b) REMOVAL. By delivery to Lessee of written notice from
Lessor not earlier than ninety (90) and not later than thirty (30) days prior
to the end of the term of this Lease, Lessor may require that any or all
Lessee Owned Alterations or Utility Installations be removed by the
expiration or termination of this Lease. Lessor may require the removal at
any time of all or any part of any Lessee Owned Alterations or Utility
Installations made without the required consent.
(c) SURRENDER/RESTORATION. Lessee shall surrender the
Premises by the Expiration Date or any earlier termination date, with all of
the improvements, parts and surfaces thereof broom clean and free of debris,
and in good operating order, condition and state of repair, ordinary wear and
tear excepted. "Ordinary wear and tear" shall not include any damage or
deterioration that would have been prevented by good maintenance practice.
Lessee shall repair any damage occasioned by the installation, maintenance or
removal of Trade Fixtures, Lessee Owned Alterations and/or Utility
Installations, furnishings, and equipment as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or groundwater contaminated by Lessee.
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee. The failure by Lessee to timely vacate the Premises pursuant to this
Paragraph 7.4(c) without the express written consent of Lessor shall
constitute a holdover under the provisions of Paragraph 26 below.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT FOR INSURANCE. Lessee shall pay for all insurance
required under Paragraph 8 except to the extent of the cost attributable to
liability insurance carried by Lessor under Paragraph 8.2(b) in excess of
$2,000,000 per occurrence. Premiums for policy periods commencing prior to or
extending beyond the Lease term shall be prorated to correspond to the Lease
term. Payment shall be made by Lessee to Lessor within ten (10) days following
receipt of an invoice.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force a
Commercial General Liability Policy of Insurance protecting Lessee and Lessor
against claims for bodily injury, personal injury and property damage based upon
or arising out of the ownership, use, occupancy or maintenance of the Premises
and all areas appurtenant thereto. Such insurance shall be on an occurrence
basis providing single limit coverage in an amount not less than $2,000,000 per
occurrence with an "ADDITIONAL INSURED-MANAGERS OR LESSORS OF PREMISES
ENDORSEMENT" and contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT"
for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall
not contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this Lease
as an "insured contract" for the performance of Lessee's indemnity obligations
under this Lease. The limits of said insurance shall not, however, limit the
liability of Lessee nor relieve Lessee of any obligation hereunder. All
insurance carried by Lessee shall be primary to and not contributory with any
similar insurance carried by Lessor, whose insurance shall be considered excess
insurance only.
(b) CARRIED BY LESSOR. Lessor shall maintain liability
insurance as described in Paragraph 8.2(a), in addition to, and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be
named as an additional insured therein.
8.3 PROPERTY INSURANCE -- BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. The Insuring Party shall obtain
and keep in force a policy or policies in the name of Lessor, with loss payable
to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the
Premises. The amount of such insurance shall be equal to the full replacement
cost of the Premises, as the same shall exist from time to time, or the amount
required by any Lenders, but in no event more than the commercially reasonable
and available insurable value thereof. If Lessor is the Insuring Party,
however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and
Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather
than by Lessor. If the coverage is available and commercially appropriate, such
policy or policies shall insure against all risks of direct physical loss or
damage (except the perils of flood and/or earthquake unless required by a
Lender), including coverage for debris removal and the enforcement of any
Applicable Requirements requiring the upgrading, demolition, reconstruction or
replacement of any portion of the Premises as the result of a covered loss.
Said policy or policies shall also contain an agreed valuation provision in lieu
of any coinsurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to
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where the Premises are located.
(b) RENTAL VALUE. The Insuring Party shall obtain and keep in
force a policy or policies in the name of Lessor with loss payable to Lessor
and any Lender, insuring the loss of the full Rent for one (1) year. Said
insurance shall provide that in the event the Lease is terminated by reason
of an insured loss, the period of indemnity for such coverage shall be
extended beyond the date of the completion of repairs or replacement of the
Premises, to provide for one full year's loss of Rent from the date of any
such loss. Said insurance shall contain an agreed valuation provision in
lieu of any coinsurance clause, and the amount of coverage shall be adjusted
annually to reflect the projected Rent otherwise payable by Lessee, for the
next twelve (12) month period. Lessee shall be liable for any deductible
amount in the event of such loss.
(c) ADJACENT PREMISES. If the Premises are part of a larger
building, or of a group of buildings owned by Lessor which are adjacent to
the Premises, the Lessee shall pay for any increase in the premiums of the
property insurance of such building or buildings if said increase is caused
by Lessee's acts, omissions, use or occupancy of the Premises.
8.4 LESSEE'S PROPERTY/BUSINESS INTERRUPTION INSURANCE.
(a) PROPERTY DAMAGE. Lessee shall obtain and maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures, and Lessee
Owned Alterations and Utility Installations. Such insurance shall be full
replacement cost coverage with a deductible of not to exceed $1,000 per
occurrence. The proceeds from any such insurance shall be used by Lessee for
the replacement of personal property, Trade Fixtures and Lessee Owned
Alterations and Utility Installations. Lessee shall provide Lessor with
written evidence that such insurance is in force.
(b) BUSINESS INTERRUPTION. Lessee shall obtain and maintain loss
of income and extra expense insurance in amounts as will reimburse Lessee for
direct or indirect loss of earnings attributable to all perils commonly
insured against by prudent lessees in the business of Lessee or attributable
to prevention of access to the Premises as a result of such perils.
(c) NO REPRESENTATION OF ADEQUATE COVERAGE. Lessor makes no
representation that the limits or forms of coverage of insurance specified
herein are adequate to cover Lessee's property, business operations or
obligations under this Lease.
8.5 INSURANCE POLICIES. Insurance required herein shall be by
companies duly licensed or admitted to transact business in the state where
the Premises are located, and maintaining during the policy term a "General
Policyholders Rating" of at least B+, V, as set forth in the most current
issue of "Best's Insurance Guide", or such other rating as may be required by
a Lender. Lessee shall not do or permit to be done anything which
invalidates the required insurance policies. Lessee shall, prior to the
Start Date, deliver to Lessor certified copies of policies of such insurance
or certificates evidencing the existence and amounts of the required
insurance. No such policy shall be cancelable or subject to modification
except after thirty (30) days prior written notice to Lessor. Lessee shall,
at least thirty (30) days prior to the expiration of such policies, furnish
Lessor with evidence of renewals or "insurance binders" evidencing renewal
thereof, or Lessor may order such insurance and charge the cost thereof to
Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such
policies shall be for a term of at least one year, or the length of the
remaining term of this Lease, whichever is less. If either Party shall fail
to procure and maintain the insurance required to be carried by it, the other
Party may, but shall not be required to, procure and maintain the same.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and
waive their entire right to recover damages against the other, for loss of or
damage to its property arising out of or incident to the perils required to be
insured against herein. The effect of such releases and waivers is not
limited by the amount of insurance carried or required, or by any deductibles
applicable hereto. The Parties agree to have their respective property
damage insurance carriers waive any right to subrogation that such companies
may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's gross negligence or willfull
misconduct, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners
and Lenders, from and against any and all claims, loss of rents and/or
damages, liens, judgments, penalties, attorneys' and consultants' fees,
expenses and/or liabilities arising out of, involving, or in connection
with, the use and/or occupancy of the Premises by Lessee. If any action or
proceeding is brought against Lessor by reason of any of the foregoing
matters, Lessee shall upon notice defend the same at Lessee's expense by
counsel reasonably satisfactory to Lessor and Lessor shall cooperate with
Lessee in such defense. Lessor need not have first paid any such claim in
order to be defended or indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or
any other person in or about the Premises, whether such damage or injury is
caused by or results from fire, steam, electricity, gas, water or rain, or from
the breakage, leakage, obstruction or other defects of pipes, fire
sprinklers, wires, appliances, plumbing, HVAC or lighting fixtures, or from
any other cause, whether the said injury or damage results from conditions
arising upon the Premises or upon other portions of the Building of which the
Premises are a part, or from other sources or places. Lessor shall not be
liable for any damages arising from any act or neglect of any other tenant of
Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor
shall under no circumstances by liable for injury to Lessee's business or for
any loss of income or profit therefrom.
9. DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to
the improvements on the Premises, other than Lessee Owned Alterations and
Utility installations, which can reasonably be repaired in six (6) months or
less from the date of the damage or destruction. Lessor shall notify Lessee
in writing within thirty (30) days from the date of the damage or destruction
as to whether or not the damage is Partial or Total.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction
to the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which cannot reasonably be repaired in six
(6) months or less from the date of the damage or destruction. Lessor shall
notify Lessee in writing within thirty(30) days from the date of the damage
or destruction as to whether or not the damage is Partial or Total.
(c) "INSURED LOSS" shall mean damage or destruction to
improvements on the Premises, other than Lessee Owned Alterations and Utility
Installations and Trade Fixtures, which was caused by an event required to be
covered by the insurance described in Paragraph 8.3(a), irrespective of any
deductible amounts or coverage limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild
the improvements owned by Lessor at the time of the occurrence to their
condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of Applicable Requirements,
and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurrence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PARTIAL DAMAGE - INSURED LOSS. If a Premises Partial Damage that
is an insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and
Utility installations) as soon as reasonably possible and this Lease shall
continue in full force and effect; provided, however, that Lessee shall, at
Lessor's election, make the repair of any damage or destruction the total
cost to repair of which is $10,000 or less, and, in such event, Lessor shall
make any applicable insurance proceeds available to Lessee on a reasonable
basis for that purpose. Notwithstanding the foregoing, if the required
insurance was not in force or the insurance proceeds are not sufficient to
effect such repair, the insuring Party shall promptly contribute the shortage
in proceeds (except as to the deductible which is Lessee's responsibility) as
and when required to complete said repairs. In the event, however, such
shortage was due to the fact that, by reason of the unique nature of the
Improvements, full replacement cost insurance coverage was not commercially
reasonable and available, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or
adequate assurance thereof, within ten (10) days following receipt of
written notice of such shortage and request therefor. If Lessor receives
said funds or adequate assurance thereof within said ten (10) day period, the
party responsible for making the repairs shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
such funds or assurance are not received, Lessor may nevertheless elect by
written notice to Lessee within ten (10) days thereafter to: (i) make such
restoration and repair as is commercially reasonable with Lessor paying any
shortage in proceeds, in which case this Lease shall remain in full force and
effect, or have this Lease terminate thirty (30) days thereafter. Lessee
shall not be entitled to reimbursement of any funds contributed by Lessee to
repair any such damage or destruction. Premises Partial Damage due to flood
or earthquake shall be subject to Paragraph 9.3, notwithstanding that there
may be some insurance coverage, but the net proceeds of any such insurance
shall be made available for the repairs if made by either Party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If a Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful
act of Lessee (in which event Lessee shall make the repairs at Lessee's
expense), Lessor may either: (i) repair such damage as soon as reasonably
possible at Lessor's expense, in which event this Lease shall continue in
full force and effect, or (ii) terminate this Lease by giving written notice
to Lessee within thirty (30) days after receipt by Lessor of knowledge of the
occurrence of such damage. Such termination shall be effective sixty (60)
days following the date of such notice. In the event Lessor elects to
terminate this Lease, Lessee shall have the right within ten (10) days after
receipt of the termination
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notice to give written notice to Lessor of Lessee's commitment to pay for the
repair of such damage without reimbursement from Lessor. Lessee shall provide
Lessor with said funds or satisfactory assurance thereof within thirty (30) days
after making such commitment. In such event this Lease shall continue in full
force and effect, and Lessor shall proceed to make such repairs as soon as
reasonably possible after the required funds are available. If Lessee does not
make the required commitment, this Lease shall terminate as of the date
specified in the termination notice.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof,
if a Premises Total Destruction occurs, this Lease shall terminate sixty (60)
days following such Destruction. If the damage or destruction was caused by the
gross negligence or willful misconduct of Lessee, Lessor shall have the right to
recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six
(6) months of this Lease there is damage for which the cost to repair exceeds
one (1) month's Base Rent, whether or not an Insured Loss, Lessor may
terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving a written termination notice to Lessee
within thirty (30) days after the date of occurrence of such damage.
Notwithstanding the foregoing, if Lessee at that time has an exercisable
option to extend this Lease or to purchase the Premises, then Lessee may
preserve this Lease by, (a) exercising such option and (b) providing Lessor
with any shortage in insurance proceeds (or adequate assurance thereof)
needed to make the repairs on or before the earlier of (i) the date which is
ten days after Lessee's receipt of Lessor's written notice purporting to
terminate this Lease, or (ii) the day prior to the date upon which such
option expires. If Lessee duly exercises such option during such period and
provides Lessor with funds (or adequate assurance thereof) to cover any
shortage in insurance proceeds, Lessor shall, at Lessor's commercially
reasonable expense, repair such damage as soon as reasonably possible and
this Lease shall continue in full force and effect. If Lessee fails to
exercise such option and provide such funds or assurance during such period,
then this Lease shall terminate on the date specified in the termination
notice and Lessee's option shall be extinguished.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) ABATEMENT. In the event of Premises Partial Damage or
Premises Total Destruction or a Hazardous Substance Condition for which
Lessee is not responsible under this Lease, the Rent payable by Lessee for
the period required for the repair, remediation or restoration of such damage
shall be abated in proportion to the degree to which Lessee's use of the
Premises is impaired, but not to exceed the proceeds received from the Rental
Value insurance. All other obligations of Lessee hereunder shall be
performed by Lessee, and Lessor shall have no liability for any such damage,
destruction, remediation, repair or restoration except as provided herein.
(b) REMEDIES. If Lessor shall be obligated to repair or
restore the Premises and does not commence, in a substantial and meaningful
way, such repair or restoration within ninety (90) days after such obligation
shall accrue, Lessee may, at any time prior to the commencement of such
repair or restoration, give written notice to Lessor and to any Lenders of
which Lessee has actual notice, of Lessee's election to terminate this Lease
on a date not less than sixty (60) days following the giving of such notice.
If Lessee gives such notice and such repair or restoration is not commenced
within thirty (30) days thereafter, this Lease shall terminate as of the date
specified in said notice. If the repair or restoration is commenced within
said thirty (30) days, this Lease shall continue in full force and effect.
"COMMENCE" shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the actual work on the
Premises, whichever first occurs.
9.7 TERMINATION - ADVANCE PAYMENTS. Upon termination of this
Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment
shall be made concerning advance Base Rent and any other advance payments
made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so
much of Lessee's Security Deposit as has not been, or is not then required to
be, used by Lessor.
9.8 WAIVE STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
with respect to the termination of this Lease and hereby waive the provisions of
any present or future statute to the extent inconsistent herewith.
10. REAL PROPERTY TAXES.
10.4 PERSONAL PROPERTY TAXES. Lessee shall pay, prior to
delinquency, all taxes assessed against and levied upon Lessee Owned
Alterations, Utility Installations, Trade Fixtures, furnishings, equipment
and all personal property of Lessee. When possible, Lessee shall cause such
property to be assessed and billed separately from the real property of
Lessor. If any of Lessee's said personal property shall be assessed with
Lessor's real property, Lessee shall pay Lessor the taxes attributable to
Lessee's property within ten (10) days after receipt of a written statement.
11. UTILITIES. Lessee shall pay for all water, gas, heat, light, power,
telephone, trash disposal and other utilities and services supplied to the
Premises, together with any taxes thereon. If any such services are not
separately metered to Lessee, Lessee shall pay a reasonable proportion, to be
determined by Lessor, of all charges jointly metered.
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law
assign, transfer, mortgage or encumber (collectively, "ASSIGN OR ASSIGNMENT")
or sublet all or any part of Lessee's interest in this Lease or in the
Premises without Lessor's prior written consent.
(b) A change in the control of Lessee shall constitute an
assignment requiring consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
transfer, leveraged buy-out or otherwise), whether or not a formal assignment or
hypothecation of this Lease or Lessee's assets occurs, which results or will
result in a reduction of the Net Worth of Lessee by an amount greater than
twenty-five percent (25%) of such Net Worth as it was represented at the time of
the execution of this Lease or at the time of the most recent assignment to
which Lessor has consented, or as it exists immediately prior to said
transaction or transactions constituting such reduction, whichever was or is
greater, shall be considered an assignment of this Lease to which Lessor may
withhold its consent. "NET WORTH OF LESSEE" shall mean the net worth of Lessee
(excluding any guarantors) established under generally accepted accounting
principles.
(d) An assignment or subletting without consent shall, at
Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or
a noncurable Breach without the necessity of any notice and grace period. If
Lessor elects to treat such unapproved assignment or subletting as a
noncurable Breach, Lessor may either: (i) terminate this Lease, or (ii) upon
thirty (30) days written notice, increase the monthly Base Rent to one
hundred ten percent
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(110%) of the Base Rent then in effect. Further, in the event of such Breach
and rental adjustment, (i) the purchase price of any option to purchase the
Premises held by Lessee shall be subject to similar adjustment to one hundred
ten percent (110%) of the price previously in effect, and (ii) all fixed and
non-fixed rental adjustments scheduled during the remainder of the Lease term
shall be increased to One Hundred Ten Percent (110%) of the scheduled
adjusted rent.
(e) Lessee's remedy for any breach of Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or
subletting shall not: (i) be effective without the express written assumption
by such assignee or sublessee of the obligations of Lessee under this Lease,
(ii) release Lessee of any obligations hereunder, or (iii) alter the primary
liability of Lessee for the payment of Rent or for the performance of any
other obligations to be performed by Lessee.
(b) Lessor may accept Rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval
of an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of Rent or performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for Lessee's
Default or Breach.
(c) Lessor's consent to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting.
(d) In the event of any Default or Breach by Lessee, Lessor
may proceed directly against Lessee, any Guarantors or anyone else
responsible for the performance of Lessee's obligations under this Lease,
including any assignee or sublessee, without first exhausting Lessor's
remedies against any other person or entity responsible therefore to Lessor,
or any security held by Lessor.
(e) Each request for consent to an assignment or subletting
shall be in writing, accompanied by information relevant to Lessor's
determination as to the financial and operational responsibility and
appropriateness of the proposed assignee or sublessee, including but not
limited to the intended use and/or required modification of the Premises, if
any, together with a fee of $1,000 or ten percent (10%) of the current
monthly Base Rent applicable to the portion of the Premises which is the
subject of the proposed assignment or sublease, whichever is greater, as
consideration for Lessor's considering and processing said request. Lessee
agrees to provide Lessor with such other or additional information and/or
documentation as may be reasonably requested.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed
to have assumed and agreed to conform and comply with each and every term,
covenant, condition and obligation herein to be observed or performed by
Lessee during the term of said assignment or sublease, other than such
obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented to in
writing.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases
under this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all Rent payable on any sublease, and Lessor may collect
such Rent and apply same toward Lessee's obligations under this Lease;
provided, however, that until a Breach shall occur in the performance of
Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by
reason of the foregoing or any assignment of such sublease, nor by reason of
the collection of Rent, be deemed liable to the sublessee for any failure of
Lessee to perform and comply with any of Lessee's obligations to such
sublessee. Lessee hereby irrevocably authorizes and directs any such
sublessee, upon receipt of a written notice from Lessor stating that a Breach
exists in the performance of Lessee's obligations under this Lease, to pay to
Lessor all Rent due and to become due under the sublease. Sublessee shall
rely upon any such notice from Lessor and shall pay all Rents to Lessor
without any obligation or right to inquire as to whether such Breach exists,
notwithstanding any claim from Lessee to the contrary.
(b) In the event of a Breach by Lessee, Lessor may, at its
option, require sublessee to attorn to Lessor, in which event Lessor shall
undertake the obligations of the sublessor under such sublease from the time of
the exercise of said option to the expiration of such sublease; provided,
however, Lessor shall not be liable for any prepaid rents or security deposit
paid by such sublessee to such sublessor or for any prior Defaults or Breaches
of such sublessor.
(c) Any matter requiring the consent of the sublessor under a
sublease shall also require the consent of Lessor.
(d) No sublessee shall further assign or sublet all or any part
of the Premises without Lessor's prior written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the
Default of Lessee within the grace period, if any, specified in such notice.
The sublessee shall have a right of reimbursement and offset from and against
Lessee for any such Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. A "DEFAULT" is defined as a failure by the
Lessee to comply with or perform any of the terms, covenants, conditions or
rules under this Lease. A "BREACH" is defined as the occurrence of one or more
of the following Defaults, and the failure of Lessee to cure such Default within
any applicable grace period:
(a) The abandonment of the Premises; or the vacating of the
Premises without providing a commercially reasonable level of security, or where
the coverage of the property insurance described in Paragraph 8.3 is jeopardized
as a result thereof, or without providing reasonable assurances to minimize
potential vandalism.
(b) The failure of Lessee to make any payment of Rent or any
Security Deposit required to be made by Lessee hereunder, whether to Lessor or
to a third party, when due, to provide reasonable evidence of insurance or
surety bond, or to fulfill any obligation under this Lease which endangers or
threatens life or property, where such failure continues for a period of three
(3) business days following written notice to Lessee.
(c) The failure by Lessee to provide (i) reasonable written
evidence of compliance with Applicable Requirements, (ii) the service contracts,
(iii) the rescission of an unauthorized assignment or subletting, (iv) a
Tenancy Statements, (v) a requested subordination, (vi) evidence concerning
any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42
(easements), or (viii) any other documentation or information which Lessor may
reasonably require of Lessee under the terms of this Lease, where any such
failure continues for a period of ten (10) days following written notice to
Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof,
other than those described in subparagraphs 13.1(a), (b) or (c), above, where
such Default continues for a period of thirty (30) days after written notice;
provided, however, that if the nature of Lessee's Default is such that more than
thirty (30) days are reasonably required for its cure, then it shall not be
deemed to be a Breach if Lessee commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making of any general arrangement or assignment for the benefit of creditors;
(ii) becoming a "DEBTOR" as defined in 11 U.S.C. Section 101 or any successor
statute thereto (unless, in the case of a petition filed against Lessee, the
same is dismissed within sixty (60) days); (iii) the appointment of a trustee
or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where
possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this
Lease, where such seizure is not discharged within thirty (30) days;
provided, however, in the event that any provision of this subparagraph 13.1(e)
is contrary to any applicable law, such provision shall be of no force or
effect, and not affect the validity of the remaining provisions.
(f) The discovery that any financial statement of Lessee or
of any Guarantor given to Lessor was materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance
with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or
the subject of a bankruptcy filing, (iv) a guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory basis, and Lessee's failure, within sixty (60) days following
written notice of any such event, to provide written alternative assurance or
security, which, when coupled with the then existing resources of Lessee,
equals or exceeds the combined financial resources of Lessee and the
Guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any of its affirmative
duties or obligations, within ten (10) days after written notice (or in case
of an emergency, without notice), Lessor may, at its option, perform such
duty or obligation on Lessee's behalf, including but not limited to the
obtaining of reasonably required bonds, insurance policies, or governmental
licenses, permits or approvals. The costs and expenses of any such
performance by Lessor shall be due and payable by Lessee upon receipt of
invoice therefor. If any check given to Lessor by Lessee shall not be honored
by the bank upon which it is drawn, Lessor, at its option, may require all
future payments to be made by Lessee to be by cashier's check. In the event
of a Breach, Lessor may, with or without further notice or demand, and
without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease shall terminate and Lessee shall
immediately surrender possession to Lessor. In such event Lessor shall be
entitled to recover from Lessee: (i) the unpaid Rent which had been earned at
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the time of termination; (ii) the worth at the time of award of the amount by
which the unpaid rent which would have been earned after termination until
the time of award exceeds the amount of such rental loss that the Lessee
proves could have been reasonably avoided; (iii) the worth at the time of
award of the amount by which the unpaid rent for the balance of the term
after the time of award exceeds the amount of such rental loss that the
Lessee proves could be reasonably avoided; and (iv) any other amount
necessary to compensate Lessor for all the detriment proximately caused by
the Lessee's failure to perform its obligations under this Lease or which in
the ordinary course of things would be likely to result therefrom, including
but not limited to the cost of recovering possession of the Premises,
expenses of reletting, including necessary renovation and alteration of the
Premises, reasonable attorneys' fees, and that portion of any leasing
commission paid by Lessor in connection with this Lease applicable to the
unexpired term of this Lease. The worth at the time of award of the amount
referred to in provision (iii) of the immediately preceding sentence shall be
computed by discounting such amount at the discount rate of the Federal
Reserve Bank of the District within which the Premises are located at the
time of award plus one percent (1%). Efforts by Lessor to mitigate damages
caused by Lessee's Breach of this Lease shall not waive Lessor's right to
recover damages under Paragraph 12. If termination of this Lease is obtained
through the provisional remedy of unlawful detainer, Lessor shall have the
right to recover in such proceeding any repaid Rent and damages as are
recoverable therein, or Lessor may reserve the right to recover all or any
part thereof in a separate suit. If a notice and grace period required under
Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to
perform or quit given to Lessee under the unlawful detainer statute shall
also constitute the notice required by Paragraph 13.1. In such case, the
applicable grace period required by Paragraph 13.1 and the unlawful detainer
statute shall run concurrently, and the failure of Lessee to cure the Default
within the greater of the two such grace periods shall constitute both an
unlawful detainer and a Breach of this Lease entitling Lessor to the remedies
provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession and
recover the Rent as it becomes due, in which event Lessee may sublet or
assign, subject only to reasonable limitations. Acts of maintenance, efforts
to relet, and/or the appointment of a receiver to protect the Lessor's
interests, shall not constitute a termination of the Lessee's right to
possession.
(c) Pursue any other remedy now or hereafter available under
the laws or judicial decisions of the state wherein the Premises are
located. The expiration or termination of this Lease and/or the termination
of Lessee's right to possession shall not relieve Lessee from liability
under any indemnity provisions of this Lease as to matters occurring or accruing
during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3 INDUCEMENT RECAPTURE. Any agreement for free or abated rent
or other charges, or for the giving or paying by Lessor to or for Lessee of
any cash or other bonus, inducement or consideration for Lessee's entering
into this Lease, all of which concessions are hereinafter referred to as
"INDUCEMENT PROVISIONS," shall be deemed conditioned upon Lessee's full and
faithful performance of all of the terms, covenants and conditions of this
Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision
shall automatically be deemed deleted from this Lease and of no further force
or effect, and any rent, other charge, bonus, inducement or consideration
theretofore abated, given or paid by Lessor under such an Inducement
Provision shall be immediately due and payable by Lessee to Lessor,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance
by Lessor of Rent or the cure of the Breach which initiated the operation of
this paragraph shall not be deemed a waiver by Lessor of the provisions of
this paragraph unless specifically so stated in writing by Lessor at the time
of such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment
by Lessee of Rent will cause Lessor to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting
charges, and late charges which may be imposed upon Lessor by any Lender.
Accordingly, if any Rent shall not be received by Lessor within five (5) days
after such amount shall be due, then, without any requirement for notice to
Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten
percent (10%) of each such overdue amount. The Parties hereby agree that such
late charge represents a fair and reasonable estimate of the costs Lessor
will incur by reason of such late payment. Acceptance of such late charge by
Lessor shall in no event constitute a waiver of Lessee's Default or Breach
with respect to such overdue amount, nor prevent the exercise of any of the
other rights and remedies granted hereunder. In the event that a late charge
is payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding any provision of this Lease
to the contrary, Base Rent shall, at Lessor's option, become due and payable
quarterly in advance.
13.5 INTEREST. Any monetary payment due Lessor hereunder, other
than late charges, not received by Lessor, when due as to scheduled payments
(such as Base Rent) or within thirty (30) days following the date on which it
was due for non-scheduled payment, shall bear interest from the date when
due, as to scheduled payments, or the thirty-first (31st) day after it was
due as to non-scheduled payments. The interest ("INTEREST") charged shall be
equal to the prime rate reported in the Wall Street Journal as published
closest prior to the date when due plus four percent (4%), but shall not
exceed the maximum rate allowed by law. Interest is payable in addition to
the potential late charge provided for in Paragraph 13.4.
13.6 BREACH BY LESSOR.
(a) NOTICE OF BREACH. Lessor shall not be deemed in breach
of this Lease unless Lessor fails within a reasonable time to perform an
obligation required to be performed by Lessor. For purposes of this
Paragraph, a reasonable time shall in no event be less than thirty (30) days
after receipt by Lessor, and any Lender whose name and address shall have
been furnished Lessee in writing for such purpose, of written notice
specifying wherein such obligation of Lessor has not been performed;
provided, however, that if the nature of Lessor's obligation is such that
more than thirty (30) days are reasonably required for its performance, then
Lessor shall not be in breach if performance is commenced within such thirty
(30) day period and thereafter diligently pursued to completion.
(b) PERFORMANCE BY LESSEE ON BEHALF OF LESSOR. In the event
that neither Lessor nor Lender cures said breach within thirty (30) days
after receipt of said notice, or if having commenced said cure they do not
diligently pursue it to completion, then Lessee may elect to cure said breach
at Lessee's expense and offset from Rent an amount equal to the greater of
one month's Base Rent or the Security Deposit, and to pay an excess of such
expense under protest, reserving Lessee's right to reimbursement from Lessor.
Lessee shall document the cost of said cure and supply said documentation to
Lessor.
14. CONDEMNATION. If the Premises or any portion thereof are taken under
the power of eminent domain or sold under the threat of the exercise of said
power (collectively "CONDEMNATION"), this Lease shall terminate as to the
part taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than ten percent (10%) of any building
portion of the Premises, or more than twenty-five percent (25%) of the land
area portion of the Premises not occupied by any building, is taken by
Condemnation, Lessee may, at Lessee's option, to be exercised in writing
within ten (10) days after Lessor shall have given Lessee written notice of
such taking (or in the absence of such notice, within ten (10) days after the
condemning authority shall have taken possession) terminate this Lease as of
the date the condemning authority takes such possession. If Lessee does not
terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in proportion to the reduction in
utility of the Premises caused by such Condemnation. Condemnation awards
and/or payments shall be the property of Lessor, whether such award shall be
made as compensation for diminution in value of the leasehold, the value of
the part taken, or for severance damages; provided, however, that Lessee
shall be entitled to any compensation for Lessee's relocation expenses, loss
of business goodwill and/or Trade Fixtures, without regard to whether or not
this Lease is terminated pursuant to the provisions of this Paragraph. All
Alterations and Utility Installations made to the Premises by Lessee, for
purposes of Condemnation only, shall be considered the property of the Lessee
and Lessee shall be entitled to any and all compensation which is payable
therefor. In the event that this Lease is not terminated by reason of the
Condemnation, Lessor shall repair any damage to the Premises caused by such
Condemnation.
15. BROKERS' FEE.
15.1 ADDITIONAL COMMISSION. In addition to the payments owed
pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise
agree in writing, Lessor agrees that: (a) if Lessee exercises any Option, (b)
if Lessee acquires any rights to the Premises or other premises owned by
Lessor and located within the same Project, if any, within which the Premises
is located, (c) if Lessee remains in possession of the Premises, with the
consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is
increased, whether by agreement or operation of an escalation clause herein,
then, Lessor shall pay Brokers a fee in accordance with the schedule of said
Brokers in effect at the time of the execution of this Lease.
15.2 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease shall be deemed to have assumed Lessor's obligation
hereunder. Each Broker shall be a third party beneficiary of the provisions of
Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts
due as and for commissions pertaining to this Lease when due, then such amounts
shall accrue Interest. In addition, if Lessor fails to pay any amounts to
Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and
Lessee of such failure and if Lessor fails to pay such amounts within ten (10)
days after said notice, Lessee shall pay said monies to its Broker and offset
such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a
third party beneficiary of any commission agreement entered into by and/or
between Lessor and Lessor's Broker.
15.3 REPRESENTATIONS AND INDEMNITIES OF BROKER RELATIONSHIPS.
Lessee and Lessor each represent and warrant to the other that it has had no
dealings with any person, firm, broker or finder (other than the Brokers, if
any) in connection with this Lease, and that no one other than said named
Brokers is entitled to any commission or finder's fee in connection herewith.
Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold
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the other harmless from and against liability for compensation or charges
which may be claimed by any such unnamed broker, finder or other similar
party by reason of any dealings or actions of the indemnifying Party,
including any costs, expenses, and/or attorneys' fees reasonably incurred with
respect thereto.
16. ESTOPPEL CERTIFICATES.
(a) Each Party (as "RESPONDING PARTY") shall within ten (10)
days after written notice from the other Party (the "REQUESTING PARTY") execute,
acknowledge and deliver to the Requesting Party a statement in writing in form
similar to the then most current "ESTOPPEL CERTIFICATE" form published by the
American Industrial Real Estate Association, plus such additional information,
confirmation and/or statements as may be reasonably requested by the Requesting
Party.
(b) If the Responding Party shall fail to execute or deliver the
Estoppel Certificate within such ten day period, the Requesting Party may
execute an Estoppel Certificate stating that: (i) the Lease is in full force and
effect without modification except as may be represented by the Requesting
Party, (ii) there are no uncured defaults in the Requesting Party's performance,
and (iii) if Lessor is the Requesting Party, not more than one month's Rent has
been paid in advance. Prospective purchasers and encumbrancers may rely upon the
Requesting Party's Estoppel Certificate, and the Responding Party shall be
estopped from denying the truth of the facts contained in said Certificate.
(c) If Lessor desires to finance, refinance, or sell the
Premises, or any part thereof, Lessee and all Guarantors shall deliver to any
potential lender or purchaser designated by Lessor such financial statements as
may be reasonably required by such lender or purchaser, including, but not
limited to, Lessee's financial statements for the past three (3) years. All such
financial statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. DEFINITION OF LESSOR. The term "LESSOR" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises, or, if
this is a sublease, of the Lessee's interest in the prior lease. In the event of
a transfer of Lessor's title or interest in the Premises or this Lease, Lessor
shall deliver to the transferee or assignee (in cash or by credit) any unused
Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such
transfer or assignment and delivery of the Security Deposit, as aforesaid, the
prior Lessor shall be relieved of all liability with respect to the obligations
and/or covenants under this Lease thereafter to be performed by the Lessor.
Subject to the foregoing, the obligations and/or covenants in this Lease to be
performed by the Lessor shall be binding only upon the Lessor as hereinabove
defined. Notwithstanding the above, and subject to the provisions of Paragraph
20 below, the original Lessor under this Lease, and all subsequent holders of
the Lessor's interest in this Lease shall remain liable and responsible with
regard to the potential duties and liabilities of Lessor pertaining to Hazardous
Substances as outlined in Paragraph 6 above.
18. SEVERABILITY. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. DAYS. Unless otherwise specifically indicated to the contrary, the word
"days" as used in this Lease shall mean and refer to calendar days.
20. LIMITATION ON LIABILITY. Subject to the provisions of Paragraph 17
above, the obligations of Lessor under this Lease shall not constitute personal
obligations of Lessor, the individual partners of Lessor or its or their
individual partners, directors, officers or shareholders, and Lessee shall look
to the Premises, and to no other assets of Lessor, for the satisfaction of any
liability of Lessor with respect to this Lease, and shall not seek recourse
against the individual partners of Lessor, or its or their individual partners,
directors, officers or shareholders, or any of their personal assets for such
satisfaction.
21. TIME OF ESSENCE. Time is of the essence with respect to the performance
of all obligations to be performed or observed by the Parties under this Lease.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains
all agreements between the Parties with respect to any matter mentioned herein,
and no other prior or contemporaneous agreement or understanding shall be
effective. Lessor and Lessee each represents and warrants to the Brokers that it
has made, and is relying solely upon, its own investigation as to the nature,
quality, character and financial responsibility of the other Party to this Lease
and as to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. The liability (including court costs and Attorneys'
fees), of any Broker with respect to negotiation, execution, delivery or
performance by either Lessor or Lessee under this Lease or any amendment or
modification hereto shall be limited to an amount up to the fee received by such
Broker pursuant to this Lease; provided, however, that the foregoing limitation
on each Broker's liability shall not be applicable to any gross negligence or
willful misconduct of such Broker.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this
Lease shall be in writing and may be delivered in person (by hand or by courier)
or may be sent by regular, certified or registered mail or U.S. Postal Service
Express Mail, with postage prepaid, or by facsimile transmission, and shall be
deemed sufficiently given if served in a manner specified in this Paragraph 23.
The addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notices. Either Party may by written
notice to the other specify a different address for notice, except that upon
Lessee's taking possession of the Premises, the Premises shall constitute
Lessee's address for notice. A copy of all notices to Lessor shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate in writing.
23.2 DATE OF NOTICE. Any notice sent by registered or certified
mail, return receipt requested, shall be deemed given on the date of delivery
shown on the receipt card, or if no delivery date is shown, the postmark
thereon. If sent by regular mail the notice shall be deemed given forty-eight
(48) hours after the same is addressed as required herein and mailed with
postage prepaid. Notices delivered by United States Express Mail or overnight
courier that guarantee next day delivery shall be deemed given twenty-four (24)
hours after delivery of the same to the Postal Service or courier. Notices
transmitted by facsimile transmission or similar means shall be deemed delivered
upon telephone confirmation of receipt, provided a copy is also delivered via
delivery or mail. If notice is received on a Saturday, Sunday or legal holiday,
it shall be deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or of any other term, covenant or condition hereof.
Lessor's consent to, or approval of, any act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any
subsequent or similar act by Lessee, or be construed as the basis of an
estoppel to enforce the provision or provisions of this Lease requiring such
consent. The acceptance of Rent by Lessor shall not be a waiver of any
Default or Breach by Lessee. Any payment by Lessee may be accepted by
Lessor on account of monies or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before
the time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for recording purposes. The Party requesting recordation shall be
responsible for payment of any fees applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of
the Premises or any part thereof beyond the expiration or termination of this
Lease. In the event that Lessee holds over, then the Base Rent shall be
increased to one hundred fifty percent (150%) of the Base Rent applicable
during the month immediately preceding the expiration or termination.
Nothing contained herein shall be construed as consent by Lessor to any
holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies
at law or in equity.
28. COVENANTS AND CONDITIONS; CONSTRUCTION OF AGREEMENT. All provisions
of this Lease to be observed or performed by Lessee are both covenants and
conditions. In construing this Lease, all headings and titles are for the
convenience of the Parties only and shall not be considered a part of this
Lease. Whenever required by the context, the singular shall include the
plural and vice versa. This Lease shall not be construed as if prepared by
one of the Parties, but rather according to its fair meaning as a whole, as
if both Parties had prepared it.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
parties, their personal representatives, successors and assigns and be
governed by the laws of the State in which the Premises are located. Any
litigation between the Parties hereto concerning this Lease shall be
initiated in the county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby
shall be subject and subordinate to any ground lease, mortgage, deed of
trust, or other hypothecation or security device (collectively, "SECURITY
DEVICE"), now or hereafter placed upon the Premises, to any and all advances
made on the security thereof, and to all renewals, modifications, and
extensions thereof. Lessee agrees that the holders of any such Security
Devices (in this Lease together referred to as "Lessor's Lender") shall have no
liability or obligation to perform any of the obligations of Lessor under
this Lease. Any Lender may elect to have this Lease and/or any Option
granted hereby superior to the lien of its Security Device by giving written
notice thereof to Lessee, whereupon this Lease and such Options shall be
deemed prior to such Security Device, notwithstanding the relative dates of
the documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not:
(i) be liable for any act or omission of any prior lessor or with respect to
events occurring prior to acquisition of ownership; (ii) be subject to any
offsets or
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defenses which Lessee might have against any prior lessor; or (iii) be bound
by prepayment of more than one (1) month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into
by Lessor after the execution of this Lease, Lessee's subordination of this
Lease shall be subject to receiving a commercially reasonable non-disturbance
agreement (a "NON-DISTURBANCE AGREEMENT") from the Lender which Non-Disturbance
Agreement provides that Lessee's possession of the Premises, and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises. Further, within sixty (60) days after the execution of this Lease,
Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance
Agreement from the holder of any pre-existing Security Device which is secured
by the Premises. In the event that Lessor is unable to provide the
Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at
Lessee's option, directly contact Lessor's lender and attempt to negotiate for
the execution and delivery of a Non-Disturbance Agreement.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that, upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of the Premises, Lessee and Lessor shall execute
such further writings as may be reasonably required to separately document any
subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding
involving the Premises to enforce the terms hereof or to declare rights
hereunder, the Prevailing Party (as hereafter defined) in any such proceeding,
action, or appeal thereon, shall be entitled to reasonable attorneys' fees.
Such fees may be awarded in the same suit or recovered in a separate suit,
whether or not such action or proceeding is pursued to decision or judgment.
The term, "PREVAILING PARTY" shall include, without limitation, a Party or
Broker who substantially obtains or defeats the relief sought, as the case may
be, whether by compromise, settlement, judgment, or the abandonment by the other
Party or Broker of its claim or defense. The attorneys' fees award shall not be
computed in accordance with any court fee schedule, but shall be such as to
fully reimburse all attorneys' fees reasonably incurred. In addition, Lessor
shall be entitled to attorneys' fees, costs and expenses incurred in the
preparation and service of notices of Default and consultations in connection
therewith, whether or not a legal action is subsequently commenced in connection
with such Default or resulting Breach.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of
an emergency, and otherwise at reasonable times for the purpose of showing
the same to prospective purchasers, lenders, or lessees, and making such
alterations, repairs, improvements or additions to the Premises as Lessor may
deem necessary. All such activities shall be without abatement of rent or
liability to Lessee. Lessor may at any time place on the Premises any
ordinary "FOR SALE" signs and Lessor may during the last six (6) months of
the term hereof place on the Premises any ordinary "FOR LEASE" signs. Lessee
may at any time place on or about the Premises any ordinary "FOR SUBLEASE"
sign.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, any
auction upon the Premises without Lessor's prior written consent. Lessor shall
not be obligated to exercise any standard of reasonableness in determining
whether to permit an auction.
34. SIGNS. Except for ordinary "For Sublease" signs, Lessee shall not place
any sign upon the Premises without Lessor's prior written consent. All signs
must comply with all Applicable Requirements.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, that Lessor may elect to continue any one or all
existing subtenancies. Lessor's failure within ten (10) days following any such
event to elect to the contrary by written notice to the holder of any such
lesser interest, shall constitute Lessor's election to have such event
constitute the termination of such interest.
36. CONSENTS. Except as otherwise provided herein, wherever in this Lease
the consent of a Party is required to an act by or for the other Party, such
consent shall not be unreasonably withheld or delayed. Lessor's actual
reasonable costs and expenses (including, but not limited to, architects',
attorneys', engineers' and other consultants' fees) incurred in the
consideration of, or response to, a request by Lessee for any Lessor consent,
including, but not limited to, consents to an assignment, a subletting or the
presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt
of an invoice and supporting documentation therefor. Lessor's consent to any
act, assignment or subletting shall not constitute an acknowledgment that no
Default or Breach by Lessee of this Lease exists, nor shall such consent be
deemed a waiver of any then existing Default or Breach, except as may be
otherwise specifically stated in writing by Lessor at the time of such consent.
The failure to specify herein any particular condition to Lessor's consent shall
not preclude the imposition by Lessor at the time of consent of such further or
other conditions as are then reasonable with reference to the particular matter
for which consent is being given. In the event that either Party disagrees with
any determination made by the other hereunder and reasonably requests the
reasons for such determination, the determining party shall furnish its reasons
in writing and in reasonable detail within ten (10) business days following such
request.
37. GUARANTOR.
37.1 EXECUTION. The Guarantors, if any, shall each execute a
guaranty in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this Lease.
37.2 DEFAULT. It shall constitute a Default of the Lessee if any
Guarantor fails or refuses, upon request to provide: (a) evidence of the
execution of the guaranty, including the authority of the party signing on
Guarantor's behalf to obligate Guarantor, and in the case of a corporate
Guarantor, a certified copy of a resolution of its board of directors
authorizing the making of such guaranty, (b) current financial statements,
(c) a Tenancy Statement, or (d) written confirmation that the guaranty is
still in effect.
38. QUIET POSSESSION. Subject to payment by Lessee of the Rent and
performance of all of the covenants, conditions and provisions on Lessee's part
to be observed and performed under this Lease, Lessee shall have quiet
possession and quiet enjoyment of the Premises during the term hereof.
39. OPTIONS.
39.1 DEFINITION. "OPTION" shall mean: (a) the right to extend the
term of or renew this Lease or to extend or renew any lease that Lessee has
on other property of Lessor; (b) the right of first refusal or first offer to
lease either the Premises or other property of Lessor; (c) the right to
purchase or the right of first refusal to purchase the Premises or other
property of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LESSEE. Each Option granted to
Lessee in this Lease is personal to the original Lessee, and cannot be assigned
or exercised by anyone other than said original Lessee and only while the
original Lessee is in full possession of the Premises and, if requested by
Lessor, with Lessee certifying that Lessee has no intention of thereafter
assigning or subletting.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later Option cannot be exercised unless
the prior Options have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option: (i) during
the period commencing with the giving of any notice of Default and continuing
until said Default is cured, (ii) during the period of time any Rent is unpaid
(without regard to whether notice thereof is given Lessee), (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has
been given three (3) or more notices of separate Default, whether or not the
Defaults are cured, during the twelve (12) month period immediately preceding
the exercise of the Option.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) An Option shall terminate and be of no further force or
effect, notwithstanding Lessee's due and timely exercise of the Option, if,
after such exercise and prior to the commencement of the extended term, (i)
Lessee fails to pay Rent for a period of thirty (30) days after such Rent
becomes due (without any necessity of Lessor to give notice thereof), (ii)
Lessor gives to Lessee three (3) or more notices of separate Default during
any twelve (12) month period, whether or not the Defaults are cured, or (iii)
if Lessee commits a Breach of this Lease.
40. MULTIPLE BUILDINGS. If the Premises are a part of a group of
buildings controlled by Lessor, Lessee agrees that it will observe all
reasonable rules and regulations which Lessor may make from time to time for
the management, safety, and care of said properties, including the care and
cleanliness of the grounds and including the parking, loading and unloading
of vehicles, and that Lessee will pay its fair share of common expenses
incurred in connection therewith.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves to itself the right, from time to time,
to grant, without the consent or joinder of Lessee, such easements, rights and
dedications that Lessor deems necessary, and to cause the recordation of parcel
maps and restrictions, so long as such easements, rights, dedications, maps and
restrictions do not unreasonably interfere with the use of the Premises by
Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to
effectuate any such easement rights, dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
Page 10 of 11 Initials: [ILLEGIBLE]
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provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such
payment shall not be regarded as a voluntary payment and there shall survive
the right on the part of said Party to institute suit for recovery of such
sum. If it shall be adjudged that there was no legal obligation on the part
of said Party to pay such sum or any part thereof, said Party shall be
entitled to recover such sum or so much thereof as it was not legally
required to pay.
44. AUTHORITY. If either Party hereto is a corporation, trust, limited
liability company, partnership, or similar entity, each individual executing
this Lease on behalf of such entity represents and warrants that he or she is
duly authorized to execute and deliver this Lease on its behalf. Each Party
shall, within thirty (30) days after request, deliver to the other Party
satisfactory evidence of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
46. OFFER. Preparation of this Lease by either Party or their agent and
submission of same to the other Party shall not be deemed an offer to lease to
the other Party. This Lease is not intended to be binding until executed and
delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by
the Parties in interest at the time of the modification. As long as they do
not materially change Lessee's obligations hereunder, Lessee agrees to make
such reasonable non-monetary modifications to this Lease as may be reasonably
required by a Lender in connection with the obtaining of normal financing or
refinancing of the Premises.
48. MULTIPLE PARTIES. If more than one person or entity is named herein
as either Lessor or Lessee, such multiple Parties shall have joint and
several responsibility to comply with the terms of this Lease.
49. MEDIATION AND ARBITRATION OF DISPUTES. An Addendum requiring the
Mediation and/or the Arbitration of all disputes between the Parties and/or
Brokers arising out of this Lease / / IS / / IS NOT attached to this Lease.
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT
THE TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY
REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH
RESPECT TO THE PREMISES.
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS
LEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION
OF THE PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO:
THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES,
THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND
THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE.
WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS
OF THE STATE IN WHICH THE PREMISES IS LOCATED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
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Executed at: IRVINE Executed at: Irvine, CA
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on: MARCH 1, 1999 on: March 8, 1999
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By LESSOR: By LESSEE:
Autry Properties I/O Magic, Inc., a California corporation
- ------------------------------------------------- -------------------------------------------------
- ------------------------------------------------- -------------------------------------------------
By: /s/ Murdoch Heideman By:
---------------------------------------------- ----------------------------------------------
Name Printed: MURDOCH HEIDEMAN Name Printed: Tony Shahbaz
------------------------------------- -------------------------------------
Title: PARTNER Title: President
------------------------------------------- -------------------------------------------
By: By:
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Name Printed: Name Printed:
------------------------------------- -------------------------------------
Title: Title:
------------------------------------------- -------------------------------------------
Address: Address:
----------------------------------------- -----------------------------------------
- ------------------------------------------------- -------------------------------------------------
Telephone: ( ) Telephone: ( )
------------------------------- -------------------------------
Facsimile: ( ) Facsimile: ( )
------------------------------- -------------------------------
Federal ID No. Federal ID No.
--------------------------------- ---------------------------------
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NOTE: These forms are often modified to meet the changing requirements of law
and industry needs. Always write or call to make sure you are utilizing the
most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So.
Flower Street, Suite 600, Los Angeles, California 90017. (213) 687-8777. Fax
No. (213) 687-8616.
Page 11 of 11
1997 -AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION REVISED FORM STN-6-2/97E
<PAGE>
ADDENDUM
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE - GROSS
BY AND BETWEEN AUTRY PROPERTIES ("LESSOR")
AND I/O MAGIC, INC., A CALIFORNIA CORPORATION ("LESSEE")
DATED FEBRUARY 1, 1999.
- --------------------------------------------------------------------------------
50. EXISTING LEASE:
The existing lease by and between Autry Properties ("Lessor") and I/O
Magic, Inc., a California corporation ("Lessee") dated November 4, 1996
for 6-B Autry (8,000 sq.ft.) shall terminate on or before June 15, 1999,
which is the commencement date of the new lease.
51. EXISTING CONDITION:
Landlord has delivered the existing 8,000 sq.ft. in its existing condition.
52. TENANT IMPROVEMENTS:
Landlord shall match $1.00 for $1.00 tenant improvements made by Tenant up
to a total contribution of $10,000.00. Tenant improvements shall be
amortized over ten (10) months at $1,000.00 per month.
53. OPTION TO EXTEND:
If Tenant is not in default of lease, Tenant shall be given two (2) one
(1) year options to extend at $0.725 for year one (1) and $0.76 for year
two (2).
54. PROPERTY TAXES:
Property taxes, real estate taxes will be paid by Landlord.
55. ALTERATIONS:
Tenant is entitled to make modifications to interior of said property.
Any building permit issues will be handled by both parties.
56. NO PERSONAL GUARANTY IS GIVEN BY LESSEE.
AGREED & ACCEPTED:
LESSOR: AUTRY PROPERTIES
By: [ILLEGIBLE] Date: MARCH 1, 1999
---------------------------------------------- ---------------------
LESSEE: I/O MAGIC, INC., a California Corporation
By: [ILLEGIBLE] Date: March 8, 1999
---------------------------------------------- ---------------------
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EXHIBIT 23.1
CONSENT OF HORWITZ & BEAM
<PAGE>
LAW OFFICES OF
HORWITZ & BEAM
TWO VENTURE PLAZA
SUITE 350
IRVINE, CALIFORNIA 92618
(949) 453-0300
(310) 842-8574
Fax: (949) 453-9416
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Gregory B. Beam, Esq. Patti L.W. McGlasson, Esq.
Lawrence W. Horwitz, Esq. Bernard C. Jasper, Esq.
Lawrence M. Cron, Esq. K. William Pergande, Esq.
Lynne Bolduc, Esq. John Y. Igarashi, Esq.
Malea M. Farsai, Esq. Christopher T. Jain, Esq.
Ralph R. Loyd, Esq.
Mark S. Dodge, Esq.
of Counsel
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September 3, 1999
I/OMAGIC CORPORATION
Ladies and Gentlemen:
This office represents I/OMagic Corporation, a Nevada corporation (the
"Registrant") in connection with the Registrant's Form 10-SB under the
Securities Exchange Act of 1934 (the "Form 10-SB"), which relates to the
registration of the Registrant's common stock.
We acknowledge that we are referred to under the heading "Legal
Matters" in the Form 10-SB, and we hereby consent to such use of our name in
such Form 10-SB.
HORWITZ & BEAM
/s/ Horwitz & Beam
