As Filed with the Securities and Exchange Commission on October 21, 1999
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Registration No. 333-87043
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
Intellesale.com, Inc.
(Exact name of registrant as specified in its charter)
Delaware 5961 52-2137650
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or 510 Ryerson Road
organization)
Lincoln Park, New Jersey 07035
(973) 686-9100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
_________________________
Charles D. Newman
Executive Vice President
510 Ryerson Road
Lincoln Park, New Jersey 07035
(973) 686-9100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
_________________________
Copies of all correspondence to:
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<S> <C> <C>
Michael Krawitz, Esq. Denis P. McCusker, Esq. Paul Jacobs, Esq.
Intellesale.com, Inc. Bryan Cave LLP Roy L. Goldman, Esq.
510 Ryerson Road One Metropolitan Square Fulbright & Jaworski L.L.P.
Lincoln Park, New Jersey 07035 211 North Broadway, Suite 3600 666 Fifth Avenue
(973) 686-9100 St. Louis, Missouri 63102-2750 New York, New York 10103
(973) 694-1166 (fax) (314) 259-2000 (212) 318-3000
(314) 259-2020 (fax) (212) 752-5958 (fax)
</TABLE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
_________________________
CALCULATION OF REGISTRATION FEE
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Proposed maximum aggregate Amount of
Title of each class of securities to be registered offering price(1) registration fee
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<S> <C> <C>
Common Stock, $0.0001 par value per share $58,995,000 $16,401
============================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933 and includes
shares that may be purchased by the underwriters to cover over-
allotments, if any.
(2) At the time of initial filing of this Registration Statement,
the registrant paid a registration fee of $15,985, reflecting a
proposed maximum aggregate offering price of $57,500,000. The
remaining $416 is being paid at the time of this Amendment.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
The information in this preliminary prospectus is not complete and may be
changed. We may not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This preliminary
prospectus is not an offer to sell these securities and we are not soliciting
any offer to buy these securities in any state where the offer or sale is not
permitted
PRELIMINARY PROSPECTUS DATED OCTOBER 21, 1999
PROSPECTUS
5,700,000 Shares
INTELLESALE.COM, INC.
[Logo]
Common Stock
___________________
This is the initial public offering of Intellesale.com, Inc. Intellesale is
offering 4,000,000 shares, and the selling stockholder, Applied Digital
Solutions, Inc., is offering 1,700,000 shares. In addition, the underwriters may
purchase up to 855,000 additional shares from Intellesale and Applied Digital
Solutions to cover over-allotments. Upon completion of this offering, Applied
Digital Solutions will beneficially own approximately 49.9% of our common stock.
Applied Digital Solutions has agreed to vote its shares in proportion to the
votes of the other stockholders. We will not receive any proceeds from shares of
common stock sold by the selling stockholder.
Prior to this offering, there has been no public market for our common
stock. We currently estimate that the initial public offering price of the
shares will be between $8.00 and $10.00 per share. We intend to apply for
inclusion of our common stock on the Nasdaq National Market under the symbol
"SALE."
See "Risk Factors" starting on page 7 to read about material risks you
should consider before you purchase shares of our common stock.
___________________
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
___________________
Per Share Total
--------- -----
Initial public offering price..................... $ $
Underwriting discounts and commissions............ $ $
Proceeds to Intellesale, before expenses.......... $ $
Proceeds to selling stockholder, before expenses.. $ $
___________________
The underwriters are offering the shares subject to various
conditions. The underwriters expect to deliver the shares to purchasers on or
about [ ], 1999.
Ladenburg Thalmann & Co. Inc. Punk, Ziegel & Company
___________________
Prospectus dated [_____________], 1999
<PAGE>
SUMMARY
The information below is only a summary of more detailed information
included in other sections of this prospectus. The other information is
important, so please read this entire prospectus carefully. Unless otherwise
stated, the information contained in this prospectus assumes that the
underwriters' over-allotment option to purchase 855,000 shares of common
stock from us and from Applied Digital Solutions is not exercised and that we
issue 1,629,889 shares of common stock to the sellers of businesses we
previously acquired as described under "Certain Relationships and Related
Transactions--Acquisition of Minority interests."
INTELLESALE.COM, INC.
Our Business
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at www.Intellesale.com
as well as through traditional channels, which include sales made by our sales
force and through products advertised via catalogs and other conventional media
advertising. We began offering products on the Internet in the second quarter of
1998. We established the Intellesale.com website in January 1999 and began to
focus our business on, and migrate our business to, the Internet. The Internet
is our fastest growing sales channel and we believe that the Internet will be
the basis for our future growth.
In addition to selling products on our website, we distribute products
through cooperative marketing arrangements with OnSale.com and uBid. Inc., which
host auctions of our products on their websites in exchange for a commission. In
addition, FlashNet Communications, Inc. markets our products to its customers
and potential customers at no cost to us in exchange for our marketing of
FlashNet's Internet services. We also advertise on Lycos and sell our
products on Amazon's Z-Shops and on eBay.
In addition to our Internet business, we buy and remarket computer
equipment and components to traditional wholesalers, retailers and value-added
resellers, as well as individual and corporate end users, and provide
integration and consulting services, computer recycling, parts-on-demand
services and transportation services for computer and other equipment. We are
transitioning this traditional commerce business to the Internet.
We offer a wide range of refurbished and new products, including laptop and
desktop computers, monitors, disk drives, modems, printers, scanners, memory,
expansion boards, cables and connectors. The majority of the products we offer
are brand name Intel Pentium(R) class or equivalent products manufactured by
IBM, Compaq, Sony, Fujitsu, Hewlett-Packard and other major manufacturers. We
offer our customers complete packages including monitors, regularly-featured
specials and the ability to purchase selected merchandise on an auction basis.
We provide a minimum six-month warranty for most products not covered by
manufacturer warranties. In addition, we offer our customers the opportunity to
purchase an extended warranty, which is priced on the basis of the selling price
of the item covered.
We are not aware of any major online retailers currently focusing
principally on refurbished computer equipment. We believe the demand for
refurbished brand name computer equipment is growing as consumers realize they
can purchase refurbished products that can serve their needs at substantial
discounts to the price of new merchandise. At the same time, shorter product
cycles result in frequent replacement of equipment. This leads to increased
quantities of off-lease and excess inventory computer equipment which vendors
and leasing companies need to dispose of in large quantities without adversely
affecting their lease or sale of new products. We offer such vendors and leasing
companies the ability to conveniently sell all their products in a single
transaction. We believe that our ability to acquire many different types of
equipment in large quantities through our established vendor relationships
provides us with a significant competitive advantage both with consumers and
vendors.
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According to International Data Corporation, a market research firm, the
number of Internet users worldwide will increase from approximately 142 million
in 1998 to 502 million in 2003. IDC further estimates that the number of people
making purchases over the Internet will increase from approximately 31 million
in 1998 to approximately 183 million in 2003. According to Jupiter
Communications, another market research firm, the second largest category of
3-commerce spending is computer hardward and software, which Jupiter projects
will grow from approximately $3.1 billion in 1998 to approximately $15.8 billion
in 2003.
Our goal is to become the website of choice for consumers and businesses
seeking refurbished and new computer equipment. Our strategy to achieve our goal
includes the following:
Increase Brand Awareness. We have achieved our level of Internet revenues
without the benefit of significant investments in marketing and promotion of our
brand. Our direct Internet revenues for the six months ended June 30, 1999 were
$20.1 million, or 27.7% of total revenues, pro forma for our acquisition of
Bostek and its affiliate effective June 1, 1999, and our revenues from sales to
other online retailers, which we refer to as Internet fulfillment, were $5.9
million, or 8.1% of total pro forma revenues. The pro forma operating income for
the six month period ended June 30, 1999 for our direct Internet business was
$1.5 million, or 51% of total pro forma operating income, while we had a pro
forma loss of $4,000 from our Internet fulfillment business. We intend to use a
portion of the proceeds from this offering to increase our marketing and
promotional efforts in order to increase our brand awareness. We believe that a
strong brand name is critical to differentiating Intellesale and attracting a
high level of customer traffic and purchases.
Increase Cooperative Relationships. We have established cooperative
marketing programs with OnSale.com, uBid.com and FlashNet. We intend to expand
these programs and establish new programs under which other companies will
promote our products on their websites and in their other customer
communications.
Continue Improving Our Website. We intend to expand our Internet sales
through continued upgrading and improvements to our website. We plan to add new
features to our website and improve its design on an ongoing basis.
Migrate Other Parts of Our Business to the Internet. We believe our
traditional commerce products can be marketed more effectively through our
website. As we expand our Internet presence, we intend to migrate the
traditional commerce segment of our business to the Internet, which should allow
us to expand our customer base, increase efficiency and reduce our operating
costs.
Expand and Improve Procurement Sources. In order to be able to offer
attractive prices to customers yet maintain our margins, we must be able to
source a sufficient amount of product at favorable prices. In order to continue
and expand our procurement capability, we intend to maintain and enhance our
existing relationships with leasing companies, manufacturers and other sources
of equipment and to pursue new relationships.
About Us
We were incorporated in Delaware in December 1998 by our parent corporation,
Applied Digital Solutions, Inc., a publicly-held company which was formerly
known as Applied Cellular Technology, Inc. and which is traded on the Nasdaq
National Market under the symbol "ADSX." Prior to our incorporation, the
operations described in this prospectus consisted of eleven businesses which
Applied Digital Solutions acquired beginning in 1996 and which our senior
management team operated for Applied Digital Solutions. We combined all these
operations in Intellesale in July 1999 in connection with this offering. When we
refer to "we" or "us" in describing our business or operations, we are referring
to the businesses and operations which now make up Intellesale, which operated
as subsidiaries of Applied Digital Solutions prior to the organization of
3
<PAGE>
Intellesale. Our principal offices are located at 510 Ryerson Road, Lincoln
Park, New Jersey 07035, and our telephone number is (973) 686-9100. Our website
is www.Intellesale.com. The information on our website is not incorporated by
reference into this prospectus.
THE OFFERING
Common stock offered
By Intellesale...................... 4,000,000 shares
By the selling stockholder.......... 1,700,000 shares
Number of shares outstanding after
the offering........................ 20,644,889 shares
Use of proceeds we will receive . Repay approximately $17.0
million under the line of
credit which we expect to
have in place at the closing
of this offering;
. Pay a total of $5.8 million to
various persons in connection
with the settlement of their
earn-out payment rights and the
purchase of minority interests
in our subsidiaries;
. Increase advertising and other
marketing efforts in connection
with the further development of
our Internet business and the
migration of other parts of our
business to the Internet, which
we anticipate will entail
expenditures of approximately
$10.0 million during the 12
months following the offering;
and
. General corporate purposes,
including working capital.
Proposed Nasdaq National Market
symbol.............................. "SALE"
You should be aware that the total shares outstanding after this
offering:
. include 1,629,889 shares of common stock to be issued
immediately following this offering to the sellers of certain
businesses we acquired, based on an assumed initial public
offering price of $9.00 per share; and
. do not include
. 2,335,000 shares reserved for issuance under our 1999
Flexible Stock Plan;
. 5,600,000 shares reserved for issuance under outstanding
options; and
. 600,000 shares issuable by us if the underwriters
exercise their over-allotment option.
The shares offered by Applied Digital Solutions do not include 255,000
shares that it will sell if the underwriters exercise their over-allotment
option.
4
<PAGE>
RISK FACTORS
See "Risk Factors," starting on page 7, to read about factors you
should consider before you purchase shares of our common stock. These factors
include the following:
. We have transacted business over the Internet for only a
short period of time and our business model is unproven;
. We may have difficulty integrating and successfully
operating the 11 companies which Applied Digital Solutions
acquired since the beginning of 1997 and combined to form
Intellesale;
. We must develop a strong brand identity in order for our
business to continue to grow;
. We may not be successful in establishing and maintaining
relationships with other online companies;
. Declining prices for new computer equipment could adversely
affect our business;
. If we need additional financing and cannot obtain it, we
may not be able to achieve our strategic business objectives;
. In our industry, we face intense competition in each area
of our business;
. We may be subject to Internet service disruptions, which
could harm our business and damage our reputation and
credibility;
. We are controlled by Applied Digital Solutions, whose
interests may conflict with those of other stockholders;
. Future sales of our common stock could adversely affect the
market price of our common stock; and
. There will be immediate and substantial dilution to new
investors as a result of this offering.
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SUMMARY FINANCIAL DATA
The following table summarizes certain financial information about our
business. The pro forma data give effect to our acquisition of Bostek, Inc. and
an affiliate of Bostek as if it had been completed on January 1, 1998. Because
of our rapid growth through acquisitions, including Bostek, and our recent shift
to transacting business on the Internet, the historic information reflected
below may not be a good basis for evaluating our current and future performance.
For a more detailed explanation of this data, see "Selected Financial Data,"
"Pro Forma Financial Information," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," Management's Discussion and
Analysis of Pro Forma Results of Operations" and our financial statements
located elsewhere in this prospectus.
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Actual Pro Forma Actual Pro Forma
------------------------------ ------------ ---------------- ----------
Six Months
Year Ended Six Months Ended Ended June
Year Ended December 31, December 31, June 30, 30,
------------------------------ ------------ ------------------ ----------
1996 1997 1998 1998 1998 1999 1999
------------------------------ ------------ ------------------ ----------
($ in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues........................... $ 1,993 $ 39,445 $ 60,743 $ 127,848 $ 28,199 $ 39,212 $ 72,612
Cost of goods sold....................... 851 33,202 47,623 105,386 22,337 27,816 57,412
-------- -------- -------- ------------ -------- -------- ----------
Gross profit............................. 1,142 6,243 13,120 22,462 5,862 11,396 15,200
Depreciation and amortization............ 2 190 434 1,622 188 568 1,034
Operating income (loss).................. 505 2,275 3,961 4,295 2,115 3,056 2,970
-------- -------- -------- ------------ -------- -------- ----------
Net income............................... $ 276 $ 993 $ 1,793 $ 960 $ 1,054 $ 1,393 $ 878
Earnings per common share - basic........ $ .02 $ .07 $ .12 $ .06 $ .07 $ .09 $ .06
Earnings per common share - diluted...... $ .02 $ .07 $ .11 $ .06 $ .07 $ .09 $ .05
Weighted average common shares
outstanding - basic.................... 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Weighted average common shares
outstanding - diluted.................. 15,000 15,000 15,841 15,841 15,972 16,296 16,296
</TABLE>
The following balance sheet data give effect to our sale of 4,000,000
shares of common stock in this offering at an assumed initial public offering
price of $9.00 per share, after deducting the estimated underwriting discount
and estimated offering expenses, and the application of the estimated net
proceeds from this offering and on a pro forma as adjusted basis to further
reflect the issuance of 1,111,111 shares to the sellers of Bostek and 518,778
shares in settlement of earn-out obligations and the acquistion of minority
interests in our subsidiaries. The assumed initial public offering price is
the midpoint of the estimated range of the initial public offering price.
See "Use of Proceeds."
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June 30, 1999
-------------------------------------------
Pro Forma
Actual As Adjusted As Adjusted
----------- --------------- -------------
($ in thousands)
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Balance Sheet Data
Cash and cash equivalents............ $ 115 $ 16,025 $10,205
Working capital...................... (17,402) 15,508 19,688
Goodwill, net........................ 34,980 34,980 44,772
Total assets......................... 67,355 83,265 87,237
Due to parent company (1)............ 27,600 10,600 10,600
Due to stockholders of Bostek 15,000 15,000 5,000
Stockholders' equity 19,808 52,718 67,388
</TABLE>
(1) At the closing of this offering we expect to have our own line of
credit in place, which will replace the line of credit which Applied
Digital Solutions is now providing to us. We intend to borrow under
this facility to repay all amounts we owe to Applied Digital
Solutions, which aggregated $33.7 million at September 30, 1999.
6
<PAGE>
RISK FACTORS
You should carefully consider the risk factors listed below and the other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Any or all of the
risks listed below could have a material adverse effect on our business,
operating results or financial condition, which could cause the market price of
our stock to decline, in which event you could lose your investment in our
common stock. You should also keep these risk factors in mind when you read
forward-looking statements. Although we have identified all of the principal
risks which we believe may affect our business, there may be other risks of
which we are not aware which may also adversely affect our business.
Additionally, the risks identified here may adversely affect our business or
financial condition in ways which we cannot anticipate.
Risks Relating to Our Business
- ------------------------------
Because we have transacted business over the Internet only since April
1998 and our business model is therefore unproven, you have only a
limited basis on which to evaluate our business and prospects
Our Internet business began with our acquisition of Data Path Technologies
in the second quarter of 1998. In January 1999, we shifted our business emphasis
to the Internet and away from traditional commerce. We expect that expanding our
Internet business will continue to be the major focus of our strategy for the
foreseeable future and that the Internet will be the basis for our future
growth. We cannot be certain that we will be successful in implementing the
changes required to carry out our business model, or that we will be able to
compete successfully in this highly competitive area. For calendar year 1998 and
the first half of 1999, on a pro forma basis, direct Internet sales, in which we
sell refurbished and new computer products through our website, represented
$18.3 million or 14.3% and $20.1 million or 27.7%. On an actual basis, direct
Internet revenues were $12.8 million, or 32.7% of total revenues, for the six
months ended June 30, 1999 compared with $2.4 million, or 8.6% of total
revenues, for the six months ended June 30, 1998. The percentage of Internet
revenues for the first half of 1999 was higher than pro forma Internet revenues
for that period because Bostek had a lower percentage of Internet revenues for
that period than did Intellesale on an actual basis.
On an actual basis, the percentage of revenues from direct
Internet sales for the first half of 1999 was higher than the percentage
of pro forma revenues from direct Internet sales because Bostek derives
a lower percentage of revenue from direct Internet sales.
Because of our recent shift to focus on Internet sales, we have had only a
limited operating history selling products on the Internet. As a result, you
have only limited historical information on which to evaluate our business and
prospects as an e-commerce company. You should consider the risks and
difficulties that companies frequently encounter when entering this new and
rapidly evolving market. The risks we face in this area include:
. our ability to manage our evolving business model;
. our ability to compete with the more established Internet operations
of our competitors;
. our ability to anticipate and adapt to a rapidly developing market;
. our need to develop and upgrade our website, transaction processing
systems and network infrastructure;
. our need to attract and retain customers at a reasonable cost;
. our ability to upgrade our systems and fulfillment capabilities to
accommodate the growth of our business;
. our ability to develop and renew cooperative relationships; and.
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We cannot assure you that we will successfully address these risks.
We may have difficulty integrating our recent acquisitions
Since the beginning of 1997, we have completed 11 acquisitions, including
the Bostek acquisition, which was completed effective June 1, 1999. On a pro
forma basis, these acquisitions accounted for approximately 90.9% of our
revenues for the year ended December 31, 1998. In the Bostek transaction, we
acquired Bostek, Inc. and its affiliate, Micro Components International,
Incorporated, which are engaged in the business of acquiring excess inventory
and refurbished computer equipment and selling such equipment, primarily over
the Internet. We expect this acquisition will be a major part of our Internet
business. On a pro forma basis, Bostek represents 47.5% of our revenues for
the year ended December 31, 1998 and 52.9% for the six months ended June 30,
1999.
Our success will depend in large part on our ability to fully integrate the
operations and management of these recently acquired entities, particularly
Bostek. A successful integration requires, among other things, the integration
of product offerings, including offerings on our website, sales and marketing
and financial reporting. The difficulties of integration may be increased by the
necessity of coordinating geographically separated organizations, integrating
personnel with disparate business backgrounds and combining different corporate
cultures. We cannot assure you that we will accomplish the integration smoothly
or successfully or that we will realize the anticipated benefits of these
acquisitions. The success of the integration will require the dedication of
management and other personnel resources which may distract their attention from
our day-to-day business.
Goodwill write-offs will reduce our earnings
As a result of all of the acquisitions described in this prospectus and the
purchases of related minority interests to occur at the closing of this
offering, we will amortize approximately $2.1 million of goodwill annually,
which will reduce our earnings per share. As required by FAS 121, we will
periodically review our goodwill for impairment based on expected future
discounted cash flows. If we determine that there is such impairment, we would
be required to write down the amount of goodwill accordingly, which would also
reduce our earnings.
We may have difficulty managing our future growth
If we are unable to manage our growth effectively, our business will
suffer. Our business has been growing rapidly; the number of our employees has
increased from 114 to 411 between the beginning of 1999 and October 1999, and
our revenues increased from $28.2 million for the six months ended June 30, 1998
to $72.6 million for the six months ended June 30, 1999. Our business plan calls
for continued substantial growth. To manage such growth in a rapidly evolving
market requires an effective planning and management process. This will place a
significant strain on our management, information systems and financial
resources. Our future success will depend on our ability to address potential
growth in the number of customers, to expand our product and service offerings
and to pursue other market opportunities. We expect that we will need to expand
existing operations, particularly those relating to customer service and product
acquisition. We expect that we will also need to continue to improve our
operational, financial and inventory systems, procedures and controls, and will
need to expand, train and manage our workforce. Furthermore, we will need to
continue to manage multiple relationships with various suppliers, freight
companies, websites, Internet service providers and other third parties to keep
control over our strategic direction as our e-commerce business evolves.
Unless we develop a strong brand identity, our business may not
continue to grow and our financial results may suffer
We believe that developing our brand name and Internet presence will be
critical to achieving widespread acceptance of our products and services.
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Promoting and positioning our brand will depend largely on the success of our
marketing efforts, our ability to provide high quality products and services at
attractive prices and our relationships with other Internet companies. In order
to promote our brand, we will need to continue to increase our marketing budget
and otherwise increase our financial commitment to creating and maintaining
brand loyalty among users. We plan to use approximately $10 million of the
proceeds of this offering for marketing over the next 12 months. Brand promotion
activities may not yield increased revenues, and if they do, any increased
revenues may not offset the expenses we incur in building our brand. Even if
we do attract new customers, they may not return to our website to conduct
additional transactions. If we fail to promote and maintain our brand or
incur substantial expenses in an unsuccessful attempt to promote and maintain
our brand, our business could be harmed.
We rely on merchandise vendors as sources for our products
The availability of off-lease and excess inventory computer equipment is
unpredictable. We have no long-term arrangements with our vendors that assure
the availability of merchandise. We purchase products from more than 250
different vendors, although we have no formal commitments with any of our
vendors, we have been conducting businesses with many of them for several years.
We cannot assure you that our current vendors will continue to sell merchandise
to us as they have in the past, or that we will be able to establish new vendor
relationships that ensure merchandise will be available to us in sufficient
quantities and at favorable prices. If we are unable to obtain sufficient
quantities of products at favorable prices, our business will be adversely
affected.
In addition, we may become obligated to deliver specified types of computer
equipment in a short time period and, in some cases, at specified prices,
as is the case with our cooperative arrangement with FlashNet. Because we have
no formal relationships with vendors, we may not be able to obtain the required
equipment in sufficient quantities in a timely manner, which could adversely
affect our ability to fulfill these obligations.
If we are unable to establish and maintain our relationships
with other online companies, our business could be harmed
We depend to a great extent on relationships with other online companies
for marketing and building our brand, and a key element of our strategy is to
establish additional cooperative sales and advertising relationships. These
relationships may include agreements for joint product offerings, anchor
tenancy, promotional placements, sponsorships and banner advertisements.
These arrangements require us to make payments or provide services, which may
be material, and generally are short-term, non-exclusive or do not provide
for guaranteed renewal. The risks of depending on these types of arrangements
include:
. the uncertainty that significant spending on these relationships will
increase our revenues;
. the possibility that expected revenue increases resulting from such
spending will not occur within the time periods we expect or at all;
. the possibility that space on other websites or the same sites may
increase in price;
. the possibility that a competitor will purchase exclusive rights to
attractive space on one or more key sites;
. the possibility that, if these relationships are successful, we may
not be able to obtain adequate amounts of merchandise to meet the
increased demand that is generated;
. the possibility that we will not be able to renew the arrangements on
successful websites on reasonable terms or at all; and
. the possibility that online companies with which we have established
relationships may exercise their right to terminate such
relationships, which generally can be done without any significant
advance notice.
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Any termination of our arrangements with these online companies could have a
material adverse effect on our business. In addition, obtaining and maintaining
these relationships could disrupt our ongoing business, distract our management
and employees and increase our expenses.
We are subject to risks that the value of our inventory may decline before we
sell it or that we may not be able to sell the inventory at a the prices
we anticipate
We purchase and warehouse inventory, much of which is refurbished or excess
inventory of personal computer equipment. As a result, we assume inventory risks
and price erosion risks for these products. These risks are especially
significant because personal computer equipment generally is characterized by
rapid technological change and obsolescence. These changes affect the market for
refurbished or excess inventory equipment. Our success will depend on our
ability to purchase inventory at attractive prices relative to its resale value
and our ability to turn our inventory rapidly through sales. If we pay too much
or hold inventory too long, we may be forced to sell our inventory at a discount
or at a loss or write down its value, and our business could be materially
adversely affected.
Declining prices for new computer equipment could reduce demand for
our products
The cost of new computer equipment, particularly personal computers, has
declined dramatically in recent years. As the price of new computer products
declines, consumers may be less likely to purchase refurbished computer
equipment unless there is a substantial discount to the price of the new
equipment. Accordingly, in selling refurbished equipment, we must offer
products at a substantial discount to the price of new products. As prices of
new products continue to decrease, our revenue, profit margins and earnings
could be adversely affected. There can be no assurance that we will be able to
maintain a sufficient pricing differential between new products and our
refurbished products to avoid adversely affecting our revenues, profit margins
and earnings.
Our quarterly revenues and operating results are not indicative of future
performance and are difficult to forecast, and potential fluctuations
in our quarterly financial results may cause volatility in our
stock price
Because we have grown rapidly through acquisition and have only recently
begun to transact business on the Internet, we do not have historical data for a
significant number of periods upon which to forecast quarterly revenues and
results of operations. As a result, although our revenues from e-commerce have
grown in recent quarters and will increase significantly as a result of the
Bostek acquisition, we believe that you should not rely on period to period
comparisons of our operating results as indicators of future performance. We
base our current and future expenditures on our plans and estimates of future
revenues. Many of our expenses are fixed, and will not decrease if the level of
our business and revenues decrease. This limits our ability to reduce our
spending if we experience an unexpected shortfall in our revenues.
We expect that our future quarterly and annual operating results will
fluctuate significantly because of many factors, some of which we do not
control. These factors include:
. our ability to acquire, price and market inventory such that we
maintain gross margins on both an absolute dollar and percentage
basis;
. our ability to adequately maintain, upgrade and develop our website,
transaction processing systems and network infrastructure;
. our ability to integrate our recent acquisitions;
. our ability to maintain existing, and develop new, cooperative
marketing relationships which may drive traffic and customers to our
website;
. the transition of our Internet fulfillment business to selling
products directly through our website and our ability to migrate our
traditional commerce business to the Internet;
10
<PAGE>
. our ability to obtain new customers at a reasonable cost and retain
existing customers;
. the development, announcement or introduction of new websites,
services or products by us or our competitors;
. the amount and timing of operating costs and capital expenditures that
we incur to expand our business and improve our website; and
. general economic conditions and economic conditions specific to the
computer industry, the Internet and e-commerce.
We depend on our small team of senior management, and we may have
difficulty attracting and retaining additional personnel
Our future success is highly dependent upon the continued services and
performance of our senior management and other key personnel. We are organized
with a small senior management team. If we were to lose the services of this
management team, our overall operations could be adversely affected. In
addition, our future success depends on our ability to identify, attract,
hire, train, retain and motivate other highly skilled technical, managerial,
marketing, purchasing and customer service personnel when we need them.
Competition for these individuals is intense. We cannot assure you that we
will be able to successfully attract, integrate or retain sufficiently
qualified personnel. Our failure to attract and retain the necessary
technical, managerial, marketing, purchasing and customer service
personnel could have a material adverse effect on our business.
If we need additional financing and cannot obtain it, we
may not be able to achieve our strategic business objectives
We expect that the proceeds of this offering, together with our available
cash resources, will be sufficient to meet our cash requirements for at least
the next 12 months. However, we may need to raise additional funds to:
. finance unanticipated working capital requirements; or
. acquire complementary businesses.
We do not yet have lending commitments from banks or other third parties, and,
until and unless we arrange for such commitments, we will rely on advances from
Applied Digital Solutions. Applied Digital Solutions has no obligation to
advance funds to us and, even if willing to do so, may not have funds available.
Our credit arrangements with Applied Digital Solutions are described under
We cannot assure you that additional financing will be available on
favorable terms or at all. If funds are not available when required for our
working capital needs or other transactions, our ability to carry out our
business plan could be adversely affected, and we may be required to scale back
our growth and operations to reflect the extent of available funding. If we are
able to arrange for credit facilities from other lenders, the debt instruments
will probably include limitations on our ability to incur other indebtedness, to
pay dividends, to create liens, to sell or purchase our capital stock, to sell
assets or to make acquisitions or enter into other transactions. Such
restrictions may adversely affect our ability to finance our future operations
or capital needs or to engage in other business activities. If we raise
additional funds by issuing equity or convertible debt securities, the
percentage ownership of our stockholders will be reduced. These securities may
have rights, preferences or privileges senior to those of our common
stockholders.
If we experience problems in our distribution operations or
with other third parties on whom we rely, we could lose customers
In addition to merchandise vendors, we depend on several other third
parties over which we have limited control, including, in particular, Federal
Express and United Parcel Service for delivery of products to our customers.
We have no long-term relationships with any of those parties. For example, we
11
<PAGE>
rely upon third-party carriers for product shipments, including shipments to
and from our distribution facility. We are therefore subject to risks, including
employee strikes and inclement weather, which could result in failures by such
carriers to deliver products to our customers in a timely manner, which could
damage our reputation and brand.
Some of our software was developed and produced by and is licensed from
third parties. We have from time to time discovered errors and defects in the
software and rely in part on our third-party providers to correct these errors
and defects in a timely manner.
We also depend on credit card processing services of third parties.
The industry in which we compete is highly competitive
While we are not aware of another company which operates in all of our
business areas, we face intense competition in each area of our business, and
many of our competitors have greater resources and a more established market
position than we have. As we focus our efforts on building our Internet
business, we expect to face increased competition from other companies that
already have an established Internet presence and from other companies which are
expanding into e-commerce that are selling their products on the Internet. Our
primary competitors include:
. major manufacturers of computer equipment such as Compaq, Computer
Corporation, Dell Computer Corporation and IBM, which offer both
refurbished and new equipment through their websites;
. traditional store-based computer retailers, such as Best Buy Co.,
Inc.,
Circuit City(R) Stores, Inc., CompUSA Inc. and Gateway Country; and
. other online competitors, such as the Boston Computer Exchange,
Buy.com Inc., Cyberian Outpost, Inc., Egghead.com, Inc., Fairmarket,
Inc., Onsale, Inc., uBid and Value America, Inc.
In addition, our Internet fulfillment business allows others to compete
with our Internet business.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors already have an established brand and can devote
substantially more resources to website development, increasing brand
recognition and product acquisition than we can. In addition, larger, well-
established and well-financed entities may join with online competitors or
computer manufacturers or suppliers as the use of the Internet and other online
services increases. The online companies who cooperate with us in offering
our products also face intense competition, and if they are unable to
successfully respond to such competition our business could suffer.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently or adopt more
aggressive price or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and test products in a manner
that is not possible over the Internet.
Our product offerings must compete with other new computer equipment and
related products offered by our competitors. That competition will intensify if
prices for new computers continue to decrease.
We expect competition to intensify in the future because current and new
competitors can enter our market with little difficulty and can launch new
websites at a relatively low cost.
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<PAGE>
If we fail to adequately protect our Intellesale.com domain name,
trademarks and other proprietary rights, our brand and reputation
could be impaired and we could lose customers
We depend on our right to use our Intellesale.com domain name in order
to operate our Internet business. This right, and related copyrights,
service marks and trademarks, as well as our trade secrets and similar
intellectual property, are important to establishing and maintaining our brand.
However, the steps we take to protect our proprietary rights may be inadequate.
Effective trademark, service mark, copyright and trade secret protection may
not be available in all of the countries where we sell our products online.
Furthermore, the relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. Therefore,
we may be unable to prevent third parties from acquiring domain names that are
similar to, infringe upon or otherwise decrease the value of our trademarks and
other proprietary rights. Use of "Intellesale.com" or similar names by others
could dilute our brand identity and confuse the market.
Moreover, other parties may assert infringement or unfair competition
claims against us. We believe that we and other participants in our markets may
be subject to infringement claims as the number of services and competitors in
our industry grows. We have, in the past, been required to make a change in a
name under which we formerly conducted business in response to an objection from
another company. Any future similar claim affecting the names under which we do
business, whether meritorious or not, could be time-consuming, result in costly
litigation, damage our reputation, cause service upgrade delays or require us to
enter into royalty or licensing agreements. These royalty or licensing
agreements may not be available on favorable terms or at all. As a result, any
claim like this could harm our business.
Year 2000 failures may adversely impact our operations
Some computers, software and other equipment include programming code in
which calendar year data is abbreviated to only two digits. As a result, some of
these systems could fail to operate or fail to produce correct results if "00"
is interpreted to mean 1900, rather than 2000. These problems are widely
expected to increase in frequency and severity as the year 2000 approaches, and
are commonly referred to as the "Millennium Bug" or "year 2000 problem."
As a company engaged in e-commerce, we rely on computer programs and
systems in connection with our internal and external communications networks and
systems (including transmissions of information over the Internet), the
operation of our website, order processing and fulfillment, accounting and
financial systems and other business functions. If any of our systems are not
year 2000 compliant or if our customers or suppliers fail to achieve year 2000
compliance, we may experience the following adverse consequences:
. a significant number of operational inconveniences and inefficiencies
for us and our customers that may divert management's time and attention
and financial and human resources from our ordinary business activities;
and
. a lesser number of serious system failures that may require significant
efforts by us or our customers to prevent or alleviate material business
disruptions.
We may incur significant additional expenses addressing year 2000 issues.
The ability of third parties with whom we do business to address adequately
their year 2000 issues is outside our control. The most reasonably likely worst-
case scenario for us resulting from year 2000 issues is that third party
noncompliance would disrupt, reduce or eliminate for a period of time the
ability of customers to connect with and purchase products at our website. If
such occurrences are frequent or long in duration, they could materially
adversely affect our business.
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<PAGE>
In addition, because we sell refurbished computer systems, consumers may be
unwilling to purchase systems which they believe are not year 2000 compliant.
Risks Related to the Internet and the Internet Industry
- -------------------------------------------------------
If we cannot respond to rapidly changing technology, our business
could be harmed
To be competitive as an Internet marketer, we must continue to enhance and
improve the responsiveness, functionality and features of our website. The
e-commerce market is characterized by rapidly changing technology, evolving
industry standards, frequent new service and product introductions and
enhancements embodying new technologies and changing customer requirements and
preferences. Our future success will depend on our ability to adapt to rapidly
changing technologies, to adapt our services to evolving industry standards and
to continually improve the performance, features and reliability of our service.
If we delay or fail to adapt to such changes customers may not use our services
and may instead use those of our competitors. In addition, the widespread
adoption of new Internet, networking or telecommunications technologies or other
technological changes could require substantial expenditures to modify or adapt
our services or infrastructure.
Without the continued development and maintenance of the
Internet, our business may not succeed
Our market is new and rapidly evolving. Our business could suffer if
Internet usage does not continue to grow. Internet usage may be inhibited for a
number of reasons, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service;
. lack of availability of cost-effective and high-speed service; and
. changes in government regulation of the Internet.
If Internet usage grows, the Internet infrastructure might not be able to
support the demands placed on it by this growth or its performance and
reliability may decline. In addition, future outages and other interruptions
occurring throughout the Internet could lead to decreased use of our website and
would therefore harm our business.
We may be subject to Internet service disruptions, which could
harm our business and damage our reputation and credibility
We do not own our own gateway to the Internet, but instead rely on our
Internet service provider to connect our current website to the Internet. In
addition, we contract the hosting of our Internet servers to Cube Computer
Corporation. From time to time, we may experience interruptions in our website
connections and our telecommunications. Continuous or prolonged interruptions in
our website connections or in our telecommunications access, or slow response
times from our website, could have a material adverse effect on our business.
We will need to continually enhance and expand our transaction processing
systems, network infrastructure, delivery and shipping systems and other
technologies to accommodate the substantial increase in the volume of traffic on
our website which we hope to develop. We cannot assure you that we will be
successful in these efforts or that we will be able to accurately project the
rate or timing of increases, if any, in traffic to our website or to expand and
upgrade our systems and infrastructure on a timely basis to accommodate such
increases.
We cannot assure you that the network of our Internet service provider will
be able to achieve or maintain sufficiently high capacity of data transmission,
especially if the customer usage of our website increases. Failure to achieve or
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<PAGE>
maintain high capacity data transmission could significantly reduce customer
demand for our services and have a material adverse effect on our business.
Regulation of the Internet could harm our business
The laws governing Internet transactions remain largely unsettled. Today
there are relatively few laws specifically directed toward online services.
However, due to the increasing popularity and use of the Internet and online
services, it is likely that laws and regulations will be adopted with respect to
the Internet or online services. These laws and regulations could cover issues
such as online contracts, user privacy, freedom of expression, pricing, fraud,
content and quality of products and services, taxation, advertising,
intellectual property rights and information security. It may take years to
determine whether and how existing laws governing issues such as property
ownership, copyrights and other intellectual property issues, taxation, libel,
obscenity and personal privacy apply to the Internet. The vast majority of these
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies. Those laws that do reference the Internet
have not yet been widely interpreted by the courts, and their applicability and
reach are therefore uncertain. Because of the rapidly evolving and uncertain
regulatory environment, we cannot predict how such laws and regulations might
affect our business. In addition, these uncertainties make it difficult to
ensure compliance with laws governing the Internet. These laws could harm us by
subjecting us to liability or forcing us to change how we do business.
Concerns over and problems related to Internet commerce security and
credit card fraud could harm our business
An important characteristic of Internet commerce is the secure transmission
of confidential information over public networks. We rely on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect secure transmission of confidential
information. While to date we are not aware of any breaches in the security of
our transmission of confidential data, if a compromise of our security measures
were to occur, it could have a material adverse effect on our business.
Any party that is able to circumvent our security measures could
misappropriate confidential information or cause interruptions in our
operations. We may be required to expend significant capital and
other resources to protect against security breaches or to alleviate problems
caused by such breaches. Concerns over the security of Internet transactions
and the privacy of users may also inhibit the growth of the Internet generally,
especially as a means of conducting Internet commerce transactions. To the
extent that activities of Intellesale or third-party contractors involve the
storage and transmission of proprietary information, such as credit card
numbers, security breaches could expose us to a risk of loss or litigation
and possible liability. We cannot assure you that our security measures will
prevent security breaches or that failure to prevent such security breaches
will not have a material adverse effect on our business.
Risks Related to our Affiliation with Applied Digital Solutions
- ---------------------------------------------------------------
We are controlled by Applied Digital Solutions, whose interests may
conflict with those of other stockholders and us
Following the offering, Applied Digital Solutions will own approximately
49.9% of our outstanding common stock. Of our seven directors, one is a director
of Applied Digital Solutions, one is an executive officer of Applied Digital
Solutions, and one is both a director and executive officer of Applied Digital
Solutions. Accordingly, subject to the voting agreement referred to below,
Applied Digital Solutions and its affiliates may be able to:
. elect our entire board of directors;
. control our management and policies;
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<PAGE>
. prevent or cause a change in control of us; and
. determine other matters submitted to our stockholders for approval,
including acquisitions, mergers, consolidations and the sale of all
or substantially all of our assets.
We also currently rely on Applied Digital Solutions for financing
and may continue to do so in the future to the extent we are unable to
establish our own line of credit.
Applied Digital Solutions has entered into an agreement with Intellesale
under which Applied Digital Solutions has agreed to vote its shares on matters
presented to our stockholders in the same proportions as the other stockholders
vote their shares.
Our common stock owned by Applied Digital Solutions will represent a
significant portion of Applied Digital Solutions' assets, and our results of
operations will have a significant impact on Applied Digital Solutions' results
of operations. Accordingly, subject to the limitations of the voting agreement
referred to above, Applied Digital Solutions, which is itself publicly traded,
may cause us to take actions which benefit its financial condition and
results of operations regardless of its effect on our business. For example,
Applied Digital Solutions has the right to require us to register its shares
for sale under the Securities Act, which could adversely affect the price of
our common stock. In addition, we have no agreement with Applied Digital
Solutions that would prevent it from competing with us.
Until we establish our separate sources of funding, we will depend
on Applied Digital Solutions for financing for our business
We currently rely on advances from Applied Digital Solutions to finance our
business operations. The availability of funds from Applied Digital Solutions
will depend on its ability to borrow under its line of credit, which in turn
depends on the financial performance of Applied Digital Solutions. Accordingly,
there can be no assurance that funds will continue to be available from Applied
Digital Solutions. Although we are in discussions with regard to establishing
our own line of credit, we may not be able to do so.
Conflicts of interest may arise between Applied Digital Solutions
and us
Three of our directors and our Chief Executive Officer hold or
have held various positions with Applied Digital Solutions. We have
entered into agreements with Applied Digital Solutions relating to
voting and sales of our common stock, registration rights relating to
our common stock, and tax allocation and sharing. Conflicts of interest
between Applied Digital Solutions and us could arise with respect to
existing or future agreements between Applied Digital Solutions and us.
Risks Associated with the Offering
- ----------------------------------
Future sales of our common stock could adversely affect the market
price of our common stock
If a substantial number of shares of our common stock, including shares
issuable upon exercise of outstanding options, are sold in the public market
after this offering, or investors become concerned that substantial sales might
occur, the market price of our common stock could decrease. Such a decrease
could make it difficult for us to raise capital by selling stock or to pay for
acquisitions using stock.
There will be 26,229,889 shares of common stock outstanding immediately
after this offering after giving effect to the issuance of shares to the sellers
of certain businesses we acquired, assuming an initial public offering price of
$9.00 per share, which are to be issued within 30 days after the date of
this offering, and 5,600,000 shares issuable upon exercise of outstanding
options, of which approximately 2,425,000 were granted to our executive
officers.
Our executive officers, directors and stockholders have agreed that they
will not sell, directly or indirectly, any common stock without the consent of
Ladenburg Thalmann & Co. Inc. for a period of 180 days after the date of this
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<PAGE>
prospectus. However, Ladenburg Thalmann may release any or all of the shares
subject to lock-up agreements at any time without notice. After these lock-up
agreements expire, all but approximately 1,644,889 of the shares subject to
these lock-up agreements could be sold immediately in the public market, subject
in most cases to volume and other restrictions.
After the 180-day lock-up period expires, we expect to file registration
statements covering 4,450,000 shares of the common stock issuable upon exercise
of options and other grants pursuant to our equity incentive plans.
In addition, we may issue additional shares:
. to employees;
. in connection with corporate alliances;
. in connection with acquisitions; and
. to raise capital.
Applied Digital Solutions, Marc Sherman, our President and Chief Executive
Officer, and Edward L. Cummings, our Executive Vice President and Chief
Financial Officer, are entitled to registration rights with respect to
13,300,000 shares they will beneficially own after this offering. Those
stockholders have the right to include shares of common stock they own any time
we register our stock for sale beginning six months following the date of this
offering, other than in connection with registering shares related to an
employee benefit plan or a merger or consolidation. In addition, Applied Digital
Solutions and Mr. Sherman have up to five demand registration rights. Sales of
shares of our common stock pursuant to these agreements may dilute the value of
the common stock offered hereby or cause its market value to drop.
Because stockholders will not receive dividends for the foreseeable
future, stockholders must rely on stock appreciation for any
return on their investment in the common stock
We do not anticipate that we will pay dividends on our common stock in the
foreseeable future. We intend to use any earnings which may be generated to
finance the growth of our businesses. In addition, it is likely that any debt
financing agreements we enter into will restrict our ability to declare
dividends. As a result, appreciation, if any, of the price of the common stock
will provide the only return to investors in this offering.
There will be immediate and substantial dilution to new investors as
a result of this offering
The initial public offering price of our common stock will be substantially
higher than the pro forma tangible book value per share of our outstanding
common stock. At an assumed initial public offering price of $9.00 per
share, purchasers of our common stock will incur immediate and substantial
dilution of $9.00 per share in the pro forma net tangible book value of
their purchased shares. The shares of our common stock owned by existing
stockholders will receive a material increase in the pro forma net tangible book
value per share. Investors may also experience additional dilution if we issue
common stock in connection with future business acquisitions and as a result of
issuance and exercise of employee stock options. As a result of this dilution,
investors purchasing stock in this offering may receive significantly less than
the full purchase price that they paid for the shares purchased in this offering
in the event of a liquidation.
Our stock price may be volatile
Prior to this offering, there has been no public market for our common
stock, and we do not know how our common stock will trade after this offering.
We cannot predict the extent to which investor interest will lead to the
development of an active and liquid trading market for our common stock. The
17
<PAGE>
initial public offering price will be determined through negotiations among the
underwriters and us and may not be indicative of the market price of the common
stock that will prevail in the trading markets. You may not be able to resell
your shares at or above the initial public offering price due to fluctuations in
the market price of our common stock. These fluctuations may result from a
number of factors, including the following:
. our perceived prospects;
. changes in our operating results;
. differences between our actual financial and operating results and
those expected by investors and research analysts;
. changes in research analysts' recommendations or projections;
. conditions or trends in the Internet and computer industries; and
. sales of common stock.
In addition, the securities markets have experienced significant volume and
price fluctuations, and the market prices of Internet companies in particular
have been especially volatile. In the past companies that have experienced
volatility in the market price of their stock have been subject to securities
class action litigation. A securities class action lawsuit against us could
result in substantial costs and a diversion of our management's attention.
Provisions in our corporate documents and Delaware law could
delay or prevent a change in control of us or limit the price that investors
might be willing to pay in the future for shares of our common stock.
Provisions in our certificate of incorporation, bylaws and Delaware law
could, together or separately:
. discourage potential acquisition proposals;
. delay or prevent a change in control; and
. discourage proxy contests and make it more difficult for you and
other stockholders to elect directors and take other corporate
actions.
As a result, these provisions could limit the price that investors might be
willing to pay in the future for shares of our common stock.
In particular, our board of directors may issue up to 5,000,000 shares of
preferred stock with rights and privileges that might be senior to our common
stock without the consent of the holders of the common stock. Our certificate of
incorporation and bylaws provide that stockholders may not take actions by
written consent and that special meetings of stockholders may only be called by
our board of directors or our chief executive officer. We are also subject to
Section 203 of the Delaware General Corporation Law, which generally prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any interested stockholder for a period of three years
following the date on which the stockholder became an interested stockholder.
In addition, a change in control will trigger payment obligations under
employment agreements we have with our four senior executives, which could
discourage a change in control of us both because of the amount involved and
the fact that senior management has an incentive to leave following a change in
control to collect these payments. These payments would be equal to three times
the employee's average annual compensation for the previous five years, minus
$1.00, subject to reduction if their payment would result in an additional
special tax to the executive.
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USE OF PROCEEDS
Our net proceeds from the sale of the 4,000,000 shares of common stock
offered by us are estimated to be approximately $32.9 million, or $38.0 million
if the underwriters' over-allotment option is exercised in full, after deducting
the estimated underwriting discounts and commissions and estimated offering
expenses we will pay. We will not receive any proceeds from shares of common
stock sold by the selling stockholder.
We plan to use the net proceeds:
. to repay approximately $17.0 million under the line of credit which we
expect to have in place at the closing of this offering, which will
replace the line of credit which Applied Digital Solutions is now
providing to us, the interest rate and other terms of which are
described under "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Intellesale.com -- Liquidity
and Capital Resources;"
. to pay a total of $5.8 million to former owners of businesses which we
acquired, in connection with the settlement of their earn-out payment
rights and, in some cases, the purchase of minority interests in our
subsidiaries;
. for advertising and other marketing efforts, which we anticipate will
total approximately $10.0 million during the 12 months following this
offering; and
. for general corporate purposes, including working capital.
Pending such uses, we intend to invest the net proceeds in short-term,
investment grade, interest bearing securities. Our management will retain broad
discretion in the allocation of these proceeds.
DIVIDEND POLICY
Holders of our common stock are entitled to receive such dividends as may
be declared by our board of directors. We have not paid any dividends on our
common stock and we do not anticipate that we will pay dividends in the
foreseeable future. Any payments of future dividends will be at the discretion
of our board of directors after taking into account various factors, such as our
financial condition, operating results, current and anticipated cash needs and
plans for expansion and restrictions in our credit documents or other
agreements. It is likely that any credit arrangement we enter into in the future
will limit our ability to pay dividends.
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CAPITALIZATION
The following table sets forth our capitalization at June 30, 1999:
. on a historical basis;
. as adjusted to reflect our sale of 4,000,000 shares of common stock
offered in the offering, assuming the underwriters' over-allotment option
is not exercised, at an assumed initial public offering price of $9.00
per share, after deducting the underwriting discounts, commissions and
estimated offering expenses and applying the estimated net proceeds as
described under "Use of Proceeds"; and
. pro forma as adjusted basis to further reflect the issuance of 1,629,889
shares of our common stock to the sellers of certain businesses we have
acquired at an assumed initial public offering price of $9.00 per share.
You should read this table in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and our
consolidated financial statements and the notes thereto included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------
As Pro Forma
Actual Adjusted As Adjusted
--------------------------------
($ in thousands)
<S> <C> <C> <C>
Due to parent company (1)................ $27,600 $10,600 $10,600
Due to stockholders of Bostek (2)........ 15,000 15,000 5,000
Notes payable............................ 62 62 62
Minority interest (3).................... 698 349 --
Stockholders' equity
Preferred stock, $.01 par value;
5,000,000 shares authorized; no shares
outstanding, actual, as adjusted and
pro forma as adjusted................. -- -- --
Common stock, $.0001 par value;
30,000,000 shares authorized,
15,000,000 shares issued and
outstanding, actual; 19,000,000 shares
issued and outstanding, as adjusted;
20,629,889 shares issued and
outstanding, pro forma as
adjusted (4).......................... 1 2 2
Additional paid-in capital.............. 15,537 48,446 63,116
Retained earnings....................... 4,270 4,270 4,270
--------------------------------
Total stockholders' equity............ 19,808 52,718 67,388
--------------------------------
Total capitalization.................. $63,168 $79,078 $83,050
================================
</TABLE>
(1) At the closing of this offering, we expect to have our own line of
credit in place, which will replace the line of credit which Applied
Digital Solutions is now providing to us. We intend to borrow under
this facility to repay all amounts we owe to Applied Digital
Solutions, which aggregated $33.7 million at September 30, 1999.
(2) Consists of $10,000,000 to be paid to the stockholders of Bostek and
its affiliate, Micro Components, in shares of our common stock, based
on the initial public offering price in this offering, within 30 days
after the closing of this offering; and $5,000,000 to be paid to the
stockholders of Bostek and its affiliate, Micro Components, in
January 2000.
(3) In connection with this offering, we will acquire the minority
interests in our subsidiaries and buy out certain earn-out
arrangements for cash totaling $5,820,000 and the issuance of
1,629,889 shares of our common stock, assuming an initial public
offering price of $9.00 per share.
(4) Does not include (a) options to purchase 5,350,000 shares of our
common stock issued under our 1997 Non-Qualified Stock Option Plan
and outstanding as of June 30, 1999 or (b) 2,500,000 shares of our
common stock reserved for issuance upon exercise of options and other
stock awards which may be granted under our 1999 Flexible Stock
Option Plan.
20
<PAGE>
DILUTION
Our net tangible book value, as of June 30, 1999, was $(15,172,000), or
$(1.01) per share of common stock. Net tangible book value per share represents
the amount of total tangible assets less total liabilities and minority
interests divided by the number of shares of common stock outstanding at that
date. After giving effect to our sale of the 4,000,000 shares of common stock
being offered hereby at an assumed initial public offering price of $9.00
per share, and the issuance of 1,629,889 shares of our common stock to the
sellers of certain businesses we have acquired assuming an initial public
offering price of $9.00 per share and after deducting estimated underwriting
discounts and public commissions and estimated offering expenses, our pro
forma net tangible book value as of June 30, 1999, would have been
$13,844,000, or $0.67 per share. This represents an immediate increase in pro
forma net tangible book value of $1.68 per share to existing stockholders,
and an immediate dilution of $8.33 per share to new investors. The following
table illustrates this per share dilution:
Assumed initial public offering price
per share................................ $9.00
-----
Net tangible book value per share at
June 30, 1999............................ $(1.01)
Increase per share attributable to
new investors............................. 1.68
------
Pro forma net tangible book value per
share after this offering................. 0.67
-----
Dilution per share to new investors........ $8.33
=====
The following table summarizes, on a pro forma basis, as of June 30, 1999,
the differences between the number of shares of common stock purchased from
Intellesale, the total consideration paid and the average price per share paid
by existing stockholders, by sellers of certain businesses we have acquired,
and by the new investors purchasing shares in this offering (at an assumed
initial public offering price of $9.00 per share and before deducting estimated
underwriting discounts and commissions and estimated offering expenses):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
($ in thousands, ------------------------ ----------------------- Price Per
except per share data) Number Percent Amount Percent Share
----------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).. 15,000,000 72.7% $15,538 23.5% $1.04
Business acquisition
stockholders (2)......... 1,629,889 7.9 14,669 22.2 9.00
----------- ----------- ------- ---------- -----------
New investors(1).......... 4,000,000 19.4 36,000 54.3 9.00
----------- ----------- ------- ---------- -----------
Total.................. 20,629,889 100.0% $66,207 100.0%
=========== =========== ======= ========== ===========
</TABLE>
________________
(1) Sales by Applied Digital Solutions in this offering will cause the
number of shares held by existing stockholders to be reduced to
13,300,000, or 64.5% of the total number of shares outstanding
after the offering, and will increase the number of shares held
by new investors to 5,700,000, or 27.6% of the total number of
our shares outstanding after this offering.
(2) Represents shares issued to the sellers of certain businesses we have
acquired, assuming an initial public offering price of $9.00 per
share.
If the underwriters exercise their over-allotment option in full, the
number of shares of common stock held by existing stockholders will be reduced
to 13,045,000 shares, or 61.4% of the total number of shares of common stock to
be outstanding immediately after this offering. In addition, the number of
shares of common stock held by the new investors will be increased to 6,555,000
or 30.9% of the total number of shares of common stock to be outstanding
immediately after this offering. The foregoing discussion and tables assume no
exercise of any outstanding stock options. As of October 15, 1999, there were
outstanding options to purchase 5,600,000 shares of common stock, of which
5,350,000 have an exercise price of $0.85 per share and the remaining 250,000
have an exercise price equal to the initial public offering price. In addition,
as of October 15, 1999, there were 2,335,000 shares reserved for future grants
or purchases pursuant to our 1999 Flexible Stock Plan, and the amounts available
for issuance could increase to as many as 7,335,000 shares under the terms of
the plan. To the extent that any shares reserved for issuance under our stock
plans are issued, there will be further dilution to new investors.
21
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for the periods ended December
31, 1996, 1997 and 1998 has been derived from our audited consolidated financial
statements included elsewhere in this prospectus. The information as of and for
the periods ended December 31, 1995 and June 30, 1998 and 1999 is unaudited and,
in our opinion, includes all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation of the information. Our results
for the six months ended June 30, 1999 are not necessarily indicative of the
results we may achieve for the full year. Because of our rapid growth through
acquisitions, including Bostek, and our recent shift to transacting business on
the Internet, the historic information reflected below may not be a good basis
for evaluating our current and future performance. You should read this
information together with the financial statements and related notes included in
this prospectus and the information under the headings "Pro Forma Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in this prospectus.
<TABLE>
<CAPTION>
Pro Forma
Four Months Pro Forma Six Months
Ended Year Ended Six Months Ended Ended
December 31, Year Ended December 31, December 31, June 30, June 30,
------------ --------------------------- ------------ --------------------- ------------
1995 (1) 1996 1997 1998 1998 (2) 1998 1999 1999 (3)
------------ --------------------------- ------------ --------------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Summary of Operations
Revenues:
Internet and Internet
fulfillment $ -- $ -- $ -- $ 7,334 $ 26,486 $ 2,439 $ 12,817 $ 26,028
Traditional commerce 645 1,993 39,445 53,409 101,362 25,760 26,395 46,584
------- ------- ------- ------- -------- -------- --------- --------
Total revenues 645 1,993 39,445 60,743 127,848 28,199 39,212 72,612
Cost of goods sold 312 851 33,202 47,623 105,386 22,337 27,816 57,412
------- ------- ------- ------- -------- -------- --------- --------
Gross profit 333 1,142 6,243 13,120 22,462 5,862 11,396 15,200
Selling, general and
administrative expense 150 635 3,778 8,725 16,545 3,559 7,772 11,196
Depreciation and -- 2 190 434 1,622 188 568 1,034
amortization ------- ------- ------- ------- -------- -------- --------- --------
Operating income (loss) 183 505 2,275 3,961 4,295 2,115 3,056 2,970
-- 1 1 45 440 12 82 82
Interest income
Interest expense (2) (10) (152) (341) (1,663) (132) (363) (837)
------- ------- ------- ------- -------- -------- --------- --------
Income before provision
for income taxes and
minority interest 181 496 2,124 3,665 3,072 1,995 2,775 2,215
Provision for income taxes -- 190 884 1,646 1,876 809 1,273 1,228
------- ------- ------- ------- -------- -------- --------- --------
Income before minority
interest 181 306 1,240 2,019 1,196 1,186 1,502 987
Minority interest -- 30 247 226 236 132 109 109
------- ------- ------- ------- -------- -------- --------- --------
Net income $ 181 $ 276 $ 993 $ 1,793 $ 960 $ 1,054 $ 1,393 $ 878
======= ======= ======= ======= ======== ======== ========= ========
Earnings per common share
- basic $ .01 $ .02 $ .07 $ .12 $ .06 $ .07 $ .09 $ .06
Earnings per common share
- diluted $ .01 $ .02 $ .07 $ .11 $ .07 $ .07 $ .09 $ .05
Weighted average common
shares outstanding -
basic 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000
Weighted average common
shares outstanding - 15,000 15,000 15,000 15,841 15,841 15,972 16,296 16,296
diluted
Balance Sheet Data
Cash and cash equivalents $ 66 $ 9 $ 615 $ 571 $ 917 $ 115
Working capital 452 474 2,158 267 3,473 (17,402)
Goodwill, net -- 1,235 2,987 8,464 4,035 34,980
Total assets 784 3,207 11,387 21,963 16,233 67,355
Due to parent company 0 178 1,242 6,022 1,933 27,600
Due to stockholders of
Bostek -- -- -- -- -- --
Stockholders' equity 155 2,023 5,247 9,740 7,763 19,808
</TABLE>
(1) Consists of Elite Computer Services, Inc. which was acquired by
Applied Digital Solutions effective September 1, 1995.
(2) Gives effect to (a) the acquisition of Bostek and the financing of
that acquisition and (b) the acquisition of Blue Star Electronics,
Inc., Consolidated Micro Components, Inc., Data Path Technologies,
Inc., Service Transport Company and Fiscal Advantage, Inc., as if such
acquisitions had occurred at January 1, 1998. Does not give effect
to purchase minority interests in our subsidiaries or buyout of
earn-out payments from holders of minority interests.
(3) Gives effect to the acquisition of Bostek and the financing of that
acquisition as if such transactions had occurred at January 1, 1998.
The actual June 30, 1999 balance sheet data included Bostek. Does not
give effect to purchase of minority interests in our subsidiaries or
buyout of earn-out payments from holders of minority interests.
22
<PAGE>
The following table sets forth certain financial data for our predecessor
companies, Elite Computer Services, Inc., of which Applied Digital Solutions
acquired 80% effective September 1, 1995, and Universal Commodities Corp., of
which Applied Digital Solutions acquired 80% effective November 1, 1996. The
selected financial data for the periods ended December 31, 1994, and 1995 and
August 31, 1995 has been derived from unaudited statements. The selected
financial data for Universal Commodities for the 10 months ended October 31,
1996 has been derived from the audited financial statements included elsewhere
in this prospectus. The selected financial data for Universal Commodities as of
and for the year ended December 31, 1994 are not presented because it commenced
operations in late December 1994. As of December 31, 1994, Universal Commodities
had nominal assets and no revenue.
<TABLE>
<CAPTION>
------------------------------------------ ---------------------------------------
Elite Predecessor Business UCC Predecessor Business
------------------------------------------ ---------------------------------------
Year Ended Eight Months Ended Year Ended Ten Months Ended
December 31, 1994 August 31, 1995 December 31, 1995 October 31, 1996
------------------------------------------ ---------------------------------------
Summary of Operations (in thousands)
<S> <C> <C> <C> <C>
Revenues:
Internet $ -- $ -- $ -- $ --
Traditional commerce 2,021 1,255 3,591 4,575
Total revenues 2,021 1,255 3,591 4,575
Cost of goods sold 1,274 563 2,834 3,689
------- ------- -------- -------
Gross profit 747 692 757 886
Selling, general and
administrative expense 748 726 605 936
Depreciation and amortization 4 -- 14 --
------- ------- -------- -------
Operating income (loss) (5) (34) 138 (50)
Interest income -- -- -- --
Interest expense (2) (1) (1) (13)
------- ------- -------- -------
Income before provision for
income taxes and minority
interest (7) (35) 137 (63)
Provision for income taxes -- -- -- --
------- ------- -------- -------
Income before minority
interest (7) (35) 137 (63)
Minority interest -- -- -- --
------- ------- -------- -------
Net income $ (7) $ (35) $ 137 $ (63)
Balance Sheet Data
Cash and cash equivalents $ 8 $ (30) $ 60 $ 12
Working capital (129) 336 289 107
Goodwill, net -- -- -- --
Total assets 466 607 537 785
Due to parent company -- -- -- --
Stockholders' equity (41) (75) 138 107
</TABLE>
23
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following pro forma unaudited condensed consolidated statement of our
operations for the six months ended June 30, 1999 reflects the effects of (1)
our acquisition of Bostek and the financing of that acquisition, (2) this
offering and the application of the estimated net proceeds to repay certain
indebtedness and (3) the purchase of the outstanding minority interests in our
subsidiaries, as if those transactions had occurred at January 1, 1998.
The following pro forma unaudited condensed consolidated statement of our
operations for the year ended December 31, 1998 reflects the effects of (1) the
acquisition of Bostek, which was completed effective June 1, 1999, and the
financing of that acquisition (other than $10.0 million which will be paid in
shares of our common stock upon the closing of this offering and $5.0 million
which will be paid in January 2000 without interest), (2) the acquisitions of
Blue Star Electronics, Inc., Consolidated Micro Components, Inc., Data Path
Technologies, Inc., GDB Software Services, Inc., Service Transport Company and
Fiscal Advantage, Inc. completed in 1998, (3) this offering and the application
of the estimated net proceeds to repay certain indebtedness and (4) the
purchase of outstanding minority interests in our subsidiaries, as if those
transactions had occurred at January 1, 1998. The acquisitions completed in 1998
were accounted for under the purchase method and are discussed under the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview--Our History." The Bostek acquisition was
accounted for under the purchase method and is discussed under the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Bostek--Acquisition by Intellesale."
The following pro forma unaudited condensed consolidated balance
sheet at June 30, 1999 reflects the effects of (1) the issuance by us of
4,000,000 shares of common stock pursuant to this offering and the
application of the estimated net proceeds to repay certain indebtedness
and (2) the purchase of the outstanding minority interests in certain of
our subsidiaries.
This pro forma unaudited financial information does not purport to
represent (1) what our actual results of operations would have been had the
acquisitions occurred on the dates assumed or (2) what we expect our results of
operations to be in the future. They do not reflect any estimates of cost
savings or other efficiencies that may be achieved from the integration of
Bostek or the other companies acquired. We believe that the assumptions used in
preparing the pro forma unaudited condensed consolidated statements of
operations provide a reasonable basis for presenting all of the significant
effects of the acquisition of Bostek and the companies acquired in 1998 and this
offering.
You should read the pro forma unaudited condensed consolidated statements
of operations and the accompanying notes together with the historical financial
statements of Intellesale and Bostek, including the notes thereto, and other
financial information pertaining to Intellesale and Bostek, including the
information set forth under "Use of Proceeds," "Capitalization," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Management's Discussion and Analysis of Pro
Forma Financial Condition and Results of Operations" included elsewhere in this
prospectus.
24
<PAGE>
Intellesale.com, Inc.
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Six Months Ended June 30, 1999
--------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Bostek, Inc. and
Intellesale Affiliate Pro Forma Pro Forma Offering Pro Forma
Actual(1) Actual(2) Adjustments Consolidated Adjustments As Adjusted
----------- ---------------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 39,212 $ 33,400 $ -- $ 72,612 $ -- $ 72,612
Cost of goods sold 27,816 29,596 -- 57,412 -- 57,412
----------- ---------------- ----------- ------------ ----------- -----------
Gross profit 11,396 3,804 -- 15,200 -- 15,200
Selling, general and administrative
expenses 7,772 3,424 -- 11,196 -- 11,196
Depreciation and amortization 568 10 456 (a) 1,034 248 (d) 1,282
----------- ---------------- ----------- ------------ ----------- -----------
Operating income (loss) 3,056 370 (456) 2,970 (248) 2,722
Interest and other income 82 -- -- 82 -- 82
Interest expense (363) (151) (323) (b) (837) 667 (e) (170)
----------- ---------------- ----------- ------------ ----------- -----------
Income before provision for income
taxes and minority interest 2,775 219 (779) 2,215 419 2,634
Provision (benefit) for income tax 1,273 74 (119) (c) 1,228 287 (f) 1,515
----------- ---------------- ----------- ------------ ----------- -----------
Income before minority interest 1,502 145 (660) 987 132 1,119
Minority interest 109 -- -- 109 (109) (g) --
----------- ---------------- ----------- ------------ ----------- -----------
Net income (loss) $ 1,393 $ 145 $ (660) $ 878 $ 241 $ 1,119
=========== ================ =========== ============ =========== ===========
Earnings per common share - diluted $ 0.09 -- -- $ 0.05 $ 0.05
Weighted average common shares
outstanding - diluted 16,296 -- -- 16,296 5,630 (h) 21,926
- ---------------------------------- =========== ================ =========== ============ =========== ===========
</TABLE>
(1) Includes one month of Bostek's operations. We acquired Bostek effective
June 1, 1999.
(2) For the five month period ended May 31, 1999.
25
<PAGE>
Intellesale.com, Inc.
Pro Forma Unaudited Condensed Consolidated Statement of Operations
For the Year Ended December 31, 1998
------------------------------------
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Predecessor Bostek, Inc.
Entities of and
Intellesale 1998 Pro Forma Affiliate Pro Forma
Actual(1) Acquisitions(2) Adjustments Subtotal Actual(3) Adjustments
----------- --------------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 60,743 $ 6,333 $ -- $ 67,076 $ 60,772 $ --
Cost of goods sold 47,623 4,397 -- 52,020 53,366 --
-------- ------- ------- -------- -------- -------
Gross profit 13,120 1,936 -- 15,056 7,406 --
Selling, general and
administrative expenses 8,725 2,145 10,870 5,675 --
Depreciation and
amortization 434 13 34 (i) 481 46 1,095 (l)
-------- ------- ------- -------- -------- -------
Operating income (loss) 3,961 (222) (34) 3,705 1,685 (1,095)
Interest and other income 45 3 -- 48 392 --
Interest expense (341) (18) -- (359) (353) (951) (m)
-------- ------- ------- -------- -------- -------
Income before provision
for income taxes and
minority interest 3,665 (237) (34) 3,394 1,724 (2,046)
Provision (benefit) for
income tax 1,646 -- (102) (j) 1,544 28 304 (n)
-------- ------- ------- -------- -------- -------
Income before minority
interest 2,019 (237) 68 1,850 1,696 (2,350)
Minority interest 226 -- 10 (k) 236 -- --
-------- ------- ------- -------- -------- -------
Net income (loss) $ 1,793 $ (237) $ 58 $ 1,614 $ 1,696 $(2,350)
======== ======= ======= ======== ======== =======
Earnings per common share
- diluted $ 0.11 -- -- $ 0.10 -- --
Weighted average common
shares outstanding -
diluted 15,841 -- -- 15,841 -- --
======== ======= ======= ======== ======== =======
<CAPTION>
Pro Forma Offering Pro Forma
Consolidated Adjustments As Adjusted
------------ ----------- -----------
<S> <C> <C> <C>
Revenues $ 127,848 $ -- $127,848
Cost of goods sold 105,386 -- 105,386
--------- ------- --------
Gross profit 22,462 -- 22,462
Selling, general and
administrative expenses 16,545 -- 16,545
Depreciation and
amortization 1,622 506 (o) 2,128
--------- ------- --------
Operating income (loss) 4,295 (506) 3,789
Interest and other income 440 -- 440
Interest expense (1,663) 1,530 (p) (133)
--------- ------- --------
Income before provision
for income taxes and
minority interest 3,072 1,024 4,096
Provision (benefit) for
income tax 1,876 658 (q) 2,534
--------- ------- --------
Income before minority
interest 1,196 366 1,562
Minority interest 236 (236) (r) --
--------- ------- --------
Net income (loss) $ 960 $ 602 $ 1,562
========= ======= ========
Earnings per common share
- diluted $ 0.06 $ 0.07
Weighted average common
shares outstanding -
diluted 15,841 5,630 (s) $ 21,471
========= ======= ========
</TABLE>
(1) Reflects 1998 operating results of all predecessor entities owned by
Applied Digital Solutions and includes the results of operations of
the companies we acquired in 1998 from their respective dates of
acquisition
(2) Represents the historical unaudited combined condensed results of Blue
Star Electronics, Inc., Consolidated Micro Components, Inc., DataPath
Technologies, Inc., GDB Software Services, Inc. and Service Transport
Company, each through March 31, 1998, and Fiscal Advantage, Inc.
through September 30, 1998.
(3) Represents Bostek's historical condensed combined results for the year
ended December 31, 1998.
26
<PAGE>
Intellesale.com, Inc.
Pro Forma Unaudited Condensed Consolidated Balance Sheet
June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Intellesale Offering Other Pro Forma
Actual Adjustments As Adjusted Adjustments As Adjusted
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents 115 15,910 (t) 16,025 (5,820)(u) 10,205
Accounts receivable 13,336 -- 13,336 -- 13,336
Inventories 15,003 -- 15,003 -- 15,003
Notes receivable - related parties 262 -- 262 -- 262
Prepaid expenses and other current assets 731 -- 731 -- 731
------ ------ ------ ------- ------
Total Current Assets 29,447 15,910 45,357 (5,820) 39,537
Equipment & Leasehold Improvements, net 1,735 -- 1,735 -- 1,735
Notes Receivable 921 -- 921 -- 921
Goodwill, net 34,980 -- 34,980 9,792(u) 44,772
Other Assets 272 -- 272 -- 272
------ ------ ------ ------- ------
67,355 15,910 83,265 3,972 87,237
====== ====== ====== ======= ======
Current Liabilities
Notes payable and current maturities
of long-term debt 99 -- 99 -- 99
Accounts payable and accrued expenses 4, 150 -- 4,150 -- 4,150
Due to Parent Company 27,600 (17,000)(t) 10,600 -- 10,600
Due to shareholder of acquired subsidiary 15,000 -- 15,000 (10,000)(v) 5,000
------ ------ ------ ------- ------
Total Current Liabilities 46,849 (17,000) 29,849 (10,000) 19,849
Minority interest 698 698 (698)(u) --
------ ------ ------ ------- ------
Stockholders Equity
Common shares 1 1 (t) 2 -- 2
Additional paid-in capital 15,537 32,909 (t) 48,446 14,670(v)(u) 63,116
Retained earnings 4,270 -- 4,270 -- 4,270
------ ------ ------ ------- ------
Total Stockholders' Equity 19,808 32,910 52,718 14,670 67,388
67,355 15,910 83,265 3,972 87,237
====== ====== ====== ======= ======
</TABLE>
27
<PAGE>
NOTES TO THE PRO FORMA UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands)
(a) Represents the net increase to amortization expense for goodwill,
arising from the allocation of the purchase price to the actual assets and
liabilities of Bostek at January 1, 1998, resulting from the acquisition of
Bostek amortized over a period of twenty years, calculated as follows:
Pro forma goodwill at January 1, 1998 $ 21,904
Divide by 20 years for annual amortization 1,095
---------
Multiply by 5/12 for 5 months amortization 456
=========
(b) Represents the net increase to our interest expense for the six months
ended June 30, 1999 associated with debt issued in connection with the purchase
of Bostek, based upon borrowing the $14,486 paid to the Bostek sellers and used
to repay Bostek debt at closing, at an average interest rate of 7.85% per annum,
calculated as follows:
Net amount borrowed $ 14,486
Multiply by 7.85% for annual interest expense 1,137
Multiply by 5/12 for 5 months interest expense 474
Less: Bostek historical interest expense (151)
---------
Net adjustment 323
=========
A change in the interest rate of 1/8% would change interest expense by
approximately $7.
(c) Represents a decrease in Bostek's tax provision due to Bostek's
earnings reduced by the pro forma interest expense, multiplied by the combined
federal and state statutory income tax rate. Bostek was a subchapter S
corporation for income tax purposes and accordingly no provision was made for
federal income taxes on a pre-acquisition historical basis. Amortization is not
deducted in computing the pro forma income tax provision.
Bostek income before provision for income taxes $ 219
Less: Pro forma interest expense (323)
---------
Adjusted loss before provision (benefit) for income taxes (104)
Multiply by statutory income tax rate of 43% (45)
Less: Existing tax provision 74
---------
Pro forma tax adjustment (119)
=========
(d) Represents the increase in goodwill amortization as a result of our
purchase of the minority interests and settlement of the earn-out obligations in
connection with this offering:
Total value of additional consideration (excluding
Service Transport) $ 10,040
Value of 50,000 shares additional consideration due to
Service Transport minority stockholder, assuming an
initial public offering price of $9.00 450
Less: Minority interest at January 1, 1999 (590)
---------
Pro forma additional goodwill at January 1, 1999 9,990
Divide by 20 years for annual amortization 495
---------
Multiply by 6/12 for 6 months amortization 248
=========
28
<PAGE>
(e) Represents the decrease in interest expense resulting from our use of
the net proceeds to repay borrowings from Applied Digital Solutions:
Pro forma amount to be repaid $17,000
Multiply by 7.85% for annual interest expense 1,335
-------
Multiply by 6/12 for 6 months interest expense 667
=======
(f) Represents the increase in the tax provision as a result of the
decrease in interest expense in (e) above. Amortization is not deducted in
computing the pro forma income tax provision.
Pro forma decrease in interest expense $ 667
Multiply by statutory income tax rate of 43% $ 287
(g) Represents the elimination of minority interest as a result of our
purchase of the minority interests in connection with this offering.
(h) Represents shares issued in connection with:
(1) this offering;
(2) payment to the former shareholders of Bostek in the amount of
$10,000, assuming an initial offering price of $9.00; and
(3) our purchase of the minority interests and settlement of the
earn-out obligation, of $10,040 assuming an initial public
offering price of $9.00, plus 50,000 shares.
(i) Represents the net increase to amortization expense for goodwill
resulting from the 1998 acquired companies amortized over a period of twenty
years, calculated as follows:
Pro forma goodwill at January 1, 1998 $ 2,397
Divide by 20 years for annual amortization 120
-------
Amortization for period prior to acquisition 34
=======
(j) Represents an adjustment to the 1998 acquired companies' tax provision
due to their earnings multiplied by the combined federal and state statutory
income tax rate. The 1998 acquired companies were subchapter S corporations for
income tax purposes and accordingly no provision was made for federal income
taxes on a pre-acquisition historical basis. Amortization of goodwill is not
deducted in computing the pro forma income tax provision.
1998 acquired companies' loss before provision for income
taxes $ (237)
Multiply by statutory income tax rate of 43% (102)
Less: Existing tax provision 0
-------
Pro forma tax adjustment (102)
=======
(k) Represent the minority interest in the earnings and losses of two of
the 1998 acquired companies, as follows:
Combined net loss of less than wholly owned subsidiares $ (50)
Minority interest at 20% $ (10)
(l) Represents the net increase to amortization expense for goodwill,
arising form the allocation of the purchase price to the actual assets and
liabilities of Bostek at January 1, 1998, amortized over a period of twenty
years, calculated as follows:
Pro forma goodwill at January 1, 1998 $21,904
Divide by 20 years for annual amortization $ 1,095
(m) Represents the net increase to interest expense for the year ended
December 31, 1998 associated with debt issued in connection with the purchase of
29
<PAGE>
Bostek, based upon borrowing the $14,486 paid to the Bostek sellers and used to
repay Bostek debt at closing, borrowed at an average interest rate of 9% per
annum, calculated as follows:
Net amount borrowed $ 14,486
Multiply by 9% for annual interest expense 1,304
Less: Bostek historical interest expense (353)
--------
Net adjustment 951
========
A change in the interest rate of 1/8% would change interest expense by
approximately $13
(n) Represents an increase in Bostek's tax provision due to Bostek's
earnings reduced by the pro forma interest expense, multiplied by the combined
federal and state statutory income tax rate. Bostek was a subchapter S
corporation for income tax purposes and accordingly no provision was made for
federal income taxes on a pre-acquisition historical basis. Amortization is not
deducted in computing the pro forma income tax provision.
Bostek income before provision for income taxes $ 1,724
Less: Pro forma interest expense (951)
--------
Adjusted income before provision for income taxes 773
Multiply by statutory income tax rate of 43% 332
Less: Existing tax provision (28)
--------
Pro forma tax adjustment 304
========
(o) Represents the increase in goodwill amortization as a result of our
purchase of the minority interests and settlement of the earn-out obligations in
connection with this offering:
Total value of additional consideration $ 10,040
(excluding Service Transport)
Value of 50,000 shares additional consideration due
Service Transport, assuming an initial public
offering price of $9.00 450
Less: Pro forma minority interest at January 1, 1998 (367)
Pro forma additional goodwill at January 1, 1998 10,123
--------
Divide by 20 years for annual amortization 506
========
(p) Represents the decrease in interest expense resulting from our use of
the net proceeds to repay borrowings from Applied Digital Solutions:
Pro forma amount to be repaid $ 17,000
Multiply by 9% for annual interest expense $ 1,530
(q) Represents the increase in the tax provision as a result of the
decrease in interest expense in (p) above. Amortization is not deducted in
computing the pro forma income tax provision.
Pro forma decrease in interest expense $ 1,530
Multiply by statutory income tax rate of 43% $ 658
(r) Represents the elimination of minority interest as a result of our
purchase of the minority interests in connection with this offering.
(s) Represents shares issued in connection with:
(1) this offering;
(2) payment to the former shareholders of Bostek in the amount of
$10,000, assuming an initial offering price of $9.00; and
(3) our purchase of the minority interests and settlement of the
earn-out obligations of $10,040, assuming an initial public
offering price of $9.00, plus 50,000 shares.
30
<PAGE>
(t) Represents the issuance of common stock and repayment of debt
under the line of credit which we expect to have in place at the closing of
this offering, which will replace the line of credit which Applied Digital
Solutions is now providing to us.
4,000,000 shares issued assuming initial public offering
price of $9.00 $36,000
Less: Amount paid in offering costs (3,090)
Less: Amount paid to Applied Digital Solutions (17,000)
--------
Net cash received $15,910
=======
(u) Represents the amount to purchase minority interests and settle
earn-out obligations.
Total value of additional consideration (excluding
Service Transport)
Amount paid in cash $ 5,820
Amount paid in stock, excluding Service Transport: 4,220
-------
$10,040
=======
Value of 50,000 shares additional consideration due
to Service
Transport minority stockholder, assuming an initial
public offering price of $9.00 450
Less: Minority interest (698)
-------
Pro forma additional goodwill (15,910)
(v) Represents amount to be paid to the shareholders of Bostek and its
affiliate, Micro Components, in shares of our common stock.
Value of 1,111,111 shares of common stock at an initial
public offering price of $9.00 $10,000
=======
31
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements under the captions "Summary," "Risk Factors," "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Intellesale.com, Inc." and elsewhere in this
prospectus are "forward-looking statements." These forward-looking statements
include, but are not limited to, statements about our plans, objectives,
expectations, prospects and intentions and other statements contained in this
prospectus that are not historical facts. When used in this prospectus, the
words "expect," "anticipate," "believe," "estimate," "intend," "plan," "seek"
and similar expressions are generally intended to identify forward-looking
statements. Because these forward-looking statements involve risks and
uncertainties, there are important factors that could cause actual results to
differ materially from those expressed or implied by these forward-looking
statements, including changes in our plans, objectives, expectations, prospects
and intentions and other factors discussed under "Risk Factors" and elsewhere in
this prospectus. We cannot guarantee any future levels of activity, performance
or achievements. We will update these forward-looking statements, to the extent
required by law, to reflect material changes in the information previously
disclosed.
This prospectus contains market data related to the Internet.
These data have been included in studies published by the Internet
market research firms Jupiter Communications and International Data
Corporation. These market data include projections that are based on a
number of assumptions. If any of the assumptions on which these
projections are based are incorrect, actual results may differ from the
projections based on those assumptions. The Internet related markets
might not grow at rates projected by Jupiter Communications and
International Data Corporation. The failure of these markets to grow at
the projected rates may seriously harm our business and may cause the
price of our common stock to decline.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our results of operations and financial
condition and the results of operations and financial condition of Bostek should
be read in conjunction with the financial statements and related notes for us
and for Bostek included elsewhere in this prospectus. We consummated the Bostek
acquisition effective June 1, 1999; accordingly, the results presented for
Intellesale for the first six months of 1999 include one month of Bostek's
operations. The following discussion contains forward-looking statements that
reflect our expectations, assumptions, estimates and beliefs. The outcome of the
events described in these forward-looking statements is subject to risks and
uncertainties, and actual results could differ materially. Factors that could
cause or contribute to such differences include those discussed below and
elsewhere in this prospectus, particularly in "Risk Factors."
OVERVIEW
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at www.Intellesale.com
as well as through traditional channels, which we are migrating to the Internet.
In addition to selling products on our website, we distribute products through
cooperative marketing arrangements with other companies.
Our business consists of our Internet segment, in which we sell refurbished
and new computer products through our website, and our traditional commerce
and other services segment, in which we buy and remarket computer equipment and
components to traditional wholesalers, retailers and value-added resellers, as
well as individual and corporate end users, and provide integration and
consulting services, computer recycling, parts-on-demand services and
transportation services for computer and other equipment. We are transitioning
this traditional commerce business to the Internet.
We began offering products on the Internet in the second quarter of 1998
with the acquisition of Data Path Technologies, Inc., which marketed refurbished
computer products through the Internet. Building on this Internet platform, we
established the Intellesale.com website in January 1999 and began to focus our
business on, and migrate our traditional commerce business to, the Internet.
Our History
We were incorporated in Delaware in December 1998 and are the successor to
several businesses. We are a controlled subsidiary of Applied Digital Solutions,
Inc., a publicly held company which is traded on the Nasdaq National Market
under the symbol "ADSX." Applied Digital Solutions acquired 80% of each of our
predecessor businesses, which are Elite Computer Services, acquired on September
1, 1995, and Universal Commodities, acquired on November 1, 1996. Effective July
13, 1999, Universal Commodities was merged into Intellesale. Applied Digital
Solutions contributed the stock of Elite to Intellesale in July 1, 1999. We have
grown rapidly, both internally and through acquisition. Our acquisitions since
1996 have been made primarily through the use of Applied Digital Solutions'
common stock. Set forth below is certain information with respect to the
acquisitions we have completed:
33
<PAGE>
<TABLE>
<CAPTION>
Fair
Value Additional
Effective of Net purchase
Date of Percent Acquisition Assets price to
Acquisition Acquired Price Acquired Goodwill be paid (1) Business Description
- ----------------------------------------------------------------------------------------------------------------------------------
1995 Acquisition ($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Elite Computer Services, September 1, 80% $ 557 $ 10 $ 547 $ 300(2) Remarketer of computer parts
Inc. 1995
1996 Acquisition
Universal Commodities November 1, 80% 1,512 271 1,241 -- Remarketer of computer equipment
Corp. 1996
1997 Acquisitions
Norcom Resources, Inc. January 1, 80% 538 57 481 900 Remarketer of mainframe computers
1997
Pizarro ReMarketing, Inc. January 1, 80% 356 156 200 500 Remarketer of computer tape
1997 and disk drives
Cybertech Station, Inc. July 1, 1997 80% 467 0 467 415 Remarketer of computer memory
products
Port Parties, Ltd. July 1, 1997 80% 3,966 82 3,884 4,000 Leasing and rental services
for meeting and convention
planners
1998 Acquisitions
Blue Star Electronics,
Inc. April 1, 1998 80% 431 1 430 175 Cable assembly manufacturer
Consolidated Micro April 1, 1998 100% 1,948 4 1,944 -- Remarketer of memory,
Components, Inc. processors and hard drives
drives
Data Path Technologies, April 1, 1998 100% 3,421 146 3,275 2,000 Remarketer of computer equipment
Inc.
GDB Software Services,
Inc. April 1, 1998 100% 1,931 221 1,710 1,500 Provider of data processing
consulting services
Service Transport Company April 1, 1998 80% 89 (69) 158 450(3) Transporter of computer equipment
Fiscal Advantage, Inc. October 1, assets 200 25 175 250 Computer leasing services
1998
1999 Acquisition
Bostek, Inc. and
affiliate June 1, 1999 100% 25,205 3,747 21,458 Remarketer of computer equipment
</TABLE>
(1) Represents the amount payable in cash of $5,821 or in shares
of Intellesale equal to 4,220 (at an assumed initial public
offering price of $9.00) on completion of this offering to
acquire the remaining minority interest in the acquired
company and any remaining earn-out rights of the selling
stockholders.
(2) This amount has already been paid.
(3) Represents the value of the 50,000 shares being issued. Based on
and assumed initial public offering price of $9.00 per share.
On the date of acquisition, each entity listed above, other than Fiscal
Advantage, became an indirect subsidiary of Applied Ditigal Solutions and a part
of Applied Digital Solutions' computer equipment sales, service and leasing
business operated by Intellesale's management team. The Fiscal Advantage
acquisition was structured as an asset purchase. In the financial statements
included elsewhere in this prospectus, other than the financial statements of
Bostek, we carved out these businesses from Applied Digital Solutions and
included these businesses in Intellesale at the same recorded values these
businesses have as part of Applied Digital Solutions. Although Intellesale has
existed as a separate legal entity only since December 1998, Intellesale's
management team has operated the businesses associated with the entitites listed
above since 1996.
Applied Digital Solutions' common stock was issued as consideration for all
of the above acquisitions, except the acquisitions of Fiscal Advantage, Inc. and
Bostek. All of the above acquisitions, including Bostek and Fiscal Advantage,
have been accounted for using the purchase method of accounting and,
accordingly, the consolidated financial statements included elsewhere herein
reflect, for the predecessor businesses, the results of operations of each
34
<PAGE>
company from the date of acquisition by Applied Digital Solutions. The costs of
acquisition include all payments under the acquisition agreements plus the
direct costs incurred in connection with the acquisitions, primarily fees for
investment banking services, legal services and accounting services. The excess
of the purchase price for the acquisitions over the estimated fair values of the
net assets acquired has been allocated to goodwill, resulting in approximately
$35.0 million of goodwill. The amortization of this goodwill over 20 years will
result in an annual noncash charge to our operating results of approximately
$2.3 million (which includes $0.5 million of goodwill amortization
resulting from our buyout of earn-out arrangements and of minority interests in
our subsidiaries), or approximately $0.6 million per quarter. Because Bostek
generated most of the goodwill and it was not acquired until June 1999.
Intellesale's historical results through June 30, 1999 do not fully reflect
these annual expected goodwill charges. See "Pro Forma Financial Information,"
Note 15 to our consolidated financial statements for information on depreciation
and amortization expense by operating segment, Note 16 for unaudited pro forma
information for the above acquisitions that occurred in 1997 and 1998 and Note
17 regarding acquisition activity in the six months ended June 30, 1999.
Accounting Policies and Trends
The consolidated financial statements included elsewhere herein reflect
the carved-out financial position, results of operations and cash flows of
Intellesale and its subsidiaries for the periods presented.
The financial statements have been prepared as if we had operated as a stand-
alone entity for the periods presented, and include those assets, liabilities,
revenues and expenses directly attributable to our operations. The determination
and presentation of assets, liabilities, revenues and expenses have been made on
a basis consistent with the policies of Applied Digital Solutions used for
purposes of consolidation. Stockholders' equity has been restated to give effect
to the merger of Universal Commodities into Intellesale and the contribution of
Elite to Intellesale as if they had occurred at November 1, 1996 and September
1, 1995, the dates that Applied Digital Solutions acquired Universal Commodities
and Elite, respectively.
For product sales, we recognize revenue upon shipment. There are no
significant post-contract support obligations at the time of revenue
recognition. Our accounting policy regarding vendor and post-contract support
obligations is based on the terms of the customers' contract, billable upon the
occurrence of the post-sale support. Costs of goods sold are recorded as the
related revenue is recognized. Although an allowance for sales returns is
recorded, we do not experience significant product returns. Regardless of the
source of the merchandise, most of our products are warranted by either us or
the manufacturer. We provide a minimum six month warranty for most products not
covered by factory warranties. In addition, we offer our customers the
opportunity to purchase an extended warranty, which is priced on the basis of
the selling price of the item covered. These extended warranties are provided
under an agreement with a third party. We record a warranty accrual based on
estimated warranty claims.
With our emphasis on the Internet, we expect Internet revenues to
contribute a significantly greater percentage of our total revenue in the
future. As our Internet segment continues to grow, we expect that gross margins
from the Internet segment will continue to be higher than margins from our
traditional commerce segment, although they may vary based on several factors,
including product pricing and product acquisition costs. However, we expect
margin pressures as we expand the Internet segment of our business. As we expand
our Internet business, we expect operating margins will decline from current
levels as we increase our advertising and website maintenance costs.
Applied Digital Solutions currently provides certain services to, and
incurs certain expenses on behalf of, Intellesale. These services include legal,
internal audit, financial reporting and human resources. These expenses include
certain corporate overhead expenses, administration of our 401(k) employee
benefit plan, preparation of advertising materials and legal fees. The amounts
which Applied Digital Solutions charges Intellesale for these services and
35
<PAGE>
expenses are determined on the basis of Applied Digital Solutions' estimate of
the relative cost to provide these services. These costs were approximately $0.4
million in 1998 and $0.3 million in the first half of 1999. No costs were
allocated in 1996 and 1997 since Applied Digital Solutions did not provide
significant services. Such expenses are not necessarily indicative of the
expenses which would have resulted had we operated as a separate entity. If
we had to provide these services ourselves, they might have cost more. Following
the completion of this offering, we will be required to provide these services
at our expense.
Due to our historical dependence on Applied Digital Solutions for funding
and certain services, our ability to grow internally has been constrained by the
allocation of resources made by Applied Digital Solutions. For this reason, we
expect to have our own line of credit in place at the closing of this offering,
which will replace our line of credit with Applied Digital Solutions. Until we
establish such lines of credit, we will depend on Applied Digital Solutions for
funding, and the ability of Applied Digital Solutions to provide such funding
will be subject to the terms and conditions of its credit facilities. Applied
Digital Solutions has no obligation to provide funding to us. To the extent
Applied Digital Solutions does not provide funding to us, because it is unable
to borrow under its facilities or because it elects not to do so, our business
may be materially adversely affected.
INTELLESALE.COM
Results of Operations
The following table summarizes our results of operations as a percentage of
revenue for the six month periods ended June 30, 1998 and 1999 and for the last
three years:
<TABLE>
<CAPTION>
Relationship to Revenue
-----------------------------------------------------
Years ended Six months ended
December 31, June 30,
-------------------------- -----------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 42.7 84.2 78.4 79.2 70.9
-------------------------- ---------------
Gross profit 57.3 15.8 21.6 20.8 29.1
Selling, general and administrative expenses 31.9 9.6 14.4 12.6 19.9
Depreciation and amortization 0.1 0.5 0.7 0.7 1.4
-------------------------- ---------------
Operating income 25.3 5.7 6.5 7.5 7.8
Interest income 0.1 0.0 0.1 0.0 0.2
Interest expense 0.5 0.4 0.6 0.4 0.9
-------------------------- ---------------
Income before provision for income taxes 24.9 5.3 6.0 7.1 7.1
and minority interest
Provision for income taxes 9.5 2.2 2.7 2.9 3.3
-------------------------- ---------------
Income before minority interest 15.4 3.1 3.3 4.2 3.8
Minority interest 1.5 0.6 0.4 0.5 0.2
-------------------------- ---------------
Net income 13.9% 2.5% 2.9% 3.7% 3.6%
========================== ===============
</TABLE>
Revenue
We began offering products on the Internet in the second quarter of 1998
with the acquisition of Data Path Technologies, Inc., which marketed refurbished
computer products through the Internet.
Six month periods ended June 30, 1998 and 1999. Revenue from customers for
each operating segment for the six months ended June 30, 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
---------------------------------
Internet.......................... $ 2,439 8.6 $12,817 32.7
Traditional commerce.............. 25,760 91.4 26,395 67.3
---------------------------------
Consolidated...................... $28,199 100.0 $39,212 100.0
=================================
36
<PAGE>
Revenue for the six month period ended June 30, 1999 was $39.2 million, an
increase of $11.0 million, or 39.1%, from $28.2 million for the first six months
of 1998. Of the $11.0 million increase, $5.0 million, or 45.5%, was contributed
by Bostek, which we acquired effective June 1, 1999, and the remainder was
contributed primarily by the full six months of revenue in 1999 from our
acquisitions in 1998. Businesses acquired in the first six months of 1998
represented $13.0 million of revenue in the first half of 1999 and $5.4 million
in the first half of 1998.
In the Internet segment, the $10.4 million increase in revenue resulted
from several factors: $4.6 million from Data Path Technologies, which was owned
for only three months in the 1998 period and expanded its business in 1999, $2.8
million from Bostek, which was acquired effective June 1, 1999, and $3.0 million
from expansion and migration of other parts of our business to the Internet.
Revenue in the traditional commerce segment increased by $0.6 million or
2.5%. Bostek and the full six months of revenues from the 1998 acquisitions
resulted in an approximately $5.5 million increase in revenue in the first half
of 1999. This increase, however, was offset by a $4.9 million decrease in
revenue from the remainder of our business as a result of decreased demand for
PC and server memory products that had experienced significant sales in 1998,
when customers were purchasing memory to address the year 2000 problem, but
which sales declined in 1999.
Years ended December 31, 1996, 1997 and 1998. Revenue from customers for
each operating segment was:
($ in thousands) 1996 % 1997 % 1998 %
--------------------------------------------------
Internet................ $ -- -- $ -- -- $ 7,334 12.1
Traditional commerce.... 1,993 100.0 39,445 100.0 53,409 87.9
--------------------------------------------------
Consolidated............ $1,993 100.0 $39,445 100.0 $60,743 100.0
==================================================
Revenue for 1998 was $60.7 million, an increase of $21.3 million, or 54.0%,
from $39.4 million in 1997. Of this increase, $17.7 million resulted from
acquisitions made during 1998 and $5.2 million resulted from acquisitions made
in 1997, which are included for a full year in 1998 results. As the acquired
companies were integrated, we increased revenue at certain companies as we
focused on shifting our customers to the proper distribution channel.
Accordingly, the dollar increase from certain 1997 acquisitions was partially
offset by decreases in revenues at other subsidiaries, resulting in an overall
revenue increase from 1997 acquisitions of $3.6 million. In addition, revenues
increased by $1.4 million in 1998 from increased sale of certain memory products
that were sold as customers prepared for the year 2000 problem.
All of our Internet revenue in 1998 was from companies we acquired in 1998.
Traditional commerce revenue for 1998 increased by $14.0 million, or 35.4%, over
1997. Of this amount, approximately $10.4 million, or 74.3%, was contributed by
companies we acquired during 1998 and a net $3.6 million, as described above,
was contributed by companies that we acquired during 1997 whose revenues grew in
1998.
The 1997 revenue represents an increase of $37.5 million over the $2.0
million reported in 1996. Of this amount, $34.0 million, or 90.7%, was
contributed by companies we acquired during 1997. The remaining increase is
primarily the result of revenues from Universal Commodities, which we acquired
in November 1996. Our operations in 1996 consisted only of Elite Computer
Services, which we acquired in August 1995, and two months of Universal
Commodities.
37
<PAGE>
Gross Profit/Margin
Six month periods ended June 30, 1998 and 1999. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet................ $1,177 48.3 $ 5,498 42.9
Traditional commerce.... 4,685 18.2 5,898 22.3
---------------------------------
Consolidated............ $5,862 20.8 $11,396 29.1
=================================
Our gross profit for the first six months of 1999 was $11.4 million, an
increase of $5.5 million, or 94.4%, from $5.9 million for the first six months
of 1998. As a percentage of revenue, the gross margin was 29.1% for the first
six months of 1999 and 20.8% for the first six months of 1998. The increase in
our gross margins resulted primarily from lower product acquisition cost, higher
pricing resulting from increased demand and the continued migration of our
business to the Internet, which has higher margins, in the first half of 1999.
Gross profit in the Internet segment increased by $4.3 million. Of this
increase, $0.5 million was contributed by Bostek, $2.7 million was contributed
by Data Path Technologies, which was included for a full six months in 1999 and
experienced significant growth in 1999 from direct website sales, and the
remaining $1.1 million was contributed from Internet sales that resulted from
expansion and migration of other parts of our business to the Internet.
Years ended December 31, 1996, 1997 and 1998. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
-----------------------------------------------
Internet.................... $ -- -- $ -- -- $ 3,353 45.7
Traditional commerce........ 1,142 57.3 6,243 15.8 9,767 18.3
-----------------------------------------------
Consolidated................ $1,142 57.3 $ 6,243 15.8 $ 13,120 21.6
===============================================
Our gross profit for 1998 was $13.1 million, an increase of $6.9 million,
or 110.2%, from $6.2 million in 1997. Of this increase, $3.3 million was the
result of the Data Path Technologies acquisition and expansion of its business
in 1998. Additionally, 1998 acquisition activity resulted in a net increase of
$2.0 million, from both acquired businesses and internal growth, and 1997
acquisitions contributed $1.6 million to the increase. The overall increase in
our gross margins resulted primarily from lower product acquisition costs which
we were able to achieve as we integrated our businesses.
As a percentage of revenue, gross margin increased to 21.6% in 1998 from
15.8% in 1997, resulting from an increase in the volume of sales on the
Internet, which has higher margins. Additionally, margins improved in the
traditional commerce segment, a result of the acquisition activity contributing
higher margin business and our ability as a whole to negotiate lower product
acquisition costs based on our ability to purchase in higher volumes.
The 1997 gross profit represents an increase of $5.1 million over the $1.1
million reported in 1996. Of this amount, $3.9 million was a result of 1997
acquisitions and the remainder was due to inclusion of Universal Commodities for
a full year in 1997. Gross margin was 57.3% in 1996, but represented only the
results of Elite for the whole year and Universal Commodities for two months.
Accordingly, we believe that 1998 margins are more indicative of margins from
our continuing business.
Selling, General and Administrative Expense
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in our traditional commerce segment.
38
<PAGE>
This is because advertising costs, website maintenance costs and labor costs are
all significantly greater than in our traditional commerce segment. We expect
these expenses to increase in absolute dollar terms in the future as the
Internet segment grows.
Six month periods ended June 30, 1998 and 1999. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet.................... $ 739 30.3 $3,703 28.9
Traditional commerce........ 2,820 10.9 4,069 15.4
--------------------------------
Consolidated................ $3,559 12.6 $7,772 19.8
================================
Selling, general and administrative expenses were $7.8 million for the
first six months of 1999, an increase of $4.2 million, or 118.4%, from $3.6
million for the first six months of 1998. As a percentage of revenue, selling,
general and administrative expenses were 19.8% for the first six months of 1999
and 12.6% for the first six months of 1998. Of the increase, $0.7 million
resulted from the Bostek acquisition, and $2.8 million resulted from 1998
acquisitions and related increase in personnel. The remainder of the increase,
both in absolute dollar terms and as a percentage of revenue, was due to the
addition of corporate management and other employees to support our growth,
advertising and management fees paid to Applied Digital Solutions. Management
fees paid to Applied Digital Solutions in the first half of 1999 amounted to
$0.3 million compared to $0.2 million in the first half of 1998.
In the Internet segment, selling general and administrative expenses
increased by $3.0 million, of which $0.4 million was due to the Bostek
acquisition and the remaining $2.6 million was primarily due to both the
inclusion of Data Path Technologies for the full six months in 1999 and the
resulting growth of the Internet business costs, including additional personnel
and advertising.
Selling, general and administrative expenses in the traditional commerce
segment increased by $1.2 million. Of this amount, $0.8 million is a result of
the acquisition of Bostek and the companies acquired in 1998. The remaining
increase is primarily due to the addition of corporate management.
Years ended December 31, 1996, 1997 and 1998. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
---------------------------------------------
Internet................... $ -- -- $ -- -- $2,551 34.8
Traditional commerce....... 635 31.9 3,778 9.6 6,174 11.6
---------------------------------------------
Consolidated............... $ 635 31.9 $ 3,778 9.6 $8,725 14.4
=============================================
Selling, general and administrative expenses were $8.7 million in 1998, an
increase of $4.9 million, or 130.9%, from $3.8 million in 1997. As a percentage
of revenue, selling, general and administrative expenses increased to 14.4% in
1998 from 9.6% in 1997. The increase from 1997 to 1998 was due primarily to 1998
acquisitions, which contributed additional expenses of $3.5 million in 1998, and
1997 acquisitions, which contributed additional expenses of $0.9 million in
1998. In addition, we paid $0.4 million in management fees to Applied Digital
Solutions in 1998. We paid no fees in 1996 or 1997 as services provided were
insignificant.
The 1997 expense represents an increase of $3.1 million over the $0.6
million reported in 1996. In 1996, selling, general and administrative expenses
were 31.9% of revenue, compared to 9.6% in 1997. The increase in absolute dollar
terms from 1996 to 1997 was primarily a result of acquisitions made in 1997 and
the acquisition of Universal Commodities made in November 1996. The decrease in
selling, general and administrative expenses as a percentage of revenue was
because acquisitions made in 1997 allowed us to spread our corporate overhead
expenses over a larger revenue base.
39
<PAGE>
Depreciation and Amortization
Six month periods ended June 30, 1998 and 1999. Depreciation and
amortization for each of the operating segments, and as a percentage of segment
revenues, during the first six months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
----------------------------
Internet....................... $ 6 $236
Traditional commerce........... 182 332
----------------------------
Consolidated................... $ 188 0.7 $568 1.4
============================
Depreciation and amortization expense was $0.6 million for the first six
months of 1999, an increase of $0.4 million, or 202.1%, from $0.2 million for
the first six months of 1998. The increase is primarily due to goodwill
amortization resulting from the companies acquired in 1998 and the Bostek
acquisition.
Years ended December 31, 1996, 1997 and 1998. Depreciation and amortization
for each of the operating segments, and as a percentage of segment revenues,
was:
($ in thousands) 1996 % 1997 % 1998 %
----------------------------------------
Internet................... $ -- -- $ -- -- $ 21 0.3
Traditional commerce....... 2 0.1 190 0.5 413 0.8
----------------------------------------
Consolidated............... $ 2 0.1 $190 0.5 $434 0.7
========================================
Depreciation and amortization expense was $0.4 million in 1998, an increase of
$0.2 million, or 128.4%, from 1997. The increase is primarily due to
amortization of goodwill associated with 1998 and 1997 acquisitions.
Depreciation and amortization expense increased by $0.2 million in 1997 as
compared to 1996 primarily as a result of goodwill amortization associated with
companies acquired in 1997 and the acquisition of Universal Commodities in
November 1996. Including our acquisition of Bostek, our annual goodwill
amortization expense will be $1.8 million.
Operating Income
Six month periods ended June 30, 1998 and 1999. Operating income for each
of the operating segments, and as a percentage of segment revenue, during the
first six months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet................... $ 437 17.9 $1,741 13.6
Traditional commerce....... 1,678 6.5 1,315 5.0
--------------------------------
Consolidated............... $2,115 7.5 $3,056 7.8
================================
Operating income was $3.1 million for the first six months of 1999, an
increase of $1.0 million, or 44.5%, from $2.1 million for the first six months
of 1998.
Of this increase, $0.4 million was contributed by Bostek, which we acquired
effective June 1, 1999, and the remainder was contributed primarily by the full
six months of operating income in 1999 from our acquisitions in 1998, most of
which occurred effective April 1, 1998. In the Internet segment, the $1.3
million increase in operating revenue resulted primarily from an increase of
$1.1 million from Data Path Technologies, which was owned for only three months
in the 1998 period and expanded its business in 1999, and $0.2 million from
Bostek, which was acquired effective June 1, 1999. The decrease in traditional
operating income was a result of migration of business to the Internet,
additional depreciation and amortization expense and increaed selling, general
and administrative expenses.
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Years ended December 31, 1996, 1997 and 1998. Operating income for each of
the operating segments, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
---------------------------------------------
Internet.................... $ -- -- $ -- -- $ 782 10.7
Traditional commerce........ 505 25.3 2,275 5.8 3,179 6.0
---------------------------------------------
Consolidated................ $ 505 25.3 $2,275 5.8 $3,961 6.5
=============================================
Operating income was $4.0 million in 1998, an increase of $1.7 million, or
74.1%, from $2.3 million in 1997. The 1997 operating income represents an
increase of $1.8 million over the $0.5 million reported in 1996. The increase
in operating income of $1.7 million over the $2.3 million reported in 1997 was
from companies acquired during 1998. The increase in operating income of $1.8
million over the $0.5 million reported in 1996 was from companies acquired by
during 1997.
Interest Income and Expense
Interest income was insignificant in each of the periods. Interest income
is earned primarily from short-term investments. Interest expense was $0.4
million for the first six months of 1999 and $0.1 million for the first six
months of 1998. Interest expense was $0.3 million in 1998, an increase of $0.2
million from $0.1 million in 1997. The 1997 expense increased $0.1 million over
the nominal amount reported in 1996. As we have grown over the last three years,
our need to finance our working capital has increased, resulting in greater
amounts borrowed and higher interest expense. Interest expense is principally
associated with advances from Applied Digital Solutions and borrowings from
financial institutions.
Income Taxes
We had effective income tax rates of 40.6% for the first six months of 1998
and 45.9% for the first six months of 1999. Our effective income tax rates were
38.3% in 1996, 41.6% in 1997 and 44.9% in 1998. Changes in the effective rate
were primarily the result of acquisitions of companies in states with higher
state income tax rates. Information on income taxes can be found in Notes
1 and 9 to our financial statements.
Liquidity and Capital Resources
We have historically funded our operations primarily through borrowings
from Applied Digital Solutions and cash from operations.
As of June 30, 1999, cash and cash equivalents totaled $0.1 million, a
decrease of $0.5 million from $0.6 million at December 31, 1998. Excess cash on
hand has been applied against our indebtedness to Applied Digital Solutions.
Operating Activities
Net cash used in operating activities was approximately $5.7 million for
the six month period ended June 30, 1999. This was primarily the result of an
increase in accounts receivable of $2.0 million and an increase of $5.4 million
in inventory, offset by net income of $1.4 million. The higher levels of
accounts receivable and inventory are a result of increased sales and
anticipated sales from the Internet. Net cash provided by operating activities
for the six months ended June 30, 1998 was approximately $0.4 million. This was
primarily the result of net income of $1.1 million and an increase in amounts
owed to Applied Digital Solutions of $0.5 million, offset by an increase in
inventory of $1.1 million. We anticipate that we will continue to use more cash
than will be provided by our operations as our business grows during the next 12
months, but at a decreasing rate compared to prior periods. In order to conduct
the marketing and other efforts we have planned during this period, we will rely
on the proceeds of this offering.
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We do not anticipate any material capital expenditures within the next 12
months. We believe that our efforts to migrate our traditional business to the
Internet will not require significant capital expenditures. We expect to enhance
our website to accommodate the needs of our traditional customers and estimate
that these costs will be less than $0.5 million.
Net cash used in operating activities was approximately $2.2 million for
the year ended December 31, 1998. This was primarily the result of an increase
in inventory of $2.3 million, a decrease in accounts payable and accrued
expenses of $1.8 million and a decrease in amounts due to Applied Digital
Solutions of $0.4 million, offset by net income of $1.8 million and depreciation
and amortization of $0.4 million. Net cash provided by operating activities was
approximately $0.2 million for the year ended December 31, 1997. This was
primarily the result of an increase in inventory of $2.3 million, an increase in
accounts receivable of $1.4 million, an increase in accounts payable of $1.7
million and an increase in amounts due to Applied Digital Solutions of $0.8
million, offset by net income of $1.0 million. Net cash provided by operating
activities was approximately $0.1 million for the year ended December 31, 1996.
This was primarily the result of an increase in inventory of $0.2 million, an
increase in accounts receivable of $0.1 million, a decrease in accounts payable
of $0.2 million and an increase in amounts owed to Applied Digital Solutions of
$0.4 million, offset by net income of $0.3 million.
Investing Activities
Net cash used in investing activities was approximately $11.8 million for
the six month period ended June 30, 1999. This was the result of payments in the
Bostek acquisition of $10.6 million and the purchase of furniture and fixtures,
equipment and leasehold improvements of $1.1 million. Net cash used in investing
activities for the six months ended June 30, 1998 was nominal.
Net cash used in investing activities was approximately $1.0 million for
the year ended December 31, 1998. This was primarily the result of an increase
in notes receivable from officers. Net cash provided by investing activities was
$0.4 million for the year ended December 31, 1997. This was primarily the result
of net cash acquired in acquisitions of $0.6 million, a decrease in notes
receivable of $0.1 million and proceeds from the sale of assets of $0.1 million,
offset by purchases of $0.4 million. Net cash used in investing activities for
the year ended December 31, 1996 was nominal.
Financing Activities
Net cash provided by financing activities was $17.0 million for the six
month period ended June 30, 1999. This was the result of additional borrowings
of $17.0 million from Applied Digital Solutions, including $10.1 million
borrowed to acquire Bostek and an additional $4.4 million to refinance Bostek's
working capital loans. Net cash provided by financing activities for the six
months ended June 30, 1998 was nominal.
Net cash provided by financing activities was approximately $3.2 million
for the year ended December 31, 1998. This was primarily the result of
additional borrowings from Applied Digital Solutions of $5.0 million for
acquisitions and working capital, offset by payments of amounts due financial
institutions of $1.8 million. Net cash used in financing activities for the year
ended December 31, 1997 was nominal. Net cash used in financing activities for
the year ended December 31, 1996 was $0.2 million. This was the result of
reductions in the amounts due financial institutions.
As of June 30, 1999, our outstanding borrowings from Applied Digital
Solutions were $27.6 million, including the amounts borrowed in connection with
the Bostek acquisition as described above. As of August 31, 1999, our
outstanding borrowings from Applied Digital Solutions were $33.0 million. From
January 1, 1999 through August 31, 1999, our average weighted interest rate on
borrowings from Applied Digital Solutions was 7.6%, and at August 31, 1999 the
interest rate on these borrowings was 6.9%. Our borrowings from Applied Digital
Solutions bear interest at the same rate as the rate paid by Applied Digital
Solutions to its lender. These rates are subject to adjustment to reflect
42
<PAGE>
changes in specified interest rate indexes. We expect to have our own line
of credit in place at the closing of this offering, which will replace the line
of credit which Applied Digital Solutions is now providing to us. We cannot
provide assurance that we will be able to establish such line of credit on
favorable terms or at all. Until we establish such line of credit, we will
depend on Applied Digital Solutions for funding, and the ability of Applied
Digital Solutions to provide such funding will be subject to the terms and
conditions of its credit facilities. We expect that the proceeds of this
offering, together with our available cash resources, will be sufficient to meet
our cash requirements for at least the next 12 months and will provide us with
sufficient resources to finance our working capital requirements for the next 12
months. However, after that 12-month period, we may require additional equity or
debt financing to meet our working capital and capital expenditure requirements.
Our capital requirements depend on a variety of factors, including but not
limited to the rate of increase or decrease in our existing business base, the
success, timing, and amount of investment required to bring new products or
services online, revenue growth or decline, and potential acquisitions. We
cannot assure you that we will not need additional financing sooner or, if
required, that it will be available on a timely basis or on terms satisfactory
to us.
Applied Digital Solutions currently has a term and revolving credit
facility with IBM Credit Corporation, under which Applied Digital Solutions may
borrow in various tranches. The aggregate amount of the facility for domestic
use is $79.0 million, of which $22.0 million is a revolving credit line that may
be used for general working capital requirements, capital expenditures and
certain other permitted purposes. The U.S. tranche bears interest at a floating
rate equal to 30-day LIBOR plus 1.75%. As of August 31, 1999, a total of $60.5
million was outstanding under this facility and $18.5 million remained available
under the U.S. tranche. The shares of Intellesale held by Applied Digital
Solutions are pledged as security for this facility. Our ability to borrow funds
from Applied Digital Solutions is subject to various factors, including the
ability of Applied Digital Solutions to meet the conditions to borrowing under
the facility, the amounts available under the facility and the determination of
the management of Applied Digital Solutions whether to make funds available to
us, which will be affected by the borrowing requirements of Applied Digital
Solutions for its own operations, for acquisitions and for its other
subsidiaries. While we cannot assure you as to Applied Digital Solutions' future
ability to borrow under this facility, Applied Digital Solutions has advised us
that it meets all conditions to borrowing under the facility as of the date of
this prospectus. Due to our historical dependence on Applied Digital Solutions
for funding, our ability to grow internally has been constrained by the
allocation of resources made by Applied Digital Solutions. We expect to have our
own line of credit in place at the closing of this offering, which will replace
the line of credit which Applied Digital Solutions is now providing, and we plan
to use approximately $17.0 million of the proceeds from this offering to repay
borrowings under that line of credit.
In connection with certain acquisitions, we have agreed to pay additional
amounts to the sellers of the acquired businesses depending on the performance
of the businesses. We have recently entered into agreements with those sellers
who are entitled to these payments under which we have agreed to pay fixed
amounts, in a combination of cash and shares of our stock, in lieu of the
earn-out payments. Some of those individuals also retained minority interests in
our subsidiaries, and in those cases, we have also agreed to repurchase their
minority interests, also for a combination of cash and our stock. Our aggregate
cash obligation to those individuals under all of these agreements is $5.8
million. We intend to use $5.8 million of the proceeds from this offering to
satisfy the cash portion of those obligations, and to issue 518,778 shares
of our common stock, assuming an initial public offering price of $9.00 per
share, to satisfy the stock portion of those obligations.
Impact of Recently Issued Accounting Standards
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (FAS) 133, Accounting for Derivative
Instruments and Hedging Activities. In 1999, the FASB issued FAS 137, Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
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<PAGE>
Date of FAS 133. We currently do not use any derivative financial instruments to
hedge our exposure to adverse fluctuations in interest rates, foreign exchange
rates, fluctuations in commodity prices or other market risks, nor do we invest
in speculative financial instruments.
Quantitative and Qualitative Disclosures About Market Risk
Less than 5% of our revenues for 1998 resulted from export to other
countries. Our operations may be subject to volatility due to inflation or
changes in political and economic conditions in these countries. Sales and
expenses that are denominated in local currencies may be affected as currency
fluctuations affect our product prices and operating costs or those of our
competitors.
Borrowings from Applied Digital Solutions are at a variable rate. We do not
have any hedging arrangements for interest rates.
BOSTEK
This portion of this discussion provides information about the operations
of Bostek for periods prior to our acquisition of Bostek, which occurred
effective June 1, 1999, and also provides information about the anticipated
effect of the acquisition on Intellesale.
Bostek was founded in 1983 as a reseller of computer equipment. In early
1998, Bostek shifted its focus to capitalize on an emerging niche segment in the
computer equipment distribution industry that involved acquiring new and
refurbished computer equipment from manufacturers, retailers and resellers and
selling such equipment over the Internet and through traditional sales channels.
In March 1998, Bostek developed a website under the name American Discount
Warehouse, at PickADW.com, to sell its products over the Internet.
Bostek operated in three business segments:
. Internet, which began in the second quarter of 1998, in which
Bostek remarketed new and refurbished computer products through
its website;
. Internet fulfillment, in which Bostek sold products to other
Internet companies that remarket the products through the
Internet; and
. Traditional commerce, in which Bostek remarketed personal
computer equipment and components to traditional wholesalers,
retailers and value-added resellers as well as individual and
corporate end users.
Acquisition by Intellesale
Effective June 1, 1999, we completed the purchase of Bostek and its
affiliate, Micro Components International, for $25.2 million, and we have agreed
to pay up to an additional $5.0 million in cash if Bostek achieves approximately
$4 million of earnings before income taxes over the two-year period ended May
31, 2001. Of the $25.2 million base purchase price, including expenses, $10.1
million was paid in cash at the closing, $10.0 million will be paid in our
common stock within 30 days after the closing of this offering, based on the
initial public offering price of this offering, and $5.0 million is payable in
cash in January 2000. We will also reimburse the former Bostek stockholders
approximately $1 million in tax liability they will incur as a result of a
Section 338(h)(10) tax election we made in connection with the acquisition. As a
result of this election, a portion of goodwill amortization will not be
deductible for tax purposes. This amount of goodwill has not been finalized. We
borrowed the $10.1 million cash portion of the consideration from Applied
Digital Solutions. We also borrowed $4.4 million from Applied Digital Solutions
to refinance Bostek's working capital loans. We intend to replace our line of
credit with Applied Digital Solutions with our own line of credit, which we
expect to have in place at the closing of this offering. Assuming an initial
public offering price of $9.00, we will issue 5,555,556 shares of common stock
to each of the two former Bostek stockholders within 30 days of the closing of
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<PAGE>
this offering, which will represent approximately 2.7% of our outstanding common
stock after giving effect to this offering and the issuance of shares of common
stock to satisfy certain earn-out obligations and to purchase minority interests
in certain subsidiaries. Both of the former Bostek stockholders are employees of
Intellesale.
The purchase price for Bostek was assigned to the assets acquired and the
liabilities assumed based on their estimated fair values at the acquisition
date. Based on such allocations, the aggregate purchase price exceeded the
estimated fair value of the net assets acquired by approximately $21.5 million.
That amount is recognized as goodwill and is being amortized over 20 years and
will result in an annual amortization charge of approximately $1.1 million. Any
additional amounts paid out under the purchase price contingency provision noted
above will result in additional goodwill.
Bostek is engaged in the business of acquiring excess inventory and
manufacturer refurbished computer equipment and selling such equipment,
primarily over the Internet. As a result of the Bostek acquisition, our product
mix now includes newer, factory-warranted, higher-end products in addition to
our refurbished equipment. In addition to expanding our product mix and customer
base, we expect that the integration of Bostek will have the following benefits:
. the combination of the best features of both websites should
enhance our customers' experience; and
. the combination of Bostek's warehousing operations with our own
should lead to cost savings.
Results of Operations
The following table summarizes Bostek's historical, pre-acquisition results
of operations as a percentage of revenue for the five-month period ended May 31,
1998 and 1999 and for the years ended December 31, 1996, 1997 and 1998:
Relationship to Revenue
---------------------------------------------
Years ended Five months ended
December 31, May 31,
------------------------ ------------------
1996 1997 1998 1998 1999
-------- ------ ------ ------ ----------
Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 87.1 86.2 87.8 87.8 88.6
------------------------ ------------------
Gross profit 12.9 13.8 12.2 12.2 11.4
Selling, general and
administrative expenses 7.1 10.1 9.4 7.5 10.3
------------------------ ------------------
Operating income 5.8 3.7 2.8 4.7 1.1
Interest and other income -- -- (0.6) -- --
Interest expense 0.2 0.1 0.6 0.9 0.5
------------------------ ------------------
Income before provision
for income taxes 5.6 3.6 2.8 3.8 0.6
Provision for income taxes 0.1 0.1 0.0 0.3 0.2
------------------------ ------------------
Net income 5.5% 3.5% 2.8% 3.5% 0.4%
======================== ==================
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Revenue
Five month periods ended May 31, 1998 and 1999. Revenue from customers for
each operating segment for the first five months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
----------------------------------------
Internet.................. $ 1,475 6.2 $ 7,321 22.0
Internet fulfillment...... 3,456 14.5 5,890 17.6
Traditional commerce...... 18,933 79.3 20,189 60.4
----------------------------------------
Consolidated.............. $23,864 100.0 $33,400 100.0
========================================
Revenue for the first five months of 1999 was $33.4 million, an increase of
$9.5 million, or 40.0%, from $23.9 million for the first five months of 1998.
This increase is primarily attributable to more transactions conducted over the
Internet. Bostek's Internet segment began operating in April 1998 and accounted
for 61.3% of the increase.
Years ended December 31, 1996, 1997 and 1998. Revenue from customers for
each operating segment was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------------
Internet................. $ -- -- $ -- -- $ 7,789 12.8
Internet fulfillment..... -- -- -- -- 8,208 13.5
Traditional commerce..... 54,400 100.0 42,930 100.0 44,775 73.7
------------------------------------------------
Consolidated............. $54,400 100.0 $42,930 100.0 $60,772 100.0
================================================
Revenue for 1998 was $60.8 million, an increase of $17.8 million, or 41.6%,
from $42.9 million in 1997. This increase is principally attributable to
increased number of transactions being conducted over the Internet and increased
revenues from Internet fulfillment arrangements. Traditional commerce revenues
were up slightly in 1998 due to increased volume of sales. The 1997 revenue
represents a decrease of $11.5 million, or 21.1% from the $54.4 million reported
in 1996. This decrease was a result of significant changes within the personal
computer market, primarily the introduction of the Intel Pentium(R) processor
which severely impacted the demand for older processors.
Gross Profit/Margin
Five month periods ended May 31, 1998 and 1999. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
-----------------------------------
Internet...................... $ 201 13.6 $ 878 12.0
Internet fulfillment.......... 317 9.2 658 11.2
Traditional commerce.......... 2,388 12.6 2,268 11.2
-----------------------------------
Consolidated.................. $2,906 12.2 $3,804 11.4
===================================
Gross profit for the first five months of 1999 was $3.8 million, an
increase of $0.9 million, or 30.9%, from $2.9 million for the first five months
of 1998. As a percentage of revenue, gross margin was 11.4% for the first five
months of 1999 and 12.2% for the first five months of 1998. Overall gross margin
decreased in the 1999 period primarily because Bostek shifted its product mix to
newer higher-end systems, where there is higher demand but increased competition
that results in lower margins for such products on both the Internet and through
traditional channels. Because Bostek has completed the shift of its product mix
to newer higher-end products, we do not expect such downward pressure on
Bostek's margins to continue.
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Years ended December 31, 1996, 1997 and 1998. Gross profit by operating
segment, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------------
Internet................. $ -- -- $ -- -- $ 857 11.0
Internet fulfillment..... -- -- -- -- 940 11.5
Traditional commerce..... 7,034 12.9 5,915 13.8 5,609 12.5
------------------------------------------------
Consolidated............. $7,034 12.9 $5,915 13.8 $7,406 12.2
================================================
Gross profit for 1998 was $7.4 million, an increase of $1.5 million, or
25.2%, from $5.9 million in 1997. Gross profit for 1997 represents a decrease of
$1.1 million, or 15.9%, over the $7.0 million reported in 1996. Overall gross
margin decreased in 1998 primarily because Bostek shifted its product mix to
newer higher-end systems, where there is higher demand but increased competition
that results in lower margins for such products on both the Internet and through
traditional channels.
Selling, General and Administrative Expense
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in Bostek's traditional and Internet
fulfillment segments. All labor costs are included in this category, as are
website maintenance costs and advertising costs, both of which are significantly
greater than in Bostek's traditional commerce and Internet fulfillment segments.
Five month periods ended May 31, 1998 and 1999. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1998 % 1999 %
-----------------------------------
Internet...................... $ 163 11.1 $ 921 12.6
Internet fulfillment.......... 208 6.0 578 9.8
Traditional commerce.......... 1,424 7.5 1,935 9.6
-----------------------------------
Consolidated.................. $1,795 7.5 $3,434 10.3
===================================
Selling, general and administrative expenses were $3.4 million for the
first five months of 1999, an increase of $1.6 million, or 91.3%, from $1.8
million for the first five months of 1998. As a percentage of revenue, selling,
general and administrative expenses were 10.3% for the first five months of 1999
and 7.5% for the first five months of 1998. The increased expense in absolute
dollar terms and as a percentage of revenue is due to the expansion of the
corporate infrastructure necessary to support continued growth and the entry
into the Internet market.
Years ended December 31, 1996, 1997 and 1998. Selling, general and
administrative expense by operating segment, and as a percentage of segment
revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
-----------------------------------------
Internet........................ $ -- -- $ -- -- $1,114 14.3
Internet fulfillment............ -- -- -- -- 712 8.7
Traditional commerce............ 3,858 7.1 4,354 10.1 3,895 8.7
-----------------------------------------
Consolidated.................... $3,858 7.1 $4,354 10.1 $5,721 9.4
=========================================
Selling, general and administrative expenses were $5.7 million in 1998, an
increase of $1.4 million, or 31.4%, from $4.4 million in 1997. The 1997 expense
represents an increase of $0.5 million, or 12.9%, over the $3.9 million reported
in 1996. As a percentage of revenue, selling, general and administrative
expenses increased from 7.1% in 1996 to 10.1% in 1997 but decreased to 9.4% in
1998. During these periods, Bostek expanded its corporate infrastructure to
support continued growth, entered the Internet market and lowered sales prices
to meet increased competition.
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Operating Income
Five month periods ended May 31, 1998 and 1999. Operating income for each
of the operating segments, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet.......................... $ 38 2.6 $ (43) (0.6)
Internet fulfillment.............. 109 3.2 80 1.4
Traditional commerce.............. 964 5.1 333 1.6
--------------------------------
Consolidated...................... $1,111 4.7 $ 370 1.1
================================
Operating income was $0.4 million for the first five months of 1999, a
decrease of $0.7 million, or 66.7%, from $1.1 million for the first five months
of 1998. The operating loss in the Internet segment for the five months ended
May 31, 1999 was primarily the result of increased advertising.
Years ended December 31, 1996, 1997 and 1998. Operating income for each of
the operating segments, and as a percentage of segment revenue, was:
($ in thousands) 1996 % 1997 % 1998 %
------------------------------------------
Internet........................ $ -- -- $ -- -- $ (257) (3.3)
Internet fulfillment............ -- -- -- -- 228 2.8
Traditional commerce............ 3,175 5.8 1,561 3.6 1,714 3.8
------------------------------------------
Consolidated.................... $3,175 5.8 $1,561 3.6 $1,685 2.8
==========================================
Operating income was $1.7 million in 1998, an increase of $0.1 million, or
7.9%, from $1.6 million in 1997. Operating income for 1997 represents a decrease
of $1.6 million, or 50.8%, over the $3.2 million reported in 1996. The operating
loss for the Internet segment for the year ended December 31, 1998 was primarily
the result of increased advertising.
Interest and Other Income and Interest Expense
Interest income, earned primarily from short-term investments, was
immaterial in each of the periods. During 1998, Bostek recognized a gain on sale
of investment of $0.4 million. The investment was accepted as payment of a
receivable and was sold for a gain by Bostek. Interest expense was $0.1 million
for the first five months of 1999 and $0.2 million for the first five months of
1998. Interest expense was $0.3 million in 1998, nominal in 1997 and $0.1
million in 1996. Interest expense is principally associated with borrowings from
financial institutions. As Bostek grew during 1998 and invested in its Internet
and Internet fulfillment segments, its need to finance its working capital
increased, resulting in greater amounts borrowed and higher interest expense
over 1997 and 1996.
Income Taxes
In 1995, Bostek elected to be treated as subchapter S corporation for
income tax purposes. The effect of this election was that corporate earnings
were reported on the individual returns of the shareholders. Upon our
acquisition of Bostek, the subchapter S corporation election terminated. Had
Bostek not been a subchapter S corporation, its tax rate would have been
approximately 44%. Bostek paid an immaterial amount of state and local taxes in
the periods presented.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities was approximately $2.5 million
for the five months ended May 31, 1999. This was primarily the result of net
income of $0.1 million, a decrease in inventory of $2.1 million, an increase in
accounts payable and accrued expenses of $2.1 million, offset by an increase in
accounts receivable of $1.9 million. Net cash used by operating activities was
approximately $1.0 million for the five month period ended May 31, 1998. This
was primarily the result of an increase in accounts receivable of $2.9 million,
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<PAGE>
offset by an increase in accounts payable and accrued expenses of $0.8 million
and net income of $0.8 million.
Net cash used in operating activities was approximately $2.3 million for
the year ended December 31, 1998. This was primarily the result of an increase
in inventory of $2.0 million, an increase in accounts receivable of $0.6
million, a decrease in accounts payable and accrued expenses of $0.7 million,
offset by net income of $1.7 million. Net cash provided by operating activities
was approximately $0.1 million for the year ended December 31, 1997. This was
primarily the result of net income of $1.5 million, offset by an increase in
inventory of $1.5 million. Net cash provided by operating activities was $4.1
million for the year ended December 31, 1996. This was primarily the result of
net income of $3.0 million and a decrease in inventory of $1.0 million.
Investing Activities
Net cash used in investing activities was approximately $0.1 million for
the five months ended May 31, 1999. This was the result of the purchase of
furniture, fixtures and equipment. Net cash used by investing activities was
nominal for the five month period ended May 31, 1998.
Net cash used by investing activities was approximately $0.2 million for
the year ended December 31, 1998. This was the result of purchase of furniture,
fixtures and equipment. Net cash used by investing activities was nominal for
the years ended December 31, 1997 and 1996.
Financing Activities
Net cash used by financing activities was $2.5 million for the five months
ended May 31, 1999. This was primarily the result of reductions in the amounts
due financial institutions of $2.1 million and dividends of $0.4 million. Net
cash provided by financing activities for the five month period ended May 31,
1998 was approximately $0.9 million. This was primarily the result of additional
borrowings from financial institutions of $0.9 million.
Net cash provided by financing activities was approximately $1.6 million
for the year ended December 31, 1998. This was primarily the result of net
borrowings from financial institutions of $3.1 million, offset by dividends paid
of $1.1 million and loans to officers of $0.5 million. Net cash provided by
financing activities was approximately $0.5 million for the year ended December
31, 1997. This was primarily the result of net borrowings from financial
institutions of $2.7 million and loans from officers of $0.3 million, offset by
dividends paid of $2.5 million. Net cash used by financing activities was $3.4
million for the year ended December 31, 1996. This was primarily the result of
reductions in the amounts due financial institutions of $2.9 million and
dividends paid of $0.5 million.
Bostek's borrowings were made under a revolving line of credit with
Citizens Bank of Massachusetts at a floating interest rate equal to the bank's
prime rate. In connection with our acquisition of Bostek, the outstanding
balance of $4.4 million under this line of credit was paid off entirely.
Financing is now obtained through borrowings from Applied Digital Solutions.
YEAR 2000 COMPLIANCE
Background. Some computers, software and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result of this design decision, some of these systems could fail to operate
or fail to produce correct results if "00" is interpreted to mean 1900, rather
than 2000. These problems are widely expected to increase in frequency and
severity as the year 2000 approaches, and are commonly referred to as the
"Millennium Bug" or "Year 2000 problem."
Assessment. The Year 2000 problem could affect computers, software and
other equipment used, operated or maintained by us. Accordingly, we are
reviewing our internal computers, software, applications and related equipment
and our systems other than information technology systems to ensure that they
49
<PAGE>
will be Year 2000 compliant. We have substantially completed our Year 2000
review. We spent approximately $20,000 in 1998 on our Year 2000 compliance
plan and approximately $30,000 in 1999, most of which relates to new
equipment. These amounts include expenditures by Bostek. We cannot be certain
that our total costs will be limited to these amounts.
Software Sold to Consumers. We do not develop software for resale. We do,
however, sell off the shelf software that may be bundled with hardware that we
sell. Software updates which address Year 2000 issues are available for most,
but not all, third party software that we sell. Furthermore when we sell such
software, it is sold "as is" without warranty of any kind. However, variability
of definitions of "compliance" with the Year 2000 and of different combinations
of software, firmware and hardware could lead to lawsuits against us. The
outcome of any such lawsuits and the impact on us are not estimable at this
time.
Internal Infrastructure. We believe that our major computers, software
applications and related equipment used in connection with our internal
operations are not subject to significant Year 2000 problems, because the
computer programs used by us are primarily off-the-shelf, recently developed
programs from third-party vendors. We have requested and obtained assurances
from certain of our vendors as to the Year 2000 compliance of their products.
However, most vendors have been reluctant to provide written assurances and we
cannot be certain that our systems utilized by us will not be affected. We have
assessed all of our operating locations and have determined that all key systems
in all locations are Year 2000 compliant. We believe that all of our systems and
equipment are Year 2000 compliant.
Systems Other than Information Technology Systems. In addition to computers
and related systems, the operation of office and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators, and
other common devices may be affected by the Year 2000 problem. We have assessed
all of our operating locations and have determined that all such other systems
and facilities are Year 2000 compliant.
Suppliers. We have communicated with third party suppliers of the major
computers, software, and other equipment we use. Based on our discussions with
these suppliers, we are not aware of any material Year 2000 problem which would
be expected to affect us. However, we have limited or no control over the
actions of these third party suppliers, and we cannot be certain that Year 2000
problems with these systems will not cause a material disruption to our
business.
Internet. As a significant percentage of our business is conducted over the
Internet, it is possible that we would be affected by telecommunications
problems experienced by our local Internet service provider or by Internet users
which might prevent those customers from being able to access our website. This
could be combined with, or result from, interruptions in electrical power
systems. Additionally, many customers may be using older systems which may not
be Year 2000 compliant, which could affect their ability to access our website.
Year 2000 problems, either in our systems or in third party systems, could also
prevent us from processing credit card sales.
Contingency Plans. As noted above, our Year 2000 compliance program
has been completed. We have not developed any specific contingency plan to
deal with unanticipated Year 2000 problems. We believe that our computer
refurbishing operations do not depend on technology which is subject to
Year 2000 disruption.
Most Likely Consequences of Year 2000 Problems. We believe we have
identified and resolved all Year 2000 problems that could materially adversely
affect our business. However, we believe that it is not possible to determine
with complete certainty that all Year 2000 problems affecting us have been
identified or corrected, and we cannot accurately predict the extent to which
Year 2000 problem-related failures may affect us. However, if such problems do
occur, we expect that they might have the following consequences:
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. a significant number of operational inconveniences and inefficiencies
for us and our clients that may divert management's time and attention
and financial and human resources from our ordinary business
activities; and
. a lesser number of serious system failures that may require significant
efforts by us or our customers to prevent or alleviate material
business disruptions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA
RESULTS OF OPERATIONS
This section discusses our results of operations on a pro forma basis, and
has been prepared to illustrate the pro forma effects of the Bostek acquisition
and the other acquisitions we describe herein as if they had all occurred on
January 1, 1997.
This pro forma unaudited financial information does not purport to
represent (1) what our actual results of operations would have been had the
acquisitions occurred on January 1, 1997 or (2) what we expect our results of
operations to be in the future. They do not reflect any estimates of cost
savings or other efficiencies that may be achieved from the integration of
Bostek or the other companies acquired. This discussion of results of operations
does not reflect the effects of this offering or the application of the net
proceeds therefrom.
This section should be read in conjunction with the historical financial
statements of Intellesale and Bostek, including the notes thereto, and other
financial information set forth under "Capitalization," "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and Pro Forma Financial Information" included elsewhere in this
document.
Pro Forma Results of Operations
The following table sets forth for the periods indicated certain components
of our pro forma unaudited consolidated statements of operations, before giving
effect to this offering and the application of the proceeds from this offering,
and the percentage of revenue represented by these components. We have not
presented a full consolidated statement of operations, which would have included
the effects of interest expense and income taxes. Except for our acquisition of
Bostek and Fiscal Advantage, all of the acquisitions were made in exchange for
the common stock of Applied Digital Solutions.
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
------------------------------------ ------------------------------------
1997 1998 1998 1999
---- ---- ---- ----
$ % $ % $ % $ %
------------------------------------ ------------------------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $110,237 100.0% $127,848 100.0% $64,346 100.0% $72,612 100.0%
Cost of goods sold 89,467 81.2 105,386 82.4 52,900 82.2 57,412 79.1
------------------------------------ ------------------------------------
Gross profit 20,770 18.8 22,462 17.6 11,446 17.8 15,200 20.9
Selling, general and
administrative expenses 16,201 14.7 16,545 12.9 7,955 12.4 11,196 15.4
Depreciation and amortization 1,462 1.3 1,622 1.3 781 1.2 1,034 1.4
------------------------------------ ------------------------------------
Operating income $ 3,107 2.8 $ 4,295 3.4 $ 2,710 4.2 $ 2,970 4.1
==================================== ====================================
</TABLE>
Pro Forma Revenue
We and Bostek began operating over the Internet in the second quarter of
1998. However, Data Path Technologies, which we acquired effective April 1,
1998, began its Internet operations in 1996 and was our platform for beginning
Internet operations.
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<PAGE>
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma revenue
for each operating segment for the first six months of 1998 and 1999 was:
($ in thousands) 1998 % 1999 %
-------------------------------
Internet............................ $ 7,857 12.2 $20,138 27.7
Internet fulfillment................ 5,498 8.5 5,890 8.1
Traditional commerce................ 50,991 79.3 46,584 64.2
-------------------------------
Consolidated........................ $64,346 100.0 $72,612 100.0
===============================
Pro forma revenue for the six month period ended June 30, 1999 was $72.6
million, an increase of $8.3 million, or 12.8%, from $64.3 million for the six
month period ended June 30, 1998.
Internet segment pro forma revenue increased by $12.3 million or 156.3%.
This increase is a result of broader consumer use and acceptance of the
Internet, as well as our marketing efforts on the Internet, via Internet portals
such as Yahoo! Inc. and Lycos and wholesale marketing arrangements with websites
such as OnSale and uBid.
Internet fulfillment segment pro forma revenue increased by $0.4 million or
7.1%. Internet fulfillment sales are sales in which Bostek sells products to
other Internet companies that remarket the products through the Internet. This
increase in pro forma revenues resulted from Bostek's use of Internet
fulfillment as a means to develop its overall Internet business, which commenced
in 1998. We are transitioning away from this wholesale distribution business and
focusing on selling products directly through our website. There are no
contractual relationships with Internet fulfillment customers and we plan to
gradually reduce this business.
Traditional commerce segment pro forma revenue decreased $4.4 million or
8.6%, primarily as a result of shifting our operations to the Internet.
Pro forma years ended December 31, 1997 and 1998. Pro forma revenue for
each operating segment was:
($ in thousands) 1997 % 1998 %
---------------------------------
Internet................. $ 12,096 11.0 $ 18,278 14.3
Internet fulfillment..... -- -- 8,208 6.4
Traditional commerce..... 98,141 89.0 101,362 79.3
---------------------------------
Consolidated............. $110,237 100.0 $127,848 100.0
=================================
Pro forma revenue for 1998 was $127.8 million, an increase of $17.6
million, or 16.0%, from $110.2 million in 1997.
Internet segment pro forma revenue increased from 1997 to 1998 by $6.2
million, or 51.1%. This growth is a direct result of our increased marketing via
our websites and Internet marketing arrangements and expanded use of the
Internet by consumers.
Internet fulfillment was commenced by Bostek in 1998. Bostek did not begin
any Internet sales until 1998. It had previously focused on traditional
distribution lines.
Traditional commerce pro forma revenue increased from 1997 to 1998 by $3.2
million, or 3.3%. In general, this increase is a result of internal growth as
the computer and related industries have expanded.
52
<PAGE>
Pro Forma Gross Profit/Margin
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma gross
profit by operating segment, and as a percentage of segment revenue, was:
($ in thousands) 1998 % 1999 %
-------------------------------
Internet........................... $ 2,466 31.4 $ 6,376 31.7
Internet fulfillment............... 563 10.2 658 11.2
Traditional commerce............... 8,417 16.5 8,166 17.5
-------------------------------
Consolidated....................... $11,446 17.8 $15,200 20.9
===============================
Pro forma gross profit for the first six months of 1999 was $15.2 million,
an increase of $3.8 million, or 33.1%, from $11.4 million for the first six
months of 1998. As a percentage of pro forma revenue, the pro forma gross margin
was 20.9% for the first six months of 1999 and 17.8% for the first six months of
1998.
In the Internet segment, pro forma gross margin remained relatively stable.
We anticipate margin pressures as we expand the Internet segment of our
business. We expect that gross margins from the Internet segment will vary based
on several factors, primarily product pricing and product acquisition costs.
Internet fulfillment pro forma margin increased by approximately 1.0
percentage point. This increase resulted from improved pricing of Internet
fulfillment arrangements. We note that this margin is significantly below the
margin achieved from direct Internet sales. Accordingly, we plan to gradually
reduce this business over time and focus on our website and wholesale marketing
arrangements for product distribution via the Internet.
Traditional commerce pro forma margin increased by approximately 1.1
percentage points. As we integrated our businesses, we have achieved higher
margins.
Pro forma years ended December 31, 1997 and 1998. Pro forma gross profit by
operating segment, and as a percentage of segment revenue, was:
($ in thousands) 1997 % 1998 %
---------------------------------
Internet................. $ 3,509 29.0 $ 5,189 28.4
Internet fulfillment..... -- -- 940 11.5
Traditional commerce..... 17,261 17.6 16,333 16.1
---------------------------------
Consolidated............. $20,770 18.8 $22,462 17.6
=================================
Our pro forma gross profit for 1998 was $22.5 million, an increase of $1.7
million, or 8.1%, from $20.8 million in 1997. As a percentage of pro forma
revenue, our pro forma gross margin decreased to 17.6% in 1998 from 18.8% in
1997. This was a result of (1) Bostek's entry into the Internet fulfillment
business, which has a lower gross margin than our Internet and traditional
commerce businesses because these customers purchase in larger quantities than
retail customers, and (2) decreases in prices to meet competition.
Pro Forma Selling, General and Administrative Expenses
Selling, general and administrative expenses, as a percentage of revenue,
are higher in the Internet segment than in our traditional segment. This is
because advertising costs, website maintenance costs and labor costs are all
significantly greater than in our traditional commerce segment. We expect these
expenses to increase in absolute dollar terms in the future as the Internet
segment grows.
Applied Digital Solutions has provided certain services and incurred
certain expenses on our behalf and on behalf of our subsidiaries. These expenses
are not necessarily indicative of the expenses which would have resulted had we
53
<PAGE>
operated as a separate entity. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Trends and Accounting Policies."
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma
selling, general and administrative expenses by operating segment, and as a
percentage of pro forma segment revenue, were:
($ in thousands) 1998 % 1999 %
--------------------------------
Internet.......................... $2,025 25.8 $ 4,624 23.0
Internet fulfillment.............. 346 6.3 578 9.8
Traditional commerce.............. 5,584 11.0 5,994 12.9
--------------------------------
Consolidated...................... $7,955 12.4 $11,196 15.4
================================
Pro forma selling, general and administrative expenses were $11.2 million
for the six month period ended June 30, 1999, an increase of $3.2 million, or
40.7%, from $8.0 million for the six month period ended June 30, 1998. The
primary reason for the increase is the overall expansion into the Internet, as
described above. As a percentage of pro forma revenue, pro forma selling,
general and administrative expenses were 15.4% and 12.4% for the six month
periods ended June 30, 1999 and 1998. However, as they relate to the Internet
business, pro forma selling, general and administrative expenses decreased as a
percentage of revenue from 25.8% to 23.0%. This decrease is due to the fact that
general and administrative expenses in the Internet segment are largely fixed
costs, and we spent only a small amount on advertising.
Pro forma selling, general and administrative expenses include management
fees paid to Applied Digital Solutions. Management fees paid to Applied Digital
Solutions in the six months ended June 30, 1999 amounted to $0.3 million
compared to $0.2 in the six months ended June 30, 1998.
Pro forma years ended December 31, 1997 and 1998. Pro forma selling,
general and administrative expense by operating segment, and as a percentage of
pro forma segment revenue, were:
($ in thousands) 1997 % 1998 %
-------------------------------
Internet................... $ 3,486 28.8 $ 4,631 25.3
Internet fulfillment....... -- -- 712 8.7
Traditional commerce....... 12,715 13.0 11,202 11.1
-------------------------------
Consolidated............... $16,201 14.7 $16,545 12.9
===============================
Pro forma selling, general and administrative expenses were $16.6 million
in 1998, an increase of $0.3 million, or 2.1%, from $16.2 million in 1997. As a
percentage of pro forma revenue, selling, general and administrative expenses
have decreased to 12.9% in 1998 from 14.7% in 1997. Management fees paid to
Applied Digital Solutions in 1998 amounted to $0.4 million. No costs were
allocated in 1997 since Applied Digital Solutions did not provide significant
services. Internet segment pro forma selling, general and administrative
expenses decreased as a percentage of Internet segment pro forma revenues from
28.8% in 1997 to 25.3% in 1998. As general and administrative expenses related
to the Internet are largely fixed, they tend to decline as a percentage of total
revenues as sales increase.
Pro Forma Depreciation and Amortization
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma
depreciation and amortization by operating segment and as a percentage of pro
forma segment revenue was:
($ in thousands) 1998 % 1999 %
------------------------------
Internet............................ $ 51 0.6 $ 230 1.1
Internet fulfillment................ 84 1.5 84 1.4
Traditional commerce................ 646 1.3 720 1.5
------------------------------
Consolidated........................ $ 781 1.2 $1,034 1.4
==============================
54
<PAGE>
Pro forma depreciation and amortization expense for the six month period
ended June 30, 1999 was $1.0 million, an increase of $0.2 million, or 30.7%,
from $0.8 million for the six month period ended June 30, 1998. The increase in
pro forma depreciation and amortization from 1998 to 1999 is attributable to
additional amortization of goodwill resulting from earn-out payments made in
1999, which increased the amount of goodwill subject to amortization.
Pro forma years ended December 31, 1997 and 1998. Pro forma depreciation
and amortization by operating segment, and as a percentage of pro forma segment
revenue, was:
($ in thousands) 1997 % 1998 %
------------------------------
Internet.................. $ 28 0.2 $ 177 0.9
Internet fulfillment...... -- -- 153 1.8
Traditional commerce...... 1,434 1.5 1,292 1.3
------------------------------
Consolidated.............. $1,462 1.3 $1,622 1.3
==============================
The pro forma depreciation and amortization for 1998 was $1.6 million, an
increase of $0.2 million, or 11.0%, from $1.5 million in 1997.
Pro Forma Operating Income
Pro forma six month periods ended June 30, 1998 and 1999. Pro forma
operating income for each of the operating segments, and as a percentage of pro
forma segment revenue, during the six month period ended June 30, 1998 and 1999
was:
($ in thousands) 1998 % 1999 %
-------------------------------
Internet........................... $ 390 5.0 $1,522 7.6
Internet fulfillment............... 133 2.4 (4) --
Traditional commerce............... 2,187 4.3 1,452 3.1
-------------------------------
Consolidated....................... $2,710 4.2 $2,970 4.1
===============================
Pro forma operating income was $3.0 million for the six month period ended
June 30, 1999, an increase of $0.3 million, or 10.1%, from $2.7 million in the
six month period ended June 30, 1998.
Pro forma years ended December 31, 1997 and 1998. Pro forma operating
income for each of the operating segments, and as a percentage of pro forma
segment revenue, was:
($ in thousands) 1997 % 1998 %
------------------------------
Internet................... $ (5) (0.1) $ 381 2.1
Internet fulfillment....... -- -- 75 0.9
Traditional commerce....... 3,112 3.2 3,839 3.8
------------------------------
Consolidated............... $3,107 2.8 $4,294 3.4
==============================
Pro forma operating income was $4.3 million in 1998, an increase of $1.2
million, or 38.2%, from $3.1 million in 1997.
55
<PAGE>
INTELLESALE.COM, INC.
About Us
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at www.Intellesale.com
as well as through traditional channels, which we are migrating to the Internet.
In addition to selling products on our website, we distribute products through
cooperative marketing arrangements with OnSale.com and uBid.com, which host
auctions of our products in exchange for a commission, as well as FlashNet
Communications, Lycos and other Internet portals and service providers. Most
of the computers we offer are brand name, Intel Pentium(R) class or equivalent
products. We offer our customers complete packages, including monitors,
regularly-featured specials and the ability to purchase selected merchandise
on an auction basis. We are not aware of any major online retailers currently
focusing principally on refurbished computer equipment.
We operate in two business segments:
. Internet, in which we sell refurbished and new computer products
through our website. Refurbished products consist primarily of off-
lease equipment which we test, clean and prepare for sale, and
manufacturer refurbished products which carry a manufacturer's
warranty. Our Internet business also includes Internet fulfillment,
in which we bulk wholesale our products to other companies that
market these products on their websites. We are transitioning away
from this wholesale distribution business and focusing on selling
products directly through our website.
. Traditional commerce and other services, in which we buy and
remarket computer equipment and components to traditional
wholesalers, retailers and value-added resellers, as well as
individual and corporate end users, and provide integration and
consulting services, computer recycling, parts-on-demand services
and transportation services for computer and other equipment. We are
transitioning our traditional commerce business to the Internet.
We believe the demand for refurbished brand name computer equipment is
growing as consumers realize they can purchase refurbished products that can
serve their needs at substantial discounts to the price of new merchandise.
Shorter product life cycles are leading to increased off-lease and excess
inventory computer equipment which vendors and leasing companies need to dispose
of in large quantities without conflicting with their primary distribution
channels. We offer such vendors and leasing companies the ability to
conveniently sell all their products to us in a single transaction. We believe
that our ability to acquire many different types of equipment in large
quantities through our established vendor relationships provides us with a
significant competitive advantage both with consumers and vendors.
We have grown rapidly, both internally and through acquisitions, since
1996. We began offering products on the Internet in the second quarter of 1998
with the acquisition of Data Path Technologies, Inc., which marketed refurbished
computer products through the Internet. Building on this Internet presence as a
platform, we established the Intellesale.com website in January 1999 and began
to focus our business on, and migrate our traditional commerce business to, the
Internet. Our revenues for the six months ended June 30, 1999, pro forma for our
acquisition of Bostek, Inc. and its affiliate, were $72.6 million. Of this
amount, approximately 28% were direct Internet sales and approximately 8% were
Internet fulfillment revenues. The Internet is our fastest growing sales channel
and we believe that the Internet will be the basis for our future growth. We
believe the expansion of our Internet business and our recent acquisition of
Bostek position Intellesale.com to become the premier website offering
refurbished and new computer equipment to consumers and businesses.
56
<PAGE>
Our Industry
Growth in Internet traffic and its use as a channel of distribution has
been fueled by several factors, including:
. a large and growing number of installed personal computers in the
home and workplace;
. improvements in Internet infrastructure and bandwidth; and
. increased awareness and acceptance of the Internet among consumer
and business users.
According to International Data Corporation, a market research firm, the
number of Internet users worldwide will increase from approximately 97 million
at the end of 1998 to approximately 142 million in 1998 to 502 million in 2003.
IDC further estimates that the number of people making purchases over the
Internet will increase from approximately 31 million in 1998 to approximately
183 million in 2003. According to Jupiter Communications, another market
research firm, the second largest category of 3-commerce spending is computer
hardware and software, which Jupiter projects will grow from approximately $3.1
billion in 1998 to approximately $15.8 billion in 2003.
In recent years, the number of companies leasing rather than purchasing
computer equipment has increased significantly. Corporate leases generally have
a three-year term after which the equipment is replaced and a new lease cycle
begins. However, with shorter product life cycles and greater reliance on
computers, it is becoming increasingly common for lessees to terminate leases
early. Off-lease equipment is generally from brand-name manufacturers and still
has a relatively high resale value when refurbished. The refurbished computer
market also includes computer equipment that has been reconditioned by the
manufacturer after being returned by customers. Refurbished computer equipment
typically requires a nominal amount of service, such as minor repairs, cleaning
and repackaging.
In addition to refurbished computer equipment, large quantities of excess
inventory computer products become available on a regular basis because the PC
industry is characterized by frequent introductions of new models with
incremental increases in features or capacity. Excess inventory products are
only marginally different from the newest models and will serve the needs of
most users.
The disposal of refurbished and excess inventory computer equipment
represents a substantial burden on many vendors. Such computers and accessories
are currently sold through many different outlets, including wholesale
distributors, catalogs, company stores or outlets, resellers and specialized
retailers, as well as mass merchants that are not committed to the resale of
these goods and generally sell them as a supplementary product line. Because of
the highly fragmented and relatively undeveloped nature of the market for this
product, prices received by leasing companies and vendors tend to be highly
variable and subject to negotiation based on quantity, age and condition of the
merchandise. Our experience has indicated that leasing companies and vendors
look favorably upon a distribution channel that enables them to dispose of
significant quantities of merchandise quickly without affecting their
traditional sales channels.
We are not aware of any major online retailers currently focusing
principally on refurbished computer equipment. Although some websites such as
OnSale.com, uBid.com and Egghead.com offer some refurbished products, we believe
that the majority of their products consist of new computers and accessories.
57
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Our Strategy
Our goal is to become the premier website offering refurbished and new
computer equipment and related components to consumers and businesses. Our
strategy to achieve our goal includes the following:
Increase Brand Awareness. We believe that a strong brand name is critical
to differentiating Intellesale and attracting a high level of customer traffic
and purchases. To date, we have made limited investments in marketing and
promotion of our brand. We intend to use a portion of the proceeds of this
offering to increase our visibility and brand recognition through online and
traditional advertising. We anticipate spending approximately $10 million on
marketing over the next twelve months. We intend to promote Intellesale.com
on a number of websites, including content providers, major portal sites and
targeted computer-related sites. Our traditional media-based advertising
efforts will include radio, print advertising, television and outdoor media.
Increase Cooperative Relationships. We intend to expand existing
cooperative programs and establish new programs under which other companies will
promote our products on their websites and in their other customer
communications, and under which we will compensate them through promotions of
their products and services or through payments of fees. We have established
such programs with OnSale and uBid, which conduct web auctions of our products
in exchange for a commission, and FlashNet Communications, with whom we jointly
market products and services. We also advertise on Lycos and sell products on
Amazon.com's Z-Shops and on eBay. These types of arrangements and cooperative
marketing programs can be a source of significant new website traffic and
customers and should aid in building recognition of our brand.
Continue Improving Our Website. We intend to expand our Internet sales
through continued upgrading and improvements to our website. We have now
completed the combination of Bostek's PickADW.com website with our
Intellesale.com website. We also plan to add new features to our website
and improve its design on an ongoing basis to increase ease of use, to lead
customers to areas that may be of particular interest to them based on their
prior purchases and page viewing patterns, and to draw customers' attention
to products we wish to feature.
Migrate Other Parts of Our Business to the Internet. From January 1, 1999
through June 30, 1999, on a pro forma basis including Bostek, approximately 28%
of our sales were conducted directly through the Internet. As we expand our
Internet presence, we intend to migrate the traditional commerce segment of our
business to the Internet, which should allow us to expand our customer base,
increase efficiency and increase our operating margins. We believe our
traditional commerce products can be marketed more effectively through our
website. We plan to display our entire inventory on our website and give access
to password-protected areas to our wholesale and mainframe customers. As part of
an automated registration process, we intend to gather basic information about
customers, their businesses and areas of interest. Based on this information and
the customers' purchase history, we plan to highlight products which may be of
interest to them or direct them to additional parts, accessories or features
which are compatible with their existing equipment. We may also include special
pricing features for some items, showing increasing discounts for customers
based on purchase volume.
Expand and Improve Procurement Sources. In order to be able to offer
attractive prices to customers yet maintain our margins, we must be able to
obtain a sufficient amount of product at favorable prices. As we have grown in
size and developed cooperative relationships, we have been able to secure more
products on improved terms. We believe this reflects the desire of vendors to
have a reliable purchaser who is in a position to regularly acquire large
quantities of products. In order to continue and expand our procurement
capability, we intend to maintain and enhance our existing relationships with
leasing companies, manufacturers and other sources of equipment and to pursue
new relationships. No single supplier provided us with more than 10% of our
products during 1998 or the first six months of 1999.
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Products That We Sell Online
Intellesale offers a wide range of refurbished and new products, including
laptop and desktop computers, monitors, disk drives, modems, printers, scanners,
memory, expansion boards, cables and connectors. Substantially all of the
products we offer are brand name products manufactured by IBM, Compaq, Sony,
Fujitsu, Hewlett-Packard and other major manufacturers. For the first half of
1999, approximately 75% of our Internet product sales were laptops, desktop
PCs and monitors. For the six months ended June 30, 1999, new products
represented approximately 16% of our revenues.
Regardless of the source of the merchandise, most of our products are
warranted by either us or the manufacturer. We provide a minimum six month
warranty for most products not covered by manufacturer warranties. In addition,
we offer our customers the opportunity to purchase an extended warranty, which
is priced on the basis of the selling price of the item covered. These extended
warranties are provided under an agreement with a third party. We believe that
our ability to offer this extended warranty coverage provides us with an
advantage over our competitors, which generally rely solely on warranties
provided by the manufacturer.
How We Acquire Products
We believe our ability to acquire computer equipment in large quantities
and at favorable prices is a key competitive advantage. We purchase from leasing
companies, computer manufacturers, corporate information technology departments
and others who look to us to be a reliable channel for disposition of products.
In 1998, we acquired approximately 43% of our refurbished equipment from 15
leasing companies and corporate end-users. Other sources of our products include
independent brokers, federal, state and local governments, liquidators and
educational institutions. We receive information about new sources of products
from prior contacts, online resources to which we subscribe, advertising,
industry publications, trade associations and email and fax bid requests
received. We currently have 18 employees who are involved in procuring
equipment.
We do not enter into formal agreements for the purchase of equipment. Our
access to sources of equipment is based primarily on relationships which we
and our predecessor companies have established over approximately the last
eight years. Since product availability is unpredictable, a strong base of
vendor relationships is important to our success. We maintain ongoing contact
through telephone calls with our vendors to learn when products will become
available.
The average age of the products which we refurbish is approximately 18
months, and the average age of our manufacturer-refurbished products is
approximately six months. The average time between our purchase of an item
and the completion of refurbishment and sale of that item was approximately
30 days for the six months ended June 30, 1999. Although we assume inventory
and price risk associated with selling these products, we believe our ability
to sell our inventory quickly through our website and our other distribution
channels justifies the risk. We typically purchase products in large
quantities, and frequently make bulk purchases on an "as-is" basis, which can
result in significantly lower acquisition cost, although these purchases are
without warranties except as to title and quantity of equipment. A small part
of a particular shipment may not meet our strict quality standards for products
we offer. In those cases, we seek to immediately sell these products in bulk
through brokers, which in some cases sell the products internationally. To
date, our expenses resulting from writedowns of excess inventory have not
been material.
There are no set formulas for determining the purchase prices we pay to our
suppliers. The pricing is usually negotiated for each transaction based on the
current market prices for similar equipment, the condition and location of the
equipment and the cost and effort anticipated in packing and shipping the
equipment.
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How We Handle and Refurbish Products
When we purchase equipment, we usually have responsibility for
transportation of the equipment to our warehouse. In some cases we use our own
trucks to transport the equipment to our warehouse. After we receive equipment
at our warehouse, we follow standard procedures to audit each shipment,
including a physical count, an inspection for physical damage and testing of
equipment. We then submit any appropriate freight claims or claims against the
vendor for shortages or defects which are covered by warranties, if any.
We have a standardized process for refurbishing equipment, depending on the
type of product. For each standard product type, we have detailed procedures
under which we identify any aspects or components of the product that do not
meet our requirements. If the defect cannot readily be remedied or if the
component cannot be replaced on a cost-effective basis, we use the component for
parts or otherwise dispose of the defective item.
For example, the procedure we follow in refurbishing a desktop PC is:
. Inspection and testing
- Physical inspection of the exterior and appearance
- Interior cleaning
- Complete erasing of all existing data and software
- Complete hardware diagnostics
. Repair or set aside
- Replacement of defective components, if any
- Set aside computers not suitable for repair, to be used for parts
. Upgrade and testing
- Upgrade the computer according to the specifications of the
customer work order
- Test the upgraded hardware
- Clean the exterior of the computer
- Label and package the computer
How We Determine Selling Prices
We determine our selling prices, both wholesale and retail, on the basis of
current market conditions and the numbers of items we have on hand, as well as
our target profit margins for various types of products. In setting the prices,
we compare prices of similar new equipment, if any, as well as prices offered by
our competitors for similar products over the Internet, in trade publications
and in other published advertisements. Given the nature of our products and the
rapid technological changes in the industry, we may have to reduce prices over
time, and a portion of our inventory may have to be recycled or sold as scrap.
However, we take these factors into account when we purchase equipment and we
have not to date incurred significant writedowns of inventory. For the six month
period ended June 30, 1999, our inventory writedowns were approximately $60,000.
How We Handle Online Customer Orders
When a customer places an order through our website, processing of the
order is automated, including submission of credit card information for
approval. If we receive this approval, we immediately notify the customer that
the order has been accepted with an automated e-mail message
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thanking the customer for the order. If the credit card transaction is declined,
we contact the customer by telephone, fax or e-mail.
On accepted orders, the order is printed automatically and delivered to the
appropriate processing department, depending on the product purchased. The
product is then taken from the warehouse, on the basis of the product locator
shown on the order, and appropriately packed with foam packing, bubble wrap or
other packaging material, the computer-generated label is attached and the order
is shipped by Federal Express or United Parcel Service or, in the case of
wholesale orders, by customer pickup or by truck shipment.
Customers may also place telephone orders for equipment shown on our
website, particularly for larger quantity orders or if the purchaser is itself a
reseller or wishes to request a quantity discount. In these cases the use of our
website increases efficiency since the customer is familiar with the product
description, availability information and pricing before the customer calls us.
On average, we currently ship products 24 to 48 hours following receipt of
the order. We offer our online customers the ability to track their shipments
through our website, using tracking numbers provided automatically for each
customer shipment.
Internet Sales and Marketing
We are focusing our marketing strategy on strengthening our brand name,
increasing customer traffic to our website and helping consumers understand the
value of purchasing refurbished computer equipment. Our marketing strategy
consists of establishing relationships with leading online companies, as well as
employing various media and promotional activities to achieve these goals.
Relationships with Leading Online Companies. We have established strategic
relationships and cooperative advertising programs with Internet service
and content providers, and we intend to build on our existing relationships and
establish additional relationships. These relationships can be a source of
significant new website traffic and customers, and aid in building brand
recognition. Some of these alliances require us to pay either up-front or
periodic fees as well as payments based upon a percentage of the net revenue
generated through the alliance. We typically enter into these agreements for an
initial term of one year, with Intellesale having a right to renew at specified
times on certain conditions, or for additional fees and/or increased revenue
sharing. Some of our relationships include:
. OnSale. We have an arrangement with OnSale.com under which OnSale hosts
web auctions of Intellesale products. In these web auctions, online
bidders are allowed to submit bids according to the time limits and
minimum bid amounts shown for the particular item, and the product is
sold to the highest bidder. We pay a commission to the company which
hosts the auction for us. On completion of each auction, information
on the winning bidders is forwarded to us electronically, and we
process and complete the entire transaction. We deal directly with the
customer, process the credit card transaction, ship directly to the
customer and handle any related customer service matters. We retain
information relating to the transaction. Links to OnSale appear on our
website. This relationship was established by our subsidiary Data Path
Technologies in 1996. We believe that we are the primary source for
refurbished computer equipment available on OnSale.com.
. uBid. Through Bostek, we have an arrangement under which uBid hosts web
auctions of Bostek products, under arrangements similar to the
arrangements we have with OnSale. Once an auction is completed, we
process and complete the sale to the customer and deal directly with the
customer. Bostek established this relationship with uBid in 1998.
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. FlashNet. On May 28, 1999, we entered into an agreement with FlashNet
Communications, Inc., under which we jointly promote refurbished
computers and Internet services. Under this program, FlashNet pays us to
provide a free personal computer for each customer who agrees to a 24 to
36 month service agreement to use the FlashNet Internet service. FlashNet
also provides $300 rebates for the purchase of selected computers from
Intellesale for customers who subscribe for Internet services through
FlashNet and who choose not to participate in the free computer program.
The rebates and free computers are advertised on both Intellesale.com and
Flash.net. We also promote the FlashNet Internet service to our customers
and include the FlashNet software with each computer we sell. In the
first three months of this program, we received orders representing
approximately $ 8.0 million in revenue for Intellesale.
. Amazon. We have an arrangement with Amazon, under which customers can
buy products we have listed on the new Z-Shops area of their website.
We pay Amazon for listing these products. Each listing contains
information about the product and a link to other products sold by us on
the Z-Shops site.
Internet Advertising. We have not spent significant amounts on advertising
or promotion of the Intellesale.com brand name. We intend to use a portion of
the proceeds from this offering to increase our advertising and promotional
activities, including online advertising. We will attempt to maximize the return
from promotional expenditures by choosing advertising media based on the cost
relative to the likely audience and ability to generate increased traffic on our
website. We intend to place advertisements on specific sites which offer product
reviews and allow price comparisons, such as ZDNet. We also will target high-
profile and high-traffic portal websites, such as Excite, Yahoo!, Lycos and
Go2Net. These advertisements will usually take the form of banner ads that
encourage readers to click through directly to our website.
We also plan to offer the sites on which we advertise reciprocal links on
our website. Our goal is to use these programs to increase our brand awareness,
educate consumers about the benefits of refurbished computer ownership, obtain
favorable percentages of click-throughs and convert those click-throughs to
sales. We currently have in place the following arrangements for Internet
advertising:
. Yahoo! We have entered into an agreement with the Yahoo! Internet portal
for banner advertising of Intellesale, which is renewable on a monthly
basis.
. Lycos. We have entered into an agreement with the Lycos Internet portal
under which, for a one year period starting May 1999, we are paying a fee
to be a featured vendor for refurbished computers on the Lycos website.
We will also appear in at least one million banner impressions on Lycos
during that period.
Customer Electronic Mail Broadcasts. Intellesale markets to its own base of
customers through e-mail broadcasts. All customers purchasing through our
website are invited to join our electronic mailing list. At least once each
month, we send an e-mail message announcing new items available, special
products available, site changes and new features. We maintain a policy of
sending only solicited e-mail, and a customer can remove his or her name from
our mailing list at any time.
Internet Fulfillment
In our Internet fulfillment business, we sell our products to other
Internet companies that remarket these products on their websites. Some of our
Internet fulfillment customers include ValueAmerica, uBid.com, Bid.com,
CyberianOutpost and OnSale.com. We are gradually transitioning away from this
wholesale distribution business in order to focus on selling products directly
through our website. Bostek accounted for substantially all our Internet
fulfillment revenue.
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The Intellesale.com Experience
Browsing. We categorize the products that we offer at Intellesale.com into
a simple set of categories and sub-categories. By clicking on the category name,
the consumer can quickly target products of interest. The major categories
offered on our opening page are "Refurbished Equipment," "New
Equipment," "Make Us an Offer" and "Parts and Kits." Our website also displays a
number of featured specials plus links to information about our customer
service, tech support, terms and conditions of sale, contact information for
persons wishing to sell used equipment and a button to check out all purchases.
Depending on whether the customer chooses to shop for refurbished or new
equipment, the screen presents a list of product groups, including notebooks,
computers and monitors. Within each product category there are further
subcategories, and the user can choose to display items based on characteristics
such as manufacturer or processor speed.
Searching. At each product screen, we provide a search tool that allows
customers to search by keywords they may enter, such as the manufacturer or
product type. Customers also have the option to select "Shop Your Way," which
allows them to search for products on our website by category (computers,
notebooks, monitors), type (new, refurbished or both) and price range.
Products on Hand. The inventory offered on our website changes daily based
on our purchases and sales of equipment. We also offer a full line of new
products, through arrangements we have made with another online vendor, whose
catalog is directly linked with our website. We generally do not include
operating systems or software with our refurbished products, although we offer
Windows installation as an option and include a copy of the FlashNet Internet
connection software with each computer we sell.
Warranty. We provide a minimum six month warranty for most products we sell
which are not covered by manufacturer warranties. In addition, we offer our
customers the opportunity to purchase an extended warranty, which is priced on
the basis of the selling price of the item covered. These extended warranties
are provided under an agreement with a third party.
Product Information and Ordering. For many of our products, the customer
can access detailed information, such as a description, system requirements and
a photo, by clicking on the item. To purchase products, customers simply click
on a button to add products to their virtual shopping baskets. Customers can add
and subtract products from their shopping baskets as they browse, just as in a
physical store. To execute orders, customers click on the "Buy Now" button, are
prompted to select quantity of products and are shown final product price and
shipping costs. The customer then reviews the pricing information and adds the
item to the shopping cart, and is shown the current status of the shopping cart
and total purchases. The customer can choose to check out from any screen, and
is then presented with warranty and return policy information, and options for
purchasing extended warranties. The customer is then prompted to supply shipping
and credit card details. Prior to finalizing an order, an order confirmation is
displayed showing the final pricing and shipping information. Our system
automatically confirms each order via e-mail. Although it does not occur
frequently, if a product selected is on backorder, our personnel will contact
the customer and inquire whether the customer wishes to wait until the selected
product is available or assists the customer in making an alternative purchase.
Customer Service. The customer service area of our website contains
information about shopping for, ordering and returning products. We currently
have 12 customer service agents who are available to answer customer questions
about products and the shopping process. Our customer service hours are 9 a.m.
to 6 p.m. Eastern time, Monday through Friday, and we have made arrangements for
a customer service center to answer calls in case all of our agents are busy.
Calls received during non-business hours are routed to the call center, and
calls are returned on the next business day. Customers also have the ability to
check the status of an order directly on our website.
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Future Enhancements and Improvements. We intend to continue enhancing the
Intellesale.com experience through ongoing upgrades and improvements to our
website. We have completed the combination of Bostek's PickADW.com website with
our Intellesale.com website. The combined website is Intellesale.com, and
visitors to PickADW.com are automatically redirected to the combined website.
We plan to add new features to the website which will:
. allow users to compare prices of refurbished products available on
our website with those of comparable new products;
. allow users to indicate their areas of interest and customize the
Intellesale.com experience for those users by directing them to
pages showing products and services that match their areas of
interest; and
. track page views and purchases of registered users, and customize
the featured items and menu selections so that customers do not
have to input their areas of interest each time they access the
website.
Technology and Systems
Intellesale has implemented a broad array of website management, search,
customer support, transaction-processing and fulfillment systems using a
combination of proprietary technologies and commercially available, licensed
technologies. Our website is built on industry standard technologies, including
two Sun Microsystems servers. The Microsoft NT 4.0 operating system, running
Active Server Pages technology and Microsoft SQL Server, performs the user
interface, ordering and customer communication functions.
We believe our website can survive the failure of one server with little or
no downtime. We currently have the capacity to support up to one million hits
per hour through a redundant T-3 connection to the Internet. Capacity can be
quickly and easily expanded without substantial additional development. Our
policy is to run key systems at no more than 60% of capacity. When our website
traffic exceeds 60% of our current capacity, we plan to increase our Internet
connection and server capacity to handle up to three million hits per hour.
We handle back-end transaction processing primarily through our custom
designed software. Our system accepts and validates orders, processes orders
with multiple vendors, receives product and assigns it to customer orders,
manages shipments and multiple shipment methods, credit card transaction
processing and automated customer communications and allows the customer to
choose whether to receive single or multiple shipments based on availability.
Cube Computer Corporation, an Internet service provider with two redundant
facilities located in Hawthorne, N.Y. and in Jersey City, N.J., provides us with
redundant Internet connections to multiple Internet access points, a secure
physical environment, climate control and redundant power. In addition, Cube
provides us with 24 hour a day, seven day a week system monitoring. Cube
currently hosts our wide area network operations in its Hawthorne, N.Y., and we
believe Cube has the capacity to support our foreseeable growth.
Traditional Commerce
In our traditional commerce business, we provide leasing, remarketing and
parts-on-demand for mainframe and midrange systems to industrial, commercial and
retail organizations. We also purchase electronic components for demanufacturing
and reclamation of precious metals, steel, aluminum and copper.
Although we expect to focus on selling our products on the Internet, we
intend to maintain and further develop other areas of our business which we
believe to be complementary to our main business. We also intend to migrate this
businesses to the Internet. We believe that the customers in our traditional
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commerce businesses desire to transact business over the Internet and that the
migration of these businesses to the Internet will increase the potential market
opportunities available to us, by allowing us to present a wider selection of
products which are likely to be of interest to these customers and allowing
them to easily select and purchase additional products.
As we migrate our traditional commerce business to the Internet, we plan to
display our entire available inventory for our wholesale products, mainframe and
midrange parts and accessories on our website. We have traditionally sold these
products through direct marketing, catalogs and telephone orders. Under the
traditional model, a customer would call us to purchase a particular item, and
may not be aware of the entire range of products which we have available. As we
introduce our wholesale customers to our website, we plan to give them access to
password-protected areas of our website which will be customized by product line
and type of customer. As part of an automated registration process, we intend to
gather basic information about customers' businesses and areas of interest.
Based on this information and the customers' purchase history, we plan to
highlight products which may be of interest to them or direct them to additional
parts, accessories or features which are compatible with their existing
equipment. We may also include a pricing feature for certain items which will
display increasing price discounts for customers based on the volume of their
purchases of particular items. The website information will also provide them
with telephone numbers for priority access to our personnel for transactions
which cannot be completed directly through our website.
Competition
While we are not aware of another company which operates in all of our
business areas, we face intense competition in each area of our business, and
many of our competitors have greater resources than we have. As we focus our
efforts on building our Internet business, we expect to face increased
competition from other companies that have an established Internet presence and
from other companies which are expanding into e-commerce.
The primary competitors we have identified include the following:
. major manufacturers of computer equipment such as Compaq, Dell and
IBM, which offer both refurbished and new equipment through their
own websites;
. traditional store-based computer retailers, such as Best Buy,
Circuit City, CompUSA and Gateway Country; and
. other online competitors, such as the Boston Computer Exchange,
Buy.com, Cyberian Outpost, Egghead.com, Fairmarket.com, OnSale, uBid
and Value America.
In our sale of refurbished computers in conjunction with FlashNet, we will
compete with, among others, the CompuServe, Prodigy and Microsoft Network online
services, each of which recently announced similar programs in which customers
can receive free new computers if they subscribe to the online service for a
specified period of time. Many computer manufacturers and traditional retailers
sell directly through their own websites, and a number of them have established
websites specifically for refurbished and off-lease equipment. In addition,
Internet portals and online service providers that feature shopping services,
such as Yahoo!, Excite, Lycos and America Online, also sell refurbished and new
computer equipment.
The principal competitive factors affecting our market are the ability to
secure large volumes of products at favorable prices, to attract customers at
favorable customer acquisition costs, to operate our website in an uninterrupted
manner and with acceptable speed and to offer attractive product pricing to
consumers. We believe our relationships with our vendors is a competitive
advantage for Intellesale, and that our ability to acquire many different types
of equipment in large quantities through our established vendor relationships
provides us with a significant competitive advantage both with consumers and
vendors.
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Until we complete phasing out our Internet fulfillment business, in which
we bulk wholesale products to other Internet companies that remarket these
products on their websites, we will also face competition from those companies
in direct sales to consumers.
Many traditional store-based and online competitors have longer operating
histories, larger customer or user bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do. Many
of these competitors already have an established brand and can devote
substantially more resources to website development, increasing brand
recognition and product sourcing than we can. In addition, larger, well-
established and well-financed entities may join with online competitors or
computer manufacturers or suppliers as the use of the Internet and other online
services increases.
Our competitors may be able to secure products from vendors on more
favorable terms, fulfill customer orders more efficiently or adopt more
aggressive price or inventory availability policies than we can. Traditional
store-based retailers also enable customers to see and test products in a manner
that is not possible over the Internet.
Employees
As of August 31, 1999, we had a total of 445 full-time employees. We also
use independent contractors and temporary employees on an as-needed basis. None
of our employees is represented by a labor union, and we consider our labor
relations to be good.
As we continue to consolidate the businesses we have acquired in recent
years, we expect to eliminate redundant positions. However, we expect that the
overall number of employees will increase as our business continues to grow. We
expect, in particular, to add employees in our technical support services area
and in our warehouse operations.
Intellectual Property
We have been granted a registered service mark for the name "Intellesale."
We also have rights to the "Intellesale.com" and "PickADW.com" domain names,
as well as rights to two other domain names, which we are currently not using.
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Facilities
At August 31, 1999, we leased a total of approximately 258,000 square feet
for our operations. Of this space, 32,000 square feet is used for office
facilities and 226,000 square feet is for factory/warehouse use. These leases
expire at various dates through 2009.
Our primary operations are conducted at our newly-leased facility in
Lincoln Park, New Jersey, which is also our corporate headquarters.
Our current leased properties are:
<TABLE>
<CAPTION>
Location Size Description
- --------------------------------------------------------------------------------
<S> <C> <C>
Lincoln Park, New Jersey 135,750 s.f. Headquarters,
warehouse/distribution; 8,000 warehouse and
s.f. office space operations center
Pleasantville, New York 21,000 s.f. warehouse; 3,000 Technical service
s.f. office space center, customer
service center
and warehouse
Hayward, California 20,000 s.f. Warehouse
Dallas, Texas 5,250 s.f. Office
Cherry Hill, New Jersey 2,900 s.f. Sales office
Newtown, Pennsylvania 2,825 s.f. Sales office
Syosset, New York 240 s.f. Sales office
</TABLE>
We also lease space in various other locations, representing a total of
59,400 additional square feet, under leases which expire at various times from
October 1999 through December 2003. Most of the operations at these locations
are being moved to our new headquarters in Lincoln Park, New Jersey. The
aggregate lease obligations for the remaining lease terms at these locations are
approximately $162,000. We do not intend to renew these leases when they expire.
Our current total lease obligations are $1.6 million per year.
Legal Proceedings
We are a party to various legal actions, either as plaintiff or defendant,
which have arisen in the ordinary course of our business. In the opinion of
management, none of these proceedings, if adversely determined, would have a
material adverse affect on our business.
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MANAGEMENT
Our Directors and Executive Officers
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------------------------------------------------------------------
<S> <C> <C>
Marc Sherman 36 Director, President and Chief Executive
Officer
Edward L. Cummings 50 Director, Executive Vice President, Chief
Financial Officer and Secretary
Garrett A. Sullivan 64 Director
Constance K. Weaver (1)(2) 46 Director
David A. Loppert 45 Director
Alexander H. Good (2) 49 Director
Glenn Meyers (1) 38 Director
Charles D. Newman 35 Executive Vice President and Chief Operating
Officer
Joseph S. Keats 36 Vice President Sales and Marketing
</TABLE>
__________________
(1) Member of audit committee
(2) Member of compensation committee
Marc Sherman has served as a director and President and Chief Executive
Officer since the inception in December 1994 of our predecessor, Universal
Commodities Corp., which was merged into Intellesale in July 1999. Mr. Sherman
founded Universal Commodities and subsequently sold 80% of its stock to Applied
Digital Solutions in November 1996. He was appointed Vice President of Applied
Digital Solutions in April 1998 and Senior Vice President in March 1999,
positions from which he resigned effective August 9, 1999. For ten years prior
to 1994, he served in key positions in various family businesses. He has over
ten years of experience in marketing, operations and executive management.
Edward L. Cummings has served as Executive Vice President, Chief Financial
Officer and Secretary of Intellesale since July 1999. He joined our predecessor
company Universal Commodities Corp. in October 1995 as controller and was
elected to the board of directors in January 1997. From September 1994 to
October 1995 he owned TCC, Inc., an operator of several retail gift shops. From
December 1981 to September 1994 he was Chief Financial Officer and Treasurer of
Albert E. Price, Inc., a giftware import and export company.
Garrett A. Sullivan has served as a director of Intellesale since
December 1998. He has served on the board of directors of Applied Digital
Solutions since August 1995 and has been Applied Digital Solutions' President
and Chief Operating Officer since February 1997. He was Applied Digital
Solutions' acting Chief Financial Officer from March 1995 to February 1997. From
1993 to 1994 he was an Executive Vice President of Envirobusiness, Inc., an
environmental consulting firm.
Constance K. Weaver has served as a director of Intellesale since January
1998. She has been a member of Applied Digital Solutions' board of directors
since June 1998. Since 1996, Ms. Weaver has been Vice President, Investor
Relations and Financial Communications for AT&T Corporation. >From 1995 through
1996 she was Senior Director, Investor Relations and Financial Communications
for Microsoft Corporation. From 1993 to 1995 she was Vice President, Investor
Relations, and from 1991 to 1993 she was Director of Investor Relations, for MCI
Communications, Inc. Ms. Weaver is a director of Primark Corporation, the
National Investor Relations Institute and Buy & Hold.com. Ms. Weaver is the
sister-in-law of our President and Chief Executive Officer, Marc Sherman.
David A. Loppert has served as a director of Intellesale since December
1998. He has been the Vice President, Treasurer and Chief Financial Officer of
Applied Digital Solutions since February 1997. From 1996 to 1997, he was Chief
Financial Officer of Bingo Brain, Inc., a manufacturer of handheld computer
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devices. From 1994 to 1996, he was Chief Financial Officer of C.T.A. America,
Inc. and Ricochet International, L.L.C., both footwear retailers. Mr. Loppert
started his financial career with Price Waterhouse in 1978 where he advanced to
the position of Senior Manager.
Alexander H. Good has served as a director of Intellesale since August
1999. Mr. Good is Chief Executive Officer of @Link Networks, Inc., a data
competitive local exchange carrier. Prior to joining @Link in August 1999, Mr.
Good was Executive Vice President, Strategy and Corporate Development of Bell
Atlantic Corporation since 1994. Prior to this position, Mr. Good
served as Corporate Senior Vice President, Strategic Planning and Corporate
Development and as President and Chief Executive Officer of Bell Atlantic
International, Inc. Prior to joining Bell Atlantic, Mr. Good was Senior Vice
President of Mobile Telecommunications Technologies Corporation and President of
MTEL International. He has served or is currently serving on a number of boards,
including Bell Atlantic Europe, S.A., Bell Atlantic International-Italia S.r.L.,
Bell Atlantic International Ventures, Inc., Bell Atlantic Puerto Rico, Inc.,
Infostrada, S.p.A. and Sodalia S.p.A.
Glenn Meyers has served as a director of Intellesale since August 1999.
Mr. Meyers has been a director and the Chairman and Chief Executive Officer of
Rare Medium, Inc. since September 1995. In addition, he has served as Chairman,
Chief Executive Officer and President of Rare Medium Group since April 1998.
Prior to joining Rare Medium, he was President of Brookridge Capital Management,
an Internet venture capital firm.
Charles D. Newman has served as Executive Vice President and Chief
Operating Officer of Intellesale since January 1999. He joined Universal
Commodities in September 1996 as Vice President. From 1992 to 1996, Mr. Newman
was the president and founder of Nu-Blind Inc., a window treatment company. From
1988 to 1992, he served as president of Phoenix Abatement, Inc., a national
asbestos and waste removal company.
Joseph S. Keats joined Intellesale in May 1998 as Vice President - Sales
and Marketing. From 1996 to 1998, he was General Manager of the Budget Car Group
retail sales division in Philadelphia, Pa. He was the President and General
Manager of Keats Ford from 1985 to 1996, when he sold this business.
Board of Directors' Committees
We have established an audit committee and a compensation committee of
our board of directors, effective upon completion of this offering.
Our audit committee will recommend for approval by the board of directors a
firm of certified public accountants to audit our financial statements. The
audit committee will also monitor the effectiveness of the audit effort, our
internal and financial accounting organization and controls and financial
reporting.
Our compensation committee will administer our 1999 Flexible Stock Plan,
including the review and grant of benefits to officers and other employees under
the plan, and will recommend the adoption of new plans. The compensation
committee will also review and approve our other compensation policies and
matters and will review and approve salaries and other matters relating to our
executive officers. The compensation committee will review all senior corporate
employees after the end of each fiscal year to determine compensation for the
subsequent year.
Director Compensation
We reimburse each member of our board of directors for out-of-pocket
expenses incurred in connection with attending board meetings. In addition, each
of Mr. Good and Mr. Meyers has been granted 7,500 shares of restricted common
stock for nominal consideration, with restrictions that lapse after one year of
service on the board, and has received an option to purchase 75,000 shares of
our common stock, exercisable at the initial public offering price beginning on
the first anniversary of such director joining the board of directors. The
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options become exercisable in three equal annual installments. Each of our
directors who is not an employee or affiliate of Intellesale is paid $2,000 for
each board meeting attended and $1,000 for each committee meeting attended.
Executive Compensation
The following table sets forth certain summary information concerning the
total remuneration paid in to our President and Chief Executive Officer and each
of our other executive officers whose compensation exceeded $100,000 in fiscal
year 1998. For periods prior to July 1999, when Intellesale began operations,
this compensation was paid to these executives in their capacities as employees
of Universal Commodities Corp., one of the predecessors of Intellesale.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------------------------- ----------------
Name and Other Annual
Principal Position Year Salary Bonus Compensation Options
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marc Sherman 1998 $129,808 $114,900 $60,279(1) 400,000(2)
President and Chief Executive 1997 125,000 -- 50,941(1) 1,060,000(2)
Officer 1996 67,215 -- -- 50,000(2)
Edward L. Cummings 1998 77,885 76,600 55,664(3) --
Executive Vice President and Chief 1997 75,000 -- 45,054(3) 1,040,000(4)
Financial Officer 1996 56,538 -- -- 33,500(4)
Charles D. Newman 1998 104,000 19,150 1,237(5) --
Executive Vice President and Chief 1997 70,000 -- 7,200(5) 300,000(6)
Operating Officer 1996 13,846 -- -- 10,000(6)
</TABLE>
_______________
(1) For 1998, includes $5,779 in leased vehicle payments and $54,500 in
finders fee payments paid by Applied Digital Solutions in connection
with acquisitions made by Applied Digital Solutions that were
initiated by Mr. Sherman or in which Mr. Sherman was instrumental.
For 1997, includes $5,887 in leased vehicle payments and $45,054 in
finders fee payments paid by Applied Digital Solutions in connection
with acquisitions made by Applied Digital Solutions that were
initiated by Mr. Sherman or in which Mr. Sherman was instrumental.
(2) For 1998 and 1996, consists of options granted by Applied Digital
Solutions under its 1996 Non-Qualified Stock Option Plan. For 1997,
includes 1,000,000 options granted by our predecessor, Universal
Commodities, under its 1997 Stock Option Plan and 60,000 options
granted by Applied Digital Solutions under its 1996 Non-Qualified
Stock Option Plan.
(3) For 1998, includes $1,164 in leased vehicle payments and $54,500 in
finders fee payments paid by Applied Digital Solutions in connection
with acquisitions made by Applied Digital Solutions that were
initiated by Mr. Cummings or in which Mr. Cummings was instrumental.
For 1997, consists of finder's fee payments paid by Applied Digital
Solutions in connection with acquisitions made by Applied Digital
Solutions that were initiated by Mr. Cummings or in which Mr. Cummings
was instrumental.
(4) For 1997, includes 1,000,000 options granted by our predecessor,
Universal Commodities, under its 1997 Stock Option Plan and 40,000
options granted by Applied Digital Solutions under its 1996 Non-
Qualified Stock Option Plan. For 1996, consists of options granted by
Applied Digital Solutions under its 1996 Non-Qualified Stock Option
Plan.
(5) For 1998, consists of leased vehicle payments. For 1997, consists of
finders fee payments paid by Applied Digital Solutions in connection
with acquisitions made by Applied Digital Solutions that were
initiated by Mr. Newman or in which Mr. Newman was instrumental.
(6) For 1997, consists of 300,000 options granted by our predecessor,
Universal Commodities, under its 1997 Stock Option Plan. For 1996,
consists of options granted by Applied Digital Solutions under its
1996 Non-Qualified Stock Option Plan.
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Stock Options
None of the executive officers named in the summary compensation table
received options to purchase our common stock in 1998. The following table
contains information concerning grants of stock options in 1998 under Applied
Digital Solutions' 1996 Non-Qualified Stock Option Plan to each of those
officers in connection with their employment by Intellesale:
Applied Digital Solutions
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------------------------------
Number of % of Total
Securities Options Per
Underlying Granted to Share Grant Date
Options Employees Exercise Expiration Present
Name Granted in 1998(2) Price Date Value (3)
- ---------------------------------------- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Marc Sherman 200,000 (1) 3.7% $ 2.16 December 2004 $254,000
200,000 (1) 3.7% 2.19 December 2004 $254,000
Edward L. Cummings -- -- -- -- --
Charles D. Newman -- -- -- -- --
</TABLE>
___________________
(1) These options are exercisable over a ten-year period beginning with the
first anniversary of the grant date.
(2) Represents the percentage of options granted to employees of Applied Digital
Solutions in 1998.
(3) Based on the grant date present value of $1.27 per option share that was
derived using the Black-Scholes option pricing model in accordance with
rules and regulations of the Securities and Exchange Commission. This is not
intended to forecast future appreciation of Applied Digital Solutions'
common stock price. The Black-Scholes model was used with the following
assumptions: dividend yield of 0%; expected volatility of 43.69%; risk-free
interest rate of 4.74%; and expected lives of five years.
Fiscal Year-End Option Values
The following table sets forth information with respect to each of the
executive officers named in the summary compensation table concerning their
unexercised Intellesale options held on December 31, 1998. No options were
exercised during 1998. All options listed become fully exercisable upon the
completion of this offering.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
at Year End 1998 Year End 1998 (1)
---------------------------------------------------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Marc Sherman 1,000,000 -- $ 8,150,000 --
Edward L. Cummings 1,000,000 -- 8,150,000 --
Charles D. Newman 300,000 -- 2,445,000 --
</TABLE>
______________________
(1) The dollar values have been calculated by determining the difference between
the fair market value of the securities underlying the options at December
31, 1998 and the exercise prices of the options. Solely for purposes of
determining the value of options at December 31, 1998, we have assumed that
the fair market value of shares of common stock issuable upon exercise of
options was $9.00 per share, the assumed initial public offering price,
since the common stock was not traded in an established market before the
offering.
Employment Agreements
Effective July 1, 1999, we entered into employment agreements with
Marc Sherman, Edward L. Cummings, Charles D. Newman and Joseph S. Keats. The
initial term of each agreement ends on June 30, 2004, subject to extension in
the case of Mr. Sherman as described below. Mr. Sherman's base compensation is
initially $400,000 per year, which will be reduced to $280,000 per year upon
completion of this offering. He will also be entitled to receive a minimum
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annual bonus based on the annual earnings of Intellesale before interest,
taxes, depreciation and amortization as a percentage of the budgeted amount
and the annual net revenue of Intellesale as a percentage of the budgeted
amount. Each such percentage will be multiplied by $125,000 to determine his
minimum bonus. The agreements of the other executives provide for base
compensation as set forth in the table below, and each is also entitled to
a minimum bonus as indicated in the table. Any bonus in excess of the
minimum bonus will be at the discretion of the board of directors.
<TABLE>
<CAPTION>
Executive Base Salary Minimum Bonus
----------------------------------------------------------------
<S> <C> <C>
Edward L. Cummings $280,000 $70,000
Charles D. Newman $280,000 $70,000
Joseph S. Keats $150,000 $37,500
</TABLE>
In addition, each of the agreements requires Intellesale to make severance
payments to the executive in the event of a change of control, as defined in the
agreements. A change of control under the agreements generally means:
. the acquisition by any person or entity of (1) more than 20% of
our outstanding shares of voting stock without the approval of the
board of directors, or (2) more than 50% of such shares with the
approval of the board, in either case through a tender offer,
exchange offer or otherwise;
. the sale or other disposition of all or substantially all of our
assets unless before the sale our stockholders own at least 50% of
the voting stock of the purchaser, and the purchaser assumes our
obligations under these agreements;
. a merger or consolidation after which our stockholders own less
than 50% of the voting stock of the surviving entity; or
. any time during any two-year period in which individuals who
constituted the board of directors at the start of such period, or
who were elected after being nominated by individuals who
constituted at least two-thirds of the board at the start of this
period, do not constitute at least 50% of the board for any
reason.
In the case of Messrs. Cummings, Newman and Keats, the severance payment
would not be payable unless Mr. Sherman was also no longer our chief executive
officer. Each executive, at his sole option and discretion, may terminate his
employment at any time upon 15 days' notice within one year after any change of
control. In this event, or if the executive's employment is terminated other
than for cause within one year of a change of control, we would be obligated to
pay to the executive, within one month after termination, a severance payment
equal to three times his average annual compensation for the previous five
years, minus $1.00. The amounts of these severance payments would be reduced if
their payment would result in an additional special tax to the executive.
Any changes in stock ownership resulting from this offering or changes in
Intellesale's board of directors within two years after this offering will not
trigger the change of control provisions in these agreements.
Each of these agreements also provides that the executive officer will not
engage in any business competitive with our business or own more than 5% of any
such business for three years after termination of employment with Intellesale.
In addition to the above, Mr. Sherman's agreement provides for automatic
one-year extensions to the employment term at the end of each contract year
unless either party gives notice at least 30 days prior to the end of such
contract year that the agreement will no longer be extended. Mr. Sherman also
receives $5,000 per month for personal expenses. In the event Mr. Sherman is
terminated for any reason except a material breach of his employment agreement,
he is entitled to receive for three years following such termination an amount
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equal to his highest annual compensation in any 12-month period during the
term of his agreement. This amount would be reduced by any change of control
payments described above.
In August 1999, Mr. Sherman purchased a residence and obtained a
mortgage loan through an unaffiliated commercial bank in the amount of
approximately $1,250,000. Applied Digital Solutions guaranteed the
loan. This satisfied the agreement of Intellesale in Mr. Sherman's
employment agreement to provide such a guarantee. Mr. Sherman has
agreed to indemnify Applied Digital Solutions for any amounts which it
is required to pay under the guarantee, and his agreement is secured by
a pledge of other real estate he owns.
1997 Non-Qualified Stock Option Plan
In 1997, Universal Commodities adopted a Non-Qualified Stock Option Plan.
Intellesale assumed the plan following the merger of Universal Commodities into
Intellesale in July 1999. Options to purchase a total of 5,450,000 shares are
outstanding under this plan, and are exercisable for ten years from the date of
the grant. The exercise price under each of the options is $0.85 per share. We
do not intend to issue any future options under this plan.
This plan was a long-term plan designed to link rewards with stockholder
value over time. Stock options were granted to aid in the retention of employees
and to align the interests of employees with stockholders. The value of the
stock options to an employee increases as the price of our stock increases above
the fair market value on the grant date, and the employee must remain in our
employ for the period required for the stock option to be exercisable, which
provides an incentive to remain with us.
1999 Flexible Stock Plan
In May 1999, our board of directors and Applied Digital Solutions, as our
majority stockholder, approved our 1999 Flexible Stock Plan. The flexible plan
is intended to attract, retain, motivate and reward employees and other
individuals and to encourage ownership by employees and other individuals of our
common stock. The flexible plan provides for benefits to be awarded in the form
of incentive stock options, non-qualified stock options, stock appreciation
rights, performance shares, restricted stock, cash awards, and other stock based
awards. Benefits under the flexible plan may be granted only to:
. persons who are our employees, members of our board and employees
and owners of entities which are not affiliated with us but which
have a direct or indirect ownership interest in us or one of our
affiliates;
. individuals who, and employees and owners of entities that, are
our or one of our affiliate's customers or suppliers;
. individuals who, and employees and owners of entities that, render
services to us or one of our affiliates; and
. individuals who, and employees and owners of entities that, have
ownership or business affiliations with any individual or entity
previously described.
The flexible plan will be administered by our compensation committee, which
has complete authority to determine the terms, conditions and provisions of, and
restrictions relating to, and to grant, the benefits under the plan.
The number of shares of our common stock which may be issued in connection
with benefits granted under the flexible plan is initially 2,500,000 shares,
plus an annual increase, effective on the first day of each calendar year
commencing January 1, 2001, of 5% of the number of outstanding shares of common
stock as of the first day of such calendar year, but not more than 7,500,000
shares in the aggregate. If there is any change in our common stock, the number
and class of shares available under the plan, and/or the price thereof, will be
appropriately adjusted.
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Options granted under the flexible plan which are intended to qualify as
incentive stock options must be exercised within ten years of the date of grant
or the expiration date set forth in the option grant, if earlier, subject to
earlier option expiration upon termination of the holder's employment,
disability or death. The exercise price of all options intended to qualify as
incentive stock options must be at least equal to the fair market value of
the underlying shares of common stock on the date of the grant, and the exercise
price of other options must be at least 85% of the fair market value of the
shares on the date of grant. Incentive stock options granted to any participant
who owns 10% or more of our outstanding common stock must have an exercise
price equal to or exceeding 110% of the fair market value of a share of
common stock on the date of the grant and must not be exercisable for longer
than five years.
A participant who is granted a stock appreciation right under the flexible
plan has the right to receive an amount equal to the difference between the fair
market value of a share of stock on the date of grant of the stock appreciation
right and such value on the date of its payment. Under the flexible plan, a
participant may also be awarded performance shares, under which the participant
may receive a grant of shares of our common stock or cash equal to the fair
market value of those shares that is contingent upon achieving targeted profit
or performance objectives established by the committee. In addition, the
committee may make restricted stock awards under the flexible plan. Restricted
stock granted under the flexible plan is subject to the terms and conditions,
and carries the voting, dividend and other ownership rights, in each case as
determined by the compensation committee.
We have granted 7,500 shares of restricted stock and nonqualified options
to purchase 75,000 shares of our common stock under the flexible plan to each of
Mr. Good and Mr. Meyers, who are members of our board of directors. The exercise
price under each option will be equal to the initial public offering price in
this offering. No other options, performance awards, stock appreciation rights,
restricted stock awards or other awards are outstanding under the flexible plan.
Our board of directors may amend or terminate the plan, but the board may
not amend the plan without the approval of our stockholders, if such amendment
would:
. cause the options which are intended to qualify as incentive stock
options to fail to qualify as incentive stock options;
. cause the plan to fail to meet the requirements of Rule 16b-3 of
the Exchange Act; or
. violate applicable law.
In the event of a change in control, our board of directors or its
committee may provide such protection as it deems necessary to maintain a
participant's rights, including:
. providing for the acceleration of any time periods relating to the
exercise or realization of any benefit;
. providing for the purchase of a benefit upon the participant's
request for an amount in cash equal to the amount which could have
been attained upon the exercise or realization of the benefit had
it been currently exercisable or payable;
. making such adjustment to the outstanding benefits as the
committee deems appropriate; and/or
. causing the outstanding benefits to be assumed, or new benefits
substituted therefor, by the surviving corporation.
Compensation Committee Interlocks and Insider Participation
Before the closing of this offering, all matters concerning executive
officer compensation were addressed by the entire board of directors because we
did not have a compensation committee. Messrs. Sherman and Cummings were
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directors and executive officers during that period and, as directors,
participated in deliberations regarding executive compensation.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Acquisition of Minority Interests
Intellesale is the successor to a number of businesses that were acquired
primarily through the use of the common stock of our principal stockholder,
Applied Digital Solutions. In most cases, Applied Digital Solutions purchased
80% of the stock of the businesses acquired. In addition, Applied Digital
Solutions generally agreed to make earn-out payments to the sellers of the
businesses acquired, including instances where Applied Digital Solutions
acquired 100% of the stock of those businesses. We have now agreed to purchase,
upon the closing of this offering, all of the minority interests in these
businesses and to settle all of the earn-out payments for fixed amounts, using a
combination of cash and Intellesale common stock. We will issue an aggregate of
518,778 shares of our common stock in acquiring these minority interests,
assuming an initial offering price of $9.00 per share. These transactions are
described below.
Elite Computer Services, Inc.
In September 1995, Applied Digital Solutions acquired 80% of the
outstanding stock of Elite Computer Services, Inc. Elite sells parts to service
companies for the repair of computers and computer equipment. In July 1999,
Applied Digital Solutions contributed the stock of Elite to Intellesale. In
August 1999, Intellesale purchased the remaining 20% minority interest in Elite
for $300,000 in cash.
Universal Commodities Corporation
In November 1996, Applied Digital Solutions acquired 80% of the outstanding
stock of Universal Commodities Corp., a seller of refurbished computer equipment
from Mr. Sherman, our current President and Chief Executive Officer and the sole
shareholder of Universal Commodities. In this transaction, Applied Digital
Solutions issued 735,000 shares of its common stock, having a fair value of
approximately $1.5 million. On July 1, 1999, Applied Digital Solutions completed
a corporate reorganization in which Universal Commodities merged into
Intellesale, with Intellesale as the surviving corporation. The outstanding
shares of common stock and options to purchase shares of common stock of
Universal Commodities were exchanged for the same number of shares of, and
options to purchase, common stock of Intellesale, having the same relative
rights and preferences as such exchanged shares. Applied Digital Solutions, Mr.
Sherman and Mr. Cummings received 12,000,000; 2,700,000; and 300,000 shares,
respectively, of Intellesale common stock in exchange for their shares of
Universal Commodities in the merger.
Norcom Resources Incorporated
In January 1997, Applied Digital Solutions acquired 80% of the outstanding
stock of Norcom Resources Incorporated. Norcom buys and sells mainframe computer
processors. The Norcom shareholders were granted the right to require Applied
Digital Solutions to purchase their remaining 20% interest in Norcom. In
August 1999, Applied Digital Solutions amended its agreement with the Norcom
shareholders to provide that Intellesale will purchase their remaining interests
in Norcom for $900,000. We have the option to pay that amount in cash, shares
of our common stock or a combination of cash and stock. We intend to pay
$450,000 in cash from the proceeds of this offering and to pay the balance in
shares of our common stock, valued at the initial public offering price in this
offering.
Pizarro Re-Marketing, Inc.
In January 1997, Applied Digital Solutions acquired 80% of the outstanding
stock of Pizarro Re-Marketing, Inc. Pizarro Remarketing buys and sells
computer tape and disk storage devices. Ms. Pizarro, the sole stockholder of
Pizarro Remarketing, was granted the right to require Applied Digital Solutions
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to purchase her remaining 20% interest in Pizarro Re-Marketing. In March 1999,
Applied Digital Solutions amended its agreement with Ms. Pizarro to provide
that Intellesale will purchase her remaining interest in Pizarro Re-Marketing
for $500,000. In August 1999, we further amended our agreement with Ms. Pizarro
to provide that we will pay that amount in cash within 30 days following the
completion of this offering. We intend to use a portion of the proceeds of this
offering to make that payment.
Cybertech Station, Inc.
In July 1997, Applied Digital Solutions acquired 80% of the outstanding
stock of Cybertech Station, Inc. Cybertech Station buys and sells computer
memory chips. Ms. Sheerr, the sole stockholder of Cybertech Station, was granted
the right to require Applied Digital Solutions to purchase her remaining 20%
interest in Cybertech Station. In August 1999, Applied Digital Solutions amended
its agreement with Ms. Sheerr to provide that Intellesale will purchase her
remaining interest in Cybertech Station for $415,000. We are obligated to pay
Ms. Sheerr $208,000 of the $415,000 in cash, which we intend to pay from the
proceeds of this offering, and to issue to Ms. Sheerr $207,000 of our common
stock, valued at the initial public offering price in this offering, within
30 days following the completion of this offering. Ms. Sheerr is the sister
of Marc Sherman, our President and Chief Executive Officer.
Port Parties, Ltd.
Effective July 1997, Applied Digital Solutions acquired 80% of the
outstanding stock of Port Parties, Ltd. which provides leased computers and
related equipment to meeting and convention planners. Applied Digital Solutions
agreed to pay an additional amount to Harvey H. Newman and Martin D. Zuckerman,
the sole stockholders of Port Parties, if Port Parties achieved specified
earnings targets during various periods ending December 31, 2000. In addition,
the selling stockholders were granted the right to require Applied Digital
Solutions to purchase their remaining 20% interest in Port Parties. In August
1999, Applied Digital Solutions transferred its shares in Port Parties to us,
and amended the agreement with Messrs. Newman and Zuckerman. The amendment
provides that Intellesale will pay $4,000,000 in lieu of the earn-out payments
and for the purchase of their remaining interests in Port Parties. We are
obligated to pay Mr. Newman $1,020,000 in cash, which we intend to pay from the
proceeds of this offering, and to issue to Mr. Newman $1,020,000 of our common
stock, valued at the initial public offering price in this offering. We are
obligated to pay Mr. Zuckerman $980,000 in cash, which we intend to pay from the
proceeds of this offering, and to issue to Mr. Zuckerman $980,000 of our common
stock, valued at the initial public offering price in this offering. Mr. Newman
is the father of Charles Newman, our Executive Vice President.
Blue Star Electronics, Inc.
In April 1998, Applied Digital Solutions acquired 80% of the outstanding
stock of Blue Star Electronics, Inc., a manufacturer of custom computer
cables and cable assemblies. Applied Digital Solutions agreed to pay an
additional amount to Paul Pappas, the sole stockholder of Blue Star, if Blue
Star achieved specified earnings targets during the two years ending December
31, 1999. In addition, Mr. Pappas was granted the right to require Applied
Digital Solutions to purchase his remaining 20% interest in Blue Star. In
August 1999, Applied Digital Solutions amended its agreement with Mr. Pappas
to provide that Intellesale will pay $175,000 in lieu of the earn-out payments
and to purchase his remaining interest in Blue Star. We are obligated to pay
Mr. Pappas $88,000 of the $175,000 in cash, which we intend to pay from the
proceeds of this offering, and to issue to Mr. Pappas $87,000 of our common
stock, valued at the initial public offering price in this offering.
Service Transport Company
In April 1998, Applied Digital Solutions acquired 80% of the outstanding
stock of Service Transport Company, a trucking company. Under the acquisition
agreement, Erich Nigl and Carl C. Saracino, the stockholders of Service
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Transport, had the right to require Applied Digital Solutions to purchase their
remaining 20% interest in Service Transport. Applied Digital Solutions
purchased Mr. Nigl's remaining interest in December 1998. In August 1999,
Applied Digital Solutions amended its agreement with Mr. Saracino to provide
that Intellesale will purchase his remaining interest in Service Transport
within 30 days after the closing of this offering for an aggregate of 50,000
shares of our common stock.
Data Path Technologies, Inc.
In April 1998, Applied Digital Solutions acquired all of the outstanding
stock of Data Path Technologies, Inc., a seller of refurbished computer
products including sales made through the Internet. Applied Digital Solutions
agreed to pay an additional amount to the stockholders of Data Path, including
Donn J. Wagner, the President of Data Path, if Data Path achieved specified
earnings targets during various periods ending December 31, 2001. In March
1999, Applied Digital Solutions amended its agreement with the Data Path
stockholders to provide that Intellesale will pay $2,000,000 in lieu of the
earn-out payments. We have the option to pay that amount in cash, in shares
of our common stock, or in a combination of cash and stock. We intend to pay
$1,400,000 of the $2,000,000 from the proceeds of this offering and to pay
the balance in stock by issuing shares of our common stock to the Data Path
stockholders, valued at the initial public offering price in this offering.
GDB Software Services, Inc.
Effective April 1998, Applied Digital Solutions acquired all of the stock
of GDB Software Services, Inc., a provider of consulting services relating to
software and computer equipment. Applied Digital Solutions agreed to pay an
additional amount to Patrick C. Chai and Robert W. Borra, the sole stockholders
of GDB Software, if GDB Software achieved specified earnings targets during
various periods ending December 31, 2001. In April 1999, Applied Digital
Solutions amended its agreement with the selling stockholders to provide that
Intellesale will pay $1,500,000 in lieu of the earn-out payments. We have the
option to pay that amount in cash, in shares of our common stock, or in a
combination of cash and stock. We intend to pay $750,000 of the $1,500,000 in
cash from the proceeds of this offering and to pay the balance in stock by
issuing shares of our common stock to Messrs. Chai and Borra, valued at the
initial public offering price in this offering.
Fiscal Advantage Corporation
Effective October 1998, Applied Digital Solutions acquired substantially
all of the assets of Fiscal Advantage Corporation, which acts as a broker in
arrangements between buyers of computers and leasing companies. We agreed to
pay an additional amount to Charles J. Phillips, the sole stockholder of Fiscal
Advantage, if Fiscal Advantage achieved specified earnings targets. In April
1999, Applied Digital Solutions amended its agreement with Mr. Phillips to
provide that Intellesale will pay $250,000 in lieu of the earn-out payments.
We have the option to pay that amount in cash, in shares of our common
stock, or in a combination of cash and stock. We intend to repay $125,000 of
the $250,000 in cash from the proceeds of this offering and to pay the balance
in stock by issuing shares of our common stock to Mr. Phillips, valued at the
initial public offering price in this offering.
Stockholders' Agreement
On June 30, 1999, Applied Digital Solutions and Messrs. Sherman and
Cummings entered into a stockholders' agreement, pursuant to which Applied
Digital Solutions granted Messrs. Sherman and Cummings certain "tag along" and
put sales rights for their shares of our common stock, which are described
in the following paragraphs.
Each of Mr. Sherman and Mr. Cummings, at his option, may participate
proportionately in any sale of our shares made by Applied Digital Solutions,
other than a sale into the public market. In that event, Messrs. Sherman and
Cummings would be entitled to elect to sell the same percentage of their
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shares of our common stock as Applied Digital Solutions proposes to sell of
its shares, and would be entitled to receive the same per share amount as
Applied Digital Solutions.
In the absence of this offering, beginning November 1, 2001, each of
Messrs. Sherman and Cummings may, at his option, require that Applied Digital
Solutions purchase all of his shares of our common stock for a per share
purchase price determined as provided in the stockholders' agreement. Upon
completion of this offering, such right to require the purchase of shares of
Intellesale will no longer apply.
Transactions with Applied Digital Solutions and Its Affiliates
Applied Digital Solutions is our principal stockholder. After the
completion of this offering, assuming an initial public offering price of
$9.00 per share and after giving effect to the issuance of 1,629,889 shares of
our common stock to the sellers of Bostek and our other subsidiaries, Applied
Digital Solutions will own approximately 49.9% of our outstanding common
stock, or approximately 47.3% if the underwriters' over-allotment option is
exercised in full. Applied Digital Solutions is a Missouri corporation which
is principally engaged in the communications industry.
Voting and Standstill Agreement. In September 1999, we entered into a
voting and standstill agreement with Applied Digital Solutions relating to
shares of our voting securities held by Applied Digital Solutions.
Under the agreement, Applied Digital Solutions has agreed to vote all of
the voting stock of Intellesale that it holds either for or against the election
or removal of directors, or on any other matter presented to the stockholders,
in the same proportion as the other stockholders of Intellesale vote for or
against such matter. Applied Digital Solutions has granted to us an irrevocable
proxy to vote its shares in this manner. In addition, Applied Digital Solutions
has agreed not to initiate or participate in any discussions relating to a
business combination involving Intellesale unless those discussions are approved
by a majority of the disinterested directors. "Disinterested directors" means
directors who are not officers or directors of Applied Digital Solutions or
owners of 5% of the outstanding common stock of Applied Digital Solutions.
Applied Digital Solutions has also agreed that it will not:
. participate in or form any group having the ability to direct
control of Intellesale;
. enter into any voting trust or other voting agreement relating to its
Intellesale shares, other than its agreement with us; or
. enter into proxy contests, election contests or solicit or participate
in solicitation or any stockholder proposals relating to Intellesale
shares.
Applied Digital Solutions also agreed that it will not own any more shares
of our stock than it will own immediately following this offering, except for
any increases due to stock splits, stock dividends or reorganizations.
The agreement provides that Applied Digital Solutions will not initiate or
participate in any tender offer for our shares, or assist any third party in a
tender offer, without the approval of a majority of the disinterested directors.
Applied Digital Solutions may sell our shares only if the sale is registered
under the Securities Act or if the sale is made through any national stock
market. It may make sales under Rule 144 only if it has first given us a copy of
any notice it is required to file with the SEC specifying the aggregate number
of shares it proposes to sell. All other private sales by Applied Digital
Solutions must first be approved by our disinterested directors. Applied Digital
Solutions has agreed not to sell any shares of our voting stock it owns during
the 180 days following the effective date of any registration statement for
sales of our voting stock.
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Applied Digital Solutions has pledged the shares of Intellesale which it
owns to secure its revolving credit agreement. If the lender under the credit
agreement were to foreclose on that pledge, it would be able to sell the shares
of Intellesale it acquires, free from the restrictions of our agreement with
Applied Digital Solutions.
The voting and standstill agreement terminates on the earlier of:
. when Applied Digital Solutions owns less than 10% of our outstanding
voting securities; or
. when it owns less than 15% of our outstanding voting securities and
another stockholder beneficially owns more voting securities than
Applied Digital Solutions.
Registration Rights. Upon completion of this offering, Applied Digital
Solutions, Marc Sherman and Edward L. Cummings, or their transferees, will be
entitled to certain rights with respect to the registration of their shares
under the Securities Act. These three stockholders will beneficially own a total
of 13,300,000 shares of our common stock after this offering, assuming the
underwriters do not exercise their over-allotment option. Applied Digital
Solutions may cause us to effect five registrations of the stock, but the
offerings must be underwritten and each one may cover no more than one-third of
the shares held by Applied Digital Solutions upon completion of this offering.
Mr. Sherman may cause us to effect seven registrations, but each one may cover
no more than 20% of the shares he holds. In addition, Applied Digital Solutions
and Messrs. Sherman and Cummings are entitled to include their shares for
registration in the event we register our stock for sale, subject to customary
rights of underwriters to reduce the number of shares that each of those
stockholders may include. We have agreed to indemnify these stockholders in
connection with these registrations, except to the extent that the losses relate
to statements included in the registration statement that are provided by the
registering stockholder or to the extent that person participates as an
underwriter in the offering.
Registration of these shares under the Securities Act would result in the
shares becoming freely tradable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness of
the registration.
Management Services. Applied Digital Solutions currently provides certain
services to us and incurs certain expenses on our behalf. These services
consist of legal, internal audit and financial reporting. We incurred
approximately $0.4 million of these costs in 1998 and approximately $0.3 million
in the first half of 1999. No costs were allocated in 1996 and 1997 because
Applied Digital Solutions did not provide significant services to us. These
expenses are not necessarily indicative of the expenses we would have incurred
had we operated as a separate entity. If we had to provide these services
ourselves, they might have cost more.
Following the closing of this offering, Applied Digital Solutions will
provide certain legal services for us on an informal basis at a cost to us of
$100 per hour. There is no formal written agreement in place with respect to
such services.
Financing. As of August 31, 1999, the outstanding amount of our borrowings
from Applied Digital Solutions was $33.0 million. We expect to have our own line
of credit in place at the closing of this offering, which will replace our line
of credit with Applied Digital Solutions. We cannot provide assurance that we
will be able to establish such line of credit on favorable terms or at all.
Applied Digital Solutions has advised us that, subject to the availability
of funds, it intends to provide interim financing to us until we have obtained
our own financing. We have been advised by Applied Digital Solutions that this
financing would be provided on a pass-through basis, which means that Applied
Digital Solutions would be passing on the exact cost of its financing. There is
no formal written agreement in place with respect to the provision of this
financing support, and we cannot assure you that Applied Digital Solutions will
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<PAGE>
be willing and/or able to provide funds to us. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a discussion of Applied Digital Solutions' credit facility.
Tax Allocation Agreement. We have entered into a tax allocation and tax
sharing agreement with Applied Digital Solutions. The agreement provides that
the tax liability of the Applied Digital Solutions federal consolidated tax
return group, during the period that we are a member of that group, will be
allocated among the members of the group in proportion to their separately
calculated tax liability. Following completion of this offering, we will no
longer be a part of the Applied Digital Solutions consolidated group. The
agreement also provides that any savings resulting from the tax benefits of
a particular member will be paid to that member, rather than accruing to the
benefit of the other members. The agreement requires that certain payments be
made between Applied Digital Solutions and us in the event there is a change
in pre-offering tax liabilities of Intellesale and provides that Applied
Digital Solutions may settle proposed adjustments without our consent. In
addition, Applied Digital Solutions has agreed to indemnify us against any tax
liabilities of the Applied Digital Solutions federal consolidated tax return
group that are not attributable to us, and we have agreed to indemnify Applied
Digital Solutions against any of our tax liabilities.
Conflicts of Interest. Our directors included one person who is a director
of Applied Digital Solutions, one who is an executive officer of Applied Digital
Solutions, and one who is both a director and executive officer of Applied
Digital Solutions. In addition, Mr. Sherman was an executive officer of Applied
Digital Solutions prior to August 9, 1999 and beneficially owns 1,409,419 shares
of Applied Digital Solutions common stock. These persons may have had a conflict
of interest in negotiating the arrangements between Applied Digital Solutions
and us described above. Although we believe that the terms of such agreements
are at least as favorable to us as those we could negotiate with unrelated
parties, these agreements may be modified in the future, and we may enter into
additional agreements or transactions with Applied Digital Solutions or its
affiliates. Conflicts of interest could arise between Applied Digital Solutions
and us with respect to any of these or any future agreements or arrangements
between Applied Digital Solutions and us. In addition, subject to the
limitations of the Voting Agreement referred to above, Applied Digital Solutions
may be able to direct the outcome of matters requiring approval by our
stockholders, including the election of our directors. If this occurs, it could
delay or prevent a change of control of Intellesale.
Indebtedness of Management
We made loans to several of our executive officers in 1997 and 1998
aggregating $696,505. The loans are unsecured, bear interest at 6% per year, and
are payable on demand. All of the loans are to be repaid in full at the time of
completion of this offering. The following table summarizes the outstanding
loans to each officer at August 31, 1999:
<TABLE>
<CAPTION>
Accrued
Interest as of
Outstanding August 31,
Officer Principal 1999 Total
------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marc Sherman $595,000 $43,318 $638,318
Edward L. Cummings 70,000 2,913 72,913
Charles D. Newman 26,505 3,802 30,307
--------------------------------------------------
$691,505 $50,033 $741,538
==================================================
</TABLE>
As provided in his employment agreement with us, Applied Digital Solutions
has guaranteed a $1,250,000 mortgage loan to Mr. Sherman, which is described
under "Management--Employment Agreements."
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of October 15, 1999, and as adjusted to reflect the sale
of the shares of common stock offered by this prospectus and the related
transactions described below, by:
. each person known to us who beneficially owns more than 5% of our
common stock;
. each of our directors and each of our executive officers named in the
summary compensation table;
. the selling stockholder; and
. all of our directors and executive officers as a group.
Except as otherwise noted below, the address of each person listed below is
our address. Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes voting or investment power with respect to
securities. A person is deemd to beneficially own shares of common stock subject
to options and warrants held by the person if the warrants or options are
currently exercisable or convertible or are exercisable or convertible within 60
days of the date of this table. Beneficial ownership after the offering assumes:
. no exercise by the underwriters of their over-allotment options from
us and Applied Digital Solutions;
. the issuance of a total of 1,111,111 shares of our common stock to
the sellers of Bostek in connection with our acquisition of Bostek;
and
. the issuance of 518,778 shares of our common stock in settlement of
earn-outs in connection with certain of our other acquisitions and in
connection with the acquisition of all outstanding minority interests
in our subsidiaries.
For a description of our obligations to the Bostek sellers, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Bostek--Acquisition by Intellesale." For a description of the
settlement of our earn-out obligations and our acquisition of these minority
interests, see "Certain Relationships and Related Transactions--Acquisition of
Minority Interests." Unless otherwise indicated, to our knowledge, all persons
listed have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law.
<TABLE>
<CAPTION>
Shares Owned Prior to Shares Owned After
Name of Beneficial Owners the Offering the Offering
- -------------------------------------------- -----------------------------------------------------------------------------
Number Percent Shares Offered Number Percent
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Applied Digital Solutions, Inc.
400 Royal Palm, Suite 410
Palm Beach, Florida 33480................ 12,000,000 79.9% 1,700,000 10,300,000 49.8%
Marc Sherman (1)............................ 3,700,000 23.1 -- 3,700,000 17.0
Edward L. Cummings (1)...................... 1,300,000 8.1 -- 1,300,000 6.0
Garrett A. Sullivan (2)..................... 500,000 3.2 -- 500,000 2.4
David A. Loppert (2)........................ 500,000 3.2 -- 500,000 2.4
Charles D. Newman (3)....................... 300,000 2.0 -- 300,000 1.4
Constance K. Weaver......................... 100,000 * -- 100,000 *
Alexander H. Good........................... 7,500 * -- 7,500 *
Glenn Meyers................................ 7,500 * -- 7,500 *
All directors and executive officers as
a group (9 Persons) (4).................... 6,415,000 34.92% 1,700,000 6,415,000 26.7%
========= ===== =========
</TABLE>
* Less than 1%.
(1) Includes 1,000,000 shares of common stock issuable upon the exercise
of stock options within 60 days. Such shares would be subject to the
limitations of the lock-up agreements described below under "Shares
Available for Future Sale."
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(2) Consists of shares of common stock issuable upon the exercise of stock
options within 60 days. Such shares would be subject to the
limitations of the lock-up agreements described below under "Shares
Available for Future Sale."
(3) Consists of shares of common stock issuable upon the exercise of stock
options within 60 days. Such shares would be subject to the
limitations of the lock-up agreements described below under "Shares
Available for Future Sale." Includes options beneficially owned by his
wife.
(4) Includes 3,425,000 shares of common stock issuable upon the exercise
of stock options within 60 days.
If the underwriters exercise their over-allotment option in full, Applied
Digital Solutions will own 10,045,000 shares of our common stock representing
approximately 47.3% of our common stock.
DESCRIPTION OF CAPITAL STOCK
Our certificate of incorporation authorizes the issuance of up to
30,000,000 shares, par value $0.0001 per share, of our common stock, and up to
5,000,000 shares of preferred stock, par value $.01 per share.
As of September 30, 1999, 15,015,000 shares of our common stock were
outstanding and held of record by five stockholders. As of August 31, 1999,
options to purchase 5,350,000 shares of our common stock at an exercise price of
$0.85 per share, and options to purchase 250,000 shares of our common stock at
an exercise price equal to the initial public offering price in the offering,
were outstanding. Of the outstanding options, none are now exercisable, but
4,300,000 become exercisable upon completion of this offering and the remainder
become exercisable at various times over the next year. Upon the closing of this
offering, we will have outstanding 20,644,889 shares of common stock, after
giving effect to the issuance of 1,629,889 shares to sellers of various
subsidiaries, including Bostek, in connection with the Bostek acquisition, the
redemption of minority interests in our subsidiaries, and the settlement of
earn-out rights.
Common Stock
All of the outstanding shares of common stock are, and the shares offered
hereby will be, fully paid and nonassessable. Each holder of common stock is
entitled to one vote for each share held of record on all matters presented to a
vote of stockholders. Holders of common stock do not have cumulative voting
rights in the election of directors. Stockholders casting a plurality of the
votes of stockholders entitled to vote in an election of directors may elect all
of the directors. Holders of common stock have no preemptive rights to purchase
or subscribe for any stock or other securities and there are no conversion
rights or redemption or sinking fund provisions with respect to such stock.
Subject to the rules and regulations of the Nasdaq National Market, additional
shares of authorized common stock may be issued without stockholder approval.
Applied Digital Solutions has entered into an agreement under which it has
agreed to vote its shares on matters presented to our stockholders in the same
proportions as the other stockholders vote their shares, subject to certain
conditions, as described under "Certain Relationships and Related Transactions--
Voting Agreement with Applied Digital Solutions."
Upon a liquidation, dissolution or winding-up, holders of our common stock
will each receive their pro rata share of our remaining assets, after payment of
liquidation preferences, if any, on any outstanding shares of preferred stock
and payments of claims of creditors.
Preferred Stock
Upon the closing of this offering, we will not have any shares of our
preferred stock outstanding. The 5,000,000 authorized shares of preferred stock
may be issued in one or more series without further approval from our
stockholders. Our board of directors is authorized to determine the terms,
limitations and relative rights and preferences of the preferred stock, to
establish series of preferred stock and to determine the variations among
series. If we issue preferred stock, it would have priority over our
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common stock with respect to dividends and to other distributions, including the
distribution of assets upon liquidation. In addition, we may be obligated to
repurchase or redeem it. The holders of preferred stock may have voting and
conversion rights, including multiple voting rights, which could adversely
affect the rights of the holders of our common stock. We do not have any present
plans to issue any shares of preferred stock.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any "business combination"
with any "interested stockholder" for a period of three years following the date
that such stockholder became an interested stockholder unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding those shares owned by
persons who are directors and also officers, and employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
. on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting
of stockholders, and not by written consent, by the affirmative vote
of at least two-thirds of the outstanding voting stock that is not
owned by the interested stockholder.
In general, Section 203 defines "business combination" to include mergers
or consolidations between a Delaware corporation and an interested stockholder,
transactions with an interested stockholder involving the assets or stock of the
corporation or its majority-owned subsidiaries and transactions which increase
an interested stockholder's percentage ownership of stock. In general, Section
203 defines an "interested stockholder" as any entity or person beneficially
owning 15% or more of the outstanding voting stock of the corporation and any
entity or person affiliated with or controlling or controlled by such entity or
person.
Limitation of Liability and Indemnification
Our certificate of incorporation and bylaws contain certain provisions
permitted under Delaware law relating to the liability of directors. These
provisions eliminate a director's personal liability for monetary damages
resulting from a breach of fiduciary duty, except in circumstances involving
certain wrongful acts, such as:
. for any breach of the director's duty of loyalty to us or to our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. for any actions under Section 174 of the Delaware General Corporation
Law; or
. for any transaction from which the director derives an improper
personal benefit.
These provisions do not limit or eliminate our rights or any stockholder's
rights to seek non-monetary relief, such as an injunction or rescission, in the
event of a breach of a director's fiduciary duty. These provisions will not
alter a director's liability under federal securities laws. In addition, we will
enter into separate agreements with each of our directors that will provide them
with indemnification protection. We believe that these provisions and agreements
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<PAGE>
will assist us in attracting and retaining qualified individuals to serve as
directors and officers.
Transfer Agent
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company.
Listing
There is currently no active trading market for our common stock. We intend
to apply to have our common stock approved for quotation on the Nasdaq National
Market under the symbol "SALE."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 20,644,889 shares of our
common stock outstanding, assuming no exercise of the underwriters'
over-allotment offering, no exercise of options and the issuance of 1,629,889
shares to owners of minority interests in our subsidiaries. Of the outstanding
shares, all of the shares of common stock sold in this offering will be freely
tradable without restriction under the Securities Act of 1933, except that any
shares purchased in this offering by our affiliates, as that term is defined in
Rule 144 under the Securities Act, may generally only be resold in compliance
with applicable provisions of Rule 144. This leaves 14,949,889 shares eligible
for sale in the public market as follows:
Number of Shares Date
-------------------------------- --------------------------
0 After the date of this prospectus.
13,300,000 After 180 days from the date of
this prospectus, subject, in some
cases, to volume limitations.
1,644,889 At various times after 365 days
from the date of this prospectus.
The restricted securities may be sold in the public market only if
registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the effect, if any, that market sales of shares or the
availability of shares for sale will have on the market price of our common
stock prevailing from time to time. We are unable to estimate the number of
shares of common stock that may be sold in the public market pursuant to Rule
144, because this will depend on the market price of our common stock, the
personal circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of our common stock in the public market could adversely
affect the market price of our common stock and could impair our ability to
raise capital through an offering of, or effect acquisitions with, our equity
securities.
Rule 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, including the holding period of any prior owner except an
affiliate, would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of:
. one percent of the number of shares of our common stock then
outstanding, which will equal approximately 190,000 shares
immediately after this offering; or
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. the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of
a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k)
Under Rule 144(k), a person who is deemed not to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the restricted shares for at least two years, including the
holding period of any prior owner except an affiliate, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, such "144(k) shares" may be sold immediately upon the completion of
this offering.
Rule 701
Securities issued in reliance on Rule 701, such as shares of common stock
acquired pursuant to the exercise of certain options prior to this offering, are
also restricted securities. Beginning 180 days after the date of this
prospectus, these restricted securities may be sold by stockholders other than
our affiliates, subject only to the manner of sale provisions of Rule 144, and
by our affiliates, subject to all provisions of Rule 144 except the one-year
holding period requirement.
Lock-Up Agreements
All of our directors, executive officers and stockholders have signed lock-
up agreements under which they have agreed not to transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for shares of our common stock,
for a period of 180 days after the date of this prospectus. Transfers or
dispositions can be made sooner:
. with the prior written consent of Ladenburg Thalmann & Co. Inc.;
. in the case of gifts or estate planning transfers where the donee
signs a lock-up agreement; or
. in the case of distributions to stockholders or affiliates of the
stockholders where the recipient signs a lock-up agreement.
Richard Sullivan, the Chairman of the Board of Applied Digital Solutions,
who holds options to purchase 1,000,000 shares of our common stock, has agreed
that, for six months following expiration of the 180-day lockup period, he will
sell any shares he may acquire under the options only pursuant to the notice and
volume limitations provisions of Rule 144.
Registration Rights
Upon completion of this offering, Applied Digital Solutions, Marc Sherman
and Edward L. Cummings and their transferees will be entitled to certain rights
with respect to the registration of their shares of common stock under the
Securities Act, entitling them to include the shares of common stock they own
when we register our own shares for sale, subject to customary provisions
limiting the number of shares they may include. Those stockholders will
beneficially own 13,300,000 shares of our common stock after this offering,
after giving effect to the sale of the 1,700,000 shares of the common stock
offered by Applied Digital Solutions in this offering, assuming no exercise of
the underwriters' over-allotment option. In addition, Applied Digital Solutions
and Mr. Sherman will have "demand" registration rights, which means that they
would be able to cause us to register their shares under the Securities Act in
certain instances. Registration of those shares under the Securities Act would
result in those shares becoming freely saleable by these persons without
restriction under the Securities Act. See "Certain Relationships and Related
Transactions-- Transactions with Applied Digital Solutions and Its
Affiliates--Registration Rights."
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<PAGE>
Stock Options
We intend to file a registration statement under the Securities Act
covering 5,350,000 shares of common stock reserved for issuance under our 1997
Non-Qualified Stock Option Plan and 2,500,000 shares of our common stock
reserved for issuance under our 1999 Flexible Stock Plan 180 days following
completion of this offering. Thereafter, shares of common stock which are issued
as a result of options previously granted to our employees and directors and
directors and officers of our affiliates will, subject to Rule 144 volume
limitations applicable to affiliates, be available for sale in the open market.
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated [___], 1999, the underwriters named below, who are represented by
Ladenburg Thalmann & Co. Inc. and Punk, Ziegel & Company L.P., have severally
agreed to purchase from us the number of shares opposite their names below.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ------
<S> <C>
Ladenburg Thalmann & Co. Inc. ............
Punk, Ziegel & Company L.P. ..............
-----------
Total.................................. 5,700,000
-----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of certain legal matters and to certain other
conditions. The underwriters are obligated to purchase and accept delivery of
all the shares, other than those shares covered by the over-allotment option
described below, if they purchase any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the initial public offering price on the cover page of this
prospectus and some of the shares to certain dealers at the initial public
offering price less a concession not in excess of $[________] per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $[________] per share on sales to other dealers. After the initial
offering of the shares to the public, the representatives may change the public
offering price and such concessions.
The following table shows the per share and total underwriting fees to be
paid to the underwriters by us and by Applied Digital Solutions in connection
with this offering. The underwriting discounts and commissions per share are the
public offering price per share less the amount paid by the underwriters to us
and to Applied Digital Solutions per share of common stock. These amounts are
shown with and without exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
Total
---------------------------------------
Without With
Per Share Over-Allotment Over-Allotment
----------------------------------------------------------
Amount % Amount % Amount %
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Underwriting discounts and commissions
we will pay.............................
Underwriting discounts and commissions
Applied Digital Solutions will pay......
----------------------------------------------------------
Total................................ $9.00
==========================================================
</TABLE>
We will pay the offering expenses, which we estimate will be approximately
$750,000.
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We and Applied Digital Solutions have granted to the underwriters an
option, exercisable for 30 days after the date of this prospectus, to purchase
up to 600,000 additional shares from Intellesale and up to 255,000 additional
shares from Applied Digital Solutions, at the initial public offering price
minus the underwriting fees. If the underwriters exercise this option, the
additional shares will be allocated between Intellesale and Applied Digital
Solutions in the same proportion as the other shares offered hereunder. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise this option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitment.
We and Applied Digital Solutions have agreed to indemnify the underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or to contribute to payments that the underwriters may be required to make
in respect to any of those liabilities. These liabilities generally consist of
damages which the underwriters may be required to pay in connection with, and
expenses incurred in responding to or defending, claims which may be asserted
against the underwriters and which arise out of or relate to the offer, purchase
or sale of our common stock in this offering.
Ladenburg Thalmann & Co. Inc. has informed us that the underwriters do not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby and that the underwriters do not intend to confirm sales
of shares to any account over which they exercise discretionary authority.
We, our executive officers and directors, Applied Digital Solutions and all
of our other stockholders have agreed, for a period of 180 days from the date of
this prospectus, not to, without the prior written consent of Ladenburg
Thalmann:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any
securities convertible into or exercisable or exchangeable for our
common stock; or
. enter into any swap or other arrangement that transfers all or a
portion of the economic consequences associated with the ownership of
any common stock, regardless of whether any of the transactions
described in clause this paragraph is to be settled by the delivery of
common stock, or such other securities, in cash or otherwise.
This limitation will not apply to the shares offered by Applied Digital
Solutions in this offering. In addition, during this period, we have agreed not
to file any registration statement with respect to, and each of our executive
officers and directors and all of our stockholders have agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of common stock or any securities convertible into or exercisable or
exchangeable for common stock, other than a registration statement registering
options or shares granted under a stock option plan, without the prior written
consent of Ladenburg Thalmann.
Prior to this offering, there was no established trading market for our
common stock. The initial public offering price for the common stock in this
offering will be determined by negotiation among us, Applied Digital Solutions
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price are the history of and the
prospects for the industry in which we compete, the ability of our management,
our past and present operations, our prospects for future earnings, the general
condition of the securities markets at the time of this offering and the recent
market prices of securities of generally comparable companies.
We intend to apply for quotation of our common stock on the Nasdaq National
Market under the symbol "SALE."
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<PAGE>
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any of these
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of our common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of our common stock included in this offering in any jurisdiction where
that would not be permitted or legal.
In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. The underwriters are not required to engage in these activities. If
these activities are commenced, they may be discontinued by the underwriters at
any time. These transactions may be effected on the Nasdaq National Market, in
the over-the-counter market or otherwise.
Ladenburg Thalmann has in the past performed investment banking services
for Applied Digital Solutions, for which it has received customary compensation,
including a fee of $1.175 million in connection with the closing of the credit
facility which Applied Digital Solutions entered into with IBM Credit
Corporation in 1999.
LEGAL MATTERS
Bryan Cave LLP, St. Louis, Missouri, as our counsel, has issued an opinion
as to the validity of the common stock. Certain legal matters in connection with
this offering will be passed upon for the underwriters by Fulbright & Jaworski
L.L.P. Bryan Cave LLP from time to time serves as legal counsel to us and to
some of our affiliates, including Applied Digital Solutions.
EXPERTS
Our consolidated financial statements for the year ended December 31,
1998 included in this prospectus have been included herein in reliance upon the
report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting. Our consolidated
financial statements for the years ended December 31, 1997 and 1996 in this
prospectus have been included herein in reliance upon the report of Rubin,
Brown, Gornstein & Co. LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements for Universal Commodities Corp. for the ten months
ended October 31, 1996 included in this prospectus have been included in this
prospectus have been included herein in reliance on the report of Rubin, Brown,
88
<PAGE>
Gornstein & Co. LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
The financial statements for Bostek for the years ended December 31, 1996,
1997 and 1998 included in this prospectus have been included in this prospectus
have been included herein in reliance on the report of DiPesa & Company,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
CHANGE IN INDEPENDENT ACCOUNTANTS
On October 23, 1998, the board of directors of Applied Digital Solutions
voted to replace Rubin, Brown, Gornstein & Co. LLP with PricewaterhouseCoopers
LLP as Applied Digital Solutions' and, as a result, Intellesale's independent
accountants for the year ending December 31, 1998. The reports of Rubin, Brown,
Gornstein on our financial statements for the past two fiscal years did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with the audits of our financial statements for each of the two fiscal years
ended December 31, 1997 and 1996, and in the subsequent interim period through
November 2, 1998, there were no disagreements with Rubin, Brown, Gornstein & Co.
LLP on any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of Rubin, Brown, Gornstein & Co. LLP, would have caused them to
make reference to the matter in their report. During the two most recent fiscal
years and in the subsequent interim period through November 2, 1998, there were
no reportable events as defined in Regulation S-K Item 304(a)(1)(v). On November
2, 1998, Applied Digital Solutions and, as a result, Intellesale, engaged
PricewaterhouseCoopers LLP as principal accountants to audit the financial
statement for the year ending December 31, 1998. During fiscal 1996 and 1997 and
in the subsequent interim period, Applied Digital Solutions and we had not
consulted PricewaterhouseCoopers LLP on items which concerned the application of
accounting principles generally, or to a specific transaction or group of
transactions, either completed or proposed, or the type of audit opinion that
might be rendered on our financial statements.
89
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 to register
the shares of common stock offered hereby. This prospectus is a part of that
registration statement. As allowed by the SEC rules, this prospectus does not
contain all the information you can find in the registration statement or the
exhibits to that registration statement. For further information with respect to
us and the common stock offered hereby, reference is made to the registration
statement and the exhibits to that registration statement. Statements in this
prospectus concerning the contents of any contract or any other document are not
necessarily complete. If a contract or document has been filed as an exhibit to
the registration statement, we refer you to that exhibit. Each statement in this
prospectus relating to a contract or document filed as an exhibit to the
registration statement is qualified by the filed exhibits. You can obtain a copy
of the registration statement and the exhibits through the SEC, at the SEC's
public reference rooms at 450 Fifth Street, N.W., Washington, D.C., 20549, Seven
World Trade Center, 13th Floor, New York, New York 10048, and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, or the SEC's
website at http://www.sec.gov. Please call the SEC at 1-800-SEC-0330 for more
information on the public reference rooms and their copy charges.
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent auditors . We will also file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You can also request copies of these documents, for a copying fee, by
writing the SEC.
90
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Intellesale.com, Inc.
Consolidated Financial Statements for the years ended December 31,
1996, 1997 and 1998
<S> <C>
Reports of Independent Accountants...................................... F-2
Financial Statements
Consolidated Balance Sheets................................... F-4
Consolidated Statements of Operations......................... F-5
Consolidated Statements of Stockholders' Equity............... F-6
Consolidated Statements of Cash Flows......................... F-7
Notes to Consolidated Financial Statements.................... F-8
Consolidated Financial Statements (unaudited) for the six months ended
June 30, 1999
Consolidated Balance Sheets................................... F-24
Consolidated Statements of Operations......................... F-25
Consolidated Statements of Stockholders' Equity............... F-26
Consolidated Statements of Cash Flows......................... F-27
Notes to Consolidated Financial Statements.................... F-28
Bostek, Inc. and Affiliate.............................................. F-33
Financial Statements for the years ended December 31, 1996, 1997 and 1998
Independent Auditor's Report............................................ F-33
Financial Statements
Balance Sheet................................................. F-36
Statements of Income and Retained Earnings.................... F-37
Statement of Cash Flows....................................... F-38
Notes to Financial Statements................................. F-39
Financial Statements (unaudited) for the five months ended May 31, 1999
and May 31, 1998
Balance Sheet................................................. F-47
Statement of Income and Retained Earnings..................... F-48
Statement of Cash Flows....................................... F-49
Notes to Financial Statements................................. F-50
Universal Commodities Corp.
Financial Statements for the ten months ended October 31, 1996
Report of Independent Accountants....................................... F-52
Financial Statements
Balance Sheet................................................. F-53
Statement of Operations....................................... F-54
Statement of Cash Flows....................................... F-55
Notes to Financial Statements................................. F-56
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Intellesale.com, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of
Intellesale.com, Inc. which includes the computer equipment sales and services
businesses of Applied Digital Solutions, Inc. at December 31, 1998, and the
results of their operations and their cash flows for the year in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
St. Louis, Missouri
June 10, 1999 (Except as to the second paragraph
of Note 1, Note 11 and Note 17 which are as of August 23, 1999)
F-2
<PAGE>
Report of Independent Accountants
Board of Directors and Stockholders
Intellesale.com, Inc.
We have audited the accompanying consolidated balance sheet of Intellesale.com,
Inc. (a majority-owned subsidiary of Applied Digital Solutions, Inc.) and
subsidiaries as of December 31, 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Intellesale.com, Inc. and subsidiaries as of December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
F-3
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Par Value)
<TABLE>
<CAPTION>
Assets
December 31,
--------------------
1997 1998
--------------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 615 $ 571
Accounts receivable (net of allowance for doubtful accounts
of $100 in 1997 and $362 in 1998) 3,626 4,675
Inventories 3,474 6,249
Notes receivable - related parties 74 262
Prepaid expenses and other current assets 125 143
- ---------------------------------------------------------------------------------
Total Current Assets 7,914 11,900
Equipment and leasehold improvements, net 418 601
Notes receivable - related parties -- 873
Goodwill, net 2,987 8,464
Other assets 68 125
- ---------------------------------------------------------------------------------
$11,387 $21,963
=================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 1,403 $ 80
Due to Parent Company 1,242 6,022
Accounts payable and accrued expenses 3,111 5,531
- ---------------------------------------------------------------------------------
Total Current Liabilities 5,756 11,633
- ---------------------------------------------------------------------------------
Commitments and contingent liabilities (Note 11)
- ---------------------------------------------------------------------------------
Minority Interest 384 590
- ---------------------------------------------------------------------------------
Stockholders' Equity
Common shares:
Authorized 30,000 shares of $.0001 par value; issued
and outstanding 15,000 shares 1
Additional paid-in capital 6,862
Equity of predecessor businesses 4,163 --
Retained earnings 1,084 2,877
- ---------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,247 9,740
- ---------------------------------------------------------------------------------
$11,387 $21,963
=================================================================================
</TABLE>
See the accompanying notes to financial statements
F-4
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
For The Years
Ended December 31,
-----------------------------
1996 1997 1998
-----------------------------
<S> <C> <C> <C>
Revenue $ 1,993 $39,445 $60,743
Costs of goods sold 851 33,202 47,623
- ----------------------------------------------------------------------------
Gross profit 1,142 6,243 13,120
Operating costs and expenses
Selling, general and administrative expenses 635 3,778 8,725
Depreciation and amortization 2 190 434
- ----------------------------------------------------------------------------
Operating income 505 2,275 3,961
INTEREST INCOME 1 1 45
INTEREST EXPENSE (10) (152) (341)
- ----------------------------------------------------------------------------
INCOME BEFORE PROVISION FOR INCOME
TAXES AND MINORITY INTEREST 496 2,124 3,665
Provision for income taxes 190 884 1,646
- ----------------------------------------------------------------------------
Income before minority interest 306 1,240 2,019
Minority interest 30 247 226
- ----------------------------------------------------------------------------
Net income $ 276 $ 993 $ 1,793
============================================================================
Earnings per common share - basic $ .02 $ .07 $ .12
============================================================================
Earnings per common share - diluted $ .02 $ .07 $ .11
============================================================================
Weighted average number of common
shares outstanding - basic 15,000 15,000 15,000
============================================================================
Weighted average number of common
shares outstanding - diluted 15,000 15,000 15,841
============================================================================
</TABLE>
See the accompanying notes to financial statements
F-5
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Common Stock Additional Equity of Retained Total
---------------- Paid-in Predecessor Earnings Stockholders'
Number Amount Capital Businesses (Deficit) Equity (Deficit)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1995 -- $ -- $ -- $ 33 $ (185) $ (152)
Net income -- -- -- -- 276 276
Contribution of capital from Parent Company for
Parent Company shares issued for acquisitions -- -- -- 336 -- 336
- --------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1996 -- -- -- 369 91 460
Net income -- -- -- -- 993 993
Contribution of capital from Parent Company for
Parent Company shares issued for acquisitions -- -- -- 3,794 -- 3,794
- --------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1997 -- -- -- 4,163 1,084 5,247
Net income -- -- -- -- 1,793 1,793
Contribution of capital from Parent Company for
Parent Company shares issued for acquisitions -- -- -- 2,700 -- 2,700
Incorporation of Intellesale 15,000 1 6,862 (6,863) -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance - December 31, 1998 15,000 $ 1 $6,862 $(6,863) $2,877 $ 9,740
==========================================================================================================================
</TABLE>
F-6
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED DECEMBER 31,
---------------------------
1996 1997 1998
---------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income $ 276 $ 993 $ 1,793
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization 2 190 434
Minority interest 30 247 226
Gain on sale of equipment -- -- (21)
Net change in operating assets and liabilities
(Note 14) (180) (1,239) (4,640)
- ---------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities 128 191 (2,208)
- ---------------------------------------------------------------------------------------
Cash Flows From Investing Activities
(Increase) decrease in notes receivable - related parties -- 108 (1,097)
Proceeds from sale of assets -- 120 110
Payments for equipment and other assets (20) (372) (248)
Net cash acquired in (used for) business acquisitions 12 563 208
- ---------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Investing Activities (8) 419 (1,027)
- ---------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Increase (decrease) in bank overdrafts 82 (82) --
Net amounts borrowed (paid) on notes payable (259) 78 (1,813)
Net amounts borrowed from Parent Company -- -- 5,004
- ---------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Financing Activities (177) (4) 3,191
- ---------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash (57) 606 (44)
Cash and Cash Equivalents - Beginning of Period 66 9 615
- ---------------------------------------------------------------------------------------
Cash and Cash Equivalents - End of Period $ 9 $ 615 $ 571
=======================================================================================
Supplemental Disclosure of Cash Flow Information
Income taxes paid $ -- $ 45 $ 2
Interest paid 10 149 341
- ---------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands)
1. Organization And Summary Of Significant Accounting Policies
Operations and Basis of Presentation
Intellesale sells refurbished and new computer equipment and related
components. We sell products online through our website at
www.Intellesale.com as well as through traditional channels, which we are
migrating to the Internet. In addition to selling products on our website,
we distribute products through cooperative marketing arrangements with
OnSale.com and uBid.com, where we conduct auctions of our products, as well
as FlashNet Communications, Lycos and other Internet portals and service
providers. Intellesale operates in two segments as more fully discussed in
Note 3.
Intellesale is a majority-owned subsidiary of Applied Digital Solutions,
Inc. (ADS or the Parent Company), formerly Applied Cellular Technology,
Inc. ADS owns 80% of Intellesale. Intellesale was incorporated in December
1998 and had no operations until July 1999, when it was merged with
Universal Commodities Corp. (UCC), one of its predecessors and
subsidiaries. Prior to merging into Intellesale, UCC had identical
ownership as Intellesale. Subsequently, the remaining predecessor
companies were combined into Intellesale.
The individual operations have been included in these financial
statements since their acquisition by ADS or UCC as described in
Note 2. As used herein, "the Company" refers to Intellesale and
all the predecessor businesses, collectively. Stockholders'
equity reflects the equity of the predecessor entities as a single
amount until incorporation of Intellesale in December 1998.
The accompanying financial statements reflect the carved-out financial
position, results of operations and cash flows of the Company for the
periods presented. The financial statements have been prepared as if the
Company had operated as a stand-alone entity for the periods presented, and
include those assets, liabilities, revenues and expenses directly
attributable to the Company. The determination and presentation of assets,
liabilities, revenues and expenses of the Company have been made on a basis
consistent with the policies of ADS used for purposes of consolidation.
Historically, the Company operated as a stand-alone entity. However, as a
subsidiary, the Company did receive certain services from ADS which are
more fully described in Note 6.
Consolidation Policy
All wholly-owned and majority owned subsidiaries have been
consolidated in these financial statements. All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements requires management to make
certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Although these estimates are
based on the knowledge of current events and actions the Company may
undertake in the future, they may ultimately differ from actual results.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
F-8
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
Inventories
Inventories primarily consist of finished goods and equipment available for
resale. Inventory is valued at the lower of cost or market, determined by
the first-in, first-out method. The Company closely monitors and analyzes
inventory for potential obsolescence and slow-moving items based upon the
aging of the inventory. Inventory items designated as obsolete or
slow-moving are reduced to net realizable value. The reserve for excess and
obsolete inventory was $50 at December 31,1998. There was no inventory
reserve in 1997.
Equipment and Leasehold Improvements
Equipment and leasehold improvements are carried at cost, less accumulated
depreciation and amortization computed using straight-line and accelerated
methods. Leasehold improvements are depreciated and amortized over the life
of leases and equipment is depreciated over periods ranging from 3 to 10
years. Equipment and leasehold improvements are periodically reviewed for
impairment based on expected future undiscounted cash flows. Management
believes there has been no impairment at December 31, 1998.
Goodwill
Goodwill is stated on the cost basis and amortized, on a straight-line
basis, over the estimated future periods to be benefitted (not exceeding 20
years). Goodwill is periodically reviewed for impairment based on expected
future undiscounted cash flows. Management believes there has been no
impairment at December 31, 1998.
Stockholders' Equity
In January 1999, the Board of Directors authorized a 15,000 for 1 stock
split of UCC stock. Stockholders' equity has been restated to give
retroactive recognition to the stock split for all periods presented and,
accordingly, number of shares, per share amounts, and stock option data
have been restated to reflect the stock split.
Revenue Recognition
For product sales, including those under cooperative marketing agreements
and fulfillment programs, the Company recognizes revenue upon shipment to
the customer. For programming and consulting services, the Company
recognizes revenue as work is performed based on actual labor hours in the
job times the standard billing rate and adjusted to realizable value if
necessary. For maintenance contracts, revenue is recognized ratably over
the life of the maintenance agreements. Costs of goods sold are recorded
as the related revenue is recognized.
The Company does not experience significant product returns. An allowance
for estimated sales returns is recorded in accrued expenses.
Advertising Costs
The Company expenses production costs of print advertisements as of the
first date the advertisements take place. Advertising expense, included in
selling, general and administrative expenses, was $183 in 1998 and $53 in
1997. There were no material advertising expenses in 1996.
Income Taxes
As a subsidiary of ADS, the Company's results of domestic operations are
included in consolidated federal income tax returns which also include ADS
and its other operating subsidiaries. The Company could be considered
jointly and severally liable for assessments of additional tax on the
consolidated group. The Company's provision (benefit) for income taxes is
based on income taxes the Company would have provided on a separate company
basis. The Company's domestic income taxes currently payable are reflected
in Due to Parent Company, as such taxes were paid or received by ADS on
behalf of the Company.
F-9
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (FAS) No. 109, Accounting for Income Taxes,
requiring the use of the liability method of accounting for income taxes.
The current and deferred tax consequences of a transaction are measured by
applying the provisions of enacted tax laws to determine the amount of
taxes payable currently or in future years. Deferred income taxes are
provided for temporary differences between income tax bases for assets and
liabilities and their carrying amounts for financial reporting purposes. A
valuation allowance reduces deferred tax assets when management determines
that it is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred income tax assets and liabilities
are reflected as other assets and liabilities (Note 9).
Earnings Per Common and Common Share Equivalent
Basic EPS is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding for the period.
Diluted EPS is computed giving effect to all dilutive potential common
shares that were outstanding during the period. Dilutive potential common
shares consist of incremental shares issuable upon exercise of stock
options and warrants and contingently issuable shares.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities. In 1999, FAS
137, Accounting for Derivative Instruments and Hedging Activities-Deferral
of the Effective Date of FAS 133, was issued. As the Company does not have
any derivative instruments or hedging transactions, adoption of FAS 133 is
not expected to have any effect on the financial statements.
In 1998, the Company adopted FAS 131, Disclosures about Segments of an
Enterprise and Related Information. FAS 131 superseded FAS 14, Financial
Reporting for Segments of a Business Enterprise, replacing the "Industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption
of FAS 131 did not affect results of operations or financial position but
did affect the disclosure of segment information (see Note 15).
In 1998, the Company adopted FAS 130, Reporting Comprehensive Income, which
establishes standards for reporting and disclosure of comprehensive income
and its components. Adoption of FAS 130 did not have a material effect on
the financial statements.
F-10
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
2. Acquisitions
The following represents all of the acquisitions made by ADS which
occurred through 1998 and which comprise these financial statements from
the date of their acquisition:
<TABLE>
<CAPTION>
EFFECTIVE FAIR VALUE
DATE OF PERCENT ACQUISITION OF NET
ACQUISITION ACQUIRED PRICE ASSETS ACQUIRED GOODWILL BUSINESS DESCRIPTION
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995 Acquisition
Elite Computer Services, Inc. 09/01/95 80% $ 557 $ 10 $ 547 Remarketer of computer parts
1996 Acquisition
Universal Commodities Corp 11/01/96 80% 1,512 271 1,241 Remarketer of computer equipment
1997 Acquisitions
Norcom Resources, Inc. 01/01/97 80% 538 57 481 Remarketer of mainframe computers
Pizarro Re-Marketing, Inc. 01/01/97 80% 356 156 200 Remarketer of computer tape and
disk drives
Cybertech Station, Inc. 07/01/97 80% 467 0 467 Remarketer of computer memory
products
Port Parties, Ltd. 07/01/97 80% 3,966 82 3,884 Leasing and rental services for
meeting and convention planners
1998 Acquisitions
Blue Star Electronics, Inc. 04/01/98 80% 431 1 430 Cable assembly manufacturer
Consolidated Micro 04/01/98 100% 1,948 4 1,944 Remarketer of memory, processors
Components, Inc. and hard drives
Data Path Technologies, 04/01/98 100% 3,421 146 3,275 Remarketer of computer equipment
Inc.
GDB Software Services, Inc. 04/01/98 100% 1,931 221 1,710 Provider of data processing
consulting services
Service Transport Company 04/01/98 80% 89 (69) 158 Transporter of computer equipment
Fiscal Advantage, Inc. 10/01/98 Assets 200 25 175 Computer leasing services
</TABLE>
The stock of ADS was issued for all of the above acquisitions except the
assets of Fiscal Advantage, Inc. which was acquired by ADS for cash.
The original ADS shares will remain outstanding and will not be
converted to Intellesale shares. The above acquisitions have been
accounted for using the purchase method of accounting and, accordingly,
the consolidated financial statements reflect the results of operations
of each company from the date of acquisition. The costs of acquisitions
reflect the Parent Company's basis in the assets and liabilities and
include all payments according to the acquisition agreements plus costs
for investment banking services, legal services and accounting services,
that were direct costs of acquiring these assets. These acquisitions
did not include separate non-compete agreements. Additionally, none of
these entities had any patents, trademarks or other identifiable
intangible assets. Therefore, the excess cost over the fair value of
the tangible assets acquired has been recorded as goodwill. Goodwill
resulting from these acquisitions is being amortized on a straight-line
basis, over twenty years. Certain acquisition agreements include the
issuance of additional shares contingent on profits of the acquired
subsidiary. See Note 17 which describes subsequent amendments to these
Agreements. In summary, these Agreements were modified to result in
Intellesale paying $5,820 in cash and $4,220 in its stock to pay the
earnout agreements and purchase minority interests. Upon earning these
shares, the value is recorded as additional goodwill. The acquisition
price and goodwill above include all such contingent payments earned.
See Note 16 for unaudited pro forma information for the above
acquisitions that occurred in 1998 and 1997.
F-11
<PAGE>
INTELLESALE.COM,INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
3. Notes Receivable
<TABLE>
<CAPTION>
1997 1998
----------------
<S> <C> <C>
Due from officers, unsecured, bears interest at 6%, $200 due $ 12 $1,073
November 1999, balance due on demand
Due from customer, unsecured, due on demand 62 62
- ------------------------------------------------------------------------------
74 1,135
Less: Current portion 74 262
- ------------------------------------------------------------------------------
$ -- $ 873
==============================================================================
</TABLE>
As provided in his employment agreement, ADS has guaranteed a
$1,250,000 mortgage loan to the President of Intellesale. This
guaranty will be retained by ADS.
4. Equipment And Leasehold Improvements
<TABLE>
<CAPTION>
1997 1998
--------------
<S> <C> <C>
Equipment $ 556 $ 795
Leasehold improvements 4 152
- ----------------------------------------------------------------
560 947
Less: Accumulated depreciation and amortization 142 346
- ----------------------------------------------------------------
$ 418 $ 601
================================================================
</TABLE>
Depreciation and amortization charged against operating income amounted to
$2, $108 and $204 for the years ended December 31, 1996, 1997 and 1998,
respectively.
5. Goodwill
Goodwill consists of the excess of cost over fair value of tangible and
identifiable intangible assets of companies purchased. The Company has
applied the purchase method of accounting for acquisitions of wholly owned
and majority owned subsidiaries.
<TABLE>
<CAPTION>
1997 1998
-----------------
<S> <C> <C>
Original balance $3,139 $8,799
Accumulated amortization (152) (335)
- -------------------------------------------------------------------
Carrying value $2,987 $8,464
===================================================================
</TABLE>
The Company has entered into various earnout arrangements with the selling
stockholders of certain acquired subsidiaries. These arrangements provide
for additional consideration to be paid in future years if certain earnings
levels are met. These amounts are recognized as additional goodwill when
earned. See Notes 2 and 17 for further discussion.
F-12
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
6. Related Party Transactions
<TABLE>
<CAPTION>
1997 1998
------------------
<S> <C> <C>
Due to Parent Company - line of credit $ -- $5,194
Due to Parent Company - other 1,242 828
- -------------------------------------------------------------------------
Due to Parent Company $1,242 $6,022
=========================================================================
</TABLE>
During the third quarter of 1998, the Parent Company entered into a twenty
million dollar line of credit with a bank, collateralized by all the
domestic assets of the Parent Company and its subsidiaries, including the
Company, at the prime lending rate or at the London Interbank Offered Rate,
as elected by the Parent Company. The line of credit was scheduled to
expire on July 31, 1999 and contained standard covenants relating to the
Parent Company's financial position and performance, as well as
restrictions on the Parent Company's declaration and payment of dividends.
The amount due to Parent Company - line of credit represents that portion
of ADS's line of credit that ADS has loaned to the company. This loan bears
interest at 9.0%, as set by the Parent Company. The loan, including
interest, is repaid as funds are available. Interest expense related to
this line of credit amounted to $140 in 1998.
In May 1999, the Parent Company entered into a Term and Revolving Credit
Agreement with IBM Credit Corporation and repaid the amount due to the
bank. The lending arrangement between the Parent Company and Intellesale
remains unchanged.
ADS provides certain services to and incurs certain expenses on behalf of
its subsidiaries. These costs, which include general overhead, certain
employee benefit programs, general treasury services and various business
insurance coverages are allocated to Parent Company subsidiaries, including
the Company, based upon the Parent Company's estimate of the relative
cost to provide these services. The Company incurred $420 in these costs
to the Parent Company in 1998. No costs were allocated in 1996 and 1997,
since the Parent Company did not provide significant services due to the
decentralized operations of the subsidiaries during those periods.
Management believes the method used to allocate expenses to the Company is
reasonable and appropriate.
The amounts due to Parent Company - other represent those amounts due to
ADS for income taxes paid on the subsidiaries' behalf.
See also Note 3 regarding notes receivable from officers.
F-13
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
7. Notes Payable
<TABLE>
<CAPTION>
1997 1998
-----------------
<S> <C> <C>
Notes payable - banks, collateralized by business assets and
by personal guarantees of officers/stockholders of certain
subsidiaries. Interest is payable monthly at rates varying
from prime plus 1/2% to prime plus 2-1/4% in 1998. The
credit lines are due through December 1999. $1,126 $ --
Notes payable - other, unsecured, due on demand 277 80
-----------------------------------------------------------------------------------
$1,403 $ 80
===================================================================================
</TABLE>
The weighted average interest rate including amounts due to Parent Company
in Note 6 was 10.3% and 9.0% for the years ended December 31, 1997 and
1998, respectively.
8. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
Notes Receivable
The carrying value of the notes approximate fair value because either the
interest rates of the notes approximate the current rate that the Company
could receive on a similar note, or because of the short-term nature of the
notes.
Notes Payable
The carrying amount approximates fair value because of the short-term
nature of the notes.
Accounts Payable And Accrued Expenses
The carrying amount approximates fair value due to their short-term nature.
9. Income Taxes
The provision for income taxes consists of:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------
<S> <C> <C> <C>
Current taxes at statutory rates $ 188 $ 921 $1,618
Deferred income taxes provision (credit) 2 (37) 28
------------------------------------------------------------------
$ 190 $ 884 $1,646
==================================================================
</TABLE>
F-14
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets and liabilities which are
recorded as other assets and liabilities consist of the following:
<TABLE>
<CAPTION>
1997 1998
------------------
<S> <C> <C>
Deferred Tax Assets - Current:
Accounts receivable $ 41 $ 9
Deferred Tax Liabilities - Long-term:
Equipment and leasehold improvements (4) --
---------------------------------------------------------
Net Deferred Tax Asset $ 37 $ 9
=========================================================
</TABLE>
The reconciliation of the effective tax rate with the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------
% % %
--------------------
<S> <C> <C> <C>
Statutory rate 34 34 34
State and local income taxes, net of federal benefits 4 8 11
--------------------
38 42 45
====================
</TABLE>
10. Earnings Per Share
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------------
<S> <C> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share -
net income available to common
stockholders $ 276 $ 993 $ 1,793
================================
Denominator:
Denominator for basic earnings per
share - weighted-average shares 15,000 15,000 15,000
Effect of dilutive securities:
Employee stock options -- -- 841
--------------------------------
Denominator for diluted earnings
per share - adjusted weighted-
average shares 15,000 15,000 15,841
================================
Basic Earnings Per Share $ .02 $ .07 $ .12
Diluted Earnings Per Share $ .02 $ .07 $ .11
</TABLE>
F-15
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
11. Commitments And Contingencies
Rentals of space, vehicles, and office equipment under operating leases
amounted to approximately $59, $231 and $521 for the years ended December
31, 1996, 1997, and 1998, respectively.
The Company has entered into employment contracts with key officers and
employees of the Company. The agreements are for periods of one to ten
years through June 2007. Some of the employment contracts also call for
bonus arrangements based on earnings of the particular subsidiary or the
Company.
The approximate minimum payments required under operating leases and
employment contracts that have initial or remaining terms in excess of one
year at December 31, 1998 are:
<TABLE>
<CAPTION>
MINIMUM EMPLOYMENT
YEAR RENTAL PAYMENTS CONTRACTS
-----------------------------------------
<S> <C> <C>
1999 $ 633 $ 2,440
2000 521 2,690
2001 430 2,620
2002 319 2,400
2003 24 1,890
Thereafter -- 1,350
-----------------------------------------
$1,927 $13,390
=========================================
</TABLE>
The Company has entered into put options with the selling stockholders of
various companies in which the Company acquired less than a 100% interest.
These options provide for the Company to acquire the remaining portion it
does not own after periods ranging from 4 to 5 years from the dates of
acquisition at amounts generally equal to 10%-20% of the average annual
earnings of the subsidiary before income taxes for the two-year period
ending the effective date of the put multiplied by a multiple ranging
from 4 to 5. See Note 17 for further discussion.
The employment agreements of four officers of the Company include certain
"change of control" provisions. An initial public offering is not
considered a "change of control." At the employee's option, he may
terminate his employment under the agreement at any time within one year
after such change of control. The Company shall pay to the employee a
severance payment based on formulas relating to parachute payment
provisions of the Internal Revenue Code and prior compensation.
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material adverse
effect on the financial position or overall trends in results of the
Company. The estimate of potential impact on the Company's financial
position, overall results of operations or cash flows for the above legal
proceedings could change in the future.
12. Profit Sharing Plan
The Company participates in the Parent Company's Section 401(k) Plan for
the benefit of eligible employees. Essentially all full-time employees
with six months of service are eligible to participate. Company matching
contributions are completely discretionary. The Company and ADS have made
no contributions to the Section 401(k) Plan in 1996 through 1998.
F-16
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
13. Stock Options
During 1997, the Company adopted a non-qualified stock option plan (the
Option Plan) and applies APB 25 and related interpretations in accounting
for the Option Plan. In addition, the Parent Company has a non-qualified
stock option plan (the Parent Option Plan) and applies APB 25 and
interpretations. The exercise price of options granted under the Option
Plan is determined at the discretion of the Company, and is typically based
on the estimated fair value of the stock at the date of grant. Compensation
expense is recognized when the exercise price of options is less than the
fair value of the underlying stock on the date of grant. Compensation
expense in 1997 and 1998 was not material. Under the Parent Option Plan,
options are granted at an exercise price which approximates fair value on
the date of grant. Accordingly, no compensation cost has been recognized.
Had compensation cost for the Option Plan and the Parent Option Plan been
determined based on the fair value at the grant dates for awards under the
Option Plan and the Parent Option Plan, consistent with the alternative
method set forth under FAS 123, Accounting for Stock-Based Compensation,
the Company's net income available to common stockholders and earnings per
common and common equivalent share would have been reduced.
The pro forma amounts are indicated below:
<TABLE>
<CAPTION>
1997 1998
----------------
<S> <C> <C>
Net income
As reported $ 993 $1,793
Pro forma $ 791 $1,450
Earnings per common share - basic
As reported $ .07 $ .12
Pro forma $ .05 $ .10
Earnings per common share - diluted
As reported $ .07 $ .11
Pro forma $ .05 $ .09
</TABLE>
Under the Option Plan, options for 7.5 million common shares were
authorized for issuance to certain officers and employees of the Company,
of which 5.4 million had been issued through December 31, 1998. The
options may not be exercised until one to four years after the options
have been granted, and are exercisable for a period of ten years. In
addition, options for 0.6 million shares of ADS stock were issued to
officers and employees of the Company through December 31, 1998 under
the Parent Option Plan.
Under the Option Plan, the fair value of each option granted is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997 and 1998:
dividend yield of 0% in both years; expected volatility ranging from 45% to
50%; risk-free interest rates ranging from 5.0% to 6.7%; and expected lives
of 10 years for both years. The weighted-average fair value of options
granted under the Option Plan was $0.32 for the year ended December 31,
1997 and $0.64 for the year ended December 31, 1998.
Under the Parent Option Plan, the fair value of each option granted is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997 and
1998: dividend yield of 0% in both years; expected volatility of 44.03% and
43.69% for 1997 and 1998,
F-17
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
respectively; risk-free interest rate of 5.72% and 4.74% for 1997 and 1998,
respectively; and expected lives of 5 years for both years. The weighted-
average fair value of options granted under the Parent Option Plan was
$1.58 for the year ended December 31, 1997 and $1.27 for the year ended
December 31, 1998.
A summary of the stock option activity under the Option Plan for 1997 and
1998 follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ---------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding on January 1 -- $ -- 4,750 $ 0.85
Granted 4,750 0.85 650 0.85
Exercised -- -- -- --
Forfeited -- -- -- --
----------------------------------------------------------------------------------------------
Outstanding on December 31 4,750 0.85 5,400 0.85
----------------------------------------------------------------------------------------------
Exercisable on December 31 -- -- -- --
----------------------------------------------------------------------------------------------
Shares available on December 31, for
options that may be granted 2,750 2,100
----------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about the Company stock options
at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
--------------------------------------------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Exercise Price Shares Life Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------
(In thousands, except for exercise price data and contractual life)
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.85 5,400 8.30 $ 0.85 -- $ --
=============================================================================================
</TABLE>
A summary of the stock option activity for ADS under the Parent Option Plan
for 1997 and 1998 with respect to employees of the Company follows:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ----------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
---------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding on January 1 -- $ -- 100 $ 3.83
Granted 100 3.83 410 2.21
Exercised -- -- -- --
Forfeited -- -- -- --
----------------------------------------------------------------------------------------------
Outstanding on December 31 100 3.83 510 2.53
----------------------------------------------------------------------------------------------
Exercisable on December 31 -- -- 200 2.19
----------------------------------------------------------------------------------------------
Shares available on December 31, for
options that may be granted -- --
----------------------------------------------------------------------------------------------
</TABLE>
F-18
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
The following table summarizes information about stock options granted to
employees of the Company under the Parent Option Plan at December 31, 1998:
<TABLE>
<CAPTION>
Outstanding Stock Options Exercisable Stock Options
-------------------------------------------------------------------------
Weighted-
Average
Remaining Weighted- Weighted-
Contractual Average Average
Range Of Exercise Prices Shares Life Exercise Price Shares Exercise Price
---------------------------------------------------------------------------------------------------
(In thousands, except for exercise price data and contractual life)
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.00 to $3.00 400 5.50 2.18 200 2.19
$3.01 to $4.00 110 6.70 3.82 -- --
---------------------------------------------------------------------------------------------------
$2.00 to $4.00 510 $2.53 200 $2.19
===================================================================================================
</TABLE>
14. Supplemental Cash Flow Information
The changes in operating assets and liabilities, excluding the effects of
acquisitions, are as follows:
<TABLE>
<CAPTION>
For The Years Ended December 31,
------------------------------------
1996 1997 1998
------------------------------------
<S> <C> <C> <C>
Increase in accounts receivable $ (115) $ (1,426) $ (204)
Increase in inventories (238) (2,277) (2,277)
(Increase) decrease in prepaid expenses (5) 2 (11)
(Increase) decrease in deferred tax asset 1 (38) 27
Increase (decrease) in due to Parent Company 391 792 (414)
Increase (decrease) in accounts payable
and accrued expenses (214) 1,708 (1,761)
----------------------------------------------------------------------------------
$ (180) $ (1,239) $ (4,640)
==================================================================================
</TABLE>
In the years ended December 31, 1996, 1997 and 1998, the Company had the
following noncash investing and financing activities:
<TABLE>
<CAPTION>
1996 1997 1998
----------------------------
<S> <C> <C> <C>
Payment of debt in exchange for common stock $ 678 $ 2,266 $ --
Assets acquired for debt -- -- 190
Assets acquired for common stock of Parent Company 985 256 2,700
Capital leases -- 158 --
</TABLE>
F-19
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
15. Segment Information
During 1998, the Company entered into the Internet business. The Company is
now organized into two primary operating segments as follows:
. Internet, in which we sell refurbished and new computer products
through our website. Refurbished products consist primarily of
off-lease equipment which we test, clean and prepare for sale,
and manufacturer refurbished products which carry a
manufacturer's warranty. Our Internet business also includes
Internet fulfillment, in which we sell our products to
other companies that market these products on their websites.
We are transitioning away from this wholesale distribution
business and focusing on selling products directly through our
website.
. Traditional commerce and other services, in which we buy and
remarket computer equipment and components to traditional
wholesalers, retailers and value-added resellers, as well as
individual and corporate end users, and provide integration and
consulting services, computer recycling, parts-on-demand services
and transportation services for computer and other equipment. We
are transitioning our traditional commerce business to the
Internet. The leasing group provides leasing and rental services
for meeting and convention planners.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies, except that
intersegment sales and transfers are generally accounted for as if the
sales or transfers were to third parties at current market prices, and
segment data includes an allocated charge for the corporate headquarters
costs. It is on this basis that management utilized the financial
information to assist in making internal operating decisions. The Company
evaluates performance based on stand alone operating segment net income.
The 'Eliminations' category includes all amounts recognized upon
consolidation of the Company's subsidiaries such as the elimination of
intersegment revenues, expenses and assets and liabilities.
F-20
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
<TABLE>
<CAPTION>
Traditional Commerce
------------------------
Sales And
1998 Internet Service Leasing Eliminations Consolidated
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 7,334 $ 48,556 $ 4,853 $ -- $ 60,743
Intersegment revenue -- 1,944 -- (1,944) --
----------------------------------------------------------------------------------------------
Total Revenue $ 7,334 $ 50,500 $ 4,853 $ (1,944) $ 60,743
==============================================================================================
Depreciation and amortization $ 21 $ 356 $ 57 $ -- $ 434
Operating income 782 2,174 1,149 (144) 3,961
Segment assets 1,860 15,951 4,484 (332) 21,963
Expenditures for property -- 248 -- -- 248
</TABLE>
<TABLE>
<CAPTION>
Traditional Commerce
------------------------
Sales And
1997 Internet Service Leasing Eliminations Consolidated
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ -- $ 38,040 $1,405 $ -- $ 39,445
Intersegment revenue -- 2,127 -- (2,127) --
----------------------------------------------------------------------------------------------
Total Revenue $ -- $ 40,167 $1,405 $ (2,127) $ 39,445
==============================================================================================
Depreciation and amortization $ -- $ 166 $ 24 $ -- $ 190
Operating income -- 2,003 272 -- 2,275
Segment assets -- 10,631 1,091 (335) 11,387
Expenditures for property -- 372 -- -- 372
</TABLE>
<TABLE>
<CAPTION>
Traditional Commerce
------------------------
Sales And
1996 Internet Service Leasing Eliminations Consolidated
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ -- $ 1,933 $ -- $ -- $ 1,993
Intersegment revenue -- -- -- -- --
---------------------------------------------------------------------------------------------
Total Revenue $ -- $ 1,933 $ -- $ -- $ 1,993
=============================================================================================
Depreciation and amortization $ -- $ 2 $ -- $ -- $ 2
Operating income -- 505 -- -- 505
Expenditures for property -- 20 -- -- 20
</TABLE>
F-21
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
16. Pro Forma Information (Unaudited)
The following pro forma consolidated information of the Company for the
years ended December 31, 1997 and 1998 gives effect to the acquisitions,
disclosed in Notes 2 and 17, as if they were effective at January 1, 1997
and January 1, 1998, respectively. The statement gives effect to the
acquisitions under the purchase method of accounting.
The pro forma information may not be indicative of the results that would
have actually occurred if the acquisitions had been effective on the dates
indicated or of the results that may be obtained in the future. The pro
forma information should be read in conjunction with the consolidated
financial statements and notes thereto of the Company.
<TABLE>
<CAPTION>
Pro Forma
-----------------------
December 31,
-----------------------
1997 1998
-----------------------
(In Thousands, Except
Per Share Amounts)
<S> <C> <C>
Revenue $ 109,594 $ 127,848
Net income available to common stockholders 964 960
Earnings per common share - basic .06 .06
Earnings per common share - diluted .06 .06
</TABLE>
17. Subsequent Events
Amendments to Purchase Agreements
Several of the purchase agreements for the subsidiaries identified in Note
2 contained provisions whereby the sellers could put their remaining
shares and obtain additional "earnout payments" upon achievement of certain
profits. The Company has entered into agreements in 1999 to fix the amount
of these payments at $10,040 in a combination of $5,820 in cash and $4,220
in stock of Intellesale plus 50,000 shares of Intellesale stock to
Service Transport.
The above settlements are contingent upon the successful completion of a
planned public offering of Intellesale within one year of reaching the
agreement and will result in additional goodwill.
Marketing Agreement
In July 1999, the Company entered into an agreement with a marketing and
support firm, under which the marketing and support firm will provide
strategic services and ongoing support services relating to the development
and maintenance of the Company's brand and website. The total fees for
these services are $2,000. One of the Company's directors is a director
and the President and Chief Executive Officer of the marketing and support
firm.
F-22
<PAGE>
INTELLESALE.COM. INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(In thousands)
Acquisitions
Effective June 1, 1999, the Company acquired all of the outstanding common
stock of Bostek, Inc. and Affiliate (Bostek) in a transaction accounted for
under the purchase method of accounting. The aggregate purchase price was
approximately $25,200 of which $10,200 was paid in cash at closing. Upon a
successful initial public offering of the common stock of Intellesale,
$10,000 will be payable in stock of the Company, and the remaining $5,000
will be payable in cash in January 2000. In the event an initial public
offering does not occur within one year from closing of the acquisition,
the $10,000 will be payable in cash. An additional $5,000 of the purchase
price, payable in cash, is contingent upon the achievement of certain
earnings targets. The purchase price for Bostek was assigned to the assets
acquired and the liabilities assumed based on their estimated fair values
at the acquisition date. Based on such allocations, the aggregate purchase
price exceeded the estimated fair value of the net assets acquired
(goodwill) by approximately $21,400, which is being amortized over 20 years
and will result in an annual amortization charge of approximately $1,000.
Office and Warehouse Lease
In June 1999, the Company entered into a five-year office and warehouse
lease. Minimum rental payments under the lease are $48 per month for the
first three years and $60 per month for the last two years.
18. Capital Structure
Common Stock
The Company has 30,000,000 shares of $0.0001 par value stock authorized
with 15,000,000 shares outstanding at December 31, 1998. All shares
outstanding are fully paid and nonassessable. Each holder of common stock
is entitled to one vote for each share held of record on all stockholder
voting matters. The common stock does not have cumulative voting rights,
preemptive rights, conversion rights, redemption provisions, or sinking
fund provisions.
Preferred Stock
The Company has 5,000 shares of $0.01 par value preferred stock with
no shares outstanding at December 31, 1998. The Company's Board of
Directors is authorized to determine the terms, limitations and relative
rights and preferences of the preferred stock. If issued, the preferred
stock would have priority over the rights of common stock.
F-23
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEET
June 30, 1999
(In Thousands, Except Par Value)
(Unaudited)
<TABLE>
<CAPTION>
Assets
<S> <C>
Current Assets
Cash and cash equivalents $ 115
Accounts receivable (net of allowance for doubtful accounts of $467) 13,336
Inventories 15,003
Notes receivable - related parties 262
Prepaid expenses and other current assets 731
-------------
Total Current Assets 29,447
Equipment and Leasehold Improvements, net 1,735
Notes receivable 921
Goodwill, net 34,980
Other assets 272
-------------
$ 67,355
=============
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable and current maturities of long-term debt $ 99
Accounts payable and accrued expenses 4,150
Due to Parent Company 27,600
Due to shareholder of acquired subsidiary 15,000
-------------
Total Current Liabilities 46,849
-------------
Commitments and contingencies
Minority interest 698
-------------
Stockholders' Equity
Common shares:
Authorized 30,000 shares of $.0001 par value; issued
and outstanding 15,000 shares 1
Additional paid-in capital 15,537
Retained earnings 4,270
-------------
Total Stockholders' Equity 19,808
-------------
$ 67,355
=============
</TABLE>
See accompanying notes to financial statements
F-24
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
------------------------------
1998 1999
------------------------------
<S> <C> <C>
Revenue $ 28,199 $ 39,212
Costs of goods sold 22,337 27,816
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 5,862 11,396
- -----------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Selling, general and administrative expenses 3,559 7,772
Depreciation and amortization 188 568
- -----------------------------------------------------------------------------------------------------------------------
Total Operating Costs and Expenses 3,747 8,340
- -----------------------------------------------------------------------------------------------------------------------
Operating income 2,115 3,056
Interest income 12 82
Interest expense (132) (363)
- -----------------------------------------------------------------------------------------------------------------------
Income before provision for income
taxes and minority interest 1,995 2,775
Provision for income taxes 809 1,273
- -----------------------------------------------------------------------------------------------------------------------
Income before minority interest 1,186 1,502
Minority interest 132 109
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 1,054 $ 1,393
=======================================================================================================================
Earnings per common share - basic $ .07 $ .09
=======================================================================================================================
Earnings per common share - diluted $ .07 $ .09
=======================================================================================================================
Weighted average number of common
shares outstanding - basic 15,000 15,000
=======================================================================================================================
Weighted average number of common
shares outstanding - diluted 15,972 16,296
=======================================================================================================================
</TABLE>
See accompanying notes to financial statements
F-25
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
Additional Total
Common Shares Paid-In Retained Stockholders'
------------------------------
Number Amount Capital Earnings Equity
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - December 31, 1998 15,000 $ 1 $ 6,862 $ 2,877 $ 9,740
Net income (unaudited) -- -- -- 1,393 1,393
Contribution of capital from
Parent Company for Parent
Company shares
issued for acquisitions (unaudited) -- -- 8,675 -- 8,675
- -----------------------------------------------------------------------------------------------------------------------------
Balance - June 30, 1999 15,000 $ 1 $15,537 $ 4,270 $19,808
=============================================================================================================================
</TABLE>
See accompanying notes to financial statements
F-26
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
For The Six Months
Ended June 30,
------------------------------------------
1998 1999
------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,054 $ 1,393
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 188 568
Minority interest 132 109
Gain on sale of equipment -- (5)
Change in assets and liabilities:
Increase in accounts receivable (583) (2,034)
Increase in inventories (1,068) (5,358)
Increase in prepaid expenses (183) (355)
Increase in due to Parent Company 510 499
Increase (decrease) in accounts payable and
accrued expenses 346 (529)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By (Used In) Operating Activities 396 (5,712)
- -------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities
Increase in notes receivable - related parties (57) (60)
Proceeds from sale of property and equipment -- 6
Payments for equipment and other assets (206) (1,071)
Proceeds from (payments for) costs of asset and business
acquisitions (net of cash balances acquired) 68 (10,633)
- -------------------------------------------------------------------------------------------------------
Net Cash (Used In) Investing Activities (195) (11,758)
- -------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities
Net paid on notes payable (50) (18)
Net amounts borrowed from Parent Company 181 17,039
Payments on long-term debt (30) (7)
- -------------------------------------------------------------------------------------------------------
Net Cash Provided By Financing Activities 101 17,014
- -------------------------------------------------------------------------------------------------------
Net Increase (Decrease) In Cash And Cash Equivalents 302 (456)
Cash And Cash Equivalents - Beginning Of Period 615 571
- -------------------------------------------------------------------------------------------------------
Cash And Cash Equivalents - End Of Period $ 917 $ 115
=======================================================================================================
Supplemental Disclosure Of Cash Flow Information
Income taxes paid $ 55 $ 376
Interest paid 132 363
Noncash investing and financing activities:
Fixed assets acquired for long-term debt -- 47
Due to stockholders of acquired subsidiary -- 15,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements
F-27
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Per Share Data)
(Unaudited)
1. Operations and Basis of Presentation
The accompanying unaudited consolidated financial statements of
Intellesale.com, Inc. (Intellesale or the "Company") as of June 30, 1999
and for the six months ended June 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of only normal recurring
adjustments) considered necessary to present fairly the consolidated
financial statements have been made.
The consolidated statement of operations for the six months ended June 30,
1999 are not necessarily indicative of the results that may be expected for
the entire year. These statements should be read in conjunction with the
consolidated financial statements and related notes thereto for the year
ended December 31, 1998.
Intellesale markets computer equipment and components, primarily as a re-
marketer of refurbished equipment, including sales through its Website,
Intellesale.com. Intellesale has begun to expand its online sales, has
recently acquired a subsidiary which sells its products online and to other
Internet marketers, and it intends to build the future of the Company's
business through Internet e-commerce. In addition to the primary Website,
Intellesale.com, Intellesale has entered into cooperative marketing
arrangements with OnSale.com, FlashNet, Lycos and other Internet portals
and service providers. Intellesale operates in two segments as more fully
discussed in Note 3.
Intellesale is a majority-owned subsidiary of Applied Digital Solutions,
Inc. (ADS or the Parent Company), formerly Applied Cellular Technology,
Inc. ADS owns 80% of Intellesale. Intellesale was incorporated in December
1998 and had no operations until July 1999, when it was merged with
Universal Commodities Corp. (UCC), one of its predecessors. Prior to
merging into Intellesale, UCC had identical ownership as Intellesale. In
July 1999, ADS contributed the stock of Elite Computer Services, Inc.
(Elite), the other predecessor, to Intellesale.
Accordingly, the historical results included herein present the results of
UCC and subsidiaries and Elite prior to the merger of UCC into Intellesale
and the contribution of Elite to Intellesale, and the results of
Intellesale after the occurrence of those events. As used herein, "the
Company" refers to Intellesale, UCC and subsidiaries and Elite,
collectively. All significant intercompany transactions have been
eliminated in consolidation. Stockholders' equity has been restated to
give effect to the merger of UCC into Intellesale and the contribution of
Elite to Intellesale as if they had occurred at November 1, 1996 and
September 1, 1995, the dates that ADS acquired UCC and Elite, respectively.
The accompanying financial statements reflect the carved-out financial
position, results of operations and cash flows of the Company for the
periods presented. The financial statements have been prepared as if the
Company had operated as a stand-alone entity for the periods presented, and
include those assets, liabilities, revenues and expenses directly
attributable to the Company. The determination and presentation of assets,
liabilities, revenues and expenses of the Company have been made on a basis
consistent with the policies of ADS used for purposes of consolidation.
Historically, the Company operated as a stand-alone entity. However, as a
subsidiary, the Company did receive certain services from ADS.
New Accounting Standards
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard (FAS) 133, Accounting for Derivative
Instruments and Hedging Activities. In 1999, FAS 137, Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FAS 133, was issued. As the Company does
F-28
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands, except per share data)
not have any derivative instruments or hedging transactions, adoption of
FAS 133 will not have any effect on the financial statements.
2. Earnings Per Share
The following is a reconciliation of the numerator and denominator of basic
and diluted earnings per share:
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
--------------------------------------
1998 1999
--------------------------------------
<S> <C> <C>
Numerator:
Numerator
Net income $ 1,054 $ 1,393
============================================================================================
Denominator:
Denominator for basic earnings per share -
Weighted-average shares 15,000 15,000
Effect of dilutive securities -
Employee stock options 972 1,296
- --------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - Adjusted
Weighted-average shares 15,972 16,296
============================================================================================
Basic earnings per share $ .07 $ .09
============================================================================================
Diluted earnings per share $ .07 $ .09
============================================================================================
</TABLE>
3. Segment Information
During 1998, in connection with its acquisition strategy, the Company
entered into the Internet business. The company is now organized into two
primary operating segments as follows:
. Internet, in which we sell refurbished and new computer products
through our website. Refurbished products consist primarily of
off-lease equipment which we test, clean and prepare for sale,
and manufacturer refurbished products which carry a
manufacturer's warranty. Our Internet business also includes
Internet fulfillment, in which we sell our products to
other companies that market these products on their websites. We
are transitioning away from this wholesale distribution business
and focusing on selling products directly through our website.
. Traditional commerce and other services, in which we buy and
remarket computer equipment and components to traditional
wholesalers, retailers and value-added resellers, as well as
individual and corporate end users, and provide integration and
consulting services, computer recycling, parts-on-demand services
and transportation services for computer and other equipment. We
area transitioning our traditional commerce business to the
Internet.
F-29
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands)
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies in the
Company's December 31, 1998 financial statements, except that
intersegment sales and transfers are generally accounted for as if the
sales or transfers were to third parties at current market prices, and
segment data includes an allocated charge for the corporate
headquarters costs. It is on this basis that management utilized the
financial information to assist in making internal operating decisions.
The Company evaluates performance based on stand alone operating
segment net income.
The following segment information is for the six month periods ended
June 30:
<TABLE>
<CAPTION>
Traditional
Commerce
-------------------------
Sales and
1998 Internet Service Leasing Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 2,439 $ 23,186 $ 2,574 $ -- $ 28,199
Intersegment revenue -- 532 -- (532) --
- -----------------------------------------------------------------------------------------------------------------------
Total Revenue $ 2,439 $ 23,718 $ 2,574 $ (532) $ 28,199
=======================================================================================================================
Depreciation and amortization $ 6 $ 155 $ 27 $ -- $ 188
Operating income 437 1,259 499 (80) 2,115
</TABLE>
<TABLE>
<CAPTION>
Traditional
-------------------------
Sales and
1999 Internet Service Leasing Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue from external customers $ 13,583 $ 22,131 $ 3,498 -- $39,212
Intersegment revenue -- 2,188 -- (2,188) --
- -----------------------------------------------------------------------------------------------------------------------
Total Revenue $ 13,583 $ 24,319 $ 3,498 $(2,188) $ 39,212
=======================================================================================================================
Depreciation and amortization $ 236 $ 215 $ 117 $ -- $ 568
Operating income 1,741 838 860 (383) 3,056
Segment assets 7,112 25,901 968 33,374 67,355
</TABLE>
4. Acquisition
In June 1999, Intellesale purchased all of the shares of Bostek, Inc. and
Micro Components International, Incorporated (collectively, "Bostek") for
approximately $25,200 includes expenses, of which $10,200 was paid in cash
at closing. Upon a successful initial public offering of Intellesale,
$10,000 will be payable in stock of Intellesale and the remaining $5,000
will be payable in cash in January, 2000. In the event an initial public
offering does not occur within one year from closing of the acquisition,
the $10,000 will be payable in cash. An additional $5,000 is contingent
upon the achievement of certain earnings targets. The transaction was
accounted for under the purchase method of accounting. The fair value of
net assets acquired and liabilities assumed was $3,747, resulting in
goodwill of $21,458. This goodwill will be amortized over 20 years.
F-30
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands, except per share data)
Unaudited pro forma results of operations for the six months ended June 30,
1999 and 1998 are included below. Such pro forma information assumes that
the above transactions had occurred as of January 1, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
For The Six
Months
Ended June 30,
---------------------------------
1998 1999
---------------------------------
<S> <C> <C>
Revenues $ 58,050 $ 72,612
Net income 1,439 891
Earnings per common share - basic .10 .06
Earnings per common share - diluted .09 .05
</TABLE>
5. Related Party Transactions
<TABLE>
<CAPTION>
June 30, 1999
-------------------
<S> <C>
Due to Parent Company - line of credit $26,273
Due to Parent Company - other 1,327
----------------------------------------------------------------
Due to Parent Company $27,600
=====================================================================
</TABLE>
During the third quarter of 1998, the Parent Company entered into a twenty
million dollar line of credit with a bank, collateralized by all the
domestic assets of the Parent Company and its subsidiaries, including the
Company, at the prime lending rate or at the London Interbank Offered Rate,
as elected by the Parent Company. The line of credit was scheduled to
expire on July 31, 1999 and contained standard covenants relating to the
Parent Company's financial position and performance, as well as
restrictions on the Parent Company's declaration and payment of dividends.
The amount due to Parent Company- line of credit represents that portion of
ADS's line of credit that ADS has loaned to the company. For 1998, this
loan bore interest at 9.0%, as set by the Parent Company. In 1999, this
loan bore interest at the pass through rate of the parent and averaged
7.85% for the six months ended June 30, 1999. The loan, including interest,
is repaid as funds are available. Interest expense related to this line of
credit amounted to $140 in 1998.
In May 1999, the Parent Company entered into a Term and Revolving Credit
Agreement with IBM Credit Corporation and repaid the amount due to the
bank. The lending arrangement between the Parent Company and Intellesale
remains unchanged. In connection with the Bostek acquisition (Note 4), the
Company borrowed approximately $10,200 from the Parent Company.
ADS provides certain services to and incurs certain expenses on behalf of
its subsidiaries. These costs, which include general overhead, certain employee
benefit programs, general treasury services and various business insurance
coverages are allocated to Parent Company subsidiaries, including the Company,
based upon the Parent Company's estimate of the relative cost to provide these
services. The Company incurred $210 and $300 in these costs to the Parent
Company in the six months ended June 30, 1998 and 1999, respectively. Management
believes the method used to allocate expenses to the Company is reasonable and
appropriate. However, allocated expenses are not necessarily indicative of the
expenses which would have resulted if the Company operated as a separate entity.
The amounts due to Parent Company - other represent those amounts due to ADS for
income taxes paid on the subsidiaries' behalf.
F-31
<PAGE>
INTELLESALE.COM, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes To Consolidated Financial Statements (Continued)
(in thousands)
6. Commitments and Contingencies
In June 1999, the Company entered into a five-year office and
warehouse lease. Minimum rental payments under the lease are $48 per
month for the first three years and $60 per month for the last two
years.
Several of the purchase agreements for the subsidiaries contained
provisions whereby the sellers could put their remaining shares and
could obtain additional "earnout payments" upon achievement of certain
profits. The Company has entered into agreements to fix the amount of
these payments at $10,040 in a combination of cash and stock.
The above settlements are contingent upon the successful completion of
a planned public offering of Intellesale within one year and will
result in additional goodwill.
The employment agreements of four officers of the Company include
certain "change of control" provisions. An initial public offering is
not considered a "change of control." At the employee's option, he may
terminate his employment under the agreement at any time within one
year after such change of control. The Company shall pay to the
employee a severance payment based on formulas relating to parachute
payment provisions of the Internal Revenue Code and prior
compensation.
The Company is party to various legal proceedings. In the opinion of
management, these proceedings are not likely to have a material
adverse effect on the financial position or overall trends in results
of the Company. The estimate of potential impact on the Company's
financial position, overall results of operations or cash flows for
the above legal proceedings could change in the future.
F-32
<PAGE>
April 6, 1999
(Except for Note 13, which is as of June 4, 1999)
To the Board of Directors
Bostek, Inc. and Affiliate
Hanover, MA
Re: Independent Auditor's Report
Bostek, Inc.
Micro Components International, Inc.
Gentlemen:
We have audited the accompanying combined balance sheet of Bostek, Inc.(a
Massachusetts corporation) and affiliate as of December 31, 1998, and the
related combined statements of income and retained earnings, and cash flows for
the year then ended. These combined financial statements are the responsibility
of the Companies' management. Our responsibility is to express an opinion on
these combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit include examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Bostek, Inc. and
affiliate as of December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Respectfully submitted,
DI PESA & COMPANY
Certified Public Accountant
Boston, Massachusetts
F-33
<PAGE>
April 1, 1998
To the Board of Directors
Bostek, Inc.
Hanover, Massachusetts
Re: Independent Auditor's Report
Gentlemen:
We have audited the accompanying balance sheet of Bostek, Inc. as of December
31, 1997, and the related statements of income, retained earnings, and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bostek, Inc. as of December 31,
1997, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Respectfully submitted,
DI PESA & COMPANY
Certified Public Accountants
Boston, Massachusetts
F-34
<PAGE>
July 23, 1999
To the Board of Directors
Bostek, Inc.
Hanover, Massachusetts
Re: Independent Auditor's Report
Gentlemen:
We have audited the accompanying statements of income, retained earnings and
cash flows of Bostek, Inc. for the year ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Bostek, Inc.
for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
Respectfully submitted,
DI PESA & COMPANY
Certified Public Accountants
Boston, Massachusetts
F-35
<PAGE>
BOSTEK, INC.
------------
BALANCE SHEET
-------------
AS OF DECEMBER 31, 1997 AND 1998
--------------------------------
<TABLE>
<CAPTION>
ASSETS
------
1997 1998
---- ----
CURRENT ASSETS (combined)
- --------------
<S> <C> <C>
Cash $1,068,101 $ 105,096
Account Receivable Trade, Net 3,937,315 4,739,295
Inventory 3,469,951 5,454,646
Prepaid Expenses 38,496 75,645
Due from Employees 66,103 130,691
Due from Realty Trust -- 93,695
---------- -----------
TOTAL CURRENT ASSETS 8,579,966 10,599,068
--------------------
PROPERTY AND EQUIPMENT, NET 96,396 258,501
- --------------------------- ---------- -----------
TOTAL ASSETS $8,676,362 $10,857,569
- ------------ ========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
- -------------------
Line-of-Credit $3,000,000 $ 6,115,000
Accounts Payable 906,107 426,505
Warranty Reserve 652,777 250,000
Accrued Expenses 284,082 14,334
Accrued State Taxes -- 64,939
---------- -----------
TOTAL CURRENT LIABILITIES 4,842,966 6,870,778
------------------------- ---------- -----------
LONG-TERM LIABILITIES
- ---------------------
Subordinated Stockholder Debt 482,789 --
----------
TOTAL LONG-TERM LIABILITIES 482,789 --
--------------------------- ----------
TOTAL LIABILITIES 5,325,755 6,870,778
----------------- ---------- -----------
STOCKHOLDERS' EQUITY
- --------------------
Common Stock 250,714 280,914
Less: Treasury Stock, At Cost (81,000) (81,000)
Retained Earnings 3,180,893 3,786,877
---------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,350,607 3,986,791
-------------------------- ---------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,676,362 $10,857,569
- ------------------------------------------ ========== ===========
</TABLE>
See Independent Auditor's Report and accompanying notes.
F-36
<PAGE>
BOSTEK, INC.
------------
STATEMENTS OF INCOME AND RETAINED EARNINGS
------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(combined)
<S> <C> <C> <C>
REVENUE $54,400,011 $42,930,016 $60,772,443
- -------
COST OF SALES 47,366,335 37,014,620 53,366,139
- ------------- ----------- ----------- -----------
GROSS PROFIT ON SALES 7,033,676 5,915,396 7,406,304
- ---------------------
OPERATING EXPENSES 3,858,219 4,354,385 5,720,778
- ------------------ ----------- ----------- -----------
INCOME FROM OPERATIONS 3,175,457 1,561,011 1,685,526
- ---------------------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
- ----------------------
Gain on Sale of Investments -- -- 381,665
Interest Income 18,259 16,324 10,800
Interest Expense (139,200) (33,590) (353,250)
----------- ----------- -----------
(120,941) (17,266) 39,215
----------- ----------- -----------
INCOME BEFORE PROVISION
FOR TAXES 3,054,516 1,543,745 1,724,741
-----------------------
PROVISION FOR INCOME TAXES 50,000 45,000 27,972
- -------------------------- ----------- ----------- -----------
NET INCOME 3,004,516 1,498,745 1,696,769
- ----------
RETAINED EARNINGS - BEGINNING BALANCE 1,635,651 4,183,363 3,180,893
- -------------------------------------
LESS: DIVIDENDS PAID (456,804) (2,501,215) (1,090,785)
- --------------------- ----------- ----------- -----------
RETAINED EARNINGS - ENDING BALANCE $ 4,183,363 $ 3,180,893 $ 3,786,877
- ---------------------------------- =========== =========== ===========
</TABLE>
See Independent Auditor's Report and accompanying notes.
F-37
<PAGE>
BOSTEK, INC.
-------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING 1996 1997 1998
---- ---- ----
ACTIVITIES (combined)
----------
<S> <C> <C> <C>
Net Income $ 3,004,516 $ 1,498,745 $ 1,696,769
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities
Depreciation 35,000 42,070 45,500
Allowance for Bad Debts 191,388 141,901 ( 294,613)
Changes in Assets and Liabilities: (
Accounts Receivable ( 82,704) 258,494 638,364)
Inventory 1,050,153 (1,484,947) (1,984,695)
Prepaid Expenses 23,230 ( 32,298) ( 37,149)
Due from Employees ( 47,405) ( 43,260) ( 64,588)
Officer Loans 29,579 - --
Accounts Payable ( 374,089) 343,152 ( 479,602)
Warranty Reserve 147,223 ( 147,223) ( 402,777)
Accrued Expenses 145,831 ( 519,079) ( 224,748)
Accrued State Taxes -- -- 19,939
Due from Related Parties -- -- 37,302
------------ ----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 4,122,722 57,555 (2,327,026)
-------------------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Purchase of Fixed Assets ( 26,643) ( 29,917) ( 207,605)
------ ------ -------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES ( 26,643) ( 29,917) ( 207,605)
-------------------- ------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Dividends Paid ( 456,804) (2,501,215) (1,090,785)
Loans from Officers -- 271,804 ( 482,789)
Net Borrowings on Line of Credit (2,900,000) 2,700,000 3,115,000
Proceeds from Issuance of Common Stock -- -- 200
Capital Contributions -- -- 30,000
----------- ----------- -----------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (3,356,804) 470,589 1,571,626
-------------------- ----------- ----------- -----------
NET CHANGE IN CASH 739,275 498,227 ( 963,005)
- ------------------
CASH - BEGINNING OF YEAR ( 169,401) 569,874 1,068,101
- ------------------------ ----------- ----------- -----------
CASH - END OF YEAR $ 569,874 $ 1,068,101 $ 105,096
- ------------------
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
-------------------------------------------------
Interest Expense Paid $ 139,200 $ 33,590 $ 353,250
Taxes Paid - State $ 397 $ 159,267 $ 98,230
</TABLE>
See Independent Auditor's Report and accompanying notes.
F-38
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A. Nature of Operations
--------------------
Bostek, Inc. and its affiliate Micro Components International,
Inc. were incorporated in the Commonwealth of Massachusetts in
1990 and 1998, respectively. The Companies operate as a single
segment as wholesalers/retailers of personal computer hardware
and peripheral products. Micro Components International, Inc.
the affiliate, is not a subsidiary of Bostek, Inc. but does
have the same shareholders and directors.
In March 1998, Bostek established a new method of distribution
for personal computer products and components, American
Discount Warehouse ("ADW"). ADW sells personal computer related
equipment to individual consumers over the Internet. For 1998,
ADW was treated as a DBA (Doing Business As) of Bostek.
B. Combined Statements
-------------------
The accompanying financial statements include the combined
accounts of Bostek, Inc. and Micro Components International,
Inc. for the year ended December 31, 1998, the first year of
operations of Micro Components International, Inc.
The Companies are affiliated by virtue of having the same
stockholders and not through parent subsidiary stock ownership.
All significant intercompany balances have been eliminated and
there were no intercompany sales transactions for the year
ended December 31, 1998.
C. Method of Accounting
--------------------
The financial statements are prepared using the accrual basis
of accounting in compliance with generally accepted accounting
principles. They accordingly reflect all significant
receivables, payables and other liabilities.
D. Revenue Recognition
-------------------
Bostek and Micro Components recognize revenues when the product
is shipped. The Companies' return policy provides for money
back guarantees on certain items. An allowance for potential
product returns based upon historical trends has been
established.
F-39
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(Continued)
E. Accounts Receivable
-------------------
The Companies provide for bad debts on the allowance method of
accounting. The allowance for uncollectible accounts was
$778,000 and $483,387 at December 31, 1997 and 1998,
respectively.
F. Inventories
-----------
Inventories consist of computer hardware and components and are
stated at historical cost (determined under the first-in,
first-out cost method) or market whichever is lower. All
inventories are of goods available for immediate resale, with
no raw materials or work in process inventory. The personal
computer industry is characterized by rapid technological
advancement and declining market prices. Should demand for the
current generation of personal computers prove to be
significantly less than anticipated, the ultimate realizable
value of such products could be substantially less than the
amount shown on the balance sheet.
G. Income Taxes
------------
In 1995, Bostek elected to be treated as an S Corporation under
provisions of the current Internal Revenue Code. The federal
income tax liability for Bostek's income is the responsibility
of the individual shareholders. Massachusetts laws vary from
Federal in that a company having receipts of $6,000,000 or more
is liable for the income measure of the corporate excise tax.
Therefore, Bostek has made a provision for income taxes of
$50,000, $45,000 and $27,972 for the years ending December 31,
1996, 1997 and 1998, respectively. Micro Components
International, Inc. (a C Corporation) provides for income taxes
under the provisions of SFAS No. 109 "Accounting for Income
Taxes". SFAS No. 109 requires an asset and liability based
approach in accounting for income taxes. Bostek has a net
operating loss of $430,870 for the year ended December 31,
1998. The deferred tax asset associated with the potential
future benefit from this net operating loss is fully offset by
a valuation allowance. There are no other temporary
differences.
F-40
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
(Continued)
H. Property and Equipment
----------------------
The Companies record property and equipment at cost. These
assets are depreciated using straight-line and accelerated
methods over the estimated lives of the respective assets,
ranging from 5 to 7 years. The difference in depreciation
calculated under current tax laws as compared to generally
accepted accounting principles is not material.
The following is a summary of property and equipment at cost,
less accumulated depreciation:
<TABLE>
<CAPTION>
1997 1998
-----------------------------------
<S> <C> <C>
Furniture and Fixtures $ 268,080 $ 475,685
Vehicles 108,224 108,224
--------- ---------
Total 376,304 583,909
-----
Accumulated Depreciation (279,908) (325,408)
--------- ---------
Net Property and Equipment $ 96,396 $ 258,501
--------------------------
========= =========
</TABLE>
I. Cash and Cash Equivalents
-------------------------
For the purpose of the Statement of Cash Flows, the Companies
consider all highly liquid investments purchased with original
maturities of three months or less to be cash equivalents. The
Companies did not have any cash equivalents for the year ended
December 31, 1996, 1997 and 1998.
J. Use of Estimates
----------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates that affect the reported amounts of assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses for the period. Actual
results may differ from those estimates.
F-41
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 2 - OPERATING LEASES
----------------
Bostek leases office space, vehicles and equipment under certain
operating leases in excess of one year. Rent expense under leases
was $188,891, $173,240 and $176,369 for 1996, 1997 and 1998,
respectively.
The following is a schedule of future minimum rental payments
required under the above leases:
Year Ending
December 31
1999 $197,120
2000 179,649
2001 160,884
2002 144,000
2003 144,000
--------
$825,653
========
NOTE 3 - RELATED PARTY TRANSACTIONS
--------------------------
Bostek leases its corporate headquarters and warehouse facilities
from a trust controlled by the shareholders of the company. The
lease is classified as an operating lease and provides for
minimum annual rentals of $144,000. There is also a mortgage on
the property of $250,000 payable to Citizens Bank of
Massachusetts that is guaranteed by Bostek.
Advances from officers represent advances made by the
shareholders of Bostek and bore an interest rate of 7%. In
accordance with the terms of the line-of-credit, the advances
were subordinate to the line-of-credit.
During 1998, the shareholders loans totaling $482,789 were paid.
F-42
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 3 - RELATED PARTY TRANSACTIONS (Continued)
--------------------------
Bostek had sales to an entity in which the shareholders owned greater
than 40% of the stock. Effective May, 1998, shareholders no longer
owned stock in this entity. The following is a summary of
transactions and balances with related parties.
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
Sales to Related Parties $ -- $1,443,153 $212,956
Due from Affiliate -- 130,997 --
Due from Realty Trust 149,382 -- 93,695
</TABLE>
During 1998, the shareholders of Bostek established Micro Components
International, Inc. The operations of the affiliate are similar to
those of Bostek. The shareholders are in a position to, and in the
future may, influence the sales volume of Bostek for the benefit of
the other company in the same line of business that are under their
control.
NOTE 4 - LINE-OF-CREDIT
--------------
On January 24, 1997, Bostek entered into a revolving line-of-credit
agreement with a financial institution providing a maximum loan
balance of $8,000,000. The outstanding balance bears interest at a
rate equal to the bank's prime rate. The Loan Agreement is
collateralized by substantially all of Bostek's assets. Additionally,
one of the principal shareholders pledged stock in Bostek as
collateral. The Loan Agreement provides for certain covenants
including among others, minimum levels of working capital and certain
ratios. At December 31, 1997 and 1998, the outstanding balance was
$3,000,000 and $6,115,000, respectively, bearing interest of 8.50%
and 8.00% respectively. This revolving line-of-credit replaced all
existing lines of credit.
On March 24, 1998, Bostek increased its line-of-credit from
$8,000,000 to $10,000,000. All other terms of the loan remained
substantially the same.
The loan agreement on the revolving line-of-credit contains various
covenants pertaining to minimum requirements for accounts receivables
and inventory balances. At December 31, 1998, Bostek had borrowings
in excess of its borrowing base. The bank has waived that requirement
of the agreement as of April 6, 1999.
F-43
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 5 - WARRANTY RESERVE
----------------
Bostek has an allowance for warranty products and returns. This
allowance is based upon the cost of handling returns and warranty
items using historical return rates and costs. The allowance for
warranty approximated $652,777 and $250,000 at December 31, 1997
and 1998, respectively.
NOTE 6 - RETIREMENT PLAN
---------------
Bostek provides a 401(k) deferred contribution plan for all full-
time employees who are over the age of twenty-one and have
completed one year of service. An employee is fully vested in
matching contributions after six years of service. Employees may
contribute up to 15% of their salary to the plan. Bostek has the
option to make a discretionary matching contribution equal to a
percentage of each employee's contribution, the exact percentage to
be determined each year by Bostek. Bostek's contributions for any
plan year shall not exceed the maximum amount allowable as a
deduction to Bostek. Retirement expense for the years ended 1996,
1997 and 1998 was $135,155, $100,000 and $- 0 -, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
-----------------------------
Bostek and its affiliate are involved in various claims arising in
the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material
adverse effect on Bostek's financial position, operating results,
or cash flows.
NOTE 8 - GAIN ON SALE OF INVESTMENT
--------------------------
During 1998, Bostek accepted stock in lieu of payment of an account
receivable. The stock subsequently appreciated and Bostek sold the
stock for a $381,665 gain in 1998.
NOTE 9 - ADVERTISING COSTS
-----------------
Advertising costs are charged to operations when incurred. The
advertising expense for Bostek for 1996, 1997 and 1998 amounted to
$12,322, $762 and $436,644, respectively.
F-44
<PAGE>
BOSTEK, INC.
------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
----------------------------------------------------
NOTE 10 - FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amount of cash, accounts receivable, accounts payable
and line-of-credit approximates fair value because of the short
maturity of those instruments. The fair value of the amounts due
from employees does not differ materially from the carrying value
recorded in the accompanying balance sheet.
NOTE 11 - NEW ACCOUNTING STANDARDS
------------------------
In 1998, the Financial Accounting Standards Board (FASB) issued FAS
133, Accounting for Derivative Instruments and Hedging Activities.
In 1999, the FASB issued FAS 137, Accounting for Derivative
Instruments - Deferral of the Effective Date of FAS 133. As Bostek
does not have any derivative instruments or hedging transactions,
adoption of FAS 133 is not anticipated to have a material effect on
the financial statements.
Bostek and Micro Components International, Inc. operate in a single
segment. Accordingly, there are no disclosure requirements under
FAS 131, Disclosures about Segments of an Enterprise and Related
Information.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (FAS) 130, Reporting Comprehensive
Income (SFAS 130). Implementation of the standard had no material
impact on Bostek's financial statements as presented.
F-45
<PAGE>
NOTE 12 COMMON STOCK AND TREASURY STOCK
-------------------------------
<TABLE>
<CAPTION>
Micro Components
International, Inc.
Bostek, Inc. no par, no par 10,000 shares
15,000 shares authorized authorized
------------------------ ----------
Outstanding Treasury Stock Outstanding
----------- -------------- -----------
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 4,000 $250,714 (2,000) $(81,000) -- --
Balance, December 31, 1996 4,000 250,714 (2,000) (81,000) -- --
Balance, December 31, 1997 4,000 250,714 (2,000) (81,000) -- --
Formation of Micro Components
International, Inc. -- -- -- -- 2,000 $30,200
Balance, December 31, 1998 4,000 $250,714 (2,000) $(81,000) 2,000 $30,200
===== ======== ====== ======== ===== =======
</TABLE>
NOTE 13 - SALE OF COMPANY
---------------
In June, 1999, Intellesale.com, Inc. a subsidiary of Applied Cellular
Technology, Inc., purchased all of the outstanding shares of common
stock, no par value of Micro Components International, Incorporated
and Bostek, Inc. for the aggregate purchase price of $25,055,000,
excluding expense, and subject to adjustment as set forth in the
Agreement of Purchase and Sale.
F-46
<PAGE>
Bostek, Inc
Balance Sheet
As of May 31, 1999
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ -
Accounts receivable 6,654,040
Inventory 3,395,582
Prepaid expenses and other assets 234,136
------------
Total current assets 10,283,758
Property and equipment, net 352,515
------------
Total Assets $ 10,636,273
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line-of-credit $ 4,040,000
Accounts payable and accrued expenses 2,599,490
Warranty reserve 250,000
------------
Total current liabilities 6,889,490
Stockholders' equity:
Common Stock 280,914
Less: Treasury Stock, At Cost (81,000)
Retained Earnings 3,546,869
------------
Total stockholders' equity 3,746,783
------------
Total Liabilities and Stockholders' Equity $ 10,636,273
============
See accompanying notes to financial statements.
F-47
<PAGE>
Bostek, Inc
Statements of Income
For the five months ended May 31, 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
May 31, 1998 May 31, 1999
<S> <C> <C>
Revenue $ 23,864,262 $ 33,400,242
Cost of Sales 20,958,198 29,596,178
------------ ------------
Gross Profit on Sales 2,906,083 3,804,066
Operating Expenses 1,795,462 3,434,201
------------ ------------
Income from Operations 1,110,601 369,885
Interest Expense 204,854 150,873
------------ ------------
Income before provision for
income taxes 905,747 218,992
Provision for income taxes 77,972 74,000
------------ ------------
Net income $ 827,775 $ 144,992
============ ============
</TABLE>
See accompanying notes to financial statements
F-48
<PAGE>
Bostak, Inc.
Statements of Cash Flows
For the Five Months Ended May, 31 1998 and 1999
(Unaudited)
<TABLE>
<CAPTION>
May 31, 1998 May 31, 1999
<S> <C> <C>
Cash Flows from Operating Activities
Net Income $ 827,775 $ 144,992
Add items not affecting cash flows
Depreciation 10,000 10,000
(Increase) Decrease in
Accounts receivable (2,867,165) (1,914,745)
Inventory 270,199 2,059,064
Other Assets (72,219) 65,895
Increase (Decrease) in:
Accounts payable and Accrued
expenses 833,166 2,093,712
Net Cash Flows from Operations (50,268) 2,458,918
Cash Flows from investing
Purchase of fixed assets (50,266) (104,014)
Cash Flows from Financing:
Dividends paid (385,000)
Payment of stockholders loans (11,489)
Increase (decrease) in line of credit 925,000 (2,075,000)
Net Cash Flows from Financing 913,511 (2,460,000)
Net Change in Cash and cash
equivalents (135,001) 105,096
Cash and cash equivalents, Beginning
of period 1,068,101 105,096
Cash and cash equivalents, Ending
of period $ 933,100 $ --
</TABLE>
See accompanying notes to financial statements
F-49
<PAGE>
BOSTEK, INC.
NOTES TO FINANCIAL STATEMENTS
For the five months ended May 31, 1998 and 1999
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Nature of Operations
Bostek, Inc. and its affiliate Micro Components International, Inc. were
incorporated in the Commonwealth of Massachusetts in 1990 and 1998,
respectively. The Companies operate as a wholesaler/retailer of personal
computer hardware and peripheral products. Micro Components International, Inc.
the affiliate, is not a subsidiary of Bostek, Inc. but does have the same
shareholders and directors.
In March 1998, Bostek developed a website under the name American Discount
Warehouse at PickADW.com to sell its products over the Internet. For 1998, ADW
was treated as a DBA (Doing Business As) of Bostek.
B. Combined Statements
The accompanying financial statements include the combined accounts of Bostek,
Inc. and Micro Components International, Inc. The Companies are affiliated by
virtue of having the same stockholders and not through parent subsidiary stock
ownership. All significant intercompany balances have been eliminated and there
were no intercompany sales transactions for the 5 months ended May, 1999.
C. Unaudited Interim Financial Statements
The accompanying unaudited financial statements as of May 31, 1999 and for the
five months ended May 31, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, all adjustments (consisting of only
normal recurring adjustments) considered necessary to present fairly the
consolidated financial statements have been made.
The consolidated statement of operations for the five months ended May 31, 1999
are not necessarily indicative of the results that may be expected for the
entire year. These statements should be read in conjunction with the financial
statements and related notes thereto for the year ended December 31, 1998.
D. Accounts Receivable
The Companies provide for bad debts on the allowance method of accounting.
The allowance for uncollectible accounts was $253,385 at May 31, 1999.
E. New Accounting Standards
In 1998, the Financial Accounting Standards Board (FASB) issued FAS 133,
Accounting for Derivative Instruments and Hedging Activities. In 1999, the FASB
issued FAS 137, Accounting for Derivative Instruments - Deferral of the
Effective Date of FAS 133. As Bostek does not have any derivative instruments or
hedging transactions, adoption of FAS 133 is not anticipated to have a material
effect on the financial statements.
F-50
<PAGE>
NOTE 2 - SALE OF COMPANY
Effective June 1, 1999, Intellesale.com, Inc. a subsidiary of Applied Cellular
Technology, Inc., purchased all of the outstanding shares of common stock, no
par value, of Micro Components International, Incorporated and Bostek, Inc. for
the aggregate purchase price of $25,055,000, excluding expenses, and subject to
adjustments as set forth in the Agreement of Purchase and Sale.
F-51
<PAGE>
Report of Independent Accountants
Board of Directors and Shareholders
Universal Commodities Corp.
We have audited the accompanying balance sheet of Universal Commodities Corp. as
of October 31, 1996, and the related statements of operations, retained earnings
and cash flows for the ten months ended October 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Universal Commodities Corp. as
of October 31, 1996, and the results of their operations and their cash flows
for the ten months ended October 31, 1996, in conformity with generally accepted
accounting principles.
Rubin, Brown, Gornstein & Co. LLP
St. Louis, Missouri
July 9, 1999
F-52
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
BALANCE SHEET
October 31, 1996
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and cash equivalents $ 12,399
Accounts receivable and unbilled receivables (net of allowance
for doubtful accounts of $63,000) 602,501
Inventories 150,000
Deposits 19,800
--------
$784,700
========
Liabilities and Stockholders' Equity
Liabilities
Notes payable - bank $100,000
Accounts payable and accrued expenses 577,535
--------
Total Liabilities 677,535
--------
Stockholders' Equity
Common Stock - Authorized 1,000,000 shares of $1 par value,
1,000 shares issued and outstanding 1,000
Additional paid-in capital 34,311
Retained earnings 71,854
--------
Total Stockholders' Equity 107,165
--------
$784,700
========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-53
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Ten Months Ended October 31, 1996
<TABLE>
<S> <C>
Revenue $4,575,131
Cost of Goods Sold 3,689,237
----------
Gross Profit 885,894
Selling, General and Administrative Expenses 936,436
----------
Operating Loss (50,542)
Interest Expense 12,766
----------
Net Loss $ (63,308)
==========
Statement of Retained Earnings
Balance - Beginning of Period $ 135,162
Net Loss (63,308)
----------
Balance - End of Period $ 71,854
==========
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-54
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
For the Ten Months Ended October 31, 1996
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net loss $ (63,308)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Change in assets and liabilities:
Increase in accounts receivable (427,962)
Decrease in inventories 129,000
Increase in accounts payable and accrued
expenses 438,314
----------
Net Cash Provided By Operating Activities 76,044
----------
Cash Flows From Financing Activities
Net amounts borrowed on notes payable 5,111
----------
Net Decrease In Cash And Cash Equivalents (47,234)
Cash And Cash Equivalents - Beginning Of Period 59,633
----------
Cash And Cash Equivalents - End Of Period $ 12,399
==========
Supplemental Disclosure Of Cash Flow Information
Interest paid $ 12,285
----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
F-55
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
October 31, 1996
1. Organization And Summary Of Significant Accounting Policies
Organization
Universal Commodities Corp. purchases new, used and scrapped computer
systems or components either to custom order or prospective sale. The
company also engages in metals reclamation and other computer part
commodity reclamation and sale.
Use of Estimates
In conformity with generally accepted accounting principles, the
preparation of financial statements requires management to make certain
estimates and assumptions that affect the amounts reported in our financial
statements and accompanying notes. Although these estimates are based on
the knowledge of current events and actions the Company may undertake in
the future, they may ultimately differ from actual results.
Inventories
Inventories consist of supplies and finished goods. Inventory is valued at
the lower of cost or market, determined by the first-in, first-out method.
The Company closely monitors and analyzes inventory for potential
obsolescence and slow-moving items based upon the aging of the inventory
and the inventory turns by product.
Revenue Recognition
For product sales, the Company recognizes revenue upon shipment.
The Company does not experience many product returns, and therefore,
Company management is of the opinion that no allowance for sales returns
is necessary. The Company has no obligation for warranties on hardware
sales, because the warranty is provided by the manufacturer. The Company
does not offer a warranty policy for services to customers.
Income Taxes
The Company has elected under Subchapter S of the Internal Revenue Code,
and similar provisions of the New Jersey tax laws, not to be subject to
corporate income taxes, but rather to have the stockholders report their
share of the Company's taxable income or losses on their personal income
tax returns. Therefore, no liability for federal and state income taxes is
reflected in the accompanying financial statements.
2. Notes Payable
The note payable to the bank in the amount of $100,000 at October 31, 1996
is a demand note secured by the business assets. Interest on the note is
payable monthly at 2% above the bank's prime rate.
3. Fair Value Of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash And Cash Equivalents
The carrying amount approximates fair value because of the short maturity
of those instruments.
________________________________________________________________________________
F-56
<PAGE>
UNIVERSAL COMMODITIES CORP.
- --------------------------------------------------------------------------------
Notes To Financial Statements (Continued)
Accounts Receivable
The carrying amounts approximate fair value.
Notes Payable
The carrying amount approximates fair value because of the short-term
nature of the notes.
Accounts Payable and Accrued Expenses
The carrying amount approximates fair value.
The estimated fair value amounts presented herein have been determined
using available market information and appropriate valuation methodologies
and are not necessarily indicative of the amount could be realized in a
current market exchange.
4. Commitments
The Company is obligated under real estate leases, expiring through 2000.
The total future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
Year Amount
-----------------------------------------
<S> <C>
1996 $ 14,000
1997 93,000
1998 99,600
1999 104,580
2000 26,460
-----------------------------------------
$337,640
=========================================
</TABLE>
5. Subsequent Events
Effective November 1, 1996, 80% of the Company was acquired by Applied
Digital Solutions (formerly Applied Cellular Technology, Inc.).
________________________________________________________________________________
F-57
<PAGE>
================================================================================
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate as
of the date on the front cover of this prospectus only. Our business, financial
condition, results of operations and prospects may have changed since that date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary................................................................................... 2
Risk Factors.............................................................................. 7
Use of Proceeds........................................................................... 18
Dividend Policy........................................................................... 19
Capitalization............................................................................ 20
Dilution.................................................................................. 21
Selected Financial Data................................................................... 22
Pro forma Financial Information........................................................... 24
Management's Discussion and Analysis of Financial Condition and Results of Operations..... 31
Management's Discussion and Analysis of Pro Foma Results of Operations.................... 51
Intellesale.com, Inc...................................................................... 56
Management................................................................................ 68
Certain Relationships and Related Transactions............................................ 75
Principal and Selling Stockholders........................................................ 81
Description of Capital Stock.............................................................. 82
Shares Eligible for Future Sale........................................................... 85
Underwriting.............................................................................. 87
Legal Matters............................................................................. 89
Experts................................................................................... 89
Change In Independent Accountants......................................................... 90
Where You Can Find Additional Information................................................. 90
</TABLE>
_______________________________________________________
Until [___________], 1999, all dealers effecting transactions in the common
stock, whether or not participating in this distribution, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
5,700,000 Shares
[logo]
Common Stock
_______________
PROSPECTUS
_______________
LADENBURG THALMANN & CO. INC.
PUNK, ZIEGEL & COMPANY
[______________], 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses (other than underwriting
discounts and commissions) which, other than the SEC registration fee, are
estimates, payable by the Registrant in connection with the sale and
distribution of the shares registered hereby:
<TABLE>
<S> <C>
SEC registration fee............................$ 16,400
NASD filing fee................................. 6,400*
Nasdaq National Market listing fee.............. 95,000*
Printing and engraving expenses................. 200,000*
Accounting fees and expenses.................... 150,000*
Legal fees and expenses......................... 200,000*
Transfer Agent and Registrar fees and expenses.. 15,000*
Miscellaneous expenses.......................... 42,850*
-------
Total......................................$ 725,550*
=======
</TABLE>
_____________
* Estimated
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law permits the indemnification by a
Delaware corporation of its directors, officers, employees and other agents
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with specified actions, suits or proceedings,
whether civil, criminal, administrative or investigative (other than derivative
actions which are by or in the right of the corporation) if they acted in good
faith and in a manner they reasonably believed to be in or not opposed to the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard of care is applicable in the case of derivative actions, except
that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with defense or settlement of such an action and requires
court approval before there can be any indemnification where the person seeking
indemnification has been found liable to the corporation.
As permitted by Delaware law, the Registrant's Amended and Restated
Certificate of Incorporation provides that no director of the Registrant will be
personally liable to the Registrant or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (a) for any breach
of duty of loyalty to the Registrant or to its stockholders, (b) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the Delaware General Corporation Law,
or (d) for any transaction from which the director derived an improper personal
benefit.
The Registrant's Amended and Restated Certificate of Incorporation further
provides that the Registrant must indemnify its directors and executive officers
and may indemnify its other officers and employees and agents to the fullest
extent permitted by Delaware law. The Registrant believes that indemnification
under its Amended and Restated Certificate of Incorporation covers negligence
and gross negligence on the part of indemnified parties.
The Registrant has entered into indemnification agreements with each of its
directors and officers. These agreements, among other things, require the
Registrant to indemnify such directors and officers for certain expenses
(including attorneys' fees), judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, including any action by or in the
right of the Registrant, arising out of
II-1
<PAGE>
such person's services as a director or officer of the Registrant, any
subsidiary of the Registrant or any other company or enterprise to which
the person provides services at the request of the Registrant.
The Underwriting Agreement (Exhibit 1) will provide for indemnification by
the underwriters of the Registrant, its directors, its officers who sign the
registration statement, and the Registrant's controlling persons for certain
liabilities, including certain liabilities arising under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to such provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in such Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
The common stock and options of the Registrant issued to stockholders and
option holders of Universal Commodities Corp., a New Jersey corporation, in
connection with the reincorporation of the Registrant into Delaware did not
constitute a "sale" pursuant to Rule 145(a)(2) promulgated under the Securities
Act. The following sets forth information regarding all securities sold by the
Registrant's New Jersey predecessor since its inception (December 1994).
(1) As of September 10, 1999, the Registrant's predecessor had granted
stock options to purchase 5,450,000 shares of its common stock to employees
pursuant to its 1997 Stock Option Plan. Of these options to purchase, no
shares have been exercised, 100,000 have been canceled, and the remainder
are outstanding.
(2) In December 1994, the Registrant's predecessor issued an aggregate
of 1,000 shares of its common stock to Marc Sherman, its founder, for
nominal cash consideration.
(3) In June 1999, the Registrant's predecessor issued an aggregate of
14,999,000 shares of its common stock to its existing stockholders in a
15,000 for 1 stock split, effected as a stock dividend.
The sales and issuances of securities described in paragraph (1) above were
deemed to be exempt from registration under the Securities Act by virtue of Rule
701 of the Securities Act in that they were offered and sold either pursuant to
a written compensatory benefit plan or pursuant to a written contract relating
to compensation, as provided by Rule 701. The sales and issuances of securities
described in paragraphs (2) and (3) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) and Section
3(a)(9), respectively. Appropriate legends are affixed to the stock certificates
issued in the aforementioned transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities. All recipients
either received adequate information about the Registrant or had access, through
employment or other relationships, to such information.
Item 16. Exhibits and Financial Statements.
See Exhibit Index and Financial Statements schedule.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under
II-2
<PAGE>
the Securities Act shall be deemed to be part of this registration statement
as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Lincoln Park, State of New Jersey, on October 21, 1999.
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
----------------------------
Marc Sherman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Director, President and
Chief Executive Officer
/s/ Marc Sherman (Principal Executive Officer) October 21, 1999
- -------------------------
(Marc Sherman)
Director, Vice President,
Chief Financial Officer and
Secretary (Principal
Financial and Accounting October 21, 1999
Edward L. Cummings* Officer)
- -------------------------
(Edward L. Cummings)
Director October 21, 1999
Alexander H. Good*
- -------------------------
(Alexander H. Good)
Director October 21, 1999
David A. Loppert*
- -------------------------
(David A. Loppert)
Director October 21, 1999
Glenn Meyers*
- -------------------------
(Glenn Meyers)
Director October 21, 1999
Garrett A. Sullivan*
- -------------------------
(Garrett A. Sullivan)
Director October 21, 1999
Constance K. Weaver*
- -------------------------
(Constance K. Weaver)
*By: /s/ Marc Sherman
----------------------
Marc Sherman
Attorney-in-Fact
II-4
<PAGE>
SCHEDULE II
INTELLESALE.COM, INC.
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Additions
------------------------------
Balance At Charged To Valuation Balance At
Beginning Cost and Accounts End of
Description of Period Expenses Acquired Deductions Period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Valuation reserve deducted in the balance
sheet from the asset to which it applies:
Accounts Receivable:
1998 Allowance for doubtful accounts $ 100 $ 294 $ 24 $ 56 $ 362
1997 Allowance for doubtful accounts 63 15 100 78 100
1996 Allowance for doubtful accounts -- -- 63 -- 63
Inventory:
1998 Allowance for excess and obsolescence -- 26 24 -- 50
1997 Allowance for excess and obsolescence -- -- -- -- --
1996 Allowance for excess and obsolescence -- -- -- -- --
</TABLE>
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of Intellesale.com, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of
Intellesale.com, Inc. (a majority-owned subsidiary of Applied Digital Solutions,
Inc.) and its subsidiaries at December 31, 1998, and the results of their
operations and their cash flows for the year in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
St. Louis, Missouri
June 10, 1999 (except as to the second paragraph of Note 1, Note 11
and Note 17, which are as of August 23, 1999)
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
Board of Directors and Stockholders
Intellesale.com, Inc.
We have audited the accompanying consolidated balance sheet of
Intellesale.com, Inc. (a majority-owned subsidiary of Applied Digital
Solutions, Inc.) and subsidiaries as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows
for each of the two years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our 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 consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of Intellesale.com, Inc. and subsidiaries as of December 31,
1997, and the consolidated results of their operations and their cash
flows for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 24, 1998
/s/ Rubin, Brown, Gornstein & Co., LLP
Rubin, Brown, Gornstein & Co., LLP
St. Louis, Missouri
February 28, 1999
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
1.1* Form of underwriting agreement
2.1 Agreement of Purchase and Sale, dated as of June 4, 1999, among the
Registrant, Applied Digital Solutions, Inc., David Romano and Eric
Limont.
2.2 Amendment No. 1, dated as of June 9, 1999, among the Registrant,
Applied Digital Solutions, David Romano and Eric Limont.
3.1 Form of Amended and Restated Certificate of Incorporation of the
Registrant.
3.2 Form of Amended and Restated Bylaws of the Registrant.
4.1 See Exhibits 3.1 and 3.2.
4.2 Registration Rights Agreement, dated as of June 30, 1999, between the
Registrant and Applied Digital Solutions, Inc.
4.3 Registration Rights Agreement, dated as of July 30, 1999, among the
Registrant, Marc Sherman and Edward L. Cummings.
4.4 Voting and Standstill Agreement dated as of September 10, 1999,
between Applied Digital Solutions and the Registrant.
5.1* Opinion of Bryan Cave LLP regarding the validity of the Common Stock
10.1 1997 Non-Qualified Stock Option Plan of Registrant
10.2 1999 Flexible Stock Plan
10.3 Employment Agreement, dated as of July 1, 1999, between the Registrant
and Marc Sherman.
10.4 Employment Agreement, dated as of July 1, 1999, between the Registrant
and Edward L. Cummings.
10.5 Employment Agreement, dated as of July 1, 1999, between the Registrant
and Charles D. Newman.
10.6 Employment Agreement, dated as of July 1, 1999, between the Registrant
and Joseph S. Keats.
10.7 Form of Tax Sharing Agreement, dated as of October __, 1999, between
the Registrant and Applied Digital Solutions, Inc.
10.8 Agreement, dated as of August 23, 1999, between the Registrant and
Paul Pappas.
10.9 Agreement, dated as of August 23, 1999, between the Registrant and
Sherri Sheerr.
10.10 Agreement, dated as of August 23, 1999, between the Registrant and
Harvey H. Newman.
10.11 Agreement, dated as of August 23, 1999, between the Registrant and
Martin D. Zuckerman.
10.12 Agreement, dated as of August 23, 1999, between the Registrant and
Carl C. Saracino.
10.13 Agreement, dated as of August 23, 1999, between the Registrant and
Donna W. Pizarro.
10.14* Form of Agreement, dated as of August 23, 1999, between the Registrant
and Joel Owens.
10.15* Form of Agreement, dated as of August 23, 1999, between the Registrant
and Michael Erickson.
10.16 Amendment to Agreement of Sale, dated as of April 1, 1999, by and
among Applied Cellular Technology, Inc., Universal Commodities Corp.
(as predecessor-in-interest to the Registrant), Patrick C. Chai,
Robert W. Borra and GDB Software Services, Inc.
<PAGE>
10.17 Amendment to Asset Purchase Agreement, dated as of April 1, 1999, by
and among the Registrant, Charles J. Phillips and Fiscal Advantage
Corporation.
10.18 Amendment to Agreement and Plan of Class B Reorganization, dated as of
April 1, 1999, by and among Applied Cellular Technology, Inc.,
Universal Commodities Corp. (as predecessor-in-interest to the
Registrant), Data Path Technologies, Inc., Donn J. Wagner, Angela S.
Wagner, Edward M. Kelly and Eilleen E. Kelly.
10.19 Form of Indemnification Agreement between the Registrant and each of
its Directors.
10.20 Business Lease, dated April 1999, between 510 Ryerson Road Corp. and
the Registrant.
10.21 Agreement, dated March 1994, between Shirley B. DiPace and Data Path
Technologies, Inc.
10.22 Agreement, dated September 14, 1998, between Shirley B. DiPace and
Data Path Technologies, Inc.
10.23 Agreement, dated March 6, 1998, between Shirley B. DiPace and Data
Path Technologies, Inc.
10.24 Agreement, dated September 14, 1998, between Shirley B. DiPace and
Data Path Technologies, Inc.
10.25 Amendment to Employment Agreement, dated September 9, 1999, between
the Registrant and Marc Sherman.
16.1* Letter from Rubin, Brown, Gornstein & Co., LLP ("RBG") concurring
with the statements made by the Registrant herein concerning RBG's
resignation as the Registrant's principal accountant
21.1 List of subsidiaries of Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Rubin, Brown, Gornstein & Co. LLP
23.3 Consent of DiPesa & Company
23.4 Consent of Rubin, Brown, Gornstein & Co. LLP
23.5* Consent of Bryan Cave LLP (included in Exhibit 5.1)
24.1++ Power of Attorney (included on signature page of Registration
Statement)
27.1 Financial Data Schedule for the Registrant
27.2* Financial Data Schedule of Bostek, Inc.
-------------
++ Previously filed.
* To be filed by amendment
Exhibit 2.1
AGREEMENT OF PURCHASE AND SALE
Agreement of Purchase and Sale (this "Agreement"), dated as of June 4,
1999, by and among Intellesale.com, Inc., a Delaware corporation ("Buyer"),
Applied Cellular Technology, Inc., a Missouri corporation ("ACT"), and David
Romano and Eric Limont, (each individually, a "Seller" and collectively, the
"Sellers").
W I T N E S S E T H:
WHEREAS, Sellers are the owners of all shares of the issued and
outstanding common stock, no par value, of Bostek, Inc.., a Massachusetts
corporation ("Bostek"), and Micro Components International, Incorporated, a
Massachusetts corporation ("Micro Components") (Bostek and Micro Components
each, a "Company" and collectively, the "Companies");
WHEREAS, the Companies are engaged in the business of buying and
selling of computer components from manufacturers and distributors whether from
excess inventory, refurbished equipment or off-lease (the "Business");
WHEREAS, at the Closing (as defined in Section 1.02), the Companies
will have minimum Target Book Value (as defined in Section 1.04(d)) of
$4,500,000 on a consolidated basis (subject to adjustment as provided herein);
and
WHEREAS, upon the terms and subject to the conditions set forth in
this Agreement, Sellers desire to sell to Buyer, and Buyer desires to buy from
Sellers, all of the outstanding shares of common stock of the Companies (the
"Stock").
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants and agreements, and upon the terms and subject to the
conditions, hereinafter set forth, the parties do hereby agree as follows:
ARTICLE I
TERMS OF PURCHASE AND SALE
1.01. Sale of the Stock. Upon the terms and subject to the conditions
set forth in this Agreement, at the Closing, Sellers shall sell to Buyer, and
Buyer shall purchase from Sellers, the Stock.
1.02. The Closing. (a) The closing of the transactions contemplated
hereby (the "Closing") shall take place at Hutchins, Wheeler & Dittmar, 101
Federal Street, Boston, MA, commencing at 9:00 a.m. (Boston time) on the later
of (i) June 21, 1999, and (ii) the fifth business day after termination or
expiration of the applicable waiting period (and any extension thereof) under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations thereunder (the "HSR Act"), or at such other time and/or
place and/or on such other date as the parties may mutually agree (the "Closing
Date").
<PAGE>
(b) At the Closing, Buyer shall deliver to Sellers:
(i) the First Payment (as defined in Section 1.03(a));
(ii) the certificates referred to in Article VI;
(iii) the Employment Agreements; and
(iv) such other instruments and documents, in form and
substance reasonably acceptable to Sellers, as may
be necessary to effect the Closing.
(c) At the Closing, Sellers shall deliver to Buyer:
(d) certificates representing the Stock, duly endorsed in blank for
transfer or accompanied by duly executed stock powers assigning the Stock in
blank
(ii) the certificates referred to in Article V;
(iii) the Employment Agreements;
(iv) the corporate minute books and stock books for
each Company;
(v) a certified copy of the certificate of
incorporation of each Company, and a good standing
certificate for each of them issued by the
Secretary of State of the Commonwealth of
Massachusetts; and
(vi) such other instruments and documents, in form and
substance reasonably acceptable to Buyer, as may
be necessary to effect the Closing.
1.03. Purchase Price and Payment. (a) Subject to increase as provided
in Section 1.03(c) and adjustment as set forth elsewhere herein, the aggregate
purchase price to be paid by Buyer for the Stock shall be $25,000,000 (the
"Purchase Price"), payable as follows and subject to adjustment as described
below:
(i) on the Closing Date, $10,000,000 shall be paid in
U.S. dollars by wire transfer of immediately
available funds to an account or accounts
designated by Sellers not less than 24 hours prior
to the Closing Date (the "First Payment");
(ii) within thirty days following the closing of the
initial public offering of shares of common stock
of Buyer pursuant to a registration statement on
Form S-1 filed and effective under the Act,
2
<PAGE>
$10,000,000 shall be paid in shares of common
stock of Buyer (the number of shares being
determined by dividing $10,000,000 by the price
charged to the public for a share of common stock
of Buyer sold in such public offering), and
(iii) on the later of (x) January 3, 2000 and (y) the
six month anniversary of the Closing Date,
$5,000,000 shall be paid in U.S. dollars by wire
transfer of immediately available funds to an
account or accounts designated by Sellers not less
than 24 hours prior to such date; provided
however, if there shall be a Change of Control (as
defined below) of Buyer or the Company prior to
the payment of such $5,000,000, then immediately
prior to the consummation thereof, Buyer shall
deposit $5,000,000 into escrow to be held and
disbursed in accordance with the terms hereof.
(b) If (i) Buyer has not completed an IPO prior to the first
anniversary of the Closing Date or (ii) prior to both the first anniversary of
the Closing Date and prior to the completion of an IPO, there is a Change of
Control of Buyer or the Company, then in lieu of the payment pursuant to Section
1.03(a)(ii), Buyer shall immediately pay to Sellers $10,000,000 in U.S. dollars
by wire transfer of immediately available funds to an account or
accountsdesignated by Sellers not less than 24 hours prior to such date.
As used herein, a "Change of Control" of a Person shall mean that the
Person shall consummate any sale, merger or similar transaction, the result of
which is that those persons who hold (in the aggregate) 100% of the voting stock
of such Person immediately prior to such transaction hold, together with their
affiliates, less than 50% of the voting stock of such Person (or the surviving
or resulting entity) immediately following such transaction, provided however,
that a public offering of securities or the exercise of employee options (or
conversion of other convertible securities) shall not be deemed a change of
control.
(c) In addition to the payments provided in Section 1.03(a), the
purchase price shall be increased in accordance with the following, subject to
Sections 1.03(d) and 1.03(e):
(i) on or prior to February 15, 2000, Buyer shall pay
to Sellers an amount (the "First Earnout Payment")
equal to $1.25 multiplied by the amount of EBIT of
the Company for the period from the July 1, 1999
to December 31, 1999;
(ii) on or prior to August 15, 2000, Buyer shall pay to
Sellers an amount (the "Second Earnout Payment")
equal to (x) $1.25 multiplied by the amount of
EBIT of the Company for the period from July 1,
1999 to June 30, 2000, minus (y) the First Earnout
Payment;
3
<PAGE>
(iii) on or prior to February 15, 2001, Buyer shall pay
to Sellers an amount (the "Third Earnout Payment")
equal to (x) $1.25 multiplied by the amount of
EBIT of the Company for the period from July 1,
1999 to December 31, 2000, minus (y) the sum of
the First Earnout Payment and the Second Earnout
Payment;
(iv) on or prior to August 15, 2001, Buyer shall pay to
Sellers an amount equal to (x) $1.25 multiplied by
the amount of EBIT of the Company for the period
from July 1, 1999 to June 30, 2001, minus (y) the
sum of the First Earnout Payment, the Second
Earnout Payment and the Third Earnout Payment.
(b) The aggregate amount paid to Sellers pursuant to Section 1.03(c)
shall be capped at $5,000,000. If Buyer has paid an aggregate of $5,000,000 (net
of any amounts repaid by Sellers pursuant to Section 1.03(e)) pursuant to
Section 1.03(c), its future obligations under Section 1.03(c) shall terminate.
If Sellers voluntarily resign their employment with the Companies, or are
terminated for cause (as defined in his Employment Agreement) (or one Seller
voluntarily resigns and the other is terminated for cause), all obligations of
Buyer pursuant to Section 1.03(c) shall terminate.
(c) If the amount calculated in clauses (i), (ii), (iii), or (iv) of
Section 1.03(c) shall be negative, then on the payment date indicated in such
clause, Sellers shall pay Buyer such amount, less any amounts previously paid to
Buyer pursuant to this Section 1.03(d). Notwithstanding the preceding sentence,
Sellers shall in no event be required to pay, pursuant to this Section 1.03(e),
amounts (in the aggregate) in excess of amounts received by them (in the
aggregate) pursuant to Section 1.03(c).
(d) "EBIT" for a given period shall mean earnings for such period
before interest and income taxes, determined in accordance with GAAP (as defined
in Section 1.04(b)), plus any management fees imposed by Buyer on the Companies
following the Closing. EBIT shall be calculated without including (i) any
Closing costs, (ii) any costs in connection with the filing of the Section
338(h)(10) Elections (as defined in Section 4.09) (including any enhanced
depreciation of assets caused thereby), and (iii) costs in connection with an
IPO of Buyer.
1.04. Closing Balance Sheet; True-up Payment. (a) As promptly as
practicable but in any event within 90 days following the Closing Date, Buyer
shall prepare, or cause to be prepared, and deliver to Sellers an unaudited
consolidated pro forma balance sheet of the Companies as of the close of
business on the day immediately preceding the Closing Date (the "Closing Balance
Sheet"). There shall be attached to the Closing Balance Sheet an annex setting
forth in reasonable detail the computation of the True-up Payment (as defined in
Section 1.04(d)).
4
<PAGE>
(b) The Closing Balance Sheet shall be prepared in accordance with
U.S. generally accepted accounting principles ("GAAP"), determined as of 11:59
p.m. on the day immediately preceding the Closing Date as if such date was the
Companies' normal year-end and applied on a consistent basis with the Annual
Financial Statements (as defined in Section 2.04(a)), except that (i) no
reserves, liabilities, asset valuation allowances or similar items reflected on
the March 31 Balance Sheet (as defined in Section 2.04(a)) or created thereafter
shall be reserved or shall be reallocated to cover any other reserve, liability,
asset valuation allowance or similar item required to be provided for on the
Closing Balance Sheet; (ii) any asset which is required to be reflected in the
Closing Balance Sheet which is not reflected in the March 31 Balance Sheet,
unless acquired thereafter, shall be excluded from the Closing Balance Sheet,
and any other asset which is reflected on the March 31 Balance Sheet that is
required to be reflected on the Closing Balance Sheet shall be recorded on the
Closing Balance Sheet on the same basis on which it was recorded on the March 31
Balance Sheet, provided that such amounts shall be adjusted in accordance with
GAAP for depreciation, amortization, valuation provision and the like, to the
extent appropriate; (iii) no deferred income tax asset or income tax liability
shall be included on the Closing Balance Sheet; (iv) no Income Tax asset or
Income Tax liability shall be included on the Closing Balance Sheet; and (v) no
intercompany accounts shall be included on the Closing Balance Sheet.
(c) The Closing Balance Sheet delivered by Buyer to Sellers and the
computation of the True-up Payment annexed thereto shall be conclusive and
binding upon the parties unless Sellers, within 30 days after the delivery to
Sellers of the Closing Balance Sheet, notify Buyer in writing that Sellers
dispute any of the amounts set forth therein, specifying the nature of the
dispute and the basis therefor. The parties shall in good faith attempt to
resolve any dispute, in which event the Closing Balance Sheet and the
computation of the True-up Payment, as amended to the extent necessary to
reflect the resolution of the dispute, shall be conclusive and binding upon the
parties. If the parties do not reach agreement resolving the dispute within 10
days after notice is given by Sellers to Buyer pursuant to the second preceding
sentence, the parties shall submit the dispute to the department specializing in
resolution dispute of the New York office of Deloitte & Touche LLP for
resolution; provided, that if Deloitte & Touche LLP has had a material
relationship with either Buyer or Sellers or any of their respective affiliates
within the two years preceding the appointment or Deloitte & Touche LLP refuses
to accept such appointment, the parties shall submit the dispute to such other
nationally recognized independent accounting firm that is mutually agreeable to
the parties, which firm shall not have had a material relationship with either
Buyer or Sellers or their respective affiliates within the two years preceding
the appointment (such accounting firm, the "Arbiter"), for resolution. If the
parties cannot agree on the selection of such an independent accounting firm to
act as Arbiter, the parties shall request the American Arbitration Association
to appoint such a firm, and such appointment shall be conclusive and binding
upon the parties. Promptly, but no later than 20 days after its acceptance of
its appointment as Arbiter, the Arbiter shall determine, based solely on
presentations by Buyer and Sellers, and not by independent review, only those
issues in dispute and shall render a report as to the dispute and the resulting
computation of the Closing Balance Sheet and the True-up Payment, if any, which
shall be conclusive and binding upon the parties. In resolving any disputed
item, the Arbiter (x) shall be bound by the provisions of paragraph (b) of this
Section 1.04 and (y) may not assign a value to any item greater than the
5
<PAGE>
greatest value for such item claimed by either party or less than the smallest
value for such item claimed by either party. The fees, costs and expenses of the
Arbiter (i) shall be borne by Sellers in the proportion that the aggregate
dollar amount of such disputed items so submitted that are unsuccessfully
disputed by Sellers (as finally determined by the Arbiter) bears to the
aggregate dollar amount of such items so submitted and (ii) shall be borne by
Buyer in the proportion that the aggregate dollar amount of such disputed items
so submitted that are successfully disputed by Sellers (as finally determined by
the Arbiter) bears to the aggregate dollar amount of such items so submitted.
Buyer and Sellers each shall make available to the other (upon the request of
the other) their respective work papers generated in connection with the
preparation or review of the Closing Balance Sheet.
(d) As used herein, (i) the term "Final Closing Balance Sheet" shall
mean the Closing Balance Sheet which has become conclusive and binding upon the
parties pursuant to paragraph (c) of this Section 1.04, (ii) the term "Closing
Book Value" shall mean the amount obtained by subtracting the total liabilities
of the Companies, as set forth in the Final Closing Balance Sheet, from the
total assets of the Companies, as set forth in the Final Closing Balance Sheet,
and (iii) the term "Target Book Value" shall mean $4,500,000 minus any Tax
Distribution Amount (as defined in Section 4.09). If the Target Book Value
exceeds the Closing Book Value, the amount of such excess shall be the "True-up
Payment." If the True-up Payment is greater than zero, the amount thereof shall
be paid by Sellers to the Companies in accordance with the provisions of
paragraph (e) of this Section 1.04.
(e) The amount of any True-up Payment shall bear interest at an annual
rate equal to 4% per annum from and including the Closing Date to, but not
including, the date of payment. Any amount payable as True-up Payment (plus
interest determined pursuant to the immediately preceding sentence) shall be
paid by wire transfer of immediately available funds to an account designated in
writing by Buyer. Such payment shall be made on the third business day following
(i) the last day on which Sellers may, pursuant to the first sentence of
paragraph (c) of this Section 1.04, notify Buyer that it disputes any of the
amounts set forth in the Closing Balance Sheet, if Sellers shall not notify
Buyer of any dispute, or such earlier date as Sellers shall advise Buyer of the
absence of any dispute, or (ii) the date mutual agreement is reached as to the
amount of the True-up Payment, if any, in the event of a dispute that is settled
by the parties without resort to the Arbiter, or (iii) the receipt of the report
of the Arbiter in the event of a dispute which is settled by the Arbiter, as
applicable.
(f) Buyer shall provide Sellers and its accountants reasonable access
to the books and records of the Companies, to any other information, including
work papers of its accountants, and to any employees of the Companies to the
extent reasonably necessary for Sellers to review the Closing Balance Sheet.
Sellers shall provide Buyer and its accountants reasonable access to the books
and records of Sellers, any other information, including work papers of its
accountants, and to any employees of Sellers to the extent reasonably necessary
for Buyer in connection with the preparation of the Closing Balance Sheet and in
connection with any objections to the Closing Balance Sheet raised by Sellers.
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ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLERS
Each Seller represents and warrants to Buyer on the date hereof and on
the Closing Date as follows:
2.01. Capitalization. The authorized capital stock of Bostek consists
of 15,000 shares of common stock, no par value, 2,000 shares of which are issued
and outstanding; the shares of Bostek are owned of record and beneficially as
set forth in Schedule 2.01. The authorized capital stock of Micro Components
consists of 10,000 shares of common stock, no par value, 2,000 shares of which
are issued and outstanding; the shares of Micro Components are owned of record
and beneficially as set forth in Schedule 2.01. All of the shares comprising the
Stock are validly issued, fully paid and non-assessable and are owned
beneficially and of record by Sellers free and clear of all liens, security
interests, restrictions, options, proxies, voting trusts or other encumbrances
("Encumbrances"). There are outstanding no securities convertible into,
exchangeable for, or carrying the right to acquire, equity securities of either
Company, or subscriptions, warrants, options, rights or other arrangements or
commitments obligating either Company to issue or dispose of any of its equity
securities or any ownership interest therein. The sale and delivery of the Stock
to Buyer pursuant to Article I hereof will vest in Buyer legal and valid title
to the Stock, free and clear of all Encumbrances (other than Encumbrances
created or suffered by Buyer).
2.02. Organization; Subsidiaries. (a) The Companies are corporations
duly organized, validly existing and in good standing under the laws of their
respective jurisdictions of incorporation and have all requisite corporate power
and authority to carry on their businesses as they are now being conducted. Each
Company is duly qualified to do business and is in good standing as a foreign
corporation in all jurisdictions where the nature of the property owned or
leased by it, or the nature of the business conducted by it, makes such
qualification necessary and the absence of such qualification would,
individually or in the aggregate, have a material adverse effect on the business
or financial condition of the Companies taken as a whole. True and complete
copies of the charter and by-laws of each Company have previously been delivered
to Buyer. True and complete copies of the minute books of each Company have
previously been made available to Buyer.
(b) Neither Company has a direct or indirect equity interest in any
entity.
2.03. Corporate Power and Authority; Effect of Agreement. Sellers are
individuals with all requisite power and authority to execute, deliver and
perform this Agreement and to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by Sellers and
constitutes the valid and binding obligation of Sellers, enforceable against
each Seller in accordance with its terms, except to the extent that such
enforceability (i) may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditors' rights generally, and
(ii) is subject to general principles of equity. The execution, delivery and
performance by Sellers of this Agreement and the consummation by Sellers of the
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transactions contemplated hereby will not, with or without the giving of notice
or the lapse of time, or both, (w) violate, or require any consent under, any
Commitment (as defined in Section 2.08), except as set forth in Schedule
2.08(b), (x) violate any law, rule or regulation to which either Seller or
either Company is subject or require any authorization, consent, approval,
exemption or other action by or notice to any governmental authority, (y)
violate any order, judgment or decree applicable to either Seller or either
Company, or (z) violate any provision of the Certificate of Incorporation or the
By-laws of either Company.
2.04. Financial Statements. (a) Sellers have delivered to Buyer (i)
the unaudited pro forma balance sheet of each Company as of March 31, 1999
(collectively, the "March 31 Balance Sheet") and unaudited pro forma statements
of operations and cash flows of each Company for the three-month period then
ended, (ii) audited balance sheets of Bostek as of December 31 of each of 1997
and 1998, and audited statements of operations and cash flows of Bostek for the
twelve-month periods then ended, including the footnotes thereto, and (iii)
unaudited balance sheet of Micro Components as of December 31, 1998 and
unaudited statement of operations of Micro Components for the twelve-month
period then ended (the financial statements listed in clauses (ii) and (iii),
the "Annual Financial Statements" and the financial statements listed in clauses
(i), (ii) and (iii), collectively, the "Financial Statements"), copies of which
are included in Schedule 2.04. The Financial Statements fairly present in all
material respects the financial position and the results of operations and cash
flows of the Companies, taken as a whole, for the respective dates or periods
(as the case may be) indicated therein and have been prepared in conformity with
GAAP consistently applied (subject, in the case of unaudited statements, to the
absence of footnotes and normal year-end adjustments). All of the assets,
liabilities, income, costs and expenses reflected in the Financial Statements
are related to the Business and arose out of and were incurred in the ordinary
course of the Business. All related party transactions have been accounted for
by use of consistent accounting policies and methodologies which would not
affect the comparability of such financial information in any material way.
(b) Except as specifically reflected in the Financial Statements or
elsewhere in the Schedules or as contemplated by this Agreement, neither Company
has any liabilities, commitments or obligations of any kind whatsoever (whether
secured or unsecured and whether accrued, absolute, contingent, direct, indirect
or otherwise), other than any liabilities, commitments or obligations incurred
after March 31, 1999 in the ordinary course of business.
2.05. Absence of Certain Changes or Events. Except as set forth in
Schedule 2.05 or reflected in the March 31 Balance Sheet or permitted or
contemplated by this Agreement, since March 31, 1999, neither Company has (a)
suffered any material damage, destruction or casualty loss to its physical
properties; (b) incurred or discharged any material obligation or liability or
entered into any other material transaction except in the ordinary course of
business; (c) suffered any material adverse change in the business, financial
condition, assets, liabilities, operations or results of operations of the
Companies taken as a whole; (d) increased the rate or terms of compensation
payable or to become payable by either Company to its directors, officers or key
employees or increased the rate or terms of any bonus, pension or other employee
benefit plan covering any of its directors, officers or key employees, except in
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each case increases occurring in the ordinary course of business in accordance
with its customary practices (including normal periodic performance reviews and
related compensation and benefit increases) or as required by any pre-existing
Commitment identified in Schedule 2.08; (e) consummated, or agreed to
consummate, any sale, lease or other transfer or disposition of any properties
or assets except for the sale of inventory items in the ordinary course of
business and except for the sale of any tangible personal property that, in the
reasonable judgment of the Companies, has become uneconomic, obsolete or worn
out; (f) incurred, assumed or guaranteed any indebtedness for borrowed money;
(g) granted any mortgage, pledge, lien or encumbrance on any of its material
properties or assets; (h) entered into, amended or terminated any material
Commitment, or waived any material rights thereunder except in the ordinary
course of business; (i) made any grant of credit to any customer or distributor
on terms or in amounts materially more favorable than those that have been
extended to such customer or distributor in the past, or (j) paid any dividend
or made any other distribution to or for the benefit of either Seller other than
payment of his regular salary. Since March 31, 1999, the Companies have been
operated in all material respects in the ordinary course in a manner consistent
with past practice.
2.06. Assets and Properties. (a) Each Company has good title to all of
the material tangible personal assets and properties which it purports to own
(including those reflected on the March 31 Balance Sheet, except for assets and
properties sold, consumed or otherwise disposed of in the ordinary course of
business since the date of the March 31 Balance Sheet, which are not
individually or in the aggregate material), free and clear of all Encumbrances,
except (a) as set forth in Schedule 2.06(a), and (b) liens for taxes not yet due
and payable or due but not delinquent or being contested in good faith by
appropriate proceedings. Except as set forth in Schedule 2.06(a), the assets
owned or leased by the Companies constitute all the assets used in and necessary
to conduct the Business as currently conducted.
(b) All material tangible property and assets owned or utilized by the
Companies are in good operating condition and repair (except for ordinary wear
and tear), free from any defects (except such minor defects as do not interfere
with the use thereof in the conduct of the normal operations), have been
maintained consistent with the standards generally followed in the industry and
are sufficient to carry on the Business as presently conducted. All buildings,
plants and other structures owned or otherwise utilized by either Company are in
good condition and repair (except for ordinary wear and tear) in all material
respects.
(c) Neither Company owns or has owned any real property.
(d) Schedule 2.06(d) sets forth a list of all real property leased by
either Company (the "Leased Real Property"). Sellers have made available to
Buyer true and complete copies of all leases and subleases relating to the
Leased Real Property. With respect to the Leased Real Property, (i) the
Companies have good and valid leasehold estates in the Leased Real Property,
free and clear of all Encumbrances, and (ii) all existing water, sewer, gas,
electricity, telephone and other utilities required for the construction, use,
occupancy, operation and maintenance of the Leased Real Property are adequate in
all material respects for the use, occupancy, operation and maintenance thereof,
as currently conducted or currently exists. Except as set forth on Schedule
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2.06(d), (A) each such lease or sublease is legal, valid, binding and
enforceable and in full force and effect and (B) the consummation of the
transactions contemplated by this Agreement will not cause a material breach or
require any third party consent under any such lease or sublease.
(e) Except as set forth on Schedule 2.06(e), (i) neither Seller and
neither Company has received notice of any pending or, to the knowledge of
Sellers, threatened condemnation or eminent domain proceedings or their local
equivalent with respect to the Owned Real Property or the Leased Real Property,
(ii) the Owned Real Property, the Leased Real Property, the use and occupancy
thereof by the Companies, and the conduct of the Business thereon and therein do
not violate any deed restrictions, applicable law consisting of building codes,
zoning, subdivision or other land use or similar laws the violation of which
would materially adversely affect the use, value or occupancy of any such
property or the conduct of the Business thereon, (iii) neither Seller and
neither Company has received written notice of a material violation of the
restrictions or laws described in the foregoing clause (ii), and (iv) none of
the structures or improvements on any of the Leased Real Property encroaches
upon real property of another person or entity, and no structure or improvement
of another person or entity encroaches upon any of the Leased Real Property,
which would materially interfere with the use thereof in the ordinary course of
business.
2.07. Intellectual Property. (a) Each item of Company Intellectual
Property (as defined in Section 2.07(j)) is set forth on Schedule 2.07.
(b) Except as set forth on Schedule 2.07(b): (i) each item of Company
Intellectual Property will be owned or available for use by the Companies on
identical terms and conditions immediately subsequent to the Closing as they
were by the Companies immediately prior to the Closing; (ii) all registered
patents, trademarks, service marks and copyrights listed on Schedule 2.07(a) are
valid and subsisting and in full force and effect and are not subject to any
taxes or other fees except for annual filing and maintenance fees; (iii) to
Sellers' knowledge, there has been no notice, claim or assertion that any item
of Company Intellectual Property is invalid, and to Sellers' knowledge, there
are no facts that would cause a reasonable person to conclude that any item of
Company Intellectual Property is invalid; (iv) to Sellers' knowledge, the
Companies have the sole and exclusive right to use all of the Company
Intellectual Property in all jurisdictions in which the Business is conducted or
proposed to be conducted, and the consummation of the transactions contemplated
hereby will not alter or impair any such rights; (v) Sellers have delivered to
Buyer all documents with respect to any invention, process, design, computer
program or other know-how or trade secret included in the Company Intellectual
Property, which documents are accurate in all material respects and reasonable
sufficient detail and content to identify and explain such invention, process,
design, computer program or other know-how or trade secret and to facilitate its
full and proper use without reliance on the special knowledge or memory of any
person; (vi) the Company Intellectual Property is all the Intellectual Property
that is necessary for the Companies to own or license to effectively operate the
Business as presently conducted; and (vii) the Companies have taken all
reasonably necessary and desirable action to maintain and protect each item of
Company Intellectual Property.
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(c) Other than as set forth on Schedule 2.07(c), neither Company has
interfered with, infringed upon, misappropriated or otherwise come into conflict
with any Intellectual Property rights of third parties, and neither Seller has
received (and neither Company) any charge, complaint, claim, demand or notice
alleging any such interference, infringement, misappropriation or violation
(including any claim that either Company must license or refrain from using any
Intellectual Property rights of any third party). Other than as set forth on
Schedule 2.07(c), to Sellers' knowledge no third party has interfered with,
infringed upon, misappropriated or otherwise come into conflict with any Company
Intellectual Property.
(d) With respect to each item of Company Intellectual Property, except
as set forth on Schedule 2.07(c): (i) the Companies possess all right, title and
interest in and to the item, free and clear of any Encumbrance, license or other
restriction; (ii) the item is not subject to any outstanding order, decree,
ruling or charge; (iii) no action, suit, proceeding, hearing, investigation,
charge, complaint, claim or demand is pending or, to Sellers' knowledge,
threatened, which challenges the legality, validity, enforceability, use or
ownership of the item; (iv) neither Company has ever agreed to indemnify any
person for or against any interference, infringement, misappropriation or other
conflict with respect to the item; (v) each license, sublicense, agreement or
permission covering the item is, and immediately after the Closing will be,
legal, valid, binding, enforceable and in full force and effect; (vi) to
Sellers' knowledge no party to any license, sublicense, agreement or permission
is in breach or default, and no event has occurred which with notice or lapse of
time would constitute a breach or default or permit termination, modification or
acceleration thereunder; (vii) no party to any license, sublicense, agreement or
permission has repudiated any provision thereof; (viii) with respect to any
sublicense, the representations and warranties set forth in subsections (i)
through (vii) above are true and correct with respect to the underlying license;
(ix) with respect to each license, sublicense, agreement or permission, the
underlying item of Company Intellectual Property is not subject to any
outstanding injunction, judgment, order, decree, ruling or charge; (x) with
respect to each license, sublicense, agreement or permission, no action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand is
pending or is threatened which challenges the legality, validity or
enforceability of the underlying item of Company Intellectual Property; and (xi)
with respect to each license, sublicense, agreement or permission, Sellers have
not granted any sublicense or similar right with respect to the license,
sublicense, agreement or permission.
(f) The continued operation of the Business as presently conducted and
as presently proposed to be conducted will not interfere with, infringe upon,
misappropriate, or otherwise come into conflict with, any Intellectual Property
rights of third parties.
(g) To Sellers' knowledge, none of either Company's employees (x) is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or (y) is subject to any judgment, decree or
order of any court or administrative agency, that would interfere with the use
of such employee's best efforts to promote the interests of the Business as
presently conducted, will conflict with, result in a breach of, or constitute a
default under, any contract, covenant or instrument under which any of such
employees is now obligated.
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(h) The Business, as currently conducted, does not and will not need
to utilize any inventions of either Seller or of any of its employees, former
employees, directors, shareholders or persons it currently intends to hire, the
rights to which have not been fully assigned to either Company.
(i) As used herein:
"Intellectual Property" shall mean (i) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereon, and all patents, patent applications and patent
disclosures, together with all reissuances, continuations, continuations-in
part, revisions, extensions and reexaminations thereof, (ii) all trademarks,
service marks, trade dress, logos, trade names, domain names and corporate
names, together with all translations, adaptations, derivations and combinations
thereof and including all goodwill associated therewith, and all applications,
registrations and renewals in connection therewith, (iii) all copyrightable
works, all copyrights and all applications, registrations and renewals in
connection therewith, (iv) all mask works and all applications, registrations
and renewals in connection therewith, (v) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
methods, schematics, technology, technical data, designs, drawings, flowcharts,
block diagrams, specifications, customer and supplier lists, pricing and cost
information and business and marketing plans and proposals), (vi) all computer
software (including data and related documentation), (vii) all other proprietary
rights, (viii) all copies and tangible embodiments of the foregoing (in whatever
form or medium) and (ix) all licenses or agreements in connection with the
foregoing.
"Company Intellectual Property" shall mean all Intellectual Property
which is used (regularly or from time to time) in connection with the operation
of the Business.
2.08. Commitments. (a) Schedule 2.08 sets forth, as of the date
hereof, each contract or agreement, whether written or oral (including any and
all amendments thereto), to which either Company is a party or by which either
Company is bound (collectively, the "Commitments") of the following types:
(i) Commitments for the sale of any real or personal
(tangible or intangible) properties other than in
the ordinary course of business, or for the grant
of any option or preferential rights to purchase
any such properties;
(ii) Commitments for the construction, modification or
repair of any building, structure or facility or
for the incurrence of any capital expenditures or
for the acquisition of fixed assets, providing for
aggregate payments in excess of $30,000;
(iii) Commitments relating to the acquisition by either
Company of any operating business or the capital
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stock of any other person or entity that have not
been consummated or that have been consummated but
contain representations, covenants, guaranties,
indemnities or other obligations that remain in
effect;
(iv) Commitments pursuant to which any party is
required to purchase or sell a stated portion of
its requirements or output to another party or
perform a stated amount of service for, on behalf
of, or upon the referral of another party;
(v) Commitments relating to any Litigation;
(vi) Commitments relating to the lending or borrowing
of money, including loan agreements, guarantees of
any liabilities, performance bonds, letters of
credit, bankers acceptances and similar
instruments or arrangements;
(vii) Commitments under which either Company agrees to
indemnify any person or entity;
(viii) Commitments containing covenants of either Company
not to compete, do business in any line of
business or in any geographical area or with any
person or entity, or to disclose certain
information, or covenants of any person or entity
not to compete with either Company in any line of
business or in any geographical area or disclose
information concerning either Company;
(ix) Commitments pursuant to which either Company (A)
leases, subleases, licenses or otherwise has the
right to use any personal property or (B) is the
lessor of any personal property;
(x) Commitments in respect of any joint venture,
partnership or other similar arrangement
(including, without limitation, any joint
development agreement);
(xi) Commitments relating to any governmental or
regulatory authority, including without
limitation, the Federal Aviation Administration;
(xii) Commitments for the lease or sub-lease of any real
property;
(xiii) Commitments for the licensing of any real
property;
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(xiv) Commitments relating to outstanding letters of
credit or performance bonds or creating any
obligation or liability as guarantor, surety,
co-signer, endorser, co-maker, indemnitor or
otherwise in respect of the obligation of any
person or entity, except as endorser or maker of
checks or letters of credit endorsed or made in
the ordinary course of business;
(xv) Commitments that involve in excess of $30,000 in
the aggregate or that may not be terminated on
less than 90 days' notice;
(xvi) Commitments (other than those specified in any of
clauses (i) through (xv) of this paragraph (a))
which relate to or affect the Business or any of
the assets or properties of either Company in any
way that are material to the Business; and
(xvi) Commitments currently in negotiation by either
Company of a type which if entered into would be
required to be listed on Schedule 2.08(a) or to be
disclosed on any other Schedule hereto.
(b) Except as set forth in Schedule 2.08(b), all of the Commitments
referred to in the preceding paragraph (a) are valid, binding, in full force and
effect and enforceable in accordance with their terms against the Companies, and
to the knowledge of Sellers, against the respective counterparties to such
Commitments. Complete copies (or, if oral, full written descriptions) of all
Commitments required to be so listed, including all amendments thereto, and
complete copies of all standard form Commitments used in the conduct of the
Business, have been delivered to Buyer. Except as set forth in Schedule 2.08(b),
(i) there is no breach, violation or default and no event which, with notice or
lapse of time or both, would constitute a breach, violation or default, or give
rise to any Encumbrance or right of termination, modification, cancellation,
prepayment, suspension, limitation, revocation or acceleration under, any
Commitment listed in Schedule 2.08(a), except for breaches, violations and
defaults, or Encumbrances or rights of termination, modification, cancellation,
prepayment, suspension, limitation, revocation or acceleration which,
individually or in the aggregate, are not material and (ii) neither of the
Companies nor, to the knowledge of Sellers, any other party to any of the
Commitments listed in Schedule 2.08(a) is in material arrears in respect of the
performance or satisfaction of the terms and conditions on its part to be
performed or satisfied under any of such Commitments and no material waiver or
material indulgence has been granted by any of the parties thereto.
2.09. Litigation. Except as set forth in Schedule 2.09, there is no
claim, suit, action or proceeding in any court or before any governmental or
regulatory authority ("Litigation") pending or, to Sellers' knowledge,
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threatened, involving either Company, the Business or any assets or liabilities
of any of the foregoing. Except as set forth in Schedule 2.09, neither Company
is subject to any outstanding orders, rulings, judgments, injunctions, writs,
decrees or actions including, without limitation, any actions brought by any
regulatory authority.
2.10. Compliance with Laws. Except as set forth in Schedule 2.10, the
Companies have been and are in material compliance with all applicable laws,
rules, regulations and orders relating to the operation, conduct or ownership of
the Business. The Companies have all material permits, licenses, certificates
and authorizations of governmental and regulatory authorities necessary for the
conduct of their business as presently conducted.
2.11. Employee Benefit Plans. (a) Schedule. Schedule 2.11(a) contains
a true and complete list of each Company Benefit Plan and each Employee
Agreement. Neither Sellers, either Company nor any ERISA Affiliate has any plan
or commitment, whether legally binding or not, to establish any new Company
Benefit Plan, to enter into any new Employee Agreement or to modify or to
terminate any Company Benefit Plan or Employee Agreement (except to the extent
required by law and as previously disclosed to Buyer or as required by this
Agreement), nor has any intention to do any of the foregoing been communicated
to Employees.
(b) Documents. The Companies have provided, or have made available, to
Buyer (i) current, accurate and complete copies of all documents embodying or
relating to each Company Benefit Plan and each Employee Agreement, including all
amendments thereto, written interpretations thereof and trust or funding
agreements with respect thereto; (ii) the two (2) most recent annual actuarial
valuations, if any, prepared for each Company Benefit Plan; (iii) the two (2)
most recent annual reports (Series 5500 and all schedules thereto), if any,
required under ERISA in connection with each Company Benefit Plan or related
trust; (iv) a statement of alternative form of compliance pursuant to Department
of Labor Regulation ss. 2520.104-23, if any, filed for each Company Benefit Plan
which is an "employee pension benefit plan" as defined in Section 3(2) of ERISA
for a select group of management or highly compensated employees; (v) the most
recent determination letter received from the IRS, if any, for each Company
Benefit Plan and related trust which is intended to satisfy the requirements of
Section 401(a) of the Code; (vi) if the Company Benefit Plan is funded, the most
recent annual and periodic accounting of Company Benefit Plan assets; (vii) the
most recent summary plan description with respect to each Company Benefit Plan;
and (viii) all material communications to any Employee or Employees relating to
each Company Benefit Plan.
(c) Compliance. With respect to each Company Benefit Plan (i) the
Companies, Sellers, and each ERISA Affiliate have performed all obligations
required to be performed by them under each Company Benefit Plan and Employee
Agreement and neither the Companies, Sellers, nor any ERISA Affiliate is in
material default under or in violation of, any Company Benefit Plan, (ii) each
Company Benefit Plan has been established and maintained in accordance with its
terms and in material compliance with all applicable laws, statutes, orders,
rules and regulations, including but not limited to ERISA and the Code,
including without limiting the foregoing, the timely filing of all required
reports, documents and notices, where applicable, with the IRS and the
Department; (iii) each Company Benefit Plan intended to qualify under Section
401 of the Code is, and since its inception has been, so qualified and a
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determination letter has been issued by the IRS to the effect that each such
Company Benefit Plan is so qualified and that each trust forming a part of any
such Company Benefit Plan is exempt from tax pursuant to Section 501(a) of the
Code and no circumstances exist which would adversely affect this qualification
or exemption; (iv) no "prohibited transaction," within the meaning of Section
4975 of the Code or Section 406 of ERISA, has occurred with respect to any
Company Benefit Plan; (v) no action or failure to act and no transaction or
holding of any asset by, or with respect to, any Company Benefit Plan has or may
subject either Company, either Seller, or any ERISA Affiliate or any fiduciary
to any tax, penalty or other liability, whether by way of indemnity or
otherwise; (vi) there are no actions, proceedings, arbitrations, suits or claims
pending, or to the knowledge of Sellers or any ERISA Affiliate, threatened or
anticipated (other than routine claims for benefits) against either Company,
either Seller or any ERISA Affiliate or any administrator, trustee or other
fiduciary of any Company Benefit Plan with respect to any Company Benefit Plan
or Employee Agreement, or against any Company Benefit Plan or against the assets
of any Company Benefit Plan; (vii) no event or transaction has occurred with
respect to any Company Benefit Plan that would result in the imposition of any
tax under Chapter 43 of Subtitle D of the Code; (viii) each Company Benefit Plan
can be amended, terminated or otherwise discontinued without liability to the
Companies, Sellers or any ERISA Affiliate; (ix) the Companies, Sellers and each
ERISA Affiliate have made all payments with respect to all periods through the
date hereof, and will make a pro-rata payment for the period ending as of the
Closing Date, in each case which are required by each Company Benefit Plan, each
related trust or by law to be made to, or with respect to each Company Benefit
Plan (including all insurance premiums or intercompany charges with respect to
each Company Benefit Plan); (x) no Company Benefit Plan is under audit or
investigation by the IRS, the Department or the PBGC, and to the knowledge of
Sellers or any ERISA Affiliate no such audit or investigation is pending or
threatened; and (xi) no liability under any Company Benefit Plan has been funded
nor has any such obligation been satisfied with the purchase of a contract from
an insurance company as to which either Company or any of its Subsidiaries has
received notice that such insurance company is insolvent or is in rehabilitation
or any similar proceeding.
(d) Pension Plans. Neither the Companies, Sellers, nor any ERISA
Affiliate presently sponsors, maintains, contributes to, nor have the Companies,
Sellers nor any ERISA Affiliate ever sponsored, maintained, contributed to, or
been required to contribute to, a Pension Plan which is subject to Title IV of
ERISA.
(e) Multi-Employer Plans. The Companies, Sellers and any ERISA
Affiliate have never contributed to or been required to contribute to, or
incurred any withdrawal liability (within the meaning of Section 4201 of ERISA)
to any Multi-Employer Plan.
(f) No Post-Employment Obligations. Neither the Companies, Sellers nor
any ERISA Affiliate (i) maintains or contributes to any Company Benefit Plan
which provides, or has any liability to provide, life insurance, medical,
severance or other employee welfare benefits to any Employee upon his retirement
or termination of employment, except as may be required by Section 4980B of the
Code; or (ii) has ever represented, promised or contracted (whether in oral or
written form) to any Employee (either individually or to Employees as a group)
that such Employee(s) would be provided with life insurance, medical, severance
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or other employee welfare benefits upon their retirement or termination of
employment, except to the extent required by Section 4980B of the Code.
(g) Effect of Transaction. The execution of, and performance of the
transactions contemplated in, this Agreement will not (either alone or upon the
occurrence of any additional or subsequent events) (i) constitute an event under
any Company Benefit Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee, (ii) result in the
triggering or imposition of any restrictions or limitations on the right of the
Companies or Buyer to amend or terminate any Company Benefit Plan and receive
the full amount of any excess assets remaining or resulting from such amendment
or termination, subject to applicable taxes, or (iii) result in any payment or
benefit that will or may be made by the Companies, either Seller, Buyer or any
of their respective affiliates with respect to any Employee and that will be
characterized as an "excess parachute payment," within the meaning of Section
280G(b)(1) of the Code.
(h) Employment Matters. Each Company and each Seller (i) is in
material compliance with all applicable federal, state and local laws, rules and
regulations (domestic and foreign) respecting employment, employment practices,
labor, terms and conditions of employment and wages and hours, in each case,
with respect to Employees; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees.
(i) Labor. No Employees are currently represented by any labor union
for purposes of collective bargaining and to Sellers' knowledge no activities
the purpose of which is to achieve such representation of all or some of such
Employees are threatened or ongoing. No work stoppage or labor strike against
either Company by Employees is pending or threatened. Neither Company and
neither Seller (i) is involved in, or to Sellers' knowledge threatened with, any
labor dispute, grievance, or litigation relating to labor matters involving any
Employees, including, without limitation, violation of any federal, state or
local labor, safety or employment laws (domestic or foreign), charges of unfair
labor practices or discrimination complaints; (ii) has engaged in any unfair
labor practices within the meaning of the National Labor Relations Act or the
Railway Labor Act; or (iii) is presently, nor has been in the past a party to,
or bound by, any collective bargaining agreement or union contract with respect
to Employees and no such agreement or contract is currently being negotiated by
Sellers or any of its affiliates.
(j) 501(c)(9) Trust. No Company Benefit Plan or Employee Agreement is
funded by a trust described in Section 501(c)(9) of the Code.
(k) Welfare Plan Funding. With respect to each Welfare Plan, all
claims incurred by Employees thereunder for which either Company is, or will
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become, liable are (i) insured pursuant to a contract of insurance whereby the
insurance company bears any risk of loss with respect to such claims; (ii)
covered under a contract with a health maintenance organization (an "HMO")
pursuant to which the HMO bears the liability for such claims, or (iii)
reflected as a liability or accrued for on either Company's balance sheet.
(l) Controlled Group Liability. The Companies have no liability,
contingent or otherwise, to, or with respect to any Benefit Plan (other than the
Company Benefit Plans and Employee Agreements which are listed on Schedule
2.11(a)), which is now or previously has been sponsored, maintained, contributed
to, or required to be contributed to, by Sellers or any ERISA Affiliate.
For the purposes of this Section 2.11, the following terms shall have
the meanings indicated:
"Benefit Plan" means each plan, program, policy, payroll practice,
contract, agreement or other arrangement providing for compensation, severance,
termination pay, performance awards, stock or stock-related awards, fringe
benefits or other employee benefits of any kind, whether formal or informal,
funded or unfunded, written or oral and whether or not legally binding,
including, without limitation, each "employee benefit plan," within the meaning
of Section 3(3) of ERISA and each "multi-employer plan" within the meaning of
Sections 3(37) or 4001(a)(3) of ERISA.
"Code" means the Internal Revenue Code of 1986, as amended and any
regulations promulgated or proposed thereunder.
"Company Benefit Plan" means each Benefit Plan (other than an Employee
Agreement) which is now or previously has been sponsored, maintained,
contributed to, or required to be contributed to, or with respect to which any
withdrawal liability (within the meaning of Section 4201 of ERISA) has been
incurred, by either Company, either Seller or any ERISA Affiliate for the
benefit of any Employee, and pursuant to which either Company, either Seller or
any ERISA Affiliate has or may have any liability, contingent or otherwise.
"Department" means the U.S. Department of Labor.
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"Employee" means each current, former, or retired employee, officer,
consultant, independent contractor, agent or director of each Company.
"Employee Agreement" means each management, employment, severance,
consulting, non-compete, confidentiality, or similar agreement or contract
between either Company or either Seller and any Employee pursuant to which
either Company or either Seller has or may have any liability contingent or
otherwise.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and any regulations promulgated or proposed thereunder.
"ERISA Affiliate" means each business or entity which is a member of a
"controlled group of corporations," under "common control" or an "affiliated
service group" with either Company within the meaning of Sections 414(b), (c) or
(m) of the Code, or required to be aggregated with either Company under Section
414(o) of the Code, or is under "common control" with either Company, within the
meaning of Section 4001(a)(14) of ERISA.
"IRS" means the Internal Revenue Service.
"Multi-Employer Plan" means each Company Benefit Plan which is a
"multi-employer plan" within the meaning of Sections 3(37) or 4001(a)(3) of
ERISA.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Pension Plan" means each Company Benefit Plan (other than a
Multi-Employer Plan) which is an "employee pension benefit plan" within the
meaning of Section 3(2) of ERISA.
"Welfare Plan" means each Company Benefit Plan which is an "employee
welfare benefit plan" within the meaning of Section 3(1) of ERISA.
2.12. Environmental Matters. (a) (i) Except as set forth in Schedule
2.12(a)(i), each Company at all times has been operated, and is, in material
compliance with all applicable Environmental Laws, including all limitations,
restrictions, conditions, standards, prohibitions, requirements, obligations,
schedules and timetables contained in all applicable Environmental Laws.
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(ii) Except as set forth in Schedule 2.12(a)(ii), each
Company (1) has obtained, and is in compliance
with, all material permits, licenses,
authorizations, registrations and other
governmental consents required by applicable
Environmental Laws ("Environmental Permits"), and
(2) has made all appropriate filings for issuance
or renewal of such Environmental Permits.
(iii) Except as set forth on Schedule 2.12(a)(iii), all
of the assets and properties owned, leased,
operated or controlled by either Company are free
of any Hazardous Substances (except those
authorized pursuant to and in accordance with
Environmental Permits held by the Companies) and
are free of all contamination arising out of,
relating to, or resulting from any Hazardous
Substances, and to Sellers' knowledge there has
been no release or other dissemination at any time
of any Hazardous Substances at, on, or about,
under or within any assets or properties owned,
leased, operated or controlled by either Company
or any predecessor thereof (other than pursuant to
and in accordance with Environmental Permits).
(iv) Except as set forth in Schedule 2.12(a)(iv), there
are no claims, notices (including, without
limitation, notices that either Company is or may
be a potentially responsible person or otherwise
liable in connection with any waste disposal or
other site containing Hazardous Substances),
civil, criminal or administrative actions, suits,
hearings, investigations, inquiries or proceedings
pending or to Sellers' knowledge threatened that
are based on or related to any Environmental
Matters (including, without limitation, the
failure to comply with any Environmental Law or
the failure to have, or to comply with, any
Environmental Permits).
(v) Except as set forth in Schedule 2.12(a)(v), to
Sellers' knowledge there are no past or present
conditions, events, circumstances, facts,
activities, practices, incidents, actions,
omissions or plans: (1) that may interfere with or
prevent continued compliance by the Companies with
Environmental Laws or the requirements of
Environmental Permits, or (2) that may give rise
to any liability or other obligation under any
Environmental Laws that may require either Company
to incur any Environmental Costs, or (3) that may
form the basis of any claim, action, suit,
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proceeding, hearing, investigation or inquiry
against or involving either Company.
(vi) Except as set forth in Schedule 2.12(a)(vi), there
are no underground or aboveground storage tanks,
incinerators or surface impoundments at, on, under
or within, or to Sellers' knowledge about, any of
the assets or properties leased, operated or
controlled by either Company. Schedule 2.12(a)(vi)
also lists all underground or aboveground storage
tanks, incinerators or surface impoundments that
were removed from any such assets or properties
since the Companies have operated or leased such
property (and to Sellers' knowledge prior
thereto).
(vii) Except as set forth on Schedule 2.12(a)(vii),
neither Company has used any waste disposal site,
or otherwise disposed of, transported, or arranged
for the transportation of, any Hazardous
Substances to any place or location.
(viii) Except as set forth in Schedule 2.12(a)(viii), no
lien exists, and to Sellers' knowledge no
condition exists which could result in the filing
of a lien, against any assets or properties owned,
leased, operated or controlled by either Company
under any Environmental Law or relating to any
Environmental Matter.
(b) Sellers have delivered to Buyer true and complete copies and
results of any reports, studies, analyses, tests, or monitoring
in the possession of or concerning the Companies, in each case
relating to any Environmental Matters (including without
limitation any Hazardous Substances at, on, about, under or
within any assets or properties owned, leased, operated or
controlled by either Company or any predecessor thereof).
For the purposes of this Section 2.12, the following terms shall have
the meanings indicated:
"Environmental Costs" means, without limitation, any actual or
potential investigation, cleanup, remediation, removal, or other response costs
(which without limitation shall include costs to cause either Company to come
into compliance with Environmental Laws), expenses (including without limitation
fees and disbursements of consultants, counsel, and other experts in connection
with any environmental investigation, testing, audits or studies, response
actions, or litigation), losses, liabilities or obligations (including without
limitation, liabilities or obligations under any lease or other contract),
payments, damages (including without limitation any actual, punitive or
consequential damages under any statutory laws, common law cause of action or
contractual obligations or otherwise, including without limitation damages (a)
of third parties for personal injury or property damage, or (b) to natural
resources), civil or criminal fines or penalties, judgments, and amounts paid in
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settlement arising out of, relating to, or resulting from any Environmental
Matter.
"Environmental Laws" means, without limitation, the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. ss.ss. 9601 et
seq., the Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C.
ss.ss. 11001 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
ss.ss. 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. ss.ss. 2601 et
seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss.ss.
136 et seq., the Clean Air Act, 42 U.S.C. ss.ss. 7401 et. seq., the Clean Water
Act (Federal Water Pollution Control Act), 33 U.S.C. ss.ss. 1251 et seq., the
Safe Drinking Water Act, 42 U.S.C. ss.ss. 300f et seq., the Occupational Safety
and Health Act, 29 U.S.C. ss.ss. 641, et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. ss.ss. 1801, et seq., as any of the above statutes
have been or may be amended from time to time, all rules and regulations
promulgated pursuant to any of the above statutes, and any other foreign,
federal, state or local law, statute, ordinance, rule or regulation governing
Environmental Matters, as the same have been or may be amended from time to
time, including any common law cause of action providing any right or remedy
relating to Environmental Matters, all indemnity agreements and other
contractual obligations (including leases, asset purchase and merger agreements)
relating to Environmental Matters, and all applicable judicial and
administrative decisions, orders, and decrees relating to Environmental Matters.
"Environmental Matter" means any matter arising out of, relating to,
or resulting from pollution, contamination, protection of the environment, human
health or safety, health or safety of employees, sanitation, and any matters
relating to emissions, discharges, disseminations, releases or threatened
releases, of Hazardous Substances into the air (indoor and outdoor), surface
water, groundwater, soil, land surface or subsurface, buildings, facilities,
real or personal property or fixtures or otherwise arising out of, relating to,
or resulting from the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, handling, release or threatened release of
Hazardous Substances.
"Hazardous Substances" means any pollutants, contaminants, toxic or
hazardous or extremely hazardous substances, materials, wastes, constituents,
compounds, chemicals, natural or man-made elements or forces (including, without
limitation, petroleum or any by-products or fractions thereof, any form of
natural gas, Bevill Amendment materials, lead, asbestos and asbestos-containing
materials ("ACM"), building construction materials and debris, polychlorinated
biphenyls ("PCBs") and PCB-containing equipment, radon and other radioactive
elements, ionizing radiation, electromagnetic field radiation and other
non-ionizing radiation, sonic forces and other natural forces, infectious,
carcinogenic, mutagenic, or etiologic agents, pesticides, defoliants,
explosives, flammables, corrosives and urea formaldehyde foam insulation) that
are regulated by, or form the basis of liability under, any Environmental Laws.
2.13. Consents. Except as set forth in Schedule 2.13 and under the HSR
Act, no consent, approval or authorization of, or exemption by, or filing with,
any governmental authority or third party is required to be obtained or made by
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either Sellers or either Company in connection with the execution, delivery and
performance by Sellers of this Agreement or the taking by Sellers of any other
action contemplated hereby.
2.14. Taxes. (a) Except as set forth in Schedule 2.14(a), all Tax
Returns required to be filed by or with respect to each Company have been
properly and timely filed and all such Tax Returns are complete and accurate in
all material respects. Except to the extent reserved or reflected against on the
March 31 Balance Sheet, all Taxes due with respect to such Tax Returns or which
are otherwise due and payable by each Company have been paid in full excluding
those arising as a result of the Section 338(h)(10) Elections referred to in
Section 4.09. All Taxes required to be withheld and paid over by each Company to
any relevant taxing authority in connection with payments to employees,
independent contractors, creditors, stockholders or to third parties have been
so withheld and paid over.
(b) Except as set forth in Schedule 2.14(b): (i) no Tax authority in a
jurisdiction where neither Company files Tax Returns has made a claim, assertion
or threat that either Company or is or may be subject to Tax in such
jurisdiction; (ii) no deficiencies for any Tax have been threatened, proposed,
asserted or assessed against either Company which have not been satisfied; (iii)
no audits or examinations with respect to either Company are ongoing or have
been threatened or proposed by the Internal Revenue Service or the appropriate
state, local or foreign Tax authority; (iv) no waivers or extensions of statutes
of limitation with respect to Taxes have been given by or requested with respect
to either Company; (v) there are no tax rulings, requests for rulings, or
closing agreements relating to either Company which could affect the liability
for Taxes of either Company for any period (or portion of a period) after the
Closing; (vi) no power of attorney has been granted by either Company with
respect to any matter relating to Taxes of either Company which is currently in
force.
(c) Neither Company is a party to or liable under any Tax Sharing
Agreement. Except as set forth in Schedule 2.14(c), each Company has not, with
respect to any taxable period for which the applicable statute of limitations
has not run, filed a combined, consolidated or unitary Tax Return with respect
to any affiliated group of which either Seller is not the common parent.
Schedule 2.14(c) sets forth a complete list of all states, territories and
jurisdictions (foreign and domestic) in which either Company has filed Income
Tax Returns for taxable periods ending on or after December 31, 1991.
(d) Bostek is, and since its formation has been, and will be until the
Closing Date, properly qualified as an "S Corporation" under Section 1361(a) of
the Code, and Bostek is, and since its formation has been, and will be until the
Closing Date so properly qualified for state and local Income Tax purposes
pursuant to analogous state or local provisions in the jurisdictions set forth
in Schedule 2.14(c).
(e) There are no Tax liens on any assets of either Company, except
liens for Taxes not yet due and payable;
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(f) As used in this Agreement:
(i) The term "Tax" (including, with correlative
meaning, the terms "Taxes" and "Taxable") includes
all federal, state, local and foreign income,
profits, franchise, gross receipts, environmental,
customs duty, capital stock, communications
services, severance, stamp, payroll, sales,
employment, unemployment, disability, use,
property, withholding, excise, production, value
added, occupancy and other taxes, duties or
assessments of any nature whatsoever, together
with all interest, penalties and additions imposed
with respect to such amounts and any interest in
respect to such penalties and additions, and
includes any liability for Taxes of another person
by contract, as a transferee or successor, under
Treasury Regulationss. 1.1502-6 or analogous
state, local, or foreign law provision, or
otherwise.
(ii) The term "Income Tax" means any federal, state,
local or foreign Tax or Taxes (i) based upon,
measured by, or calculated with respect to, net
income or net receipts, proceeds or profits, or
(ii) based upon, measured by, or calculated with
respect to multiple bases (including, but not
limited to, corporate franchise or occupation
Taxes) if such Tax may be based upon, measured by,
or calculated with respect to one or more bases
described in (i) above.
(iii) The term "Tax Return" includes all returns and
reports (including elections, declarations,
disclosures, schedules, estimates and information
returns) required to be supplied to a Tax
authority relating to Taxes.
(iv) The term "Income Tax Return" includes all Tax
Returns relating to Income Taxes.
(vi) The term "Treasury Regulations" means the
regulations prescribed under the Code.
(vii) The term "Sellers' Group" means any "affiliated
group" (as defined in Section 1504(a) of the Code
without regard to the limitations contained in
Section 1504(b) of the Code) that includes either
Seller or any predecessor of or successor to
either Seller (or another such predecessor or
successor).
(g) Since March 31, 1999, neither Company has made any payment or
distribution of cash or other assets to Sellers other than those set forth on
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Schedule 2.14(g), which schedule sets forth the purpose of each such payment
(including, in the case of distributions to pay taxes, the quarter and year in
respect of which the tax obligation accrued).
2.15. Fees. Except as set forth on Schedule 2.15, neither Company and
neither Seller has paid or become obligated to pay any fee or commission to any
broker, finder or intermediary in connection with the transactions contemplated
hereby.
2.16. Significant Customers and Suppliers. Schedule 2.16 sets forth a
list of (i) the ten most significant suppliers in materials or services to the
Business during the last twelve months ("Major Suppliers") and (ii) the ten most
significant customers of products or services of the Business during the last
twelve months (the "Major Customers"). Except as set forth on Schedule 2.16, no
Major Supplier or Major Customer has during the last twelve months decreased
materially or, to the knowledge of Sellers , threatened to materially decrease
or limit materially its provision of services or supplies to the Business. To
Sellers' knowledge, there has been no termination, cancellation or limitation
of, or any material modification or change in, the business relationships of the
Business, with any Major Supplier or Major Customer.
2.17. Intercompany Transactions. Schedule 2.17 sets forth a list of
(a) all transactions between either Company, on the one hand, and either Seller
or any of either Seller's affiliates, on the other hand, since January 1, 1997,
(b) all assets, properties and services of either Company used by Sellers or any
of its affiliates, or vice versa, at any time since January 1, 1997 and (c) all
Commitments between either Company, on the one hand, and either Seller or any of
either Seller's affiliates, on the other hand. The Business has been conducted
by Sellers using only assets of the Companies and Sellers have no other business
lines or activities that are used in connection with, or similar to, the
Business.
2.18. Insurance. All of the material assets of the Companies and all
aspects of the Business that are of insurable character are covered by insurance
with reputable insurers against risks of liability, casualty and fire and other
losses and liabilities customarily obtained to cover comparable businesses and
assets in amounts, scope and coverage which are consistent with prudent industry
practice. Neither Company is in default with respect to its obligations under
any material insurance policy maintained by it. Schedule 2.18 sets forth a list
of all insurance coverage carried by the Companies, the carrier and the terms
and amount of coverage. All such policies and other instruments are in full
force and effect and all premiums with respect thereto have been paid. Neither
Company has failed to give any notice or present any claim under any such
insurance policy in due and timely fashion or as required by any of such
insurance policies, and neither Company has otherwise, through any act, omission
or non-disclosure, jeopardized or impaired full recovery of any claim under such
policies, and there are no claims by either Company under any of such policies
to which any insurance company is denying liability or defending under a
reservation of rights or similar clause. Neither Company has received notice of
any pending or threatened termination of any of such policies or any premium
increases for the current policy period with respect to any of such policies and
the consummation of the transactions contemplated by this Agreement will not
result in any such termination or premium increase.
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2.19. Year 2000. Except as set forth on Schedule 2.19, the internal
hardware and software and interfaces related to such hardware and software are
Year 2000 Compliant and, to Sellers' knowledge, customer and vendor software and
interfaces related to such hardware and software are Year 2000 Compliant.
"Year 2000 Compliant" means the successful operation prior to, during
and after January 1, 2000 without error relating to or as a result of date data,
the successful management and manipulation of data involving dates, including
single century formulas and multi-century formulas and the obtaining of correct
results for date calculations that are both chronologically earlier and later
than December 31, 1999 and in date calculations using the date September 9,
1999.
2.20. Sole Representations and Warranties. The representations and
warranties contained in this Article II are the only representations and
warranties made by Sellers in connection with the transactions contemplated by
this Agreement and supersede any and all previous written or oral statements
made by the Companies and Sellers to Buyer.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer hereby represents and warrants to Sellers on the date hereof and
on the Closing Date as follows:
3.01. Organization. Buyer is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, and has all requisite corporate power and authority to carry on
its business as it is now being conducted, and to execute, deliver and perform
this Agreement and to consummate the transactions contemplated hereby.
3.02. Corporate Power and Authority; Effect of Agreement. The
execution, delivery and performance by Buyer of this Agreement and the
consummation by Buyer of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Buyer. This
Agreement has been duly and validly executed and delivered by Buyer and
constitutes the valid and binding obligation of Buyer, enforceable against Buyer
in accordance with its terms, except to the extent that such enforceability (i)
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditors' rights generally, and (ii) is subject to
general principles of equity. The execution, delivery and performance by Buyer
of this Agreement and the consummation by Buyer of the transactions contemplated
hereby will not, with or without the giving of notice or the lapse of time, or
both, (i) violate, or require any consent under, any material contract or other
commitment of Buyer, (ii) violate any provision of law, rule or regulation to
which Buyer is subject, (iii) violate any order, judgment or decree applicable
to Buyer or (iv) violate any provision of the Certificate of Incorporation or
the By-laws of Buyer; except, in each case, for violations which in the
aggregate would not materially hinder or impair the consummation of the
transactions contemplated hereby.
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3.03. Consents. Except under the HSR Act, no consent, approval or
authorization of, or exemption by, or filing with, any governmental authority or
third party is required to be obtained or made by Buyer in connection with the
execution, delivery and performance by Buyer of this Agreement, or the taking by
Buyer of any other action contemplated hereby.
3.04. Availability of Funds. Buyer will have available on the Closing
Date sufficient funds to enable it to consummate the transactions contemplated
by this Agreement.
3.05. Purchase for Investment. Buyer is purchasing the Stock for
investment and not with a view to any public resale or other distribution
thereof.
3.06. Fees. Neither Buyer nor any of Buyer's affiliates has paid or
become obligated to pay any fee or commission to any broker, finder or
intermediary (other than bonus arrangements with employees of Buyer) in
connection with the transactions contemplated hereby.
3.07. Registration Rights. Except as set forth on Schedule 3.07, Buyer
has not granted as of the date hereof any registration rights with respect to
any of its equity securities or guaranteed the sales price of any equity
security upon the sale thereof by any shareholder.
3.08. Sole Representations and Warranties. The representations and
warranties contained in this Article III are the only representations and
warranties made by Buyer in connection with the transactions contemplated by
this Agreement and supersede any and all previous written or oral statements
made by Buyer to either Company or to either Seller.
ARTICLE IV
COVENANTS
4.01. Compliance with Antitrust Laws; Regulatory and Other Consents.
(a) Each of Buyer and Sellers shall make all required filings under the HSR Act
not later than five business days from the date hereof and otherwise cooperate
with the other in making filings under the HSR Act and shall use its best
efforts to take, or cause to be taken, all actions necessary, proper or
advisable to consummate and make effective as promptly as practicable the
transactions contemplated by this Agreement, including using its best efforts to
resolve such objections, if any, as the Antitrust Division of the Department of
Justice (the "Antitrust Division") or the Federal Trade Commission (the "FTC")
or state antitrust enforcement or other governmental authority (collectively,
the "Regulatory Agencies") may assert under the antitrust laws with respect to
the transactions contemplated hereby. In the event an action is instituted by
any person or entity challenging the transactions contemplated hereby as
violative of the antitrust laws, each of Buyer and Sellers shall use their best
efforts to resist or resolve such action.
(b) The parties agree to cooperate in obtaining any consents of any
third parties (in addition to the Antitrust Division, the FTC or other parties
or agencies, whose consents or approvals are covered elsewhere herein) required
in connection with the transactions contemplated hereunder (each, a "Required
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Consent"). The parties agree that in the event such a Required Consent is not
obtained prior to the Closing and the Closing occurs, Sellers will, subsequent
to the Closing, cooperate with Buyer and the Companies in attempting to obtain
the Required Consent.
(c) Subject to the terms and conditions in this Agreement, each of the
parties hereto shall use its reasonable best efforts to take promptly, or cause
to be taken, all actions and to do promptly, or cause to be done, all things
necessary, proper or advisable under applicable law to consummate and make
effective the transactions contemplated hereby.
4.02. Conduct of Business. Except as may be otherwise contemplated by
this Agreement or required by any of the documents listed in the Schedules to
this Agreement or except as Buyer may otherwise consent to in writing, from the
date hereof and prior to the Closing, Sellers shall cause the Companies to (i)
in all material respects, operate the Business only in the ordinary course; (ii)
use their reasonable efforts to preserve intact their business organization and
not make or institute any material changes in its methods of purchase, sale,
management, accounting or operation; (iii) maintain their properties, machinery
and equipment in sufficient operating condition and repair to enable them to
operate their business in all material respects in the manner in which their
business is currently operated, except for substantial maintenance required by
reason of fire, flood, earthquake or other acts of God; (iv) use their
reasonable efforts to continue all material existing insurance policies (or
comparable insurance) of or relating to each Company in full force and effect;
(v) use their reasonable efforts to keep available until the Closing the
services of their present officers, employees and agents (as a group); (vi) use
their reasonable efforts to preserve their relationships with their material
lenders, suppliers, customers, licensors and licensees and others having
material business dealings with either Company such that their business will not
be materially impaired; (vii) not acquire assets or capital stock or other
interest in any other entity; (viii) not enter into, modify or amend any
employment, severance, stay-pay, termination or similar agreements or
arrangements or grant any bonus, salary increase, severance or termination pay
to any employee, officer, director or consultant other than in the ordinary
course of business consistent with past practice; (ix) not enter into, adopt or
amend any employee benefit or similar plan; (x) not enter into, modify or waive
any confidentiality, standstill or non-compete agreement or arrangement; (xi)
create any Encumbrance on any property or asset (whether tangible or intangible)
of either Company outside the ordinary course of business; (xii) sell, assign,
transfer, lease or otherwise dispose of any assets of either Company; (xiii) not
take any action that would likely result in any of the representations and
warranties set forth in Article II becoming false or inaccurate in any material
respect; (xiv) not enter into or consummate any transactions with an affiliate
which transaction is outside the ordinary course of business or unrelated to the
Business; and (xv) not agree in writing or otherwise to do any of the things
prohibited by this Section 4.02.
4.03. Access. From the date hereof and prior to the Closing, Sellers
shall provide or cause the Companies to provide Buyer and its counsel,
accountants and other representatives (a) with such information as Buyer may
from time to time reasonably request with respect to the Companies, the Business
and the transactions contemplated by this Agreement; (b) reasonable access upon
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reasonable notice to the properties, books, contracts, documents and records of
the Companies and the Business as Buyer may from time to time reasonably
request; (c) access to employees, agents and representatives for the purposes of
such meetings and communications as Buyer reasonably desires; and (d) with the
prior consent of Sellers in each instance (which consent shall not be
unreasonably withheld), access to vendors, customers, manufacturers of its
machinery and equipment, and others having business dealings with the Companies.
Such access shall include without limitation access to the books, records,
schedules, work papers and audit programs of the Companies and the Companies'
accountants and access to representatives of such accountants. Any disclosure
whatsoever during such investigation by Buyer shall not constitute an
enlargement of or additional representations or warranties of Sellers beyond
those specifically set forth in this Agreement except as otherwise expressly
provided herein. As promptly as practicable after the date hereof, Sellers and
Buyer shall cooperate in taking reasonable actions toward integrating the
Business with Buyer's operations.
4.04. No Solicitation. From the date of this Agreement until the
Closing or until terminated pursuant to Article VIII, other than in connection
with the transactions contemplated hereby, none of the Companies or Sellers
shall solicit, propose or facilitate (including by way of providing information
regarding the Business or either Company to any third party), directly or
indirectly, any inquiries, discussions or proposals for, continue or enter into
negotiations looking toward, or enter into or consummate any agreement or
understanding in connection with any proposal regarding any purchase or other
acquisition of all or any portion of the Business (other than the ordinary
course of business sale of inventory or replacement of assets), either Company
or any of the equity securities (whether newly issued or currently outstanding)
of either Company, or any merger, business combination or recapitalization
involving either Company, and Sellers will cause each Company's officers,
directors, employees, representatives, agents and affiliates to refrain from any
of the above.
4.05. Further Assurances. At any time or from time to time after the
Closing, each party shall, at the request of the other party, execute and
deliver any further instruments or documents and take all such further action as
such other party may reasonably request in order to evidence the consummation of
the transactions contemplated hereby.
4.06. Confidentiality Agreements. At the Closing, Sellers shall
provide to Buyer a list of all parties who received confidential information
with respect to either Company in connection with the potential acquisition of
either Company and copies of any confidentiality agreements entered into with
respect thereto. Sellers agree, at the request of Buyer or either Company, to
use their reasonable best efforts to enforce their rights under such
confidentiality agreements on behalf of Buyer and the Companies.
4.07. Notice. Sellers shall have a continuing obligation to promptly
notify Buyer in writing as to any matter hereafter arising or discovered which
becomes known to Sellers prior to the Closing (except for matters brought to
Sellers' attention by Buyer in writing) which, if existing or known at the date
of this Agreement, would have been required to be set forth or described in any
Schedule to this Agreement or otherwise would have resulted in any
representation or warranty of Sellers contained herein being false or inaccurate
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in any material respect. No disclosure made by Sellers following the date hereof
shall be deemed to amend or modify any representation or warranty contained in
this Agreement or the Schedules hereto.
4.08. Confidentiality. Sellers agree that neither Seller nor any of
either Seller's affiliates will disclose any Confidential Information (as
defined below) after the date hereof to any third party, except as required by
law. "Confidential Information" shall mean any information concerning either
Company which is in the possession of Sellers and its affiliates (other than the
Companies) on the date hereof or on the Closing Date relating to the Business,
other than information which is or becomes available to the public (other than
as a result of the disclosure by Sellers or any of their affiliates (other than
the Companies) of such information in contravention of the covenants set forth
in this Section 4.08.
4.09. Responsibility for Taxes; Returns; Audits.
(a) Indemnification.
(1) Sellers shall be responsible for and indemnify and hold
harmless Buyer and its affiliates, including the Companies, from
and against any Losses arising with respect to:
(i) all Taxes of the Companies for any Taxable year or
period ending on or before the Closing Date, including
without limitation all Taxes arising from the Section 338
Elections,
(ii) for any Taxable year or period beginning before and
ending after the Closing Date, all Taxes of each Company for
the portion of such taxable period ending on and including
the Closing Date, and
(iii) all Taxes of Sellers or any affiliate thereof (other
than the Companies); provided, however, that Sellers shall
be permitted to cause Bostek to make distributions to
Sellers in accordance with Section 4.09(h). For purposes of
this Section 4.09(a), Sellers' obligation to indemnify Buyer
and its affiliates with respect to Taxes other than Income
Taxes shall apply only to the extent that the Losses
incurred with respect to any such Tax exceeds the reserves
for such Tax on the March 31 Balance Sheet, as such Balance
Sheet may be adjusted to reflect solely (i) any payments out
of such reserves and (ii) the operations of the Companies in
the ordinary course of business, subsequent to the date of
such Balance Sheet prior to the Closing Date.
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(2) For purposes of this Section
4.09(a), whenever it is necessary to determine the
liability for Taxes of either Company for a
portion of a Taxable year or period that begins
before and ends after the Closing Date, the
determination of such Taxes for the portion of the
year or period ending on, and the portion of the
year or period beginning after, the Closing Date
shall be determined (i) in the case of Income
Taxes, based upon an interim closing of the books
of each Company (as appropriate) as of the close
of business on the Closing Date and (ii) in the
case of Taxes other than Income Taxes, (a) with
respect to sales, transfer, excise, gains, and
other Taxes based upon transfers or transactions,
based upon whether the relevant transaction
occurred on or prior to, or subsequent to, the
Closing Date, and (b) in the case of all other
Taxes (including real and personal property Taxes)
based upon the relative number of days in the
portion of the taxable period up to and including
the Closing Date and the relative number of days
in the portion of the taxable period subsequent to
the Closing Date.
(b) Tax Returns; Filing and Payments.
(1) Buyer shall timely prepare (or cause
to be prepared), and shall timely file, subject to
the participation, review and consent of Sellers
(which consent will not be unreasonably withheld)
(or cause to be timely filed) all Income Tax
Returns of each Company for any Taxable year or
period ending on or before the Closing Date which
are not required to be filed on or before the
Closing Date ("Short Period Returns"). The Short
Period Returns shall reflect, among other required
items (i) taxable income of Bostek (including
separately stated items) arising from the Section
338(h)(10) Elections; (ii) other taxable income of
Bostek (including separately stated item); and
(iii) the amount of Bostek's gain recognized, if
any, pursuant to Section 1374 of the Code and
related tax liability under Section 1374 and its
state counterpart. Such Short Period Returns shall
be prepared and filed in accordance with past
practice and custom and on such Tax Returns, no
positions shall be taken, elections made (other
than the Section 338(h)(10) Elections), or methods
adopted that are inconsistent with positions
taken, elections made, or methods used in filing
similar Tax Returns in prior periods. Sellers
shall, consistent with the manner that payments
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must be made with respect to each of such Income
Tax Returns, upon written notice by Buyer, provide
Buyer with funds to timely pay the Tax liability
shown on such Income Tax Return.
(2) Buyer shall prepare, subject to the
participation, review and consent of Sellers
(which consent will not be unreasonably withheld)
(or cause to be prepared) and file (or cause to be
filed) all Income Tax Returns of the Companies for
any Taxable year or period commencing prior to the
Closing Date and ending subsequent to the Closing
Date. Sellers shall, consistent with the manner
that payments must be made with respect to each
such Income Tax Return, upon written notice by
Buyer, provide Buyer with funds to timely pay the
portion of the Tax liability shown on such Income
Tax Return which is described as being the
responsibility of Sellers under Section 4.09(a),
and Buyer shall pay or cause to be paid such
amounts to the appropriate Tax authority.
(3) With respect to any Tax Return
referred to in clause 4.09(b)(1) and 4.09(b)(2)
above, Buyer shall provide Sellers a draft of such
Tax Return and Tax information (including, without
limitation, work papers and schedules) for review
of such Tax Return in a timely manner no later
than 30 days prior to the due date (taking into
account valid extensions) for the filing of such
Tax Return. The parties shall consult in good
faith with regard to the form and content of such
Returns, provided that, in the event of any
disagreement, the Returns shall be filed in the
form set forth by the party with responsibility
for the preparation of the Return. Neither Buyer
nor any of Buyer's affiliates shall amend, refile,
or otherwise modify (without the prior written
consent of Sellers) any Tax Return relating in
whole or in part to Bostek with respect to any
taxable year ending before the Closing Date.
(c) Termination of Tax Sharing Agreements; Powers of Attorney.
(1) Any Tax Sharing Agreement to which
either Company is a party shall be terminated as
of the Closing Date, and neither Company shall
have further obligations thereunder. For purposes
of this Agreement, the term "Tax Sharing
Agreement" includes any agreement or arrangement,
whether or not written, providing for the sharing
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or allocation of liability for Taxes of the
parties thereto.
(2) All powers of attorney granted by
either Company with respect to Taxes shall be
revoked as of the Closing Date.
(3) Sellers agree that between the date
of the Agreement and the Closing Date, it will not
cause or permit either Company to (i) make any
change in such Company's Tax accounting methods,
any new election with respect to Taxes or any
modification or revocation of any existing
election with respect to Taxes or (ii) settle or
otherwise dispose of any Tax audit, dispute, or
other Tax proceeding, in each case without Buyer's
express written consent thereto.
(d) Section 338 Elections.
(1) At Buyer's option, Sellers will join
with Buyer in making timely elections under
Section 338(h)(10) of the Code and any
corresponding elections under state, local or
foreign tax law with respect to the purchase and
sale of the stock of Bostek (collectively, the
"Section 338(h)(10) Elections"). Sellers and Buyer
shall cooperate in all necessary actions to effect
the Section 338(h)(10) Elections and shall report
the transactions consistent with the making of the
Section 338(h)(10) Elections and shall take no
position contrary thereto without the written
consent of the other party.
(2) If the Section 338(h)(10) Elections
are made, Sellers will have an Income Tax
liability in an amount equal to the Section
338(h)(10) Payment (as defined below).
Notwithstanding anything to the contrary in
Section 4.09(a), Buyer shall pay to Sellers, not
later than 30 days before the Section 338(h)(10)
Payment must be paid by Sellers to the applicable
governmental authority, an amount equal to (i) the
difference between (x) the combined Federal and
State Income Tax liability of the Sellers assuming
the Section 338(h)(10) Elections were made, and
(y) the combined Federal and State Income Tax
liability of the Sellers assuming the Section
338(h)(10) Elections were not made (the "Section
338(h)(10) Payment"), plus (ii) a gross up payment
equal to the additional Taxes incurred by Sellers
by virtue of receiving the Section 338(h)(10)
Payment. Buyer shall pay Sellers all federal,
state, local and foreign entity level taxes
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incurred by Bostek under Section 1374 or its
equivalent as a result of, arising from or
attributable to the making of the Section
338(h)(10) Elections, up to a maximum of
[$56,000], such payment to be made not later than
30 days before the same must be paid by Sellers to
the applicable governmental authority. Buyer shall
indemnify Sellers against Losses arising out of
any failure by Buyer to make the payments required
of Buyer pursuant to this paragraph (2).
(3) Buyer shall be responsible for
preparing drafts of all forms, attachments and
schedules necessary to effectuate the Section
338(h)(10) Elections including, without
limitation, IRS Form 8023 or applicable successor
form, and any similar forms on applicable
successor forms under applicable state or local
income tax laws (the "Section 338(h)(10) Forms"),
subject to the review and consent of Sellers
(which consent will not be unreasonably withheld).
Sellers shall cooperate in good faith with Buyer
and shall promptly file with Buyer all information
reasonably requested by Buyer and relevant to the
preparation of the Section 338(h)(10) Forms.
Sellers and Buyer shall attempt in good faith to
execute at or prior to the Closing any and all
such Section 338(h)(10) Forms. In the event,
however, any Section 338(h)(10) Forms are not
executed at the Closing, at least 45 days prior to
the latest date for the filing of each Section
338(h)(10) Forms, Buyer shall furnish Sellers with
a copy of each such form for its review and
comment, together with Buyer's proposed
determination of the MADSP (as defined in
applicable Treasury Regulations under Section 338)
and allocation of the MADSP to the assets of
Bostek (the "Allocation").
(4) Buyer and Sellers agree to consult
in good faith with regard to the proposed
determination of the MADSP and the Allocation,
provided that Sellers shall accept Buyer's final
determination of the MADSP and the Allocation
(which Buyer shall provide to Sellers at least
fifteen days prior to the due date for filing of
the Section 338(h)(10) Forms), to the extent that
they are reasonable and consistent with applicable
Tax law. Sellers and Buyer will reflect such
Allocation in all applicable Tax Returns filed by
any of them, including but not limited to the
Section 338(h)(10) Forms. Sellers , Buyer and
Bostek shall not take a position before any Tax
authority or otherwise (including in any Tax
Return) inconsistent with the determination of the
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MADSP and the Allocation unless and to the extent
required to do so pursuant to a determination (as
defined in Section 1313(a) of the Code or any
similar state or local law).
(e) Assistance and Cooperation.
(1) From and after the Closing Date, to
the extent reasonably requested by the other
party, Sellers and Buyer shall assist and
cooperate with the other party in the preparation
of any Tax Return which the other party is
responsible to file pursuant to Section 4.09(b)
herein and shall assist and cooperate with the
other party in preparing for any audits or
disputes relating to Taxes for which the other
party is responsible pursuant to this Agreement.
From and after the Closing Date, Sellers and Buyer
shall, pursuant to the other party's reasonable
request, make available to the other party all
information, records and documents reasonably
available to that party which are necessary for
the preparation of any Tax Return or resolution of
any audit or dispute. In all such cases, the party
seeking assistance or cooperation shall bear the
expenses of the other party incurred in connection
with respect thereto. Buyer and Sellers
acknowledge that any information obtained in
connection with the preparation of any Tax Return
, audit or other disputes pursuant to this Section
4.09(e) is of a confidential nature and each will
use reasonable commercial efforts under the
circumstances to maintain such confidentiality
(except to the extent that such information
suggests or is evidence of a breach of an
obligation from Buyer to Sellers or vice versa).
(2) From and after the Closing Date,
Sellers and Buyer shall provide timely notice to
the other in writing of any pending or threatened
tax audits or assessments of the Companies for
taxable periods for which the other is liable
under this Agreement, and shall furnish the other
with copies of all correspondence received from
any taxing authority in connection with any tax
audit or information request with respect to any
such taxable period.
(f) Certain Taxes. Sellers shall bear, and shall indemnify and hold
harmless Buyer and its affiliates (including the Companies) from and against,
all sales, transfer, stamp, documentary, real estate transfer, real estate
gains, and other similar Taxes incurred in connection with the transactions
contemplated by this Agreement. Sellers shall timely file any Returns required
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to be filed in connection with such Taxes, and Buyer shall cooperate with
Sellers in such preparation.
(g) Contests.
(1) Subject to the provisions of this
Section 4.09(g) Sellers shall have the right, at
their own expense, to control, manage and be
responsible for any audit, contest, or similar
proceeding with respect to Income Taxes for any
Taxable year or period ending on or before the
Closing Date and shall have the right to settle or
contest in its discretion any such audit, contest
or proceeding; provided, however, that (i) Sellers
shall not have the right to control any such
proceeding unless they first acknowledge in
writing their obligation to fully indemnify Buyer
for the Taxes at issue in the proceeding; (ii) no
settlement or disposition of any such proceeding
shall be made without Buyer's consent (which
consent shall not be unreasonably withheld) if the
same reasonably could be expected to affect
Buyer's liability for Tax in any taxable period or
portion of a taxable period ending after the
Closing Date; (iii) Buyer and Sellers shall
jointly control any Income Tax proceeding relating
to a taxable period that begins before, and ends
after, the Closing Date; and (iv) Buyer shall have
the right to attend and participate in (but not
control) at its own expense, any proceeding to the
extent that it relates to Income Taxes, other than
Income Taxes for which either Company filed a Tax
Return as part of the consolidated, combined, or
unitary group of which Sellers are the common
parent.
(2) Except for proceedings the control
of which is determined pursuant to Section
4.09(g)(1) above, Buyer shall, at its own expense,
control, manage and solely be responsible for any
audit, contest, claim, proceeding or inquiry with
respect to Income Taxes for any Taxable year or
period ending after the Closing Date, and shall
have the exclusive right to settle or contest any
such audit, contest, claim, proceeding or inquiry
without the consent of any other party, provided
Sellers do not have an obligation to indemnify
Buyer for Taxes at issue in the proceeding (in
which case the provisions of Article IX shall
govern.
(h) Subchapter S Tax Distributions. On or prior to the Closing Date,
Bostek may distribute to Sellers, with respect to their shares of common stock
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in Bostek, an aggregate amount (the "Tax Distribution Amount") equal to (i) the
estimated aggregate federal and state income tax liability of such Sellers with
respect to the S corporation income from the normal operation of Bostek during
the period beginning on April 1, 1999 and ending on the Closing Date, determined
without taking into account items of income, gain, deduction, loss and the
likely result of the Section 338(h)(10) Elections and the transactions
contemplated hereby, minus (ii) the amount previously distributed for such
purpose. The Tax Distribution Amount shall be calculated by Bostek's independent
auditors (subject to review and consent of Buyer and its accountants, which
consent will not be unreasonably withheld), and the amount of Sellers' aggregate
federal and state income tax liability as a result of ownership of stock in
Bostek shall be calculated at a rate not to exceed the rate determined based on
the following: (i) each Seller is a natural person and resident of the
Commonwealth of Massachusetts, (ii) each Seller is subject to the highest
marginal federal and state income tax rates for 1999, and (iii) the allocations
for Bostek shall be deemed, for 1999, to be the sole source of income and loss
of the Sellers.
4.10. Cooperation with Public Filings. Each Seller shall cooperate,
and shall cause each Company and each Company's accountants to cooperate, with
Buyer and its affiliates and advisors in the preparation and filing of any
registration statement or other public filings (and any related documentation or
filings) in a timely fashion and shall use, and cause each Company to use, his
or its reasonable best efforts to assist Buyer in having any such registration
statement declared effective by the Securities and Exchange Commission as
promptly as practicable and in maintaining the effectiveness of any such
registration statement. If Sellers shall obtain knowledge of any information
pertaining to either Company that would require any amendment or supplement to
any registration statement, Sellers shall so advise Buyer in writing and shall
promptly furnish Buyer with all information as shall be required for such
amendment or supplement and shall promptly take such action as shall be required
to amend or supplement any such registration statement. Without limiting the
generality of the foregoing, Sellers shall use their best efforts to cause the
Companies' accountants (i) to issue a consent to the inclusion of their opinion
on the Companies' audited financial statements for 1998 and 1997, (ii) to issue
a consent to be referred to as experts in the appropriate sections of any
registration statement, and (iii) to provide a "comfort letter" in form and
substance reasonably acceptable to any underwriter of Buyer. Sellers acknowledge
that any breach of the foregoing will result in significant harm to Buyer with
Losses including the cost of causing an audit to be performed and the cost of
delaying the filing of any such registration statement. In addition, if
necessary, (i) Sellers shall use its reasonable best efforts to cause its
accountants to prepare an audited income statement for 1996 in as timely a
fashion as possible and consent the inclusion of their opinion thereon, and (ii)
Sellers shall cause Bostek's former accountants to issue a consent to the
inclusion of their opinion on the Companies' audited income statement for 1996.
4.11. Cash Management; Financing Arrangements. Sellers will cooperate
with Buyer in making preparations for the Companies to participate in banking
and financing programs of Buyer.
4.12. Non-Competition Agreement. Each Seller agrees that for a period
commencing on the date hereof and ending on the later of (i) the fifth
anniversary of the Closing Date, and (ii) one year following the date of such
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Seller's termination of employment with each Company and its affiliates, such
Seller shall not, without the prior written consent of Buyer, (a) engage in any
Competitive Activity anywhere in the world (including, without limitation,
anywhere in the United States of America) or (b) directly or indirectly solicit
for employment, including, without limitation, recommending to any subsequent
employer the solicitation for employment of, any employee of either Company. The
parties hereto acknowledge and agree that (x) Sellers will receive substantial
and valuable benefits under this Agreement in consideration of the covenants and
agreements of Sellers set forth in this Section 4.12, (y) Buyer would not have
executed and delivered this Agreement, or agreed to consummate the transactions
contemplated hereby upon the terms and conditions set forth in this Agreement,
if Sellers had not entered into the covenants and agreements set forth in this
Section 4.12 and (z) the parties intend that such agreements and covenants be
enforceable and that it would be grossly inequitable if a court or judicial
tribunal were to not enforce such covenants and agreements to the fullest extent
provided herein. "Competitive Activity" shall mean engaging in any of the
following activities: (i) serving as a director of any Competitor; (ii) directly
or indirectly (x) controlling any Competitor or (y) owning any equity or debt
interests in any Competitor (other than equity or debt interests which are
publicly traded and do not exceed 5% of the particular class of interests then
outstanding) (it being understood that, if any such interests in any Competitor
are owned by an investment vehicle or other entity in which Sellers owns an
equity interest, a portion of the interests in such Competitor owned by such
entity shall be attributed to Sellers, such portion determined by applying the
percentage of the equity interest in such entity owned by Sellers to the
interests in such Competitor owned by such entity); (iii) directly or indirectly
soliciting, diverting, taking away, appropriating or otherwise interfering with
any of the customers or suppliers of the Business; or (iv) employment by
(including serving as an officer of), or providing consulting services to, any
Competitor. "Competitor" shall mean any entity that is engaged in the business
of buying and selling of computer components from manufacturers and distributors
whether from excess inventory, refurbished equipment or off-lease, without
regard to size, or is engaged in owning, operating or acquiring directly or
indirectly one or more Competitors, without regard to size. Notwithstanding
anything contained herein to the contrary, if Buyer, ACT or any successor or
assignee thereof shall be in default with respect to any of its obligations
under this Agreement, and such default shall continue for 15 business days (10
business days in the case of payment obligations) after Sellers provide written
notice of such defaults to Buyer, the covenants contained in this Section 4.12
shall be terminated and of nor further force or effect without further action
required by Sellers.
4.13. Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Securities and Exchange Commission which
may permit the sale of restricted securities (as that term is used in Rule 144
under the Act) to the public without registration, Buyer agrees to do the
following so long as either Seller owns any of the shares of stock received
pursuant to Section 1.03(a)(ii) and such shares are restricted securities:
(a) beginning 90 days following the effective date of an IPO, make and
keep public information available as those terms are understood and defined in
Rule 144 of the Act;
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(b) use its reasonable commercial efforts to file with the Securities
and Exchange Commission in a timely manner all reports and other documents
required of Buyer under the Act and the Securities Exchange Act of 1934, as
amended, after it has become subject to such reporting requirements; and
(c) furnish to Sellers, upon request therefor, a copy of the most
recent annual or quarterly report of Buyer, and such other reports and documents
so filed as either Seller may reasonably request in availing itself of any rule
or regulation of the Securities and Exchange Commission allowing a Seller to
sell any such securities without registration..
4.14. Parent Guaranty. From and after the Closing until the
consummation by Buyer of an IPO, ACT, for itself and for its successors and
assigns, hereby unconditionally guarantees the obligations of Buyer contained
herein including but not limited to the obligations contained in Section 1.03.
4.15. Exhibit and Schedule Completion; Tax Matters. Within 5 days from
the date hereof, Sellers shall deliver to Buyer all schedules and exhibits
hereto being prepared by Sellers and Buyer shall have 4 days after receipt
thereof to review such schedules and exhibits. If any of such schedules or
exhibits is not acceptable to Buyer in its sole discretion, Buyer shall have the
right to terminate this Agreement within such 4 day period. Buyer shall continue
its tax analysis of the Companies and, within 5 days from the date hereof, Buyer
shall deliver to Sellers an amendment to Section 4.09 hereof or a notice to
Sellers indicating that no amendment is required, and Sellers shall have 4 days
after receipt thereof to review such amendment or notice. If Sellers (in their
sole discretion) do not execute such amendment or notice within such 4 day
period, then this Agreement shall terminate. If this Agreement shall terminate
pursuant to this Section 4.15, then neither party shall have any obligation to
the other for any breach hereunder and this Agreement shall be deemed to have
never been entered into by the parties hereto.
ARTICLE V
CONDITIONS TO BUYER'S OBLIGATIONS
The obligation of Buyer to consummate the transactions contemplated by
this Agreement shall be subject to the satisfaction (or waiver) on or prior to
the Closing Date of all of the following conditions:
5.01. Representations, Warranties and Covenants of Sellers. Sellers
shall have complied in all material respects with its agreements and covenants
contained herein to be performed on or prior to the Closing Date, and the
representations and warranties of Sellers contained herein in the aggregate
shall be true in all material respects on and as of the Closing Date with the
same effect as though made on and as of the Closing Date, except (a) as
otherwise contemplated hereby, and (b) to the extent that any such
representations and warranties were made as of a specified date and as to such
representations and warranties the same shall continue on the Closing Date to
have been true in all material respects as of the specified date. For purposes
of the preceding sentence, specific material adverse effect and materiality
qualifiers contained in individual representations and warranties shall be
disregarded. Buyer shall have received a certificate of Sellers, dated as of the
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Closing Date and signed by each Seller, certifying as to the fulfillment of the
condition set forth in this Section 5.01.
5.02. No Prohibition. No statute, rule or regulation or order of any
court or administrative agency shall be in effect which prohibits Buyer from
consummating the transactions contemplated hereby.
5.03. Consents. The applicable waiting period under the HSR Act shall
have expired or been terminated and all other consents, approvals,
authorizations, exemptions and waivers from governmental agencies and third
parties that shall be required for the consummation of the transactions
contemplated hereby, including those listed on Schedule 5.03, shall have been
obtained in form and substance reasonably satisfactory to Buyer.
5.04. Employment Agreements. Each Seller shall have executed
employment agreements in the form of Exhibit 5.04 (the "Employment Agreements").
5.05. No Material Adverse Change. Since March 31, 1999, the Companies
shall have not suffered any material adverse change in the business, assets,
liabilities or results of operations of the Companies taken as a whole except
for changes as result of general economic or industry conditions.
ARTICLE VI
CONDITIONS TO SELLERS' OBLIGATIONS
The obligation of Sellers to consummate the transactions contemplated by
this Agreement shall be subject to the satisfaction (or waiver) on or prior to
the Closing Date of all of the following conditions:
6.01. Representations, Warranties and Covenants of Buyer. Buyer shall
have complied in all material respects with its agreements and covenants
contained herein to be performed on or prior to the Closing Date, and the
representations and warranties of Buyer contained herein in the aggregate shall
be true in all material respects on and as of the Closing Date with the same
effect as though made on and as of the Closing Date, except (a) as otherwise
contemplated hereby, and (b) to the extent that any such representations and
warranties were made as of a specified date and as to such representations and
warranties the same shall continue on the Closing Date to have been true in all
material respects as of the specified date. For purposes of the preceding
sentence, specific material adverse effect and materiality qualifiers contained
in individual representations and warranties shall be disregarded. Sellers shall
have received a certificate of Buyer, dated as of the Closing Date and signed by
an officer of Buyer, certifying as to the fulfillment of the condition set forth
in this Section 6.01.
6.02. No Prohibition. No statute, rule or regulation or order of any
court or administrative agency shall be in effect which prohibits Sellers from
consummating the transactions contemplated hereby.
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6.03. HSR Act. The applicable waiting period under the HSR Act shall
have expired or been terminated.
ARTICLE VII
STOCK CERTIFICATES; LEGEND
7.01. Securities Laws; Legend. (a) Each Seller represents and warrants
that: (i) he understands that the shares of common stock of Buyer being issued
pursuant to Section 1.03(a) have not been and will not be registered under the
Securities Act of 1933, as amended (the "Act"), and it is the intention of the
parties hereto that the issuance of such securities be exempt from registration
under the Act and the rules promulgated thereunder by the Securities and
Exchange Commission; (ii) he understands that the shares of common stock of
Buyer being issued pursuant to Section 1.03(a) may not be sold, transferred,
assigned, exchanged, pledged, encumbered or otherwise disposed of unless they
are registered under the Act or an exemption from registration is available;
(iii) he is acquiring the shares of common stock of Buyer being issued pursuant
to Section 1.03(a) for investment for his own account and not with a view to the
distribution thereof; (iv) he has, or together with his advisers, if any, have,
such knowledge and experience in financial and business matters that he is, or
the together with his advisers, if any, are, and will be capable of evaluating
the merits and risks relating to his acquisition of shares of common stock
pursuant to Section 1.03(a); (v) he has been given the opportunity to obtain
information and documents relating to Buyer and to ask questions of and receive
answers from representatives of Buyer concerning Buyer; and (vi) he is able to
bear the economic risk of a total loss of value of his interest in Buyer.
Sellers covenant that neither shall directly or indirectly sell, transfer,
assign, exchange, pledge, encumber or otherwise dispose of any shares of common
stock of Buyer obtained pursuant to Section 1.03(a) until after the first
anniversary of the Closing Date and then only in compliance with the Act.
(b) The certificates representing shares of common stock of Buyer
issued pursuant to Section 1.03(a) shall bear the following legend:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or any securities
regulatory authority of any state, and may not be sold, transferred,
assigned, exchanged, pledged, encumbered or otherwise disposed of
except in compliance with all applicable securities laws and except in
accordance with the provisions of a Agreement of Purchase and Sale, a
copy of which is available for inspection at the offices of the
Company."
ARTICLE VIII
TERMINATION PRIOR TO CLOSING
8.01. Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) By the mutual written consent of Buyer and Sellers; or
(b) By either Buyer or Sellers, by giving written notice of such
termination to the other party, if the Closing shall not have occurred on or
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prior to July 31, 1999; provided that the terminating party is not in material
breach of its obligations under this Agreement; or
(c) By either Buyer or Sellers, by giving written notice of such
termination to the other party, if there shall have been a material breach by
the other party of any of its covenants or agreements contained herein and any
such breach results in a failure to be able to satisfy a condition to the
terminating party's obligation to consummate the transactions provided herein;
or
(d) By either Buyer or Seller as provided in Section 4.15.
8.02. Effect on Obligations. Termination of this Agreement pursuant to
this Article VIII shall terminate all obligations of the parties hereunder,
except for the obligations under Sections 9.11, 9.12 and 9.13 and this Section
8.02; provided, however, that nothing shall relieve the defaulting or breaching
party (whether or not it is the terminating party) from any liability to the
other party hereto.
ARTICLE IX
MISCELLANEOUS
9.01. Survival. The representations and warranties of the parties
hereto contained herein or in any agreement, certificate (including the Sellers'
Certificate and the Buyer's Certificate) or other document executed at or prior
to the Closing in connection herewith (an "Ancillary Document") shall expire on
the 18 month anniversary of the Closing Date, except that the representations
and warranties set forth in Sections 2.01, 2.07, 2.12 and 2.14 of this Agreement
shall survive the Closing Date until the expiration of the applicable statute of
limitations (including any extensions thereof). After the expiration of such
periods, any claim by a party hereto based upon any such representation or
warranty shall be of no further force and effect, except to the extent a party
has asserted a claim in accordance with this Article IX for breach of any such
representation or warranty prior to the expiration of such period, in which
event any representation or warranty to which such claim relates shall survive
with respect to such claim until such claim is resolved as provided in this
Article IX. The covenants and agreements of the parties hereto shall survive the
Closing until performed in accordance with their terms.
9.02. Agreement to Indemnify. (a) From and after the Closing Date,
Buyer shall indemnify, defend and hold harmless Sellers and any affiliate of
Sellers and each of Sellers' respective agents and representatives, and each of
Sellers' heirs, executors, successors and assigns (collectively, "Sellers'
Indemnified Group") from and against any liability, loss, damage, claim
(including third-party claims, whether or not meritorious), cost or expense
(including, without limitation, reasonable attorneys' fees and disbursements)
(collectively, "Losses") incurred or suffered by Sellers' Indemnified Group to
the extent the Losses arise out of, or result from (i) the failure of any
representation or warranty made by Buyer herein or in any Ancillary Document to
have been true when made and as of the Closing Date or (ii) the breach of any
covenant or agreement of Buyer contained herein or in any Ancillary Document.
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(b) From and after the Closing Date, Sellers shall indemnify, defend
and hold harmless Buyer and any affiliate of Buyer and each of their respective
directors, officers, employees, agents and representatives, and each of the
heirs, executors, successors and assigns of any of the foregoing (collectively,
"Buyer's Indemnified Group") from and against all Losses incurred or suffered by
Buyer's Indemnified Group to the extent the Losses arise out of, or result from
(i) the failure of any representation or warranty made by Sellers herein or in
any Ancillary Document to have been true when made and as of the Closing Date,
(ii) the breach of any covenant or agreement of Sellers contained herein or in
any Ancillary Document, or (iii) any asset, property, right, obligation or
liability of either Company not primarily related to the Business including,
without limitation, any of the foregoing arising out of any discontinued
operation of either Company.
9.03. Indemnification Procedure. (a) The party seeking indemnification
under this Agreement (the "Indemnified Party") shall promptly notify the party
from which indemnification is being sought (the "Indemnifying Party") of the
facts and circumstances upon which the Indemnified Party intends to base a claim
for indemnification hereunder ("Notices"). Notice shall in all events be
considered prompt if given (a) no later than 30 days after the Indemnified Party
learns of the facts upon which it will claim such indemnification or (b) if
earlier, in sufficient time to allow the Indemnifying Party to exercise its
rights pursuant to this Section 9.03; provided, however, that the failure to
provide such Notice of claims promptly (so long as a notice of claims is given
before the date on which the applicable representation or warranty ceases to
survive) shall not affect the obligations of the Indemnifying Party hereunder
except to the extent the Indemnifying Party is prejudiced thereby. The
Indemnifying Party shall have the right, at its own cost, to participate jointly
in the defense of any third-party claim, demand, lawsuit or other proceeding in
connection with which the Indemnified Party has claimed indemnification
hereunder, and may elect to take over the defense of such claim within 10 days
following Notice thereof upon its written unconditional acknowledgment of its
obligation to indemnify the Indemnified Party with respect to such claim;
provided, however, that Sellers shall not be permitted to take over the defense
of any claim brought by any customer or supplier of the Business against any
member of Buyer's Indemnified Group for which indemnification is available
pursuant to this Article IX, and such member of Buyer's Indemnified Group shall
defend such claim; provided, further, that such member of Buyer's Indemnified
Group shall not settle or otherwise dispose of such claim without the consent of
Sellers, which consent shall not be unreasonably withheld or delayed. If the
Indemnifying Party makes such an election, (x) it shall keep the Indemnified
Party informed as to the status of such matter and shall send promptly copies of
all pleadings to the Indemnified Party, (y) with respect to any issue involved
in such claim, it shall have the sole right, with respect to claims or portions
of claims seeking monetary damages only, to settle or otherwise dispose of such
claim on such terms as it, in its sole discretion, shall deem appropriate;
provided, however, that the consent of the Indemnified Party to the settlement
or disposition shall be required if such settlement or disposition shall result
in any liability to, equitable relief against or adverse business effect on the
Indemnified Party, which consent shall not be unreasonably withheld or delayed,
and (z) the Indemnified Party shall have the right to participate jointly in the
defense of such claim, but shall do so at its own cost not subject to
reimbursement under Section 9.02. If the Indemnifying Party does not elect to
take over the defense of a third-party claim, the Indemnified Party shall have
the right to contest, compromise or settle such claim in the exercise of its
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reasonable judgment; provided, however, that the consent of the Indemnifying
Party to any compromise or settlement of such claim shall be required if such
compromise or settlement shall result in any liability to the Indemnifying
Party, which consent shall not be unreasonably withheld or delayed.
(b) Notwithstanding the provisions of Section 9.03(a), with respect to
any third-party claim or demand that the Indemnifying Party is defending, the
Indemnified Party shall have the right to retain separate counsel to represent
it and the Indemnifying Party shall pay the fees and expenses of such separate
counsel if there are conflicts that make it reasonably necessary for separate
counsel to represent the Indemnified Party and the Indemnifying Party.
9.04. Other Indemnification Matters. (a) The indemnification provided
in this Article IX shall be the sole and exclusive remedy for any inaccuracy or
breach of any representation or warranty made by Sellers or Buyer in this
Agreement or in any Ancillary Document. All amounts payable by one party in
indemnification of the other (whether or not as provided in Section 9.04(d))
shall be considered an adjustment to the Purchase Price.
(b) Upon making any payment to an Indemnified Party for any
indemnification claim pursuant to this Article IX, the Indemnifying Party shall
be subrogated, to the extent of such payment, to any rights which the
Indemnified Party may have against any other parties with respect to the subject
matter underlying such indemnification claim.
(c) The amount of any Losses shall be computed net of any insurance
proceeds received by the Indemnitee or its Affiliates in connection therewith.
(d) The amount of any Losses shall be computed net of any tax benefit
realized by the Indemnitee or its Affiliates as a result of such Loss, or the
amount of any tax benefit realized by the Indemnitee as a result of any payment
made.
(e) Notwithstanding anything herein to the contrary, if either Seller
shall have indemnification obligations pursuant to this Agreement, such payment
shall be made 50% (or such other proportion as Buyer and Sellers may agree) in
cash by immediately available funds and 50% (or such other proportion as Buyer
and Sellers may agree) by transfer by such Seller of the number of shares having
an aggregate market value equal to the indemnification obligation of Sellers.
For purposes hereof, "market value" for a share of common stock of Buyer shall
be the average closing price per share of common stock of Buyer for the 10
trading days immediately preceding the date on which Buyer reclaims such shares.
If any future payment obligation pursuant to Section 1.03(c) shall be reduced
pursuant to clause (ii) above, the amount so reduced shall be deemed "paid" for
purposes of Section 1.03.
(f) With respect to Sellers' liability for claims made under clause
(b)(i) of Section 9.02: (i) Sellers shall have no liability for such claims
until the aggregate amount of the Losses incurred by Buyer's Indemnified Group
shall exceed $250,000, in which case Seller shall be liable only for the portion
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<PAGE>
of the Losses exceeding $250,000 (the "Deductible"), and (ii) Sellers shall have
no liability for such claims in excess of $2,500,000 (the "Cap"); provided,
however, that claims for breaches of any representations or warranties contained
in Sections 2.01, 2.12, 2.14, 2.15 and 2.17 shall not be subject to the
Deductible or the Cap.
(g) The material adverse effect and materiality (or correlative
meaning) qualifications included in the representations, warranties and
covenants shall have no effect on any provisions in this Article IX concerning
the indemnities of Sellers with respect to such representations, warranties and
covenants, each of which is given as though there were no material adverse
effect or materiality (or correlative meaning) qualification for purposes of
such indemnities.
9.05. Interpretive Provisions. (a) Whenever used in this Agreement,
"to Sellers' knowledge" or "to the knowledge of Sellers" shall mean the actual
knowledge of either of the Sellers and the knowledge that either would have
after due and reasonable inquiry.
(b) The words "hereof," "herein," "hereby" and "hereunder" and words
of similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision thereof.
(c) For purposes of this Agreement, each Company shall be deemed to be
affiliates of Sellers prior to the Closing and affiliates of Buyer after the
Closing.
9.06. Entire Agreement. This Agreement (including the Schedules) and
the Ancillary Documents constitute the sole understanding of the parties with
respect to the subject matter hereof.
9.07. Successors and Assigns. The terms and conditions of this
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties hereto; provided, however, that this
Agreement may not be assigned by either party hereto without the prior written
consent of the other (except that Buyer may without the prior written consent of
Sellers assign this Agreement to any affiliate of Buyer so long as such assignee
shall execute a counterpart of this Agreement agreeing to be bound by the
provisions hereof as "Buyer," and agreeing to be jointly and severally liable
with the assignor and any other assignee for all of the obligations of the
assignor hereunder, but no such assignment of this Agreement or any of the
rights or obligations hereunder shall relieve Buyer of its obligations under
this Agreement. Notwithstanding anything contained in this Agreement to the
contrary, nothing in this Agreement, express or implied, is intended to confer
on any person other than the parties hereto or their respective heirs,
successors, executors, administrators and assigns any rights, remedies,
obligations or liabilities under or by reason of this Agreement.
9.08. Headings. The headings of the Articles, Sections and paragraphs
of this Agreement are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
9.09. Modification and Waiver. No amendment, modification or
alteration of the terms or provisions of this Agreement shall be binding unless
the same shall be in writing and duly executed by the parties hereto, except
that any of the terms or provisions of this Agreement may be waived in writing
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at any time by the party which is entitled to the benefits of such waived terms
or provisions. No waiver of any of the provisions of this Agreement shall be
deemed to or shall constitute a waiver of any other provision hereof (whether or
not similar). No delay on the part of any party in exercising any right, power
or privilege hereunder shall operate as a waiver thereof.
9.10. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
9.11. Expenses. Except as otherwise provided herein, each Seller and
Buyer shall pay all costs and expenses incurred by him or it or on his or its
behalf in connection with this Agreement and the transactions contemplated
hereby, including, without limiting the generality of the foregoing, fees and
expenses of its own financial consultants, accountants and counsel.
9.12. Notices. Any notice, request, instruction or other document to
be given hereunder by any party hereto to any other party shall be in writing
and shall be given (and will be deemed to have been duly given upon receipt) by
delivery in person, by electronic facsimile transmission, by overnight courier
or by registered or certified mail, postage prepaid,
if to Sellers to:
222 Webster Street
Hanover, MA 02339
Attention: David Romano
Telephone: (781) 982-3000
Facsimile: (781) 921-1368
with a copy to:
Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, MA 02110
Attention: James Westra, Esq.
Telephone: (617) 951-6600
Facsimile: (617) 951-1295
if to Buyer to it at:
2047 Route 13 North
Burlington, NJ 08016
Attention: Marc Sherman
Telephone: (609) 499-4200
Facsimile: (609) 499-4958
with a copy to:
Applied Cellular Technology, Inc.
400 Royal Palm Way, Suite. 410
Palm Beach, FL 33480
Attention: Michael Krawitz
Telephone: (561) 366-4800
Facsimile: (561) 366-0002
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or at such other address for a party as shall be specified by like notice.
9.13. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware without giving effect to
the principles of conflicts of law. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of the State of Delaware and of the United States of America, in
each case located in the County of New Castle, for any Litigation arising out of
or relating to this Agreement and the transactions contemplated hereby (and
agrees not to commence any Litigation relating thereto except in such courts),
and further agrees that service of any process, summons, notice or document by
U.S. registered mail to its respective address set forth in this Agreement shall
be effective service of process for any Litigation brought against it in any
such court. Each of the parties hereto hereby irrevocably and unconditionally
waives any objection to the laying of venue of any Litigation arising out of
this Agreement or the transactions contemplated hereby in the courts of the
State of Delaware or the United States of America, in each case located in the
County of New Castle, and hereby further irrevocably and unconditionally waives
and agrees not to plead or claim in any such court that any such Litigation
brought in any such court has been brought in an inconvenient forum.
9.14. Public Announcements. Neither Sellers nor Buyer shall make any
public statements, including, without limitation, any press releases, with
respect to this Agreement and the transactions contemplated hereby without the
prior written consent of the other party except as may be required by law. If a
public statement is required to be made by law, the parties shall consult with
each other in advance as to the contents and timing thereof.
9.15. Payments to Sellers. In connection with any payment obligation
of Buyer hereunder, Sellers shall provide Buyer with payment instructions. In
the absence of joint instructions by Sellers, Buyer shall be deemed to have
discharged such payment obligation by paying one half of such payment obligation
to each Seller (in accordance with the instructions received by such Seller).
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf as of the date first above written.
BUYER:
INTELLESALE.COM, INC.
By:
-----------------------------
Name:
Title:
APPLIED CELLULAR TECHNOLOGY, INC.
By:
-----------------------------
Name:
Title:
SELLERS:
--------------------------------
DAVID ROMANO
--------------------------------
ERIC LIMONT
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AGREEMENT OF PURCHASE AND SALE
Dated as of June 4, 1999
by and among
INTELLESALE.COM, INC.,
APPLIED CELLULAR TECHNOLOGY, INC.,
DAVID ROMANO
and
ERIC LIMONT
<PAGE>
ARTICLE I TERMS OF PURCHASE AND SALE 1
1.01. SALE OF THE STOCK 1
1.02. THE CLOSING 2
1.03. PURCHASE PRICE AND PAYMENT 3
1.04. CLOSING BALANCE SHEET; TRUE-UP PAYMENT 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLERS 8
2.01. CAPITALIZATION 8
2.02. ORGANIZATION; SUBSIDIARIES 9
2.03. CORPORATE POWER AND AUTHORITY; EFFECT OF AGREEMENT 9
2.04. FINANCIAL STATEMENTS 9
2.05. ABSENCE OF CERTAIN CHANGES OR EVENTS 10
2.06. ASSETS AND PROPERTIES 11
2.07. INTELLECTUAL PROPERTY 12
2.08. COMMITMENTS 15
2.09. LITIGATION 18
2.10. COMPLIANCE WITH LAWS 18
2.11. EMPLOYEE BENEFIT PLANS 18
2.12. ENVIRONMENTAL MATTERS 24
2.13. CONSENTS 27
2.14. TAXES 27
2.15. FEES 30
2.16. SIGNIFICANT CUSTOMERS AND SUPPLIERS 30
2.17. INTERCOMPANY TRANSACTIONS 30
2.18. INSURANCE 30
2.19. YEAR 2000 31
2.20. SOLE REPRESENTATIONS AND WARRANTIES 31
ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER 32
3.01. ORGANIZATION 32
3.02. CORPORATE POWER AND AUTHORITY; EFFECT OF AGREEMENT 32
3.03. CONSENTS 32
3.04. AVAILABILITY OF FUNDS 33
3.05. PURCHASE FOR INVESTMENT 33
3.06. FEES 33
3.07. REGISTRATION RIGHTS 33
3.08. SOLE REPRESENTATIONS AND WARRANTIES 33
ARTICLE IV COVENANTS 33
4.01. COMPLIANCE WITH ANTITRUST LAWS; REGULATORY AND OTHER CONSENTS 33
4.02. CONDUCT OF BUSINESS 34
<PAGE>
4.03. ACCESS 35
4.04. NO SOLICITATION 36
4.05. FURTHER ASSURANCES 36
4.06. CONFIDENTIALITY AGREEMENTS 36
4.07. NOTICE 36
4.08. CONFIDENTIALITY 37
4.09. RESPONSIBILITY FOR TAXES; RETURNS; AUDITS 37
4.10. COOPERATION WITH PUBLIC FILINGS 43
4.11. CASH MANAGEMENT; FINANCING ARRANGEMENTS 44
4.12. NON-COMPETITION AGREEMENT 44
4.13. RULE 144 REPORTING 45
4.14. PARENT GUARANTY 46
4.15. EXHIBIT AND SCHEDULE COMPLETION; TAX MATTERS 46
ARTICLE V CONDITIONS TO BUYER'S OBLIGATIONS 46
5.01. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLERS 46
5.02. NO PROHIBITION 47
5.03. CONSENTS 47
5.04. EMPLOYMENT AGREEMENTS 47
5.05. NO MATERIAL ADVERSE CHANGE 47
ARTICLE VI CONDITIONS TO SELLERS' OBLIGATIONS 48
6.01. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER 48
6.02. NO PROHIBITION 48
6.03. HSR ACT 48
ARTICLE VII STOCK CERTIFICATES; LEGEND 48
7.01. SECURITIES LAWS; LEGEND 48
ARTICLE VIII TERMINATION PRIOR TO CLOSING 49
8.01. TERMINATION 49
8.02. EFFECT ON OBLIGATIONS 50
ARTICLE IX MISCELLANEOUS 50
9.01. SURVIVAL 50
9.02. AGREEMENT TO INDEMNIFY 51
9.03. INDEMNIFICATION PROCEDURE 51
9.04. OTHER INDEMNIFICATION MATTERS 53
9.05. INTERPRETIVE PROVISIONS 54
9.06. ENTIRE AGREEMENT 54
ii
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9.07. SUCCESSORS AND ASSIGNS 54
9.08. HEADINGS 55
9.09. MODIFICATION AND WAIVER 55
9.10. COUNTERPARTS 55
9.11. EXPENSES 55
9.12. NOTICES 55
9.13. GOVERNING LAW 57
9.14. PUBLIC ANNOUNCEMENTS 57
9.15. PAYMENTS TO SELLERS 57
iii
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Term Defined
Index of Defined Terms
Term Defined
- ---- -------
ACM Section 2.12(b)
Act Section 7.02
Allocation Section 4.09(d)(3)
Ancillary Document Section 9.01
Annual Financial Statements Section 2.04(a)
Antitrust Division Section 4.01(a)
Arbiter Section 1.04(c)
Benefit Plan Section 2.11(l)
Business Recitals
Buyer Preamble
Buyer's Indemnified Group Section 9.02(b)
Closing Balance Sheet Section 1.04(a)
Closing Book Value Section 1.04(d)
Closing Date Section 1.02
Closing Section 1.02
Code Section 2.11(l); Section 2.14(f)(v)
Commitments Section 2.08(a)
Company Recitals
Company Benefit Plan Section 2.11(l)
Company Intellectual Property Section 2.07(j)
Competitive Activity Section 4.12
Competitor Section 4.12
Confidential Information Section 4.08
Deductible Section 9.04(b)
Department Section 2.11(l)
EBIT Section 1.03(e)
Employee Agreement Section 2.11(l)
Employee Section 2.11(l)
Encumbrances Section 2.01
Environmental Costs Section 2.12(b)
Environmental Laws Section 2.12(b)
Environmental Matter Section 2.12(b)
Environmental Permits Section 2.12(a)(ii)
ERISA Affiliate Section 2.11(l)
ERISA Section 2.11(l)
Final Closing Balance Sheet Section 1.04(d)
Financial Statements Section 2.04(a)
First Payment Section 1.03
<PAGE>
First Earnout Payment Section 1.03
FTC Section 4.01(a)
GAAP Section 1.04(b)
Hazardous Substances Section 2.12(b)
HMO Section 2.11(k)
HSR Act Section 1.02
Income Tax Return Section 2.14(f)(iv)
Income Tax Section 2.14(f)(ii)
Indemnified Party Section 9.03(a)
Indemnifying Party Section 9.03(a)
Intellectual Property Section 2.07(j)
IRS Section 2.11(l)
Leased Real Property Section 2.06(d)
Litigation Section 2.09
Losses Section 9.02(a)
Major Customers Section 2.16
Major Suppliers Section 2.16
March 31 Balance Sheet Section 2.04(a)
Market Value Section 1.03
Multi-Employer Plan Section 2.11(l)
Notices Section 9.03(a)
Owned Real Property Section 2.06(c)
PBGC Section 2.11(l)
PCBs Section 2.12(b)
Pension Plan Section 2.11(l)
Products Section 2.17
Purchase Price Section 1.02
Regulatory Agencies Section 4.01(a)
Required Consent Section 4.01(b)
Second Earnout Payment Section 1.03
Section 338 Elections Section 4.09(d)(1)
Section 338(h)(10) Elections Section 4.09(d)(1)
Section 338(h)(10) Forms Section 4.09(d)(3)
Sellers' Group Section 2.14(f)(vii)
Sellers Preamble
Sellers' Indemnified Group Section 9.02(a)
Special Indemnifications 9.04(c)
Stock Recitals
Subsidiaries Section 2.02(b)
Target Book Value Section 1.04(d)
Tax Distribution Amount Section 4.09
<PAGE>
Tax Return Section 2.14(f)(iii)
Tax Sharing Agreement Section 4.09(c)(1)
Tax Section 2.14(f)(i)
Third Earnout Payment Section 1.03
Treasury Regulations Section 2.14(f)(vi)
True-up Payment Section 1.04(d)
Welfare Plan Section 2.11(l)
Year 2000 Problem Section 2.20
<PAGE>
Schedule 3.07
Registration Rights
Applied Cellular Technology and Messrs. Sherman and Cummings have registration
rights requiring Buyer to register their shares, however each of the foregoing
will be subject to a lock-up agreement with Buyer's underwriters.
No shareholder has guaranteed sales price for any equity security, except that
if there is no IPO in certain specified period, Messrs. Sherman and Cummings
have agreements which allow them to put a portion of their interest in Buyer to
ACT.
Exhibit 2.2
AMENDMENT NO. 1
This Amendment No. 1 (this "Amendment"), dated as of June 9, 1999, to
the Agreement of Purchase and Sale (the "Agreement"), dated as of June 4, 1999,
by and among Intellesale.com, Inc., a Delaware corporation ("Buyer"), Applied
Cellular Technology, Inc., a Missouri corporation ("ACT"), and David Romano and
Eric Limont, (each individually, a "Seller" and collectively, the "Sellers").
W I T N E S S E T H:
In consideration of the mutual agreements hereinafter set forth, the
parties do hereby agree as follows:
1. Purchase Price. (a) The first sentence of Section 1.03(a) is hereby
amended by deleting the amount "$25,000,000" and replacing it with the amount
"25,055,000".
(b) Clause (i) of Section 1.03(a) is hereby amended by deleting the
amount "$10,000,000" and replacing it with the amount "$10,055,000".
2. Target Book Value. Clause (iii) of Section 1.04(d) is hereby
amended by deleting such clause and replacing it in its entirety with the
following:
"(iii) the term "Target Book Value" shall mean (X)
$4,500,000, minus (Y) any Tax Distribution Amount (as
defined in Section 4.09), minus (Z) an amount previously
distributed (but not more than $100,000) in respect of the
estimated aggregate federal and state income tax liability
of Sellers with respect to the S corporation income from the
normal operation of Bostek during the period beginning on
January 1, 1999 and ending on March 31, 1999".
3. Responsibility For Taxes. (a) Paragraph (1) of Section 4.09(a) of
the Agreement is hereby amended by adding the following to the end of the first
sentence thereof (immediately before the period):
"; and provided further that Sellers' obligation to
indemnify Buyer as provided in this sentence shall not apply
to the extent Buyer fails to make payments (or allow
distributions) to Sellers or Bostek as provided in this
Section 4.09".
(b) Paragraph (2) of Section 4.09(d) of the Agreement is hereby
amended by deleting such Paragraph and replacing it in its entirety with the
following:
"(2) If the Section 338(h)(10) Elections are made, Sellers
and Bostek will have an Income Tax liability in an amount
equal to the Section 338(h)(10) Payment (as defined below).
<PAGE>
Notwithstanding anything to the contrary in Section 4.09(a),
Buyer shall pay to Sellers or Bostek (as applicable), not
later than 30 days before the Section 338(h)(10) Payment
must be paid by Sellers or Bostek (as applicable) to the
applicable governmental authority, an amount equal to (i)
the difference between (x) the combined Federal and State
Income Tax liability of the Sellers assuming the Section
338(h)(10) Elections were made, and (y) the combined Federal
and State Income Tax liability of the Sellers assuming the
Section 338(h)(10) Elections were not made (the "Section
338(h)(10) Payment"), plus (ii) a payment equal to the
additional Taxes incurred by Sellers by virtue of receiving
the Section 338(h)(10) Payment and the additional Taxes
incurred by Sellers by virtue of receiving any payments
pursuant to this clause (ii). Buyer shall pay Sellers all
federal, state, local and foreign entity level taxes
incurred by Bostek under Section 1374 or its equivalent as a
result of, arising from or attributable to the making of the
Section 338(h)(10) Elections, up to a maximum of $56,000,
such payment to be made not later than 30 days before the
same must be paid by Sellers to the applicable governmental
authority. Schedule 4.09(d) sets forth an example of the
calculation of the Section 338(h)(10) Payment; the parties
agree that the methodology used in such example will govern
any disputes between the parties regarding the
interpretation of this Section 4.09(d)(2) as it relates to
calculating the actual Section 338(h)(10) Payment. Buyer
shall indemnify Sellers against Losses arising out of any
failure by Buyer to make the payments required of Buyer
pursuant to this paragraph (2). Notwithstanding anything to
the contrary contained herein, Buyer shall not be required
to pay to Sellers any amount in respect of time value of
money in connection with Taxes being due or paid earlier as
a result of making the Section 338(h)(10) Elections."
(c) Section 4.09(h) is hereby amended by adding to the end thereof the
following sentence:
"Sellers shall pay to Bostek the amount, if any, of the
excess of (X) the amounts distributed to Sellers in respect
of the estimated aggregate federal and state income tax
liability of Sellers with respect to the S corporation
income from the normal operation of Bostek during the period
beginning on January 1, 1999 and ending on the Closing Date,
over (Y) the actual federal and state income tax liability
of Sellers for such period as computed in accordance with
the foregoing sentence. Any amount, in excess of $100,000,
paid by Sellers pursuant to the preceding sentence in
respect of the period from January 1, 1999 to March 31, 1999
shall be deemed to have been paid to Bostek one minute prior
to the close of business on the day immediately preceding
the Closing Date (and, accordingly, shall be reflected in
the Closing Balance Sheet)."
4. Acceptance of Schedules; Completion of Tax Matters. Buyer
acknowledges receipt of Sellers' schedules to the Agreement and explicitly
waives its right to terminate the Agreement pursuant to Sections 4.15 and
8.01(d). Sellers acknowledge that this Amendment constitutes the amendment
referred to in Section 4.15 and explicitly waive their right to terminate the
Agreement pursuant to Sections 4.15 and 8.01(d). Except as explicitly set forth
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in this Section 3, neither Buyer nor Sellers are waiving rights of termination
set forth in the Agreement.
5. Headings. The headings of the Sections and paragraphs of this
Amendment are inserted for convenience only and shall not be deemed to
constitute part of this Agreement or to affect the construction hereof.
6. Modification and Waiver. No amendment, modification or alteration
of the terms or provisions of this Amendment shall be binding unless the same
shall be in writing and duly executed by the parties hereto, except that any of
the terms or provisions of this Agreement may be waived in writing at any time
by the party which is entitled to the benefits of such waived terms or
provisions. No waiver of any of the provisions of this Amendment shall be deemed
to or shall constitute a waiver of any other provision hereof (whether or not
similar). No delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof.
7. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
8. Governing Law. This Amendment shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to the
principles of conflicts of law. Each of the parties hereto hereby irrevocably
and unconditionally consents to submit to the exclusive jurisdiction of the
courts of the State of Delaware and of the United States of America, in each
case located in the County of New Castle, for any Litigation (as defined in the
Agreement) arising out of or relating to this Amendment and the transactions
contemplated hereby (and agrees not to commence any Litigation relating thereto
except in such courts), and further agrees that service of any process, summons,
notice or document by U.S. registered mail to its respective address set forth
in this Agreement shall be effective service of process for any Litigation
brought against it in any such court. Each of the parties hereto hereby
irrevocably and unconditionally waives any objection to the laying of venue of
any Litigation arising out of this Amendment or the transactions contemplated
hereby in the courts of the State of Delaware or the United States of America,
in each case located in the County of New Castle, and hereby further irrevocably
and unconditionally waives and agrees not to plead or claim in any such court
that any such Litigation brought in any such court has been brought in an
inconvenient forum.
[Remainder of Page Intentionally Left Blank]
3
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Amendment to be executed on its behalf as of the date first above written.
BUYER:
INTELLESALE.COM, INC.
By:
-----------------------------
Name:
Title:
APPLIED CELLULAR TECHNOLOGY, INC.
By:
-----------------------------
Name:
Title:
---------------------------------
SELLERS:
---------------------------------
DAVID ROMANO
---------------------------------
ERIC LIMONT
4
<PAGE>
Schedule 5.03
Consents, etc.
1. Waivers must be obtained for any rights of first refusal applicable to
shares of common stock of Bostek or Micro Components (see Schedule
2.08(a)(iii)(b)-(d)).
2. Bostek's guarantee of the mortgage on the facility located at 222
Webster St. must be removed.
3. Bostek and Micro Components must revoke the power of attorney granted
to Mr. Parsons (and Mr. Parsons must agree to such revocation).
4. See Schedule 2.13.
5
Exhibit 3.1
FORM OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
INTELLESALE.COM, INC.
It is hereby certified that:
1. The present name of the corporation (hereinafter called the
"corporation") is Intellesale.com, Inc. The name under which the corporation was
originally incorporated was Intellesale.com, Inc.; and the date of filing the
original certificate of incorporation of the corporation with the Secretary of
State of the State of Delaware is December 7, 1998.
2. The certificate of incorporation is hereby amended in its entirety
as set forth in the Amended and Restated Certificate of Incorporation
hereinafter provided for.
3. The provisions of the certificate of incorporation of the
corporation as heretofore amended and/or supplemented, and as herein amended,
are hereby restated and integrated into the single instrument which is
hereinafter set forth, and which is entitled Amended and Restated Certificate of
Incorporation of Intellesale.com, Inc.
4. The amendments and the restatement of the certificate of
incorporation herein certified have been duly adopted by the stockholders in
accordance with the provisions of Sections 228, 242 and 245 of the General
Corporation Law of the State of Delaware.
5. The certificate of incorporation of the corporation, as amended and
restated herein, shall at the effective time of this restated certificate on
incorporation, read as follows:
ARTICLE I
The name of the corporation (hereinafter referred to as the
"Corporation") is Intellesale.com, Inc.
ARTICLE II
The address of the registered office of the Corporation in the
State of Delaware is 1013 Centre Road, in the City of Wilmington, County of New
Castle 19805. The name and address of the Registered agent is Corporation
Service Company.
ARTICLE III
The period of duration of the Corporation is perpetual.
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ARTICLE IV
The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law ("DGCL").
ARTICLE V
(a) The total number of shares of capital stock of all classes
which the Corporation shall have the authority to issue is Thirty Million
(30,000,000) shares, consisting of Forty Million (40,000,000) shares of Common
Stock, par value $.01 per share, and Five Million (5,000,000) shares of
Preferred Stock, par value $.01 per share.
(b) The designations, voting powers, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions of the above classes of stock are as follows:
(i) Subject to the limitations hereinafter contained and to
the requirements of the laws of the State of Delaware, authority is
hereby vested in the Board of Directors of the Corporation to issue
from time to time said Five Million (5,000,000) shares of Preferred
Stock in one or more series, with such voting powers, full or limited,
or no voting powers, and such designations, preferences and relative,
participating, optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated in the
resolution or resolutions providing for the issuance of such stock
adopted by the Board of Directors. Without limiting the generality of
the foregoing, in the resolution or resolutions providing for the
issuance of such shares of each particular series of Preferred Stock,
subject to the limitations hereinafter contained and to the
requirements of the laws of the State of Delaware, the Board of
Directors is also expressly authorized:
(A) to fix the distinctive serial designation of the
shares of any such series;
(B) to fix the consideration for which the shares of
any such series are to be issued;
(C) to fix the rate or amount per annum, if any, at
which the holders of the shares of any such series shall be
entitled to receive dividends, the dates on which such
dividends shall be payable, whether the dividends shall be
cumulative or noncumulative, and if cumulative, to fix the
date or dates from which such dividends shall be cumulative;
(D) to fix the price or prices at which, the times
during which, and the other terms, if any, upon which the
shares of any such series may be redeemed;
(E) to fix the rights, if any, which the holders of
shares of any such series have in the event of dissolution or
upon distribution of the assets of the Corporation;
2
<PAGE>
(F) to determine whether the shares of any such
series shall be made convertible into or exchangeable for
other securities of the Corporation, including shares of the
Common Stock of the Corporation or shares of any other series
of the Preferred Stock of the Corporation, now or hereafter
authorized, or any new class of preferred stock of the
Corporation hereafter authorized, the price or prices or the
rate or rates at which conversion or exchange may be made, and
the terms and conditions upon which any such conversion right
or exchange right shall be exercised;
(G) to determine whether a sinking fund shall be
provided for the purchase or redemption of shares of any
series and, if so, to fix the terms and amount or amounts of
such sinking fund;
(H) to determine whether the shares of any such
series shall have voting rights, and, if so, to fix the voting
rights of the shares of such series; and
(I) to fix such other preferences and rights
privileges and restrictions applicable to any such series as
may be permitted by law.
(ii) Subject to the prior rights of the holders of any shares
of Preferred Stock, the holders of the Common Stock shall be entitled
to receive, to the extent permitted by law, such dividends as may be
declared from time to time by the Board of Directors.
In the event of any voluntary or involuntary liquidation,
dissolution, distribution of assets or winding up of the Corporation, after the
holders of the Preferred Stock then outstanding, if any, shall have received the
full preferential amounts to which such holders may be entitled upon such
voluntary or involuntary liquidation, dissolution, distribution of assets or
winding up, the holders of Common Stock shall be entitled, to the exclusion of
such holders of the Preferred Stock then outstanding, to receive all the
remaining assets of the Corporation of whatever kind available for distribution
to stockholders, ratably in proportion to the number of shares of Common Stock
held by them respectively. A consolidation, merger or reorganization of the
Corporation with any other corporation or corporations, or a sale of all or
substantially all of the assets of the Corporation, shall not be considered a
dissolution, liquidation or winding up of the Corporation within the meaning of
the immediately preceding sentence.
Except as may otherwise by required by law, the By-Laws of the
Corporation or this Certificate of Incorporation, each holder of Common Stock
shall be entitled to one vote for each share of Common Stock held of record in
the name of such stockholder on all matters voted upon by the stockholders,
including the election of directors.
ARTICLE VI
All preemptive rights of shareholders are hereby denied, so
that no shares of capital stock of the Corporation of any class whether now or
hereafter authorized and no other security of the Corporation shall carry with
it and no holder or owner of any share or shares of capital stock of the
3
<PAGE>
Corporation of any class whether now or hereafter authorized or of any other
security of the Corporation shall have any preferential or preemptive right to
acquire additional shares of capital stock of the Corporation of any class
whether now or hereafter authorized or of any other security of the Corporation.
All cumulative voting rights are hereby denied, so that none
of the capital stock of the Corporation of any class whether now or hereafter
authorized or of any other security of the Corporation shall carry with it and
no holder or owner of any share or shares of capital stock of the Corporation of
any class whether now or hereafter authorized or of any other security of the
Corporation shall have any right to cumulative voting in the election of
directors or for any other purpose.
The foregoing provisions are not intended to modify or
prohibit any provisions of any voting trust or agreement between or among
holders or owners of shares of stock or other securities.
ARTICLE VII
(a) Except as may be otherwise provided by law or in this
Certificate of Incorporation, the business and affairs of the Corporation shall
be managed under the direction of the Board of Directors. The number of
directors of the Corporation shall be fixed by, or in the manner provided in,
the By-Laws of the Corporation. In furtherance and not in limitation of the
powers conferred by the laws of the State of Delaware, the Board of Directors is
expressly authorized and empowered:
(i) to make, alter, amend or repeal the By-Laws of the
Corporation in any manner not inconsistent with the laws of the State of
Delaware or this Certificate of Incorporation, subject to the power of the
stockholders, at the time entitled to vote, to alter, amend or repeal By-Laws
made by the Board of Directors;
(ii) to fix from time to time the amount of net profits of
the Corporation or of its surplus to be reserved as working capital or for any
other lawful purpose;
(iii) to authorize and issue obligations of the
Corporation, secured or unsecured, and to include therein such provisions as to
redemption, conversion or other terms thereof as the Board of Directors in its
sole discretion may determine, and to authorize the mortgaging or pledging, as
security therefor, of any property of the Corporation, real or personal,
including after-acquired property;
(iv) to determine whether any, and if any, what part, of
the net profits of the Corporation or of its surplus shall be declared in
dividends and paid to the stockholders, and to direct and determine the use and
disposition of such net profits or such surplus; and
(v) from time to time, without the vote or assent of the
stockholders, to issue additional shares of authorized Common Stock.
4
<PAGE>
In addition to the powers and authorities herein or by law
expressly conferred upon it, the Board of Directors may exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation,
subject, nevertheless, to the provisions of the laws of the State of Delaware,
of this Certificate of Incorporation and of the By-Laws of the Corporation.
(b) No contract or other transaction of the Corporation shall
be affected by the fact that any of the directors of the Corporation are in any
way interested in or connected with any other party to such contract or
transaction, or are themselves parties to such contract or transaction, provided
that at the meeting of the Board of Directors or of the committee there of
authorizing or confirming such contract or transaction there shall be present a
quorum of directors not so interested or connected, and such contract or
transaction shall be approved by a majority of such quorum, which shall consist
of directors not so interested or connected.
ARTICLE VIII
(a) The Corporation shall to the fullest extent permitted by
the laws of Delaware as the same now or may hereafter exist, indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he or she is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the Corporation, and with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he or she reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful. To the extent that a director or officer of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in this subsection (a) of this ARTICLE
VIII or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.
(b) Any indemnification required under subsection (a) of this
ARTICLE VIII (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because he or she has met
the applicable standard of conduct set forth in subsection (a) of this ARTICLE
VIII. Such determination shall be made (1) by the board of directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or, even
5
<PAGE>
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (3) by the stockholders.
(c) Expenses (including attorneys' fees) incurred by an
officer or a director in defending any civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation as authorized in or pursuant to this ARTICLE
VIII.
(d) The indemnification and advancement of expenses provided
by, or granted pursuant to paragraph (c) of this ARTICLE VIII shall not be
deemed exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any agreement, vote of
stockholders or disinterested directors, the By-Laws of the Corporation or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office.
(e) Without limiting the provisions of this ARTICLE VIII, the
Corporation is authorized from time to time, without further action by the
stockholders of the Corporation, to enter into agreements with any director or
officer of the Corporation providing such rights of indemnification as the
Corporation may deem appropriate, up to the maximum extent permitted by law. Any
agreement entered into by the Corporation with a director may be authorized by
the other directors, and such authorization shall not be invalid on the basis
that similar agreements may have been or may thereafter be entered into with
other directors.
(f) The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
Corporation, or is or was serving at the request of the Corporation as a
director or officer of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him or her and incurred
by him or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of this ARTICLE VIII.
(g) The indemnification and advancement of expenses provided
by, or granted pursuant to, this ARTICLE VIII shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and
administrators of such a person.
(h) For purposes of this ARTICLE VIII, references to a
corporation shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which if its separate existence had continued, would
have had power and authority to indemnify its directors or officers so that a
person who is or was a director or officer of such constituent corporation, or
is or was serving at the request of such constituent corporation as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
ARTICLE VIII with respect to the resulting or surviving corporation as he or she
6
<PAGE>
would have with respect to such constituent corporation if its separate
existence had continued.
(i) For purposes of this ARTICLE VIII, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director or officer of the Corporation which
imposes duties on, or involves services by such director or officer with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he or she reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this ARTICLE VIII.
(j) Persons who are not covered by the foregoing provisions of
this ARTICLE VIII and who are or were employees or agents of the Corporation, or
are or were serving at the request of the Corporation as employees or agents of
another corporation, partnership, joint venture, trust or other enterprise, may
be indemnified to the fullest extent permitted by the laws of Delaware as the
same now or may hereafter exist or to such lesser extent as the Board of
Directors of the Corporation, in its discretion, may from time to time deem
appropriate.
ARTICLE IX
Except as otherwise provided in this Certificate of
Incorporation, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders of the Corporation and may not be effected by consent in writing
by such stockholders. A special meeting of stockholders may be called only by
the Board of Directors pursuant to a resolution adopted by the affirmative vote
of a majority of the entire Board of Directors or by the Chairman of the Board
of Directors, a Vice Chairman of the Board of Directors or the President.
ARTICLE VIII
Whenever a compromise or arrangement is proposed between the
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as a consequence of such compromise or arrangement, the said
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<PAGE>
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors.
ARTICLE XI
A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director except (i) for 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) pursuant to Section 174 of the DGCL (providing for liability of
directors for unlawful payment of dividends or unlawful stock purchases or
redemptions), or (iv) for any transaction from which the director derived an
improper personal benefit. Should the DGCL be amended hereafter so as to expand
or limit the liability of a director, then the liability of a director of the
Corporation shall be so expanded to the fullest extent required or so limited to
the fullest extent permitted by such amendment without the need for amendment of
this Certificate of Incorporation or further action on the part of the
stockholders of the Corporation.
8
Exhibit 3.2
FORM OF
AMENDED AND RESTATED
BY-LAWS
OF
INTELLESALE.COM, INC.
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office of
Intellesale.com, Inc. (the "Corporation") shall be in the State of Delaware at
such location and with such registered agent in charge thereof as may be
established by the Board of Directors from time to time.
Section 1.2 Other Offices. The Corporation may also have
offices at such other places both within and without the State of Delaware as
the Board of Directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
STOCKHOLDERS
Section 2.1. Annual Meetings. An annual meeting of
stockholders shall be held for the election of directors and to transact such
other business as may properly be brought before the meeting at such date, time
and place either within or without the State of Delaware as may be designated
from time to time by the Board of Directors and stated in the notice of the
meeting.
Section 2.2. Special Meetings. A special meeting of the
stockholders may be called only by the Board of Directors pursuant to a
resolution adopted by the affirmative vote of a majority of the entire Board of
Directors or by the Chairman of the Board of Directors, a Vice Chairman of the
Board of Directors or the President. Only such business shall be conducted, and
only such proposals shall be acted upon, as shall have been properly brought
before the meeting as hereinafter provided.
Section 2.3. Notice of Meetings. Whenever stockholders are
required or permitted to take any action at a meeting, annual or special, a
written notice of the meeting shall be given to such stockholder or stockholders
which shall state the place, date and hour of the meeting and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. Unless
otherwise provided by law, the written notice of any meeting shall be given not
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less than ten (10) nor more than sixty (60) days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 2.4. Notice of Stockholder Business at Meetings. At
any meeting of stockholders, annual or special, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before the meeting as hereinafter provided. For a proposal to
be properly brought before a meeting, each item of business must either (a) be
specified in the notice of meeting (or any supplement thereto) given by or at
the direction of the Board of Directors or the persons calling the meeting as
herein provided, (b) be otherwise properly brought before the meeting by or at
the direction of the Board of Directors, or (c) be otherwise properly brought
before the meeting by a stockholder as hereinafter provided. For a proposal to
be properly brought before a meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation, in
the case of an annual meeting, not less than ninety (90) days nor more than one
hundred and twenty (120) days prior to the meeting of stockholders and, in the
case of a special meeting, not less than ten (10) days immediately following the
giving of notice of such special meeting; provided, however, that in the event
that less than one hundred (100) days notice or prior public disclosure of the
date of the annual meeting of stockholders is given or made to the stockholders,
to be timely, notice of a proposal delivered by the stockholder must be received
by the Secretary not later than the close of business on the tenth day following
the day on which notice of the date of the annual meeting of stockholders was
mailed or such public disclosure was made to the stockholders. The provisions of
this Section 2.4 shall also govern what constitutes timely notice for purposes
of Rule 14a-4(c) under the Securities Exchange Act of 1934, as amended. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the meeting (a) a brief description of the
proposal desired to be brought before the meeting and the reasons for conducting
such business at the meeting, (b) the name and address of record of the
stockholder proposing the business and any other stockholders known by such
stockholder to be supporting the proposal, (c) the class or classes of stock and
number of shares of such class or classes of stock which are beneficially owned
by the proposing stockholder or stockholders on the date of the stockholder
notice, and (d) any material interest of the proposing stockholder or
stockholders in the proposal.
Notwithstanding anything in these By-Laws to the contrary, no
business shall be conducted at a meeting of stockholders except in accordance
with the procedures set forth in this Section 2.4. The Board of Directors may
reject any stockholder proposal submitted for consideration at a meeting of
stockholders which is not made in accordance with the terms of this Section 2.4
or which is not a proper subject for stockholder action in accordance with
provisions of applicable law. Alternatively, if the Board of Directors fails to
consider the validity of any such stockholder proposal, the presiding officer of
the meeting of stockholders may, if the facts warrant, determine and declare to
the persons attending the meeting that the business was not properly brought
before the meeting in accordance with the provisions of this Section 2.4, and he
or she shall further declare that any such business not properly brought before
such meeting shall not be transacted. The Board of Directors or, as the case may
be, the presiding officer of the meeting shall have absolute authority to decide
questions of compliance with the foregoing procedures and the Board of
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Directors' or, as the case may be, the presiding officer's ruling thereon shall
be final and conclusive. This provision shall not prevent the consideration and
approval or disapproval at the annual meeting of stockholders of reports of
officers, directors and committees of the Board of Directors, but, in connection
with such reports, no new business shall be acted upon at such meeting unless
stated, filed and received as herein provided.
Section 2.5. Nomination of Director Candidates. To be
qualified for election as a director, persons must be nominated in accordance
with the procedures set forth in this Section 2.5. Nominations of candidates for
election to the Board of Directors of the Corporation may be made only by or at
the direction of the Board of Directors or by a stockholder entitled to vote at
such meeting of stockholders. All such nominations, except those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received by the Secretary not less
than ninety (90) days nor more than one hundred and twenty (120) days prior to
the meeting of stockholders; provided, however, that in the event that less than
one hundred (100) days' notice or prior public disclosure of the date of the
meeting of stockholders is given or made to stockholders, to be timely, notice
of a nomination delivered by such stockholder must be received by the Secretary
not later than the close of business on the tenth day following the day on which
notice of the date of the meeting of stockholders was mailed or such public
disclosure was made to the stockholders. Such stockholder's notice shall set
forth (a) the name, age, business address and residence address, and the
principal occupation or employment of any nominee proposed in such notice, (b)
the name and address of the stockholder or stockholders giving the notice as the
same appears in the Corporation's stock ledger, (c) the number of shares of
capital stock of the Corporation which are beneficially owned by any such
nominee and by such nominating stockholder or stockholders, and (d) such other
information concerning any such nominee as would be required, under the rules of
the Securities and Exchange Commission, in a proxy statement soliciting proxies
for the election of such nominee.
At the request of the Board of Directors, any person nominated
for election as a director shall furnish to the Secretary the information
required by this Section 2.5 to be set forth in a stockholder's notice of
nomination which pertains to the nominee. The Chairman of a meeting of
stockholders shall, if the facts warrant, determine and declare at such meeting
of stockholders that such nomination was not made in accordance with the
procedures prescribed by this Section 2.5, and he or she shall further declare
that the defective nomination shall be disregarded. The Chairman of a meeting of
stockholders shall have absolute authority to decide questions of compliance
with the foregoing procedures and his or her ruling thereon shall be final and
conclusive.
Section 2.6. Adjournments. Any meeting of stockholders, annual
or special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the Corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
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more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
Section 2.7. Quorum. At each meeting of stockholders, except
where otherwise provided by law or the Certificate of Incorporation or these
By-Laws, the holders of a majority of the outstanding shares of each class of
stock entitled to vote at the meeting, present in person or represented by
proxy, shall constitute a quorum. For purposes of the foregoing, two or more
classes or series of stock shall be considered a single class if the holders
thereof are entitled to vote together as a single class at the meeting. In the
absence of a quorum, the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided by Section 2.6 of these
By-Laws until a quorum shall be present or represented. The stockholders present
or represented at a duly organized meeting may continue to transact business
until adjournment, notwithstanding the withdrawal of enough stockholders to
leave less than a quorum. Shares of the Corporation's own capital stock
belonging on the record date for the meeting to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors of such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes; provided, however, that the foregoing shall not limit the right of the
Corporation to vote stock, including, but not limited to, its own stock, held by
it in a fiduciary capacity.
Section 2.8. Organization. Meetings of stockholders shall be
presided over by the Chairman of the Board, if any, or in his or her absence by
the Vice Chairman of the Board, if any, or in his or her absence by the
President, or in his or her absence by a Vice President, or in the absence of
all of the foregoing persons by a chairman designated by the Board of Directors,
or in the absence of such designation by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 2.9. Voting; Proxies. Unless otherwise provided in the
Certificate of Incorporation, each stockholder entitled to vote at any meeting
of stockholders shall be entitled to one vote for each share of stock held by
him or her which has voting power upon the matter in question. Each stockholder
entitled to vote at a meeting of stockholders may authorize another person or
persons to act for him or her by proxy, but no such proxy shall be voted or
acted upon after three (3) years from the date of such proxy, unless the proxy
provides for a longer period. A duly executed proxy shall be irrevocable if it
states that it is irrevocable and if, and only as long as, it is coupled with an
interest sufficient in law to support an irrevocable power. A stockholder may
revoke any proxy which is not irrevocable by attending the meeting and voting in
person or by filing an instrument in writing revoking the proxy or another duly
executed proxy bearing a later date than the original proxy with the Secretary
of the Corporation. Voting at meetings of stockholders need not be by written
ballot and need not be conducted by inspectors unless the holders of a majority
of the outstanding shares of all classes of stock entitled to vote thereon
present in person or by proxy at such meeting shall so determine. At all
meetings of stockholders for the election of directors, a plurality of the votes
cast shall be sufficient to elect. All other elections and questions shall,
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unless otherwise provided by law or by the Certificate of Incorporation or these
By-Laws, be decided by the vote of the holders of a majority of the outstanding
shares of all classes of stock entitled to vote thereon present in person or by
proxy at the meeting, provided that (except as otherwise required by law or by
the Certificate of Incorporation) the Board of Directors may require a larger
vote upon any election or question.
Section 2.10. Fixing Date for Determination of Stockholders of
Record. In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the Board of Directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. If no record
date is fixed by the Board of Directors: (1) the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; (2) the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board may fix a new record date for the adjourned meeting.
Section 2.11. List of Stockholders Entitled to Vote. The
Secretary shall prepare and make, at least ten (10) days before every meeting of
stockholders, annual or special, a complete list of the stockholders entitled to
vote at such meeting, arranged in alphabetical order, and showing the address of
each such stockholder and the number of shares registered in the name of each
such stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
stockholder who is present.
Section 2.12. Consent of Stockholders in Lieu of Meeting.
Except as otherwise provided in the Certificate of Incorporation, any action
required by law to be taken at any annual or special meeting of stockholders of
the Corporation, or any action which may be taken at any annual or special
meeting of stockholders, may not be effected by consent in writing in lieu of a
meeting by such stockholders.
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ARTICLE III
BOARD OF DIRECTORS
Section 3.1. Powers; Number; Qualifications. Except as may be
otherwise provided by law or in the Certificate of Incorporation, the business
and affairs of the Corporation shall be managed under the direction of the Board
of Directors. The number of directors which shall constitute the whole Board
shall be not less than five (5) nor more than twenty (20). The exact number of
directors within the minimum and maximum limitation specified in the preceding
sentence shall be fixed from time to tome exclusively by resolution of a
majority of the whole Board. Directors need not be stockholders or residents of
the State of Delaware.
Section 3.2. Election; Term of Office; Resignation; Removal;
Vacancies. The members of each class of directors shall be elected at the annual
meeting of the stockholders at which the term of office of such class expires,
as provided herein. Each director shall hold office until the expiration of the
term for which he or she was elected and shall continue in office until his or
her successor is elected and qualified or until his or her earlier resignation
or removal. Any director may resign at any time upon written notice to the Board
of Directors or to the President or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein, and unless
otherwise specified therein, no acceptance of such resignation shall be
necessary to make it effective. A director may be removed from office only for
cause and by the affirmative vote of the holders of not less than eighty percent
(80%) of all the outstanding shares of stock of the Corporation entitled to vote
generally in the election of directors at a special meeting of stockholders
called expressly for that purpose. Unless otherwise provided in the Certificate
of Incorporation or these By-Laws, any vacancies which exist following the
election of the initial director shall be filled by the initial director and
vacancies and newly created directorships resulting from any increase in the
authorized number of directors or from any other cause shall be filled by a
majority of the directors then in office, although less than a quorum, or by the
sole remaining director, and directors so chosen shall hold office until the
next annual election of the class for which such directors shall have been
chosen, and until their successors shall be elected and qualified. The
stockholders of the Corporation are expressly prohibited from cumulating their
votes in any election of directors of the Corporation.
Section 3.3. Regular Meetings. Regular meetings of the Board
of Directors shall be held at such places within or without the State of
Delaware and at such times as the Board may from time to time determine, and if
so determined, notice thereof need not be given.
Section 3.4. Special Meetings. Special meetings of the Board
of Directors may be held at any time or place within or without the State of
Delaware whenever called by the Chairman of the Board, if any, by the Vice
Chairman of the Board, if any, by the President or by any two directors. Notice
of any special meeting of the Board of Directors shall be given at least five
(5) days prior to the date of the special meeting by written notice to each
director.
Section 3.5. Telephonic Meetings Permitted. Unless otherwise
restricted by the Certificate of Incorporation or these By-Laws, members of the
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Board of Directors, or any committee designated by the Board, may participate in
a meeting of the Board or of such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section 3.5 shall constitute presence in person at such
meeting.
Section 3.6. Quorum; Vote Required for Action. At all meetings
of the Board of Directors, a majority of the entire Board of Directors shall
constitute a quorum for the transaction of business. The vote of a majority of
the directors present at a meeting at which a quorum is present shall be the act
of the Board unless the Certificate of Incorporation or these By-Laws shall
require a vote of a greater number. In case at any meeting of the Board a quorum
shall not be present, the members of the Board present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 3.7. Organization. Meetings of the Board of Directors
shall be presided over by the Chairman of the Board, if any, or in his or her
absence by the Vice Chairman of the Board, if any, or in his or her absence by
the President, or in their absence by a chairman chosen at the meeting. The
Secretary shall act as secretary of the meeting, but in his or her absence the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
Section 3.8. Informal Action by Directors. Unless otherwise
restricted by the Certificate of Incorporation or these By-Laws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or such committee.
Section 3.9. Compensation. The Board of Directors shall have
the authority to fix compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of
Directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
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ARTICLE IV
COMMITTEES
Section 4.1. Committees. The Board of Directors may, by
resolution adopted by a majority of the entire Board, designate one or more
committees, each committee to consist of one or more of the directors of the
Corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of such committee. In the absence or disqualification of a member of a
committee, the member or members thereof present at any meeting of such
committee and not disqualified from voting, whether or not he or she or they
constitute a quorum, may unanimously appoint another member of the Board to act
at such meeting in place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors,
shall have and may exercise all the powers and authority of the Board in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have power or authority in reference to amending the
Certificate of Incorporation, adopting an agreement of merger or consolidation,
recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of dissolution,
removing or indemnifying directors or amending these By-Laws; and, unless the
resolution expressly so provides, no such committee shall have the power or
authority to declare a dividend or to authorize the issuance of stock.
Section 4.2. Committee Rules. Unless the Board of Directors
otherwise provides, each committee designated by the Board may make, alter and
repeal rules for the conduct of its business. In the absence of a provision by
the Board of Directors or a provision in the rules of such committee to the
contrary, a majority of the entire authorized number of members of such
committee shall constitute a quorum for the transaction of business, the vote of
a majority of the members present at a meeting at the time of such vote if a
quorum is then present shall be the act of such committee, and in all other
respects each committee shall conduct its business in the same manner as the
Board of Directors of the Corporation conducts its business pursuant to Article
III of these By-Laws.
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ARTICLE V
OFFICERS
Section 5.1. Officers; Election; Qualification; Term of
Office; Resignation; Removal; Vacancies. As soon as practicable after the annual
meeting of stockholders in each year, the Board of Directors shall elect a
President and a Secretary, and the Board of Directors may, if it so determines,
elect from among its members a Chairman of the Board and a Vice Chairman of the
Board. The Board may also elect one or more Vice Presidents, one or more
Assistant Vice Presidents, one or more Assistant Secretaries, a Treasurer and
one or more Assistant Treasurers and may give any of them such further
designations or alternate titles as it considers desirable. Each such officer
shall hold office until the first meeting of the Board of Directors after the
annual meeting of stockholders next succeeding his or her election, and until
his or her successor is elected and qualified or until his or her earlier
resignation or removal. Any officer may resign at any time upon written notice
to the Board of Directors or to the President or the Secretary of the
Corporation. Such resignation shall take effect at the time specified therein,
and unless otherwise specified therein no acceptance of such resignation shall
be necessary to make it effective. The Board of Directors may remove any officer
with or without cause at any time. Any such removal shall be without prejudice
to the contractual rights of such officer, if any, with the Corporation, but the
election or appointment of an officer shall not of itself create contractual
rights. Any number of offices may be held by the same person. Any vacancy
occurring in any office of the Corporation by death, resignation, removal or
otherwise may be filled for the unexpired portion of the term by the Board of
Directors at any regular or special meeting of the Board.
Section 5.2. Powers and Duties of Executive Officers. The
officers of the Corporation shall have such powers and duties in the management
of the Corporation as may be prescribed by the Board of Directors and, to the
extent not so provided, as generally pertain to their respective offices,
subject to the control of the Board of Directors. The Board may require any
officer, agent or employee to give security for the faithful performance of his
or her duties.
ARTICLE VI
STOCK
Section 6.1. Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate signed by or in the name of
the Corporation by the Chairman or Vice Chairman of the Board of Directors, if
any, or the President or a Vice President, and by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary, of the Corporation,
certifying the number of shares owned by him or her in the Corporation. If such
certificate is manually signed by one officer or manually countersigned by a
transfer agent or by a registrar, any other signature on the certificate may be
a facsimile. In case any officer, transfer agent or registrar who has signed or
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whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he or she
were such officer, transfer agent or registrar at the date of issue.
Section 6.2. Lost, Stolen or Destroyed Stock Certificates;
Issuance of New Certificates. The Corporation may issue a new certificate of
stock in the place of any certificate theretofore issued by it, alleged to have
been lost, stolen or destroyed, and the Corporation may require the owner of the
lost, stolen or destroyed certificate, or his or her legal representative, to
give the Corporation a bond sufficient to indemnify the Corporation against any
claim that may be made against the Corporation on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
ARTICLE VII
INDEMNIFICATION
Section 7.1. Indemnification of Officers and Directors. The
Corporation shall to the fullest extent permitted by the laws of Delaware as the
same now or may hereafter exist, indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he or she is or was a director or officer of the Corporation, or is or
was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Corporation, and with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful. To the extent
that a director or officer of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in Section
7.1 of this ARTICLE VII or in defense of any claim, issue or matter therein, he
or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith.
Section 7.2. Determination. Any indemnification required under
Section 7.1 of this ARTICLE VII (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Section 7.1 of this ARTICLE VII. Such determination shall be made (1) by the
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board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (2) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders.
Section 7.3. Advancement of Expenses. Expenses (including
attorneys' fees) incurred by an officer or a director in defending any civil,
criminal, administrative or investigative action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he or she
is not entitled to be indemnified by the Corporation as authorized in or
pursuant to this ARTICLE VII.
Section 7.4. Other Rights of Indemnification. The
indemnification and advancement of expenses provided by, or granted pursuant to
this ARTICLE VII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
any By-Law of the Corporation, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in another capacity while holding such office.
Section 7.5. Indemnification Agreements. Without limiting the
provisions of this ARTICLE VII, the Corporation is authorized from time to time,
without further action by the stockholders of the Corporation, to enter into
agreements with any director or officer of the Corporation providing such rights
of indemnification as the Corporation may deem appropriate, up to the maximum
extent permitted by law. Any agreement entered into by the Corporation with a
director may be authorized by the other directors, and such authorization shall
not be invalid on the basis that similar agreements may have been or may
thereafter be entered into with other directors.
Section 7.6. Liability Insurance. The Corporation shall have
the power to purchase and maintain insurance on behalf of any person who is or
was a director or officer of the Corporation, or is or was serving at the
request of the Corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him or her and incurred by him or her in any such capacity, or
arising out of his or her status as such, whether or not the Corporation would
have the power to indemnify him or her against such liability under the
provisions of this ARTICLE VII.
Section 7.7. Survival of Right to Indemnification. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this ARTICLE VII shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
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Section 7.8. Definitions. For purposes of this ARTICLE VII,
references to a "corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which if its separate
existence had continued, would have had power and authority to indemnify its
directors or officers so that a person who is or was a director or officer of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, shall stand in the same
position under the provisions of this ARTICLE VII with respect to the resulting
or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued.
For purposes of this ARTICLE VII, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director or officer of the Corporation which
imposes duties on, or involves services by such director or officer with respect
to an employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner he or she reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this ARTICLE VII.
Section 7.9. Indemnification of Employees and Agents. Persons
who are not covered by the foregoing provisions of this ARTICLE VII and who are
or were employees or agents of the Corporation, or are or were serving at the
request of the Corporation as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise, may be indemnified to the
fullest extent permitted by the laws of Delaware as the same now or may
hereafter exist or to such lesser extent as the Board of Directors of the
Corporation, in its discretion, may from time to time deem appropriate.
ARTICLE VIII
MISCELLANEOUS
Section 8.1. Fiscal Year. The fiscal year of the Corporation
shall be determined by the Board of Directors.
Section 8.2. Seal. The Corporation may have a corporate seal
which shall have the name of the Corporation inscribed thereon and shall be in
such form as may be approved from time to time by the Board of Directors. The
corporate seal may be used by causing it or a facsimile thereof to be impressed
or affixed or in any other manner reproduced.
Section 8.3. Manner of Notice. Whenever, under the provisions
of the statutes or of the Certificate of Incorporation or of these By-Laws,
notice is required to be given to any stockholder, it shall not be construed to
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mean personal notice, but such notice may be given in writing, by mail,
addressed to such stockholder, at his or her address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Notice to directors or officers of the Corporation may be given by
telegram, telephone, mailgram, telex, telecopier, courier or any other similar
medium.
Section 8.4. Waiver of Notice of Meetings of Stockholders,
Directors and Committees. Whenever notice is required to be given by law or
under any provision of the Certificate of Incorporation or these By-Laws, a
written waiver thereof, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting was not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless so required by the Certificate
of Incorporation or these By-Laws.
Section 8.5. Interested Directors; Quorum. No contract or
transaction between the Corporation and one or more of its directors or
officers, or between the Corporation and any other corporation, partnership,
association or other organization in which one or more of its directors or
officers are directors or officers, or have a financial interest, shall be void
or voidable solely for this reason, or solely because the director or officer is
present at or participates in the meeting of the Board of Directors or committee
thereof which authorizes the contract or transaction, or solely because his or
her or their votes are counted for such purpose, provided: (1) the material
facts as to his or her relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee and the Board or committee in good faith authorizes the contract or
transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or (3) the contract or transaction is
fair as to the Corporation as of the time it is authorized, approved or
ratified, by the Board of Directors, a committee thereof or the stockholders.
Common or interested directors may be counted in determining the presence of a
quorum at a meeting of the Board of Directors or of a committee which authorizes
the contract or transaction.
Section 8.6. Form of Records. Any records maintained by the
Corporation in the regular course of its business, including its stock ledger,
books of account and minute books, may be kept on, or be in the form of, punch
cards, magnetic tape, photographs, microphotographs or any other information
storage device, provided that the records so kept can be converted into clearly
legible form within a reasonable time. The Corporation shall so convert any
records so kept upon the request of any person entitled to inspect the same.
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Section 8.7. Amendment of By-Laws. These By-Laws may be
altered or repealed, and new By-Laws made, by the Board of Directors or by the
affirmative vote of the holders of not less than eighty percent (80%) of the
combined voting power of the outstanding shares of stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class.
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Exhibit 4.2
REGISTRATION RIGHTS AGREEMENT, dated as of June 30, 1999,
between Applied Digital Solutions, Inc., a Missouri corporation ("ADS"), and
Intellesale.com, Inc., a Delaware corporation (the "Company").
On the date hereof, Universal Commodities Corp. ("UCC") is
merging with and into the Company (the "Merger"), pursuant to which ADS, as a
shareholder of UCC will be issued shares of Common Stock (as defined below). In
connection with the Merger, and in consideration for their participation
therein, the Company has agreed to grant to ADS certain rights with respect to
their ownership of shares of the Company's common stock as set forth herein.
If ADS desires to sell shares of Common Stock (whether prior
to, concurrently with or following any registration and offering by the Company
of shares of its capital stock to the public (an "Offering")), it may be
necessary to register such shares under the Securities Act (as defined below).
Accordingly, the parties hereto agree as follows:
1. Definitions. As used herein, unless the context otherwise
requires, the following terms have the following respective meanings:
"Commission" means the Securities and Exchange Commission or
any other Federal agency at the time administering the Securities Act.
"Common Stock" means any shares of common stock, par value
$.0001 per share, of the Company, now or hereafter authorized to be issued, and
any and all securities of any kind whatsoever of the Company which may be
exchanged for or converted into Common Stock, any and all securities of any kind
whatsoever of the Company which may be issued on or after the date hereof in
respect of, in exchange for, or upon conversion of shares of Common Stock
pursuant to a merger, consolidation, stock split, stock dividend,
recapitalization of the Company or otherwise.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time. Reference
to a particular section of the Exchange Act shall include a reference to the
comparable section, if any, of any such similar Federal statute.
"Person" means a corporation, an association, a partnership,
an organization, a business, a trust, an individual, or any other entity or
organization, including a government or political subdivision or an
instrumentality or agency thereof.
"Registrable Securities" means (i) any shares of Common Stock
owned by ADS, whether prior or subsequent to the effectiveness of this
Agreement, and (ii) any Common Stock issued with respect to the Common Stock
referred to in clause (i) by way of a stock dividend, stock split or reverse
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or otherwise. As to any particular Registrable Securities,
such securities shall cease to be Registrable Securities (a) when a registration
statement with respect to the sale of such securities shall have become
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effective under the Securities Act and such securities shall have been disposed
of in accordance with such registration statement, (b) when such securities
shall have been otherwise transferred, new certificates for them not bearing a
legend restricting further transfer shall have been delivered by the Company and
subsequent public distribution of them shall not require registration of them
under the Securities Act, or (c) when such securities shall have been sold as
permitted by, and in compliance with, the Securities Act. Any certificate
evidencing the Registrable Securities shall bear a legend stating that the
securities have not been registered under the Securities Act and setting forth
or referring to the restrictions on transferability and sale of the securities.
"Registration Expenses" means all expenses incident to the
registration and disposition of the Registrable Securities pursuant to Section 2
hereof, including, without limitation, all registration, filing and applicable
national securities exchange fees, all fees and expenses of complying with state
securities or blue sky laws (including fees and disbursements of counsel to the
underwriters or ADS in connection with "blue sky" qualification of the
Registrable Securities and determination of their eligibility for investment
under the laws of the various jurisdictions), all word processing, duplicating
and printing expenses, all messenger and delivery expenses, the fees and
disbursements of counsel for the Company and of its independent public
accountants, including the expenses of "cold comfort" letters or any special
audits required by, or incident to, such registration, all fees and
disbursements of underwriters (other than underwriting discounts and
commissions), all transfer taxes, and the fees and expenses of counsel to ADS;
provided, however, that Registration Expenses shall exclude, and ADS shall pay,
underwriting discounts and commissions in respect of the Registrable Securities
being registered.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Act shall include a reference to the
comparable section, if any, of any such similar Federal statute.
2. Registration Under Securities Act, etc.
2.1 Registration on Request.
(a) Request. At any time or from time to time
after the six month anniversary of the closing of an initial public offering of
Common Stock, ADS shall have the right to require the Company to effect the
registration under the Securities Act of all or part of the Registrable
Securities, by delivering a written request therefor to the Company specifying
the number of shares of Registrable Securities and the intended method of
distribution. The Company shall (i) as expeditiously as possible (but in any
event within 90 days of receipt of a written request), use its best efforts to
effect the registration under the Securities Act (including by means of a shelf
registration pursuant to Rule 415 under the Securities Act if so requested in
such request and if the Company is then eligible to use such a registration) of
the Registrable Securities which the Company has been so requested to register
by ADS, for distribution in accordance with the intended method of distribution
set forth in the written request delivered by ADS, and (ii) if requested, obtain
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acceleration of the effective date of then registration statement relating to
such registration.
(b) Registration of Other Securities. Whenever
the Company shall effect a registration pursuant to this Section 2.1, no
securities other than Registrable Securities shall be included among the
securities covered by such registration unless ADS shall have consented in
writing to the inclusion therein of such other securities, which consent may be
subject to terms and conditions determined by ADS in its sole discretion;
provided, however, that ADS shall not unreasonably refuse to consent to the
inclusion of securities pursuant to "incidental registration" rights or "request
registration" rights granted to any other Person pursuant to a registration
rights agreement entered into with the Company on or before the date hereof.
(c) Registration Statement Form. Registrations
under this Section 2.1 shall be on such appropriate registration form of the
Commission as shall be selected by the Company and as shall be reasonably
acceptable to ADS. The Company agrees to include in any such registration
statement all information which, in the opinion of counsel to ADS and counsel to
the Company, is necessary or desirable to be included therein.
(d) Expenses. The Company shall pay all
Registration Expenses in connection with and registration requested pursuant to
this Section 2.1.
(e) Effective Registration Statement. A
registration requested pursuant to this Section 2.1 shall not be deemed to have
been effected (including for purposes of paragraph (h) of this Section 2.1) (i)
unless a registration statement with respect thereto has become effective and
has been kept continuously effective for a period of at least 120 days (or such
shorter period which shall terminate when all the Registrable Securities covered
by such registration statement have been sold pursuant thereto), (ii) if after
it has become effective, such registration is interfered with by any stop order,
injunction or other order or requirement of the Commission or other governmental
agency or court for any reason not attributable to ADS and has not thereafter
become effective, or (iii) if the conditions to closing specified in the
underwriting agreement, if any, entered into in connection with such
registration are not satisfied or waived.
(f) Selection of Underwriters. The underwriters
of each underwritten offering of the Registrable Securities so to be registered
shall be selected by ADS.
(g) Right to Withdraw. If the managing
underwriter of any underwritten offering shall advise ADS that the Registrable
Securities covered by the registration statement cannot be sold in such offering
within a price range acceptable to ADS, then ADS shall have the right to notify
the Company in writing that it has determined that the registration statement be
abandoned or withdrawn, in which event the Company shall abandon or withdraw
such registration statement. In the event of such abandonment or withdrawal,
such request shall not be counted for purposes of the requests for registration
to which ADS is entitled pursuant to this Section 2.1.
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(h) Limitations on Registration on Request. ADS
shall be entitled to require the Company to effect, and the Company shall be
required to effect, seven registrations pursuant to this Section 2.1, provided,
however, that the aggregate offering value of the shares to be registered
pursuant to any such registration shall be at least $10,000,000 unless ADS then
own shares with an aggregate value less than $10,000,000 (in which case such
lesser number of shares may be registered) and provided further that ADS shall
not request the registration of, and the Company shall not be obliged to effect
the registration of, a number of shares in excess of one-third of the shares
held by ADS on the day following the initial public offering of Common Stock
(adjusted for any stock splits, stock dividends or similar events).
(i) Postponement. The Company shall be entitled
once in any six-month period to postpone for a reasonable period of time (but
not exceeding 90 days) (the "Postponement Period") the filing of any
registration statement required to be prepared and filed by it pursuant to this
Section 2.1 if (x) the Company determines, in its reasonable judgment, that such
registration and offering would materially interfere with any material
financing, corporate reorganization or other material transaction involving the
Company or any subsidiary, or would require premature disclosure thereof, and
promptly gives ADS written notice of such determination, containing a general
statement of the reasons for such postponement and an approximation of the
anticipated delay, or (y) the Company filed, within 90 days preceding the
registration request, a registration statement pursuant to which ADS sold, or
had the right to sell, shares of Common Stock. Notwithstanding the foregoing,
the Company shall be entitled to postpone (for only so long as necessary) the
filing of any registration statement required to be prepared and filed by it
pursuant to this Section 2.1 if it is prohibited from doing so pursuant to
another registration rights agreement between the Company and another
stockholder of the Company entered into on or prior to the date hereof. If the
Company shall postpone the filing of a registration statement, ADS shall have
the right to withdraw the request for registration by giving written notice to
the Company at any time and, in the event of such withdrawal, such request shall
not be counted for purposes of the requests for registration to which ADS is
entitled pursuant to this Section 2.1.
2.2 Incidental Registration.
(a) Right to Include Registrable Securities. If
the Company at any time proposes to register any of its securities under the
Securities Act by registration on Form S-1, S-2 or S-3 or any successor or
similar form(s) (except registrations on any such Form or similar form(s) solely
for registration of securities in connection with an employee benefit plan or
dividend reinvestment plan or a merger or consolidation), whether or not for
sale for its own account, it will each such time give prompt written notice to
ADS of its intention to do so and of ADS's rights under this Section 2.2. Upon
the written request of ADS (which request shall specify the maximum number of
Registrable Securities intended to be disposed of by ADS), made as promptly as
practicable and in any event within 30 days after the receipt of any such notice
(15 days if the Company states in such written notice or gives telephonic notice
to ADS, with written confirmation to follow promptly thereafter, stating that
(i) such registration will be on Form S-3 and (ii) such shorter period of time
is required because of a planned filing date), the Company shall use its best
efforts to effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by ADS; provided,
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however, that if, at any time after giving written notice of its intention to
register any securities and prior to the effective date of the registration
statement filed in connection with such registration, the Company shall
determine for any reason not to register or to delay registration of such
securities, the Company shall give written notice of such determination and its
reasons therefor to ADS and (i) in the case of a determination not to register,
shall be relieved of its obligation to register any Registrable Securities in
connection with such registration (but not from any obligation of the Company to
pay the Registration Expenses in connection therewith), without prejudice,
however, to the rights of ADS to request that such registration be effected as a
registration under Section 2.1 and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities,
for the same period as the delay in registering such other securities. No
registration effected under this Section 2.2 shall relieve the Company of its
obligation to effect any registration upon request under Section 2.1. The
Company will pay all Registration Expenses in connection with any registration
of Registrable Securities requested pursuant to this Section 2.2.
(b) Right to Withdraw. ADS shall have the right
to withdraw its request for inclusion of its Registrable Securities in any
registration statement pursuant to this Section 2.2 at any time prior to the
execution of an underwriting agreement with respect thereto by giving written
notice to the Company of its request to withdraw.
(c) Priority in Incidental Registrations. If
the managing underwriter of any underwritten offering shall inform the Company
by letter of its belief that the number of Registrable Securities requested to
be included in such registration, when added to the number of other securities
to be offered in such registration, would materially adversely affect such
offering, then the Company shall include in such registration, to the extent of
the number and type which the Company is so advised can be sold in (or during
the time of) such offering without so materially adversely affecting such
offering (the "Section 2.2 Sale Amount"), (i) all of the securities proposed by
the Company to be sold for its own account; and (ii) thereafter, to the extent
the Section 2.2 Sale Amount is not exceeded, the Registrable Securities
requested by ADS to be included in such registration pursuant to Section 2.2(a);
and any other securities of the Company requested to be included in such
registration by any holder thereof as a result of the exercise of such holder's
right to cause such securities to be so registered (reducing any such request on
a pro rata basis, as necessary, to not exceed the Section 2.2 Sale Amount).
(d) Plan of Distribution. Any participation by
holders of Registrable Securities in a registration by the Company shall be in
accordance with the Company's plan of distribution, provided that ADS, if it is
selling in such registration, shall have the right to select the co-managing
underwriter.
2.3 Registration Procedures. If and whenever the
Company is required to use its best efforts to effect the registration of any
Registrable Securities under the Securities Act as provided in Sections 2.1 and
2.2 hereof, the Company shall as expeditiously as possible:
(a) prepare and file with the Commission as soon as
practicable the requisite registration statement to effect
such registration (and shall include all financial statements
required by the Commission to be filed therewith) and
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thereafter use its best efforts to cause such registration
statement to become effective; provided, however, that before
filing such registration statement (including all exhibits) or
any amendment or supplement thereto or comparable statements
under securities or blue sky laws of any jurisdiction, the
Company shall furnish such documents to ADS and each
underwriter participating in the offering of the Registrable
Securities and their respective counsel, which documents will
be subject to the review and comments of ADS, each underwriter
and their respective counsel; and provided, further, however,
that the Company may discontinue any registration of its
securities which are not Registrable Securities at any time
prior to the effective date of the registration statement
relating thereto;
(b) notify ADS of the Commission's requests for
amending or supplementing the registration statement and the
prospectus, and prepare and file with the Commission such
amendments and supplements to such registration statement and
the prospectus used in connection therewith as may be
necessary to keep such registration statement effective and to
comply with the provisions of the Securities Act with respect
to the disposition of all Registrable Securities covered by
such registration statement for such period as shall be
required for the disposition of all of such Registrable
Securities in accordance with the intended method of
distribution thereof; provided, that except with respect to
any such registration statement filed pursuant to Rule 415
under the Securities Act, such period need not exceed 120
days;
(c) furnish, without charge, to ADS and each
underwriter such number of conformed copies of such
registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such
number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed
under Rule 424 under the Securities Act, in conformity with
the requirements of the Securities Act, and such other
documents, as ADS and such underwriters may reasonably
request;
(d) use its best efforts (i) to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such securities or blue sky laws
of such States of the United States of America where an
exemption is not available and as ADS or any managing
underwriter shall reasonably request, (ii) to keep such
registration or qualification in effect for so long as such
registration statement remains in effect, and (iii) to take
any other action which may be reasonably necessary or
advisable to enable ADS to consummate the disposition in such
jurisdictions of the securities to be sold by ADS, except that
the Company shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in
any jurisdiction wherein it would not but for the requirements
of this subsection (d) be obligated to be so qualified or to
consent to general service of process in any such
jurisdiction;
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(e) use its best efforts to cause all Registrable
Securities covered by such registration statement to be
registered with or approved by such other federal or state
governmental agencies or authorities as may be necessary in
the opinion of counsel to the Company and counsel to ADS to
consummate the disposition of such Registrable Securities;
(f) furnish to ADS and each underwriter, if any,
participating in the offering of the securities covered by
such registration statement, a signed counterpart of (i) an
opinion of counsel for the Company, and (ii) a "comfort"
letter signed by the independent public accountants who have
certified the Company's financial statements included or
incorporated by reference in such registration statement,
covering substantially the same matters with respect to such
registration statement (and the prospectus included therein)
and, in the case of the accountants' comfort letter, with
respect to events subsequent to the date of such financial
statements, as are customarily covered in opinions of issuer's
counsel and in accountants' comfort letters delivered to the
underwriters in underwritten public offerings of securities
(and dated the dates such opinions and comfort letters are
customarily dated) and, in the case of the legal opinion, such
other legal matters, and, in the case of the accountants'
comfort letter, such other financial matters, as ADS, or the
underwriters, may reasonably request;
(g) promptly notify ADS and each managing underwriter,
if any, participating in the offering of the securities
covered by such registration statement (i) when such
registration statement, any pre-effective amendment, the
prospectus or any prospectus supplement related thereto or
post-effective amendment to such registration statement has
been filed, and, with respect to such registration statement
or any post-effective amendment, when the same has become
effective; (ii) of any request by the Commission for
amendments or supplements to such registration statement or
the prospectus related thereto or for additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of such registration statement or
the initiation of any proceedings for that purpose; (iv) of
the receipt by the Company of any notification with respect to
the suspension of the qualification of any of the Registrable
Securities for sale under the securities or blue sky laws of
any jurisdiction or the initiation of any proceeding for such
purpose; (v) at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, upon
discovery that, or upon the happening of any event as a result
of which, the prospectus included in such registration
statement, as then in effect, includes an untrue statement of
a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements
therein not misleading, in the light of the circumstances
under which they were made, and in the case of this clause
(v), at the request of ADS, promptly prepare and furnish to
ADS and each managing underwriter, if any, participating in
the offering of the Registrable Securities, a reasonable
number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter
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delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they
were made; and (vi) at any time when the representations and
warranties of the Company contemplated by Section 2.4(a) or
(b) hereof cease to be true and correct;
(h) otherwise comply with all applicable rules and
regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve
months beginning with the first full calendar month after the
effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder, and
promptly furnish to ADS a copy of any amendment or supplement
to such registration statement or prospectus;
(i) provide and cause to be maintained a transfer agent
and registrar (which, in each case, may be the Company) for
all Registrable Securities covered by such registration
statement from and after a date not later than the effective
date of such registration;
(j) (i) use its best efforts to cause all Registrable
Securities covered by such registration statement to be listed
on the principal securities exchange on which similar
securities issued by the Company are then listed (if any), if
the listing of such Registrable Securities is then permitted
under the rules of such exchange, or (ii) if no similar
securities are then so listed, use its best efforts to (x)
cause all such Registrable Securities to be listed on a
national securities exchange or (y) failing that, secure
designation of all such Registrable Securities as a National
Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ") "national market system security" within the
meaning of Rule 11Aa2-1 of the Commission or (z) failing that,
to secure NASDAQ authorization for such shares and, without
limiting the generality of the foregoing, to arrange for at
least two market makers to register as such with respect to
such shares with the National Association of Securities
Dealers, Inc.;
(k) deliver promptly to counsel to ADS and each
underwriter, if any, participating in the offering of the
Registrable Securities, 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 such registration statement;
(l) use its best efforts to obtain the withdrawal of
any order suspending the effectiveness of the registration
statement;
(m) provide a CUSIP number for all Registrable
Securities, no later than the effective date of the
registration statement; and
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(n) make available its employees and personnel and
otherwise provide reasonable assistance to the underwriters
(taking into account the needs of the Company's businesses) in
their marketing of Registrable Securities.
The Company may require ADS to furnish the Company with such information
regarding ADS and the distribution of the Registrable Securities as the Company
may from time to time reasonably request in writing.
ADS agrees that upon receipt of any notice from the Company of
the happening of any event of the kind described in paragraph (g)(iii) or (v) of
this Section 2.3, ADS will, to the extent appropriate, discontinue its
disposition of Registrable Securities pursuant to the registration statement
relating to such Registrable Securities until, in the case of paragraph (g)(v)
of this Section 2.3, its receipt of the copies of the supplemented or amended
prospectus contemplated by paragraph (g)(v) of this Section 2.3 and, if so
directed by the Company, will deliver to the Company (at the Company's expense)
all copies, other than permanent file copies, then in its possession, of the
prospectus relating to such Registrable Securities current at the time of
receipt of such notice. If the disposition by ADS of its securities is
discontinued pursuant to the foregoing sentence, the Company shall extend the
period of effectiveness of the registration statement by the number of days
during the period from and including the date of the giving of notice to and
including the date when ADS shall have received copies of the supplemented or
amended prospectus contemplated by paragraph (g)(v) of this Section 2.3; and, if
the Company shall not so extend such period, ADS's request pursuant to which
such registration statement was filed shall not be counted for purposes of the
requests for registration to which ADS is entitled pursuant to Section 2.1
hereof.
2.4 Underwritten Offerings.
(a) Requested Underwritten Offerings. If
requested by the underwriters for any underwritten offering by ADS pursuant to a
registration requested under Section 2.1, ADS shall enter into a customary
underwriting agreement with a managing underwriter or underwriters selected by
ADS. Such underwriting agreement shall be satisfactory in form and substance to
ADS and shall contain such representations and warranties by, and such other
agreements on the part of, the Company and such other terms as are generally
prevailing in agreements of that type, including, without limitation, customary
provisions relating to indemnification and contribution. ADS shall be party to
such underwriting agreement and may, at its option, require that any or all of
the representations and warranties by, and the other agreements on the part of,
the Company to and for the benefit of such underwriters shall also be made to
and for the benefit of ADS and that any or all of the conditions precedent to
the obligations of such underwriters under such underwriting agreement be
conditions precedent to the obligations of ADS. ADS shall not be required to
make any representations or warranties to or agreements with the Company or the
underwriters other than representations, warranties or agreements regarding ADS,
its ownership of and title to the Registrable Securities, and its intended
method of distribution; and any liability of ADS to any underwriter or other
person under such underwriting agreement shall be limited to liability arising
from breach of its representations and warranties and shall be limited to an
amount equal to the proceeds (net of expenses and underwriting discounts and
commissions) that it derives from such registration.
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(b) Incidental Underwritten Offerings. In the
case of a registration pursuant to Section 2.2 hereof, if the Company shall have
determined to enter into any underwriting agreements in connection therewith,
all of the Registrable Securities to be included in such registration shall be
subject to such underwriting agreements. ADS may, at its option, require that
any or all of the representations and warranties by, and the other agreements on
the part of, the Company to and for the benefit of such underwriters shall also
be made to and for the benefit of ADS and that any or all of the conditions
precedent to the obligations of such underwriters under such underwriting
agreement be conditions precedent to the obligations of ADS. ADS shall not be
required to make any representations or warranties to or agreements with the
Company or the underwriters other than representations, warranties or agreements
regarding ADS, its ownership of and title to the Registrable Securities, and its
intended method of distribution; and any liability of ADS to any underwriter or
other Person under such underwriting agreement shall be limited to liability
arising from breach of its representations and warranties and shall be limited
to an amount equal to the proceeds (net of expenses and underwriting discounts
and commissions) that it derives from such registration.
2.5 Preparation; Reasonable Investigation. In
connection with the preparation and filing of each registration statement under
the Securities Act pursuant to this Agreement, the Company will give ADS (if it
participates in such registration statement), its underwriters, if any, and
their respective counsel, accountants and other representatives and agents the
opportunity to participate in the preparation of such registration statement,
each prospectus included therein or filed with the Commission, and each
amendment thereof or supplement thereto, and give each of them such access to
its books and records and such opportunities to discuss the business of the
Company with its officers and employees and the independent public accountants
who have certified its financial statements, and supply all other information
reasonably requested by each of them, as shall be necessary or appropriate, in
the opinion of ADS and such underwriters' respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act.
2.6 Indemnification.
(a) Indemnification by the Company. The Company
agrees that in the event of any registration of any securities of the Company
under the Securities Act pursuant hereto, the Company shall, and hereby does,
indemnify and hold harmless ADS, its respective partners, officers, directors,
agents and affiliates and each other Person who participates as an underwriter
in the offering or sale of such securities, against any losses, claims, damages,
or liabilities, joint or several, to which ADS or any such officer, director,
partner, agent or affiliate or underwriter may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities, joint or several (or actions or proceedings, whether commenced or
threatened, in respect thereof), arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in any
registration statement under which such securities were registered under the
Securities Act, any preliminary prospectus, final prospectus or summary
prospectus contained therein, or any amendment or supplement thereto, (ii) any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances in which they were made not misleading, or (iii) any violation by
the Company of any federal, state or common law rule or regulation applicable to
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the Company and relating to action required of or inaction by the Company in
connection with any such registration, and the Company shall reimburse ADS and
each such director, officer partner, agent or affiliate and underwriter Person
for any legal or any other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, liability, action or
proceeding; provided that the Company shall not be liable in any such case to
ADS or any such partner, agent, or affiliate to the extent that any such loss,
claim, damage, liability (or action or proceeding in respect thereof) or expense
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company through an instrument duly executed by or on behalf of ADS,
specifically stating that it is for use in the preparation thereof; and
provided, further, that the Company shall not be liable to any Person who
participates as an underwriter in the offering or sale of Registrable Securities
or any other Person, if any, who controls such underwriter within the meaning of
the Securities Act, in any such case to the extent that any such loss, claim,
damage, liability (or action or proceeding in respect thereof) or expense (i)
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in such registration statement, any such
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement in reliance upon and in conformity with written information furnished
to the Company through an instrument duly executed by or on behalf of such
Person or (ii) arises out of such Person's failure to send or give a copy of the
final prospectus, as the same may be then supplemented or amended, to the Person
asserting an untrue statement or alleged untrue statement or omission or alleged
omission at or prior to the written confirmation of the sale of Registrable
Securities to such Person if such statement or omission was corrected in such
final prospectus. Such indemnity shall remain in full force regardless of any
investigation made by or on behalf of ADS or any such director, officer,
partner, agent, affiliate or underwriter and shall survive the transfer of such
securities by ADS.
(b) Indemnification by ADS. As a condition to
including any Registrable Securities in any registration statement, the Company
shall have received an undertaking reasonably satisfactory to it from ADS so
including any Registrable Securities to indemnify and hold harmless (in the same
manner and to the same extent as set forth in paragraph (a) of this Section 2.6)
the Company, and each director of the Company, each officer of the Company and
each other Person, if any, who controls the Company within the meaning of the
Securities Act, with respect to any statement or alleged statement in or
omission or alleged omission from such registration statement, any preliminary
prospectus, final prospectus or summary prospectus contained therein, or any
amendment or supplement thereto, but only to the extent such statement or
alleged statement or omission or alleged omission was made in reliance upon and
in conformity with written information furnished to the Company through an
instrument duly executed by ADS specifically stating that it is for use in the
preparation of such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement; provided, however, that
the liability of such indemnifying party under this Section 2.6(b) shall be
limited to the amount of proceeds (net of expenses and underwriting discounts
and commissions) received by such indemnifying party in the offering giving rise
to such liability. Such indemnity shall remain in full force and effect,
regardless of any investigation made by or on behalf of the Company or any such
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director, officer or controlling Person and shall survive the transfer of such
securities by ADS.
(c) Notices of Claims, etc. Promptly after
receipt by an indemnified party of notice of the commencement of any action or
proceeding involving a claim referred to in the preceding subsections of this
Section 2.6, such indemnified party shall, if a claim in respect thereof is to
be made against an indemnifying party, give written notice to the latter of the
commencement of such action or proceeding; provided, however, that the failure
of any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subsections of this
Section 2.6, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice, and shall not relieve the
indemnifying party from any liability which it may have to the indemnified party
otherwise than under this Section 2.6. In case any such action or proceeding is
brought against an indemnified party, the indemnifying party shall be entitled
to participate therein and, unless in the opinion of outside counsel to the
indemnified party a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, to assume the defense
thereof, jointly with any other indemnifying party similarly notified to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
or proceeding include both the indemnified party and the indemnifying party and
if in the opinion of outside counsel to the indemnified party there may be legal
defenses available to such indemnified party and/or other indemnified parties
which are different from or in addition to those available to the indemnifying
party, the indemnified party or parties shall have the right to select separate
counsel to defend such action or proceeding on behalf of such indemnified party
or parties, provided, however, that the indemnifying party shall be obligated to
pay for only one counsel for all indemnified parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for any legal
expenses subsequently incurred by the latter in connection with the defense
thereof other than reasonable costs of investigation (unless the first proviso
in the preceding sentence shall be applicable). No indemnifying party shall be
liable for any settlement of any action or proceeding effected without its
written consent. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation.
(d) Contribution. If the indemnification
provided for in this Section 2.6 shall for any reason be held by a court to be
unavailable to an indemnified party under subsection (a) or (b) hereof in
respect of any loss, claim, damage or liability, or any action in respect
thereof, then, in lieu of the amount paid or payable under subsection (a) or (b)
hereof, the indemnified party and the indemnifying party under subsection (a) or
(b) hereof shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating the same), (i) in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand, and the
indemnified party on the other, which resulted in such loss, claim, damage or
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liability, or action in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations, or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law or if the allocation provided in this clause (ii) provides a greater amount
to the indemnified party than clause (i) above, in such proportion as shall be
appropriate to reflect not only the relative fault but also the relative
benefits received by the indemnifying party and the indemnified party from the
offering of the securities covered by such registration statement as well as any
other relevant equitable considerations. The parties hereto agree that it would
not be just and equitable if contributions pursuant to this Section 2.6(d) were
to be determined by pro rata allocation or by any other method of allocation
which does not take into account the equitable considerations referred to in the
preceding sentence of this Section 2.6(d). No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. In addition, no Person shall be obligated to
contribute hereunder any amounts in payment for any settlement of any action or
claim effected without such Person's consent, which consent shall not be
unreasonably withheld. Notwithstanding anything in this subsection (d) to the
contrary, no indemnifying party (other than the Company) shall be required to
contribute any amount in excess of the proceeds (net of expenses and
underwriting discounts and commissions) received by such party from the sale of
the Registrable Securities in the offering to which the losses, claims, damages
or liabilities of the indemnified parties relate.
(e) Other Indemnification. Indemnification and
contribution similar to that specified in the preceding subsections of this
Section 2.6 (with appropriate modifications) shall be given by the Company and
ADS with respect to any required registration or other qualification of
securities under any federal, state or blue sky law or regulation of any
governmental authority other than the Securities Act. The indemnification
agreements contained in this Section 2.6 shall be in addition to any other
rights to indemnification or contribution which any indemnified party may have
pursuant to law or contract and shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the transfer of any of the Registrable Securities by
ADS.
(f) Indemnification Payments. The
indemnification and contribution required by this Section 2.6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or expense, loss, damage or liability
is incurred.
2.7 Unlegended Certificates. In connection with
the offering of any Registrable Securities registered pursuant to this Section
2, the Company shall (i) facilitate the timely preparation and delivery to ADS
and the underwriters, if any, participating in such offering, of unlegended
certificates representing ownership of such Registrable Securities being sold in
such denominations and registered in such names as requested by ADS or such
underwriters and (ii) instruct any transfer agent and registrar of such
Registrable Securities to release any stop transfer orders with respect to any
such Registrable Securities.
2.8 Limitation on Sale of Securities. The Company
hereby agrees that if it shall previously have received a request for
registration pursuant to Section 2.1 or 2.2 hereof, and if such previous
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registration shall not have been withdrawn or abandoned, the Company shall not
effect any public or private offer, sale or distribution of its securities or
effect any registration of any of its equity securities under the Securities Act
(other than a registration on Form S-8 or any successor or similar form which is
then in effect), whether or not for sale for its own account, until a period of
90 days (or such shorter period as ADS shall be advised by their managing
underwriter) shall have elapsed from the effective date of such previous
registration, and the Company shall so provide in any registration rights
agreements hereafter entered into with respect to any of its securities..
2.9 No Required Sale. Nothing in this Agreement
shall be deemed to create an independent obligation on the part of ADS to sell
any Registrable Securities pursuant to any effective registration statement.
3. Rule 144. The Company shall take all actions reasonably
necessary to enable holders of Registrable Securities to sell such securities
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144, or (b) any similar rule or regulation
hereafter adopted by the Commission including, without limiting the generality
of the foregoing, filing on a timely basis all reports required to be filed by
the Exchange Act. Upon the request of ADS, the Company will deliver to ADS a
written statement as to whether it has complied with such requirements.
4. Amendments and Waivers. This Agreement may be amended,
modified or supplemented only by written agreement of the party against whom
enforcement of such amendment, modification or supplement is sought.
5. Adjustments. In the event of any change in the
capitalization of the Company as a result of any stock split, stock dividend,
reverse split, combination, recapitalization, merger, consolidation, or
otherwise, the provisions of this Agreement shall be appropriately adjusted. The
Company agrees that it shall not effect or permit to occur any combination or
subdivision of shares which would adversely affect the ability of ADS to include
any Registrable Securities in any registration contemplated by this Agreement or
the marketability of such Registrable Securities in any such registration.
6. Notice. All notices and other communications hereunder
shall be in writing and, unless otherwise provided herein, shall be deemed to
have been given when received by the party to whom such notice is to be given at
its address set forth below, or such other address for the party as shall be
specified by notice given pursuant hereto:
(a) If to ADS, to it at:
400 Royal Palm Way, Suite 410
Palm Beach, FL 33480
Attention: President
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(b) If to the Company, to it at:
510 Ryerson Rd.
Lincoln Park, NJ 07035
Attention: President
7. Assignment; Third Party Beneficiaries. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors and permitted assigns. This Agreement may
not be assigned by the Company. ADS may, at its election, at any time or from
time to time, assign its rights under this Agreement, in whole or in part, to
any purchaser of shares of Common Stock held by it.
8. Remedies. The parties hereto agree that money damages or
other remedy at law would not be sufficient or adequate remedy for any breach or
violation of, or a default under, this Agreement by them and that, in addition
to all other remedies available to them, each of them shall be entitled to an
injunction restraining such breach, violation or default or threatened breach,
violation or default and to any other equitable relief, including without
limitation specific performance, without bond or other security being required.
In any action or proceeding brought to enforce any provision of this Agreement
(including the indemnification provisions thereof), the successful party shall
be entitled to recover reasonable attorneys' fees in addition to its costs and
expenses and any other available remedy.
9. No Inconsistent Agreements. The Company will not, on or
after the date of this Agreement, enter into any agreement with respect to its
securities which is inconsistent with the rights granted to ADS in this
Agreement or otherwise conflicts with the provisions hereof, other than any
customary lock-up agreement with the underwriters in connection with any
Offering effected hereunder, pursuant to which the Company shall agree not to
register for sale, and the Company shall agree not to sell or otherwise dispose
of, Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, for a specified period (not to exceed 180 days)
following such Offering. The Company has not previously entered into any
agreement with respect to its securities granting any registration rights to any
Person. The rights granted to ADS hereunder do not in any way conflict with and
are not inconsistent with any other agreements to which the Company is a party
or by which it is bound.
11. Descriptive Headings. The descriptive headings of the
several sections and paragraphs of this Agreement are inserted for reference
only and shall not control or otherwise affect the meaning hereof.
12. Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights and obligations of the parties
hereto shall be governed by, the laws of the Delaware, without giving effect to
the conflicts of law principles thereof. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of Delaware and the United States of America located in the County
of New Castle for any action or proceeding arising out of or relating to this
Agreement and the transactions contemplated hereby (and agrees not to commence
any action or proceeding relating thereto except in such courts), and further
agrees that service of any process, summons, notice or document by U.S.
registered mail to its respective address set forth in Section 6 hereof shall be
effective service of process for any action or proceeding brought against it in
any such court. Each of the parties hereto hereby irrevocably and
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unconditionally waives any objection to the laying of venue of any action or
proceeding arising out of this Agreement or the transactions contemplated hereby
in the courts of Delaware or the United States of America located in the County
of New Castle, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action or
proceeding brought in any such court has been brought in an inconvenient forum.
13. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
14. Invalidity of Provision. The invalidity or
unenforceability of any provision of this Agreement in any jurisdiction shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of this Agreement, including
that provision, in any other jurisdiction. If any restriction or provision of
this Agreement is held unreasonable, unlawful or unenforceable in any respect,
such restriction or provision shall be interpreted, revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
15. Further Assurances. Each party hereto shall do and perform
or cause to be done and performed all further acts and things and shall execute
and deliver all other agreements, certificates, instruments, and documents as
any other party hereto reasonably may request in order to carry out the intent
and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
16. Entire Agreement; Effectiveness. This Agreement
constitutes the entire agreement, and supersedes all prior agreements and
understandings, oral and written, between the parties hereto with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered by their respective officers thereunto duly
authorized.
INTELLESALE.COM, INC.
By: ______________________________
Name:
Title:
APPLIED DIGITAL SOLUTIONS
By: ______________________________
Name:
Title:
16
REGISTRATION RIGHTS AGREEMENT, dated as of June 30, 1999,
among Marc Sherman ("Sherman"), Edward Cummings ("Cummings"), and
Intellesale.com, Inc., a Delaware corporation (the "Company").
On the date hereof, Universal Commodities Corp. ("UCC") is
merging with and into the Company (the "Merger"), pursuant to which Cummings and
Sherman, as shareholders of UCC will be issued shares of Common Stock (as
defined below). In connection with the Merger, and in consideration for their
participation therein, the Company has agreed to grant to Sherman and Cummings
certain rights with respect to their ownership of shares of the Company's common
stock as set forth herein.
Sherman and Cummings are referred to herein individually as an
Employee and collectively as the Employees. If either Employee desires to sell
shares of Common Stock (whether prior to, concurrently with or following any
registration and offering by the Company of shares of its capital stock to the
public (an "Offering")), it may be necessary to register such shares under the
Securities Act (as defined below).
Accordingly, the parties hereto agree as follows:
1. Definitions. As used herein, unless the context
otherwise requires, the following terms have the following respective meanings:
"Commission" means the Securities and Exchange Commission or
any other Federal agency at the time administering the Securities Act.
"Common Stock" means any shares of common stock, par value
$.0001 per share, of the Company, now or hereafter authorized to be issued, and
any and all securities of any kind whatsoever of the Company which may be
exchanged for or converted into Common Stock, any and all securities of any kind
whatsoever of the Company which may be issued on or after the date hereof in
respect of, in exchange for, or upon conversion of shares of Common Stock
pursuant to a merger, consolidation, stock split, stock dividend,
recapitalization of the Company or otherwise.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time. Reference
to a particular section of the Exchange Act shall include a reference to the
comparable section, if any, of any such similar Federal statute.
"Person" means a corporation, an association, a partnership,
an organization, a business, a trust, an individual, or any other entity or
organization, including a government or political subdivision or an
instrumentality or agency thereof.
"Registrable Securities" means (i) any shares of Common Stock
owned by either Employee, whether prior or subsequent to the effectiveness of
this Agreement, (ii) any shares of Common Stock owned by either Employee
issuable upon exercise of a stock option, and (iii) any Common Stock issued with
respect to the Common Stock referred to in clauses (i) or (ii) by way of a stock
dividend, stock split or reverse stock split or in connection with a combination
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of shares, recapitalization, merger, consolidation or otherwise. As to any
particular Registrable Securities, such securities shall cease to be Registrable
Securities (a) when a registration statement with respect to the sale of such
securities shall have become effective under the Securities Act and such
securities shall have been disposed of in accordance with such registration
statement, (b) when such securities shall have been otherwise transferred, new
certificates for them not bearing a legend restricting further transfer shall
have been delivered by the Company and subsequent public distribution of them
shall not require registration of them under the Securities Act, or (c) when
such securities shall have been sold as permitted by, and in compliance with,
the Securities Act. Any certificate evidencing the Registrable Securities shall
bear a legend stating that the securities have not been registered under the
Securities Act and setting forth or referring to the restrictions on
transferability and sale of the securities.
"Registration Expenses" means all expenses incident to the
registration and disposition of the Registrable Securities pursuant to Section 2
hereof, including, without limitation, all registration, filing and applicable
national securities exchange fees, all fees and expenses of complying with state
securities or blue sky laws (including fees and disbursements of counsel to the
underwriters or the Employees and the Other Investors in connection with "blue
sky" qualification of the Registrable Securities and determination of their
eligibility for investment under the laws of the various jurisdictions), all
word processing, duplicating and printing expenses, all messenger and delivery
expenses, the fees and disbursements of counsel for the Company and of its
independent public accountants, including the expenses of "cold comfort" letters
or any special audits required by, or incident to, such registration, all fees
and disbursements of underwriters (other than underwriting discounts and
commissions), all transfer taxes, and the fees and expenses of counsel to the
Employees and the Other Investors; provided, however, that Registration Expenses
shall exclude, and the Employees and the Other Investors shall pay, underwriting
discounts and commissions in respect of the Registrable Securities being
registered.
"Securities Act" means the Securities Act of 1933, as amended,
or any similar Federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time. References to a
particular section of the Securities Act shall include a reference to the
comparable section, if any, of any such similar Federal statute.
2. Registration Under Securities Act, etc.
2.1 Registration on Request.
(a) Request. At any time or from time to time
after the six month anniversary of the closing of an initial public offering of
Common Stock, Sherman shall have the right to require the Company to effect the
registration under the Securities Act of all or part of the Registrable
Securities, by delivering a written request therefor to the Company specifying
the number of shares of Registrable Securities and the intended method of
distribution. The Company shall (i) as expeditiously as possible (but in any
event within 90 days of receipt of a written request), use its best efforts to
effect the registration under the Securities Act (including by means of a shelf
registration pursuant to Rule 415 under the Securities Act if so requested in
such request and if the Company is then eligible to use such a registration) of
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the Registrable Securities which the Company has been so requested to register
by Sherman, for distribution in accordance with the intended method of
distribution set forth in the written request delivered by Sherman, and (ii) if
requested, obtain acceleration of the effective date of then registration
statement relating to such registration.
(b) Registration of Other Securities. Whenever
the Company shall effect a registration pursuant to this Section 2.1, no
securities other than Registrable Securities shall be included among the
securities covered by such registration unless Sherman shall have consented in
writing to the inclusion therein of such other securities, which consent may be
subject to terms and conditions determined by Sherman in his sole discretion;
provided, however, that Sherman shall not unreasonably refuse to consent to the
inclusion of securities pursuant to "incidental registration" rights or "request
registration" rights granted to any other Person pursuant to a registration
rights agreement entered into with the Company on or before the date hereof.
(c) Registration Statement Form. Registrations
under this Section 2.1 shall be on such appropriate registration form of the
Commission as shall be selected by the Company and as shall be reasonably
acceptable to Sherman. The Company agrees to include in any such registration
statement all information which, in the opinion of counsel to Sherman and
counsel to the Company, is necessary or desirable to be included therein.
(d) Expenses. The Company shall pay all
Registration Expenses in connection with and registration requested pursuant to
this Section 2.1.
(e) Effective Registration Statement. A
registration requested pursuant to this Section 2.1 shall not be deemed to have
been effected (including for purposes of paragraph (h) of this Section 2.1) (i)
unless a registration statement with respect thereto has become effective and
has been kept continuously effective for a period of at least 120 days (or such
shorter period which shall terminate when all the Registrable Securities covered
by such registration statement have been sold pursuant thereto), (ii) if after
it has become effective, such registration is interfered with by any stop order,
injunction or other order or requirement of the Commission or other governmental
agency or court for any reason not attributable to Sherman and has not
thereafter become effective, or (iii) if the conditions to closing specified in
the underwriting agreement, if any, entered into in connection with such
registration are not satisfied or waived.
(f) Selection of Underwriters. The underwriters
of each underwritten offering of the Registrable Securities so to be registered
shall be selected by Sherman.
(g) Right to Withdraw. If the managing
underwriter of any underwritten offering shall advise Sherman that the
Registrable Securities covered by the registration statement cannot be sold in
such offering within a price range acceptable to Sherman, then Sherman shall
have the right to notify the Company in writing that he has determined that the
registration statement be abandoned or withdrawn, in which event the Company
shall abandon or withdraw such registration statement. In the event of such
abandonment or withdrawal, such request shall not be counted for purposes of the
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requests for registration to which Sherman is entitled pursuant to this Section
2.1.
(h) Limitations on Registration on Request.
Sherman shall be entitled to require the Company to effect, and the Company
shall be required to effect, seven registrations pursuant to this Section 2.1,
provided, however, that the number of shares to be registered pursuant to any
such registration shall not exceed 740,000 shares (adjusted for any stock
splits, stock dividends or similar events after the date hereof).
(i) Postponement. The Company shall be entitled
once in any six-month period to postpone for a reasonable period of time (but
not exceeding 90 days) (the "Postponement Period") the filing of any
registration statement required to be prepared and filed by it pursuant to this
Section 2.1 if (x) the Company determines, in its reasonable judgment, that such
registration and offering would materially interfere with any material
financing, corporate reorganization or other material transaction involving the
Company or any subsidiary, or would require premature disclosure thereof, and
promptly gives Sherman written notice of such determination, containing a
general statement of the reasons for such postponement and an approximation of
the anticipated delay, or (y) the Company filed, within 90 days preceding the
registration request, a registration statement pursuant to which ACT sold, or
had the right to sell, shares of Common Stock. Notwithstanding the foregoing,
the Company shall be entitled to postpone (for only so long as necessary) the
filing of any registration statement required to be prepared and filed by it
pursuant to this Section 2.1 if it is prohibited from doing so pursuant to
another registration rights agreement between the Company and another
stockholder of the Company entered into on or prior to the date hereof. If the
Company shall postpone the filing of a registration statement, Sherman shall
have the right to withdraw the request for registration by giving written notice
to the Company at any time and, in the event of such withdrawal, such request
shall not be counted for purposes of the requests for registration to which
Sherman is entitled pursuant to this Section 2.1.
2.2 Incidental Registration.
(a) Right to Include Registrable Securities. If
the Company at any time proposes to register any of its securities under the
Securities Act by registration on Form S-1, S-2 or S-3 or any successor or
similar form(s) (except registrations on any such Form or similar form(s) solely
for registration of securities in connection with an employee benefit plan or
dividend reinvestment plan or a merger or consolidation), whether or not for
sale for its own account, it will each such time give prompt written notice to
each of the Employees of its intention to do so and of the Employees' rights
under this Section 2.2. Upon the written request of either of the Employees
(which request shall specify the maximum number of Registrable Securities
intended to be disposed of by such Employee), made as promptly as practicable
and in any event within 30 days after the receipt of any such notice (15 days if
the Company states in such written notice or gives telephonic notice to the
Employees, with written confirmation to follow promptly thereafter, stating that
(i) such registration will be on Form S-3 and (ii) such shorter period of time
is required because of a planned filing date), the Company shall use its best
efforts to effect the registration under the Securities Act of all Registrable
Securities which the Company has been so requested to register by the Employees;
provided, however, that if, at any time after giving written notice of its
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intention to register any securities and prior to the effective date of the
registration statement filed in connection with such registration, the Company
shall determine for any reason not to register or to delay registration of such
securities, the Company shall give written notice of such determination and its
reasons therefor to the Employees and (i) in the case of a determination not to
register, shall be relieved of its obligation to register any Registrable
Securities in connection with such registration (but not from any obligation of
the Company to pay the Registration Expenses in connection therewith), without
prejudice, however, to the rights of the Employees to request that such
registration be effected as a registration under Section 2.1 and (ii) in the
case of a determination to delay registering, shall be permitted to delay
registering any Registrable Securities, for the same period as the delay in
registering such other securities. No registration effected under this Section
2.2 shall relieve the Company of its obligation to effect any registration upon
request under Section 2.1. The Company will pay all Registration Expenses in
connection with any registration of Registrable Securities requested pursuant to
this Section 2.2.
(b) Right to Withdraw. Each Employee shall have
the right to withdraw his request for inclusion of its Registrable Securities in
any registration statement pursuant to this Section 2.2 at any time prior to the
execution of an underwriting agreement with respect thereto by giving written
notice to the Company of his request to withdraw.
(c) Priority in Incidental Registrations. If
the managing underwriter of any underwritten offering shall inform the Company
by letter of its belief that the number of Registrable Securities requested to
be included in such registration, when added to the number of other securities
to be offered in such registration, would materially adversely affect such
offering, then the Company shall include in such registration, to the extent of
the number and type which the Company is so advised can be sold in (or during
the time of) such offering without so materially adversely affecting such
offering (the "Section 2.2 Sale Amount"), (i) all of the securities proposed by
the Company to be sold for its own account; and (ii) thereafter, to the extent
the Section 2.2 Sale Amount is not exceeded, the Registrable Securities
requested by either Employee to be included in such registration pursuant to
Section 2.2(a); and any other securities of the Company requested to be included
in such registration by any holder thereof as a result of the exercise of such
holder's right to cause such securities to be so registered (reducing any such
request on a pro rata basis, as necessary, to not exceed the Section 2.2 Sale
Amount).
(d) Plan of Distribution. Any participation by
holders of Registrable Securities in a registration by the Company shall be in
accordance with the Company's plan of distribution, provided that Sherman, if he
is selling in such registration, shall have the right to select the co-managing
underwriter.
2.3 Registration Procedures. If and whenever the
Company is required to use its best efforts to effect the registration of any
Registrable Securities under the Securities Act as provided in Sections 2.1 and
2.2 hereof, the Company shall as expeditiously as possible:
(a) prepare and file with the Commission as soon as
practicable the requisite registration statement to effect
such registration (and shall include all financial statements
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required by the Commission to be filed therewith) and
thereafter use its best efforts to cause such registration
statement to become effective; provided, however, that before
filing such registration statement (including all exhibits) or
any amendment or supplement thereto or comparable statements
under securities or blue sky laws of any jurisdiction, the
Company shall furnish such documents to each Employee and each
underwriter participating in the offering of the Registrable
Securities and their respective counsel, which documents will
be subject to the review and comments of each participating
Employee, each underwriter and their respective counsel; and
provided, further, however, that the Company may discontinue
any registration of its securities which are not Registrable
Securities at any time prior to the effective date of the
registration statement relating thereto;
(b) notify the participating Employees of the
Commission's requests for amending or supplementing the
registration statement and the prospectus, and prepare and
file with the Commission such amendments and supplements to
such registration statement and the prospectus used in
connection therewith as may be necessary to keep such
registration statement effective and to comply with the
provisions of the Securities Act with respect to the
disposition of all Registrable Securities covered by such
registration statement for such period as shall be required
for the disposition of all of such Registrable Securities in
accordance with the intended method of distribution thereof;
provided, that except with respect to any such registration
statement filed pursuant to Rule 415 under the Securities Act,
such period need not exceed 120 days;
(c) furnish, without charge, to the participating
Employees and each underwriter such number of conformed copies
of such registration statement and of each such amendment and
supplement thereto (in each case including all exhibits), such
number of copies of the prospectus contained in such
registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed
under Rule 424 under the Securities Act, in conformity with
the requirements of the Securities Act, and such other
documents, as the participating Employees and such
underwriters may reasonably request;
(d) use its best efforts (i) to register or qualify all
Registrable Securities and other securities covered by such
registration statement under such securities or blue sky laws
of such States of the United States of America where an
exemption is not available and as the participating Employees
or any managing underwriter shall reasonably request, (ii) to
keep such registration or qualification in effect for so long
as such registration statement remains in effect, and (iii) to
take any other action which may be reasonably necessary or
advisable to enable the participating Employees to consummate
the disposition in such jurisdictions of the securities to be
sold by such Employees, except that the Company shall not for
any such purpose be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein
it would not but for the requirements of this subsection (d)
be obligated to be so qualified or to consent to general
service of process in any such jurisdiction;
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(e) use its best efforts to cause all Registrable
Securities covered by such registration statement to be
registered with or approved by such other federal or state
governmental agencies or authorities as may be necessary in
the opinion of counsel to the Company and counsel to the
participating Employees to consummate the disposition of such
Registrable Securities;
(f) furnish to the participating Employees and each
underwriter, if any, participating in the offering of the
securities covered by such registration statement, a signed
counterpart of (i) an opinion of counsel for the Company, and
(ii) a "comfort" letter signed by the independent public
accountants who have certified the Company's financial
statements included or incorporated by reference in such
registration statement, covering substantially the same
matters with respect to such registration statement (and the
prospectus included therein) and, in the case of the
accountants' comfort letter, with respect to events subsequent
to the date of such financial statements, as are customarily
covered in opinions of issuer's counsel and in accountants'
comfort letters delivered to the underwriters in underwritten
public offerings of securities (and dated the dates such
opinions and comfort letters are customarily dated) and, in
the case of the legal opinion, such other legal matters, and,
in the case of the accountants' comfort letter, such other
financial matters, as the participating Employees, or the
underwriters, may reasonably request;
(g) promptly notify the participating Employees and
each managing underwriter, if any, participating in the
offering of the securities covered by such registration
statement (i) when such registration statement, any
pre-effective amendment, the prospectus or any prospectus
supplement related thereto or post-effective amendment to such
registration statement has been filed, and, with respect to
such registration statement or any post-effective amendment,
when the same has become effective; (ii) of any request by the
Commission for amendments or supplements to such registration
statement or the prospectus related thereto or for additional
information; (iii) of the issuance by the Commission of any
stop order suspending the effectiveness of such registration
statement or the initiation of any proceedings for that
purpose; (iv) of the receipt by the Company of any
notification with respect to the suspension of the
qualification of any of the Registrable Securities for sale
under the securities or blue sky laws of any jurisdiction or
the initiation of any proceeding for such purpose; (v) at any
time when a prospectus relating thereto is required to be
delivered under the Securities Act, upon discovery that, or
upon the happening of any event as a result of which, the
prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, in
the light of the circumstances under which they were made, and
in the case of this clause (v), at the request of the
participating Employees, promptly prepare and furnish to such
Employees and each managing underwriter, if any, participating
in the offering of the Registrable Securities, a reasonable
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number of copies of a supplement to or an amendment of such
prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such securities, such
prospectus shall not include an untrue statement of a material
fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they
were made; and (vi) at any time when the representations and
warranties of the Company contemplated by Section 2.4(a) or
(b) hereof cease to be true and correct;
(h) otherwise comply with all applicable rules and
regulations of the Commission, and make available to its
security holders, as soon as reasonably practicable, an
earnings statement covering the period of at least twelve
months beginning with the first full calendar month after the
effective date of such registration statement, which earnings
statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder, and
promptly furnish to the participating Employees a copy of any
amendment or supplement to such registration statement or
prospectus;
(i) provide and cause to be maintained a transfer agent
and registrar (which, in each case, may be the Company) for
all Registrable Securities covered by such registration
statement from and after a date not later than the effective
date of such registration;
(j) (i) use its best efforts to cause all Registrable
Securities covered by such registration statement to be listed
on the principal securities exchange on which similar
securities issued by the Company are then listed (if any), if
the listing of such Registrable Securities is then permitted
under the rules of such exchange, or (ii) if no similar
securities are then so listed, use its best efforts to (x)
cause all such Registrable Securities to be listed on a
national securities exchange or (y) failing that, secure
designation of all such Registrable Securities as a National
Association of Securities Dealers, Inc. Automated Quotation
System ("NASDAQ") "national market system security" within the
meaning of Rule 11Aa2-1 of the Commission or (z) failing that,
to secure NASDAQ authorization for such shares and, without
limiting the generality of the foregoing, to arrange for at
least two market makers to register as such with respect to
such shares with the National Association of Securities
Dealers, Inc.;
(k) deliver promptly to counsel to the participating
Employees and each underwriter, if any, participating in the
offering of the Registrable Securities, 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 such
registration statement;
(l) use its best efforts to obtain the withdrawal of
any order suspending the effectiveness of the registration
statement;
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(m) provide a CUSIP number for all Registrable
Securities, no later than the effective date of the
registration statement; and
(n) make available its employees and personnel and
otherwise provide reasonable assistance to the underwriters
(taking into account the needs of the Company's businesses) in
their marketing of Registrable Securities.
The Company may require each participating Employee to furnish the Company with
such information regarding such Employee and the distribution of the Registrable
Securities as the Company may from time to time reasonably request in writing.
The Employees agree that upon receipt of any notice from the
Company of the happening of any event of the kind described in paragraph
(g)(iii) or (v) of this Section 2.3, each participating Employee will, to the
extent appropriate, discontinue his disposition of Registrable Securities
pursuant to the registration statement relating to such Registrable Securities
until, in the case of paragraph (g)(v) of this Section 2.3, his receipt of the
copies of the supplemented or amended prospectus contemplated by paragraph
(g)(v) of this Section 2.3 and, if so directed by the Company, will deliver to
the Company (at the Company's expense) all copies, other than permanent file
copies, then in its possession, of the prospectus relating to such Registrable
Securities current at the time of receipt of such notice. If the disposition by
the participating Employees of their securities is discontinued pursuant to the
foregoing sentence, the Company shall extend the period of effectiveness of the
registration statement by the number of days during the period from and
including the date of the giving of notice to and including the date when the
participating Employees shall have received copies of the supplemented or
amended prospectus contemplated by paragraph (g)(v) of this Section 2.3; and, if
the Company shall not so extend such period, Sherman's request pursuant to which
such registration statement was filed shall not be counted for purposes of the
requests for registration to which Sherman is entitled pursuant to Section 2.1
hereof.
2.4 Underwritten Offerings.
(a) Requested Underwritten Offerings. If
requested by the underwriters for any underwritten offering by Sherman pursuant
to a registration requested under Section 2.1, Sherman shall enter into a
customary underwriting agreement with a managing underwriter or underwriters
selected by him. Such underwriting agreement shall be satisfactory in form and
substance to Sherman and shall contain such representations and warranties by,
and such other agreements on the part of, the Company and such other terms as
are generally prevailing in agreements of that type, including, without
limitation, customary provisions relating to indemnification and contribution.
Sherman shall be party to such underwriting agreement and may, at his option,
require that any or all of the representations and warranties by, and the other
agreements on the part of, the Company to and for the benefit of such
underwriters shall also be made to and for the benefit of Sherman and that any
or all of the conditions precedent to the obligations of such underwriters under
such underwriting agreement be conditions precedent to the obligations of
Sherman. Sherman shall not be required to make any representations or warranties
to or agreements with the Company or the underwriters other than
representations, warranties or agreements regarding Sherman, his ownership of
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and title to the Registrable Securities, and his intended method of
distribution; and any liability of Sherman to any underwriter or other person
under such underwriting agreement shall be limited to liability arising from
breach of his representations and warranties and shall be limited to an amount
equal to the proceeds (net of expenses and underwriting discounts and
commissions) that he derives from such registration.
(b) Incidental Underwritten Offerings. In the
case of a registration pursuant to Section 2.2 hereof, if the Company shall have
determined to enter into any underwriting agreements in connection therewith,
all of the Registrable Securities to be included in such registration shall be
subject to such underwriting agreements. The participating Employees may, at
their option, require that any or all of the representations and warranties by,
and the other agreements on the part of, the Company to and for the benefit of
such underwriters shall also be made to and for the benefit of the participating
Employees and that any or all of the conditions precedent to the obligations of
such underwriters under such underwriting agreement be conditions precedent to
the obligations of the participating Employees. None of the participating
Employees shall be required to make any representations or warranties to or
agreements with the Company or the underwriters other than representations,
warranties or agreements regarding such participating Employee, his ownership of
and title to the Registrable Securities, and his intended method of
distribution; and any liability of any participating Employee to any underwriter
or other Person under such underwriting agreement shall be limited to liability
arising from breach of his representations and warranties and shall be limited
to an amount equal to the proceeds (net of expenses and underwriting discounts
and commissions) that he derives from such registration.
2.5 Preparation; Reasonable Investigation. In
connection with the preparation and filing of each registration statement under
the Securities Act pursuant to this Agreement, the Company will give the
participating Employees, their underwriters, if any, and their respective
counsel, accountants and other representatives and agents the opportunity to
participate in the preparation of such registration statement, each prospectus
included therein or filed with the Commission, and each amendment thereof or
supplement thereto, and give each of them such access to its books and records
and such opportunities to discuss the business of the Company with its officers
and employees and the independent public accountants who have certified its
financial statements, and supply all other information reasonably requested by
each of them, as shall be necessary or appropriate, in the opinion of the
participating Employees and such underwriters' respective counsel, to conduct a
reasonable investigation within the meaning of the Securities Act.
2.6 Indemnification.
(a) Indemnification by the Company. The Company
agrees that in the event of any registration of any securities of the Company
under the Securities Act, the Company shall, and hereby does, indemnify and hold
harmless each Employee, his respective partners, agents and affiliates and each
other Person who participates as an underwriter in the offering or sale of such
securities, against any losses, claims, damages, or liabilities, joint or
several, to which such Employee or any such partner, agent or affiliate or
underwriter may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities, joint or several (or actions or
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proceedings, whether commenced or threatened, in respect thereof), arise out of
or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary prospectus,
final prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, (ii) any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances in which they were made not misleading, or
(iii) any violation by the Company of any federal, state or common law rule or
regulation applicable to the Company and relating to action required of or
inaction by the Company in connection with any such registration, and the
Company shall reimburse such Employee and each such partner, agent or affiliate
and underwriter Person for any legal or any other expenses reasonably incurred
by them in connection with investigating or defending any such loss, claim,
liability, action or proceeding; provided that the Company shall not be liable
in any such case to the Employees or any such partner, agent, or affiliate to
the extent that any such loss, claim, damage, liability (or action or proceeding
in respect thereof) or expense arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, any such preliminary prospectus, final prospectus,
summary prospectus, amendment or supplement in reliance upon and in conformity
with written information furnished to the Company through an instrument duly
executed by or on behalf of the participating Employee, specifically stating
that it is for use in the preparation thereof; and provided, further, that the
Company shall not be liable to any Person who participates as an underwriter in
the offering or sale of Registrable Securities or any other Person, if any, who
controls such underwriter within the meaning of the Securities Act, in any such
case to the extent that any such loss, claim, damage, liability (or action or
proceeding in respect thereof) or expense (i) arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in such registration statement, any such preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company through an
instrument duly executed by or on behalf of such Person or (ii) arises out of
such Person's failure to send or give a copy of the final prospectus, as the
same may be then supplemented or amended, to the Person asserting an untrue
statement or alleged untrue statement or omission or alleged omission at or
prior to the written confirmation of the sale of Registrable Securities to such
Person if such statement or omission was corrected in such final prospectus.
Such indemnity shall remain in full force regardless of any investigation made
by or on behalf of any Employee or any such partner, agent, affiliate or
underwriter and shall survive the transfer of such securities by such Employee.
(b) Indemnification by the Employees. As a
condition to including any Registrable Securities in any registration statement,
the Company shall have received an undertaking reasonably satisfactory to it
from each Employee so including any Registrable Securities to indemnify and hold
harmless (in the same manner and to the same extent as set forth in paragraph
(a) of this Section 2.6) the Company, and each director of the Company, each
officer of the Company and each other Person, if any, who controls the Company
within the meaning of the Securities Act, with respect to any statement or
alleged statement in or omission or alleged omission from such registration
statement, any preliminary prospectus, final prospectus or summary prospectus
contained therein, or any amendment or supplement thereto, but only to the
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extent such statement or alleged statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company through an instrument duly executed by such Employee specifically
stating that it is for use in the preparation of such registration statement,
preliminary prospectus, final prospectus, summary prospectus, amendment or
supplement; provided, however, that the liability of such indemnifying party
under this Section 2.6(b) shall be limited to the amount of proceeds (net of
expenses and underwriting discounts and commissions) received by such
indemnifying party in the offering giving rise to such liability. Such indemnity
shall remain in full force and effect, regardless of any investigation made by
or on behalf of the Company or any such director, officer or controlling Person
and shall survive the transfer of such securities by such Employee.
(c) Notices of Claims, etc. Promptly after
receipt by an indemnified party of notice of the commencement of any action or
proceeding involving a claim referred to in the preceding subsections of this
Section 2.6, such indemnified party shall, if a claim in respect thereof is to
be made against an indemnifying party, give written notice to the latter of the
commencement of such action or proceeding; provided, however, that the failure
of any indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under the preceding subsections of this
Section 2.6, except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice, and shall not relieve the
indemnifying party from any liability which it may have to the indemnified party
otherwise than under this Section 2.6. In case any such action or proceeding is
brought against an indemnified party, the indemnifying party shall be entitled
to participate therein and, unless in the opinion of outside counsel to the
indemnified party a conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, to assume the defense
thereof, jointly with any other indemnifying party similarly notified to the
extent that it may wish, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such action
or proceeding include both the indemnified party and the indemnifying party and
if in the opinion of outside counsel to the indemnified party there may be legal
defenses available to such indemnified party and/or other indemnified parties
which are different from or in addition to those available to the indemnifying
party, the indemnified party or parties shall have the right to select separate
counsel to defend such action or proceeding on behalf of such indemnified party
or parties, provided, however, that the indemnifying party shall be obligated to
pay for only one counsel for all indemnified parties. After notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof and approval by the indemnified party of such counsel, the
indemnifying party shall not be liable to such indemnified party for any legal
expenses subsequently incurred by the latter in connection with the defense
thereof other than reasonable costs of investigation (unless the first proviso
in the preceding sentence shall be applicable). No indemnifying party shall be
liable for any settlement of any action or proceeding effected without its
written consent. No indemnifying party shall, without the consent of the
indemnified party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all liability
in respect to such claim or litigation.
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(d) Contribution. If the indemnification
provided for in this Section 2.6 shall for any reason be held by a court to be
unavailable to an indemnified party under subsection (a) or (b) hereof in
respect of any loss, claim, damage or liability, or any action in respect
thereof, then, in lieu of the amount paid or payable under subsection (a) or (b)
hereof, the indemnified party and the indemnifying party under subsection (a) or
(b) hereof shall contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating the same), (i) in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand, and the
indemnified party on the other, which resulted in such loss, claim, damage or
liability, or action in respect thereof, with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations, or (ii)
if the allocation provided by clause (i) above is not permitted by applicable
law or if the allocation provided in this clause (ii) provides a greater amount
to the indemnified party than clause (i) above, in such proportion as shall be
appropriate to reflect not only the relative fault but also the relative
benefits received by the indemnifying party and the indemnified party from the
offering of the securities covered by such registration statement as well as any
other relevant equitable considerations. The parties hereto agree that it would
not be just and equitable if contributions pursuant to this Section 2.6(d) were
to be determined by pro rata allocation or by any other method of allocation
which does not take into account the equitable considerations referred to in the
preceding sentence of this Section 2.6(d). No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. The participating Employees' obligations to
contribute as provided in this subsection (d) are several and not joint and
shall be in proportion to the relative value of their respective Registrable
Securities covered by such registration statement. In addition, no Person shall
be obligated to contribute hereunder any amounts in payment for any settlement
of any action or claim effected without such Person's consent, which consent
shall not be unreasonably withheld. Notwithstanding anything in this subsection
(d) to the contrary, no indemnifying party (other than the Company) shall be
required to contribute any amount in excess of the proceeds (net of expenses and
underwriting discounts and commissions) received by such party from the sale of
the Registrable Securities in the offering to which the losses, claims, damages
or liabilities of the indemnified parties relate.
(e) Other Indemnification. Indemnification and
contribution similar to that specified in the preceding subsections of this
Section 2.6 (with appropriate modifications) shall be given by the Company and
the participating Employees with respect to any required registration or other
qualification of securities under any federal, state or blue sky law or
regulation of any governmental authority other than the Securities Act. The
indemnification agreements contained in this Section 2.6 shall be in addition to
any other rights to indemnification or contribution which any indemnified party
may have pursuant to law or contract and shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the transfer of any of the Registrable
Securities by any of the Employees.
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(f) Indemnification Payments. The
indemnification and contribution required by this Section 2.6 shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or expense, loss, damage or liability
is incurred.
2.7 Unlegended Certificates. In connection with
the offering of any Registrable Securities registered pursuant to this Section
2, the Company shall (i) facilitate the timely preparation and delivery to the
Employees and the underwriters, if any, participating in such offering, of
unlegended certificates representing ownership of such Registrable Securities
being sold in such denominations and registered in such names as requested by
the Employees or such underwriters and (ii) instruct any transfer agent and
registrar of such Registrable Securities to release any stop transfer orders
with respect to any such Registrable Securities.
2.8 Limitation on Sale of Securities. The Company
hereby agrees that if it shall previously have received a request for
registration pursuant to Section 2.1 or 2.2 hereof, and if such previous
registration shall not have been withdrawn or abandoned, the Company shall not
effect any public or private offer, sale or distribution of its securities or
effect any registration of any of its equity securities under the Securities Act
(other than a registration on Form S-8 or any successor or similar form which is
then in effect), whether or not for sale for its own account, until a period of
90 days (or such shorter period as the participating Employees shall be advised
by their managing underwriter) shall have elapsed from the effective date of
such previous registration, and the Company shall so provide in any registration
rights agreements hereafter entered into with respect to any of its securities.
2.9 No Required Sale. Nothing in this Agreement
shall be deemed to create an independent obligation on the part of either of the
Employees to sell any Registrable Securities pursuant to any effective
registration statement.
3. Rule 144. The Company shall take all actions reasonably
necessary to enable holders of Registrable Securities to sell such securities
without registration under the Securities Act within the limitation of the
exemptions provided by (a) Rule 144, or (b) any similar rule or regulation
hereafter adopted by the Commission including, without limiting the generality
of the foregoing, filing on a timely basis all reports required to be filed by
the Exchange Act. Upon the request of an Employee, the Company will deliver to
such Employee a written statement as to whether it has complied with such
requirements.
4. Amendments and Waivers. This Agreement may be amended,
modified or supplemented only by written agreement of the party against whom
enforcement of such amendment, modification or supplement is sought.
5. Adjustments. In the event of any change in the
capitalization of the Company as a result of any stock split, stock dividend,
reverse split, combination, recapitalization, merger, consolidation, or
otherwise, the provisions of this Agreement shall be appropriately adjusted. The
Company agrees that it shall not effect or permit to occur any combination or
subdivision of shares which would adversely affect the ability of the Employees
14
<PAGE>
to include any Registrable Securities in any registration contemplated by this
Agreement or the marketability of such Registrable Securities in any such
registration.
6. Notice. All notices and other communications hereunder
shall be in writing and, unless otherwise provided herein, shall be deemed to
have been given when received by the party to whom such notice is to be given at
its address set forth below, or such other address for the party as shall be
specified by notice given pursuant hereto:
(a) If to Sherman, to:
40D Long Beach Blvd.
Loveladies, NJ 08008
With a copy to Cummings
(b) If to Cummings, to:
133 Plum St.
Moorestown, NJ 08057
With a copy to Sherman
(c) If to the Company, to it at:
510 Ryerson Rd.
Lincoln Park, NJ 07035
Attention: President
7. Assignment; Third Party Beneficiaries. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective heirs, successors and permitted assigns. This
Agreement may not be assigned by the Company. Either Employee may, at his
election, at any time or from time to time, assign his rights under this
Agreement, in whole or in part, to any purchaser of shares of Common Stock held
by him.
8. Remedies. The parties hereto agree that money damages or
other remedy at law would not be sufficient or adequate remedy for any breach or
violation of, or a default under, this Agreement by them and that, in addition
to all other remedies available to them, each of them shall be entitled to an
injunction restraining such breach, violation or default or threatened breach,
violation or default and to any other equitable relief, including without
limitation specific performance, without bond or other security being required.
In any action or proceeding brought to enforce any provision of this Agreement
(including the indemnification provisions thereof), the successful party shall
be entitled to recover reasonable attorneys' fees in addition to its costs and
expenses and any other available remedy.
9. No Inconsistent Agreements. The Company will not, on or
after the date of this Agreement, enter into any agreement with respect to its
15
<PAGE>
securities which is inconsistent with the rights granted to the Employees in
this Agreement or otherwise conflicts with the provisions hereof, other than any
customary lock-up agreement with the underwriters in connection with any
Offering effected hereunder, pursuant to which the Company shall agree not to
register for sale, and the Company shall agree not to sell or otherwise dispose
of, Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock, for a specified period (not to exceed 180 days)
following such Offering. The Company has not previously entered into any
agreement with respect to its securities granting any registration rights to any
Person. The rights granted to the Employees hereunder do not in any way conflict
with and are not inconsistent with any other agreements to which the Company is
a party or by which it is bound.
11. Descriptive Headings. The descriptive headings of the
several sections and paragraphs of this Agreement are inserted for reference
only and shall not control or otherwise affect the meaning hereof.
12. Governing Law. This Agreement shall be construed and
enforced in accordance with, and the rights and obligations of the parties
hereto shall be governed by, the laws of the Delaware, without giving effect to
the conflicts of law principles thereof. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the exclusive jurisdiction
of the courts of Delaware and the United States of America located in the County
of New Castle for any action or proceeding arising out of or relating to this
Agreement and the transactions contemplated hereby (and agrees not to commence
any action or proceeding relating thereto except in such courts), and further
agrees that service of any process, summons, notice or document by U.S.
registered mail to its respective address set forth in Section 6 hereof shall be
effective service of process for any action or proceeding brought against it in
any such court. Each of the parties hereto hereby irrevocably and
unconditionally waives any objection to the laying of venue of any action or
proceeding arising out of this Agreement or the transactions contemplated hereby
in the courts of Delaware or the United States of America located in the County
of New Castle, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action or
proceeding brought in any such court has been brought in an inconvenient forum.
13. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original, but all such
counterparts shall together constitute one and the same instrument.
14. Invalidity of Provision. The invalidity or
unenforceability of any provision of this Agreement in any jurisdiction shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of this Agreement, including
that provision, in any other jurisdiction. If any restriction or provision of
this Agreement is held unreasonable, unlawful or unenforceable in any respect,
such restriction or provision shall be interpreted, revised or applied in a
manner that renders it lawful and enforceable to the fullest extent possible
under law.
15. Further Assurances. Each party hereto shall do and perform
or cause to be done and performed all further acts and things and shall execute
and deliver all other agreements, certificates, instruments, and documents as
16
<PAGE>
any other party hereto reasonably may request in order to carry out the intent
and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
16. Entire Agreement; Effectiveness. This Agreement
constitutes the entire agreement, and supersedes all prior agreements and
understandings, oral and written, between the parties hereto with respect to the
subject matter hereof.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed and delivered by their respective officers thereunto duly
authorized.
INTELLESALE.COM, INC.
By: _________________________
Name:
Title:
_____________________________
Marc Sherman
_____________________________
Edward L. Cummings
17
Exhibit 4.4
VOTING AND STANDSTILL AGREEMENT
This Voting and Standstill Agreement (this "Agreement") is entered into
this 10th day of September, 1999, by and between Intellesale.com, Inc., a
Delaware corporation (the "Company"), and Applied Digital Solutions, Inc., a
Missouri corporation ("ADS").
W I T N E S S E T H:
WHEREAS, ADS owns 80% of the outstanding shares of common stock of the
Company;
WHEREAS, the Company plans to complete an initial public offering of
its common stock in the near future, which, although it will reduce ADS'
ownership, will result in ADS continuing to own a substantial interest in the
Company;
WHEREAS, it is the mutual intention of the Company and ADS to enter
into certain agreements contained herein which shall, for a period of time
following the initial public offering, govern the voting and transfer of shares
of the Company's common stock held by ADS;
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, and other good and valuable consideration, the receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:
SECTION 1: VOTING
1.1 Voting by ADS.
(a) Obligation. ADS shall vote the total number of shares of common
stock of the Company or shares of any other class of capital stock of the
Company entitled to vote generally on matters submitted to a vote of the
Company's stockholders ("Voting Securities") that it or any of its subsidiaries
beneficially owns (whether now owned or hereafter acquired) and to which it is
entitled to vote ("ADS Shares") in accordance with the provisions of this
Section 1.1.
(b) Voting on Directors and Other Matters. On the election (or removal)
of directors and on all other matters submitted to a vote of the Company's
stockholders, all ADS Shares shall be voted proportionally in accordance with
the total number of affirmative or negative votes cast by the Public
Stockholders (as defined below) with respect to such matter.
(c) Public Stockholders. The term "Public Stockholders" shall mean all
stockholders of the Company holding Voting Securities other than ADS and its
subsidiaries.
<PAGE>
(d) Procedure.
(i) To effectuate the voting requirements set forth in this
Section 1.1, ADS agrees that it shall:
(A) vote on all matters submitted to the vote
of holders of Voting Securities using a special form of proxy to be furnished by
the Company pursuant to which ADS shall give written instructions that all ADS
Shares shall be voted in accordance with the applicable provisions of this
Section 1.1; and
(B) not vote or permit to be voted any ADS Shares
held in "street" or other
nominee name or on any proxy other than the special form of proxy referred to in
Section 1.1(d)(i)(A).
(i) ADS shall deliver to the Company, prior to any vote by the
holders of Voting Securities, a report indicating the number of shares
constituting the ADS Shares if the number of ADS Shares has changed from the
amount reported in the most recent Schedule 13D or 13G filed by ADS.
(ii) The Company shall give to ADS written notice of the votes
cast by the Public Stockholders and the manner in which the votes cast by ADS
were calculated for purposes of the voting of the special proxy referred to in
this Section 1.1(d) in accordance with the voting requirements of this Section
1.1.
(e) Irrevocable Proxy. In order to secure the obligation of ADS to vote
in accordance with the provisions hereof, ADS shall deliver to the Company on
the date hereof an irrevocable proxy in the form attached hereto as Exhibit A.
1.2 Business Combinations. ADS shall not, and shall not permit any of
its officers or directors to, initiate, propose, encourage or otherwise solicit
or participate in any form of business combination or similar transaction
involving the Company, including a merger, consolidation, exchange offer or sale
or liquidation of the Company's assets, or any form of restructuring,
recapitalization or similar transaction with respect to the Company (a "Business
Combination"), without the prior approval of a majority of the members of the
Board of Directors who are not officers or directors of ADS or owners of 5% of
the outstanding common stock of ADS (the "Disinterested Directors"). If a
majority of the Disinterested Directors shall approve a Business Combination,
ADS may participate therein on terms no less advantageous than those offered to
any other stockholder of the Company (in its capacity as a stockholder).
1.3 No 13D Groups. ADS shall not directly or indirectly, participate
in, act in concert with or encourage the formation of any 13D Group, or
otherwise act in concert with any other persons, for the purpose of acquiring,
holding, voting or disposing of, or seeking or offering to acquire, hold, vote
2
<PAGE>
or dispose of Voting Securities or rights to acquire Voting Securities, or
otherwise become a "person" within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Notwithstanding the foregoing, the acquisition, disposition and voting of Voting
Securities by ADS to the extent specifically permitted by this Agreement shall
not constitute the formation of a 13D Group for purposes of this Section 1.3.
1.4 No Voting Trusts or Agreements. ADS shall not deposit any ADS
Shares in a voting trust or subject any ADS Shares to any arrangement or
agreement with respect to the voting of such shares, except as provided for in
Section 1.1 of this Agreement and except to the extent necessary to comply with
their obligations under this Agreement.
1.5 Proxy Contests. ADS shall not, and shall not permit any of its
officers or directors to, (i) initiate, propose, encourage or participate in any
"solicitation" of "proxies" (as such terms are defined in SEC Regulation 14A),
including action by written consent, (ii) become a "participant" in any
"election contest" (as such terms are defined or used in SEC Rule 14a-11) with
respect to the Company, nominate any person for election as a director, or seek
to advise, encourage or influence any person with respect to the voting of any
Voting Securities of the Company or soliciting proxies for the election of such
person, or (iii) initiate, propose or otherwise solicit or participate in the
solicitation of any stockholder for the approval of one or more stockholder
proposals with respect to the Company (as described under SEC Rule 14a-8), or
encourage any other person to initiate any stockholder proposal relating to the
Company.
SECTION 2: RESTRICTIONS ON OWNERSHIP OF VOTING SECURITIES
2.1 Standstill Restriction. ADS shall not permit the total number of
Voting Securities beneficially owned by it or its subsidiaries to at any time
exceed the number of ADS Shares owned by it immediately following the closing of
the Company's initial public offering (after giving effect to any redemption of
shares of common stock owned by ADS as contemplated by the final prospectus
relating to the initial public offering); provided, however, that ADS shall not
be in violation of the provisions of this Section 2.1 solely as a result of an
increase in the number of ADS Shares due to any stock split, stock dividend or
reorganization undertaken by the Company.
SECTION 3: TRANSFERS BY ADS
3.1 Tender Offers. ADS shall not, and shall not permit its officers or
directors to, (i) initiate, participate in or encourage any third party tender
offers to purchase or exchange ("Tender Offer") shares of Voting Securities
without the prior approval of the Disinterested Directors of the Company, or
(ii) tender any ADS Shares into any Tender Offer which the Disinterested
Directors have recommended be rejected by the Company's stockholders.
3
<PAGE>
3.2 Market Sales; Rule 144 Sales. ADS may offer, sell or transfer ADS
Shares pursuant to a bona fide public offering, registered under the Securities
Act of 1933, as amended (the "Securities Act"), or pursuant to any other
transaction conducted on a national public stock exchange that is in compliance
with the Securities Act. ADS shall not transfer any ADS Shares pursuant to the
provisions of Rule 144 of the Securities Act without having first given to the
Company an executed copy of any notice on Form 144 required to be filed with the
SEC specifying an aggregate number of shares proposed to be sold.
3.3 Private Sales. Except as permitted by Sections 3.1 and 3.2 hereof,
ADS shall not transfer any ADS Shares to any person (other than to a person, and
in a transaction, that has been approved in writing in advance by the
Disinterested Directors). As used in this Section 3, the terms "transfer,"
"transferring, "transferred" and variations thereof, shall mean and refer to any
sale, gift, pledge, encumbrance, hypothecation, distribution, transfer or other
act or action, whether voluntary or involuntary, by operation of law or
otherwise, whereby or as a result of which, ADS' ownership, interest or rights
in any ADS Shares are transferred, disposed of or encumbered in any way.
3.4 Sales Prohibited During Public Offerings. ADS agrees that if any
shares of Voting Securities of the Company are offered to the public in an
underwritten public offering pursuant to an effective registration statement
under the Securities Act, ADS will not effect any public sale or distribution of
any ADS Shares (other than shares registered for sale pursuant to such
registration statement) within the 14 days prior to, and within the 180 days
after, the effective date of such registration statement.
3.5 Non-Conforming Transfers Void. Any transfer or attempted transfer
of ADS Shares in violation of any provision of this Section 3 shall be void ab
initio and the Company shall not be required to, and the Company's transfer
agent shall be instructed not to, recognize any such transfer or attempted
transfer on the books and records of the Company. The certificates evidencing
any shares of ADS Shares shall bear a legend to such effect. ADS shall promptly
submit to the Company any shares of Voting Securities acquired by of them so
that such certificates may be legended in accordance with the foregoing
provision.
SECTION 4: TERMINATION
4.1 Term of Agreement. The provisions of this Agreement shall terminate
upon the earlier to occur of (i) ADS ceasing to beneficially own at least 10% of
the total number of Voting Securities then outstanding or (ii) ADS ceasing to
beneficially own at least 15% of the total number of Voting Securities then
outstanding and, at such time, another person or entity beneficially owns more
Voting Securities than ADS.
4
<PAGE>
SECTION 5: MISCELLANEOUS
5.1 Legends. ADS agrees as that:
(a) within 10 business days after the acquisition by it or any of its
subsidiaries of any certificates evidencing Voting Securities (or, in
the case of Voting Securities currently owned by ADS or any of its
subsidiaries, within 10 business days after the date hereof) to submit
such certificates to the Company for placement on the face thereof the
following legend:
"The shares represented by this certificate are
subject to the restrictions on disposition and to the other
provisions of a Voting and Standstill Agreement dated as of
September ___, 1999 between Intellesale.com, Inc. and Applied
Digital Solutions, Inc. Copies of such Agreement are on file
at the respective offices of Intellesale.com, Inc. and
Applied Digital Solutions, Inc."; and
(b) to the entry of stop transfer orders with the transfer agents of
any such Voting Securities against the transfer of such legended
certificates representing such Voting Securities except in compliance
with this Agreement.
Upon the occurrence of any transfer made in accordance with the terms of this
Section 3, if the ADS Shares are no longer subject to the restrictions set forth
in this Agreement, the Company shall, and shall cause its transfer agent to,
remove all restrictive legends referencing this Agreement (other than securities
laws legends that may still be applicable) that are set forth on the certificate
representing such transferred ADS Shares.
5.2 Board Approval. Any approval by the Disinterested Directors in
accordance with this Agreement shall be evidenced by a specific resolution
adopted by the Disinterested Directors at a meeting duly called and held.
5.3 Amendment. This Agreement may not be modified, amended, altered or
supplemented except by a written agreement signed by the Company and ADS, which
modification, amendment, alteration or supplement must be approved by a majority
of the Disinterested Directors. If any term or provision of this Agreement is
held by a court of competent jurisdiction to be invalid, void, unenforceable or
against public policy, the remainder of terms, provisions, and covenants of this
Agreement shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
5.4 Successor; Assignment. Except as otherwise provided herein, this
Agreement shall be binding upon and shall inure to the benefit of the successors
to, and permitted assigns of, the parties hereto; provided, however, that this
Agreement shall not be binding upon or inure to the benefit of any successor to
the Company in a merger in which the Company is not the surviving corporation.
This Agreement shall not be assignable by any of the parties hereto without
prior written consent of the other parties.
5
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5.5 Applicable Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of the State of Delaware, without giving
effect to principles of conflict of law thereof.
5.6 Entire Agreement; Counterparts. This Agreement, including the
Exhibit hereto, contains all of the terms, conditions, representations and
warranties agreed upon by parties relating to the subject matter of this
Agreement and supersedes all other prior and contemporaneous agreements,
negotiations, correspondence, undertakings and communications of the parties,
oral or written, respecting such subject matter. This Agreement may executed in
any number of counterparts, each of which shall be deemed an original, and all
of which, together, shall constitute one and the same instrument.
5.7 Section Headings. The section and subsection headings contained in
this Agreement are solely for the purposes of reference and shall not affect the
meaning or interpretation of this Agreement.
5.8 Injunctive Relief. The parties acknowledge and agree that the
Company would be irreparably damaged in the event any of the provisions of
Sections 1, 2 or 3 are not performed by ADS in accordance with their specific
terms or are otherwise breached, the remedies at law for any such breach are
inadequate and the Company will suffer direct and continuing injury as a result
of any such breach. Accordingly, it is agreed that the Company shall be
entitled, without necessity of furnishing a bond, to injunctive relief
(including a temporary restraining order or a preliminary injunction) to prevent
breaches of any of such Sections and to specifically enforce any of such
Sections and the terms and provisions thereof in any action instituted in any
court of the United States or any state thereof having subject matter
jurisdiction, in addition to, and not in limitation of, any other remedy to
which the parties may be entitled, at law or in equity.
5.9 Remedies. The parties agree that the sole and exclusive remedies
for a breach of any of the provisions of this Agreement shall be an award of
damages or injunctive relief, as determined by a court of competent
jurisdiction, and that no breach of any provision of this Agreement by any party
hereto shall give rise to a right of the non-breaching party or parties to
terminate this Agreement nor shall any such breach excuse the non-breaching
party or parties from the obligation to perform any of its or their obligations
hereunder.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
APPLIED DIGITAL SOLUTIONS, INC.
By: /s/ Garrett A. Sullivan
------------------------
Its: President
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
------------------------
Its: President
7
Exhibit 10.1
UNIVERSAL COMMODITIES CORP.
1997 NON-QUALIFIED STOCK OPTION PLAN
<PAGE>
UNIVERSAL COMMODITIES CORP.
1997 NON-QUALIFIED STOCK OPTION PLAN
TABLE OF CONTENTS
ARTICLE I - Name and Purpose. 1
1.1. Name............................................................1
1.2. Purpose.........................................................1
ARTICLE II - Definitions of Terms and Rules of Construction. 1
2.1. General Definitions.............................................1
(a) Affiliate...............................................1
(b) Agreement...............................................1
(c) Board...................................................1
(d) Change of Control.......................................2
(e) Company.................................................2
(f) Committee...............................................2
(g) Common Stock............................................2
(h) Director................................................2
(i) Effective Date..........................................2
(j) Employee................................................2
(k) Employer................................................2
(l) Fair Market Value.......................................2
(m) NQSO 2
(n) Option..................................................2
(o) Parent..................................................2
(p) Participant.............................................3
(q) Plan 3
(r) Share...................................................3
(s) Subsidiary..............................................3
2.2. Other Definitions...............................................3
2.3. Conflicts in Plan...............................................3
ARTICLE III - Common Stock. 3
3.1. Number of Shares................................................3
3.2. Reusage.........................................................4
3.3. Adjustments.....................................................4
i
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ARTICLE IV - Eligibility. 4
4.1. Determined By Committee.........................................4
ARTICLE V - Administration. 4
5.1. Committee.......................................................4
5.2. Authority.......................................................5
5.3. Adjudication of Claims..........................................5
5.4. Options for Directors...........................................6
ARTICLE VI - Amendment, Termination, and Change of Control. 6
6.1. Power of Board..................................................6
6.2. Limitation......................................................6
6.3. Term............................................................7
6.4. Termination.....................................................7
6.5. Effect of Amendment or Termination..............................7
6.6. Committee's Right...............................................7
6.7. Change of Control...............................................7
ARTICLE VII - Agreements 8
7.1. Grant Evidenced by Agreement....................................8
7.2. Provisions of Agreement.........................................8
ARTICLE VIII - Payment, Dividends, and Withholdings. 8
8.1. Payment.........................................................8
8.2. Dividend Equivalents............................................9
8.3. Withholding.....................................................9
ARTICLE IX - Options. 9
9.1. Type of Options.................................................9
9.2. Terms of NQSOs..................................................9
9.3. Determination by Committee.....................................10
ARTICLE X - Miscellaneous Provisions. 10
10.1. Underscored References........................................10
10.2. Number and Gender.............................................10
10.3. Governing Law.................................................10
ii
<PAGE>
10.4. Purchase for Investment.......................................10
10.5. No Employment Contract........................................11
10.6. No Effect on Other Benefits...................................11
iii
<PAGE>
UNIVERSAL COMMODITIES CORP.
1997 NON-QUALIFIED STOCK OPTION PLAN
ARTICLE I
NAME AND PURPOSE
1. Name and Purpose.
1.1 Name.
The name of this Plan is the "Universal Commodities Corp. 1997
Non-Qualified Stock Option Plan."
1.2. Purpose
The Company has established this Plan to attract, retain,
motivate and reward Employees and Directors and to encourage ownership of the
Company's Common Stock by them.
ARTICLE II
DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION
2. Definitions of Terms and Rules of Construction.
2.1. General Definitions.
The following words and phrases, when used in the Plan, unless
otherwise specifically defined or unless the context clearly otherwise requires,
shall have the following respective meanings:
(a) Affiliate. A Parent or Subsidiary of the Company.
(b) Agreement. The document which evidences the grant of an
Option under the Plan and which sets forth the terms, conditions and
provisions of, and restrictions relating to, such Option.
(c) Board. The Board of Directors of the Company.
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(d) Change of Control. The acquisition, without the approval
of the Board, by any person or entity, other than the Company or a
Related Entity, of more than 20% of the outstanding shares of the
Company's voting common stock through a tender offer, exchange offer or
otherwise; the liquidation or dissolution of the Company following a
sale or other disposition of all or substantially all of its assets; a
merger or consolidation involving the Company which results in the
Company not being the surviving parent corporation; or any time during
any two-year period in which individuals who constituted the Board at
the start of such period (or whose election was approved by at least
two-thirds of the then members of the Board who were members at the
start of the two-year period) do not constitute at least 50% of the
Board for any reason. A Related Entity is the Parent, a Subsidiary or
any employee benefit plan (including a trust forming a part of such a
plan) maintained by the Parent, the Company or a Subsidiary.
(e) Company. Universal Commodities Corp.
(f) Committee. The Committee described in Section 5.1.
(g) Common Stock. The Company's common stock which presently
has no par value per Share.
(h) Director. A member of the Board or a member of the Board
of Directors of any Affiliate.
(i) Effective Date. The date that the plan is approved by the
shareholders of the company which was March 20, 1997.
(j) Employee. Any person employed by the Employer.
(k) Employer. The Company and all Affiliates.
(l) Fair Market Value. The closing price of the shares on the
stock exchange that the company is traded on a given date or, in the
absence of sale on a given date, the closing price on the last day on
which a sale occurred prior to such date. If the shares are not
publicly traded, the committee shall determine fair value.
(m) NQSO. A non-qualified stock option, which is an Option
that does not qualify as an Incentive Stock Option under Section 422 of
the Internal Revenue Code of 1986, as amended.
(n) Option. An option to purchase Shares granted under the
Plan.
(o) Parent. Any corporation (other than the Company or a
Subsidiary) in an unbroken chain of corporations ending with the
2
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Company, if, at the time of the grant of an Option, each of the
corporations (other than the Company or a Subsidiary) owns stock
possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
(p) Participant. An individual who is granted an Option under
the Plan. Options may be granted only to Employees and Directors.
(q) Plan. The Universal Commodities Corp. 1997 Non-Qualified
Stock Option Plan and all amendments and supplements to it.
(r) Share. A share of Common Stock.
(s) Subsidiary. Any corporation, other than the Company, in an
unbroken chain of corporations beginning with the Company if, at the
time of grant of an Option, each of the corporations, other than the
last corporation in the unbroken chain, owns stock possessing 50% or
more of the total combined voting power of all classes of stock in one
of the other corporations in such chain.
2.2. Other Definitions.
In addition to the above definitions, certain words and
phrases used in the Plan and any Agreement may be defined in other portions of
the Plan or in such Agreement.
2.3. Conflicts in Plan.
In the case of any conflict in the terms of the Plan relating
to an Option, the provisions in the ARTICLE of the Plan which specifically
grants such Option shall control those in a different ARTICLE.
ARTICLE III
COMMON STOCK
3. Common Stock.
3.1. Number of Shares.
The number of Shares for which Options may be granted under
the Plan shall be 7,500,000 Shares. Such Shares may be authorized but unissued
Shares, Shares held in the treasury, or both.
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3.2. Reusage.
If an Option expires or is terminated, surrendered, forfeited,
or cancelled without having been fully exercised, the Shares with respect to
which such Option has not been exercised at the time of termination, surrender,
forfeiture, or cancellation shall again be available for use under the Plan.
3.3. Adjustments.
If there is any change in the Common Stock of the Company by
reason of any stock dividend, spin-off, split-up, spin-out, recapitalization,
merger, consolidation, reorganization, combination or exchange of shares, number
and class of shares available for Options and the number of Shares subject to
outstanding Options, and the price thereof, as applicable, shall be
appropriately adjusted by the Committee.
ARTICLE IV
ELIGIBILITY
4. Eligibility.
4.1. Determined By Committee.
The Participants and the Options they receive under the Plan
shall be determined solely by the Committee. In making its determinations, the
Committee shall consider past, present and expected future contributions of
Participants and potential Participants to the Employer, including, without
limitation, the performance of, or the refraining from the performance of,
services.
ARTICLE V
ADMINISTRATION
5. Administration.
5.1. Committee.
The Plan shall be administered by the Committee. The Committee
shall consist of three or more members at least one of whom must be a member of
the Board. The members of the Committee shall be appointed by and shall serve at
the pleasure of the Board, which may from time to time appoint members in
4
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substitution for members previously appointed and fill vacancies, however
caused, in the Committee. The Committee may select one of its members as its
Chairman and shall hold its meetings at such times and places as it may
determine. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members. Any
decision or determination reduced to writing and signed by a majority of the
members shall be fully as effective as if it had been made by a majority vote at
a meeting duly called and held.
5.2. Authority.
Subject to the terms of the Plan, the Committee shall have
discretionary authority to:
(a) determine the individuals to whom Options are granted, the
amounts of Options to be granted and the time of all such grants;
(b) determine the terms, conditions and provisions of, and
restrictions relating to, each Option granted;
(c) interpret and construe the Plan and all Agreements;
(d) prescribe, amend and rescind rules and regulations
relating to the Plan;
(e) determine the content and form of all Agreements;
(f) determine all questions relating to Options under the
Plan;
(g) maintain accounts, records and ledgers relating to
Options;
(h) maintain records concerning its decisions and proceedings;
(i) employ agents, attorneys, accountants or other persons for
such purposes as the Committee considers necessary or desirable;
(j) take, at anytime, any action permitted by Section 6.7
irrespective of whether any Change of Control has occurred or is
imminent; and
(k) do and perform all acts which it may deem necessary or
appropriate for
the administration of the Plan and carry out the purposes of the Plan.
5
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5.3. Adjudication of Claims.
The Committee shall have discretionary authority to make all
determinations as to the right to benefits under the Plan. In the event that a
Participant believes he has not received the benefits to which he is entitled
under the Plan, a claim shall be made in writing to the Committee. The claim
shall be reviewed by the Committee. If the claim is approved or denied, in full
or in part, the Committee shall provide a written notice of approval or denial
within 90 days with, in the case of a denial, the specific reasons for the
denial and specific reference to the provisions of the Plan and/or Agreement
upon which the denial is based. A claim shall be deemed denied if the Committee
does not take any action within the aforesaid 90 day period. If a claim is
denied or deemed denied and a review is desired, the Participant shall notify
the Committee in writing within 60 days of the receipt of notice of denial or
the date on which the claim is deemed to be denied, as the case may be. In
requesting a review, the Participant may review the Plan or any document
relating to it and submit any written issues and comments he may deem
appropriate. The Committee shall then review the claim and provide a written
decision within 60 days. This decision, if adverse to the Participant, shall
state the specific reasons for the decision and shall include reference to
specific provisions of the Plan and/or Agreement on which the decision is based.
The Committee's decision on review shall be final.
5.4. Options for Directors.
Notwithstanding any other provision of the Plan, all
determinations relating to whether or not a member of the Board shall receive an
Option, the terms and conditions relating to any Option granted to such member,
and all matters relating to such Option after it is granted shall be made by the
Board but without any participation in such decisions by such member, and the
Board, other than such member, shall have all of the powers and authorities
granted in the Plan to the Committee for such purposes.
ARTICLE VI
AMENDMENT, TERMINATION, AND CHANGE OF CONTROL
6. Amendment, Termination, and Change of Control.
6.1. Power of Board.
Except as hereinafter provided, the Board shall have the sole
right and power to amend the Plan at any time and from time to time.
6
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6.2. Limitation.
The Board may not amend the Plan, without approval of the
shareholders of the Company, in a manner which would violate applicable law.
6.3. Term.
The Plan shall commence as of the Effective Date and, subject
to the terms of the Plan, shall continue in full force and effect until the
earlier of March 19, 2007 or the termination of the Plan by the Board.
6.4. Termination.
The Plan may be terminated at any time by the Board.
6.5. Effect of Amendment or Termination.
Subject to the provisions of Section 6.6, the amendment or
termination of the Plan shall not adversely affect a Participant's right to any
Option granted prior to such amendment or termination.
6.6. Committee's Right.
Any Option granted may be converted, modified, forfeited or
cancelled, in whole or in part, by the Committee if and to the extent permitted
in the Plan or applicable Agreement or with the consent of the Participant to
whom such Option was granted.
6.7. Change of Control.
In order to maintain a Participant's rights in the event of a
Change in Control, the Committee, in its sole discretion, may, in any Agreement
evidencing an Option, or at any time prior to, or simultaneously with or after a
Change in Control, provide such protection as it may deem necessary. Without, in
any way, limiting the generality of the foregoing sentence or requiring any
specific protection, the Committee may:
(a) provide for the acceleration of any time periods relating
to the exercise of such Option so that such Option may be exercised in
full on or before a date fixed by the Committee;
(b) provide for the purchase of such Option, upon the
Participant's request, for an amount of cash equal to the amount which
could have been attained upon the exercise of such Option had such
Option been currently exercisable;
7
<PAGE>
(c) make such adjustment to the Option then outstanding as the
Committee deems appropriate to reflect such transaction or change;
and/or
(d) cause the Options then outstanding to be assumed, or new
Options substituted therefor, by the surviving corporation in such
change.
ARTICLE VII
AGREEMENTS
7. Agreements
7.1. Grant Evidenced by Agreement.
The grant of any Option under the Plan shall be evidenced by
an Agreement which shall describe the Option granted and the terms and
conditions of the Option. The granting of any Option shall be subject to, and
conditioned upon, the recipient's execution of any Agreement required by the
Committee. Except as otherwise provided in an Agreement, all capitalized terms
used in the Agreement shall have the same meaning as in the Plan, and the
Agreement shall be subject to all of the terms of the Plan.
7.2. Provisions of Agreement.
Each Agreement will provide that the grantee shall not resign
as an Employee or Director until at least one year has elapsed. Subject to the
preceding sentence and the other terms of the Plan, each Agreement shall contain
such additional provisions that the Committee shall determine to be necessary,
desirable and appropriate for the Option granted.
ARTICLE VIII
PAYMENT, DIVIDENDS, AND WITHHOLDING
8. Payment, Dividends, and Withholdings.
8.1. Payment.
Upon the exercise of an Option, the amount due the Company
shall be paid:
8
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(a) in cash;
(b) by the tender or constructive tender to the Company of
Shares owned by the optionee and registered in his name having a Fair
Market Value equal to the amount due to the Company;
(c) in other property, rights and credits, including the
Participant's promissory note;
(d) in cash, but by means of a so-called "cashless exercise"
of an Option; and/or
(e) by any combination of the payment methods specified in
(a), (b), (c) and (d)
above.
Notwithstanding, the foregoing, any method of payment other than (a) may be used
only with the consent of the Committee or if and to the extent so provided in an
Agreement. The proceeds of the sale of Common Stock purchased pursuant to an
Option shall be added to the general funds of the Company or to the Shares held
in treasury, as the case may be, and used for the corporate purposes of the
Company as the Board shall determine.
8.2. Dividend Equivalents.
Grants of Options may include dividend equivalent payments or
dividend credit rights.
8.3. Withholding.
The Company may, at the time any Option is exercised, withhold
from the Shares issuable upon the exercise of an Option, any amount necessary to
satisfy federal, state and local income and/or other tax withholding
requirements with respect to the exercise of such Option. The Committee or the
Company may require a participant to tender to the Company cash in the amount
necessary to comply with any such withholding requirements.
9
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ARTICLE IX
OPTIONS
9. Options.
9.1. Type of Options.
Only NQSOs may be granted by the Committee under the Plan.
9.2. Terms of NQSOs.
The terms of each NQSO shall provide that (a) such Option
shall not be treated as an Incentive Stock Option under Section 422 of the
Internal Revenue Code of 1986, as amended, (b) that the Option will not be
exercisable (i) until at least one year after the Option has been granted and
(ii) unless the optionee is a Director or an Employee at the time of exercise or
has ceased to be such at least one year after the Option is granted and after it
is exercisable because of death, total and permanent disability or termination
by the Company without cause, and (c) that such option shall not be exercisable
more than ten years after the date of grant. The purchase price for Shares under
any NQSO shall be not less than 85% of the Fair Market Value of the Shares at
the time the Option is granted.
9.3. Determination by Committee.
Except as otherwise provided in Section 9.2, or otherwise in
the Plan, the terms of all Options shall be determined by the Committee.
ARTICLE X
MISCELLANEOUS PROVISIONS
10. Miscellaneous Provisions.
10.1. Underscored References.
The underscored references contained in the Plan are included
only for convenience, and they shall not be construed as a part of the Plan or
in any respect affecting or modifying its provisions.
10.2. Number and Gender.
The masculine and neuter, wherever used in the Plan, shall
refer to either the masculine, neuter or feminine; and, unless the context
otherwise requires, the singular shall include the plural and the plural the
singular.
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10.3. Governing Law.
This Plan shall be construed and administered in accordance
with the laws of the State of New
Jersey.
10.4. Purchase for Investment.
The Committee may require each person purchasing Shares
pursuant to an Option to represent to and agree with the Company in writing that
such person is acquiring the Shares for investment and without a view to
distribution or resale. The certificates for such Shares may include any legend
which the Committee deems appropriate to reflect any restrictions on transfer.
All certificates for Shares delivered under the Plan shall be subject to such
stock-transfer orders and other restrictions as the Committee may deem advisable
under all applicable laws, rules and regulations, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
references to such restrictions.
10.5. No Employment Contract.
The adoption of the Plan shall not confer upon any Employee
any right to continued employment nor shall it interfere in any way with the
right of the Employer to terminate the employment of any of its Employees at any
time.
10.6. No Effect on Other Benefits.
The grant of Options under the Plan shall have no effect on
any benefits to which a Participant may be entitled from the Employer, under
another plan or otherwise, or preclude a Participant from receiving any such
benefits.
11
Exhibit 10.2
INTELLESALE.COM, INC.
1999 FLEXIBLE STOCK PLAN
<PAGE>
INTELLESALE.COM, INC.
1999 FLEXIBLE STOCK PLAN
TABLE OF CONTENTS
1. NAME AND PURPOSE 1
1.1. Name.............................................................1
1.2. Purpose..........................................................1
2. DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION 1
2.1. General Definitions..............................................1
2.1.1. Affiliate.............................................1
2.1.2. Agreement.............................................1
2.1.3. Benefit...............................................1
2.1.4. Board.................................................1
2.1.5. Cash Award............................................1
2.1.6. Change of Control.....................................2
2.1.7. Code..................................................2
2.1.8. Company...............................................2
2.1.9. Committee.............................................2
2.1.10. Common Stock.........................................2
2.1.11. Effective Date.......................................2
2.1.12. Employee.............................................2
2.1.13. Employer.............................................2
2.1.14. Exchange Act.........................................3
2.1.15. Fair Market Value....................................3
2.1.16. Fiscal Year..........................................3
2.1.17. ISO..................................................3
2.1.18. NQSO.................................................3
2.1.19. Option...............................................3
2.1.20. Other Stock Based Award..............................3
2.1.21. Parent...............................................3
2.1.22. Participant..........................................4
2.1.23. Performance Based Compensation.......................4
2.1.24. Performance Share....................................4
2.1.25. Plan.................................................4
2.1.26. Reload Option........................................4
2.1.27. Restricted Stock.....................................4
2.1.28. Rule 16b-3...........................................4
2.1.29. SEC..................................................4
2.1.30. Share................................................4
2.1.31. SAR..................................................5
2.1.32. Subsidiary...........................................5
2.2. Other Definitions................................................5
2.3. Conflicts........................................................5
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3. COMMON STOCK 5
3.1. Number of Shares.................................................5
3.2. Reusage..........................................................5
3.3. Adjustments......................................................6
4. ELIGIBILITY 6
4.1. Determined By Committee..........................................6
5. ADMINISTRATION 6
5.1. Committee........................................................6
5.2. Authority........................................................6
5.3. Delegation.......................................................7
5.4. Determination....................................................7
6. AMENDMENT 7
6.1. Power of Board...................................................7
6.2. Limitation.......................................................7
7. TERM AND TERMINATION 8
7.1. Term.............................................................8
7.2. Termination......................................................8
8. MODIFICATION OR TERMINATION OF BENEFITS 8
8.1. General..........................................................8
8.2. Committee's Right................................................8
9. CHANGE OF CONTROL 8
9.1. Right of Committee...............................................8
10. AGREEMENTS AND CERTAIN BENEFITS 9
10.1. Grant Evidenced by Agreement....................................9
10.2. Provisions of Agreement.........................................9
10.3. Transferability.................................................9
11. REPLACEMENT AND TANDEM AWARDS 9
11.1. Replacement.....................................................9
11.2. Tandem Awards..................................................10
12. PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING 10
12.1. Payment........................................................10
12.2. Dividend Equivalents...........................................10
12.3. Deferral.......................................................10
12.4. Withholding....................................................10
13. OPTIONS 11
13.1. Types of Options...............................................11
13.2. Grant of ISOs and Option Price.................................11
13.3. Other Requirements for ISOs....................................11
13.4. NQSOs..........................................................11
13.5. Determination by Committee.....................................11
14. SARS 11
14.1. Grant and Payment..............................................11
14.2. Grant of Tandem Award..........................................11
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<PAGE>
14.3. ISO Tandem Award...............................................12
14.4. Payment of Award...............................................12
15. ANNUAL LIMITATIONS 12
15.1. Limitation on Options and SARs.................................12
15.2. Computations...................................................12
16. RESTRICTED STOCK AND PERFORMANCE SHARES 12
16.1. Restricted Stock...............................................12
16.2. Cost of Restricted Stock.......................................12
16.3. Non-Transferability............................................12
16.4. Performance Shares.............................................13
16.5. Grant..........................................................13
17. CASH AWARDS 13
17.1. Grant..........................................................13
17.2. Rule 16b-3.....................................................13
17.3. Restrictions...................................................13
18. OTHER STOCK BASED AWARDS AND OTHER BENEFITS 13
18.1. Other Stock Based Awards.......................................13
18.2. Other Benefits.................................................13
19. MISCELLANEOUS PROVISIONS 14
19.1. Underscored References.........................................14
19.2. Number and Gender..............................................14
19.3. Unfunded Status of Plan........................................14
19.4. Termination of Employment......................................14
19.5. Designation of Beneficiary.....................................14
19.6. Governing Law..................................................14
19.7. Purchase for Investment........................................15
19.8. No Employment Contract.........................................15
19.9. No Effect on Other Benefits....................................15
iii
<PAGE>
INTELLESALE.COM, INC.
1999 FLEXIBLE STOCK PLAN
1. NAME AND PURPOSE
1.1 Name.
The name of this Plan is the "Intellesale.com, Inc. 1999 Flexible
Stock Plan."
1.2 Purpose.
The Company has established this Plan to attract, retain, motivate
and reward Employees and other individuals, to encourage ownership of the
Company's Common Stock by Employees and other individuals, and to promote and
further the best interests of the Company by granting cash and other awards.
2. DEFINITIONS OF TERMS AND RULES OF CONSTRUCTION
2.1 General Definitions.
The following words and phrases, when used in the Plan, unless
otherwise specifically defined or unless the context clearly otherwise requires,
shall have the following respective meanings:
2.1.1 Affiliate.
A Parent or Subsidiary of the Company.
2.1.2. Agreement.
The document which evidences the grant of any Benefit under
the Plan and which sets forth the Benefit and the terms, conditions and
provisions of, and restrictions relating to, such Benefit.
2.1.3. Benefit.
Any benefit granted to a Participant under the Plan.
2.1.4. Board.
The Board of Directors of the Company.
2.1.5 Cash Award.
A Benefit payable in the form of cash.
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2.1.6. Change of Control.
The acquisition, without the approval of the Board, by any
"person" or "group" (as that term is used in Section 13(d) and 14(d)(2) of
the Exchange Act), other than the Company or a Related Entity, of
beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of
outstanding voting securities of the Company carrying more than 20% of the
combined voting power in the election of directors through a tender offer,
exchange offer or otherwise; the liquidation or dissolution of the Company
following a sale or other disposition of all or substantially all of its
assets; a merger or consolidation involving the Company as a result of
which persons who were shareholders of the Company immediately prior to the
effective date of the merger or consolidation shall have beneficial
ownership of less than 50% of the combined voting power in the election of
directors of the surviving corporation following the effective date of such
merger or consolidation; or any time during any two-year period in which
individuals who constituted the Board at the start of such period (or whose
election was approved by at least two-thirds of the then members of the
Board who were members at the start of the two-year period) do not
constitute at least 50% of the Board for any reason. A Related Entity is
the Parent, a Subsidiary or any employee benefit plan (including a trust
forming a part of such a plan) maintained by the Parent, the Company or a
Subsidiary.
2.1.7. Code.
The Internal Revenue Code of 1986, as amended. Any reference
to the Code includes the regulations promulgated pursuant to the Code.
2.1.8. Company.
Intellesale.com, Inc.
2.1.9. Committee.
The Committee described in Section 5.1.
2.1.10. Common Stock.
The Company's common stock which presently has a par value of
$.0001 per Share.
2.1.11. Effective Date.
The date that the Plan is approved by the shareholders of the
Company which must occur within one year before or after approval by the
Board. Any grants of Benefits prior to the approval by the shareholders of
the Company shall be void if such approval is not obtained.
2.1.12. Employee.
Any person employed by the Employer.
2.1.13. Employer.
The Company and all Affiliates.
2
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2.1.14. Exchange Act.
The Securities Exchange Act of 1934, as amended.
2.1.15. Fair Market Value.
The last sale price, regular way, or, in case no such sale
takes place on such date, the average of the closing bid and asked prices,
regular way, of the Shares, in either case as reported in the principal
consolidated transaction reporting system with respect to securities listed
or admitted to trading on the New York Stock Exchange, Inc. (the "NYSE")
or, if the Shares are not listed or admitted to trading on the NYSE, as
reported in the principal consolidated transaction reporting system with
respect to securities listed on the principal national securities exchange
on which the Shares are listed or admitted to trading or, if the Shares are
not listed or admitted to trading on any national securities exchange, the
last quoted sale price on such date or, if not so quoted, the average of
the high bid and low asked prices in the over-the-counter market on such
date, as reported by the National Association of Securities Dealers, Inc.
Automated Quotations System or such other system then in use, or, if on any
such date the Shares are not quoted by any such organization, the average
of the closing bid and asked prices on such date as furnished by a
professional market maker making a market in the Shares selected by the
Committee. If the Shares are not publicly held or so listed or publicly
traded, the determination of the Fair Market Value per Share shall be made
in good faith by the Committee.
2.1.16. Fiscal Year.
The taxable year of the Company which is the calendar year.
2.1.17. ISO.
An Incentive Stock Option as defined in Section 422 of the
Code.
2.1.18. NQSO.
A non-qualified stock Option, which is an Option that does
not qualify as an ISO.
2.1.19. Option.
An option to purchase Shares granted under the Plan.
2.1.20. Other Stock Based Award.
An award under Section 8 that is valued in whole or in part
by reference to, or is otherwise based on, Common Stock.
2.1.21. Parent.
Any corporation (other than the Company or a Subsidiary) in
an unbroken chain of corporations ending with the Company, if, at the time
of the grant of an Option or other Benefit, each of the corporations (other
than the Company) owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in
such chain.
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2.1.22. Participant.
An individual who is granted a Benefit under the Plan.
Benefits may be granted only to Employees, members of the Board, employees
and owners of entities which are not Affiliates but which have a direct or
indirect ownership interest in an Employer or in which an Employer has a
direct or indirect ownership interest, individuals who, and employees and
owners of entities which, are customers and suppliers of an Employer,
individuals who, and employees and owners of entities which, render
services to an Employer, and individuals who, and employees and owners of
entities, which have ownership or business affiliations with any individual
or entity previously described.
2.1.23. Performance Based Compensation.
Compensation which meets the requirements of Section
162(m)(4)(C) of the Code.
2.1.24. Performance Share.
A Share awarded to a Participant under Section 16 of the
Plan.
2.1.25. Plan.
The Intellesale.com, Inc. 1999 Flexible Stock Plan and all
amendments and supplements to it.
2.1.26. Reload Option.
An Option to purchase the number of Shares used by a
Participant to exercise an Option and to satisfy any withholding
requirement incident to the exercise of such Option.
2.1.27. Restricted Stock.
Shares issued under Section 15 of the Plan.
2.1.28. Rule 16b-3.
Rule 16b-3 promulgated by the SEC, as amended, or any
successor rule in effect from time to time.
2.1.29. SEC.
The Securities and Exchange Commission.
2.1.30. Share.
A share of Common Stock.
4
<PAGE>
2.1.31. SAR.
A stock appreciation right, which is the right to receive an
amount equal to the appreciation, if any, in the Fair Market Value of a
Share from the date of the grant of the right to the date of its payment.
2.1.32. Subsidiary.
Any corporation, other than the Company, in an unbroken chain
of corporations beginning with the Company if, at the time of grant of an
Option or other Benefit, each of the corporations, other than the last
corporation in the unbroken chain, owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.
2.2. Other Definitions.
In addition to the above definitions, certain words and phrases used
in the Plan and any Agreement may be defined in other portions of the Plan or in
such Agreement.
2.3. Conflicts.
In the case of any conflict in the terms of the Plan relating to a
Benefit, the provisions in the section of the Plan which specifically grants
such Benefit shall control those in a different section. In the case of any
conflict between the terms of the Plan relating to a Benefit and the terms of an
Agreement relating to a Benefit, the terms of the Plan shall control.
3. COMMON STOCK
3.1 Number of Shares.
The number of Shares which may be issued or sold or for which
Options, SARs or Performance Shares may be granted under the Plan shall be
2,500,000 Shares, plus an annual increase, effective as of the first day of each
calendar year, commencing with 2000, equal to 5% of the number of outstanding
Shares as of the first day of such calendar year, but in no event more than
7,500,000 Shares in the aggregate. Such Shares may be authorized but unissued
Shares, Shares held in the treasury, or both. The full number of Shares
available may be used for any type of Option or other Benefit.
3.2. Reusage.
If an Option or SAR expires or is terminated, surrendered, or
canceled without having been fully exercised, if Restricted Shares or
Performance Shares are forfeited, or if any other grant results in any Shares
not being issued, the Shares covered by such Option or SAR, grant of Restricted
Shares, Performance Shares or other grant, as the case may be, shall again be
available for use under the Plan. Any Shares which are used as full or partial
payment to the Company upon exercise of an Option or for any other Benefit that
requires a payment to the Company shall be available for purposes of the Plan.
3.3. Adjustments.
If there is any change in the Common Stock of the Company by reason
of any stock dividend, spin-off, split-up, spin-out, recapitalization, merger,
5
<PAGE>
consolidation, reorganization, combination or exchange of shares, or otherwise,
the number of SARs and number and class of shares available for Options and
grants of Restricted Stock, Performance Shares and Other Stock Based Awards and
the number of Shares subject to outstanding Options, SARs, grants of Restricted
Stock which are not vested, grants of Performance Shares which are not vested,
and Other Stock Based Awards, and the price thereof, as applicable, shall be
appropriately adjusted by the Committee.
4. ELIGIBILITY
4.1 Determined By Committee.
The Participants and the Benefits they receive under the Plan shall
be determined solely by the Committee. In making its determinations, the
Committee shall consider past, present and expected future contributions of
Participants and potential Participants to the Employer, including, without
limitation, the performance of, or the refraining from the performance of,
services. Unless specifically provided otherwise herein, all determinations of
the Committee in connection with the Plan or an Agreement shall be made in its
sole discretion.
5. ADMINISTRATION
5.1 Committee.
The Plan shall be administered by the Committee. The Committee shall
consist of the Board, unless the Board appoints a Committee of two or more but
less than all of the Board. If the Committee does not include the entire Board,
it shall serve at the pleasure of the Board, which may from time to time appoint
members in substitution for members previously appointed and fill vacancies,
however caused, in the Committee. The Committee may select one of its members as
its Chairman and shall hold its meetings at such times and places as it may
determine. A majority of its members shall constitute a quorum. All
determinations of the Committee made at a meeting at which a quorum is present
shall be made by a majority of its members present at the meeting. Any decision
or determination reduced to writing and signed by a majority of the members
shall be fully as effective as if it had been made by a majority vote at a
meeting duly called and held.
5.2 Authority.
Subject to the terms of the Plan, the Committee shall have
discretionary authority to:
(a) determine the individuals to whom Benefits are granted, the type
and amounts of Benefits to be granted and the date of issuance and duration
of all such grants;
(b) determine the terms, conditions and provisions of, and
restrictions relating to, each Benefit granted;
(c) interpret and construe the Plan and all Agreements;
(d) prescribe, amend and rescind rules and regulations relating to
the Plan;
(e) determine the content and form of all Agreements;
(f) determine all questions relating to Benefits under the Plan;
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(g) maintain accounts, records and ledgers relating to Benefits;
(h) maintain records concerning its decisions and proceedings;
(i) employ agents, attorneys, accountants or other persons for such
purposes as the Committee considers necessary or desirable;
(j) take, at any time, any action permitted by Section 9.1
irrespective of whether any Change of Control has occurred or is imminent;
(k) determine, except to the extent otherwise provided in the Plan,
whether and the extent to which Benefits under the Plan will be structured
to conform to the requirements applicable to Performance-Based
Compensation, and to take such action, establish such procedures, and
impose such restrictions at the time such Benefits are granted as the
Committee determines to be necessary or appropriate to conform to such
requirements; and
(l) do and perform all acts which it may deem necessary or
appropriate for the administration of the Plan and carry out the purposes
of the Plan.
5.3 Delegation.
Except as required by Rule 16b-3 with respect to grants of Options,
Stock Appreciation Awards, Performance Shares, Other Stock Based Awards, or
other Benefits to individuals who are subject to Section 16 of the Exchange Act
or as otherwise required for compliance with Rule 16b-3 or other applicable law,
the Committee may delegate all or any part of its authority under the Plan to
any Employee, Employees or committee.
5.4 Determination.
All determinations of the Committee shall be final.
6. AMENDMENT
6.1 Power of Board.
Except as hereinafter provided, the Board shall have the sole right
and power to amend the Plan at any time and from time to time.
6.2 Limitation.
The Board may not amend the Plan, without approval of the
shareholders of the Company:
(a) in a manner which would cause Options which are intended to
qualify as ISOs to fail to qualify;
(b) in a manner which would cause the Plan to fail to meet the
requirements of Rule 16b-3; or
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(c) in a manner which would violate applicable law.
7. TERM AND TERMINATION
7.1 Term.
The Plan shall commence as of the Effective Date and, subject to the
terms of the Plan, including those requiring approval by the shareholders of the
Company and those limiting the period over which ISOs or any other Benefits may
be granted, shall continue in full force and effect until terminated.
7.2 Termination.
The Plan may be terminated at any time by the Board.
8. MODIFICATION OR TERMINATION OF BENEFITS
8.1 General.
Subject to the provisions of Section 8.2, the amendment or
termination of the Plan shall not adversely affect a Participant's right to any
Benefit granted prior to such amendment or termination.
8.2 Committee's Right.
Any Benefit granted may be converted, modified, forfeited or
canceled, in whole or in part, by the Committee if and to the extent permitted
in the Plan or applicable Agreement or with the consent of the Participant to
whom such Benefit was granted. Except as may be provided in an Agreement, the
Committee may, in its sole discretion, in whole or in part, waive any
restrictions or conditions applicable to, or accelerate the vesting of, any
Benefit.
9. CHANGE OF CONTROL
9.1 Right of Committee.
In order to maintain a Participant's rights in the event of a Change
of Control, the Committee, in its sole discretion, may, in any Agreement
evidencing a Benefit, or at any time prior to, or simultaneously with or after a
Change of Control, provide such protection as it may deem necessary. Without, in
any way, limiting the generality of the foregoing sentence or requiring any
specific protection, the Committee may, without the approval or consent of the
Participant:
(a) provide for the acceleration of any time periods relating to the
exercise or realization of such Benefit so that such Benefit may be
exercised or realized in full on or before a date fixed by the Committee;
(b) provide for the purchase of such Benefit, upon the Participant's
request, for an amount of cash equal to the amount which could have been
attained upon the exercise or realization of such Benefit had such Benefit
been currently exercisable or payable;
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(c) make such adjustment to the Benefits then outstanding as the
Committee deems appropriate to reflect such transaction or change; and/or
(d) cause the Benefits then outstanding to be assumed, or new
Benefits substituted therefor, by the surviving corporation in such change.
10. AGREEMENTS AND CERTAIN BENEFITS
10.1 Grant Evidenced by Agreement.
The grant of any Benefit under the Plan may be evidenced by an
Agreement which shall describe the specific Benefit granted and the terms and
conditions of the Benefit. The granting of any Benefit shall be subject to, and
conditioned upon, the recipient's execution of any Agreement required by the
Committee. Except as otherwise provided in an Agreement, all capitalized terms
used in the Agreement shall have the same meaning as in the Plan, and the
Agreement shall be subject to all of the terms of the Plan.
10.2 Provisions of Agreement.
Each Agreement shall contain such provisions that the Committee shall
determine to be necessary, desirable and appropriate for the Benefit granted
which may include, but not necessarily be limited to, the following with respect
to any Benefit: description of the type of Benefit; the Benefit's duration; its
transferability; if an Option, the exercise price, the exercise period and the
person or persons who may exercise the Option; the effect upon such Benefit of
the Participant's death, disability, changes of duties or termination of
employment; the Benefit's conditions; when, if, and how any Benefit may be
forfeited, converted into another Benefit, modified, exchanged for another
Benefit, or replaced; and the restrictions on any Shares purchased or granted
under the Plan.
10.3 Transferability.
Unless otherwise specified in an Agreement or permitted by the
Committee, each Benefit granted shall be not transferable other than by will or
the laws of descent and distribution and shall be exercisable during a
Participant's lifetime only by him.
11. REPLACEMENT AND TANDEM AWARDS
11.1 Replacement.
The Committee may permit a Participant to elect to surrender a
Benefit in exchange for a new Benefit.
11.2 Tandem Awards.
Awards may be granted by the Committee in tandem. However, no Benefit
may be granted in tandem with an ISO except SARs.
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12. PAYMENT, DIVIDENDS, DEFERRAL AND WITHHOLDING
12.1 Payment.
Upon the exercise of an Option or in the case of any other Benefit
that requires a payment by a Participant to the Company, the amount due the
Company is to be paid:
(a) in cash, including by means of a so-called "cashless exercise" of
an Option;
(b) by the surrender of all or part of a Benefit (including the
Benefit being exercised);
(c) by the tender to the Company of Shares owned by the optionee and
registered in his name having a Fair Market Value equal to the amount due
to the Company;
(d) in other property, rights and credits deemed acceptable by the
Committee, including the Participant's promissory note;
(e) by any combination of the payment methods specified in (a), (b),
(c) and (d) above.
Notwithstanding, the foregoing, any method of payment other than
(a) may be used only with the consent of the Committee or if and to the extent
so provided in an Agreement. The proceeds of the sale of Shares purchased
pursuant to an Option and any payment to the Company for other Benefits shall be
added to the general funds of the Company or to the Shares held in treasury, as
the case may be, and used for the corporate purposes of the Company as the Board
shall determine.
12.2 Dividend Equivalents.
Grants of Benefits in Shares or Share equivalents may include
dividend equivalent payments or dividend credit rights.
12.3 Deferral.
The right to receive any Benefit under the Plan may, at the request
of the Participant, be deferred for such period and upon such terms as the
Committee shall determine, which may include crediting of interest on deferrals
of cash and crediting of dividends on deferrals denominated in Shares.
12.4 Withholding.
The Company may, at the time any distribution is made under the Plan,
whether in cash or in Shares, or at the time any Option is exercised, withhold
from such distribution or Shares issuable upon the exercise of an Option, any
amount necessary to satisfy federal, state and local income and/or other tax
withholding requirements with respect to such distribution or exercise of such
Options. The Committee or the Company may require a participant to tender to the
Company cash and/or Shares in the amount necessary to comply with any such
withholding requirements.
13. OPTIONS
13.1 Types of Options.
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It is intended that both ISOs and NQSOs, which may be Reload Options,
may be granted by the Committee under the Plan.
13.2 Grant of ISOs and Option Price.
Each ISO must be granted to an Employee and granted within ten years
from the earlier of the date of adoption by the Board or the Effective Date. The
purchase price for Shares under any ISO shall be no less than the Fair Market
Value of the Shares at the time the Option is granted.
13.3 Other Requirements for ISOs.
The terms of each Option which is intended to qualify as an ISO shall
meet all requirements of Section 422 of the Code.
13.4 NQSOs.
The terms of each NQSO shall provide that such Option will not be
treated as an ISO. The purchase price for Shares under any NQSO shall be no less
than 85% of the Fair Market Value of the Shares at the time the Option is
granted.
13.5 Determination by Committee.
Except as otherwise provided in Section 13.2 through Section 13.4,
the terms of all Options shall be determined by the Committee.
14. SARS
14.1 Grant and Payment.
The Committee may grant SARs. Upon electing to receive payment of a
SAR, a Participant shall receive payment in cash, in Shares, or in any
combination of cash and Shares, as the Committee shall determine.
14.2 Grant of Tandem Award.
The Committee may grant SARs in tandem with an Option, in which case:
the exercise of the Option shall cause a correlative reduction in SARs standing
to a Participant's credit which were granted in tandem with the Option; and the
payment of SARs shall cause a correlative reduction of the Shares under such
Option.
14.3 ISO Tandem Award.
When SARs are granted in tandem with an ISO, the SARs shall have such
terms and conditions as shall be required for the ISO to qualify as an ISO.
14.4 Payment of Award.
SARs shall be paid by the Company to a Participant, to the extent
payment is elected by the Participant (and is otherwise due and payable), as
soon as practicable after the date on which such election is made.
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15. ANNUAL LIMITATIONS
15.1 Limitation on Options and SARs.
The number of (a) Shares covered by Options where the purchase price
is no less than the Fair Market Value of the Shares on the date of grant plus
(b) SARs which may be granted to any Participant in any Fiscal Year shall not
exceed 100,000.
15.2 Computations.
For purposes of Section 15.1: Shares covered by an Option that is
canceled shall count against the maximum, and, if the exercise price under an
Option is reduced, the transaction shall be treated as a cancellation of the
Option and a grant of a new Option; and SARs covered by a grant of SARs that is
canceled shall count against the maximum, and, if the Fair Market Value of a
Share on which the appreciation under a grant of SARs will be calculated is
reduced, the transaction will be treated as a cancellation of the SARs and the
grant of a new grant of SARs.
16. RESTRICTED STOCK AND PERFORMANCE SHARES
16.1 Restricted Stock.
The Committee may grant Benefits in Shares available under Section 3
of the Plan as Restricted Stock. Shares of Restricted Stock shall be issued and
delivered at the time of the grant or as otherwise determined by the Committee,
but shall be subject to forfeiture until provided otherwise in the applicable
Agreement or the Plan. Each certificate representing Shares of Restricted Stock
shall bear a legend referring to the Plan and the risk of forfeiture of the
Shares and stating that such Shares are nontransferable until all restrictions
have been satisfied and the legend has been removed. At the discretion of the
Committee, the grantee may or may not be entitled to full voting and dividend
rights with respect to all shares of Restricted Stock from the date of grant.
16.2 Cost of Restricted Stock.
Unless otherwise determined by the Committee, grants of Shares of
Restricted Stock shall be made at a per Share cost to the Participant equal to
par value.
16.3 Non-Transferability.
Shares of Restricted Stock shall not be transferable until after the
removal of the legend with respect to such Shares.
16.4 Performance Shares.
Performance Shares are the right of an individual to whom a grant of
such Shares is made to receive Shares or cash equal to the Fair Market Value of
such Shares at a future date in accordance with the terms and conditions of such
grant. The terms and conditions shall be determined by the Committee, in its
sole discretion, but generally are expected to be based substantially upon the
attainment of targeted profit and/or performance objectives.
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16.5 Grant.
The Committee may grant an award of Performance Shares. The number of
Performance Shares and the terms and conditions of the grant shall be set forth
in the applicable Agreement.
17. CASH AWARDS
17.1 Grant.
The Committee may grant Cash Awards at such times and (subject to
Section 17.2) in such amounts as it deems appropriate.
17.2 Rule 16b-3.
The amount of any Cash Award in any Fiscal Year to any Participant
who is subject to Section 16 of the Exchange Act shall not exceed the greater of
$100,000 or 100% of his cash compensation (excluding any Cash Award under this
Section 17) for such Fiscal Year.
17.3 Restrictions.
Cash Awards may be subject or not subject to conditions (such as an
investment requirement), restricted or nonrestricted, vested or subject to
forfeiture and may be payable currently or in the future or both.
18. OTHER STOCK BASED AWARDS AND OTHER BENEFITS
18.1 Other Stock Based Awards.
The Committee shall have the right to grant Other Stock Based Awards
which may include, without limitation, the grant of Shares based on certain
conditions, the payment of cash based on the performance of the Common Stock,
and the grant of securities convertible into Shares.
18.2 Other Benefits.
The Committee shall have the right to provide types of Benefits under
the Plan in addition to those specifically listed, if the Committee believes
that such Benefits would further the purposes for which the Plan was
established.
19. MISCELLANEOUS PROVISIONS
19.1 Underscored References.
The underscored references contained in the Plan are included only
for convenience, and they shall not be construed as a part of the Plan or in any
respect affecting or modifying its provisions.
19.2 Number and Gender.
The masculine and neuter, wherever used in the Plan, shall refer to
either the masculine, neuter or feminine; and, unless the context otherwise
requires, the singular shall include the plural and the plural the singular.
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19.3 Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive
and deferred compensation. With respect to any payments or deliveries of Shares
not yet made to a Participant by the Company, nothing contained herein shall
give any rights that are greater than those of a general creditor of the
Company. The Committee may authorize the creation of trusts or other
arrangements to meet the obligations created under the Plan to deliver Shares or
payments hereunder consistent with the foregoing.
19.4 Termination of Employment.
If the employment of a Participant by the Company terminates for any
reason, except as otherwise provided in an Agreement, all unexercised, deferred,
and unpaid Benefits may be exercisable or paid only in accordance with rules
established by the Committee. These rules may provide, as the Committee may deem
appropriate, for the expiration, forfeiture, continuation, or acceleration of
the vesting of all or part of the Benefits.
19.5 Designation of Beneficiary.
A Participant may file with the Committee a written designation of a
beneficiary or beneficiaries (subject to such limitations as to the classes and
number of beneficiaries and contingent beneficiaries as the Committee may from
time to time prescribe) to exercise, in the event of the death of the
Participant, an Option, or to receive, in such event, any Benefits. The
Committee reserves the right to review and approve beneficiary designations. A
Participant may from time to time revoke or change any such designation of
beneficiary and any designation of beneficiary under the Plan shall be
controlling over any other disposition, testamentary or otherwise; provided,
however, that if the Committee shall be in doubt as to the right of any such
beneficiary to exercise any Option or to receive any Benefit, the Committee may
determine to recognize only an exercise by the legal representative of the
recipient, in which case the Company, the Committee and the members thereof
shall not be under any further liability to anyone.
19.6 Governing Law.
This Plan shall be construed and administered in accordance with the
laws of the State of Delaware.
19.7 Purchase for Investment.
The Committee may require each person purchasing Shares pursuant to
an Option or other award under the Plan to represent to and agree with the
Company in writing that such person is acquiring the Shares for investment and
without a view to distribution or resale. The certificates for such Shares may
include any legend which the Committee deems appropriate to reflect any
restrictions on transfer. All certificates for Shares delivered under the Plan
shall be subject to such stock-transfer orders and other restrictions as the
Committee may deem advisable under all applicable laws, rules and regulations,
and the Committee may cause a legend or legends to be put on any such
certificates to make appropriate references to such restrictions.
19.8 No Employment Contract.
Neither the adoption of the Plan nor any Benefit granted hereunder
shall confer upon any Employee any right to continued employment nor shall the
Plan or any Benefit interfere in any way with the right of the Employer to
terminate the employment of any of its Employees at any time.
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19.9 No Effect on Other Benefits.
The receipt of Benefits under the Plan shall have no effect on any
benefits to which a Participant may be entitled from the Employer, under another
plan or otherwise, or preclude a Participant from receiving any such benefits.
15
Exhibit 10.3
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made and entered into this 17th day of
June, 1999, by and between INTELLESALE.COM, INC., a Delaware corporation
("Company") and MARC SHERMAN ("Employee").
BACKGROUND
Employee is employed by Company as its president and chief executive
officer. The parties desire to enter into a formal employment agreement covering
the terms and conditions of such employment.
TERMS AND CONDITIONS
Employment. Company hereby employs Employee, and Employee hereby
accepts such employment by Company, on the terms and conditions set forth below.
Capacity. Employee shall serve as Company's president and chief
executive officer. Employee shall perform such services for Company as Company's
board of directors ("Board") shall direct from time to time. However, no such
services shall be of a nature which are not commensurate with, and/or are
beneath the dignity of, Employee's position described in the first sentence of
this paragraph or are not of an executive or managerial nature.
Term. Company's employment of Employee under this Agreement shall be
for an initial term of five years commencing on July 1, 1999 and ending on June
30, 2004. The term of Employee's employment under this Agreement shall
automatically be renewed for successive additional one year terms on each
anniversary of the commencement of Employee's employment under this Agreement,
beginning with the July 1, 2000 anniversary date, each of which terms shall be
added at the end of the then existing term (taking into account any prior
extensions or failures to extend), unless either party notifies the other at
least 30 days prior to an anniversary date of this Agreement that he or it does
not desire the additional one year term to be added to the term of the
Agreement. For example, unless either party notifies the other to the contrary
on or before June 1, 2000, the term of this Agreement shall be extended from
July 1, 2004 to June 30, 2005. For further example, and assuming the term of
this Agreement has been extended to June 30, 2005, if one party notifies the
other that it does not desire to extend the term of this Agreement for an
additional year and such notice is given on or before June 1, 2001, the term of
this Agreement shall not be extended from July 1, 2005 to Jun 30, 2006.
Notwithstanding the foregoing, the term of this Agreement may end prior to the
termination date determined under this paragraph 3 as provided in paragraphs 9,
10, 11 and 12.
Service While Employed. Employee agrees to devote his best efforts, his
full diligence and substantially all of his business time to his duties
hereunder and shall not engage, either directly or indirectly, in any business
or other activity which is competitive with or adverse to the interests or the
business of Company.
<PAGE>
Items Furnished and Relocation. Company shall furnish Employee with
such private office, secretarial assistance, and such other facilities,
equipment and services suitable to his position and adequate to perform his
duties hereunder. Employee shall not be relocated by Company without his
consent.
Compensation, Vacations and Reimbursement. As partial compensation for
his services to Company, Company agrees to pay Employee an annual salary in
regular monthly or other agreed upon installments of not less than $400,000.00
and an annual bonus computed in accordance with Exhibit A which is attached and
is a part of this Agreement. In addition, Employee shall be entitled to receive
such bonuses (in addition to that required under the preceding sentence),
incentive compensation, and other compensation, if any, as the Board , executive
committee, compensation committee, or other designated committee shall award
Employee from time to time whether in cash, Company stock, stock options, other
stock based compensation, other form of remuneration, or any combination of the
foregoing. All such compensation shall be subject to legally required income and
employment tax withholding. Employee shall be entitled to paid vacations and
reimbursement for all reasonable business expenses in accordance with Company's
policies for executive officers.
Pension, Welfare and Related Benefits. In addition to the compensation
described in paragraph 6 above, Employee shall be entitled to participate in
such bonus, profit sharing, deferred compensation and pension plans of Company
for which he is eligible and such welfare and fringe benefits plans and programs
of the Company for which he is eligible.
Other Benefits; Loan. Company shall pay employee the sum of $5,000.00
per month to be used by Employee for such personal, business, financial, club,
automobile or other expenses as he, in his sole discretion, shall determine.
Such amount shall be in addition to any reimbursement to which Employee is
entitled under paragraph 6. In addition, at such time that Employee closes the
purchase of a new principal or secondary residence ("Residence"), Company shall
loan Employee the sum of $1,250,000.00 to be applied against the purchase price
of the Residence and closing costs. Such loan shall be secured by a first lien
on the Residence, be of a 30 year duration (or such shorter duration requested
by Employee), be amortized through equal monthly payments over the term of the
loan, bear an interest rate equal to the applicable federal rate (as defined in
Section 1274(d) of the Internal Revenue Code of 1986, as amended ("Code") for
loans of similar duration and payment schedules, and permit prepayment without
penalty. The note evidencing the loan and mortgage or other security instrument
shall contain terms and conditions customarily included in residential secured
loans in the metropolitan area in which the Residence is located.
Death and Disability. If Employee dies during the term of this
Agreement, his employment shall be deemed to have been terminated as of the last
day of the month in which his death occurs, and Company will pay to Employee's
personal representative all salary and any other compensation due Employee
through the end of such month. If Employee becomes permanently disabled so that
he cannot perform his duties , as determined by a physician selected by or
acceptable to Company, his employment shall be deemed to have been terminated as
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of the last day of the month in which such determination is made, and he will
receive his salary and any other compensation due him through the end of such
month.
Termination Upon Retirement or Notice. From and after the time Employee
attains age 65, he may retire at any time by notifying Company at least 120 days
prior to his intended retirement date or be retired by Company upon at least two
years notice. In addition, Employee may terminate his employment at any time
after June 30, 2001, upon one year's notice. If a notice of termination has been
given under this paragraph 10, and the Agreement is terminated under another
provision if this Agreement, such as by death ("Other Termination Provision")
prior to the date of such termination under this paragraph 10, then the
Agreement shall be deemed to have been terminated pursuant to the Other
Termination Provision.
Default. In the event that either party fails to perform material
provision of this Agreement and such failure continues for 15 days after
notification from the nonbreaching party, the nonbreaching party may terminate
this Agreement by notice to the breaching party. Such termination shall be
without prejudice to any rights or remedies which the nonbreaching party may
have.
Change in Control. Notwithstanding any other provision of this
Agreement, should a "change of control" occur, Employee, at his sole option and
discretion, may terminate his employment under this Agreement at any time within
one year after such change of control upon 15 days notice. In the event of such
termination, Company shall pay to Employee a severance payment ("Severance
Payment") equal to three times the base amount as defined in Section 280G(b)(3)
of the Code minus $1.00. Notwithstanding the foregoing, (a) if the Severance
Payment and any other amounts payable by Company to Employee are parachute
payments under Code Section 280G (collectively, "Parachute Payments") and, (b),
if reducing the Severance Payment would eliminate the tax provided for in Code
Section 4999 ("Section 4999 Tax") which would otherwise be applicable to the
Parachute Payments, and (c) if, because of such elimination, the net amount of
the Parachute Payments (total payments minus Section 4999 Tax) would be greater
than such net amount without reduction, then the Severance Payment shall be
reduced by the smallest amount required to eliminate the imposition of the
Section 4999 Tax. The foregoing determination shall be made by Company's general
counsel, and his determination shall be binding upon Company and Employee. The
amount determined under the foregoing provisions of this paragraph 12 shall be
payable no later than one month after the effective date of the Employee's
termination of employment. A change in control means: (a) the acquisition by any
person or entity, other than Company or a "related entity," of (i) more than 20%
without the approval of the Board or (ii) more than 50% with the approval of the
Board of the outstanding shares of Company's voting stock on a diluted and/or
converted basis through a tender offer, exchange offer or otherwise; (b) the
sale or other disposition of all or substantially all of Company's assets unless
shareholders of Company prior to such sale or disposition own at least 50% of
the voting stock on a diluted and/or converted basis of the purchaser, and the
purchaser assumes Company's obligations under this Agreement; (c) a merger of
consolidation involving Company which results in Company not being the surviving
parent corporation or after which shareholders of the Company own less than 50%
of the voting stock on a diluted and/or converted basis of the surviving entity;
or (d) any time during any two-year period in which individuals who constituted
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the Board at the start of such period (or, except in the case of a transaction
described in a(i) or (c), whose election was approved by at least two-thirds of
the then members of the Board who were members at the start of the two-year
period) do not constitute at least 50% of the Board for any reason. A related
entity is the parent, a subsidiary or any employee benefit plan (including a
trust forming a part of such a plan) maintained by Company, its parent or a
subsidiary. Notwithstanding the foregoing, any changes in stock ownership
resulting from the initial public offering of the Company's shares (("IPO") or a
change in the Board within two years of the IPO and resulting from a change in
stock ownership effected by the IPO shall not be considered a change of control.
Nondisclosure; Return of Records. Employee will not, except as
authorized by Company, publish or disclose to others, or use for his own
benefit, or authorize anyone else to publish or disclose or use, or copy or make
notes of any secret, proprietary, or confidential information or knowledge of
data or trade secrets of or relating to the business activities of Company which
may come to Employee's knowledge during his employment with the Company. Upon
termination of Employee's employment for any reason, Employee will deliver to
Company, without retaining any copies, notes or excerpts, all records, notes,
data, memoranda, and all other documents or materials made or compiled by
Employee, or made available to him by Company during his employment, which are
in Employee's possession and/or control and which are the property of Company
and/or which relate to Employee's employment or the business activities of
Company.
Binding Effect. This Agreement shall be binding upon and inure to the
benefit of Company and any successors or assigns of Company, and Employee, his
heirs, personal representatives and assigns, except that Employee's obligations
to perform services and rights to receive payment therefore shall be
nonassignable and nontransferable.
Entire Agreement: Modification. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter and supersedes
all prior or contemporaneous agreements not set forth in this agreement. This
Agreement may not be modified other than by an agreement in writing signed by
each of the parties.
Waiver. Any failure by either party to enforce any provision of this
Agreement shall not operate as a waiver of such provision or any other
provision. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as a waiver of any other breach of such provision or
any other provision of this agreement.
Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not effect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
Paragraph Headings. Paragraph headings throughout this Agreement are
solely for the convenience of the parties and shall not be construed as a part
of any section or as modifying the contents of any section.
4
<PAGE>
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
Notices. All notices under this Agreement shall be personally
delivered, sent certified mail, postage prepaid, to Company at its corporate
office and to Employee at his principal residence, or sent by telecopy.
Supplemental Compensation. Except as otherwise provides below, upon the
termination of Employee's employment with Company for any reason, other than due
to his breach of a material provision of his employment as described in
paragraph 11, Employee shall be entitled to receive from Company 36 equal
monthly payments, with the first such payment due on the second first day of the
month after termination of employment, of 8.333% of Employee's compensation over
the 12-consecutive month period for which his compensation was the greatest. If
Employee should die before all or any part of the above described monthly
payments have been made, all payments or all remaining payments shall be made to
his designated beneficiary, if any, otherwise to his estate. The aggregate
amount payable under this paragraph 21 shall be reduced (but not below zero) by
the amount, if any, payable under paragraph 12, and such reduced amount shall
also be payable in 36 equal monthly installments. Notwithstanding the foregoing,
if Employee terminates his employment pursuant to the second sentence of
paragraph 10, the amount payable under this paragraph 21, shall be 50% of the
amount that would otherwise be payable.
Non-Competition. For a three year period from and after termination of
Employee's employment for any reason other than death, Employee shall not
engage, directly or indirectly, either on his own behalf or on behalf of any
other person, firm, corporation or other entity, in any business competitive
with the business of Company, in the geographic area in which Company is
conducting business at the time of termination of Employee's employment, or own
more than 5% of any such firm, corporation or other entity. In addition,
Employee must furnish Company with such information as Company shall from time
to time request in order to determine that Employee is in compliance with the
requirements of the preceding provisions of this paragraph 22. The payments to
be made under paragraph 21 are conditioned upon Employee's complying with the
provisions of this paragraph 22. In the event that such provisions are not
complied with, then, in addition to all other rights and remedies which Company
may have ( and which Employee agrees shall include equitable relief), Company
may suspend such payments for any period of time in which Employee is not in
compliance with the preceding provisions of this paragraph 22. Employee agrees
that the restrictions of this paragraph 22 are reasonable and required to
protect the legitimate business interests of Company.
Modification. In the event that any provision of this Agreement is
invalid or unenforceable, it shall be modified to the extent required to be
valid and enforceable and only to such extent. If it cannot be so modified, then
it shall be deemed to have been deleted from this Agreement but such deletion
shall not affect the remaining terms and provisions of this Agreement.
5
<PAGE>
Company. For purposes of paragraphs 4, 13, and 22 of this Agreement,
the Company means Intellesale.com, Inc. and all subsidiaries and affiliates of
it.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INTELLESALE.COM, INC.
"Company"
By: /s/ Michael Krawitz
-------------------------------
Title: Vice President
/s/ Marc Sherman
-----------------------------------
Marc Sherman
"Employee"
6
<PAGE>
EXHIBIT A TO
EMPLOYMENT AGREEMENT
BETWEEN INTELLESALE.COM, INC.
AND MARC SHERMAN
A. Current Annual Bonus Formula.
For each fiscal year, Employee's bonus (if any) shall be 1.0%
of the consolidated earnings of Company and subsidiaries before interest, taxes,
depreciation and amortization. The computation of the bonus, if any, to which
Employee is entitled shall be made by Company's chief financial officer in
accordance with generally accepted accounting principles consistently applied.
Any bonus to which Employee is entitled shall be paid as soon as practicable but
in no event later than the 15th day of the third month after the end of the
fiscal year for which the bonus was earned. In the event Employee's employment
terminates prior to the end of the fiscal year, Employee or his personal
representative shall be entitled to a pro rata portion of the bonus for such
fiscal year unless his employment was terminated pursuant to paragraph 11, in
which event no bonus shall be payable. Employee's pro rata portion of his bonus
shall be the same percentage of the bonus as the number of days for which he was
employed for such fiscal year is of 365.
B. Modified Annual Bonus Formula.
If Company adopts a bonus plan or program intended to meet the
requirements for "other performance-based compensation" under Code Section
162(m) (4) ("162(m) Plan") pursuant to which the bonus, if any, to which one or
more of its employees may be determined, if the provisions of the 162 (m) Plan
are applicable to Employee, and if the annual bonus for Employee under the
162(m) Plan can, in the Company's good faith belief, reasonably be expected to
be substantially similar in amount to that determined under A above over the
remaining term of this Agreement, then the provisions of the 162(m) Plan shall
supersede and replace the provisions of A above from and after the first day of
Company's fiscal year for which the 162 (m) Plan is effective.
7
Exhibit 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made and entered into this 17th day of
June, 1999, by and between INTELLESALE.COM, INC., a Delaware corporation
("Company") and EDWARD CUMMINGS ("Employee").
BACKGROUND
Employee is employed by Company as its vice-president and chief
financial officer. The parties desire to enter into a formal employment
agreement covering the terms and conditions of such employment.
TERMS AND CONDITIONS
Employment. Company hereby employs Employee, and Employee hereby
accepts such employment by Company, on
the terms and conditions set forth below.
Capacity. Employee shall serve as Company's vice-president and chief
financial officer. Employee shall perform such services for Company as Company's
board of directors ("Board") and chief executive officer shall direct from time
to time. However, no such services shall be of a nature which are not
commensurate with, and/or are beneath the dignity of, Employee's position
described in the first sentence of this paragraph or are not of an executive or
managerial nature.
Term. Company's employment of Employee under this Agreement shall be
for an initial term of five years commencing on July 1, 1999 and ending on June
30, 2004. Notwithstanding the foregoing, the term of this Agreement may end
prior to the termination date determined under this paragraph 3 as provided in
paragraphs 9, 10, 11 and 12.
Service While Employed. Employee agrees to devote his best efforts, his
full diligence and substantially all of his business time to his duties
hereunder and shall not engage, either directly or indirectly, in any business
or other activity which is competitive with or adverse to the interests or the
business of Company.
Items Furnished and Relocation. Company shall furnish Employee with
such private office, secretarial assistance, and such other facilities,
equipment and services suitable to his position and adequate to perform his
duties hereunder. Employee shall not be relocated by Company without his consent
to any area other than Palm Beach County, Florida or the metropolitan areas of
Lincoln Park or Burlington, New Jersey.
Compensation, Vacations and Reimbursement. As partial compensation for
his services to Company, Company agrees to pay Employee an annual salary in
regular monthly or other agreed upon installments of not less than $280,000.00
and an annual bonus computed in accordance with Exhibit A which is attached and
is a part of this Agreement. In addition, Employee shall be entitled to receive
such bonuses (in addition to that required under the preceding sentence),
incentive compensation, and other compensation, if any, as the Board, executive
<PAGE>
committee, compensation committee, or other designated committee shall award
Employee from time to time whether in cash, Company stock, stock options, other
stock based compensation, other form of remuneration, or any combination of the
foregoing. All such compensation shall be subject to legally required income and
employment tax withholding. Employee shall be entitled to paid vacations and
reimbursement for all reasonable business expenses in accordance with Company's
policies for executive officers.
Pension, Welfare and Related Benefits. In addition to the compensation
described in paragraph 6 above, Employee shall be entitled to participate in
such bonus, profit sharing, deferred compensation and pension plans of Company
for which he is eligible and such welfare and fringe benefits plans and programs
of the Company for which he is eligible.
Loan. If Employee is required to relocate to Palm Beach County,
Florida, then at such time that Employee closes the purchase of a new principal
or secondary residence in Florida ("Residence"), Company shall loan Employee the
sum of $500,000.00 to be applied against the purchase price of the Residence and
closing costs. Such loan shall be secured by a first lien on the Residence, be
of a 30 year duration (or such shorter duration requested by Employee), be
amortized through equal monthly payments over the term of the loan, bear an
interest rate equal to the applicable federal rate (as defined in Section
1274(d) of the Internal Revenue Code of 1986, as amended ("Code") for loans of
similar duration and payment schedules, and permit prepayment without penalty.
The note evidencing the loan and mortgage or other security instrument shall
contain terms and conditions customarily included in residential secured loans
in the metropolitan area in which the Residence is located.
Death and Disability. If Employee dies during the term of this
Agreement, his employment shall be deemed to have been terminated as of the last
day of the month in which his death occurs, and Company will pay to Employee's
personal representative all salary and any other compensation due Employee
through the end of such month. If Employee becomes permanently disabled so that
he cannot perform his duties , as determined by a physician selected by or
acceptable to Company, his employment shall be deemed to have been terminated as
of the last day of the month in which such determination is made, and he will
receive his salary and any other compensation due him through the end of such
month.
Termination Upon Retirement or Notice. From and after the time Employee
attains age 65, he may retire at any time by notifying Company at least 120 days
prior to his intended retirement date or be retired by Company upon at least two
years notice. In addition, Employee may terminate his employment at any time
after June 30, 2001, upon one year's notice. If a notice of termination has been
given under this paragraph 10, and the Agreement is terminated under another
provision if this Agreement, such as by death ("Other Termination Provision")
prior to the date of such termination under this paragraph 10, then the
Agreement shall be deemed to have been terminated pursuant to the Other
Termination Provision.
Default. In the event that either party fails to perform material
provision of this Agreement and such failure continues for 15 days after
notification from the nonbreaching party, the nonbreaching party may terminate
this Agreement by notice to the breaching party. Such termination shall be
2
<PAGE>
without prejudice to any rights or remedies which the nonbreaching party may
have.
Change in Control and CEO. Notwithstanding any other provision of this
Agreement, should Marc Sherman cease to be chief executive officer of Employer
and should a "change of control" occur, Employee, at his sole option and
discretion, may terminate his employment under this Agreement at any time within
one year after such change of control upon 15 days notice. In the event of such
termination, Company shall pay to Employee a severance payment ("Severance
Payment") equal to three times the base amount as defined in Section 280G(b)(3)
of the Code minus $1.00. Notwithstanding the foregoing, (a) if the Severance
Payment and any other amounts payable by Company to Employee are parachute
payments under Code Section 280G (collectively, "Parachute Payments") and, (b),
if reducing the Severance Payment would eliminate the tax provided for in Code
Section 4999 ("Section 4999 Tax") which would otherwise be applicable to the
Parachute Payments, and (c) if, because of such elimination, the net amount of
the Parachute Payments (total payments minus Section 4999 Tax) would be greater
than such net amount without reduction, then the Severance Payment shall be
reduced by the smallest amount required to eliminate the imposition of the
Section 4999 Tax. The foregoing determination shall be made by Company's general
counsel, and his determination shall be binding upon Company and Employee. The
amount determined under the foregoing provisions of this paragraph 12 shall be
payable no later than one month after the effective date of the Employee's
termination of employment. A change in control means: (a) the acquisition by any
person or entity, other than Company or a "related entity," of (i) more than 20%
without the approval of the Board or (ii) more than 50% with the approval of the
Board of the outstanding shares of Company's voting stock on a diluted and/or
converted basis through a tender offer, exchange offer or otherwise; (b) the
sale or other disposition of all or substantially all of Company's assets unless
shareholders of Company prior to such sale or disposition own at least 50% of
the voting stock on a diluted and/or converted basis of the purchaser, and the
purchaser assumes Company's obligations under this Agreement; (c) a merger of
consolidation involving Company which results in Company not being the surviving
parent corporation or after which shareholders of the Company own less than 50%
of the voting stock on a diluted and/or converted basis of the surviving entity;
or (d) any time during any two-year period in which individuals who constituted
the Board at the start of such period (or, except in the case of a transaction
described in a(i) or (c), whose election was approved by at least two-thirds of
the then members of the Board who were members at the start of the two-year
period) do not constitute at least 50% of the Board for any reason. A related
entity is the parent, a subsidiary or any employee benefit plan (including a
trust forming a part of such a plan) maintained by Company, its parent or a
subsidiary. Notwithstanding the foregoing, any changes in stock ownership
resulting from the initial public offering of the Company's shares (("IPO") or a
change in the Board within two years of the IPO and resulting from a change in
stock ownership effected by the IPO shall not be considered a change of control.
Nondisclosure; Return of Records. Employee will not, except as
authorized by Company, publish or disclose to others, or use for his own
benefit, or authorize anyone else to publish or disclose or use, or copy or make
notes of any secret, proprietary, or confidential information or knowledge of
data or trade secrets of or relating to the business activities of Company which
3
<PAGE>
may come to Employee's knowledge during his employment with the Company. Upon
termination of Employee's employment for any reason, Employee will deliver to
Company, without retaining any copies, notes or excerpts, all records, notes,
data, memoranda, and all other documents or materials made or compiled by
Employee, or made available to him by Company during his employment, which are
in Employee's possession and/or control and which are the property of Company
and/or which relate to Employee's employment or the business activities of
Company.
Binding Effect. This Agreement shall be binding upon and inure to the
benefit of Company and any successors or assigns of Company, and Employee, his
heirs, personal representatives and assigns, except that Employee's obligations
to perform services and rights to receive payment therefore shall be
nonassignable and nontransferable.
Entire Agreement: Modification. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter and supersedes
all prior or contemporaneous agreements not set forth in this agreement. This
Agreement may not be modified other than by an agreement in writing signed by
each of the parties.
Waiver. Any failure by either party to enforce any provision of this
Agreement shall not operate as a waiver of such provision or any other
provision. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as a waiver of any other breach of such provision or
any other provision of this agreement.
Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not effect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
Paragraph Headings. Paragraph headings throughout this Agreement are
solely for the convenience of the parties and shall not be construed as a part
of any section or as modifying the contents of any section.
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
Notices. All notices under this Agreement shall be personally
delivered, sent certified mail, postage prepaid, to Company at its corporate
office and to Employee at his principal residence, or sent by telecopy.
Non-Competition. For a three year period from and after termination of
Employee's employment for any reason other than death, Employee shall not
engage, directly or indirectly, either on his own behalf or on behalf of any
other person, firm, corporation or other entity, in any business competitive
with the business of Company, in the geographic area in which Company is
conducting business at the time of termination of Employee's employment, or own
more than 5% of any such firm, corporation or other entity. In addition,
Employee must furnish Company with such information as Company shall from time
to time request in order to determine that Employee is in compliance with the
requirements of the preceding provisions of this paragraph 21. In the event that
4
<PAGE>
such provisions are not complied with, Employee agrees that Company's remedies
shall include equitable relief. Employee agrees that the restrictions of this
paragraph 21 are reasonable and required to protect the legitimate business
interests of Company.
Modification. In the event that any provision of this Agreement is
invalid or unenforceable, it shall be modified to the extent required to be
valid and enforceable and only to such extent. If it cannot be so modified, then
it shall be deemed to have been deleted from this Agreement but such deletion
shall not affect the remaining terms and provisions of this Agreement.
Company. For purposes of paragraphs 4, 13, and 21 of this Agreement,
the Company means Intellesale.com, Inc. and all subsidiaries and affiliates of
it.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INTELLESALE.COM, INC.
"Company"
By: /s/ Michael Krawitz
-------------------------------
Title: Vice President
/s/ Edward Cummings
-----------------------------------
Edward Cummings
"Employee"
5
<PAGE>
EXHIBIT A TO
EMPLOYMENT AGREEMENT
BETWEEN INTELLESALE.COM, INC.
AND EDWARD CUMMINGS
A. Current Annual Bonus Formula.
For each fiscal year, Employee's bonus (if any) shall be 0.7%
of the consolidated earnings of Company and subsidiaries before interest, taxes,
depreciation and amortization. The computation of the bonus, if any, to which
Employee is entitled shall be made by Company's chief financial officer in
accordance with generally accepted accounting principles consistently applied.
Any bonus to which Employee is entitled shall be paid as soon as practicable but
in no event later than the 15th day of the third month after the end of the
fiscal year for which the bonus was earned. In the event Employee's employment
terminates prior to the end of the fiscal year, Employee or his personal
representative shall be entitled to a pro rata portion of the bonus for such
fiscal year unless his employment was terminated pursuant to paragraph 11, in
which event no bonus shall be payable. Employee's pro rata portion of his bonus
shall be the same percentage of the bonus as the number of days for which he was
employed for such fiscal year is of 365.
B. Modified Annual Bonus Formula.
If Company adopts a bonus plan or program intended to meet the
requirements for "other performance-based compensation" under Code Section
162(m) (4) ("162(m) Plan") pursuant to which the bonus, if any, to which one or
more of its employees may be determined, if the provisions of the 162 (m) Plan
are applicable to Employee, and if the annual bonus for Employee under the
162(m) Plan can, in the Company's good faith belief, reasonably be expected to
be substantially similar in amount to that determined under A above over the
remaining term of this Agreement, then the provisions of the 162(m) Plan shall
supersede and replace the provisions of A above from and after the first day of
Company's fiscal year for which the 162 (m) Plan is effective.
6
Exhibit 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made and entered into this 17th day of
June, 1999, by and between INTELLESALE.COM, INC., a Delaware corporation
("Company") and CHARLES NEWMAN ("Employee").
BACKGROUND
Employee is employed by Company as its executive vice-president and
chief operating officer. The parties desire to enter into a formal employment
agreement covering the terms and conditions of such employment.
TERMS AND CONDITIONS
Employment. Company hereby employs Employee, and Employee hereby
accepts such employment by Company, on
the terms and conditions set forth below.
Capacity. Employee shall serve as Company's executive vice-president
and chief operating officer. Employee shall perform such services for Company as
Company's board of directors ("Board") and chief executive office shall direct
from time to time. However, no such services shall be of a nature which are not
commensurate with, and/or are beneath the dignity of, Employee's position
described in the first sentence of this paragraph or are not of an executive or
managerial nature.
Term. Company's employment of Employee under this Agreement shall be
for an initial term of five years commencing on July 1, 1999 and ending on June
30, 2004. Notwithstanding the foregoing, the term of this Agreement may end
prior to the termination date determined under this paragraph 3 as provided in
paragraphs 8, 9, 10, and 11.
Service While Employed. Employee agrees to devote his best efforts, his
full diligence and substantially all of his business time to his duties
hereunder and shall not engage, either directly or indirectly, in any business
or other activity which is competitive with or adverse to the interests or the
business of Company.
Items Furnished and Relocation. Company shall furnish Employee with
such private office, secretarial assistance, and such other facilities,
equipment and services suitable to his position and adequate to perform his
duties hereunder. Employee shall not be relocated by Company without his consent
to any area other than Palm Beach County, Florida or the metropolitan areas of
Lincoln Park or Burlington, New Jersey.
Compensation, Vacations and Reimbursement. As partial compensation for
his services to Company, Company agrees to pay Employee an annual salary in
regular monthly or other agreed upon installments of not less than $280,000.00
and an annual bonus computed in accordance with Exhibit A which is attached and
is a part of this Agreement. In addition, Employee shall be entitled to receive
such bonuses (in addition to that required under the preceding sentence),
incentive compensation, and other compensation, if any, as the Board, executive
<PAGE>
committee, compensation committee, or other designated committee shall award
Employee from time to time whether in cash, Company stock, stock options, other
stock based compensation, other form of remuneration, or any combination of the
foregoing. All such compensation shall be subject to legally required income and
employment tax withholding. Employee shall be entitled to paid vacations and
reimbursement for all reasonable business expenses in accordance with Company's
policies for executive officers.
Pension, Welfare and Related Benefits. In addition to the compensation
described in paragraph 6 above, Employee shall be entitled to participate in
such bonus, profit sharing, deferred compensation and pension plans of Company
for which he is eligible and such welfare and fringe benefits plans and programs
of the Company for which he is eligible.
Death and Disability. If Employee dies during the term of this
Agreement, his employment shall be deemed to have been terminated as of the last
day of the month in which his death occurs, and Company will pay to Employee's
personal representative all salary and any other compensation due Employee
through the end of such month. If Employee becomes permanently disabled so that
he cannot perform his duties , as determined by a physician selected by or
acceptable to Company, his employment shall be deemed to have been terminated as
of the last day of the month in which such determination is made, and he will
receive his salary and any other compensation due him through the end of such
month.
Termination Upon Retirement or Notice. From and after the time Employee
attains age 65, he may retire at any time by notifying Company at least 120 days
prior to his intended retirement date or be retired by Company upon at least two
years notice. In addition, Employee may terminate his employment at any time
upon one year's notice. If a notice of termination has been given under this
paragraph 9, and the Agreement is terminated under another provision if this
Agreement, such as by death ("Other Termination Provision") prior to the date of
such termination under this paragraph 9, then the Agreement shall be deemed to
have been terminated pursuant to the Other Termination Provision.
Default. In the event that either party fails to perform material
provision of this Agreement and such failure continues for 15 days after
notification from the nonbreaching party, the nonbreaching party may terminate
this Agreement by notice to the breaching party. Such termination shall be
without prejudice to any rights or remedies which the nonbreaching party may
have.
Change in Control and CEO. Notwithstanding any other provision of this
Agreement, should Marc Sherman cease to be chief executive officer of Employer
and should a "change of control" occur, Employee, at his sole option and
discretion, may terminate his employment under this Agreement at any time within
one year after such change of control upon 15 days notice. In the event of such
termination, Company shall pay to Employee a severance payment ("Severance
Payment") equal to three times the base amount as defined in Section 280G(b)(3)
of the Internal Revenue Code of 1986, as amended ("Code") minus $1.00.
Notwithstanding the foregoing, (a) if the Severance Payment and any other
amounts payable by Company to Employee are parachute payments under Code Section
280G (collectively, "Parachute Payments") and, (b), if reducing the Severance
2
<PAGE>
Payment would eliminate the tax provided for in Code Section 4999 ("Section 4999
Tax") which would otherwise be applicable to the Parachute Payments, and (c) if,
because of such elimination, the net amount of the Parachute Payments (total
payments minus Section 4999 Tax) would be greater than such net amount without
reduction, then the Severance Payment shall be reduced by the smallest amount
required to eliminate the imposition of the Section 4999 Tax. The foregoing
determination shall be made by Company's general counsel, and his determination
shall be binding upon Company and Employee. The amount determined under the
foregoing provisions of this paragraph 12 shall be payable no later than one
month after the effective date of the Employee's termination of employment. A
change in control means: (a) the acquisition by any person or entity, other than
Company or a "related entity," of (i) more than 20% without the approval of the
Board or (ii) more than 50% with the approval of the Board of the outstanding
shares of Company's voting stock on a diluted and/or converted basis through a
tender offer, exchange offer or otherwise; (b) the sale or other disposition of
all or substantially all of Company's assets unless shareholders of Company
prior to such sale or disposition own at least 50% of the voting stock on a
diluted and/or converted basis of the purchaser, and the purchaser assumes
Company's obligations under this Agreement; (c) a merger of consolidation
involving Company which results in Company not being the surviving parent
corporation or after which shareholders of the Company own less than 50% of the
voting stock on a diluted and/or converted basis of the surviving entity; or (d)
any time during any two-year period in which individuals who constituted the
Board at the start of such period (or, except in the case of a transaction
described in a(i) or (c), whose election was approved by at least two-thirds of
the then members of the Board who were members at the start of the two-year
period) do not constitute at least 50% of the Board for any reason. A related
entity is the parent, a subsidiary or any employee benefit plan (including a
trust forming a part of such a plan) maintained by Company, its parent or a
subsidiary. Notwithstanding the foregoing, any changes in stock ownership
resulting from the initial public offering of the Company's shares (("IPO") or a
change in the Board within two years of the IPO and resulting from a change in
stock ownership effected by the IPO shall not be considered a change of control.
Nondisclosure; Return of Records. Employee will not, except as
authorized by Company, publish or disclose to others, or use for his own
benefit, or authorize anyone else to publish or disclose or use, or copy or make
notes of any secret, proprietary, or confidential information or knowledge of
data or trade secrets of or relating to the business activities of Company which
may come to Employee's knowledge during his employment with the Company. Upon
termination of Employee's employment for any reason, Employee will deliver to
Company, without retaining any copies, notes or excerpts, all records, notes,
data, memoranda, and all other documents or materials made or compiled by
Employee, or made available to him by Company during his employment, which are
in Employee's possession and/or control and which are the property of Company
and/or which relate to Employee's employment or the business activities of
Company.
Binding Effect. This Agreement shall be binding upon and inure to the
benefit of Company and any successors or assigns of Company, and Employee, his
heirs, personal representatives and assigns, except that Employee's obligations
to perform services and rights to receive payment therefore shall be
nonassignable and nontransferable.
3
<PAGE>
Entire Agreement: Modification. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter and supersedes
all prior or contemporaneous agreements not set forth in this agreement. This
Agreement may not be modified other than by an agreement in writing signed by
each of the parties.
Waiver. Any failure by either party to enforce any provision of this
Agreement shall not operate as a waiver of such provision or any other
provision. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as a waiver of any other breach of such provision or
any other provision of this agreement.
Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not effect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
Paragraph Headings. Paragraph headings throughout this Agreement are
solely for the convenience of the parties and shall not be construed as a part
of any section or as modifying the contents of any section.
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
Notices. All notices under this Agreement shall be personally
delivered, sent certified mail, postage prepaid, to Company at its corporate
office and to Employee at his principal residence, or sent by telecopy.
Non-Competition. For a three year period from and after termination of
Employee's employment for any reason other than death, Employee shall not
engage, directly or indirectly, either on his own behalf or on behalf of any
other person, firm, corporation or other entity, in any business competitive
with the business of Company, in the geographic area in which Company is
conducting business at the time of termination of Employee's employment, or own
more than 5% of any such firm, corporation or other entity. In addition,
Employee must furnish Company with such information as Company shall from time
to time request in order to determine that Employee is in compliance with the
requirements of the preceding provisions of this paragraph 20. In the event that
such provisions are not complied with, Employee agrees that Company's remedies
shall include equitable relief. Employee agrees that the restrictions of this
paragraph 21 are reasonable and required to protect the legitimate business
interests of Company.
Modification. In the event that any provision of this Agreement is
invalid or unenforceable, it shall be modified to the extent required to be
valid and enforceable and only to such extent. If it cannot be so modified, then
it shall be deemed to have been deleted from this Agreement but such deletion
shall not affect the remaining terms and provisions of this Agreement.
Company. For purposes of paragraphs 4, 12, and 20 of this Agreement,
the Company means Intellesale.com, Inc. and all subsidiaries and affiliates of
it.
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INTELLESALE.COM, INC.
"Company"
By: /s/ Michael Krawitz
---------------------------
Title: Vice President
/s/ Charles Newman
------------------------------
Charles Newman
"Employee"
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<PAGE>
EXHIBIT A TO
EMPLOYMENT AGREEMENT
BETWEEN INTELLESALE.COM, INC.
AND CHARLES NEWMAN
A. Current Annual Bonus Formula.
For each fiscal year, Employee's bonus (if any) shall be 0.7%
of the consolidated earnings of Company and subsidiaries before interest, taxes,
depreciation and amortization. The computation of the bonus, if any, to which
Employee is entitled shall be made by Company's chief financial officer in
accordance with generally accepted accounting principles consistently applied.
Any bonus to which Employee is entitled shall be paid as soon as practicable but
in no event later than the 15th day of the third month after the end of the
fiscal year for which the bonus was earned. In the event Employee's employment
terminates prior to the end of the fiscal year, Employee or his personal
representative shall be entitled to a pro rata portion of the bonus for such
fiscal year unless his employment was terminated pursuant to paragraph 10, in
which event no bonus shall be payable. Employee's pro rata portion of his bonus
shall be the same percentage of the bonus as the number of days for which he was
employed for such fiscal year is of 365.
B. Modified Annual Bonus Formula.
If Company adopts a bonus plan or program intended to meet the
requirements for "other performance-based compensation" under Code Section
162(m) (4) ("162(m) Plan") pursuant to which the bonus, if any, to which one or
more of its employees may be determined, if the provisions of the 162 (m) Plan
are applicable to Employee, and if the annual bonus for Employee under the
162(m) Plan can, in the Company's good faith belief, reasonably be expected to
be substantially similar in amount to that determined under A above over the
remaining term of this Agreement, then the provisions of the 162(m) Plan shall
supersede and replace the provisions of A above from and after the first day of
Company's fiscal year for which the 162 (m) Plan is effective.
6
Exhibit 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT ("Agreement") made and entered into this 17th day of
June, 1999, by and between INTELLESALE.COM, INC., a Delaware corporation
("Company") and JOSEPH KEATS ("Employee").
BACKGROUND
Employee is employed by Company as its vice-president, sales and
marketing. The parties desire to enter into a formal employment agreement
covering the terms and conditions of such employment.
TERMS AND CONDITIONS
Employment. Company hereby employs Employee, and Employee hereby
accepts such employment by Company, on the terms and conditions set forth below.
Capacity. Employee shall serve as Company's vice-president, sales and
marketing. Employee shall perform such services for Company as companies board
of directors ("Board") and chief executive officer shall direct from time to
time. However, no such services shall be of a nature which are not commensurate
with, and/or are beneath the dignity of, Employee's position described in the
first sentence of this paragraph or are not of an executive or managerial
nature.
Term. Company's employment of Employee under this Agreement shall be
for an initial term of five years commencing on July 1, 1999 and ending on June
30, 2004. Notwithstanding the foregoing, the term of this Agreement may end
prior to the termination date determined under this paragraph 3 as provided in
paragraphs 8, 9, 10, and 11.
Service While Employed. Employee agrees to devote his best efforts, his
full diligence and substantially all of his business time to his duties
hereunder and shall not engage, either directly or indirectly, in any business
or other activity which is competitive with or adverse to the interests or the
business of Company.
Items Furnished and Relocation. Company shall furnish Employee with
such private office, secretarial assistance, and such other facilities,
equipment and services suitable to his position and adequate to perform his
duties hereunder. Employee shall not be relocated by Company without his consent
to any area other than Palm Beach County, Florida or the metropolitan areas of
Lincoln Park or Burlington, New Jersey.
Compensation, Vacations and Reimbursement. As partial compensation for
his services to Company, Company agrees to pay Employee an annual salary in
regular monthly or other agreed upon installments of not less than $150,000.00
and an annual bonus computed in accordance with Exhibit A which is attached and
is a part of this Agreement. In addition, Employee shall be entitled to receive
such bonuses (in addition to that required under the preceding sentence),
incentive compensation, and other compensation, if any, as the Board, executive
<PAGE>
committee, compensation committee, or other designated committee shall award
Employee from time to time whether in cash, Company stock, stock options, other
stock based compensation, other form of remuneration, or any combination of the
foregoing. All such compensation shall be subject to legally required income and
employment tax withholding. Employee shall be entitled to paid vacations and
reimbursement for all reasonable business expenses in accordance with Company's
policies for executive officers.
Pension, Welfare and Related Benefits. In addition to the compensation
described in paragraph 6 above, Employee shall be entitled to participate in
such bonus, profit sharing, deferred compensation and pension plans of Company
for which he is eligible and such welfare and fringe benefits plans and programs
of the Company for which he is eligible.
Death and Disability. If Employee dies during the term of this
Agreement, his employment shall be deemed to have been terminated as of the last
day of the month in which his death occurs, and Company will pay to Employee's
personal representative all salary and any other compensation due Employee
through the end of such month. If Employee becomes permanently disabled so that
he cannot perform his duties , as determined by a physician selected by or
acceptable to Company, his employment shall be deemed to have been terminated as
of the last day of the month in which such determination is made, and he will
receive his salary and any other compensation due him through the end of such
month.
Termination Upon Retirement or Notice. From and after the time Employee
attains age 65, he may retire at any time by notifying Company at least 120 days
prior to his intended retirement date or be retired by Company upon at least two
years notice. In addition, Employee may terminate his employment at any time
upon one year's notice. If a notice of termination has been given under this
paragraph 9, and the Agreement is terminated under another provision if this
Agreement, such as by death ("Other Termination Provision") prior to the date of
such termination under this paragraph 9, then the Agreement shall be deemed to
have been terminated pursuant to the Other Termination Provision.
Default. In the event that either party fails to perform material
provision of this Agreement and such failure continues for 15 days after
notification from the nonbreaching party, the nonbreaching party may terminate
this Agreement by notice to the breaching party. Such termination shall be
without prejudice to any rights or remedies which the nonbreaching party may
have.
Change in Control and CEO. Notwithstanding any other provision of this
Agreement, should Marc Sherman cease to be chief executive officer of Employer
and should a "change of control" occur, Employee, at his sole option and
discretion, may terminate his employment under this Agreement at any time within
one year after such change of control upon 15 days notice. In the event of such
termination, Company shall pay to Employee a severance payment ("Severance
Payment") equal to three times the base amount as defined in Section 280G(b)(3)
of the Internal Revenue Code of 1986, as amended ("Code") minus $1.00.
Notwithstanding the foregoing, (a) if the Severance Payment and any other
amounts payable by Company to Employee are parachute payments under Code Section
280G (collectively, "Parachute Payments") and, (b), if reducing the Severance
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<PAGE>
Payment would eliminate the tax provided for in Code Section 4999 ("Section 4999
Tax") which would otherwise be applicable to the Parachute Payments, and (c) if,
because of such elimination, the net amount of the Parachute Payments (total
payments minus Section 4999 Tax) would be greater than such net amount without
reduction, then the Severance Payment shall be reduced by the smallest amount
required to eliminate the imposition of the Section 4999 Tax. The foregoing
determination shall be made by Company's general counsel, and his determination
shall be binding upon Company and Employee. The amount determined under the
foregoing provisions of this paragraph 12 shall be payable no later than one
month after the effective date of the Employee's termination of employment. A
change in control means: (a) the acquisition by any person or entity, other than
Company or a "related entity," of (i) more than 20% without the approval of the
Board or (ii) more than 50% with the approval of the Board of the outstanding
shares of Company's voting stock on a diluted and/or converted basis through a
tender offer, exchange offer or otherwise; (b) the sale or other disposition of
all or substantially all of Company's assets unless shareholders of Company
prior to such sale or disposition own at least 50% of the voting stock on a
diluted and/or converted basis of the purchaser, and the purchaser assumes
Company's obligations under this Agreement; (c) a merger of consolidation
involving Company which results in Company not being the surviving parent
corporation or after which shareholders of the Company own less than 50% of the
voting stock on a diluted and/or converted basis of the surviving entity; or (d)
any time during any two-year period in which individuals who constituted the
Board at the start of such period (or, except in the case of a transaction
described in a(i) or (c), whose election was approved by at least two-thirds of
the then members of the Board who were members at the start of the two-year
period) do not constitute at least 50% of the Board for any reason. A related
entity is the parent, a subsidiary or any employee benefit plan (including a
trust forming a part of such a plan) maintained by Company, its parent or a
subsidiary. Notwithstanding the foregoing, any changes in stock ownership
resulting from the initial public offering of the Company's shares (("IPO") or a
change in the Board within two years of the IPO and resulting from a change in
stock ownership effected by the IPO shall not be considered a change of control.
Nondisclosure; Return of Records. Employee will not, except as
authorized by Company, publish or disclose to others, or use for his own
benefit, or authorize anyone else to publish or disclose or use, or copy or make
notes of any secret, proprietary, or confidential information or knowledge of
data or trade secrets of or relating to the business activities of Company which
may come to Employee's knowledge during his employment with the Company. Upon
termination of Employee's employment for any reason, Employee will deliver to
Company, without retaining any copies, notes or excerpts, all records, notes,
data, memoranda, and all other documents or materials made or compiled by
Employee, or made available to him by Company during his employment, which are
in Employee's possession and/or control and which are the property of Company
and/or which relate to Employee's employment or the business activities of
Company.
Binding Effect. This Agreement shall be binding upon and inure to the
benefit of Company and any successors or assigns of Company, and Employee, his
heirs, personal representatives and assigns, except that Employee's obligations
to perform services and rights to receive payment therefore shall be
nonassignable and nontransferable.
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<PAGE>
Entire Agreement: Modification. This Agreement constitutes the entire
agreement between the parties with respect to the subject matter and supersedes
all prior or contemporaneous agreements not set forth in this agreement. This
Agreement may not be modified other than by an agreement in writing signed by
each of the parties.
Waiver. Any failure by either party to enforce any provision of this
Agreement shall not operate as a waiver of such provision or any other
provision. Any waiver by either party of any breach of any provision of this
Agreement shall not operate as a waiver of any other breach of such provision or
any other provision of this agreement.
Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not effect the other provisions of this
Agreement, and this Agreement shall be construed in all respects as if such
invalid or unenforceable provision were omitted.
Paragraph Headings. Paragraph headings throughout this Agreement are
solely for the convenience of the parties and shall not be construed as a part
of any section or as modifying the contents of any section.
Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware.
Notices. All notices under this Agreement shall be personally
delivered, sent certified mail, postage prepaid, to Company at its corporate
office and to Employee at his principal residence, or sent by telecopy.
Non-Competition. For a three year period from and after termination of
Employee's employment for any reason other than death, Employee shall not
engage, directly or indirectly, either on his own behalf or on behalf of any
other person, firm, corporation or other entity, in any business competitive
with the business of Company, in the geographic area in which Company is
conducting business at the time of termination of Employee's employment, or own
more than 5% of any such firm, corporation or other entity. In addition,
Employee must furnish Company with such information as Company shall from time
to time request in order to determine that Employee is in compliance with the
requirements of the preceding provisions of this paragraph 20. In the event that
such provisions are not complied with, Employee agrees that Company's remedies
shall include equitable relief. Employee agrees that the restrictions of this
paragraph 20 are reasonable and required to protect the legitimate business
interests of Company.
Modification. In the event that any provision of this Agreement is
invalid or unenforceable, it shall be modified to the extent required to be
valid and enforceable and only to such extent. If it cannot be so modified, then
it shall be deemed to have been deleted from this Agreement but such deletion
shall not affect the remaining terms and provisions of this Agreement.
Company. For purposes of paragraphs 4, 12, and 20 of this Agreement,
the Company means Intellesale.com, Inc. and all subsidiaries and affiliates of
it.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
INTELLESALE.COM, INC.
"Company"
By: /s/ Michael Krawitz
----------------------------
Title: Vice President
/s/ Joseph Keats
-------------------------------
Joseph Keats
"Employee"
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<PAGE>
EXHIBIT A TO
EMPLOYMENT AGREEMENT
BETWEEN INTELLESALE.COM, INC.
AND JOSEPH KEATS
A. Current Annual Bonus Formula.
For each fiscal year, Employee's bonus (if any) shall be
0.375% of the consolidated earnings of Company and subsidiaries before interest,
taxes, depreciation and amortization. The computation of the bonus, if any, to
which Employee is entitled shall be made by Company's chief financial officer in
accordance with generally accepted accounting principles consistently applied.
Any bonus to which Employee is entitled shall be paid as soon as practicable but
in no event later than the 15th day of the third month after the end of the
fiscal year for which the bonus was earned. In the event Employee's employment
terminates prior to the end of the fiscal year, Employee or his personal
representative shall be entitled to a pro rata portion of the bonus for such
fiscal year unless his employment was terminated pursuant to paragraph 10, in
which event no bonus shall be payable. Employee's pro rata portion of his bonus
shall be the same percentage of the bonus as the number of days for which he was
employed for such fiscal year is of 365.
B. Modified Annual Bonus Formula.
If Company adopts a bonus plan or program intended to meet the
requirements for "other performance-based compensation" under Code Section
162(m) (4) ("162(m) Plan") pursuant to which the bonus, if any, to which one or
more of its employees may be determined, if the provisions of the 162 (m) Plan
are applicable to Employee, and if the annual bonus for Employee under the
162(m) Plan can, in the Company's good faith belief, reasonably be expected to
be substantially similar in amount to that determined under A above over the
remaining term of this Agreement, then the provisions of the 162(m) Plan shall
supersede and replace the provisions of A above from and after the first day of
Company's fiscal year for which the 162 (m) Plan is effective.
6
Exhibit 10.7
APPLIED DIGITAL SOLUTIONS, INC./
INTELLESALE.COM, INC.
TAX SHARING AGREEMENT
THIS AGREEMENT dated as of October __, 1999, by and among
APPLIED DIGITAL SOLUTIONS, INC., a Missouri corporation ("ADS"),
Intellesale.com, Inc., a Delaware corporation ("Intellesale"), and Intellesale's
domestic affiliates that are signatories to this Agreement (each, an
"Intellesale Subsidiary"). Defined terms are set forth in Article I.
WHEREAS, ADS is the common parent of the ADS Consolidated
Group and such group includes Intellesale and other members of the Intellesale
Sub Group. The ADS Consolidated Group files a Consolidated Federal Income Tax
Return;
WHEREAS, ADS expects that, as a result of the sale of the
common stock of Intellesale, pursuant to an initial public offering ("IPO"),
Intellesale will cease to be a member of the ADS Consolidated Group; and
WHEREAS, ADS and Intellesale desire to set forth their
agreement on the proper allocation among ADS, Intellesale and their respective
Affiliates of foreign, federal, state and local Taxes incurred in taxable
periods beginning prior to (and in certain respects, subsequent to) the
Deconsolidation Date and their respective obligations in respect of the same;
NOW, THEREFORE, in consideration of their mutual promises, the
parties hereby agree as follows:
1. Definitions.
(a) As used in this Agreement:
"ADS Consolidated Group" means, with respect to any taxable
period, the corporations which are members of the affiliated group of
corporations of which ADS is the common parent (within the meaning of Section
1504 of the Code).
"ADS Income Tax Liability" means (i) the ADS Sub Group's
allocable share of the liability for Federal Taxes of the ADS Consolidated Group
for all periods that the ADS Sub Group were members of such group determined as
if the members of the ADS Sub Group were the only members of the ADS
Consolidated Group; (ii) the ADS Sub Group's allocable share of the Consolidated
Non-Federal Tax liability of the ADS Sub Group for all periods they joined in
the filing of a Tax Return in respect of a Consolidated Non-Federal Tax with ADS
determined as if the members of the ADS Sub Group were the only members included
in such Tax Return; and (iii) any liability resulting from any Income Taxes of
the ADS Sub Group with respect to any Post-Deconsolidation Tax Period or any
Income Taxes of the ADS Sub Group allocated to such group pursuant to Section
2(c) hereof. The parties intend that the ADS Sub Group's allocable share of the
<PAGE>
liability for Federal Taxes or Consolidated Non-Federal Taxes as determined in
clause (i) or (ii) above, when added to the Intellesale Sub Group's allocable
share of the liability for Federal Taxes or Consolidated Non-Federal Taxes for
the same period will equal 100% of the liability for Federal Taxes of the ADS
Consolidated Group or Consolidated Non-Federal Taxes for such period, and that
any difference shall be allocated between the ADS Sub Group and the Intellesale
Sub Group in proportion to the amount determined under clause (i) or (ii) above
with respect to both the ADS Sub Group and the Intellesale Sub Group.
"ADS Indemnitee" means ADS and its Affiliates.
"ADS Sub Group" means, jointly and severally, the ADS
Consolidated Group, but does not include any corporation that is a member of the
Intellesale Sub Group.
"Affiliate" of any person means any person, corporation,
partnership or other entity directly or indirectly controlling, controlled by or
under common control with such person excluding any shareholder of ADS.
References herein to an Affiliate of ADS shall mean any Affiliate of ADS,
excluding on or after the Deconsolidation Date, Intellesale, any subsidiaries of
Intellesale, of which Intellesale owns at least fifty percent (50%) of the total
combined voting power, and all shareholders of Intellesale. References herein to
an Affiliate of Intellesale shall exclude ADS, all subsidiaries of ADS which are
not subsidiaries of Intellesale and all shareholders of Intellesale.
"After-Tax Amount" means an amount that shall be equal to the
hypothetical after-tax amount of the indemnity payment due hereunder, taking
into account the hypothetical Tax consequences of the payments or accruals of
the amounts which give rise to the indemnity obligation. References to
"After-Tax basis", "hypothetical Tax consequences" and "hypothetical After-Tax
amount" refer to calculations of Tax at the maximum statutory rate (or rates, in
the case of an item that affects more than one Tax) applicable to an ADS
Indemnitee or an Intellesale Indemnitee, as the case may be, for the relevant
year. Such After-Tax Amount shall take into account the benefit or detriment in
a subsequent period of an item of adjustment which gives rise to an Indemnitee
payment.
"Applicable Rate" means the interest rate determined under the
provisions of sections 6621 and 6622 of the Code.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Non-Federal Tax" means, with respect to each
foreign, state or local taxing jurisdiction, any income or franchise Tax payable
to any such jurisdiction in which Intellesale or any of its Affiliates is or may
be liable for such Tax on a consolidated, combined or unitary basis with ADS or
any of its Affiliates.
"Consolidated Federal Income Tax Return" means any Tax Return
with respect to Federal Income Taxes filed on a consolidated basis when
Intellesale or one or more of its Affiliates join in filing such Tax Return with
ADS or one or more ADS Affiliate.
2
<PAGE>
"Deconsolidation" shall mean any event pursuant to which
Intellesale ceases to be a member of the ADS Consolidated Group.
"Deconsolidation Date" means the date that Intellesale ceases
to be a member of the ADS Consolidated Group as determined under Treas. Reg. ss.
1.1502-76(b).
"Federal Tax" means any United States net income,
environmental, excise, alternative or add-on minimum Tax.
"Final Determination" means: (i) with respect to Federal
Taxes, (A) a "determination" as defined in section 1313(a) of the Code, or (B)
the date of acceptance by or on behalf of the Internal Revenue Service of Form
870-AD (or any successor form thereto) as a final resolution of tax liability
for any taxable period, except that a Form 870-AD (or successor form thereto)
that reserves the right of the taxpayer to file a claim for refund and/or the
right of the Internal Revenue Service to assert a further deficiency shall not
constitute a Final Determination with respect to the item or items so reserved;
(ii) with respect to Taxes other than Federal Taxes, any final determination of
liability in respect of a Tax provided for under applicable law; (iii) any final
disposition by reason of the expiration of the applicable statute of
limitations; and (iv) the payment of Tax by the ADS Sub Group or the Intellesale
Sub Group, whichever is responsible for payment of such Tax under applicable
law, with respect to any item disallowed by a Taxing Authority, provided that
the provisions of Section 6(b) hereof have been complied with, or, if such
Section 6(b) is inapplicable, that the party responsible under the terms of this
Agreement for such Tax is notified by the party paying such Tax that it has
determined that no action should be taken to recoup such disallowed item, and
the other party agrees with such determination.
"Income Taxes" means any Federal Tax, foreign, state or local
income or franchise tax or other tax measured by income and all other taxes
reported on returns which include federal, state or local income or franchise
taxes or other taxes measured by income, together with any interest, penalties
or additions to tax imposed with respect thereto.
"Income Tax Return" means any foreign, federal, state or local
consolidated or separate Tax Return which reports Income Taxes of ADS,
Intellesale or their Affiliates.
"Intellesale Income Tax Liability" means (i) the Intellesale
Sub Group's allocable share of the liability for Federal Taxes of the ADS
Consolidated Group for all periods that the Intellesale Sub Group were members
of such group determined as if the members of the Intellesale Sub Group were the
only members of the ADS Consolidated Group; (ii) the Intellesale Sub Group's
allocable share of the Consolidated Non-Federal Tax liability of the Intellesale
Sub Group for all periods they joined in the filing of a Tax Return in respect
of a Consolidated Non-Federal Tax with ADS, determined as if the members of the
Intellesale Sub Group were the only members included in such Tax Return; (iii)
any liability resulting from any Income Taxes of the Intellesale Sub Group with
respect to any Post-Deconsolidation Tax Period or any Income Taxes of the
Intellesale Sub Group allocated to such party for any taxable period commencing
at the Deconsolidation Date pursuant to Section 2(c) hereof; and (iv) any
Federal Tax liability or any other Income Tax liability of any member of the
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<PAGE>
Intellesale Sub Group attributable to any period prior to the date any member of
the Intellesale Sub Group became a member of the ADS Consolidated Group. The
parties intend that the Intellesale Sub Group's allocable share of the liability
for Federal Taxes or Consolidated Non-Federal Taxes as determined in clause (i)
or (ii) above when added to the ADS Sub Group's allocable share of the liability
for Federal Taxes or Consolidated Non-Federal Taxes for the same period will
equal 100% of the liability for Federal Taxes of the ADS Consolidated Group or
Consolidated Non-Federal Tax for such period, and that any difference shall be
allocated between the Intellesale Sub Group and the ADS Sub Group in proportion
to the amount determined under clause (i) or (ii) above with respect to both the
Intellesale Sub Group and the ADS Sub Group.
"Intellesale Indemnitee" means Intellesale and each of its
Affiliates.
"Intellesale Sub Group" means, jointly and severally,
Intellesale and any subsidiaries of Intellesale which would be members of an
affiliated group of corporations if Intellesale were the common parent (within
the meaning of Section 1504 of the Code).
"Other Taxes" means taxes other than Income Taxes.
"Post-Deconsolidation Tax Period" means a tax period beginning
after the Deconsolidation Date.
"Pre-Deconsolidation Tax Period" means any tax period
beginning before the Deconsolidation Date.
"Tax" means (A) any net income, alternative or add-on minimum,
gross income, gross receipts, sales, use, ad valorem, franchise, profits,
license, withholding, payroll, employment, excise, transfer, recording,
severance, stamp, occupation, premium, property, environmental, custom duty, or
other tax, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest and any penalty, addition to tax or
additional amount imposed by any governmental authority responsible for the
imposition of any such domestic or foreign tax (a "Taxing Authority"); and (B)
any liability of Intellesale, ADS or any of their Affiliates (or, in each case,
any successor in interest thereto by merger or otherwise), as the case may be,
for the payment of any amounts of the type described in clause (A) for any
taxable period resulting from the application of Treasury Regulation Section
1.1502-6 or, in the case of any Consolidated Non-Federal Tax, any similar
provision applicable under State law.
"Tax Assets" means any Tax Item that could reduce the amount
of Tax liability, including a net operating loss, net capital loss, investment
Tax credit, foreign Tax credit, charitable deduction or credit relative to
alternative minimum tax or any other Tax credit.
"Tax Item" means any item of income, gain, loss, deduction or
credit or other attribute that may increase or decrease a Tax.
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<PAGE>
"Tax Return" means all reports, estimates, extensions,
information statements and returns relating to or required by law to be filed in
connection with the determination, assessment or collection of any Taxes and in
the case of consolidated or combined tax returns, by ADS, Intellesale or their
Affiliates on behalf of the Intellesale Sub Group, and all information returns
(e.g., Form W-2, Form 1099) and reports relating to Taxes and employee benefit
plans of ADS, Intellesale or their Affiliates.
(b) Any term used in this Agreement which is not
defined in this Agreement shall, to the extent the
context requires, have the meaning assigned to it in the Code or applicable
Treasury Regulations thereunder.
2. Income Taxes.
(a) Applicable Agreements. On and after the
Deconsolidation Date, this Agreement shall constitute the sole Tax Sharing
Agreement between the ADS Sub Group and the Intellesale Sub Group, and except as
otherwise provided in this Agreement, all such agreements, if any, shall be
terminated effective as of the end of the Deconsolidation Date. Any such
termination shall not be effective as to any right or obligation of the ADS Sub
Group or the Intellesale Sub Group with respect to any third party.
(b) Filing Returns.
(i) ADS shall prepare (or cause to be
prepared) and file (or cause to be filed)
for all taxable periods ending with or prior
to the Deconsolidation Date all Consolidated
Federal Income Tax Returns for ADS, the ADS
Consolidated Group, the ADS Sub Group, the
Intellesale Sub Group and all other
consolidated, combined or unitary Tax
Returns for such entities. Included as a Tax
Return to be filed by ADS pursuant to the
preceding sentence is the Consolidated
Federal Income Tax Return of the ADS
Consolidated Group for the year of the IPO,
which will include all income and loss of
ADS for such year and the income and loss of
the Intellesale Sub Group for the portion of
such year ending on the Deconsolidation
Date.
(ii) Intellesale shall be responsible for
preparing and filing all Income Tax Returns
required to be filed by or on behalf of the
Intellesale Sub Group, for all taxable
periods beginning after the Deconsolidation
Date.
(iii) Those Income Tax Returns of the
Intellesale Sub Group which include any
taxable period beginning before and ending
after the Deconsolidation Date shall be
prepared by Intellesale and filed by
Intellesale on a basis which is consistent
with the manner in which ADS or its
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<PAGE>
Affiliates filed such Tax Returns in the
past, unless a contrary treatment is
required by law.
(iv) The Intellesale Sub Group hereby
irrevocably designates ADS as its agent (and
the agent of all Intellesale Affiliates) for
the purpose of taking any and all actions
necessary or incidental to the filing of any
Tax Return required to be filed by ADS
pursuant to this Agreement or filing any
amended Consolidated Federal Income Tax
Return or Consolidated Non-Federal Tax
Return in respect of any adjustment of Tax
attributable to any period during which
Intellesale was a member of the ADS
Consolidated Group or any Consolidated
Non-Federal Group. ADS shall fully inform
Intellesale in writing, prior to taking such
actions, of all actions to be taken on
behalf of Intellesale. Intellesale shall
provide ADS with a Power of Attorney in
respect of the filing of such returns.
Notwithstanding any indication to the
contrary in this Section 2(b)(iv) or
elsewhere in this Agreement, ADS shall not
have the authority as agent for the
Intellesale Sub Group (or any Intellesale
Affiliate) or pursuant to the Power of
Attorney to take a position with respect to
a Tax Item, on a Tax Return required to be
filed by ADS pursuant to this Agreement or
any amended Consolidated Federal Income Tax
Return or Consolidated Non-Federal Tax
Return, that is inconsistent with the
position taken in the past with respect to
such Tax Item or that could reasonably be
expected to affect adversely the Intellesale
Sub Group or any Intellesale Affiliate with
respect to Tax Returns filed after the
Deconsolidation Date.
(c) Allocation of Tax Liability. For purposes
of allocation of Income Tax liability, between the ADS Sub Group and the
Intellesale Sub Group for purposes of this Agreement, the deconsolidation of
Intellesale shall be effective for Income Tax purposes in all taxing
jurisdictions as of the end of the Deconsolidation Date (even though the laws of
a particular Taxing jurisdiction do not recognize a short Tax period in respect
to the issuance of common stock of Intellesale for purposes of defining a
Consolidated Group). For purposes of this Section 2(c), the Income Taxes for the
portion of the taxable period up to and including the Deconsolidation Date shall
be determined on the basis of an interim closing of the books as of the end of
the Deconsolidation Date.
(d) Tax Refunds. Intellesale shall be entitled
to, and ADS agrees to promptly pay to Intellesale, an amount equal to all
foreign, federal, state and local Tax refunds and interest thereon, if any was
paid or credited (including, without limitation, as a credit or offset against
any other Taxes) (collectively "Refunds"), received by the ADS Sub Group to the
extent attributable to any Taxes for which Intellesale has indemnified the ADS
Sub Group pursuant to this Agreement.
6
<PAGE>
(e) ADS Indemnification. The ADS Sub Group
will jointly and severally indemnify each Intellesale Indemnitee against and
hold it harmless from (i) any ADS Income Tax Liability and (ii) all liability
for fees, costs and expenses (including but not limited to reasonable attorneys'
fees) arising out of or incident to any proceeding before any Taxing Authority
or any judicial authority with respect to any amount indemnifiable under clause
(i) of this section 2(e).
(f) Intellesale Indemnification. The Intellesale
Sub Group will jointly and severally indemnify each ADS Indemnitee against and
hold it harmless from (i) any Intellesale Income Tax Liability and (ii) all
liability for fees, costs and expenses (including, but not limited to,
reasonable attorneys' fees) arising out of or incident to any proceedings before
any Taxing Authority or any judicial authority with respect to any amount
indemnifiable under clause (i) of this Section 2(f) or with respect to Section
3(c).
(g) Indemnification Payments. ADS, the ADS Sub
Group and the Intellesale Sub Group shall discharge their obligations under
Sections 2(e) and 2(f) hereof by paying an After-Tax Amount within 30 days of
demand therefor. Notwithstanding the foregoing, if either Intellesale or ADS
disputes the fact or the amount of an obligation under Section 2(e) or 2(f),
then no payment shall be required until any such good faith dispute is resolved
in accordance with Section 13(b) hereof; provided, however, that any amount not
paid within 30 days of demand therefor shall bear interest at the Applicable
Rate from the date on which such demand was made until the date of payment.
(h) Taxes on Issuance. Any tax liability for Income
Taxes attributable to the issuance by Intellesale of Intellesale stock shall be
and remain the sole liability of Intellesale and the ADS Sub Group shall not
have any responsibility therefor.
3. Carrybacks; Other Tax Adjustments.
(a) If allowable by applicable law, Intellesale
will permit, in it's sole discretion, the use in any Pre-Deconsolidation Tax
Period of the Intellesale Sub Group of any Tax Asset by ADS arising in a
Post-Deconsolidation Tax Period. Likewise, if allowable by applicable law, ADS
will permit, in it's sole discretion, the use in any Pre-Deconsolidation Tax
Period of the ADS Sub Group or Intellesale Sub Group of any Tax Asset by
Intellesale arising in a Post-Deconsolidation Tax Period. The benefit from such
Tax Assets shall be considered equal to (i) the excess of the amount of Federal
Taxes or Consolidated Non-Federal Taxes, as the case may be, that would have
been payable by the ADS Consolidated Group or any relevant Consolidated
Non-Federal Group in the absence of such carryback over (ii) the amount of
Federal or Consolidated Non-Federal Taxes, as the case may be, actually payable
by the ADS Consolidated Group or relevant Consolidated Non-Federal Group. ADS
shall pay to Intellesale 50% of the benefit of such Tax Asset. Payment of the
amount of such benefit shall be made within 30 days of the receipt by ADS of any
refund, credit or other offset attributable thereto. Such amount payable shall
not exceed 50% of the amount that would have been received if the Intellesale
Sub Group or the ADS Sub Group, as the case may be, had filed as a separate
consolidated group.
7
<PAGE>
(b) At either ADS or Intellesale's request and
expense, the other party shall undertake those actions reasonably necessary to
enable such party to receive the benefit of any Tax Asset.
(c) If, subsequent to the payment by ADS to
Intellesale of any amount referred to in Section 3(a) above, there shall be (A)
a Final Determination under applicable law of a deficiency of Federal Taxes or
Consolidated Non-Federal Taxes of the ADS Consolidated Group or the relevant
group filing Consolidated Non-Federal Tax Returns, on the grounds that the Tax
Asset giving rise to such payment was in fact not available in whole or in part,
or (B) a Final Determination resulting from an audit of the Intellesale Sub
Group (or any successor thereto) which results in a reduction of any Tax Asset
so carried back, Intellesale shall repay to ADS, within 30 days of such Final
Determination, an After-Tax Amount reflecting the amount which would not have
been payable to Intellesale pursuant to this Section 3 had the amount of the
benefit been determined in light of such event.
(d) ADS and the members of the ADS Sub Group agree to
pay Intellesale the detriment to the Intellesale Sub Group (or any successor
thereto) from an adjustment to the ADS Income Tax Liability which results in an
increase of Intellesale liability for any Post-Deconsolidation Tax Period.
Intellesale and the members of the Intellesale Sub Group agree to pay ADS the
benefit received by the Intellesale Sub Group (or any successor thereto) from an
adjustment to the ADS Income Tax Liability which results in a reduction of
Intellesale liability for any Post-Deconsolidation Tax Period. Such
detriment/benefit shall be considered equal to the difference between the amount
of Federal Taxes or Non-Federal Taxes, as the case may be, that would have been
payable by the Intellesale Sub Group and the amount of Federal Taxes or
Non-Federal Taxes, as the case may be, actually payable by the Intellesale Sub
Group, taking into account such adjustment. Payment of such detriment/benefit
shall be made within 30 days of the filing of the applicable Tax Return
(including, without limitation, any amended or estimated return) for the taxable
period for which the benefit is utilized. Intellesale agrees to file such an
applicable Tax Return as soon as practicable after receiving notice from ADS to
the effect that such an adjustment to the ADS Income Tax Liability had been
made.
4. Other Taxes.
Liability for Other Taxes of the Intellesale Sub Group
(including any Tax liability in respect of the operations of the Intellesale Sub
Group prior to the Deconsolidation Date whether or not such operations were
conducted as a division of ADS) shall be the sole responsibility of the
Intellesale Sub Group, and liability for all Other Taxes that are attributable
to the ADS Sub Group (other than any operations of any of the Intellesale Sub
Group operated as a division of ADS) shall be the sole responsibility of the ADS
Sub Group. The ADS Sub Group and the Intellesale Sub Group each agrees to
indemnify and hold the other harmless in accordance with such undertaking.
Any Tax liabilities (including, but not limited to, sales Tax,
stock transfer Tax, documentary Tax and start-up Tax) attributable to the
Deconsolidation, including a public offering of Intellesale stock, shall be the
8
<PAGE>
sole responsibility of Intellesale and none of the members of the ADS Sub Group
shall have any responsibility therefor.
5. Additional Covenants.
(a) Intellesale and ADS shall cooperate (and shall
cause each of their Affiliates to cooperate) fully at such time and to the
extent reasonably requested by the other parties in connection with the
preparation and filing of any return, claim for a refund or other claim with
respect to Taxes or the conduct of any audit, dispute, proceeding, suit or
action concerning any return, amounts indemnifiable hereunder or any other
matter contemplated hereunder. Such cooperation shall include, without
limitation, the following: (i) the retention and provision for inspection on
reasonable request of books, records, documentation or other information
relating to any return until the expiration of the applicable statute of
limitation (giving effect to any extension, waiver or mitigation thereof); (ii)
the provision of additional information and explanation of material provided
under clause (i) of this Section 5(a); (iii) the execution of any document that
may be necessary or helpful in connection with the filing of any return by ADS,
Intellesale or any Affiliate of either, or any audit, proceeding, suit or action
addressed in the preceding sentence; and (iv) the use of the parties' best
efforts to obtain any documentation from a governmental authority or a third
party that may be necessary or helpful in connection with the foregoing.
(b) ADS and Intellesale shall advise each other with
respect to any proposed Tax adjustments relating to the ADS Consolidated Group
or any other consolidated, combined or unitary group of which Intellesale or its
Affiliates have filed with ADS or any of its Affiliates which are the subject of
any Internal Revenue Service or other Tax authority, audit or investigation, or
are the subject of any proceeding or litigation, and which may affect any Tax
attribute of any of the Intellesale Sub Group or the ADS Sub Group (including,
but not limited to, basis in an asset or the amount of earnings and profits).
(c) ADS and Intellesale, as the case may be, shall
promptly furnish to the other upon receipt a copy of any revenue agent's report
or similar report, notice of proposed adjustment, or notice of deficiency
received by ADS, any Affiliate of ADS, Intellesale, or any Affiliate of
Intellesale, as the case may be, relating to the other party's (or its
Affiliate's) obligations under Sections 2 or 3 hereof, or any adjustment
referred to in Section 5(c) hereof. ADS and Intellesale shall cooperate to keep
each other fully informed with respect to any development relating to all
matters described in this Agreement.
(d) ADS shall not without the prior written consent
of Intellesale modify or make any election (except as required by law) with
respect to Taxes affecting or binding on Intellesale or any of its Affiliates
for any taxable period beginning after the Deconsolidation Date. Intellesale
shall not, without the prior written consent of ADS, modify or make any election
(except as required by law) with respect to Taxes affecting or binding on the
ADS Sub Group for any taxable period.
9
<PAGE>
6. Cooperation and Contest.
(a) ADS shall have control over all matters in
respect of any Tax Return filed by ADS, or any Tax audit, dispute or proceeding
(whether administrative or judicial) relating to any Tax matters in respect of
any Tax Return filed by ADS. ADS shall promptly notify Intellesale of any
inquiries from the Internal Revenue Service or any other Tax authority which
relate to matters described in Sections 2(f) and 3. Intellesale shall have
control over all matters in respect of any Tax Return filed by Intellesale or
any Tax audit, dispute or proceeding (whether administrative or judicial)
relating to any Tax matters in respect of any Tax Return filed by Intellesale.
Intellesale shall promptly notify ADS of any inquiries from the Internal Revenue
Service or any other Tax authority which relate or may relate to matters
described in Sections 2(e) and 3.
(b) No settlement of any Internal Revenue Service or
other Tax authority audit relating to any matter which would cause a payment
under Sections 2(e), 2(f) or 3 shall be accepted or entered into by or on behalf
of the party entitled to receive a payment under Sections 2(e), 2(f) or 3,
whichever is applicable (the "Indemnitee"), unless (x) the party ultimately
responsible for such payment under Sections 2(e), 2(f) or 3, whichever is
applicable (the "Indemnitor"), consents thereto in writing (which consent shall
not be unreasonably withheld), or (y) the Indemnitor does not consent and it has
provided the Indemnitee with an opinion of its counsel that there is substantial
authority for the Indemnitor's position.
(c) In the event that a judgment of the United States
Tax Court or other court of competent jurisdiction results in an adverse
determination with respect to any issue which would cause Intellesale to pay ADS
any amount under Sections 2(f) or 3, Intellesale shall have the right to cause
ADS to appeal from such adverse determination at Intellesale's expense if
Intellesale delivers to ADS an opinion from its counsel that such appeal will
more likely than not succeed.
7. Payments.
All Payments to be made hereunder shall be made in immediately
available funds and, unless otherwise provided herein, within 30 days of the
date determined herein.
8. Notices.
All notices, demands, claims, or other communications under
this Agreement shall be in writing and shall be deemed to have been given upon
the delivery or mailing thereof, as the case may be, if delivered personally or
sent by certified mail, return receipt requested, postage prepaid, to the
parties at the following addresses (or at such other address as a party may
specify by notice to the other):
10
<PAGE>
If to ADS, to:
APPLIED DIGITAL SOLUTIONS, INC.
400 Royal Palm Way, Suite 410
Palm Beach , Florida 33480
Attention: Chief Financial Officer
Fax: (561) 366-0002
If to Intellesale, to:
INTELLESALE.COM, INC.
2047 Route 130 North
Burlington, New Jersey 08016
Attention: Chief Financial Officer
Fax: (973) 694-1616
9. Costs and Expenses.
Except as expressly set forth in this Agreement, each party
shall bear its own costs and expenses incurred pursuant to this Agreement. ADS
shall receive reimbursement for any expenses in respect of any Return filed by
ADS on behalf of Intellesale. Such expenses shall include any services performed
by ADS on behalf of Intellesale at the rate of $150 per hour for officers of ADS
and $50 per hour for non-officers of ADS.
10. Termination and Survival.
Notwithstanding anything in this Agreement to the contrary,
this Agreement shall remain in effect and its provisions shall survive for the
full period of all applicable statutes of limitation (giving effect to any
extension, waiver or mitigation thereof).
11. Section Headings.
The section headings contained in this Agreement are for
reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
12. Amendments; No Waivers.
(a) Any provision of this Agreement may be amended or
waived if, and only if, such amendment or waiver is in writing and signed, in
the case of an amendment, by ADS and Intellesale or, in the case of a waiver, by
the party against whom the waiver is to be effective.
(b) No failure or delay by any party in exercising
any right, power or privilege hereunder shall operate as a waiver thereof nor
shall any single or partial exercise thereof preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
11
<PAGE>
13. Governing Law and Interpretation.
(a) This Agreement shall be governed by and construed
in accordance with the laws of the State of Missouri.
(b) Any disagreement between the parties hereto with
respect to this Agreement, other than Sections 2 and 3, not resolved by mutual
agreement of the parties shall be settled by arbitration in the City of St.
Louis, State of Missouri in accordance with the Rules of the American
Arbitration Association, and judgment upon the award so rendered may be entered
in any court having jurisdiction thereof.
14. Counterparts.
This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original, but all of which together shall
constitute one and the same instrument.
15. Assignment.
This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors, provided that no
party may assign, delegate or otherwise transfer any of its rights or
obligations under this Agreement without the consent of the other parties
hereto.
--------------------------------
12
<PAGE>
THIS AGREEMENT CONTAINS BINDING ARBITRATION PROVISIONS WHICH MAY
BE ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Agreement as of the day and year first above written.
APPLIED DIGITAL SOLUTIONS, INC. PORT PARTIES, LTD.
By: ___________________________ By: ___________________________
Its: President Its: President
Intellesale.COM, INC. BLUE STAR ELECTRONICS, INC.
By: ___________________________ By: ___________________________
Its: President Its: President
PIZARRO RE-MARKETING, INC. CONSOLIDATED MICRO
COMPONENTS, INC.
By: ___________________________ By: ___________________________
Its: President Its: President
NORCOM RESOURCES, INC. DATA PATH TECHNOLOGIES, INC.
By: ___________________________ By: ___________________________
Its: President Its: President
CYBERTECH STATION, INC. INTERNET MARKETING AND
RESEARCH, INC.
By: ___________________________ By: ___________________________
Its: President Its: President
13
<PAGE>
GDB SOFTWARE SERVICES, INC. BOSTEK, INC.
By: ___________________________ By: ___________________________
Its: President Its: President
SERVICE TRANSPORT COMPANY FISCAL ADVANTAGE CORPORATION
By: ___________________________ By: ___________________________
Its: President Its: President
14
Exhibit 10.8
[OBJECT OMITTED]
August 23, 1999
Paul Pappas
60 Knickerbacher Road, #20
Dumont, NJ 07628
Dear Paul:
This letter is to confirm our agreement as follows:
1. On or before August 30, 1999, you shall transfer all of your
shares of capital stock in Blue Star Electronics, Inc. (free and
clear of all claims, liens or encumbrances) to Intellesale.com,
Inc. ("Intellesale") by sending the following: (a) the
certificate or certificates representing the shares of capital
stock of Blue Star Electronics, Inc. owned by you, and (b) a
stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction of all
future obligations to you under the Agreement of Sale, dated
April 1, 1998, as amended, Intellesale will, within 30 days of
the closing of an initial public offering of common stock of
Intellesale (an "IPO"), do the following:
(a) pay you, by check or wire transfer, the amount of
$88,000, and
(b) issue to you shares of common stock of Intellesale
having an aggregate value of $87,000 (such value being
based on the per share offering price of common stock
in the IPO).
3. You must notify the Company your wire transfer information
in case the Company chooses to pay this amount by wire transfer.
<PAGE>
4. If an IPO has not occurred by April 1, 2000, then you may
require Intellesale to return to you any shares you transferred
to Intellesale pursuant to Paragraph 1, and this letter agreement
shall terminate with no further obligation of Intellesale or you.
5. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity security
in Blue Star Electronics, Inc.
The share certificates and stock power referred to in Paragraph 1
should be sent by overnight mail to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
---------------------
Name: Marc Sherman
Title: President
Agreed to and accepted:
By: /s/ Paul Pappas
---------------------
Paul Pappas
Exhibit 10.9
[OBJECT OMITTED]
August 23, 1999
Sherri Sheerr
2021 Country Club Drive
Doylestown, PA 18901
Dear Sherri:
This letter is to confirm our agreement as follows:
1. On or before August 30, 1999, you shall transfer all of your
shares of capital stock in Cybertech Station, Inc. (free and
clear of all claims, liens or encumbrances) to Intellesale.com,
Inc. ("Intellesale") by sending the following:
(a) the certificate or certificates representing the shares
of capital stock of Cybertech Station, Inc. owned by
you, and
(b) a stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction of all
future obligations to you under the Agreement of Sale, dated
October 8, 1997, as amended, Intellesale will, within 30 days of
the closing of an initial public offering of common stock of
Intellesale (an "IPO"), do the following:
(a) pay you, by check or wire transfer, the amount of
$208,000, and
(b) issue to you shares of common stock of Intellesale
having an aggregate value of $207,000 (such value being
based on the per share offering price of common stock
in the IPO).
3. You must notify the Company your wire transfer information
in case the Company chooses to pay this amount by wire transfer.
<PAGE>
4. If an IPO has not occurred by April 1, 2000, then you may
require Intellesale to return to you any shares you transferred
to Intellesale pursuant to Paragraph 1, and this letter agreement
shall terminate with no further obligation of Intellesale or you.
5. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity security
in Cybertech Station, Inc.
The share certificates and stock power referred to in Paragraph 1
should be sent by overnight mail to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
-----------------------
Name: Marc Sherman
Title: President
Agreed to and accepted:
By: /s/ Sherri Sheer
---------------------
Sherri Sheerr
Exhibit 10.10
[OBJECT OMITTED]
August 23, 1999
Harvey H. Newman
40 East 80th Street
New York, NY 10021
Dear Harvey:
This letter is to confirm our agreement as follows:
1. On or before August 30, 1999, you shall transfer all of your
shares of capital stock in Port Parties, Ltd. (free and clear of
all claims, liens or encumbrances) to Intellesale.com, Inc.
("Intellesale") by sending the following:
(a) the certificate or certificates representing the shares
of capital stock of Port Parties, Ltd. owned by you,
and
(b) a stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction of all
future obligations to you under the Agreement of Sale, dated
October 21, 1997, as amended, Intellesale will, within 30 days of
the closing of an initial public offering of common stock of
Intellesale (an "IPO"), do the following:
(a) pay you, by check or wire transfer, the amount of
$1,020,000, and
(b) issue to you shares of common stock of Intellesale
having an aggregate value of $1,020,000 (such value
being based on the per share offering price of common
stock in the IPO).
3. You must notify the Company your wire transfer information
in case the Company chooses to pay this amount by wire transfer.
<PAGE>
4. If an IPO has not occurred by April 1, 2000, then you may
require Intellesale to return to you any shares you transferred
to Intellesale pursuant to Paragraph 1, and this letter agreement
shall terminate with no further obligation of Intellesale or you.
5. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity security
in Port Parties, Ltd.
The share certificates and stock power referred to in Paragraph 1
should be sent by overnight mail to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
-----------------------
Name: Marc Sherman
Title: President
Agreed to and accepted:
By: /s/ Harvey H. Newman
----------------------
Harvey H. Newman
Exhibit 10.11
[OBJECT OMITTED]
August 23, 1999
Martin D. Zuckerman
604 Carlyle Street
Cederhurst, NY 11516
Dear Marty:
This letter is to confirm our agreement as follows:
1. On or before August 30, 1999, you shall transfer all of your
shares of capital stock in Port Parties, Ltd. (free and clear of
all claims, liens or encumbrances) to Intellesale.com, Inc.
("Intellesale") by sending the following:
(a) the certificate or certificates representing the shares
of capital stock of Port Parties, Ltd. owned by you,
and
(b) a stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction of all
future obligations to you under the Agreement of Sale, dated
October 21, 1997, as amended, Intellesale will, within 30 days of
the closing of an initial public offering of common stock of
Intellesale (an "IPO"), do the following:
(a) pay you, by check or wire transfer, the amount of
$980,000, and
(b) issue to you shares of common stock of Intellesale
having an aggregate value of $980,000 (such value being
based on the per share offering price of common stock
in the IPO).
3. You must notify the Company your wire transfer information
in case the Company chooses to pay this amount by wire transfer.
<PAGE>
4. If an IPO has not occurred by April 1, 2000, then you may
require Intellesale to return to you any shares you transferred
to Intellesale pursuant to Paragraph 1, and this letter agreement
shall terminate with no further obligation of Intellesale or you.
5. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity security
in Port Parties, Ltd.
The share certificates and stock power referred to in Paragraph 1
should be sent by overnight mail to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
-----------------------
Name: Marc Sherman
Title: President
Agreed to and accepted:
By: /s/ Martin D. Zuckerman
------------------------
Martin D. Zuckerman
Exhibit 10.12
[OBJECT OMITTED]
August 23, 1999
Carl C. Saracino
23 2nd St.
Bordentown, NJ 08505
Dear Carl:
This letter is to confirm our agreement as follows:
1. On or before August 30, 1999, you shall transfer all of your
shares of capital stock in Service Transport Company (free and
clear of all claims, liens or encumbrances) to Intellesale.com,
Inc. ("Intellesale") by sending the following:
(a) the certificate or certificates representing the shares
of capital stock of Service Transport Company owned by
you, and
(b) a stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction of all
future obligations to you under the Agreement of Sale, dated
March 31, 1998, as amended, Intellesale will, within 30 days of
the closing of an initial public offering of common stock of
Intellesale (an "IPO"), issue to you 50,000 shares of common
stock of Intellesale.
3. If an IPO has not occurred by April 1, 2000, then you may
require Intellesale to return to you any shares you transferred
to Intellesale pursuant to Paragraph 1, and this letter agreement
shall terminate with no further obligation of Intellesale or you.
<PAGE>
4. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity security
in Service Transport Company.
The share certificates and stock power referred to in Paragraph 1
should be sent by overnight mail to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
-----------------------
Name: Marc Sherman
Title: President
Agreed to and accepted:
By: /s/ Carl C. Saracino
----------------------
Carl C. Saracino
Exhibit 10.13
[OBJECT OMITTED]
August 23, 1999
Donna W. Pizarro
6717 Levelland Drive
Dallas, TX 75252
Dear Donna:
This letter is to confirm our agreement as follows:
1. On or before August 30, 1999, you shall transfer all of your
shares of capital stock in Pizarro Re-Marketing, Inc. (free and
clear of all claims, liens or encumbrances) to Intellesale.com,
Inc. ("Intellesale") by sending the following:
(a) the certificate or certificates representing the shares
of capital stock of Pizarro Re-Marketing, Inc. owned by
you, and
(b) a stock power (one is included with this letter).
2. In exchange for your shares and in full satisfaction of all
future obligations to you under the Agreement of Sale, dated
March 24, 1997, as amended, Intellesale will, within 30 days of
the closing of an initial public offering of common stock of
Intellesale (an "IPO"), pay you, by check or wire transfer, the
amount of $500,000.
3. You must notify the Company your wire transfer information
in case the Company chooses to pay this amount by wire transfer.
4. If an IPO has not occurred by April 1, 2000, then you may
require Intellesale to return to you any shares you transferred
to Intellesale pursuant to Paragraph 1, and this letter agreement
shall terminate with no further obligation of Intellesale or you.
<PAGE>
5. After giving effect to the transfer in Paragraph 1, you
represent and warrant that you will not own any equity security
in Pizarro Re-Marketing, Inc.
The share certificates and stock power referred to in Paragraph 1
should be sent by overnight mail to:
Ed Cummings
Intellesale.com
2047 Rte. 130 North
Burlington, NJ 08016
Very truly yours,
INTELLESALE.COM, INC.
By: /s/ Marc Sherman
-----------------------
Name: Marc Sherman
Title: President
Agreed to and accepted:
By: /s/ Donna W. Pizzaro
---------------------
Donna W. Pizarro
Exhibit 10.16
AMENDMENT TO AGREEMENT OF SALE
THIS AMENDMENT AGREEMENT made this 1st day of April, 1999 by and among
Applied Cellular Technology, Inc. ("ACT"), Universal Commodities Corporation,
("Buyer"), Patrick C. Chai ("Chai") and Robert W. Borra ["Borra" hereinafter
collectively referred to as "Sellers"] and GDB Software Services, Inc., a New
York corporation ("Acquiree").
WHEREAS, the parties entered into an Agreement of Sale dated June 30,
1998 (the "Agreement of Sale") whereby Buyer acquired one hundred percent (100%)
of the issued and outstanding shares of Acquiree; and
WHEREAS, the Buyer is in the process of preparing for an Initial
Public Offering ("IPO"); (the tentative name of such corporation is "Inteletek,
Inc."); and
WHEREAS, such Agreement of Sale contained a provision whereby the
Acquiree, could upon the achievement of certain agreed upon EBIT amounts, earn
additional payments, defined in Section 2.2(c) of such Agreement of Sale as
Additional Consideration.
WHEREAS, the parties wish to fix the amount of such "Additional
Consideration" and method and manner of payment.
NOW, THEREFORE, in exchange for the mutual covenants contained herein
and other good and valuable consideration, the parties agree as follows:
1. Additional Consideration. The total amount to be paid as Additional
Consideration shall be One Million Five Hundred Thousand Dollars
($1,500,000.00), and shall be paid to Sellers by Buyer, at its sole discretion,
in a combination of either cash and/or shares of the restricted common stock of
Inteletek, Inc. ("Inteletek Stock"). The ratio of cash and/or Inteletek Stock
that is paid by Buyer shall be determined by Buyer at the time of payment. The
valuation of the Inteletek Stock conveyed to Sellers shall be determined as the
"Offering Price" of the Inteletek Stock at the time of the IPO. The allocation
of the Additional Consideration; unless otherwise agreed, shall be apportioned
equally between Chai and Borra.
Such Inteletek Stock shall be restricted for a one (1) year
period from the date of issuance.
The parties agree that, if necessary, Sellers shall enter into a
Registration Rights Agreement which shall more clearly define the parties'
rights and obligations with regard to the Inteletek Stock issued pursuant to
this Agreement.
2. Registration Rights. In the event that Inteletek Stock is issued to
Sellers pursuant to this Amendment Agreement, such Inteletek Stock shall be
issued in accordance with the Registration Rights Agreement and shall contain
the following restricted legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and are
<PAGE>
"restricted securities" as that term is defined in Rule 144 under the
Act. The shares may not be sold or offered for sale except pursuant to
an effective registration statement under the Securities Act of 1933
or an opinion of counsel for the corporation that registration is not
required under such Act."
Inteletek shall make very good faith effort to prepare and
file a Registration Statement with respect to such Inteletek Stock
conveyed hereunder within one (1) year of the date of issuance.
3. Additional Consideration. The parties agree that this Amendment
Agreement shall supercede and replace all the obligations and duties under the
Additional Consideration provision as provided for in the Agreement of Sale and
that the payment of the amount as hereinabove provided shall be construed as the
full and complete payment of the amounts due under the Agreement of Sale.
4. Rights of Recession. In the event that Inteletek is not able to
successfully complete the IPO within one (1) year of the date of this Amendment
Agreement, this Amendment Agreement shall be terminated and the parties' rights
with regard to any payment of the Additional Consideration shall revert to those
as provided in the Agreement of Sale.
5. Miscellaneous.
5.1 Further Assurances. At any time, and from time to time, after
the date of this Amendment Agreement, each party will execute such additional
instruments and take such action as may be reasonably requested by the other
party to confirm or perfect title to any property transferred hereunder or
otherwise to carry out the intent and purposes of this Amendment Agreement.
5.2 Waiver. Any failure on the part of any party hereto to comply
with any of its obligations, agreements or conditions hereunder may be waived in
writing by the party to whom such compliance is owed.
5.3 Arbitration. Any and all disputes and differences between or
among the parties with respect to the construction or performance of the terms
of this Amendment Agreement which cannot be resolved amicably shall be resolved
by arbitration before the American Arbitration Association in accordance with
its rule then sitting in the State of New Jersey.
5.4 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have given if delivered in person or if
sent by prepaid first class registered or certified mail, return receipt
requested, fax or recognized courier then upon receipt thereof to the following
addresses:
2
<PAGE>
To Sellers: Patrick C. Chai
106 Sterling Court
Muttontown, NY 11791
Robert W. Borra
206 High Pasture Circle
Dix Hills, NY 11746
To Acquiree: GDB Software Services, Inc.
125 Michael Drive
Syosset, NY 11791
With copies to: Michael Kane, Esquire
Kane & Silverman, P.C.
2401 Pennsylvania Avenue
Suite 1C44
Philadelphia, PA 19130
To ACT: Applied Cellular Technology, Inc.
400 Royal Palm Way, Suite 410
Palm Beach, Florida 33480
ATT: Garrett A. Sullivan
with copies to: Paul D. Creme, Esquire
Merra, Kanakis, Creme & Mellor, P.C.
60 Main Street
Nashua, NH 03060
To Buyer: Universal Commodities Corporation
2047 Rt. 130 North
Burlington, NJ 08016
ATT: Marc Sherman
5.5 Headings. The section and subsection headings in this Amendment
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Amendment Agreement.
5.6 Counterparts. This Amendment Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
5.7. Governing Law. The laws of the State of New Jersey shall
govern this Amendment Agreement.
3
<PAGE>
5.8 Binding Effect. This Amendment Agreement shall be binding upon
the parties hereto and inure to the benefit of the parties, their respective
heirs, administrators, executors, successors and assigns.
5.9 Entire Agreement. This Amendment Agreement is the entire
agreement of the parties covering everything agreed upon or understood in the
transaction. In instances of inconsistencies between this Amendment Agreement
and the Agreement of Sale the former shall govern. There are no oral promises,
conditions, representations, understandings, interpretations or terms of any
kind as conditions or inducements to the execution hereof, and except as
modified herein the terms and conditions of the Agreement of Sale, shall remain
in full force and effect.
5.10 Severability. If any part of this Amendment Agreement is
deemed to be unenforceable the balance of this Amendment Agreement shall remain
in full force and effect.
THE BALANCE OF THIS PAGE HAS BEEN
INTENTIONALLY LEFT BLANK
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement
the day and year first above written.
GDB SOFTWARE SERVICES, INC. ( "Acquiree")
By: /s/ Patrick C. Chai
--------------------------------------
Patrick C. Chai
Its duly authorized President
SELLERS:
By: Patrick C. Chai
--------------------------------------
Patrick C. Chai
By: /s/ Robert W. Borra
--------------------------------------
Robert W. Borra
APPLIED CELLULAR TECHNOLOGY, INC.
By: /s/ Garrett A. Sullivan
--------------------------------------
Garrett A. Sullivan
Its duly authorized President
UNIVERSAL COMMODITIES CORPORATION
("Buyer")
By: /s/ Marc Sherman
--------------------------------------
Marc Sherman
Its duly authorized President
5
Exhibit 10.17
AMENDMENT TO ASSET PURCHASE AGREEMENT
THIS AMENDMENT AGREEMENT made this 1st day of April, 1999 by and
among Inteletek, Inc., ("Purchaser"), Charles J. Phillips ("Shareholder") and
Fiscal Advantage Corporation, a Texas corporation ("Seller").
WHEREAS, the parties entered into an Asset Purchase Agreement
dated January 4, 1999 (the "Asset Purchase Agreement") whereby Purchaser agreed
to purchase and Seller agreed to sell certain assets of the Seller; and
WHEREAS, the Purchaser is in the process of preparing for an
Initial Public Offering ("IPO"); (the tentative name of such corporation is
"Inteletek, Inc."); and
WHEREAS, such Asset Purchase Agreement contained a provision
whereby the Seller, could upon the achievement of certain agreed upon "Projected
EBIT Amounts," earn additional payments, defined in Section 3.1(ii) and 3.1(iii)
of such Asset Purchase Agreement as "Earnout Payments."
WHEREAS, the parties wish to fix the amounts of such "Earnout
Payments" and method and manner of payment.
NOW, THEREFORE, in exchange for the mutual covenants contained
herein and other good and valuable consideration, the parties agree as follows:
1. Earnout Payments. The total amount to be paid as Earnout
Payments shall be Two Hundred Fifty Thousand Dollars ($250.000.00) and shall be
paid to Seller by Purchaser, at its sole discretion, in a combination of either
cash and/or shares of the restricted common stock of Inteletek, Inc. ("Inteletek
Stock"). The ratio of cash and/or Inteletek Stock that is paid by Purchaser
shall be determined by Purchaser at the time of payment. The valuation of the
Inteletek Stock conveyed to Seller shall be determined as the "Offering Price"
of the Inteletek Stock at the time of the IPO.
Such Inteletek Stock shall be restricted for a one year (1)
period from the date of issuance.
The parties agree that, if necessary, Shareholder shall enter
into a Registration Rights Agreement which shall more clearly define the
parties' rights and obligations with regard to the Inteletek Stock issued
pursuant to this Agreement.
2. Registration Rights. In the event that Inteletek Stock is
issued to Seller pursuant to this Amendment Agreement, such Inteletek Stock
shall be issued in accordance with the Registration Rights Agreement and shall
contain the following restricted legend:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933 and are "restricted
securities" as that term is defined in Rule 144 under the Act.
<PAGE>
The shares may not be sold or offered for sale except pursuant to
an effective registration statement under the Securities Act of
1933 or an opinion of counsel for the corporation that
registration is not required under such Act."
Inteletek shall make very good faith effort to prepare and
file a Registration Statement with respect to such Inteletek
Stock conveyed hereunder within one (1) year of the date of
issuance.
3. Earnout Payments. The parties agree that this Amendment
Agreement shall supercede and replace all the obligations and duties under the
Earnout Payments provision as provided for in the Asset Purchase Agreement and
that the payment of the amount as hereinabove provided shall be construed as the
full and complete payment of the amounts due under the Asset Purchase Agreement.
4. Rights of Recession. In the event that Inteletek is not able
to successfully complete the IPO within one (1) year of the date of this
Amendment Agreement, this Amendment Agreement shall be terminated and the
parties' rights with regard to any payment of the Earnout Payment shall revert
to those as provided in the Asset Purchase Agreement.
5. Miscellaneous.
5.1. Further Assurances. At any time, and from time to time,
after the date of this Amendment Agreement, each party will execute such
additional instruments and take such action as may be reasonably requested by
the other party to confirm or perfect title to any property transferred
hereunder or otherwise to carry out the intent and purposes of this Amendment
Agreement.
5.2. Waiver. Any failure on the part of any party hereto to
comply with any of its obligations, agreements or conditions hereunder may be
waived in writing by the party to whom such compliance is owed.
5.3. Arbitration. Any and all disputes and differences between
or among the parties with respect to the construction or performance of the
terms of this Amendment Agreement which cannot be resolved amicably shall be
resolved by arbitration before the American Arbitration Association in
accordance with its rule then sitting in the State of New Jersey.
5.4. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have given if delivered in person or
if sent by prepaid first class registered or certified mail, return receipt
requested, fax or recognized courier then upon receipt thereof to the following
addresses:
To Shareholder: Charles J. Phillips
1716 Barclay Drive
Richardson, TX 75081
2
<PAGE>
To Seller: Fiscal Advantage Corporation
1144 N. Plano Road, Suite 137
Richardson, TX 75081
To Purchaser: Inteletek, Inc.
2047 Rt. 130 North
Burlington, NJ 08016
ATT: Marc Sherman
with copies to: Paul D. Creme, Esquire
Merra, Kanakis, Creme & Mellor, P.C.
60 Main Street
Nashua, NH 03060
5.5. Headings. The section and subsection headings in this
Amendment Agreement are inserted for convenience only and shall not affect in
any way the meaning or interpretation of this Amendment Agreement.
5.6. Counterparts. This Amendment Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
5.7. Governing Law. The laws of the State of New Jersey shall
govern this Amendment Agreement.
5.8. Binding Effect. This Amendment Agreement shall be binding
upon the parties hereto and inure to the benefit of the parties, their
respective heirs, administrators, executors, successors and assigns.
5.9. Entire Agreement. This Amendment Agreement is the entire
agreement of the parties covering everything agreed upon or understood in the
transaction. In instances of inconsistencies between this Amendment Agreement of
Sale the former shall govern. There are no oral promises, conditions,
representations, understandings, interpretations or terms of any kind as
conditions or inducements to the execution hereof, and except as modified herein
the terms and conditions of the Agreement of Sale, shall remain in full force
and effect.
5.10. Severability. If any part this Amendment Agreement is
deemed to be unenforceable the balance of this Amendment shall remain in full
force and effect.
THE BALANCE OF THIS PAGE HAS BEEN
INTENTIONALLY LEFT BLANK
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
Agreement the day and year first above written.
FISCAL ADVANTAGE CORPORATION
("Seller")
By: /s/ Charles J. Phillips
-----------------------------------
Charles J. Phillips
Its duly authorized President
SHAREHOLDER:
By: /s/ Charles J. Phillips
-----------------------------------
Charles J. Phillips
INTELETEK, INC.
("Purchaser")
By: /s/ Marc Sherman
-----------------------------------
Marc Sherman
Its duly authorized President
4
Exhibit 10.18
AMENDMENT TO AGREEMENT AND PLAN OF CLASS B REORGANIZATION
THIS AMENDMENT AGREEMENT made this 1st day of April, 1999 by
and among Applied Cellular Technology, Inc. ("ACT"), Universal Commodities
Corporation, ("Buyer"), Donn J. Wagner ("Donn Wagner"), Angela S. Wagner
("Angela Wagner"), Edward M. Kelly ("Edward Kelly") and Eileen E. Kelly
[("Eileen Kelly") together with Donn Wagner, Angela Wagner and Edward Kelly,
collectively the Sellers] and Data Path Technologies, Inc., a New York
corporation ("Acquiree").
WHEREAS, the parties entered into an Agreement and Plan of
Class B Reorganization dated June 30, 1998 (the "Agreement and Plan of Class B
Reorganization") whereby Buyer acquired one hundred percent (100%) of the issued
and outstanding shares of Acquiree; and
WHEREAS, the Buyer is in the process of preparing for an
Initial Public Offering ("IPO"); (the tentative name of such corporation is
"Inteletek, Inc."); and
WHEREAS, such Agreement and Plan of Class B Reorganization
contained a provision whereby the Acquiree, could upon the achievement of
certain agreed upon EBIT amounts, earn additional payments, defined in Section
2.2(c) of such Agreement and Plan of Class B Reorganization as Additional
Consideration.
WHEREAS, the parties wish to fix the amount of such
"Additional Consideration" and method and manner of payment.
NOW, THEREFORE, in exchange for the mutual covenants contained
herein and other good and valuable consideration, the parties agree as follows:
1. Additional Consideration. The total amount to be paid as
Additional Consideration shall be Two Million Dollars ($2,000,000.00), and shall
be paid to Sellers by Buyer, at its sole discretion, in a combination of either
cash and/or shares of the restricted common stock of Inteletek, Inc. ("Inteletek
Stock"). The ratio of cash and/or Inteletek Stock that is paid by Buyer shall be
determined by Buyer at the time of payment, provided however that in no event
shall Sellers receive less than seventy percent (70%) of such payment in cash.
The balance shall be paid in stock pursuant to this Agreement. The valuation of
the Inteletek Stock conveyed to Seller shall be determined as the "Offering
Price" of the Inteletek Stock at the time of the IPO. The allocation of the
Additional Consolidation, unless otherwise agreed shall be apportioned equally
among Donn Wagner, Angela Wagner, Edward Kelly and Eileen Kelly.
Such Inteletek Stock shall be restricted for a one (1) year
period from the date of issuance.
The parties agree that, if necessary, Seller shall enter into
a Registration Rights Agreement which shall more clearly define the parties'
<PAGE>
rights and obligations with regard to the Inteletek Stock issued pursuant to
this Agreement.
2. Registration Rights. In the event that Inteletek Stock is
issued to Seller pursuant to this Amendment to Agreement and Plan of Class B
Reorganization, such Inteletek Stock shall be issued in accordance with the
Registration Rights Agreement and shall contain the following restricted legend:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933 and are
"restricted securities" as that term is defined in Rule under
the Act. The shares may not be sold or offered for sale except
pursuant to an effective registration statement under the
Securities Act of 1933 or an opinion of counsel for the
corporation that registration is not required under such Act."
Inteletek shall make very good faith effort to
prepare and file a Registration Statement with respect to such
Inteletek Stock conveyed hereunder within one (1) year of the
date of issuance.
3. Additional Consideration. The parties agree that this
Amendment Agreement and Plan of Class B Reorganization shall supercede and
replace all the obligations and duties under the Additional Consideration
provision as provided for in the Agreement and Plan of Class B Reorganization
and that the payment of the amount as hereinabove provided shall be construed as
the full and complete payment of the amounts due under the Amendment Agreement
and Plan of Class B Reorganization.
4. Rights of Recession. In the event that Inteletek is not
able to successfully complete the IPO within one (1) year of the date of this
Amendment Agreement and Plan of Class B Reorganization, this Amendment Agreement
and Plan of Class B Reorganization shall be terminated and the parties' rights
with regard to any payment of the Additional Consideration shall revert to those
as provided in the Amendment to Agreement and Plan of Class B Reorganization.
5. Miscellaneous.
5.1 Further Assurances. At any time, and from
time to time, after the date of this Amendment to Agreement and Plan of Class B
Reorganization, each party will execute such additional instruments and take
such action as may be reasonably requested by the other party to confirm or
perfect title to any property transferred hereunder or otherwise to carry out
the intent and purposes of this Amendment to Agreement and Plan of Class B
Reorganization.
5.2 Waiver. Any failure on the part of any
party hereto to comply with any of its obligations, agreements or conditions
hereunder may be waived in writing by the party to whom such compliance is owed.
5.3 Arbitration. Any and all disputes and
differences between or among the parties with respect to the construction or
performance of the terms of this Amendment to Agreement and Plan of Class B
2
<PAGE>
Reorganization which cannot be resolved amicably shall be resolved by
arbitration before the American Arbitration Association in accordance with its
rule then sitting in the State of New Jersey.
5.4 Notices. All notices and other
communications hereunder shall be in writing and shall be deemed to have given
if delivered in person or if sent by prepaid first class registered or certified
mail, return receipt requested, fax or recognized courier then upon receipt
thereof to the following addresses:
To Sellers: Donn J. Wagner and
Angela S. Wagner
83 East Street
South Salem, NY 10590
and
Edward M. Kelly and
Eileen E. Kelly
247-38 39th Street
Little Neck, NY 11352
To Acquiree: Data Path Technologies, Inc.
220 Tompkins Avenue
Pleasantville, NY 10570
With copies to: Nathaniel S. Gore, Esquire
Zuckerman, Gore & Brandeis, LLP
900 Third Avenue
New York, NY 10001
To ACT Applied Cellular Technology, Inc.
400 Royal Palm Way, Suite 410
Palm Beach, FL 33480
ATT: Garrett A. Sullivan
with copies to: Paul D. Creme, Esquire
Merra, Kanakis, Creme & Mellor, P.C.
60 Main Street
Nashua, NH 03060
To Buyer: Universal Commodities Corporation
2047 Rt. 130 North
Burlington, NJ 08016
ATT: Marc Sherman
5.5 Headings. The section and subsection
headings in this Amendment to Agreement and Plan of Class B Reorganization are
3
<PAGE>
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Amendment to Agreement and Plan of Class B
Reorganization.
5.6 Counterparts. This Amendment to Agreement
and Plan of Class B Reorganization may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.7 Governing Law. The laws of the State of New
Jersey shall govern this Amendment to Agreement and Plan of Class B
Reorganization.
5.8 Binding Effect. This Amendment to Agreement
and Plan of Class B Reorganization shall be binding upon the parties hereto and
inure to the benefit of the parties, their respective heirs, administrators,
executors, successors and assigns.
5.9 Entire Agreement. This Amendment to
Agreement and Plan of Class B Reorganization is the entire agreement of the
parties covering everything agreed upon or understood in the transaction. In
instances of inconsistencies between this Amendment to Agreement and Plan of
Class B Reorganization and the Agreement of Sale the former shall govern. There
are no oral promises, conditions, representations, understandings,
interpretations or terms of any kind as conditions or inducements to the
execution hereof, and except as modified herein the terms and conditions of the
Amendment of Agreement and Plan of Class B Reorganization, shall remain in full
force and effect.
5.10 Severability. If any part of this Amendment
to Agreement and Plan of Class B Reorganization is deemed to be unenforceable
the balance of this Amendment to Agreement and Plan of Class B Reorganization
shall remain in full force and effect.
THE BALANCE OF THIS PAGE HAS BEEN
INTENTIONALLY LEFT BLANK
4
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment
to Agreement and Plan of Class B Reorganization the day and year first above
written.
DATA PATH TECHNOLOGIES, INC. ("Acquiree")
By:
--------------------------------------
Donn J. Wagner
Its duly authorized President
SELLERS:
By:
--------------------------------------
Donn J. Wagner
By:
--------------------------------------
Angela S. Wagner
By:
--------------------------------------
Edward M. Kelly
By:
--------------------------------------
Eileen M. Kelly
APPLIED CELLULAR TECHNOLOGY, INC.
("ACT")
By:
--------------------------------------
Garrett A. Sullivan
Its duly authorized President
UNIVERSAL COMMODITIES CORPORATION
("Buyer")
By:
--------------------------------------
Marc Sherman
Its duly authorized President
5
Exhibit 10.19
FORM OF
INDEMNIFICATION AGREEMENT
This Indemnification Agreement, dated as of ____________ ___,
1999, is made by and between Intellesale.com, Inc. a Delaware corporation (the
"Company"), and ____________________ (the "Indemnitee"), an "agent" (as
hereinafter defined) of the Company.
RECITALS
A. The Company recognizes that competent and experienced
persons are increasingly reluctant to serve as directors or executive officers
of corporations unless they are protected by comprehensive liability insurance
or indemnification, or both, due to increased exposure to litigation costs and
risks resulting from their service to such corporations, and due to the fact
that the exposure frequently bears no reasonable relationship to the
compensation of such directors and executive officers;
B. The statutes and judicial decisions regarding the duties of
directors and executive officers are often difficult to apply, ambiguous or
conflicting, and therefore fail to provide such directors and executive officers
with adequate, reliable knowledge of legal risks to which they are exposed or
information regarding the proper course of action to take;
C. The Company and the Indemnitee recognize that plaintiffs
often seek damages in such large amounts and the costs of litigation may be so
enormous (whether or not the case is meritorious), that the defense and/or
settlement of such litigation is often beyond the personal resources of
directors and executive officers;
D. The Company believes that it is unfair for its directors
and executive officers to assume the risk of huge judgments and other expenses
which may occur in cases in which the director or executive officer received no
personal profit and in cases where the director or executive officer was not
culpable;
E. The Company, after reasonable investigation, has determined
that the liability insurance coverage presently available to the Company is
inadequate to cover all possible exposure for which the Indemnitee should be
protected. The Company believes that the interests of the Company and its
stockholders would best be served by a combination of such insurance and the
indemnification by the Company of the directors and executive officers of the
Company,
F. Section 145 of the General Corporation Law of Delaware
("Section 145"), under which the Company is organized, empowers the Company to
indemnify its directors, officers, employees and agents by agreement and to
indemnify persons who serve, at the request of the Company, as the directors,
officers, employees or agents of other corporations or enterprises, and
expressly provides that the indemnification provided by Section 145 is not
exclusive;
<PAGE>
G. The Board of Directors has determined that contractual
indemnification as set forth herein is not only reasonable and prudent but
necessary to promote the best interests of the Company and its stockholders;
H. The Company desires and has requested the Indemnitee to
serve or continue to serve as a director or executive officer of the Company
free from undue concern for claims for damages arising out of or related to such
services to the Company; and
I. The Indemnitee is willing to serve, or to continue to
serve, the Company, only on the condition that he is furnished the indemnity
provided for herein.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth below, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Definitions.
(a) Agent. For purposes of this Agreement, "agent" of the
Company means any person who is or was a director, officer, employee or other
agent of the Company or a subsidiary of the Company, or is or was serving at the
request of, for the convenience of, or to represent the interest of the Company
or a subsidiary of the Company as a director, officer, employee or agent of
another foreign or domestic corporation, partnership, joint venture, trust or
other enterprise.
(b) Expenses. For purposes of this Agreement, "expenses"
includes all direct and indirect costs of any type or nature whatsoever
(including, without limitation, all attorneys' fees and related disbursements
and other out-of-pocket costs), actually and reasonably incurred by the
Indemnitee in connection with either the investigation, defense or appeal of a
proceeding or establishing or enforcing a right to indemnification under this
Agreement, Section 145 or otherwise, and amounts paid in settlement by or on
behalf of the Indemnitee, but shall not include any final judgments, fines or
penalties actually levied against the Indemnitee.
(c) Proceedings. For the purposes of this Agreement,
"proceeding" means any threatened, pending or completed action, suit or other
proceeding, whether civil, criminal, administrative or investigative.
(d) Subsidiary. For purposes of this Agreement, "subsidiary"
means any corporation of which more than 50% of the outstanding voting
securities are owned directly or indirectly by the Company, by the Company and
one or more other subsidiaries or by one or more other subsidiaries.
(e) Definitions Relating to Employee Benefit Plans. For
purpose of this Agreement, "other enterprise" shall include employee benefit
plans; references to "fines" shall include any excise tax assessed with respect
to any employee benefit plans; references to "serving at the request of the
Company" shall include any service as a director, officer, employee or agent of
2
<PAGE>
the Company which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and any person who acts in good faith and in a
manner he reasonably believes to be in the best interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Company" as referred to in this
Agreement.
2. Agreement to Serve. The Indemnitee agrees to serve and/or
continue to serve as an agent of the Company, at the will of the Company (or
under separate agreement, if such agreement exists), in the capacity the
Indemnitee currently serves as an agent of the Company, so long as he is duly
appointed or elected and qualified in accordance with the applicable provisions
of the By-Laws of the Company or any subsidiary of the Company or until such
time as he tenders his resignation in writing; provided, however, that nothing
contained in this Agreement is intended to create any right to continued
employment by the Indemnitee in any capacity.
3. Indemnity in Third Party Proceedings. The Company shall
indemnify the Indemnitee if the Indemnitee is a party to or threatened to be
made a party to or otherwise involved in any proceeding (other than a proceeding
by or in the right of the Company) by reason of the fact that the Indemnitee is
or was an agent of the Company, including any proceeding based upon any act or
inaction by the Indemnitee in his capacity as an agent of the Company, against
any and all expenses, judgments, fines and penalties actually and reasonably
incurred by him in connection with such proceeding, but only if the Indemnitee
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any proceeding by judgment, order of court, settlement,
conviction or on plea of nolo contendere, or its equivalent, shall not, of
itself, create a presumption that the Indemnitee did not act in good faith and
in a manner which he reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to any criminal proceedings, that
such person had reasonable cause to believe that his conduct was unlawful.
4. Indemnity in Derivative Actions; Indemnification as
Witness.
(a) The Company shall indemnify the Indemnitee if the
Indemnitee is a party to or threatened to be made a party to or otherwise
involved in any proceeding by or in the right of the Company to procure a
judgment in its favor by reason of the fact that the Indemnitee is or was an
agent of the Company, including any proceeding based upon any act or inaction by
the Indemnitee in his capacity as an agent of the Company, against all expenses
actually and reasonably incurred by the Indemnitee in connection with such
proceeding, but only if the Indemnitee acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Company, except that no indemnification under this Section 4 shall be made in
respect of any claim, issue or matter as to which the Indemnitee shall have been
finally adjudged to be liable to the Company by a court of competent
jurisdiction for gross negligence or misconduct in the performance of his duty
to the Company, unless and only to the extent that any court in which such
proceeding was brought shall determine upon application that, despite the
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<PAGE>
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses as such
court shall deem proper.
(b) Notwithstanding any other provisions of this Agreement,
to the extent the Indemnitee is, by reason of the fact that he is or was an
agent of the Corporation, involved in any investigative proceeding, including
but not limited to testifying as a witness or furnishing documents in response
to a subpoena or otherwise, the Indemnitee shall be indemnified against any and
all expenses actually and reasonably incurred by or for him in connection
therewith.
5. Indemnification of Expenses of Successful Party.
Notwithstanding any other provisions of this Agreement, to the extent that the
Indemnitee has been successful on the merits or otherwise in defense of any
proceeding or in defense of any claim, issue or matter therein, the Company
shall indemnify the Indemnitee against all expenses actually and reasonably
incurred in connection with such proceeding.
6. Partial Indemnification. If the Indemnitee is entitled
under any provision of this Agreement to indemnification by the Company for some
or a portion of any expenses, judgments, fines or penalties, actually and
reasonably incurred by him in a proceeding but is not entitled, however, to
indemnification for the total amount thereof, the Company shall nevertheless
indemnify the Indemnitee for the portion thereof to which the Indemnitee is
entitled.
7. Advancement of Expenses. Subject to Section 11(a) hereof,
the Company shall advance all expenses incurred by the Indemnitee in connection
with any proceeding to which the Indemnitee is a party or is threatened to be
made a party by reason of the fact that the Indemnitee is or was an agent of the
Company. The Indemnitee hereby undertakes to repay such amounts advanced only
if, and to the extent that, it shall ultimately be determined that the
Indemnitee is not entitled to be indemnified by the Company as authorized by
this Agreement. The advances to be made hereunder shall be paid by the Company
to or on behalf of the Indemnitee within thirty (30) days following delivery of
a written request therefor by the Indemnitee to the Company.
8. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of
the commencement of or the threat of commencement of any proceeding, the
Indemnitee shall, if the Indemnitee believes that indemnification with respect
thereto may be sought from the Company under this Agreement, notify the Company
of the commencement or threat of commencement thereof, provided the failure to
provide such notification shall not diminish the Indemnitee's indemnification
hereunder.
(b) Any indemnification requested by the Indemnitee under
Section 3, 4, 5 or 6 hereof shall be made no later than forty-five (45) days
after receipt of the written request of the Indemnitee unless a determination is
made within said forty-five (45) day period (i) by the Board of Directors of the
Company by a majority vote of a quorum thereof consisting of directors who are
not parties to such proceeding, or (ii) in the event such a quorum is not
obtainable, at the election of the Company, either by independent legal counsel
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in a written opinion or by a panel of arbitrators (selected in the manner set
forth in Section 8(c) hereof) that the Indemnitee has not met the relevant
standards for indemnification set forth in Section 3, 4, 5 or 6 hereof.
(c) Except as set forth herein, the right of indemnification
under this Agreement and any dispute arising hereunder, including but not
limited to matters of validity, interpretation, application and enforcement,
shall be determined exclusively by and through final and binding arbitration in
St. Louis, Missouri, each party hereto expressly and conclusively waiving his
right to proceed to a judicial determination with respect to such matter. Such
arbitration shall be conducted in accordance with the commercial arbitration
rules then in effect of the American Arbitration Association before a panel of
three arbitrators, one of whom shall be selected by the Company, the second of
whom shall be selected by the Indemnitee and the third of whom shall be selected
by the other two arbitrators. If for any reason arbitration under the
arbitration rules of the American Arbitration Association cannot be initiated,
the necessary arbitrator or arbitrators shall be selected by the presiding judge
of the state court of general jurisdiction in St. Louis, Missouri. Each
arbitrator selected as provided hereto is required to be serving or to have
served as a director or an executive officer of a corporation whose shares of
common stock, during at least one year of such service, were quoted in the
Nasdaq National Market System or listed on the New York Stock Exchange. It is
expressly understood and agreed by the parties that a party may compel
arbitration pursuant to this Section 8(c) through an action for specific
performance and that any award entered by the arbitrators may be enforced,
without further evidence or proceedings, in any court of competent jurisdiction.
(d) The provisions of Section 8(c) hereof shall not apply
if, and to the extent that, they may be inconsistent with an undertaking given
by the Company (including an undertaking given after the date of this Agreement)
to the Securities and Exchange Commission to submit to a court of competent
jurisdiction the question whether indemnification for liabilities under the
Securities Act of 1933, as amended (the "Securities Act"), by the Company is
against public policy as expressed in the Securities Act, and to be governed by
the final adjudication of such issue. In such case, the determination by such
court shall be deemed, for purposes of this Agreement, to be a determination
pursuant to Section 8(c) hereof.
(e) The Company shall reimburse the Indemnitee for the
expenses incurred in prosecuting or defending such arbitration unless the
arbitrator finds that each of the claims and/or defenses of the Indemnitee in
any such proceeding was frivolous or in bad faith.
9. Assumption of Defense. In the event the Company shall be
obligated to pay the expenses of any proceeding against the Indemnitee, the
Company, if appropriate, shall be entitled to assume the defense of such
proceeding, with counsel reasonably acceptable to the Indemnitee, upon the
delivery to the Indemnitee of written notice of its election to do so. After
delivery of such notice, approval of such counsel by the Indemnitee and the
retention of such counsel by the Company, the Company will not be liable to the
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
the Indemnitee with respect to the same proceeding, provided that (a) the
Indemnitee shall have the right to employ his counsel in such proceeding at the
Indemnitee's expense and (b) if (i) the employment of counsel by the Indemnitee
5
<PAGE>
has been previously authorized in writing by the Company, (ii) the Company shall
have reasonably concluded that there may be a conflict of interest between the
Company and the Indemnitee in the conduct of any such defense, or (iii) the
Company shall not, in fact, have employed counsel to assume the defense of such
proceeding, the fees and expenses of the Indemnitee's counsel shall be at the
expense of the Company.
10. Insurance. The Company may, but is not obligated to,
obtain directors' and officers' liability insurance ("D&O Insurance") as may be
or become available in reasonable amounts from established and reputable
insurers with respect to which the Indemnitee is named as an insured.
Notwithstanding any other provision of the Agreement, the Company shall not be
obligated to indemnify the Indemnitee for expenses, judgments, fines or
penalties which have been paid directly to the Indemnitee by D&O Insurance. If
the Company has D&O Insurance in effect at the time the Company receives from
the Indemnitee any notice of the commencement of a proceeding, the Company shall
give prompt notice of the commencement of such proceeding to the insurers in
accordance with the procedures set forth in the policy. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of the lndemnitee, all amounts payable as a result of such proceeding
in accordance with the terms of such policy.
11. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by the Indemnitee. To indemnify or
advance expenses to the Indemnitee with respect to proceedings or claims
initiated or brought voluntarily by the Indemnitee and not by way of defense,
except to the extent set forth in Section 8(e) hereof; provided, however, that
such indemnification or advancement of expenses may be provided by the Company
in specific cases if the Board of Directors finds it to be appropriate; or
(b) Unauthorized Settlements. To indemnify the Indemnitee
under this Agreement for any amounts paid in settlement of a proceeding effected
without the Company's written consent; the Company shall not settle any
proceeding without the Indemnitee's written consent; neither the Company nor the
Indemnitee will unreasonably withhold consent to any proposed settlement; or
(c) Certain Matters. To indemnify the Indemnitee on account
of any proceeding with respect to (i) payments made to the Indemnitee if it is
determined by final judgment or other final adjudication that such payments were
in violation of law or (ii) which it is determined by final judgment or other
final adjudication that the conduct of the Indemnitee constituted bad faith or
active and deliberate dishonesty; or
(d) Section 16. To indemnify the Indemnitee on account of
any claim by or on behalf of the Company for recovery of profits resulting from
the purchase and sale or sale and purchase by the Indemnitee of equity
securities of the Company pursuant to Section 16(b) of the Securities Exchange
Act of 1934, as amended; or
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(e) Unlawful. To indemnify the Indemnitee to the extent such
indemnification has been determined pursuant to Section 8(c) hereof to be
unlawful.
12. Nonexclusivity. The provisions for indemnification and
advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which the Indemnitee may have under any provision
of law, the Company's Certificate of Incorporation or By-Laws, the vote of the
Company's stockholders or disinterested directors, other agreements or
otherwise, both as to action in his official capacity and to action in another
capacity while occupying his position as an agent of the Company, and the
Indemnitee's rights hereunder shall continue after the Indemnitee has ceased
acting as an agent of the Company and shall inure to the benefit of the heirs,
executors and administrators of the Indemnitee.
13. Subrogation. In the event of payment under this
Agreement, the Company shall be subrogated to the extent of such payment to all
of the rights of recovery of the Indemnitee, who shall execute all papers
required and shall do everything that may be necessary to secure such rights,
including the execution of such documents necessary to enable the Company
effectively to bring suit to enforce such rights.
14. Interpretation of Agreement. It is understood that the
parties hereto intend this Agreement to be interpreted and enforced so as to
provide indemnification to the Indemnitee to the fullest extent now or hereafter
permitted by law.
15. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, (a) the validity, legality and enforceability of the remaining
provisions of the Agreement (including without limitation all portions of any
paragraphs of this Agreement containing any such provision held to be invalid,
illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby, and (b) to
the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable, that are not
themselves invalid, illegal or unenforceable) shall be construed so as to give
effect to the intent manifested by the provision held invalid, illegal or
unenforceable and to give effect to Section 14 hereof.
16. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provision hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
17. Successors and Assigns. The terms of this Agreement
shall bind, and shall inure to the benefit of, the successors and assigns of the
parties hereto.
18. Notice. All notices, claims, requests, demands and other
communications hereunder shall be in writing and shall be duly given if: (a)
personally delivered or sent via telecopy, (b) sent by certified mail, return
receipt requested, or (c) sent by nationally recognized overnight courier
service (for next business day delivery), shipping prepaid to the addresses
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<PAGE>
shown on the signature page of this Agreement or such other address or addresses
as the person to whom notice is to be given may have previously furnished to the
other party in writing in the manner set forth above. Notices shall be deemed
given at the time of personal delivery or completed telecopy, or, if sent by
certified mail, three (3) business days after such sending, or, if sent by
nationally recognized overnight courier service, one (1) business day after such
sending.
19. Governing Law. This Agreement shall be governed
exclusively by and construed according to the laws of the State of Delaware, as
applied to contracts between Delaware residents entered into and to be performed
entirely within Delaware, without giving effect to conflict of laws principles.
If a court of competent jurisdiction shall make a final determination that the
provisions of the law of any state other than Delaware govern indemnification by
the Company of its directors and executive officers, then the indemnification
provided under this Agreement shall in all instances be enforceable to the
fullest extent permitted under such law, notwithstanding any provision of this
Agreement to the contrary.
The parties hereto have entered into this Indemnity Agreement
effective as of the date first above written.
INTELLESALE.COM, INC.
By
-------------------------------------
Marc Sherman
President and Chief Executive Officer
510 Ryerson Road
Lincoln Park, New Jersey 07035
INDEMNITEE:
Name:
Address:
-------------------------------
-------------------------------
-------------------------------
8
Exhibit 10.20
Consult your lawyer before signing this lease. It has important legal _________
BUSINESS LEASE
The Landlord and the Tenant agree to lease the Rental Space for the
Term and at the Rent stated, as follows: (The words Landlord and Tenant include
all landlords and all tenants under this Lease.)
Landlord 510 Ryerson Road Corp. Tenant Intellesale.com, Inc.*
------------------------------- --------------------------------------
Print or type Print or type
c/o Safer Development & Management Corp. 510 Ryerson Road
- ---------------------------------------- -------------------------------------
Address Residence address
1875 McCarter Highway, Newark, NJ 07104 Lincoln Park, New Jersey 07035
- --------------------------------------- -------------------------------------
Zip
Rental Space. Approximately One hundred forty three thousand seven hundred fifty
(143,750+/-) square feet, as delineated on Exhibit "A" attached to and made part
of this Lease (sometimes referred to as "Demised Premises")
in the Building at 510 Ryerson Road, (Block 22, Lot 338) Lincoln Park, New
Jersey
- --------------------------------------------------------------------------------
Address
Date of Lease April 1999
- -----------------------------------------------------------
Term Five (5) Years
Beginning June 1 1999
------------- --
Ending May 31 2004
-------------
- -----------------------------------------------------------
Security $105,416.00
- -----------------------------------------------------------
Broker. The Landlord and the Tenant recognize SBW&E, Inc.
(see separate agreement)
as the Broker who brought about this Lease. The Landlord
143,750 shall pay the Broker's commission.
- ------------------------------------------------------------
Liability Insurance. See Paragraph 6
-------------------------------
<PAGE>
Rent for the Term is $3,162,500.00
The Rent is payable in advance on the first day of each month as follows:
Months 1-36 $47,916.67
Months 37-60 $59,895.83
- -calculated based upon 143,750
square feet of rentable space;
together with all payments
designated as Additional Rent
- --------------------------------------------------------------------------------
Use of Rental Space solely, by TENANT, for the purpose of warehousing and
distributing of computer and electronic equipment and supplies, and related
offices, and for no other use or purpose.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
Additional agreements are set forth on the Rider which is attached to,
incorporated in and made part of this Lease. Whenever there is an inconsistency
between the printed language of this Lease and the language of the Rider, the
language of the Rider shall control.
* a Delaware corporation authorized to transact business in New Jersey.
- --------------------------------------------------------------------------------
Table of Contents
1. Possession and Use 16. No Alterations
2. Delay in Giving of Possession 17. Signs
3. No Assignment or Subletting 18. Access to Rental Space
4. Rent and Additional Rent 19. Fire and Other Casualty
5. Security 20. Eminent Domain
6. Liability Insurance 21. Subordination to Mortgage
7. Unavailability of Fire Insurance, 22. Tenant's Certificate
Rate Increases
8. Water Damage 23. Violation, Eviction,
9. Liability of Landlord and Tenant Re-entry and Damages
10. Real Estate Taxes 24. Notices
11. Acceptance of Rental Space 25. No Waiver
12. Quiet Enjoyment 26. Survival
13. Utilities and Services 27. End of Term
14. Tenant's Repairs, Maintenance, 28. Binding
and Compliance
15. Landlord's Repairs and Maintenance 29. Full Agreement
- --- ---------------------------------- --- -------------------------
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ADDENDUM TO LEASE AGREEMENT
BY AND BETWEEN
510 RYERSON ROAD CORP. AS LANDLORD
AND
INTELLESALE.COM, INC. AS TENANT
===============================
This Addendum is attached to and made part of the Lease Agreement as referenced
above.
EXHIBIT A
DIAGRAM
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1. Possession and Use
The Landlord shall give possession of the Rental Space to the Tenant
for the Term. The Tenant shall take possession of and use the Rental Space for
the purpose stated above. The Tenant may not use the Rental Space for any other
purposes without the written consent of the Landlord.
The Tenant shall not allow the Rental Space to be used for any unlawful
or hazardous purpose. The Tenant is satisfied that the Rental Space is zoned for
the Use stated. The Tenant shall obtain any necessary certificate of occupancy
or other certificate permitting the Tenant to use the Rental Space for that Use.
The Tenant shall not use the Rental Space in any manner that results in
(1) an increase in the rate of fire or liability insurance or (2) cancellation
of any fire or liability insurance policy on the Rental Space. The Tenant shall
comply with all requirements of the insurance companies insuring the Rental
Space. The Tenant shall not abandon the Rental Space during the Term of this
Lease or permit it to become vacant for extended periods.
See Rider Paragraph 1.
2. Delay in Giving of Possession
This paragraph applies if (a) the Landlord cannot give possession of
the Rental Space to the Tenant on the beginning date and (b) the reason for the
delay is not the Landlord's fault. The Landlord shall then have 30 days in which
to give possession. If possession is given within that time, the Tenant shall
accept possession and pay the Rent from that date. The ending date of the Term
shall not change. If possession is not given within that time this Lease may be
cancelled by either party on notice to the other.
3. No Assignment or Subletting
The Tenant may not do any of the following without the Landlord's
written consent: (a) assign this Lease (if the Tenant is a corporation, the sale
of a majority of its shares shall be treated as an assignment), (b) sublet all
or any part of the Rental Space or (c) permit any other person or business to
use the Rental Space. See Rider Paragraph 3.
4. Rent and Additional Rent
Tenant shall pay the Rent to the Landlord at the Landlord's address.
If the Tenant fails to comply with any agreement in this Lease, the
Landlord may do so on behalf of the Tenant. The Landlord may charge the cost to
comply, including reasonable attorney's fees, to the Tenant as "additional
rent". The additional rent shall be due and payable as Rent with the next
monthly Rent payment. Non-payment of additional rent shall give the Landlord the
same rights against the Tenant as if the Tenant failed to pay the Rent.
See Rider Paragraph 4.
5. Security
The Tenant has given to the Landlord the Security stated above. The
Security shall be held by the Landlord during the Term of this Lease. The
Landlord may deduct from the Security any expenses incurred in connection with
the Tenant's violation of any agreement in this Lease. For example, if the
Tenant does not leave the Rental Space in good condition at the end of the Term,
the Security may be used to put it in good condition. If the amount of damage
exceeds the Security, the Tenant shall pay the additional amount to the Landlord
on demand.
If the Landlord uses the Security or any part of it during the Term,
the Tenant shall on demand pay the Landlord for the amount used. The amount of
the Security is to remain constant throughout the Term. The Security is not to
be used by the Tenant for the payment of Rent. The Landlord shall repay to the
Tenant any balance remaining within a reasonable time after the end of the Term.
The Tenant shall not be entitled to interest on the Security.
If the Landlord's interest in the Rental Space is transferred, the
Landlord shall turn over the Security to the new Landlord. The Landlord shall
notify the Tenant of the name and address of the new Landlord. Notification must
be given within 5 days after the transfer, by registered or certified mail. The
Landlord shall then no longer be responsible to the Tenant for the repayment of
the Security. The new Landlord shall be responsible to the Tenant for the return
of the Security in accordance with the terms of this Lease. See Rider Paragraph
5.
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6. Liability Insurance
The Tenant shall obtain, pay for, and keep in effect for the benefit of
the Landlord and the Tenant public liability insurance on the Rental Space. The
insurance company and the broker must be acceptable to the Landlord. This
coverage must be in at least the minimum amounts stated above.
All policies shall state that the insurance company cannot cancel or
refuse to renew without at least 10 days written notice to the Landlord.
The Tenant shall deliver the original policy to the Landlord with proof
of payment of the first year's premiums. This shall be done not less than 15
days before the Beginning of the Term. The Tenant shall deliver a renewal policy
to the Landlord with proof of payment not less than 15 days before the
expiration date of each policy.
Continued on Rider Paragraph 6.
7. Unavailability of Fire Insurance, Rate Increases
If due to the Tenant's use of the Rental Space the Landlord cannot
obtain and maintain fire insurance on the Building in an amount and form
reasonably acceptable to the Landlord, the Landlord may cancel this Lease on 30
days notice to the Tenant. If due to the Tenant's use of the Rental Space the
fire insurance rate is increased, the Tenant shall pay the increase in the
premium to the Landlord on demand.
8. Water Damage
The Landlord shall not be liable for any damage or injury to any
persons or property caused by the leak or flow of water from or into any part of
the Building.
9. Liability of Landlord and Tenant
The Landlord shall not be liable for injury or damage to any person or
property unless it is due to the Landlord's act or neglect. The Tenant is liable
for any loss, injury or damage to any person or property caused by the act or
neglect of the Tenant or the Tenant's employees. The Tenant shall defend the
Landlord from and reimburse the Landlord for all liability and costs resulting
from any injury or damage due to the act or neglect of the Tenant or the
Tenant's employees.
10. Real Estate Taxes See Rider Paragraph 10
See Rider Paragraph 10.
11. Acceptance of Rental Space
The Tenant has inspected the Rental Space and agrees that the Rental
Space is in satisfactory condition. The Tenant accepts the Rental Space "as is".
12. Quiet Enjoyment
The Landlord has the right to enter into this Lease. If the Tenant
complies with this Lease, the Landlord must provide the Tenant with undisturbed
possession of the Rental Space.
13. Utilities and Services
The Tenant shall arrange and pay for all utilities and services
required for the Rental Space, including the following:
(a) Heat
(b) Hot and cold water
(c) Electric
(d) Gas
(e) sewer
(f) trash removal
The Landlord is not liable for any inconvenience or harm caused by any
stoppage or reduction of utilities and services beyond the control of the
Landlord. This does not excuse the Tenant from paying Rent. See Rider Paragraph
13.
14. Tenant's and Compliance
The Tenant shall:
(a) Promptly comply with all laws, orders, rules and requirements of
governmental authorities, insurance carriers, board of fire underwriters, or
similar groups.
(b) Maintain the Rental Space and all equipment and fixtures in it in
good repair and appearance.
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<PAGE>
(c) Make all necessary repairs to the Rental Space and all equipment
and fixtures in it, except structural repairs.
(d) Maintain the Rental Space in a neat, clean, safe, and sanitary
condition, free of all garbage.
(e) Keep the walks, driveway, parking area, yard, entrances, hallways,
and stairs clean and free from trash, debris, snow and ice.
(f) Use all electric, plumbing and other facilities in the Rental
Space safely., and to maintain and replace all fixtures as required.
(g) Use no more electricity than the wiring or feeders to the Rental
Space can safely carry.
(h) Promptly replace all broken glass in the Rental Space.
(i) Do nothing to destroy, deface, damage, or remove any part of the
Rental Space.
(j) Keep nothing in the Rental Space which is inflammable, dangerous
or explosive or which might increase the danger of fire or other casualty.
(k) Promptly notify the Landlord when there are conditions which need
repair.
(l) Do nothing to destroy the peace and quiet of the Landlord, other
tenants, or persons in the neighborhood.
(m) Avoid littering in the building or on its grounds.
The Tenant shall pay any expenses involved in complying with the above.
15. Landlord's Repairs and Maintenance
The Landlord shall:
(a) Maintain the public areas, roof and exterior walls in good
condition.
(b) Make all structural repairs unless these repairs are necessary by
the act or neglect of the Tenant or the Tenant's employees.
(c) Make necessary replacements of the plumbing, cooling, heating and
electrical systems, except when made necessary by the act or neglect of the
Tenant or the Tenant's employees.
(d) See Rider Paragraph 15(d) and Paragraph 46.
16. No Alterations
The Tenant may not make any changes or additions to the Rental Space
without the Landlord's written consent. Any changes or additions made without
the Landlord's written consent shall be removed by the Tenant on demand.
All changes or additions made with the Landlord's written consent shall
become the property of the Landlord when completed and paid for by the Tenant.
They shall remain as part of the Rental Space at the end of the Term. The
Landlord may demand that the Tenant remove any changes or additions at the end
of the Term. The Tenant shall promptly pay for all costs of any permitted
changes or additions. The Tenant shall not allow any mechanic's lien or other
claim to be filed against the Building. If any lien or claim is filed against
the Building, the Tenant shall have it promptly removed. See Rider Paragraph 16.
17. Signs
The Tenant shall obtain the Landlord's written consent before placing
any sign on or about the Rental Space. Signs must conform with all applicable
municipal ordinances and regulations.
18. Access to Rental Space
The Landlord shall provide reasonable notice to the Tenant to (a)
inspect the Rental Space, (b) make necessary repairs, alterations, or
improvements, (c) supply services, and (d) show it to prospective buyers,
mortgage lenders, contractors or insurers, and to real estate appraisers.
The Landlord may show the Rental Space to rental applicants at
reasonable hours on notice to the Tenant within 6 months before the end of the
Term.
The Landlord may enter the Rental Space at any time without notice to
the Tenant in case of emergency.
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19. Fire and Other Casualty
The Tenant shall notify the Landlord at once of any fire or other
casualty in the Rental Space. The Tenant is not required to pay Rent when the
Rental Space is unusable. If the Tenant uses part of the Rental Space, the
Tenant must pay Rent pro-rata for the usable part.
See Rider Paragraph 19.
20. Eminent Domain See Rider Paragraph 20.
See Rider Paragraph 20.
21. Subordination to Mortgage
In a foreclosure sale all mortgages which now or in the future affect
the Building have priority over this Lease. This means that the holder of a
mortgage may end this Lease on a foreclosure sale. The Tenant shall sign all
papers needed to give any mortgage priority over this Lease. If the Tenant
refuses, the Landlord may sign the papers on behalf of the Tenant.
22. Tenant's Certificate
At the request of the Landlord, the Tenant shall sign a certificate
stating that (a) this Lease has not been amended and is in effect, (b) the
Landlord has fully performed all of the Landlord's agreements in this Lease, (c)
the Tenant has no rights to the Rental Space except as stated in this Lease, (d)
the Tenant has paid all Rent to date, and (e) the Tenant has not paid Rent for
more than one month in advance. The Certificate shall also list all the property
attached to the Rental Space owned by the Tenant.
23. Violation, Eviction, Re-entry and Damages
The Landlord reserves a right of re-entry which allows the Landlord to
end this Lease and re-enter the Rental Space if the Tenant violates any
agreement in this Lease. This is done by eviction. Eviction is a court procedure
to remove a tenant. Eviction is started by the filing of a complaint in court
and the service of a summons on a tenant to appear in court. The Landlord may
also evict the Tenant for any one of the other grounds of good cause provided by
law. After a court order of eviction and compliance with the warrant of removal,
the Landlord may re-enter and take back possession of the Rental Space. If the
cause for eviction is non-payment of Rent, notice does not have to be given to
the Tenant before the Landlord.
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RIDER TO LEASE AGREEMENT, dated the ____ day of May, 999 by and between 510
Ryerson Road Corp. (Landlord) and Intellesale.com, Inc. a Delaware corporation
authorized to do business in New Jersey (Tenant).
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USE: Tenant shall use the Premises solely for the purpose as stated on the first
page of the Lease, which must be a zoned use, and for no other use or purpose.
Tenant shall not create a nuisance or use the Premises for any immoral or
illegal purposes.
The Landlord shall give possession of the Premises to the Tenant for
the Term. The Tenant shall take possession of and use the Premises for the
purposes stated above. The Tenant may not use the Premises for any other purpose
without the written consent of the Landlord.
The Tenant shall not allow the Premises to be used for any unlawful or
hazardous purpose. The Tenant is satisfied that the Premises is zoned for the
Use stated. The Tenant shall obtain any necessary certificate of occupancy or
other certificate permitting the Tenant to use the Premises for that Use.
The Tenant shall not use the Premises in any manner that results in:
(1) an increase in the rate of fire or liability insurance or (2) cancellation
of any fire or liability insurance policy on the Premises. The Tenant shall not
abandon the Premises during the Term of this Lease or permit it to become vacant
for extended periods.
If the Landlord cannot give possession of the Premises to the Tenant on
the beginning date and the reason for the delay is not the Landlord's fault, the
Landlord shall not be held liable for the delay. The Landlord shall then have
thirty (30) days in which to give possession. If possession is given within that
time, the Tenant shall accept possession and pay the Rent from that date. The
ending date of the Term shall not change.
Tenant shall not use or occupy the Demised Premises in any manner
which:
(i) impairs or tends to impair the character or appearance of the
Demised Premises or the Building or improvements; or
(ii) impairs or tends to impair the proper and economic maintenance,
operations and/or repair of the Demised Premises or the Building or
improvements; or
(iii) annoys or inconveniences or tends to annoy or inconvenience other
tenants of the Landlord or neighbors of the Building.
The Tenant will not conduct any auction, fire, bankruptcy, selling out
or going out of business, or similar sales on or about the premises unless given
written permission by the Landlord which permission shall not be unreasonably
withheld or delayed.
The Tenant shall not do or permit any act or thing to be done in,
about, or to the Demised Premises which shall or might subject the Landlord to
any liability or responsibility to any person or for property damage.
RENT: The Rent shall be paid:
(i) in advance, without notice, demand, offset, or deduction except as
provided in Paragraph 19 herein.
(ii) by the first day of each month during the Term; and
(iii) to Landlord at 1875 McCarter Highway, Newark, New Jersey 07104,
or as Landlord may specify in writing to Tenant.
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If Tenant fails to pay part or all of the Rent or Additional Rent
within ten (10) days after it is due, the Tenant shall also pay, as Additional
Rent a late charge equal to five (5%) percent of the unpaid Rent and Additional
Rent.
If the Tenant fails to comply with any agreement in this Lease, the
Landlord may do so on behalf of the Tenant. The Landlord may charge the cost to
comply, including reasonable attorney's fees, to the Tenant as "Additional
Rent". The Additional Rent shall be due and payable as Rent with the next
monthly rent payment. Non-payment of Additional Rent shall give the Landlord the
same rights against the Tenant as if the Tenant failed to pay the Rent. The
Additional Rent shall be due and payable as Rent within thirty (30) days
following written Notice from the Landlord of the assessment sums due and owing.
FIRST OPTION TO EXTEND: Tenant is given the option to extend the term on all the
provisions contained in this Lease, except for minimum monthly rent, for a three
[3] year period ("the first extended term") following expiration of the initial
term, by giving notice of exercise of the option ("the first option notice") to
Landlord at least six [6] months but not more than one [one] year before the
expiration of the initial term, TIME BEING OF THE ESSENCE as Landlord's receipt
of the first option notice. Provided that, if Tenant is in default on the date
of giving the first option notice, the first option notice shall be totally
ineffective, or if Tenant is in default on the date the first extended term is
to commence, the first extended term shall not commence and this Lease shall
expire at the end of the initial term.
The monthly rent for the first extended term shall be fixed at ninety (90%)
percent of the Fair Market Rental Value of the Demised Premises at the time of
the expiration of the initial Lease term, but in no event shall the base monthly
rental be less than the base monthly rental for the last month of the initial
Lease term. The parties shall have fifteen (15) days after Landlord receives the
first option notice in which to agree on minimum monthly rent during the first
extended term. If the parties agree on the minimum monthly rent for the first
extended term during that period, they shall immediately execute an amendment to
this Lease stating the minimum monthly rent.
If the parties are unable to agree on the minimum monthly rent for the first
extended term within that period, then within fifteen [15] days after the
expiration of that period, LANDLORD shall provide to TENANT a list of three (3)
real estate appraisers, each with at least 5 years' full-time industrial
appraisal experience in the Morris County, New Jersey area and licensed by the
State of New Jersey. Within ten (10) days of TENANT receiving the list of
appraisers, TENANT shall notify LANDLORD of TENANT's choice of appraiser.
Failure by TENANT to notify LANDLORD within this period shall cancel this First
Option to Extend. Upon completion, the appraisal report shall be sent to TENANT
and LANDLORD by certified mail, return receipt requested. Within ten (10) days
of receiving the report, TENANT shall notify LANDLORD in writing of its intent
to accept the Fair Market Rental Value rate determined by the appraiser. If
TENANT accepts the appraisal rate and renews the Lease, the rate shall be used
to determine the minimum monthly rent and LANDLORD and TENANT shall equally
share the expense of the appraisal cost. If TENANT does not accept the appraisal
and does not renew the Lease, which right is reserved to TENANT, TENANT shall
pay the full cost of the appraisal report.
In setting the minimum monthly rent for the first extended term, the appraiser
shall base the appraisal upon the use of the Premises for warehousing,
distributing and the other rights granted in the "Use" paragraph of this Lease.
In no event shall the minimum monthly rent for the first extended term be less
than the minimum monthly rent for the last year of the initial term of this
Lease.
Anything in this option provision to the contrary notwithstanding, if TENANT
does not exercise the first option to extend then not less than four (4) months
prior to the end of the initial Term, TENANT shall prepare, file and diligently
pursue obtaining ISRA approval in connection with the cessation of its operation
at the Premises. TENANT shall provide to LANDLORD copies of all filings with any
responses from the NJDEPE in connection with this ISRA compliance.
SECOND OPTION TO EXTEND: Tenant is given the option to extend the term on all
the provisions contained in this Lease, except for minimum monthly rent, for a
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three [3] year period ("the second extended term") following expiration of the
first extended term, by giving notice of exercise of the option ("the second
option notice") to Landlord at least six [6] months but not more than one [one]
year before the expiration of the first extended term, TIME BEING OF THE ESSENCE
as to Landlord's receipt of the second option notice. Provided that, if Tenant
is in default on the date of giving the second option notice, the second option
notice shall be totally ineffective, or if Tenant is in default on the date the
second extended term is to commence, the second extended term shall not commence
and this Lease shall expire at the end of the first extended term.
The monthly rent for the second extended term shall be fixed at ninety (90%)
percent of the Fair Market Rental Value of the Demised Premises at the time of
the expiration of the first extended term, but in no event shall the base
monthly rental be less than the base monthly rental for the last month of the
first extended term. The parties shall have fifteen (15) days after Landlord
receives the second option notice in which to agree on minimum monthly rent
during the second extended term. If the parties agree on the minimum monthly
rent for the second extended term during that period, they shall immediately
execute an amendment to this Lease stating the minimum monthly rent.
If the parties are unable to agree on the minimum monthly rent for the second
extended term within that period, then within fifteen [15] days after the
expiration of that period, LANDLORD shall provide to TENANT a list of three (3)
real estate appraisers, each with at least 5 years' full-time industrial
appraiser experience in the Morris County, New Jersey area and licensed by the
State of New Jersey. Within ten (10) days of TENANT receiving the list of
appraisers, TENANT shall notify LANDLORD of TENANT's choice of appraiser.
Failure by TENANT to notify LANDLORD within this period shall cancel this Second
Option to Extend. Upon completion, the appraisal report shall be sent to TENANT
and LANDLORD by certified mail, return receipt requested. Within ten (10) days
of receiving the report, TENANT shall notify LANDLORD in writing of its intent
to accept the Fair Market Rental Value rate determined by the appraiser. If
TENANT accepts the appraisal rate and renews the Lease, the rate shall be used
to determine the minimum monthly rent and LANDLORD and TENANT shall equally
share the expense of the appraisal cost. If TENANT does not accept the appraisal
and does not renew the Lease, which right is reserved to TENANT, TENANT shall
pay the full cost of the appraisal report.
In setting the minimum monthly rent for the second extended term, the appraiser
shall base the appraisal upon the use of the Premises for warehousing,
distributing and the other rights granted in the "Use" paragraph of this Lease.
In no event shall the minimum monthly rent for the second extended term be less
than the minimum monthly rent for the last year of the first extended term.
Anything in this option provision to the contrary notwithstanding, if TENANT
does not exercise the second option to extend then not less than four (4) months
prior to the end of the first extended term TENANT shall prepare, file and
diligently pursue obtaining ISRA approval n connection with the cessation of its
operation at the Premises. TENANT shall provide to LANDLORD copies of all
filings with any responses from the NJDEPE in connection with this ISRA
compliance.
OPTION TO PURCHASE: Landlord grants to Tenant the option to purchase the Land
and the Building of which the Demised Premises form a part in accordance with
the provisions of this Lease, provided that Tenant is not in default of any of
its obligations under this Lease either at the time Tenant exercises the option
or at the time of closing.
Tenant shall have the right to exercise this option to purchase at any
time during the last eighteen months of the term, between December 1, 2002 and
November 30, 2003.
Tenant shall exercise the option by delivering to Landlord written
notice (the "Option Notice") within the option period started in the preceding
paragraph. In order to be effective, the Option Notice shall be accompanied by a
Bank Check or Certified Check in an amount equal to ten (10%) percent of the
purchase price (as set forth in the following paragraph) (the "deposit"),
payable to the order of Philip D. Neuer, Esq., escrow agent and shall be
received by the Landlord on or before November 30, 2003. TIME BEING OF THE
ESSENCE. The deposit shall constitute liquidated damages in the event Tenant,
after exercising this option shall default and fail to close title. The parties
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agree that Landlord's actual damages may not be ascertainable and for that
reason have agreed to this liquidated damage provision.
The purchase price shall be Nine Million Three Hundred Forty-Three
Thousand Seven Hundred Fifty ($9,343,750.00) Dollars.
The purchase price shall be payable in full in lawful money of the
United States of America by Tenant at the closing.
Landlord shall deliver a Bargain and Sale Deed with Covenants against
Grantor's Acts, executed and acknowledged in recordable form, conveying the Land
and Building. Title shall be conveyed free and clear of all liens, encumbrances,
covenants, restrictions, easements and other matters of record, except all
tenancies which may then be in existence and all matters of record at the time
this Lease is executed (it being the intention of the parties that Landlord
shall convey to Tenant title which is consistent with the title which exists at
this time), current real property taxes and current assessments not yet due and
payable, and anything whether of record or not of record which is in any way
affects title resulting from the acts or omissions of Tenant. Landlord's title
insurance policy is attached to and made part of this Lease as Exhibit "B".
Tenant shall accept title subject to all matters set forth in Exhibit "B".
All rent, utilities, real property taxes, insurance premiums and all
other customary items for like properties shall be adjusted as of the date of
the closing. Landlord shall pay the Realty Transfer Fee. Tenant shall pay all
recording costs.
Tenant shall not assign its interest, or any portion of its interest,
in the option granted by this paragraph, except to an entity controlled by the
Tenant or by its present majority shareholder, and then, only after the option
is exercised and Tenant remains liable.
If Tenant does not properly and timely exercise the option strictly in
accordance with this Paragraph on or before November 30, 2003, Time Being of the
Essence, then this option shall automatically expire.
Subject to the provisions of the following subparagraphs, closing of
title shall take place not later than the first day of the seventh (7th) month
following Landlord's receipt of the option notice. After the first day of the
seventh month either Landlord or Tenant may declare Time to Be of the Essence
for the closing of title by delivering written notice to the other party not
less than 21 days prior to the closing date established in that notice.
In the event that Landlord elects to effectuate a tax-deferred
like-kind exchange as presently provided for in Internal Revenue Code Section
1031 in connection with the transaction described in this paragraph, the Tenant
agrees to cooperate with the Landlord provided that:
A. Tenant shall not incur any additional costs, tax liability or
expense in effectuating such exchange;
B. The closing date shall not be unduly delayed by reason of such
exchange;
C. Landlord shall remain fully liable for all of its obligations
under this Lease; and
D. Landlord shall indemnify and hold Tenant harmless from and
against any liability, cost, claim or expense arising from
such exchange.
Subject to the foregoing, Tenant agrees to execute such documents as
may be reasonably required to effectuate the like-kind exchange described above.
In the event Landlord is unable to complete the Like-kind exchange
prior to the closing date, Tenant's obligations under this paragraph shall
remain in full force and effect for a period not to exceed three hundred sixty
five (365) days after closing, it being understood that completion of such
exchange is not a condition of the closing.
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Tenant covenants and agrees that it shall be responsible for compliance
with the New Jersey Industrial Site Recovery Act in connection with the
conveyance of the property from Landlord to Tenant. Landlord agrees that an
Administrative Consent Order shall be sufficient evidence of compliance.
Tenant shall have the right to inspect the Land and the Building of
which the Demised Premises form a part at any time or at various times prior to
the exercise of the option to purchase.
1. Paragraph 1 is amended and supplemented by adding the following:
Landlord at its cost and expense shall prepare a site plan drawing, provide
public notice and the testimony of the Engineer who prepares the site plan.
Tenant is responsible for all other costs, expenses and aspects of obtaining
site plan approval, any and all variances that may be required, and the
Certificate of Occupancy.
3. Paragraph 3 is amended and supplemented by adding the following: The
Tenant may not do any of the following without the Landlord's written consent:
(a) assign this Lease (if the Tenant is a corporation, the sale of a majority of
its shares shall be treated as an assignment), (b) sublet all or any part of the
Premises or (c) permit any other person or business to use the Premises.
Landlord shall not be required to consent to any assignment or sublease
to any individual or entity which:
(a) engages in manufacturing activities; or
(b) operates a business with an SIC Code which will subject the
property to the provisions of the Industrial Site Recovery Act
(ISRA); or
(c) increases the potential for environmental impacts to the land,
the building or the demised premises; or
(d) in the exercise of the Landlord's sound business judgment does
not posses the requisite financial stability, management
expertise or business history to warrant being approved as an
assignee or sub-tenant.
In no event shall the pro rata rental to be paid by any assignee or
subtenant be less than that specified in this Lease.
If the Tenant desires to assign this Lease or sublet any portion of the
Demised Premises, then the Tenant must first offer this Lease back to the
Landlord at no cost to the Landlord. The Tenant must make or pay for all repairs
which are its obligation under this Lease or any sublease or any other agreement
prior to its surrender of this Lease and must assign to the Landlord all of its
right, title and interest in or to any assignments or subleases then in
existence for any portion of the Demised Premises. Basic Rent, Additional Rent
and all other monetary obligations of the Tenant shall be apportioned to such
date and the Tenant shall surrender the Demised Premises on such date. Subject
to payment of required Lease adjustments, the parties shall thereafter have no
further liability one to the other and Tenant shall not be entitled to any
portion of the rental nor other receipts from any existing or future assignee,
tenant or subtenant. The Landlord may lease the Demised Premises to any party
whatsoever, without any liability to the Tenant nor to any other party for any
amount whatsoever, including, but not limited to, brokerage fees or commissions,
even if the said party was engaged in the previous negotiations with or
introduced to the Demised Premises by the Tenant. Upon acceptance by the
Landlord of the surrender of this Lease, the Tenant must notify each existing
assignee and subtenant, if any, by receipted delivery service that its full
future rent and all other payments must be made to the Landlord herein.
If the Landlord decides not to accept the surrender of the Lease, the
Tenant may assign this Lease or sublet more than one-half of the Demised
Premises to the proposed assignee or subtenant upon the same terms and
conditions as those specified in the proposed assignment or sublease agreement
sent to the landlord for its consent, subject, however, to the Landlord's rights
under this article and this Lease. The Landlord shall have the right to demand,
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as a condition of consent to any sublease or assignment, security or additional
security from the Tenant, the assignee or the sublessee, as the case may be.
In the event of a default by the Tenant, the Landlord, at its option,
may collect all Basic Rent, Additional Rent, and any other monetary obligations
from any and all present or future assignees, subtenants and/or occupants and
apply the amount collected toward the Tenant's obligations under this Lease. No
such collection on the part of the Landlord shall be deemed a waiver of any of
the Landlord's rights under this lease; nor shall it be deemed an acceptance of
the assignee, subtenant or occupant by the Landlord as a tenant; nor shall it be
deemed an acceptance of any assignment or sublease not previously approved by
the Landlord; nor shall it release the Tenant from the further performance of
its covenants and obligations under the Lease. The Tenant shall remain fully
liable for any deficiency in the amounts so received by the Landlord and the
amounts specified to be paid under this Lease. Any excess in the amounts so
received shall remain the property of the Landlord and the Tenant shall have no
interest in same.
4. Paragraph 4 is amended and supplemented by adding the following: In the
event additional rent is assessed, Landlord shall give written Notice to Tenant
of each such claims expense, the payment of which shall be due within thirty
(30) days of this Notice.
5. Paragraph 5 is amended and supplemented by adding the following: Upon
execution of this Lease, Tenant shall pay to Landlord the Security Deposit
("Security") in the amount of One hundred five thousand four hundred sixteen
Dollars ($105,416.00). The Security shall be held by the Landlord during the
term of this Lease. The Landlord may deduct from the Security any expenses
incurred in connection with the Tenant's violation of any agreement in this
Lease. If the amount of damage exceeds the Security, the Tenant shall pay the
additional amount to the Landlord on demand.
If the Landlord uses the Security or any part of it during the Term,
the Tenant shall on demand pay the Landlord for the amount used. The amount of
the Security is to remain constant throughout the Term. The Security is not to
be used by the Tenant for the payment of Rent. The Landlord shall repay to the
Tenant any balance remaining within a reasonable time after the end of the Term.
The Tenant shall not be entitled to interest on the Security.
If the Landlord's interest in the Premises is transferred, the Landlord
shall turn over the Security to the new Landlord. The Landlord shall notify the
Tenant of the name and address of the new Landlord. Notification must be given
within five (5) days after the transfer, by registered or certified mail. The
Landlord shall then no longer be responsible to the Tenant for the repayment of
the Security. The new Landlord shall be responsible to the Tenant for the return
of the Security in accordance with the terms of this Lease.
The Tenant covenants that it will not assign or encumber or attempt to
assign or encumber the monies deposited herein as Security and that neither the
Landlord nor its successors or assigns shall be bound by any such assignment,
encumbrance, attempted assignment or attempted encumbrance. The Landlord or its
successors in interest will return the Security to the original Tenant
regardless of one or more assignments of the Tenant's interest in the Premises.
Upon the return of such Security, or balance thereof, to the original Tenant,
the Landlord or its successor in interest shall be completely relieved of
liability hereunder. Landlord may commingle the Security with its other funds.
The use, application or retention of all or any portion of the Security
by the Landlord shall not prevent the Landlord from exercising any other right
or remedy provided for under this Lease or at law or equity and shall not
operate as a limitation on any recovery to which the Landlord may otherwise be
entitled. It is specifically agreed and understood that the Tenant is liable to
the Landlord for the payment of any sums due to the Landlord under the Lease
regardless of any application by the Landlord of the amount of Security provided
for herein. In consideration of the agreed to rental specified herein, the
Tenant does hereby grant to the Landlord the right to use said Security for its
own purposes and it shall not be considered as trust funds. No interest on the
said Security nor other sums shall be payable hereunder to the Tenant by the
Landlord.
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Based upon the annual reconciliation of Tenant's Proportionate Share of
actual Operating Expenses and Taxes, the actual amount due from Tenant for the
final estimate period of the Term of this Lease shall be due and payable even
though it may not be finally calculated until after the expiration of the Term.
Accordingly, Landlord shall have the right to continue to hold a portion, as
reasonably estimated by Landlord in good faith, of the Security Deposit
following the expiration of the Term until Tenant's Proportionate Share of
actual Operating Expenses or Taxes, or both, has or have been calculated by
Landlord and paid by Tenant.
6. Paragraph 6 is amended and supplemented by adding the following: The
Tenant shall maintain liability insurance in the amount of which shall be
combined minimum amount of four million ($4,000,000.00) dollars. The Tenant
shall obtain, pay for as Additional Rent and keep in effect for the benefit of
the Landlord and the Tenant public liability insurance on the Premises. The
insurance company and the broker must be acceptable to the Landlord. This
coverage must be in at least the minimum amounts stated above.
All policies shall state that the insurance company cannot cancel or
refuse to renew without at least ten (10) days written notice to Landlord.
The Tenant shall deliver the original Form ACORD 27 policy to the
Landlord with proof of payment of the first year's premium. This shall be done
not less than fifteen (15) days before the Beginning of the Term. The Tenant
shall deliver a renewal policy to the Landlord with proof of payment not less
than fifteen (15) days before the expiration date of each policy.
The Tenant shall pay all premiums and charges for the insurance that it
is required to maintain under this Lease. If the Tenant shall fail to make any
such payment when due or otherwise fail to maintain any required insurance or
satisfy the requirements of the Landlord or the mortgagees designated by the
Landlord, the Landlord, at its option, may, but shall not be obligated to,
either make such payments as shall be required to maintain any such insurance as
aforesaid or obtain a separate insurance policy to provide the required coverage
without waiving or releasing any default by the Tenant.
The Tenant shall give prompt notice to the Landlord of any claims made
under the insurance policies on the Premises, Building and/or Land. The
Landlord, may, at its option, participate in any and all settlement negotiations
with any insurance company concerning any and all claims to which it is a party.
In the event of any loss or damage covered by insurance, the Tenant shall
execute and deliver to the Landlord, if requested, such proof of loss and other
instruments as may be required to obtain insurance monies payable to the
Landlord and/or the said mortgagees. In the event the Tenant fails to so execute
the aforesaid documents in a timely manner, the Tenant hereby constitutes and
appoints the Landlord as its attorney in fact and authorizes the Landlord to
execute the aforesaid documents on its behalf without any further authorization
from the Tenant. The Tenant shall not violate or permit to be violated any of
the conditions or provisions of any policy of insurance placed at any time on
the Demised Premises, Building and/or Land.
Each such insurance policy or certificate therefor obtained by the
Tenant pursuant to this Lease shall be (a) issued for terms of not less than
twelve (12) full consecutive calendar months, and shall contain a clause that
the policy shall not be canceled without at least ten (10) days prior written
notice to the Landlord and the mortgagees designated by the Landlord, (b)
written on a form satisfactory to the Landlord and the mortgagees designated by
the Landlord by a good and solvent insurance company of recognized standing,
admitted to do business in the State of New Jersey, and shall be without
co-insurance clauses nor any deductible feature (except as specifically
permitted by the Landlord in writing provided that the Tenant remains at all
times liable for the payment to the Landlord of such deductible amount in the
event of a loss), (c) shall name 510 Ryerson Road Corp. as Landlord and its
mortgagees each as a "named insured", (d) shall contain a provision that no act
or omission of the Tenant shall affect or limit the obligations of the insurance
company issuing such policy to pay in the event of a loss, and (e) shall contain
a Loss Discovery Clause.
In the event that the Tenant performs any negligent act or omission
which results in a loss, forfeiture or reduction of said insurance coverage or
payments, the Tenant shall pay to the Landlord upon demand, as Additional Rent,
the amount of such loss, forfeiture or reduction not otherwise covered by
Landlord's insurance policy proceeds. In the event of any loss or damage not
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covered or only partially covered by insurance, the Tenant shall bear its
proportionate share of the full cost of repairing such loss or damage above any
amount obtained from the insurance company. The Tenant shall pay the full cost
of any increase in the insurance premiums on the Land, Building or the Demised
Premises if such increase is due to the Tenant's or its permittees' use, tenancy
or occupancy. The Landlord and the Tenant specifically waive any and all rights
of subrogation as against the other.
The Tenant shall be responsible to carry its own fire, contents and
sprinkler damage insurance and all and all other insurance upon its own and its
permittee's personal property, its contents, its work, its alterations, its
improvements, and the like. The Landlord shall not be liable for the Tenant's
failure to do so.
Paragraph 9 is amended and supplemented by adding the following: The
Landlord shall not be liable for injury or damage to any person or property
unless it is due to the Landlord's act or neglect. The Tenant is liable for any
loss, injury or damage to any person or property caused by the act or neglect of
the Tenant or the Tenant's employees. The Tenant shall defend the Landlord and
reimburse the Landlord for all liability and costs resulting from any injury or
damage due to the act or neglect of the Tenant or the Tenant's employees.
The Landlord shall not be liable for any damage or injury to any
persons or property caused by the leak or flow of water from or into any part of
the Building.
The Tenant shall look solely to the Landlord's interest in the Real
Estate for the enforcement of any judgment or decree requiring the payment of
money to the Tenant by reason of any default or breach by the Landlord under
this Lease or for any other reason, and to no other property or asset of the
Landlord, its partners, owners, principals, officers, directors or the like. In
no event shall there be any personal liability on the part of the Landlord, its
partners, owners, principals, officers, directors or the like beyond its
interest in the Building and Land, and no other asset of the Landlord, its
partners, owners, principals, officers, directors or the like shall be subject
to levy, execution, attachment or any other legal process.
10. REAL ESTATE TAXES AND GOVERNMENTAL IMPOSITIONS: In addition to the
Rent, the Tenant shall pay to the Landlord upon demand, as Additional Rent, its
proportionate share of all real estate taxes, all assessments and all special
assessments and any other governmental impositions, levies and charges or the
like of every kind and nature whatsoever, or any governmental charges levied in
substitution thereof, which shall, during the Term of this Lease, be imposed
upon or charged against the Demised Premises, Building and/or Land or any part
thereof, together with any interest and penalties thereon.
If at any time during the Term of this Lease, the method or scope of
taxation prevailing as the date of execution of this Lease shall be modified or
enlarged so as to cause the method of taxation to be changed, so that in lieu
of, or as an addition to the governmental impositions named herein, there may be
a capital levy or other imposition based on the value of the Building and/or
Land, or the rents received therefrom, or some other form of assessment based in
whole or in part on some other valuation of the Landlord's real property
including the Demised Premises, then and in such event, such substituted tax or
imposition shall be payable in accordance with the obligations set forth in this
article. Such substitute tax shall be computed as if the Building and Land of
which the Demised Premises are a part were the only property owned by the
Landlord.
It is the intent of the parties hereto that the Rent to be paid by the
Tenant to the Landlord as provided for in this Lease shall be an absolute net
return to the Landlord and that the Tenant shall, in all events, and in addition
to the Rent be responsible for its proportionate share of all charges (other
than the Landlord's income franchise, estate, inheritance or transfer taxes
unless such taxes are reasonably deemed imposed in substitution for the
aforesaid governmental impositions) imposed by any governmental authority upon
the Land, the buildings thereon, the improvements thereto, the contents thereof,
or caused by the Tenant's use thereof. This Lease shall always be construed in
order to effectuate this declared intent of the parties.
The Tenant shall pay to the Landlord its proportionate share of the
real estate taxes due on the Building and the Land upon which it is located as
an escrow payable in twelve (12) equal installments on the first day of every
month, in advance. The Tenant shall initially pay a one (1) month escrow to the
Landlord. Said escrow amount is to be adjusted annually in accordance with the
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tax bill from the Borough of Lincoln Park. The Landlord is authorized to hold
the Tenant's proportionate share of the real estate taxes plus one (1) month as
tax escrow prior to the date each quarterly tax payment is due to the Borough of
Lincoln Park.
The Landlord shall have the sole and unrestricted right, but not the
obligation, to contest the validity or amount of any imposition. If the Landlord
shall institute any such contest, it shall have the sole and unrestricted right
to settle any negotiations, proceeding or action upon any terms the Landlord may
in its sole discretion determine. The Tenant shall not have the right to
institute any such proceedings, it being understood that the commencement,
settlement and conduct thereof shall be in the sole discretion of the Landlord.
The Tenant shall pay its proportionate share of such imposition when due. Upon
final determination, the Tenant shall be entitled to its proportionate share of
the net amount (after deduction for experts, attorneys, witnesses and all other
fees and expenses) of any refund of such impositions to the extent the same may
have been paid by the Tenant. Tenant shall have the right to contest a real
estate tax increase only with the written consent of the Landlord.
14. Paragraph 14 is amended and supplemented by adding the following:
Anything in the Paragraph 14(a) to the contrary notwithstanding, it is agreed
that all costs of compliance which are caused by or related to TENANT's manner
of use of the Demised Premises shall be the sole responsibility of the TENANT.
Where compliance is required of the Building, generally, and not as a specific
result of TENANT's manner of use, then the TENANT shall only pay its
proportionate share of such compliance, which cost of compliance shall be
amortized over the useful life of each such improvement as reasonably determined
by the parties.
15. Paragraph 15 is amended and supplemented by adding the following:
(d) The Landlord shall:
(i) maintain the public areas, roof and exterior walls in
good condition;
(ii) make all structural repairs unless these repairs are made
necessary by the act or neglect of the Tenant or the Tenant's
employees;
The Landlord shall have no liability to the Tenant, nor shall there be
any allowance nor abatement whatsoever to the Tenant for diminution in the
rental value of the Demised Premises, nor shall the Tenant's covenants and
obligations under the Lease be reduced, abated or affected in any manner
whatsoever, by reason of any inconvenience, annoyance, disturbance,
interruption, loss of business or other damage or injury arising from either the
Landlord's doing or failing to do any repairs, maintenance, alterations,
additions, improvements, replacements, changes or work of any nature or type
whatsoever to any portion of the Building, Land, Demised Premises or their
fixtures, appurtenances or equipment.
16. Paragraph 16 is amended and supplemented by adding the following:
"Alterations" means alterations, additions, substitutions,
installations, changes, and improvements, but excludes minor decorations.
The Tenant shall not make Alterations without the Landlord's advance
written consent. Any alterations made without the Landlord's written consent
shall be removed by the Tenant on demand.
All alterations made with the Landlord's written consent shall become
the property of the Landlord when completed and paid for by the Tenant. They
shall remain as part of the Premises at the end of the Term. The Landlord may
demand that the Tenant remove any Alterations at the end of the Term. The Tenant
shall promptly pay for all costs of any permitted Alterations. The Tenant shall
not allow any mechanic's lien or other claim to be filed against the Building.
If any lien or claim is filed against the Building, the Tenant shall have it
promptly removed.
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Prior to performing any work permitted hereunder, the Tenant shall
first submit plans and specifications to the Landlord for its approval. No work
may be commenced and no permits may be applied for unless and until the Landlord
has issued its written approval for all work which Tenant proposes to perform.
Upon receiving Landlord's written approval, then Tenant shall obtain, at the
Tenant's cost and expense, all permits, approvals, certificates and the like
required by any governmental or quasi-governmental bodies and, upon completion,
certificate of final approval thereof and shall deliver promptly duplicates of
all such permits, approvals, certificates and the like to the Landlord. In
addition, before commencing any work on the Demised Premises, the Tenant and its
contractors and subcontractors shall provide the Landlord with acceptable
insurance certificates insuring the Landlord against all risks and liabilities
relating to the Tenant's construction on the Demised Premises. The Tenant agrees
to carry, and will cause its contractors and subcontractors to carry such
builder's risk, workman's compensation, general liability, personal and property
damage insurance as the Landlord may require. Any change in or additional
plumbing or electrical wiring for installations made by the Tenant in the
Demised Premises shall be made at the Tenant's own cost and expense by a
licensed plumber or electrical contractor as appropriate, with proper permits
for same. Upon completion of such work, the Tenant shall obtain and deliver to
the Landlord certificates of inspection and approval from the authorities having
jurisdiction.
The Tenant shall not and is specifically prohibited from doing any of
the following:
(i) installing or hanging or in any way attaching any equipment,
machinery, appurtenances, or the like on any structural element of the
Building, on the exterior of the Building, on the roof, or anywhere on
the Land,
(ii) cutting any holes into any structural elements of the Building, or
into the exterior of the Building or into the roof,
(iii) making any structural modifications to the Demised Premises or to
the Building,
(iv) making any modifications or alterations to the Building's systems
as they existed at the Commencement Date.
19. Paragraph 19 is amended and supplemented by adding the following:
The Tenant shall notify the Landlord at once of any fire or other
casualty, in the Premises. The Tenant is not required to pay Rent when the
Rental Space is unusable. If the Tenant uses part of the Premises, the Tenant
must pay Rent pro-rata for the usable part.
If the Rental Space is partially damaged by fire or other casualty, the
Landlord shall repair it as soon as possible. This includes the damage to the
Rental Space and fixtures installed by the Landlord. The Landlord need not
repair or replace anything installed by the Tenant.
If the fire or other casualty is caused by the negligent act or neglect
of the Tenant or the Tenant's employees, agents or invitees, the Tenant shall
pay for all repairs and all other damages.
In case of any damage to the Building by fire or other casualty
occurring during the Term or previous thereto, which renders the Demised
Premises totally untenantable and that the same cannot be repaired within six
(6) months from the happening of such damage, then the Term of this Lease shall
terminate from the date of the surrender of the Demised Premises by the Tenant
to the Landlord. The Tenant shall pay rent only to the time of such surrender.
Upon such termination, the Landlord, discharged from all of the terms,
conditions and provisions of this Lease and any liability thereunder, may
re-enter and repossess the Demised Premises without any liability whatsoever to
any party. If the Demised Premises shall be so damaged, but the damage is
repairable within six (6) months from the happening of such damage, the Landlord
agrees that if required to do so by the other terms and conditions of this Lease
to repair the same with due diligence and reasonable speed and dispatch subject
to the terms and conditions of this Lease. In such event, this Lease shall
remain in full force and effect during the period of the Landlord's restoration
and the rent shall abate during the period of restoration. The payment of rent
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shall resume upon such restoration and delivery by the Landlord to the Tenant.
Landlord need not repair or replace anything installed by the Tenant.
If the Demised Premises shall be partially damaged then, if required to
do so by the other terms and conditions of this Lease, the Landlord agrees to
repair the same with due diligence and reasonable speed and dispatch subject to
the terms and conditions of this Lease. In such event, this Lease shall remain
in full force and effect during the period of the Landlord's restoration. The
rent accrued and accruing shall not abate, except for that portion of the
Demised Premises that has been rendered untenantable and as to only that portion
the rent shall abate pro rata. The payment of rent for such portion shall resume
upon its restoration and delivery by the Landlord to the Tenant.
In all events, the Landlord shall receive the insurance proceeds and
the Tenant shall assign and deliver to the Landlord all insurance proceeds or
rights thereto arising from the damage to or destruction of the Demised
Premises. Provided the damage shall be covered by insurance as aforesaid, and
provided the insurance applicable shall be in an amount equal to the full
replacement value of the property damaged, the Landlord shall pay from these
proceeds the cost of repairing such damage as may have occurred, whether total
or partial. It is the intent of the parties hereto that the Landlord shall be
responsible for the repair of all damage to the Demised Premises only to the
extent that the cost of such repairs is covered by insurance and only after the
Landlord receives the appropriate insurance proceeds and not otherwise. In the
event the damage shall not be covered by insurance or if the insurance proceeds
are insufficient to cover the full cost of repairing the damage, including both
temporary and permanent repairs, and the damage has been caused by the negligent
act of Tenant, its employees, agents or invitees, then the cost of repairing,
replacing or restoring the Demised Premises shall be payable by the Tenant to
the Landlord but only to the extent that the insurance proceeds are insufficient
to cover the cost of repairing the damage. It is further understood that the
responsibility of the Landlord to repair, replace or restore damaged property
covered by insurance shall not extend to items of the Tenant's personal property
maintained on the Demised Premises nor to any removable improvements made by the
Tenant. Such items shall be restored, replaced or repaired by the Tenant at its
option. All insurance proceeds as are applicable to the repair, replacement or
restoration of damaged property which is the responsibility of the Landlord,
shall be paid to the Landlord or to the mortgagee designated by the Landlord
prior to the Landlord's commencement of permanent repairs. The Tenant hereby
consents to and assigns to the Landlord all its right, title and interest in
such insurance proceeds. In all events, the Tenant is responsible to pay the
amount of any deductions which the insurance company may make for any reason
from the payment of the claim. Anything in the foregoing to the contrary
notwithstanding, Tenant does not assign any insurance proceeds to Landlord which
have been paid to Tenant for the repair or replacement of Tenant's property.
20. Paragraph 20 is amended and supplemented by adding the following:
If the Land, Building or Demised Premises or any portion thereof are
taken under Eminent Domain or condemnation proceedings as defined herein and the
Demised Premises cannot be reasonably restored to a complete architectural unit,
then this Lease shall terminate, and the Term hereof shall end as of such date
as the Landlord shall fix by notice in writing to the Tenant. The Tenant shall
have no claim against the Landlord for the value of any unexpired Term.
In the event that the Demised Premises can be so restored and the
amount of any separate award received by the Landlord for such restoration is
sufficient to pay for such work, then the Landlord shall with reasonable
dispatch restore and make a complete architectural unit of Demised Premises and
shall pay the cost of such work. In such event, this Lease shall continue in
full force and effect except that the rent shall be abated proportionately as
appropriate for the portion of the Demised Premises taken in condemnation. If,
however, the amount of any separate award received by the Landlord is
insufficient to pay for such restoration, then this Lease, at the option of the
Landlord, shall terminate and the Term hereof shall end as of such date as the
Landlord shall fix by notice in writing to the Tenant. In such event, the Tenant
shall have the option of paying for any deficiency in such separate award. If
the Tenant chooses to pay for such deficiency, then the Landlord shall with
reasonable dispatch restore and make a complete architectural unit of the
Demised Premises and shall pay the cost of such work, but in no event shall the
Landlord be required to expend more than a sum equal to the amount of a separate
award received by the Landlord for such restoration plus Tenant's deficiency
payment. Under such circumstances, any deficiency in such separate award will be
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paid by the Tenant and this Lease shall continue in full force and effect except
that the rent shall be abated proportionately as appropriate for the portion of
the Demised Premises so taken in condemnation. This Lease, at the option of
Landlord or Tenant, shall terminate in the event the Building cannot be
restored.
The award, proceeds or settlement on all or any part of the Demised
Premises, in any such condemnation proceeding shall be payable to the Landlord.
No part of any award made to the Landlord shall belong to the Tenant, nor shall
the Tenant make any claim against the governmental or other authority for the
value of its leasehold. All rights of the Tenant, if any, to damages are hereby
assigned to the Landlord and the Tenant hereby assigns to the Landlord all of
its interest and rights in and to such awards, proceeds or settlements. The
Tenant agrees to execute and deliver to the Landlord any instruments or
documents as may be required or deemed necessary to facilitate or expedite any
aforesaid proceedings, or to obtain such awards, proceeds or settlements for the
Landlord, or to effectuate a proper transfer of title to such governmental or
other authority, agency, body or public utility seeking to take or acquire the
said Land, Building or Demised Premises or any part thereof. In the event the
Tenant fails to so execute the aforesaid documents in a timely manner, the
Tenant hereby constitutes and appoints the Landlord as its attorney in fact and
authorizes the Landlord to execute the aforesaid documents on its behalf without
any further authorization from the Tenant.
Provided the Landlord's condemnation proceedings are not thereby
interfered with or delayed, the Tenant may, by separate application and at its
own cost and expense, enter into condemnation proceedings in its own right for
the purpose of asserting any claim it may have with respect to such improvements
as it may have installed in the Demised Premises which improvements would not
otherwise be the property of the Landlord upon the termination of this Lease and
for which it would be entitled to compensation under existing law, provided,
however, that such award shall be made in addition to, and shall not result in a
reduction of, the award payable to the Landlord. The Tenant may not participate
in nor interfere with nor delay the condemnation proceedings nor any settlement
thereof of the Landlord nor may the Tenant make any claim for the value of the
portion of this Lease then remaining. Such separate awards as may result from
the Tenant's separate claims shall be payable to the Tenant.
If the taking of the whole or any part of Demised Premises, as would
render the use of the premises unsuitable for the Tenant as set forth above,
shall be for a period of six (6) months or less, the rent payable by the Tenant
to the Landlord shall abate from the date possession of the premises is
surrendered to the condemning authority and recommence when possession is
restored to the Tenant. If such taking shall extend beyond six (6) months, then
this Lease may be terminated at the option of either party. The party exercising
such option must do so within thirty (30) days of the date possession of the
premises is surrendered to the condemning authority. If any party does not so
terminate within the said thirty (30) days, it loses its right to do so. In the
event of such temporary taking, neither the Term of this Lease nor the
Expiration Date hereunder shall be affected.
If there is a termination of this Lease pursuant to this article, then
the Tenant covenants and agrees to immediately vacate the Demised Premises,
remove all of its personal property and other items therefrom, and deliver
peaceable possession thereof to the Landlord or to such party designated by the
Landlord. If the Tenant fails to remove all of its personal property and other
items from the Demised Premises within fourteen (14) days of the finalization of
the condemnation proceedings the Landlord, as it sees fit, may remove and
dispose of any and all property or other items found in or on the Demised
Premises, Building or Land at the sole cost and expense of the Tenant and the
Tenant shall indemnify and hold the Landlord harmless from and against any and
all claims from any and all parties whatsoever in connection with such removal
or disposal. Failure by the Tenant to comply with any provisions in this article
shall subject Tenant to such costs, expenses, damages, losses and the like as
the Landlord may incur by reason of the Tenant's breach hereof including, but
not limited to, attorney's fees (whether for litigation or otherwise) and the
like.
21. Paragraph 21 is amended and supplemented by adding the following:
Landlord shall utilize its best efforts to obtain from each mortgagee a
non-disturbance and attornment agreement which would provide that so long as the
Tenant is not in default each such mortgagee will recognize this Lease provided
that Tenant attorns to such mortgagee.
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31. LANDLORD'S WORK: Tenant has inspected the Premises and agrees to accept the
Premises in an "as is" condition. Tenant shall perform all work required in
order to obtain a Certificate of Occupancy at its sole cost and expense, obtain
any municipal permits that may be required, and comply with all municipal
construction codes.
32. FIRE INSURANCE: In addition to the Rent, the Tenant shall, as
Additional Rent, pay its proportionate share of the premiums comprehensive fire
and extended coverage insurance covering the Building and the improvements upon
the Land and the Demised Premises with full extended coverage, and such other
insurance (including flood insurance and war risk insurance) as may from time to
time by available and reasonably required by the Landlord or its mortgagees or
any governmental authority, all for the benefit of the Landlord and said
mortgagees, and in an amount equal to one hundred percent (100%) of the full
replacement value of all of the buildings and improvements upon the Land without
deduction for depreciation including, but not limited to, such added replacement
costs as may result by reason of any change or changes in applicable ordinances
and building codes. The Landlord reserves the right to adjust the amount of
insurance coverage from time to time as may be required or desirable to provide
adequate coverage consistent with then existing economic conditions. Fire and
extended coverage policies insuring the Building shall not name the Tenant as an
insured party.
The Tenant shall pay its portion of such insurance premiums in twelve
(12) equal monthly installments to the Landlord on the first day of every month,
in advance.
If due to the Tenant's use of the Premises the Landlord cannot obtain
and maintain fire insurance on the Building in an amount and form reasonably
acceptable to the Landlord, the Landlord may cancel this Lease on thirty (30)
days notice to the Tenant. If due to the Tenant's use of the Premises the fire
insurance rate is increased, the Tenant shall pay the increase in the premium to
the Landlord on demand.
33. COMPLIANCE WITH LAW AND INSURANCE REGULATIONS: During Terms of this
Lease, the Tenant shall, at its sole cost and expense, promptly observe and
comply with the legal requirements and with all federal, state, county and
municipal laws, ordinances, statutes, rules, orders, requirements, regulations,
rulings, and the like of any and all governmental authorities, present and/or
future, having jurisdiction over the Demised Premises, or over the Tenant's or
its permittees' use or occupancy of the Demised Premises, or over the business
at any time transacted thereon by the Tenant or its permittees, or by anyone
using or occupying the premises by, through or under the Tenant. It is expressly
understood that the Tenant is obligated to make or reimburse Landlord for all
changes, structural and nonstructual, foreseen and unforeseen, ordinary and
extraordinary, in order to comply with such governmental regulations, whether or
not arising out of the Tenant's or its permittees' use or occupancy of the
Demised Premises. The Tenant shall also, at the Tenant's cost and expense,
comply with reasonable rules promulgated by the Landlord in writing, for the
correction, prevention and abatement of nuisances, violations or other
grievances, in, upon or connected with the Demised Premises, Building or Land
during said Term. The Tenant shall also, at its sole cost and expense, promptly
observe and comply with all regulations of the Fire Department and any insurance
underwriting board, insurance inspection bureau and other body exercising
similar functions, and with all insurance companies writing policies covering
the Demised Premises, Building and/or Land or any part thereof, and with any
other body exercising similar functions, including, but not limited to, the
installation of fire extinguishes and other safety equipment.
Anything in the foregoing to the contrary notwithstanding, it is agreed
that all costs of compliance which are caused by or related to TENANT's manner
of use of the Demised Premises shall be the sole responsibility of the TENANT.
Where compliance is required of the Building, generally, and not as a specific
result of TENANT's manner of use, then the TENANT shall only pay its
proportionate share of such compliance, which cost of compliance shall be
amortized over the useful life of each such improvement as reasonably determined
by the parties.
The Tenant and/or its permittees and/or anyone using or occupying the
premises by, through or under the Tenant shall not refine, produce, store,
handle, use, transfer, process, transport, dispose of or the like any hazardous
or toxic substances or wastes as same may be described or defined in any
federal, state or local law, ordinance or statute at, on, in or about the
Demised Premises, Building or Land. Should the Tenant or its permittees or
anyone using or occupying the premises by, through or under the Tenant cause or
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permit any intentional or unintentional action or omission resulting in the
releasing, spilling, leaking, pumping, pouring, emitting, emptying, dumping, or
the like of any such hazardous wastes, or substances, the Tenant shall promptly
clean up such wastes or substances and repair any related damage in accordance
with the provisions of all applicable laws including, but not limited to, the
New Jersey Spill Compensation and Control Act and pay and discharge any and all
fines, penalties, costs, interest charges, expenses and like which may be impose
as a result of such actions or omissions. In the event that there shall be filed
a lien against the Demised Premises, then the Tenant shall immediately either
(a) pay the claim and remove the lien from the Demised Premises, or (b) furnish
a bond, cash deposit or other security satisfactory to the Landlord, the
Landlord's title insurance company, and mortgagee, if any, in an amount
sufficient to discharge the claim out of which the lien arises.
Without limiting anything contained in this Lease, the Tenant covenants
and agrees that it shall fully comply with all federal, state, county and
municipal environmental laws including, but not limited to, the New Jersey
Industrial Site Recovery Act (ISRA), the New Jersey Spill Compensation and
Control Act, and all acts, laws, rules, regulations, directives, modifications,
changes and the like presently or hereafter promulgated by the state and/or the
federal government and/or their various divisions and agencies and/or any other
authority having jurisdiction. In addition, prior to the Expiration Date or
earlier termination of this Lease, the Tenant agrees to supply to the Landlord
appropriate Evidence of Compliance with the aforesaid laws, rules and
regulations. "Evidence of Compliance", as used herein, shall be deemed to
include a letter of non-applicability regarding ISRA or a letter of negative
declaration issued by the New Jersey Department of Environmental Protection and
Energy. Without limitation of the foregoing, the Tenant's obligations shall
include the proper filing of all forms and the performance to the State's and
the Landlord's satisfaction of all soil, ground, water and surface water
sampling and tests required by the State of New Jersey. The Tenant shall
immediately provide the Landlord with copies of all filings, correspondence,
reports, notices, orders, findings, declaration and other materials pertinent to
the Tenant's compliance. The Tenant's SIC number is . The Tenant shall be
obligated to continue to make monthly payments to the Landlord in the sum
equivalent to the monthly Fixed Rent for the last month of the Term together
with all Additional Rent without occupancy of the premises until the delivery of
the appropriate Evidence of Compliance. The foregoing notwithstanding, if Tenant
is eligible to receive a Letter of Nonapplicability and has filed the necessary
affidavit, filing fee an other document pursuant to NJDEP regulations not less
than sixty (60) days prior to the expiration of the Term, then the preceding
sentence concerning rent payments shall not be applicable. If, however, Tenant's
application for a Letter of Nonapplicability is rejected by NJDEP and some other
form of compliance would be required, then the obligations provided above shall
be immediately reinstated.
In the event appropriate Evidence of Compliance is not delivered to the
Landlord prior to the surrender of the Demised Premises by the Tenant, it is
agreed and understood that the Tenant shall furnish for the benefit of the
Landlord a bond or other security satisfactory to the Landlord in an amount
equal to two hundred percent (200%) of the total cost of effecting such
compliance. Said bond or other security shall remain effective until the time as
appropriate Evidence of Compliance has been delivered to the Landlord. The
Landlord may draw upon said bond or other security if such Evidence of
Compliance is not delivered to the Landlord within six (6) months of the
Expiration Date or earlier termination of this Lease. The Tenant shall be solely
liable for and shall pay to the Landlord as Additional Rent, any and all costs,
fees, expenses and the like incurred by the Landlord in enforcing or satisfying
the Tenant's obligations under this article and this Lease, including, but not
limited to, engineering, sampling, inspection, cleanup, removal, damages, fines,
attorney's fees (whether for litigation or otherwise) and the like.
If, as of the Effective Date of this Lease, ISRA or any other
environmental statute, law or ordinance, does not apply to the Tenant's business
or operations, it may not engage in any future activity on the Demised Premises
which would subject it to the regulation of ISRA or any other environmental
statute, law or ordinance. The Tenant may not increase or expand in any new or
additional operations which are subject to the regulations of ISRA or any other
environmental statute, law, or ordinance of any operations which may be
considered hazardous, above which it may be engaging in as of the Effective Date
of this Lease.
34. DEFAULT, ADDITIONAL REMEDIES: In addition to the matters set forth
elsewhere in this Lease, during the Term of this Lease and any renewals or
extensions thereof, events of default shall include, but shall not be limited
to, the following, whether by act, omission or by operation of law:
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(i) any voluntary or involuntary assignment, transfer or sale of
the Tenant's assets for the benefit of creditors, or
(ii) an adjudication that the Tenant is bankrupt or insolvent, or
(iii) the filing of any voluntary or involuntary petition in bankruptcy
by or against the Tenant or instituting a proceeding under the Revised
Bankruptcy Act, or
(iv) the Tenant's dissolution, liquidation, break up, transfer, sale,
or decrease of fifty percent (50%) or more in the Tenant's assets or
net worth, or
(v) if the Tenant is a partnership or consists of more than one
person and any partner of the partnership or any other person or entity
making up the Tenant in this Lease is or becomes bankrupt or insolvent,
or makes an assignment for the benefit of creditors, or
(vi) an appointment of a receiver for the assets of the Tenant for
insolvency or alleged insolvency of having the authority to take
possession of the Demised Premises, or
(vii) an attachment of or levy on or writ of execution against the
Tenant's leasehold interest by any third party, or
(viii) failure by the Tenant to pay, at the time the same are due and
payable, any installment of rent or other sum due under this Lease to
be paid by the Tenant, or
(ix) any subletting or assignment of this Lease by the Tenant which
not approved by the Landlord in accordance with the terms of this
Lease or otherwise not permitted under this Lease, or (x) the Tenant's
loss of authorization to do business in New Jersey, or
(xi) the Tenant's abandoning, deserting or vacating the Demised
Premises, or
(xii) any execution or attachment or the like issued against the
Tenant or any of the Tenant's property whereupon the Demised Premises
shall be taken or occupied by someone other than the Tenant, or
(xiii) failure by the Tenant to perform or observe any other
requirement of this Lease which is its obligation to perform or
observe.
The Landlord shall be entitled to the following additional remedies in
the Event of Default by or Eviction of the Tenant:
(i) In the event of default, the Landlord may, at any time thereafter,
terminate this Lease, upon giving notice of such termination to the
Tenant or to any one of any trustees, receivers, assignees or other
persons in charge of or acting as a custodian or owner of the assets
or property of the Tenant. This Lease shall terminate on the date
fixed in such notice. Notwithstanding any such termination, the
Landlord may still enforce its rights pursuant to this Lease.
(ii) No payment by the Tenant or receipt or acceptance by the Landlord
of a lesser amount than the full amount of any payment shall be deemed
to be other than a payment on account, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment
be deemed an accord and satisfaction, and the Landlord may accept such
check or payment without prejudice to the Landlord's right to recover
the balance or to pursue any other remedy provided in this Lease or at
law or equity.
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(iii) If the Tenant fails to pay any installment of rent or any other
monetary obligation for more than five (5) days after the same becomes
due and payable, the Tenant shall pay to the Landlord upon demand, as
Additional Rent, a late fee of five percent (5%) of the outstanding
installment or payment due. In addition, rent or any other monetary
obligation, including but not limited to late fees, not paid when due
shall bear interest from the date due until paid at the lesser of one
percent (1%) per month or the maximum rate permitted by law to charge.
The Tenant, on behalf of itself and any and all persons claiming
through or under the Tenant, does hereby waive and surrender all right and
privilege which it, they or any of them have or might have, under or by reason
of any present or future law, to redeem the Demised Premises or to have a
continuance of this Lease after being dispossessed, removed or ejected from the
Demised Premises by process of law or under the provisions of this Lease or
after the Expiration Date or earlier termination of this Lease.
The specified remedies to which the Landlord may resort under the
provisions of this Lease are cumulative and are not intended to be exclusive of
any other remedies or means of redress to which the Landlord may be lawfully
entitled in case of any breach or threatened breach by the Tenant of any
provision of this Lease. If the Landlord pursues any remedy granted by the
provisions of this Lease or at law or equity, it shall not be construed as a
waiver or relinquishment of any other remedy afforded thereby. For the purposes
of any suit brought or based hereon, this Lease shall be construed to be a
divisible contract, and successive actions may be maintained on this Lease on
successive periodic sums which mature hereunder. For the purposes of any suit
brought or based herein, this Lease shall be construed to be a divisible
contract and successive actions may be maintained on this Lease on successive
periodic sums which mature hereunder.
No waiver by the Landlord of any term, covenant, condition, provision,
agreement or the like of this Lease shall be deemed to have been made unless
expressed in writing and signed by the Landlord. In addition, any assumption by
the Landlord of any payment to be made by or any duty to be performed by the
Tenant shall not obligate the Landlord, nor relieve the Tenant from the
responsibility, to make any such payment or to perform any such duty in the
future. The consent or approval of the Landlord to or of any act by the Tenant
shall not be deemed to waive or render unnecessary consent to or approval of any
subsequent similar act. Any inaction by the Landlord shall not be deemed to be
an approval of any act of the Tenant.
The Landlord reserves a right of re-entry which allows the Landlord to
end this Lease and re-enter the Premises if the Tenant violates any agreement in
this Lease. This is done by eviction. Eviction is a court procedure to remove a
Tenant. Eviction is started by filing a complaint in court and the service of a
summons on a Tenant to appear in court. The Landlord may also evict the Tenant
for any one of the other grounds of good cause provided by law. After a court
order of eviction and compliance with the warrant of removal, the Landlord may
re-enter and take back possession of the Premises. If the cause for eviction is
non-payment of Rent, notice does not have to be given to the Tenant before the
Landlord files a complaint. If there is any other cause to evict, the Landlord
must give notice to the Tenant the notice required by law before the Landlord
files a complaint for eviction.
The Tenant is liable for all damages caused by the Tenant's violation
of any agreement in this Lease. This includes reasonable attorney's fees and
costs.
After eviction the Tenant shall pay the Rent for the Term or until the
Landlord re-rents the Premises, if sooner. If the Landlord re-enters the
Premises for less than the Tenant's Rent, the Tenant shall pay the difference
until the end of the Term. The Tenant shall not be entitled to any excess
resulting from the re-renting. The Tenant shall also pay (a) all reasonable
expenses incurred by the Landlord in preparing the Premises for re-renting and
(b) commissions paid to a broker for finding a new tenant.
35. REQUEST BY MORTGAGEE OR PROSPECTIVE MORTGAGEE FOR CHANGE OF LANGUAGE:
Provided that the same do not increase any of the Tenant's duties, obligations
or liabilities, and further provided that the same do not limit the Tenant's
rights with respect to the Demised Premises and the common areas, then in the
event that a mortgagee or prospective mortgagee of the Demised Premises shall
request a change in the language or provisions of this Lease or shall require a
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separate agreement of any kind, the Tenant shall execute such consents without
delay.
36. SEVERABILITY: If any term or provision of this Lease or the application
thereof to any person or circumstance shall, to any extent, be invalid or
unenforceable, the remainder of this Lease, or the application of such term or
provision to persons or circumstances other than those as to which it is held
invalid or unenforceable, shall not be affected thereby, and each term and
provision of this Lease shall be valid and be enforced to the fullest extent
permitted by law. If any provision of this Lease is capable of two
constructions, one of which would render the provision invalid and the other of
which would render the provision valid, the provision shall be the meaning which
renders it valid.
37. CONSTRUCTION: It is agreed and understood that this Lease, its terms
and conditions and any interpretation hereof shall be construed (i) in
accordance with the laws of the State of New Jersey and (ii) as a work product
jointly drafted by counsel for the parties.
38. NO REPRESENTATIONS BY LANDLORD: The Landlord and the Landlord's agents
and representatives have made no representations or promises, by implication or
otherwise, with respect to the said Demised Premises, Building, Land,
neighboring surroundings, rents, leases, expenses of operation, or any other
matter or thing affecting or related to the Demised Premises or the leasing of
same except as herein expressly set forth. The Tenant has inspected the Land,
Building, and Demised Premises and is thoroughly acquainted with their condition
and agrees to take the same "as is" except as expressly provided for in this
Lease. The Tenant agrees that in taking this Lease, it is governed by its own
inspection of the premises and plans, and by its own judgement of their
desirability for its purpose, and it has not been governed or influenced by any
representatives of the Landlord or the Broker, if any, as to the condition,
suitability and/or character of the Demised Premises including, but not limited
to, the Building, site, location, and all other matters.
39. WAIVER OF TRIAL BY JURY: The Landlord and Tenant shall and hereby do
waive trial by jury in any action, proceeding or counterclaim brought by either
of the parties hereto against the other party on any matters whatsoever arising
out of or in any way connected with this Lease, the relationship of the Landlord
and the Tenant, the Tenant's use or occupancy of said premises, any claim or
injury or damage, and any emergency statutory or any other statutory remedy. It
is further mutually agreed that in the event the Landlord commences any summary
proceeding for possession of the Demised Premises, the Tenant will not interpose
any counterclaim of whatever nature or description in any such proceedings. The
Tenant may only file its counterclaim, if any, in a separate and distinct action
or proceedings.
40. MEMORANDUM OF LEASE: Neither this Lease nor a memorandum of any of its
contents shall be recorded by the Tenant without the Landlord's prior written
consent, which consent shall or shall not be given in the sole discretion of the
Landlord. Should the Tenant record this Lease or a memorandum of the contents
hereof without the Landlord's prior written consent, the Landlord may, upon
written notice to the Tenant, terminate this Lease as of the date of such
notice.
41. BROKER: The Tenant represents that it has dealt with no realtors,
brokers, salespersons, agents or the like in connection with the negotiation of
this Lease and the renting of the Demised Premises hereunder, other than SBWE,
Inc. (the "named Broker"), and that no person, firm, corporation or other entity
is or shall be entitled to the payment of any fee, commission, compensation or
the like or other form of remuneration in connection with this Lease in any
manner. The Tenant also represents that it has no prior agreement for any
payments of commissions or the like to any such person for the Demised Premises.
Should any claims be made for brokerage commissions, other than those payable to
the above named Broker, through or on account of dealings, conversations,
statements, negotiations or the like of the Tenant or its agents or
representatives, the Tenant shall indemnify the Landlord against any and all
losses, costs, claims, damages, liability, expenses or the like including, but
not limited to, costs of litigation, attorney's fees (whether for litigation or
otherwise) and the like, in connection therewith. The Landlord agrees to pay a
real estate commission to the named Broker in accordance with a separate written
agreement between the Landlord and the named Broker, all of the terms of which
are incorporated in this Lease. This obligation to pay a real estate commission
to the named Broker, including but not limited to installment payments, or
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commissions for lease renewals, extension or the like, if any, shall run with
this Lease and the right to receive the rent. The written agreement between the
Landlord and the named Broker, and the obligation to pay the real estate
commission referred to herein, shall be binding upon any person who, or entity
which, becomes the Landlord under this Lease, by any means whatsoever.
42. INDEMNIFICATION: The Landlord shall not be liable for injury or damage
to any person or property unless it is due to the Landlord's act or neglect. The
Tenant is liable for any loss, injury or damage to any person or property caused
by the act or neglect of the Tenant or the Tenant's employees. The Tenant shall
defend the Landlord and reimburse the Landlord for all liability and costs
resulting from any injury or damage due to the act or neglect of the Tenant or
the Tenant's employees.
The Tenant further agrees to indemnify and save the Landlord harmless
from and against any and all claims by or on behalf of any person, firm,
corporation, entity, or the like and any and all other parties, arising from the
conduct about or management of or condition of the Demised Premises, or from the
Tenant's or its permittees' use or occupancy of or operations in the Demised
Premises or that of anyone using or occupying the premises by, through or under
the Tenant, or from any accident in or on the Demised Premises. The Tenant will
further indemnify and save the Landlord harmless from and against any and all
claims arising from any breach or default on the part of the Tenant or any of
its permittees or anyone using or occupying the premises by, through or under
the Tenant in the performance of any covenant or agreement to be performed
pursuant to the provisions of this Lease, or arising from any negligence or act
or failure to act of the Tenant or any of its permittees or anyone using or
occupying the premises by, through or under the Tenant, and from and against all
costs, counsel fees, expenses, liabilities and the like incurred as a result of
any such claim, action or proceeding brought thereon. In case any action or
proceeding is brought against the Landlord by reason of any such claim, the
Tenant, upon notice from the Landlord and at the Tenant's sole cost and expense,
covenants to immediately resist or defend such action or proceeding by counsel
reasonably satisfactory to the Landlord or to pay for the Landlord's legal fees
for such defense at the Landlord's option. Anything is this Lease to the
contrary notwithstanding, the Tenant hereby waives, for itself and all of its
insurance carriers, any and all rights of subrogation against the Landlord
and/or its permittees for any loss or damage, regardless of cause or origin, and
the Tenant agrees to obtain from its insurance carrier or carriers a waiver of
its and/or their right to subrogation against the Landlord. A copy of this
waiver shall be delivered to the Landlord along with the evidence of insurance
described in this Lease. The inability to obtain a written waiver of subrogation
from any insurance carrier shall in no way limit the enforceability of this
paragraph against any such insurance carrier. Nothing in this Article is to be
construed to limit the coverage for the protection of the Landlord under the
Tenant's liability policy as provided in this Lease.
Neither the Landlord nor its permittees shall be liable for any damage
or injury to property or person caused by or resulting from (i) theft,
electricity, gas, water, sewer, any utility service, ice or snow (except
resulting from Landlord's negligence in performing snow plowing), any weather
condition, or any leak, flow or obstruction from or into any part of the Demised
Premises, Building or Land; (ii) from any action or non-action of itself or the
Tenant or their respective permittees or any other person or party; or (iii)
from any damage or injury resulting or arising from any other cause or happening
whatsoever. The within covenant by the Tenant is an express inducement to the
Landlord to enter into this Lease.
Anything hereinabove contained to the contrary notwithstanding, the
Tenant in all events shall assume all risk of damage or loss to its property,
equipment, machines, inventory, fixtures and the like occurring in or about the
Demised Premises, Building or Land, whatever the case of such damage or loss.
The Tenant waives all right of recovery against the Landlord and its permittees
for any loss, damage, injury or the like of any nature whatsoever including work
interruption. The Tenant shall obtain from its insurance carrier waivers of
recovery and insurance rights under its policies which shall be included within
the terms of the policies and will furnish evidence of such waivers to the
Landlord upon request.
The Tenant agrees to save the Landlord harmless from and against any
and all claims, liability, responsibility or the like of any nature whatsoever
with regard to the Tenant's or its permittees' non-compliance with any or all
environmental acts, laws, rules, regulations or the like or that of anyone using
or occupying the premises by, through or under the Tenant or with regard to any
conditions caused by the Tenant or its permittees or anyone using or occupying
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the premises by, through or under the Tenant which may be in violation of any of
the provisions of any and all environmental acts, laws, rules, regulations or
the like.
The Tenant shall look solely to the Landlord's interest in the Real
Estate for the enforcement of any judgement or decree requiring the payment of
money to the Tenant by reason of any default or breach by the Landlord under
this Lease or for any other reason, and to no other property or asset of the
Landlord, its partners, owners, principals, officers, directors or the like. In
no event shall there be any personal liability on the part of the Landlord, its
partners, owners, principals, officers, directors or the like beyond its
interest in the Building and Land, and no other asset of the Landlord, its
partners, owners, principals, officers, directors or the like shall be subject
to levy, execution, attachment or any other legal process.
43. HOLDOVER: In the event that the Tenant shall remain in the Demised
Premises after the expiration of the Term of this Lease or after the termination
of this Lease, without having executed a new written lease with the Landlord nor
an extension to this Lease, such holding over shall not constitute a renewal or
extension of this Lease. The Landlord may, at its option, elect to treat the
Tenant as one who has not removed at the end of its term and as one who is
occupying the premises illegally, and thereupon be entitled to all the remedies
against the Tenant provided at law or equity in that situation. Or the Landlord
may, at its option, elect to construe such holding over as tenancy from
month-to-month, subject to all terms and conditions of this Lease, except as to
duration thereof and rent payable thereunder, and any other term or condition
which the Landlord, in its sole discretion, chooses to change, delete or add.
The Landlord shall give the Tenant thirty (30) days written notice of any
changes, deletions or additions to this Lease. In the event that the Landlord
chooses to treat the Tenant as having a holding over or month-to-month tenancy,
the Tenant shall be liable for all amounts provided for in N.J.S.A. 2A:42-6,
without prior demand or notice being required.
44. DUTY TO PAY RENT: The Tenant may not withhold all or any portion of,
nor may the Tenant offset nor deduct any amount from the Rent and Additional
Rent specified herein for any reason whatsoever except as provided in Paragraph
19 herein. This Lease and the obligation of the Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on the part of the
Tenant to be performed, shall in no way be affected, impaired or excused, in
whole or in part, for any reason whatsoever. The Tenant's sole remedy is to seek
an enforcement of the provisions of this Lease under operation of law by an
action or proceeding for specific performance, injunction or declaratory
judgement.
Rent, Additional Rent and any other monetary obligation of the Tenant
shall be paid in lawful money of the United States to the Landlord at its
office, or to the Landlord's agent or such other place as the Landlord shall
designate by notice to the Tenant. The Tenant shall pay all sums due promptly
without notice or demand therefor, and without any abatement, deduction, set off
or the like for any reason whatsoever, except as may be expressly provided in
this Lease. If the Tenant makes any payment to the Landlord by check, same shall
be by check of the Tenant and the Landlord shall not be required to accept the
check of any other person. Any check received by the Landlord shall be deemed
received subject to collection. Any acceptance by the Landlord of any payment
made by any other person for the account of the Tenant shall not be deemed to be
a consent by the Landlord to any assignment or subletting, nor shall it relieve
the Tenant of its obligations hereunder. If any check is mailed by the Tenant,
the Tenant shall post such check in sufficient time prior to the date when
payment is due so that such check will be received by the Landlord on or before
the day when payment is due. No lateness or failure of delivery of the mails
will excuse the Tenant from its obligation to have made the payment in question
when required under this Lease.
The Landlord is not liable for any inconvenience or harm caused by any
stoppage or reduction of utilities and services beyond the control of the
Landlord. This does not excuse Tenant from paying Rent.
45. LIMIT OF LANDLORD'S LIABILITY: The Tenant shall look solely to the
Landlord's interest in the Real Estate for the enforcement of any judgement or
decree requiring the payment of money to the Tenant by reason of any default or
breach by the Landlord under this Lease or for any other reason, and to no other
property or asset of the Landlord, its partners, owners, principals, officers,
directors or the like. In no event shall there be any person liability on the
part of the Landlord, its partners, owners, principals, officers, directors or
the like beyond its interest in the Building and Land, and no other asset of the
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Landlord, its partners, owners, principals, officers, directors or the like
shall be subject to levy, execution, attachment or any other legal process.
46. OPERATING EXPENSES: The Landlord shall make a reasonable estimate of
the Operating Expenses for each calendar year and the Tenant shall pay as
Additional Rent the Tenant's pro rata share of the Operating Expenses in twelve
(12) equal monthly installments, due and payable on the first day of each month.
If the last day of the Term ends on any day other than the last day of
a calendar year, any payment due to the Landlord or to the Tenant by reason of
any increase or decrease in Operating Expenses shall be pro rated as applicable
within ten (10) days of written notice.
Operating Expenses are the sum of the following, without limitation and
whether or not within the contemplation of the parties, including, but not
limited to: (i) the cost and expenses for the repair, replacement, maintenance,
policing, insurance and operation of the Building, Land, and common areas; (ii)
the cost for fire, rent, casualty, glass, flood, liability, fidelity and such
other insurance required by the Landlord or other parties having an insurable
interest; (iii) the fees payable to a managing agent appointed by the Landlord
(provided same are competitive with the fees payable to independent managing
agents of comparable facilities in Morris County), not to exceed five percent
(5%) of the Rent; (iv) professional fees other than legal and accounting; (v)
wages and fringe benefit payments to persons engaged in such operation,
maintenance and repair (for persons not engaged on a full-time basis at this
Property, these costs shall be allocated equitably); (vi) the cost of building
and cleaning supplies and service and maintenance contracts with independent
contractors; (vii) utilities covering all common areas, including heat, air
conditioning and storage areas, and parking areas; (viii) utility, water and
other charges for the Premises which are not separately metered; and (ix) the
cost for fire alarm systems.
Tenant shall have the right to receive copies, if available, of
invoices reflecting amounts billed as Operating Expenses and Real Estate Taxes
if requested in writing no later than thirty (30) days following Tenant's
receipt of Landlord's annual recap. Tenant shall then have the right to audit
Landlord's charges for Operating Expenses and Real Estate Taxes. Such audit
shall be requested, in writing, not later than thirty (30) days following
Tenant's receipt of Landlord's invoices of Operating Expenses and Real Estate
Tax charges and shall provide not less than thirty (30) days notice of the date
of such audit. Tenant shall be entitled to audit only the expenses for the year
in question and no others. Landlord shall afford Tenant access to its books and
records at Landlord's offices during normal business hours. If the audit reveals
that Landlord's charges are not overstated by an amount in excess of five
percent (5%), then Tenant shall reimburse Landlord for its reasonable costs
incurred in preparing for the audit, including but not limited to administrative
and bookkeeping expenses of Landlord's employees and employees of its duly
appointed managing agent. Landlord and Tenant shall, within thirty (30) days
after the audit, adjust any underpayment or overpayment and make any required
payment or credit for any overpayment.
The Landlord reserves the right to adjust the amount of insurance
coverage from time to time as may be required or desirable to provide adequate
coverage consistent with then existing economic conditions.
"Operating Expenses" shall not include the cost and expenses for the
replacement of the roof, floor, walls and structural elements of the Building.
"Operating Expenses" shall not include expenses for any improvements
made to the Land or Building which are capitalized except those expenses for
improvements which result in a savings of labor, energy, utility or material
costs shall be included at the lesser of the cost of such improvement amortized
over the useful life of the improvement or the annual savings in costs resulting
from the improvement.
47. LANDLORD AND TENANT RELATIONSHIP: Nothing contained in this Lease shall
be deemed or construed by the parties hereto or by any other party to create the
relationship of principal and agent or of partnership or joint venture or of any
other association whatsoever between the Landlord and the Tenant. It is
expressly understood and agreed that such relationship and association between
the parties hereto is one solely of landlord and tenant.
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48. TENANT'S CARE OF PREMISES:
The Tenant shall:
(i) promptly comply with all laws, orders, rules and requirements of
governmental authorities, insurance carriers, board of fire
underwriters, or similar groups;
(ii) maintain the Premises and all equipment and fixtures in it in
good repair and appearance;
(iii) make all necessary repairs to the Premises and all equipment and
fixtures in it, except structural repairs;
(iv) maintain the Premises in a neat, clean, safe, and sanitary
condition, free of all garbage;
(v) use all electric, plumbing, and other facilities in the Premises
safely, and maintain and replace all fixtures as required;
(vi) use no more electricity than the wiring or feeders to the Premises
can safely carry;
(vii) promptly replace all broken glass in the Premises;
(viii) do nothing to destroy, deface, damage, or remove any part of the
Premises;
(ix) keep nothing in the Premises which is inflammable, dangerous or
explosive or which might increase the danger of fire or other casualty;
(x) promptly notify the Landlord when there are conditions which need
repair;
(xi) do nothing to destroy the peace and quiet of the Landlord, other
tenants, or persons in the neighborhood;
(xii) avoid littering in the building or on its grounds.
The Tenant shall pay any expenses involved in complying with the above.
The Tenant agrees to cooperate with the Landlord and other tenants,
occupants and neighbors, if any, so as not to create any interference with the
normal use of the Demised Premises, the Building, the Land, and the surrounding
area. The Tenant shall not interfere with the proceedings of other tenants,
occupants or neighbors, if any.
The removal of all garbage, trash, rubbish, refuse and the like shall
be made only by way of the proper areas provided therefor. Garbage, trash,
refuse and the like shall be kept neatly in appropriate, sanitary and adequate
containers. The Tenant will separate all debris in accordance with any federal,
state, county and municipal regulations, directives and laws which may apply.
49. SURVIVAL OF REMEDIES: Any liability for payments hereunder including,
but not limited to, the payment of rent, repairs, maintenance and the like,
shall survive the termination, expiration or sooner cancellation of this Lease.
50. TRAILER STORAGE: The Tenant will not permit any storage of trailers nor
any storage inside trailers on the Land.
51. AUTHORITY OF PARTIES: Each party warrants that it is authorized to
enter into the Lease, that the person signing on its behalf is duly authorized
to execute the Lease, and that no other signatures are necessary.
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52. ATTORNEY'S FEES: The Tenant is liable for all damages caused by the
Tenant's violation of any agreement in this Lease. This includes reasonable
attorney's fees and costs.
53. NOTICES: Unless a Lease provision expressly authorizes verbal notice,
all notices under this Lease shall be in writing and sent by registered or
certified mail, postage prepaid, to the address for each party stated above in
this Lease.
Either party may change these persons or addresses by giving notice as
provided above. Tenant shall also give required notices to Landlord's mortgagee
after receiving notice from Landlord of the mortgagee's name and address. Notice
shall be considered given and received on the latest original delivery or
attempted delivery date as indicated on the postage receipt(s) of all persons
and addresses to which notice is to be given.
54. PARTIAL INVALIDITY: If any term or provision of this Lease or the
application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such term or provision to persons or circumstances other than those as to which
it is held invalid or unenforceable, shall not be affected thereby, and each
term and provision of this Lease shall be valid and be enforced to the fullest
extent permitted by law. If any provision of this Lease is capable of two
constructions, one of which would render the provision invalid and the other of
which would render the provision valid, the provision shall be the meaning which
renders it valid.
55. WAIVER: The failure of the Landlord to exercise any of its rights is
not a waiver of those rights. The Landlord waives only those rights specified in
writing and signed by the Landlord. The Landlord's failure to enforce any
agreement in this Lease shall not prevent the Landlord from enforcing the
agreement for any violations occurring at a later time.
56. CONSTRUCTION: It is agreed and understood that this Lease, its terms
and conditions and any interpretation hereof shall be construed (i) in
accordance with the laws of the State of New Jersey and (ii) as a work product
jointly drafted by counsel for the parties.
57. BINDING ON SUCCESSORS: This Lease shall bind the parties' heirs,
successors, representatives, subtenants and assigns.
58. GOVERNING LAW: This Lease shall be governed by the laws of the State of
New Jersey.
59. INSURANCE INCREASE: If due to Tenant's particular use of the Premises
the Landlord's insurance rates are increased, Tenant shall pay the increase.
60. WAIVER OF TRIAL BY JURY: The Tenant shall and hereby does waive trial
by jury in any action, proceeding or counterclaim brought by either of the
parties hereto against the other party on any matters whatsoever arising out of
or in any way connected with this Lease, the relationship of the Landlord and
the Tenant, the Tenant's use or occupancy of said premises, any claim or injury
or damage, and any emergency statutory or any other statutory remedy. It is
further mutually agreed that in the event the Landlord commences any summary
proceeding for possession of the Demised Premises, the Tenant will not interpose
any counterclaim of whatever nature or description in any such proceedings. The
Tenant may only file its counterclaim, if any, in a separate and distinct action
or proceedings.
61. RECORDING: Neither this Lease nor a memorandum of any of its contents
shall be recorded by the Tenant without the Landlord's prior written consent,
which consent shall or shall not be given in the sole discretion of the
Landlord. Should the Tenant record this Lease or a memorandum of the contents
hereof without the Landlord's prior written consent, the Landlord may, upon
written notice to the Tenant, terminate this Lease as of the date of such
notice.
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62. SURVIVAL OF REMEDIES: Any liability for payments hereunder including,
but not limited to, the payment of rent, repairs, maintenance and the like,
shall survive the termination, expiration or sooner cancellation of this Lease.
64. BUSINESS DAYS: Business days means Monday through Friday inclusive,
excluding holidays. Throughout this Lease, wherever "days" are used the term
shall refer to calendar days. Wherever the term "business days" is used the term
shall refer to business days.
65. ENTIRE AGREEMENT: This Lease contains the entire agreement between the
parties about the Premises and Building. Except for the Rules for which
paragraph 9.01(a) controls, this Lease shall be modified only by a writing
signed by both parties.
66. REQUEST FOR CHANGE OF LANGUAGE: Provided that the same do not increase
any of the Tenant's duties, obligations or liabilities, and further provided
that the same do not limit the Tenant's rights with respect to the Demised
Premises and the common areas, then in the event that a mortgagee or prospective
mortgagee of the Demised Premises shall request a change in the language or
provisions of this Lease or shall require a separate agreement of any kind, the
Tenant shall execute such consents without delay.
At no time may the Tenant use this Lease or the value of this Lease or
its leasehold as collateral for loans or for any similar purpose. The Tenant
shall not mortgage or encumber this Lease in any manner. The Tenant shall have
no authority to create or place any lien or encumbrance of any kind whatsoever
upon this Lease or upon the Demised Premises, Building or Land nor in any manner
to bind the interest of the Landlord in the Demised Premises, Building or Land.
67. NO REPRESENTATIONS BY LANDLORD: The Landlord and the Landlord's agents
and representatives have made no representations or promises, by implication or
otherwise, with respect to the said Demised Premises, Building, Land,
neighboring surroundings, rents, leases, expenses of operation, or any other
matter or thing affecting or related to the Demised Premises or the leasing of
same except as herein expressly set forth. The Tenant has inspected the Land,
Building, and Demised Premises and is thoroughly acquainted with their condition
and agrees to take the same "as is" except as expressly provided for in this
Lease. The Tenant agrees that in taking this Lease, it is governed by its own
inspection of the premises and plans, and by its own judgement of their
desirability for its purpose, and it has not been governed or influenced by any
representatives of the Landlord or the Broker, if any, as to the condition,
suitability and/or character of the Demised Premises including, but not limited
to, the Building, site, location, and all other matters.
68. LANDLORD AND TENANT RELATIONSHIP: Nothing contained in this Lease shall
be deemed or construed by the parties hereto or by any other party to create the
relationship of principal and agent or of partnership or joint venture or of any
other association whatsoever between the Landlord and the Tenant. It is
expressly understood and agreed that such relationship and association between
the parties hereto is one solely of landlord and tenant.
68. UTILITY DEREGULATION: Landlord has advised Tenant that presently
General Public Utilities ("GPU") is the utility company which provides
electricity service for the Premises, Property and Land. The foregoing
notwithstanding, Landlord shall have the right, in Landlord's sole discretion,
at any time and from time to time during the Term, to either contract for
service from a different company or companies providing electricity service
(each to be referred to as an "Alternate Service Provider") or continue to
contract for electricity service from GPU. In all such events, Tenant shall be
responsible for and liable to either GPU or each Alternate Service Provider
where electricity service to the Premises is separately metered. If there is no
separate meter for the Premises, the Tenant shall pay Landlord for electricity
service as an operating expense, regardless of the utility provider.
Tenant shall cooperate with Landlord, GPU and any Alternate Service
Provider at all times. Tenant shall, as reasonably necessary, allow Landlord,
GPU and any Alternate Service Provider access to the electric lines, feeders,
risers, wiring, and any other accouterments or machinery within the Premises.
- 23 -
<PAGE>
Landlord shall in no way be liable or responsible for any loss, damage,
or expense that Tenant may sustain or incur by reason of any change, failure,
interference, disruption, or defect in the supply or character of the electric
energy furnished to the Premises, or if the quantity or character of the
electric energy supplied by either GPU or any Alternate Service Provider is no
longer available or suitable for Tenant's requirements, and no such change,
failure, defect, unavailability, or unsuitability shall constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of rent, or relieve Tenant from any of its obligations under this
Lease.
69. SURRENDERING THE PREMISES: Upon the Ending Date, Tenant shall surrender
the Premises to Landlord in broom clean condition. On surrender, Tenant shall
remove from the Premises its personal property, trade fixtures, signs, and any
alterations required to be removed under Paragraph 16 and repair any damage to
the Premises caused by the removal or by Tenant's moving. Any items not removed
by Tenant as required above shall be considered abandoned. Landlord may dispose
of abandoned items as Landlord chooses and bill Tenant for the cost of their
disposal, or keep it as abandoned property.
70. MECHANIC'S LIENS: Tenant shall, within twenty (20) days after receiving
notice of any mechanic's lien for material or work claimed to have been
furnished to the Premises on Tenant's behalf and at Tenant's request, except for
work contracted by Landlord:
(i) discharge the lien; or
(ii) post a bond equal to the amount of the disputed claim with
companies reasonably satisfactory to Landlord.
If Tenant posts a bond, it shall contest the validity of the lien.
Tenant shall indemnify, defend, and hold Landlord harmless from losses incurred
from these liens.
If Tenant does not discharge the lien or post the bond within the
twenty (20) day period, Landlord may pay any amounts, including interest and
legal fees, to discharge the lien. Tenant shall then be liable to Landlord for
the amounts paid by Landlord.
Paragraph 70 is not a consent to subject Landlord's property to these
liens.
See Addendum Attached.
ATTEST: 510 RYERSON ROAD CORP.,
LANDLORD:
- ------------------------------- By:
Philip D. Neuer --------------------------------------
Secretary Albert Safer, President
- 24 -
<PAGE>
WITNESS: INTELLESALE.COM, INC.
TENANT:
- ------------------------------- By:
--------------------------------------
Charles D. Newman, Executive Vice
President and Chief Operating Officer
- 25-
<PAGE>
EXHIBIT A
DIAGRAM
Exhibit 10.21
THIS AGREEMENT BETWEEN SHIRLEY B. DiPACE, RESIDING AT 120 East
Hartsdale Avenue, Hartsdale, NY 10530
as Landlord
and DATA PATH TECHNOLOGIES, INC., a domestic Corporation with
offices at 220 Tompkins Ave., Pleasantville, NY 10570
as Tenant
Witnesseth: The Landlord hereby leases to the Tenant the following
premises:
The warehouse building on the westerly side of Tompkins Avenue, Pleasantville,
NY, as shown on plan annexed hereto together with use of the loading dock on the
southerly side of the building and together with the right to park over the
parking area on the southerly side of the building and also the right to park in
common with other tenants on the macadam parking area on the northerly side of
the building, as shown on the parking plan annexed hereto as Exhibit "A".
for the term of Four Years to commence from the 1st day of May 1994 and
to end on the 30th day of April, 1998 to be used and occupied only for
warehouse and storage purposes and accessory uses for the storage of
computers and related merchandise. No storage of any kind of any
chemicals or solid waste or other materials which might be considered
toxic shall be stored in or about the premiums at any time during this
lease upon the conditions and covenants following:
1st. That the Tenant shall pay the annual rent of FIFTY THOUSAND and No/100
($50,000.00) DOLLARS during the first year of the term of this lease. FIFTY-FIVE
THOUSAND and No/100 ($55,000.00) DOLLARS per annum during the second year of the
term of this lease; SIXTY THOUSAND and No/100 ($60,000.00) during the third term
of this lease; and SIXTY-FIVE THOUSAND and No/100 ($65,000.00) DOLLARS during
the fourth term of this lease.
said rent to be paid in equal monthly payments in advance on the first day of
each and every month during the term aforesaid, as follows:
Commencing May 1, 1994 $4,167.00 per month
Commencing May 1, 1995 $4,583.00 per month
Commencing May 1, 1996 $5,000.00 per month
Commencing May 1, 1997 $5,417.00 per month
<PAGE>
2nd. That the Tenant shall take good care of the premises and shall, at the
Tenant's own cost and expense make all repairs
and at the end or other expiration of the term, shall deliver up the demised
premises in a good order or condition, damages by the elements excepted.
3rd. That the Tenant shall promptly execute and comply with all statutes,
ordinances, rules, orders, regulations and requirements of the Federal, State
and Local Governments and of any and all their Departments and Bureaus
applicable to said premises, for the correction, prevention, and abatement of
nuisances or other grievances, in, upon, or connected with said premises during
said term; and shall also promptly comply with and execute all rules, orders,
and regulations of the New York Board of Fire Underwriters, or any other similar
body, at the Tenant's own cost and expense.
4th. That the Tenant, successors, heirs, executors or administrators shall not
assign this agreement, or underlet or underlease the premises, or any part
thereof, or make any alterations on the premises, without the Landlord's consent
in writing; or occupy, or permit or suffer the same to be occupied for any
business or purpose deemed disreputable or extra-hazardous on account of fire,
under the penalty of damages and forfeiture, and in the event of a breach
thereof, the term herein shall immediately cease and determine the option of the
Landlord as if it were the expiration of the original term.
5th. Tenant must give Landlord prompt notice of fire, accident, damage or
dangerous or defective condition. If the Premises can not be used because of
fire or other casualty, Tenant is not required to pay rent for the time the
Premises unusable. If part of the Premises can not be used, Tenant must pay rent
for the usable part. Landlord shall have the right to decide which part of the
Premises is usable. Landlord need only repair the damaged structural parts of
the Premises. Landlord is not required to repair or replace any equipment,
fixtures, furnishings or decorations unless originally installed by Landlord.
Landlord is not responsible for delays due to settling insurance claims,
obtaining estimates, labor and supply problems or any other cause not fully
under Landlord's control.
If the fire or other casualty is caused by an act or neglect of Tenant,
Tenant's employees or invitees, or at the time of the fire or casualty Tenant is
in default in any term of this Lease, then all repairs will be made at Tenant's
expense and Tenant must pay the full rent with no adjustment. The cost of the
repairs will be added rent.
Landlord has the right to demolish or rebuild the Building if there is
substantial damage by fire or other casualty. Landlord may cancel this Lease
within 30 days after the substantial fire or casualty by giving Tenant notice of
Landlord's invention to demolish or rebuild. The Lease will end 30 days after
Landlord's cancellation notice to Tenant. Tenant must deliver the Premises to
Landlord on or before the cancellation date in the notice and pay all rent due
to the date of the fire or casualty. If the Lease is cancelled Landlord is not
required to repair the Premises or Building. The cancellation does not release
Tenant of liability in connection with the fire or casualty. This Section is
intended to replace the terms of New York Real Property Law Section 227.
2
<PAGE>
6th. The said Tenant agrees that the said Landlord and the Landlord's agents and
other representatives shall be to enter into and upon said premises, or any part
thereof, at all reasonable hours for the purpose of examining making such
repairs or alterations therein as may be necessary to the safety and
preservation thereof.
7th. The Tenant also agrees to permit the Landlord or the Landlord's agents to
show the premises to persons wishing to hire or purchase the same; and the
Tenant further agrees that on and after the sixth month, next preceding the
expiration of the term hereby granted, the Landlord or the Landlord's agents
shall have the right to place notices on the front of said premises, or any part
thereof, offering the premises "To Let" or "For Sale", and the Tenant hereby
agrees to permit the same to remain thereon without hindrance or molestation.
8th. That if the said premises, or any part thereof shall be deserted or become
vacant during said term, or if any default be made in the payment of the said
rent or any part thereof, or if any default be made in the performance of any of
the covenants herein contained, the Landlord or representatives may re-enter the
said premises by force, summary proceedings or otherwise, and remove all persons
therefrom, without being liable to prosecution therefor, and the Tenant hereby
expressly waives the service of any notice in writing or intention to re-enter,
and the Tenant shall pay at the same time as the rent becomes payable under the
terms hereof a sum equivalent to the rent reserved herein, and the Landlord may
rent the premises on behalf of the Tenant, reserving the right to rent the
premises for a longer period of time than fixed in the original lease without
releasing the original Tenant from any liability, applying any moneys collected,
first to the expense of resuming or obtaining possession, second to restoring
the premises to a rentable condition, and then to the payment of the rent and
all other charges due and grow due to the Landlord, any surplus to be paid to
the Tenant, who shall remain liable for any deficiency.
9th. [Text struck through.]
10th. That the Tenant shall neither encumber nor obstruct the sidewalk in front
of, entrance to, or halls and stairs of said premises, nor allow the same to be
obstructed or encumbered in any manner.
11th. The Tenant shall neither place, or cause or allow to be placed, any sign
of any kind whatsoever at, in or about the entrance to said premises or any
other part of same, except in or at such place or places as may be indicated by
the Landlord and consented to by the Landlord in writing. And in case the
Landlord or the Landlord's representatives shall deem it necessary to remove any
such sign or signs in order to paint the said premises or building or any part
thereof, the Landlord shall have the right to do so, providing the same be
removed and replaced at the Landlord's expense, whenever the said repairs,
alterations or improvements shall be completed.
12th. That the Landlord is exempt from any and all liability for any damage or
injury to person or property caused by or resulting from steam, electricity,
gas, water, rain, ice or snow, or any leak or flow from or into any part of said
building or from any damage or injury resulting or arising from any other cause
or happening whatsoever unless said damage or injury be caused by or be due to
the negligence of the Landlord.
13th. That if default be made in any of the covenants herein contained, then it
shall be lawful for the said Landlord to re-enter the said premises, and the
same to have again, re-possess and enjoy. The said Tenant hereby expressly
waives the service of any notice in writing of intention to re-enter.
3
<PAGE>
14th. That this instrument shall not be a lien against said premises in respect
to any mortgages that are now on or that hereafter may be placed against said
premises, and that the recording of such mortgage or mortgages shall have
preference and precedence and be superior and prior in lien of this lease,
irrespective of the date of recording and the Tenant agrees to execute, without
cost, any such instrument which may be deemed necessary or desirable to further
effect the subordination of this lease to any such mortgage or mortgages, and a
refusal to execute such instrument shall entitle the Landlord, or the Landlord's
assigns and legal representatives to the option of cancelling this lease without
incurring any expense or damage and the term hereby granted is expressly limited
accordingly.
15th. The Tenant has this day deposited with the Landlord the sum of $6,600 as
security for the full and faithful performance by the Tenant of all the terms,
covenants and conditions of this lease upon the Tenant's part to be performed,
which said sum shall be returned to the Tenant after the time fixed as the
expiration of the term herein, provided the Tenant has fully and faithfully
carried out all of said terms, covenants and conditions on Tenant's part to be
performed. In the event of a bona fide sale, subject to this lease, the Landlord
shall have the right to transfer the security to the vendee for the benefit of
the Tenant and the Landlord shall be considered released by the Tenant from all
liability for the return of such security; and the Tenant agrees to look to the
new Landlord solely for the return of the said security, and it is agreed that
this shall apply to ever transfer or assignment made of the security to a new
Landlord.
16th. That the security deposited under this lease shall not be mortgaged,
assigned or encumbered by the Tenant without the written consent of the
Landlord.
17th. It is expressly understood and agreed that in case the demised premises
shall be deserted or vacated, or if default be made in the payment of the rent
or any part thereof as herein specified, or if, without the consent of the
Landlord, the Tenant shall sell, assign, or mortgage this lease of if default be
made in the performance of any of the covenants and agreements in this lease
contained on the part of the Tenant to be kept and performed, of if the Tenant
shall fail to comply with any of the statutes, ordinances, rules, orders,
regulations and requirements of the Federal, State and Local Governments or of
any and all their Departments and Bureaus, applicable to said premises, or if
the Tenant shall file or there be filed against Tenant a petition in bankruptcy
or arrangement, or Tenant be adjudicated a bankrupt or make an assignment for
the benefit of creditors or take advantage of any insolvency act, the Landlord
may, if the Landlord so elects, at any time thereafter terminate this lease and
the term hereof, on giving to the Tenant five days' notice in writing of the
Landlord's intention so to do, and this lease and the term hereof shall expire
and come to an end on the date fixed in such notice as if the said date were the
date originally fixed in this lease for the expiration hereof, Such notice may
be given by mail to the Tenant addressed to the demised premises.
18th. Tenant shall pay to Landlord the rent or charge, which may, during the
demised term, be assessed or imposed for the water used or consumed in or on the
said premises, whether determined by meter or otherwise, as soon as and when the
same may be assessed or imposed, and will also pay the expenses for the setting
of a water meter in the said premises should the latter be required. Tenant
shall pay Tenant's proportionate part of the sewer, rent or change imposed upon
the building. All such rents or charges or expenses shall be paid as additional
rent and shall be added to the next month's rent thereafter to become due.
4
<PAGE>
19th. That the Tenant will not nor will the Tenant permit undertenants or other
persons to do anything in said premises, or bring anything into said premises,
or permit anything to be brought into said premises or to be kept therein, which
will in any way increase the rate of fire insurance on said demised premises,
nor use the demised premises or any part thereof, nor suffer or permit their use
for any business or purpose which would cause an increase in the rate of fire
insurance on said building, and the Tenant agrees to pay on demand any such
increase.
20th. The failure of the Landlord to insist upon a strict performance of any of
the terms, conditions and covenants herein, shall not be deemed a waiver of any
rights or remedies that the Landlord may have, and shall not be deemed a waiver
of any rights or remedies that the Landlord may have, and shall not be deemed a
waiver of any subsequent breach or default in the terms, conditions and
covenants herein contained. This instrument may not be changed, modified,
discharged or terminated orally.
21st. If the whole or any part of the demised premises shall be acquitted or
condemned by Eminent Domain or any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim against
Landlord for the value of any unexpired term of said lease. No part of any award
shall belong to Tenant.
22nd. If after default in payment of rent or violation of any other provisions
of this lease, or upon the expiration of this lease, the Tenant moves out or is
dispossessed and fails to remove trade, fixtures or other property prior to such
said default, removal, expiration of lease, or prior to the issuance of the
final order or execution of the warrant, then and in that event, the said
fixtures and property shall be deemed abandoned by the said Tenant and shall
become the property of the Landlord.
23rd. In the event that the relation of the Landlord and Tenant may cease or
terminate by reason of the re-entry of the Landlord under the terms and
covenants contained in this lease or by the ejectment of the Tenant by summary
proceedings or otherwise, or alter the abandonment of the premises by the
Tenant, it is hereby agreed that the Tenant shall remain liable and shall pay in
monthly payments the rent which accrues subsequent to the re-entry by the
Landlord, and the Tenant expressly agrees to pay as damages for the breach of
the covenants herein contained, the difference or deficiency between the rent
herein reserved and the rent collected if any, shall become due and payable in
monthly payments during the remainder of the unexpired term, as the amounts of
such difference or deficiency shall from time to time be ascertained, and it is
mutually agreed between Landlord and Tenant that the respective parties hereto
shall and hereby do waive trial by jury in any action, proceeding or
5
<PAGE>
counterclaim brought by either of the parties against the other on any matters
whatsoever arising out of or in any way connected with this lease, the Tenant's
use or occupancy or said premises, and/or any claim of injury or damage.
24th. The Tenant waives all rights to redeem under any law of the State of New
York.
25th. This lease and the obligation of Tenant to pay rent hereunder and perform
all of the other covenants and agreements hereunder on part of Tenant to be
performed shall in nowise be affected, impaired or excused because Landlord is
unable to supply or is delayed in supplying any service expressly or impliedly
to be supplied or is unable to make, or is delayed in making any repairs,
additions, alterations or decorations or is unable to supply or is delayed in
supplying any equipment or fixtures if Landlord is prevented or delayed from so
doing by reason of governmental preemption in connection with a National
Emergency or in connection with any rule, order or regulation of any department
of subdivision thereof of any governmental agency or by reason of the condition
of supply and demand which have been or are affected by war or other emergency.
26th. No diminution or abatement of rent, or other compensation, shall be
claimed or allowed for inconvenience or discomfort arising from the making of
repairs or improvements to the building or to its appliances, nor for any space
taken to comply with any law, ordinance or order of a governmental authority. In
respect to the various "services," if any, herein expressly or impliedly agreed
to be furnished by the Landlord to the Tenant, it is agreed that there shall be
no diminution or abatement of the rent, or any other compensation, for
interruption or curtailment of such "service" or to some other cause, not gross
negligence on the part of the Landlord. No such interruption or curtailment of
any such "service" shall be deemed a constructive eviction. The Landlord shall
not be required to furnish, and the Tenant shall not be entitled to receive, any
of such "services" during any period wherein the Tenant shall be in default in
respect of the payment to rent. Neither shall there be any abatement or
diminution of rent because of making of repairs, improvements or decorations to
the demised premises after the date above fixed for the commencement of the
term, it being understood that rent shall, in any event, commence to run at such
date so above fixed.
27th. Landlord shall not be liable for failure to give possession of the
premises upon commencement date by reason of the fact that premises are not
ready for occupancy or because a prior Tenant or any other person is wrongfully
holding over or is in wrongful possession, of for any other reason. The rent
shall not commence until possession is given or is available, but the term
herein shall not be extended.
28th. SEE RIDER ANNEXED HERETO
And the Landlord doth covenant that the said Tenant on paying the said
yearly rent, and performing the covenants aforesaid, shall and may peacefully
and quietly have, hold and enjoy the said demised premises for the term
aforesaid, provided, however, that this covenant shall be conditioned upon the
retention of tile to the premises by the Landlord.
6
<PAGE>
And it is mutually understood and agreed that the covenants and
agreements contained in the within lease shall be binding upon the parties
hereto and upon their respective successors, heirs, executors and
administrators.
In Witness Whereof, the parties have interchangeably set their hands
and seals (or caused these presents to be signed by their proper corporate
officers and caused their proper corporate seal to be hereto affiliated) this
day of March 1994.
Signed, sealed and delivered
in the presence of
L.S.
-------------------------
SHIRLEY B. DiPACE -- LANDLORD
L.S.
-------------------------
DATA PATH TECHNOLOGIES, INC.
By: L.S
----------------------
President
7
<PAGE>
Rider to Lease Agreement between SHIRLEY B. DiPACE, Landlord, and DATA PATH
TECHNOLOGIES, INC., as Tenant, dated March 1994.
29. In addition to the rent to be paid hereunder, Tenant shall
reimburse tot he Landlord its proportionate share of all Real
Estate Taxes and assessments above the taxes paid by the
Landlord for Calendar Year 1998. The tax base shall be
computed on the basis of the Town, School and Village Taxes,
which are due in April, June and September of 1998. The
parties agree that the current taxes allocable to the Tenant,
based upon current assessments of the property by the Town and
Village is as follows:
Town Tax - 100% Village Tax - 49.10%
The Landlord represents that the property being leased herein
consists of all the property being assessed by the Town under
a separate tax lot for the premises being rented herein, and
that the premises herein, on the Village Tax Assessment Lot,
comprises 49.10% of the value thereof, in that the Village Tax
Parcel contains property in excess of the property being
leased herein.
30. The Tenant not sublet the premises or assign this lease in
whole or in part without the Landlord's consent, in writing,
which consent shall not be unreasonably withheld. In the event
the Tenant shall sublet all or part of the premises or assign
this lease for a use which is for other than the use permitted
herein by the Tenant if a request is made to assign the lease
or sublet the premises to a party who is not a successor or
purchaser of the business enterprise being conducted by the
Tenant, then, in lieu of such approval, the Landlord shall
have the option of cancelling this lease.
31. The Landlord will furnish cold water to the demised premises
for normal lavatory use, at Tenant's expense.
32. The Tenant may, at its own expense, make nonstructural
alterations and installations to the demised premises, as the
Tenant deems necessary or desirable. In the event structural
alterations are required, the Landlord's consent to same shall
not be unreasonably withheld.
33. The premises shall be delivered to the Tenant in their "as is"
condition, except for Landlord's work to be completed as shown
on "Schedule B" annexed hereto.
34. The Tenant agrees that it shall, at its own cost and expense,
keep the demised premises insured with public liability
insurance in an approved company, satisfactory to the
Landlord, which policy shall name the Landlord as co-insured,
and shall deliver the policy to the Landlord at or before the
commencement of the term of this lease. Such limits shall not
be less than $500,000.00 injury to one person, and
$1,000,000.00 for each occurrence.
<PAGE>
35. The Tenant shall keep the above-mentioned policy in full force
and effect during the term of this lease and shall pay all
premiums on the above-mentioned policy as the same become due,
and if the Tenant shall default in providing such policy, or
in paying the premiums thereon, the Landlord may cause said
policy to be written and/or pay the premiums thereon, and the
Tenant agrees to pay to the Landlord the amount so paid by the
Landlord, as rent with the next accruing installment of rent
hereunder.
36. The Tenant agrees to keep all of the property demised herein
in a neat and clean condition, to repair the macadam pavement
when required to keep the grass areas cut, trimmed and neat at
all times, and to maintain the loading dock now on the
premises.
37. Tenant shall be responsible for providing for its own trash
removal and shall hire a private carting company for such
purpose.
38. The landlord, within six months of the date of the
commencement of the terms of this Lease, will complete the
following repairs and perform the work as hereafter set forth.
a) The rear loading dock bumper and plate will be repaired or
replaced.
b) The rear overhead door will be replaced by Olmstead Door
Co.
c) The Landlord will install service to the building which
will consist only of a gas pipe from Tompkins Avenue to a
meter located along the northerly side of the building.
d) The Landlord shall install two to three receptacles in the
warehouse.
e) The roof shall be checked and any leaks sealed.
f) Replace one flush valve in the bathroom urinal.
g) Repair plumbing line to supply hot water in the large
bathroom.
h) Repair roof vents so that they operate.
2
<PAGE>
39. The Tenant shall have the right to terminate this Lease on
the second anniversary date, April 31, 1996; provided Tenant
gives Landlord notice of its intention to terminate this Lease
on the second anniversary date not later than December 31,
1995, which notice shall be in writing.
_______________________________________
SHIRLEY B. DiPACE, Landlord
DATA PATH TECHNOLOGIES, INC.
_______________________________________
By: President
3
Exhibit 10.22
THIS AGREEMENT BETWEEN SHIRLEY B. DiPACE, RESIDING AT 120 East
Hartsdale Avenue, Hartsdale, NY 10530
as Landlord
and DATA PATH TECHNOLOGIES, INC., a domestic Corporation with
offices at 220 Tompkins Ave., Pleasantville, NY 10570
as Tenant
Witnesseth: The Landlord hereby leases to the Tenant the following
premises:
The warehouse building on the westerly side of Tompkins Avenue, Pleasantville,
NY, as shown on Exhibit A annexed hereto, which consists of approximately 10,560
sq. ft. of building, with the fenced-in parking area, together with common use
of the parking area in cross-hatch, to be used by Whiffen Electric and the
Tenant herein for loading and unloading off Tompkins Avenue to the rear of the
building. 147 Wheeler Avenue, Pleasantville, NY 10570.
for the term of Four Years to commence from the 1st day of September
___ 1998 and to end on the 31st day of August 2002 to be used and
occupied only for warehouse and storage purposes and accessory uses for
the storage of computers and related merchandise. No storage of any
kind of any chemicals or solid waste or other materials which might be
considered toxic shall be stored in or about the premiums at any time
during this lease upon the conditions and covenants following:
1st. That the Tenant shall pay the annual rent of
said rent to be paid in equal monthly payments in advance on the day of each and
every month during the term aforesaid, as follows:
September 1, 1998 -- $6,600.00
September 1, 2000 -- $6,798.00
2nd. That the Tenant shall take good care of the premises and shall, at the
Tenant's own cost and expense make all repairs
and at the end or other expiration of the term, shall deliver up the demised
premises in a good order or condition, damages by the elements excepted.
3rd. That the Tenant shall promptly execute and comply with all statutes,
ordinances, rules, orders, regulations and requirements of the Federal, State
and Local Governments and of any and all their Departments and Bureaus
applicable to said premises, for the correction, prevention, and abatement of
nuisances or other grievances, in, upon, or connected with said premises during
said term; and shall also promptly comply with and execute all rules, orders,
and regulations of the New York Board of Fire Underwriters, or any other similar
body, at the Tenant's own cost and expense.
4th. That the Tenant, successors, heirs, executors or administrators shall not
assign this agreement, or underlet or underlease the premises, or any part
thereof, or make any alterations on the premises, without the Landlord's consent
in writing; or occupy, or permit or suffer the same to be occupied for any
business or purpose deemed disreputable or extra-hazardous on account of fire,
under the penalty of damages and forfeiture, and in the event of a breach
<PAGE>
thereof, the term herein shall immediately cease and determine the option of the
Landlord as if it were the expiration of the original term.
5th. Tenant must give Landlord prompt notice of fire, accident, damage or
dangerous or defective condition. If the Premises can not be used because of
fire or other casualty, Tenant is not required to pay rent for the time the
Premises unusable. If part of the Premises can not be used, Tenant must pay rent
for the usable part. Landlord shall have the right to decide which part of the
Premises is usable. Landlord need only repair the damaged structural parts of
the Premises. Landlord is not required to repair or replace any equipment,
fixtures, furnishings or decorations unless originally installed by Landlord.
Landlord is not responsible for delays due to settling insurance claims,
obtaining estimates, labor and supply problems or any other cause not fully
under Landlord's control.
If the fire or other casualty is caused by an act or neglect of Tenant,
Tenant's employees or invitees, or at the time of the fire or casualty Tenant is
in default in any term of this Lease, then all repairs will be made at Tenant's
expense and Tenant must pay the full rent with no adjustment. The cost of the
repairs will be added rent.
Landlord has the right to demolish or rebuild the Building if there is
substantial damage by fire or other casualty. Landlord may cancel this Lease
within 30 days after the substantial fire or casualty by giving Tenant notice of
Landlord's invention to demolish or rebuild. The Lease will end 30 days after
Landlord's cancellation notice to Tenant. Tenant must deliver the Premises to
Landlord on or before the cancellation date in the notice and pay all rent due
to the date of the fire or casualty. If the Lease is cancelled Landlord is not
required to repair the Premises or Building. The cancellation does not release
Tenant of liability in connection with the fire or casualty. This Section is
intended to replace the terms of New York Real Property Law Section 227.
6th. The said Tenant agrees that the said Landlord and the Landlord's agents and
other representatives shall be to enter into and upon said premises, or any part
thereof, at all reasonable hours for the purpose of examining making such
repairs or alterations therein as may be necessary to the safety and
preservation thereof.
7th. The Tenant also agrees to permit the Landlord or the Landlord's agents to
show the premises to persons wishing to hire or purchase the same; and the
Tenant further agrees that on and after the sixth month, next preceding the
expiration of the term hereby granted, the Landlord or the Landlord's agents
shall have the right to place notices on the front of said premises, or any part
thereof, offering the premises "To Let" or "For Sale", and the Tenant hereby
agrees to permit the same to remain thereon without hindrance or molestation.
8th. That if the said premises, or any part thereof shall be deserted or become
vacant during said term, or if any default be made in the payment of the said
rent or any part thereof, or if any default be made in the performance of any of
the covenants herein contained, the Landlord or representatives may re-enter the
said premises by force, summary proceedings or otherwise, and remove all persons
therefrom, without being liable to prosecution therefor, and the Tenant hereby
expressly waives the service of any notice in writing or intention to re-enter,
2
<PAGE>
and the Tenant shall pay at the same time as the rent becomes payable under the
terms hereof a sum equivalent to the rent reserved herein, and the Landlord may
rent the premises on behalf of the Tenant, reserving the right to rent the
premises for a longer period of time than fixed in the original lease without
releasing the original Tenant from any liability, applying any moneys collected,
first to the expense of resuming or obtaining possession, second to restoring
the premises to a rentable condition, and then to the payment of the rent and
all other charges due and grow due to the Landlord, any surplus to be paid to
the Tenant, who shall remain liable for any deficiency.
9th. [Text struck through.]
10th. That the Tenant shall neither encumber nor obstruct the sidewalk in front
of, entrance to, or halls and stairs of said premises, nor allow the same to be
obstructed or encumbered in any manner.
11th. The Tenant shall neither place, or cause or allow to be placed, any sign
of any kind whatsoever at, in or about the entrance to said premises or any
other part of same, except in or at such place or places as may be indicated by
the Landlord and consented to by the Landlord in writing. And in case the
Landlord or the Landlord's representatives shall deem it necessary to remove any
such sign or signs in order to paint the said premises or building or any part
thereof, the Landlord shall have the right to do so, providing the same be
removed and replaced at the Landlord's expense, whenever the said repairs,
alterations or improvements shall be completed.
12th. That the Landlord is exempt from any and all liability for any damage or
injury to person or property caused by or resulting from steam, electricity,
gas, water, rain, ice or snow, or any leak or flow from or into any part of said
building or from any damage or injury resulting or arising from any other cause
or happening whatsoever unless said damage or injury be caused by or be due to
the negligence of the Landlord.
13th. That if default be made in any of the covenants herein contained, then it
shall be lawful for the said Landlord to re-enter the said premises, and the
same to have again, re-possess and enjoy. The said Tenant hereby expressly
waives the service of any notice in writing of intention to re-enter.
14th. That this instrument shall not be a lien against said premises in respect
to any mortgages that are now on or that hereafter may be placed against said
premises, and that the recording of such mortgage or mortgages shall have
preference and precedence and be superior and prior in lien of this lease,
irrespective of the date of recording and the Tenant agrees to execute, without
cost, any such instrument which may be deemed necessary or desirable to further
effect the subordination of this lease to any such mortgage or mortgages, and a
3
<PAGE>
refusal to execute such instrument shall entitle the Landlord, or the Landlord's
assigns and legal representatives to the option of cancelling this lease without
incurring any expense or damage and the term hereby granted is expressly limited
accordingly.
15th. The Tenant has this day deposited with the Landlord the sum of $6,600 as
security for the full and faithful performance by the Tenant of all the terms,
covenants and conditions of this lease upon the Tenant's part to be performed,
which said sum shall be returned to the Tenant after the time fixed as the
expiration of the term herein, provided the Tenant has fully and faithfully
carried out all of said terms, covenants and conditions on Tenant's part to be
performed. In the event of a bona fide sale, subject to this lease, the Landlord
shall have the right to transfer the security to the vendee for the benefit of
the Tenant and the Landlord shall be considered released by the Tenant from all
liability for the return of such security; and the Tenant agrees to look to the
new Landlord solely for the return of the said security, and it is agreed that
this shall apply to ever transfer or assignment made of the security to a new
Landlord.
16th. That the security deposited under this lease shall not be mortgaged,
assigned or encumbered by the Tenant without the written consent of the
Landlord.
17th. It is expressly understood and agreed that in case the demised premises
shall be deserted or vacated, or if default be made in the payment of the rent
or any part thereof as herein specified, or if, without the consent of the
Landlord, the Tenant shall sell, assign, or mortgage this lease of if default be
made in the performance of any of the covenants and agreements in this lease
contained on the part of the Tenant to be kept and performed, of if the Tenant
shall fail to comply with any of the statutes, ordinances, rules, orders,
regulations and requirements of the Federal, State and Local Governments or of
any and all their Departments and Bureaus, applicable to said premises, or if
the Tenant shall file or there be filed against Tenant a petition in bankruptcy
or arrangement, or Tenant be adjudicated a bankrupt or make an assignment for
the benefit of creditors or take advantage of any insolvency act, the Landlord
may, if the Landlord so elects, at any time thereafter terminate this lease and
the term hereof, on giving to the Tenant five days' notice in writing of the
Landlord's intention so to do, and this lease and the term hereof shall expire
and come to an end on the date fixed in such notice as if the said date were the
date originally fixed in this lease for the expiration hereof, Such notice may
be given by mail to the Tenant addressed to the demised premises.
18th. Tenant shall pay to Landlord the rent or charge, which may, during the
demised term, be assessed or imposed for the water used or consumed in or on the
said premises, whether determined by meter or otherwise, as soon as and when the
same may be assessed or imposed, and will also pay the expenses for the setting
of a water meter in the said premises should the latter be required. Tenant
shall pay Tenant's proportionate part of the sewer, rent or change imposed upon
the building. All such rents or charges or expenses shall be paid as additional
rent and shall be added to the next month's rent thereafter to become due.
19th. That the Tenant will not nor will the Tenant permit undertenants or other
persons to do anything in said premises, or bring anything into said premises,
or permit anything to be brought into said premises or to be kept therein, which
will in any way increase the rate of fire insurance on said demised premises,
4
<PAGE>
nor use the demised premises or any part thereof, nor suffer or permit their use
for any business or purpose which would cause an increase in the rate of fire
insurance on said building, and the Tenant agrees to pay on demand any such
increase.
20th. The failure of the Landlord to insist upon a strict performance of any of
the terms, conditions and covenants herein, shall not be deemed a waiver of any
rights or remedies that the Landlord may have, and shall not be deemed a waiver
of any rights or remedies that the Landlord may have, and shall not be deemed a
waiver of any subsequent breach or default in the terms, conditions and
covenants herein contained. This instrument may not be changed, modified,
discharged or terminated orally.
21st. If the whole or any part of the demised premises shall be acquitted or
condemned by Eminent Domain or any public or quasi public use or purpose, then
and in that event, the term of this lease shall cease and terminate from the
date of title vesting in such proceeding and Tenant shall have no claim against
Landlord for the value of any unexpired term of said lease. No part of any award
shall belong to Tenant.
22nd. If after default in payment of rent or violation of any other provisions
of this lease, or upon the expiration of this lease, the Tenant moves out or is
dispossessed and fails to remove trade, fixtures or other property prior to such
said default, removal, expiration of lease, or prior to the issuance of the
final order or execution of the warrant, then and in that event, the said
fixtures and property shall be deemed abandoned by the said Tenant and shall
become the property of the Landlord.
23rd. In the event that the relation of the Landlord and Tenant may cease or
terminate by reason of the re-entry of the Landlord under the terms and
covenants contained in this lease or by the ejectment of the Tenant by summary
proceedings or otherwise, or alter the abandonment of the premises by the
Tenant, it is hereby agreed that the Tenant shall remain liable and shall pay in
monthly payments the rent which accrues subsequent to the re-entry by the
Landlord, and the Tenant expressly agrees to pay as damages for the breach of
the covenants herein contained, the difference or deficiency between the rent
herein reserved and the rent collected if any, shall become due and payable in
monthly payments during the remainder of the unexpired term, as the amounts of
such difference or deficiency shall from time to time be ascertained, and it is
mutually agreed between Landlord and Tenant that the respective parties hereto
shall and hereby do waive trial by jury in any action, proceeding or
counterclaim brought by either of the parties against the other on any matters
whatsoever arising out of or in any way connected with this lease, the Tenant's
use or occupancy or said premises, and/or any claim of injury or damage.
24th. The Tenant waives all rights to redeem under any law of the State of New
York.
25th. This lease and the obligation of Tenant to pay rent hereunder and perform
all of the other covenants and agreements hereunder on part of Tenant to be
performed shall in nowise be affected, impaired or excused because Landlord is
unable to supply or is delayed in supplying any service expressly or impliedly
to be supplied or is unable to make, or is delayed in making any repairs,
additions, alterations or decorations or is unable to supply or is delayed in
supplying any equipment or fixtures if Landlord is prevented or delayed from so
doing by reason of governmental preemption in connection with a National
5
<PAGE>
Emergency or in connection with any rule, order or regulation of any department
of subdivision thereof of any governmental agency or by reason of the condition
of supply and demand which have been or are affected by war or other emergency.
26th. No diminution or abatement of rent, or other compensation, shall be
claimed or allowed for inconvenience or discomfort arising from the making of
repairs or improvements to the building or to its appliances, nor for any space
taken to comply with any law, ordinance or order of a governmental authority. In
respect to the various "services," if any, herein expressly or impliedly agreed
to be furnished by the Landlord to the Tenant, it is agreed that there shall be
no diminution or abatement of the rent, or any other compensation, for
interruption or curtailment of such "service" or to some other cause, not gross
negligence on the part of the Landlord. No such interruption or curtailment of
any such "service" shall be deemed a constructive eviction. The Landlord shall
not be required to furnish, and the Tenant shall not be entitled to receive, any
of such "services" during any period wherein the Tenant shall be in default in
respect of the payment to rent. Neither shall there be any abatement or
diminution of rent because of making of repairs, improvements or decorations to
the demised premises after the date above fixed for the commencement of the
term, it being understood that rent shall, in any event, commence to run at such
date so above fixed.
27th. Landlord shall not be liable for failure to give possession of the
premises upon commencement date by reason of the fact that premises are not
ready for occupancy or because a prior Tenant or any other person is wrongfully
holding over or is in wrongful possession, of for any other reason. The rent
shall not commence until possession is given or is available, but the term
herein shall not be extended.
28th. See Rider annexed hereto
And the Landlord doth covenant that the said Tenant on paying the said
yearly rent, and performing the covenants aforesaid, shall and may peacefully
and quietly have, hold and enjoy the said demised premises for the term
aforesaid, provided, however, that this covenant shall be conditioned upon the
retention of tile to the premises by the Landlord.
And it is mutually understood and agreed that the covenants and
agreements contained in the within lease shall be binding upon the parties
hereto and upon their respective successors, heirs, executors and
administrators.
In Witness Whereof, the parties have interchangeably set their hands
and seals (or caused these presents to be signed by their proper corporate
officers and caused their proper corporate seal to be hereto affiliated) this
14th day of September, 1998.
Signed, sealed and delivered in the presence of
L.S.
--------------------------
SHIRLEY B. DiPACE -- LANDLORD
6
<PAGE>
L.S.
--------------------------
Tenant
- -----------------------------
DATA PATH TECHNOLOGY
By:
--------------------------
Don Wagner, President
7
<PAGE>
Rider to Lease Agreement between SHIRLEY B. DiPACE, Landlord,
and DATA PATH TECHNOLOGIES, INC., as Tenant, dated March 1994
29. In addition to the rent to be paid hereunder, Tenant shall
reimburse tot he Landlord its proportionate share of all Real
Estate Taxes and assessments above the taxes paid by the
Landlord for Calendar Year 1998. The tax base shall be
computed on the basis of the Town, School and Village Taxes,
which are due in April, June and September of 1998. The
parties agree that the current taxes allocable to the Tenant,
based upon current assessments of the property by the Town and
Village is as follows:
Town Tax - 100% Village Tax - 49.10%
The Landlord represents that the property being leased herein
consists of all the property being assessed by the Town under
a separate tax lot for the premises being rented herein, and
that the premises herein, on the Village Tax Assessment Lot,
comprises 49.10% of the value thereof, in that the Village Tax
Parcel contains property in excess of the property being
leased herein.
30. The Tenant not sublet the premises or assign this lease in
whole or in part without the Landlord's consent, in writing,
which consent shall not be unreasonably withheld. In the event
the Tenant shall sublet all or part of the premises or assign
this lease for a use which is for other than the use permitted
herein by the Tenant if a request is made to assign the lease
or sublet the premises to a party who is not a successor or
purchaser of the business enterprise being conducted by the
Tenant, then, in lieu of such approval, the Landlord shall
have the option of cancelling this lease.
31. The Landlord will furnish cold water to the demised premises
for normal lavatory use, at Tenant's expense.
32. The Tenant may, at its own expense, make nonstructural
alterations and installations to the demised premises, as the
Tenant deems necessary or desirable. In the event structural
alterations are required, the Landlord's consent to same shall
not be unreasonably withheld.
33. The premises shall be delivered to the Tenant in their "as is"
condition, except Landlord shall repair the rear overhead
door.
34. The Tenant agrees that it shall, at its own cost and expense,
keep the demised premises insured with public liability
insurance in an approved company, satisfactory to the
Landlord, which policy shall name the Landlord as co-insured,
and shall deliver the policy to the Landlord at or before the
commencement of the term of this lease. Such limits shall not
be less than $500,000.00 injury to one person, and
$1,000,000.00 for each occurrence.
<PAGE>
35. The Tenant shall keep the above-mentioned policy in full force
and effect during the term of this lease and shall pay all
premiums on the above-mentioned policy as the same become due,
and if the Tenant shall default in providing such policy, or
in paying the premiums thereon, the Landlord may cause said
policy to be written and/or pay the premiums thereon, and the
Tenant agrees to pay to the Landlord the amount so paid by the
Landlord, as rent with the next accruing installment of rent
hereunder.
36. The Tenant agrees to keep all of the property demised herein
in a neat and clean condition, to repair the macadam pavement
when required to keep the grass areas cut, trimmed and neat at
all times, and to maintain the loading dock now on the
premises.
37. Tenant shall be responsible for providing for its own trash
removal and shall hire a private carting company for such
purpose.
38. Tenant occupies the building as a sub-tenant of ECO TERRA INC.
Tenant shall pay the full months rent except that a credit of
$108.50 per day shall be given for each day ECO-TERRA INC.
occupies its 1/2 of the building.
---------------------------
SHIRLEY B. DiPACE, Landlord
---------------------------
By: President
2
Exhibit 10.23
AGREEMENT
This Agreement made the 6th day of March, 1998 by and between SHIRLEY
B. DiPACE, residing at 120 East Hartsdale Avenue, Hartsdale, NY 10530 (Landlord)
and DATA PATH TECHNOLOGIES, INC., with offices at 220 Tompkins Avenue,
Pleasantville, NY 10570 (Tenant).
WHEREAS, the Tenant currently occupies premises known as 220 Tompkins
Avenue, Pleasantville, NY 10570 pursuant to the terms of a written Lease which
by its terms expired on April 30, 1998; and
WHEREAS, the Landlord and Tenant have agreed to extend the term of
said Lease to August 30, 1998 under the terms and conditions hereinafter set
forth;
NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and other
valuable consideration, it is mutually agreed as follows:
1) The term of the current Lease between the Landlord and
Tenant is hereby extended to August 30, 1998;
2) Paragraph 1 of the Lease Agreement (Rent) is amended as
follows:
a) The Tenant shall pay to the Landlord the sum of
Seven Thousand One Hundred Eighty-Eight and no/100
Dollars ($7,188.00) per month commencing on May 1,
1998 and on the first day of each and every month
thereafter until the end of the term.
3) Paragraph 29 of the Lease is hereby amended to provide the
tax base for purposes of computations for future adjustments
for Town, School and Village Taxes shall be those taxes
which are due and paid in April, June and September of 1998,
which shall be the base year for computation of all future
tax increases.
4) Paragraph 38 and 39 of the Lease are cancelled.
Except as hereinafter modified, and other terms and conditions of the
Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement and year
and date first above written.
/s/ Shirley B. DiPace DATA PATH TECHNOLOGIES, INC.
- -----------------------------
SHIRLEY B. DiPACE, (Landlord)
By: /s/ Edward M. Kelly
---------------------------------
Edward M. Kelly, Vice President, (Tenant)
Exhibit 10.24
AGREEMENT
This Agreement made the 14th day of September, 1998 by and
between SHIRLEY B. DiPACE, residing at 120 East Hartsdale Avenue, Hartsdale, NY
10530 (Landlord) and DATA PATH TECHNOLOGIES, INC., with offices at 220 Tompkins
Avenue, Pleasantville, NY 10570 (Tenant).
WHEREAS, the Tenant currently occupies premises known as 220
Tompkins Avenue, Pleasantville, NY 10570 pursuant to the terms of a written
Lease which by its terms expired on April 30, 1998; and
WHEREAS, the Landlord and Tenant extended the term of said
Lease to August 30, 1998 pursuant to the terms of a written agreement dated
March 6th, 1998; and
WHEREAS, the Landlord and Tenant have agreed to extend the
term for an additional four years commencing September 1, 1998;
NOW, THEREFORE, in consideration of Ten Dollars ($10.00) and
other valuable consideration, it is mutually agreed as follows:
1) The term of the current Lease between the Landlord
and Tenant is hereby extended to August 30, 2002.
2) Paragraph 1 of the Lease Agreement (Rent) is amended
as follows:
a) The Tenant shall pay to the Landlord during
the first two years of the term of this
lease, an annual rental of Eighty-Six
Thousand Four Hundred and 00/100
($86,400.00) payable in advance commencing
September 1, 1998 in equal monthly
installments of Seven Thousand Two Hundred
and no/100 Dollars ($7,200.00) per month on
the first day of each and every month
thereafter until August 20, 2000.
b) During the second two years of the terms of
this lease commencing September 1, 2000, an
annual rental of Eighty Eight Thousand Nine
Hundred Ninety Two Dollars ($88,992.00)
payable in monthly installments of $7,416.00
commencing September 1, 2000, until the end
of the term.
3) Paragraph 29 of the Lease is hereby amended to
provide the tax base for purposes of computations for
future adjustments for Town, School and Village Taxes
shall be those taxes which are due and paid in April,
June and September of 1998, which shall be the base
year for computation of all future tax increases.
4) Paragraph 38 and 39 of the Lease are cancelled.
<PAGE>
Except as hereinafter modified, and other terms and conditions
of the Lease Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement
and year and date first above written.
DATA PATH TECHNOLOGIES, INC.
/s/ Shirley B. DiPace
- -----------------------------
SHIRLEY B. DiPACE, (Landlord)
By: /s/ Edward M. Kelly
---------------------------------
Edward M. Kelly, Vice President, (Tenant)
2
Exhibit 10.25
September 9, 1999
Mr. Marc Sherman
40D Long Beach Blvd.
Loveladies, NJ 08008
Dear Marc:
Reference is made to the Employment Agreement, dated June 17, 1999,
between Intellesale.com, Inc. (the "Company") and you (the "Employment
Agreement"). This letter is to confirm our agreement as follows:
1. If prior to January 1, 2000, an underwritten public offering of at
least $30 million of common stock of the Company is consummated, then
upon such event:
(a) Section 6 of the Employment Agreement automatically shall be
amended by deleting the amount "$400,000" and replacing it with
the amount "$280,000."
(b) Exhibit A, Paragraph A automatically shall be amended by
replacing it in its entirety as follows:
"For each fiscal year, Employee's bonus (if any) shall be
determined by the Compensation Committee of the Board of
Directors, but shall be at least the Earnings Percentage
multiplied by $125,000, plus the Revenue Percentage
multiplied by $125,000. The "Earnings Percentage" shall mean
(i) the actual consolidated earnings of Company and
subsidiaries before interest, taxes, depreciation and
amortization, divided by (ii) the target for such number (as
prepared by management and approved by the Board of
Directors of the Company). The Revenue Percentage shall mean
(i) the actual gross revenue of the Company and its
subsidiaries, divided by (ii) the target for such number (as
prepared by management and approved by the Board of
Directors of the Company). The computation of the bonus, if
any, to which Employee is entitled shall be made by
Company's chief financial officer in accordance with
generally accepted accounting principles consistently
applied. Any bonus to which Employee is entitled shall be
paid as soon as practicable but in no event later than the
15th day of the second month after the end of the fiscal
year for which the bonus was earned. In the event Employee's
employment terminates prior to the end of the fiscal year,
Employee or his personal representative shall be entitled to
a pro rata portion of the bonus for such fiscal year unless
<PAGE>
Mr. Marc Sherman -2- September 9, 1999
his employment was terminated pursuant to paragraph 11, in
which event no bonus shall be payable. Employee's pro rata
portion of his bonus shall be the same percentage of the
bonus as the number of days for which he was employed for
such fiscal year is of 365."
2. Section 10 of the Employment Agreement is hereby amended by replacing
the date contained therein with the date January 1, 2001 and replacing
the words "one year's" with the words "six months'".
If the foregoing accurately reflects your understanding of the
agreement between you and the Company, please sign this letter and the enclosed
copy and return one of them to the Company whereupon the foregoing will
constitute a binding agreement between the Company and you.
Very truly yours,
INTELLESALE.COM, INC.
By: _______________________________
Name: Michael Krawitz
Title: Vice President
Agreed to and accepted as of
the date first above written:
- -------------------------
Marc Sherman
Exhibit 21.1
Exhibit 21.1
Intellesale.com, Inc.
List of Subsidiary Companies
Company Name State of Incorporation
Bostek, Inc. Massachusetts
Blue Star Electronics, Inc. New Jersey
Consolidated Micro Components, Inc. Pennsylvania
Cybertech Station, Inc. Pennsylvania
Data Path Technologies, Inc. New York
Elite Computer Services, Inc. New Jersey
GDB Software Services, Inc. New York
Micro Components International, Inc. Massachusetts
Norcom Resources, Inc. Minnesota
Pizarro Re-Marketing, Inc. Texas
Port Parties, Ltd. New York
Service Transport Company New Jersey
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment to Registration Statement on
Form S-1 of our report dated June 10, 1999 (except as to the second paragraph of
Note 1, the second paragraph of Note 11 and Note 17, which is as of August 23,
1999) relating to the financial statements and financial statement schedule of
Intellesale.com, Inc., which appear in such Registration Statement. We also
consent to the references to us under the heading "Experts" in such Registration
Statement.
PricewaterhouseCoopers LLP
October [__], 1999
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 of our report dated February 24, 1998,
relating to the financial statements and financial statement schedule of
Intellesale.com, Inc. for the years ended December 31, 1996 and 1997, which
appear in such Registration Statement. We also consent to the references to us
under the heading "Experts" in such Registration Statement.
/S/ Rubin, Brown, Gornstein & Co., LLP
- ---------------------------------------
Rubin, Brown, Gornstein & Co., LLP
October 20, 1999
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITOR
We hereby consent to the use in this Amendment to Registration Statement on Form
S-1 of our reports dated April 6, 1999 (Except for Note 13, which is as of June
4, 1999), April 1, 1998 and July 23, 1999, relating to the financial statements
of Bostek, Inc. for the years ended December 31, 1998, 1997 and 1996,
respectively, which appear in such Registration Statement. We also consent to
the references to us under the heading "Experts" in such Registration Statement.
DI PESA & COMPANY
Certified Public Accountants
October [__], 1999
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Pre-Effective Amendment No. 1 to
Registration Statement on Form S-1 of our report dated July 9, 1998, relating to
the financial statements of Universal Commodities Corp. for the ten months ended
October 31, 1996 which appear in such Registration Statement. We also consent to
the references to us under the heading "Experts" in such Registration Statement.
/S/ Rubin, Brown, Gornstein & Co., LLP
- ---------------------------------------
Rubin, Brown, Gornstein & Co., LLP
October 20, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.1
Exhibit 27.1
Financial Data Schedule
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Registrant's audited consolidated financial statements as of and for the twelve
months ended December 31, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0001094819
<NAME> Intellesale.com, Inc.
<S> <C>
<PERIOD-START> Jan-01-1998
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 571000
<SECURITIES> 0
<RECEIVABLES> 5037000
<ALLOWANCES> 362000
<INVENTORY> 6249000
<CURRENT-ASSETS> 11900000
<PP&E> 947000
<DEPRECIATION> 346000
<TOTAL-ASSETS> 20852000
<CURRENT-LIABILITIES> 11633000
<BONDS> 80000
0
0
<COMMON> 1000
<OTHER-SE> 8529000
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<INCOME-TAX> 1646000
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<EPS-BASIC> 0.12
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</TABLE>
