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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS
UNDER SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
EBIZ ENTERPRISES, INC.
(Name of Small Business Issuer in its Charter)
COMMISSION FILE NUMBER: ____________
NEVADA 84-1075269
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15695 NORTH 83RD WAY
SCOTTSDALE, ARIZONA 85260
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER: (480) 778-1000
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(Title of class)
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PART I
Except for historical information contained herein, this Form 10-SB
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and Ebiz
Enterprises, Inc. ("Ebiz") intends that such forward-looking statements be
subject to the safe harbors created thereby. Wherever possible, we have
identified these forward-looking statements by words such as "anticipates"
"believes" "estimates" "expects" "intends" and similar expressions. Such
forward-looking statements involve risks and uncertainties and include, but are
not limited to, statements regarding future events and Ebiz's plans and
expectations. Our actual results may differ materially from such statements.
Factors that may cause or contribute to such differences include, but are not
limited to, those discussed in "ITEM 1. DESCRIPTION OF BUSINESS - FACTORS
AFFECTING FUTURE PERFORMANCE" and "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," as well as those discussed
elsewhere herein and in the exhibits hereto and incorporated by reference.
Although we believe that the assumptions underlying the forward-looking
statements herein are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. In addition, as disclosed under
"ITEM 1. DESCRIPTION OF BUSINESS - FACTORS AFFECTING FUTURE PERFORMANCE," the
business and operations of Ebiz are subject to substantial risks which increase
the uncertainties inherent in the forward-looking statements included in this
Form 10-SB. The inclusion of such forward-looking information should not be
regarded as a representation by Ebiz or any other person that the future events,
plans or expectations contemplated by Ebiz will be achieved.
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Ebiz develops and operates Internet e-commerce Web sites, and designs,
manufactures and distributes high-value, low-cost computer systems intended to
capture leadership positions within specific, rapidly-growing segments of the
computer industry, including the business, small-office/home-office ("SOHO") and
consumer markets.
Ebiz addresses these high-growth markets through an integrated business
strategy that brings together virtual communities, with content, services and
innovative product solutions through the development of Vertical Service Portals
("VSPs"). Our VSPs provide meaningful content, value-added free services,
resources, communication, links, training, support and information, combined
with commercial product sales specifically targeted to the needs of that
community's interests.
The vision of Ebiz is to "accelerate the alternatives"(TM) in personal
and business computing by focusing primarily on leveraging the benefits and
opportunities provided by utilizing the Linux Operating System. We are focused
on three fast-growing emerging markets, for which we believe Ebiz is ideally
positioned to develop and deploy e-commerce Internet VSPs and branded computer
products.
We distribute our Element-L(TM) and M(2) Systems(TM) brands, as well as
many other vendors' products through our e-commerce VSPs. The Element-L(TM) and
M(2) Systems(TM) lines are also distributed through authorized resellers such as
Onsale.com, egghead.com and Fred Meyer Food Stores. We anticipate distributing
our new PIA(TM) line through our newly developed VSP, PlanetPIA.com, and other
distribution channels. We also distribute third party products including
systems, components, peripherals and software from leading industry
manufacturers and developers through our VSPs.
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THE MARKET AND INDUSTRY
E-Commerce Market
The Internet has emerged as the significant interactive medium for
communications, information and commerce. In its 1999 report, The Global Market
Forecast for Internet Usage and Commerce, International Data Corporation
("IDC"), a market research firm, estimates that the number of Internet users
worldwide exceeded 97 million in 1998 and will grow to over 502 million by the
end of 2003. According to IDC, the number of users who make purchases over the
Web will jump from 31 million in 1998 to more than 183 million in 2003 which
will represent only 36% of all Web users.
In 1998, 56% of Web users resided outside the United States; however,
these users accounted for only 26% of worldwide e-commerce spending. By 2003,
IDC estimates 65% of Web users will be international, and foreign countries will
account for just less than half of worldwide Internet commerce.
Business-to-business trade on the Internet in the United States is
predicted to increase from $43 billion in 1998 to $1.3 trillion in 2003,
according to a December 1998 report from Forrester Research, Inc., a leading
independent research firm. As intercompany e-commerce accelerates within
industry supply chains, Forrester expects on-line business trade to surpass 9%
of total U.S. business sales by 2003. Forrester Research estimates that by 2003,
consumers will spend $108 billion to buy goods online, while businesses will
spend $1.3 trillion. As expected, computing and electronic equipment will remain
one of the largest categories of goods traded between businesses, reaching $395
billion in revenue by 2003, while other industries, such as cars and
petrochemicals, will also top the $150 billion mark.
The Linux Market
Overview. Linux is a free Unix-type operating system originally created
by Linus Torvalds at the University of Helsinki in Finland. He began his work in
1991 when he released version 0.02 and worked steadily until 1994 when version
1.0 of the Linux Kernel was released. The current full-featured version is 2.2
(released January 25, 1999), and development continues.
Linux is developed under the GNU General Public License and its source
code is freely available to everyone. This, however, doesn't mean that the Linux
operating system and its assorted distributions are free - companies and
developers may charge for the system and adaptations as long as the source code
remains available. Linux may be used for a wide variety of purposes including
networking, software development, and as an end-user platform. Linux systems are
considered an excellent, low-cost alternative to other more expensive operating
systems.
Due to the very nature of the Linux functionality and availability, it
has become quite popular worldwide and a vast number of software programmers
have taken the Linux source code and adapted it to meet their individual needs.
At this time, there are numerous ongoing projects for porting Linux to various
hardware configurations and purposes.
The Rapidly Growing Market. The Linux operating system is growing
beyond the early adopter phase and reaching the mainstream business market.
Active Linux users worldwide are estimated to be in excess of 10,000,000.
Numerous hardware and software manufacturers have announced and have deployed
Linux-based solutions, including IBM, Gateway, Dell, Intel, Corel and Sun
Microsystems among others. In addition, companies focused on Linux-based
initiatives have entered the public market arena. Red Hat, Inc.'s initial public
offering in August 1999 and its subsequent stock performance have validated the
market for Linux-based companies. Since that time, a number of other Linux-based
companies have filed for their own IPOs, including Andover.net and VA Linux,
Inc.
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In a 1999 bulletin titled Linux Operating System Market Overview, IDC
presented its first-ever forecast for Linux. Through 2003, total Linux
commercial product shipments are predicted to grow faster than the total
shipments of all other client or server operating environments monitored by IDC.
Linux license shipments grew at a dramatic rate of 212.5 percent from 1997 to
1998, now accounting for more than 17 percent of all server operating
environments shipped. IDC estimates Linux commercial shipments will increase at
a compound annual growth rate ("CAGR") of 25% from 1999 through 2003, compared
with a 10% CAGR for all other operating environments combined and a 12% CAGR for
all other server operating environments combined. IDC reports on only commercial
shipments of Linux and is unable to track systems downloaded from the Internet
at no charge.
Linux has been used in academic and research environments since its
inception for applications such as e-mail, Web servers, bulletin boards and
research projects. In 1999, IDC expects more application vendors to port their
offerings to Linux and hardware vendors to continue to expand their available
product lines running Linux for server-side endeavors. Further, IDC believes
that some desktop initiatives including an improved graphical user interface and
increased desktop application availability have the ability to trigger interest
in Linux as a desktop operating system toward 2003.
Linux servers are expected to have a larger impact on the worldwide
server appliance market, according to Dataquest Inc., a unit of Gartner Group,
Inc. in a July 1999 report. Dataquest estimates that by 2003, Linux servers will
account for approximately 24 percent of worldwide server appliance revenue, or
$3.8 billion, and 14 percent of server appliance shipments, or 1.1 million
units. Linux servers are projected to represent 3.4 percent of worldwide
traditional server revenue, or $1.9 billion and 8.1% of traditional server
shipments, or 450,000 units by 2003.
The Home Computer Market
Lower-priced personal computers and the demand to connect to the
Internet had a strong impact on the U.S. consumer segment, as 6.4 million
American households acquired PCs in 1998 resulting in a total of 52 million
households, or 50 percent of U.S. households, having a PC in 1998, according to
Dataquest Inc. In 1995, just 27 percent of U.S. households had a PC. These
percentages increased to 36% in 1996 and 43% in 1997.
In a related study, according to a 1999 research report by Cahners
In-Stat Group, the Residential Gateway market is expected to grow from a market
that barely exists today to one that exceeds $2.4 billion by 2003. Cahners
reports that digital TV, Web-based interactive TV and the emergence of non-PC
based Internet appliances will help drive this market. A Residential Gateway is
the device that connects a home computer system or network to the Internet. With
the deployment of high-speed Internet connections and the push by service
providers to offer integrated voice, data and video services over the same
high-speed pipe to different nodes throughout the home, the Residential Gateway
is expected to become an integral component in the network.
BUSINESS OBJECTIVES AND STRATEGIES
Our strategic business objectives are to:
- Develop comprehensive VSPs that combine product marketing with
community interests such as news, resources, links and other
incentives intended to build customer loyalty and promote
repeat visits;
- Leverage our Linux product development expertise to continue
product extensions within the Element-L(TM) and PIA(TM)
product lines;
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- Generate significant revenue to achieve financial targets
through product sales as well as through technical support,
service and training opportunities, customer services,
Internet advertising, marketing and Web links;
- Expand sales, marketing, production and distribution of our
branded product lines until they are until they are
internationally recognized leading PC brands; and
- Become a nationally recognized leader in e-commerce marketing
and distribution of computer hardware and software products in
the market niches we target.
In developing our online market position, our goal is to be the
definitive Internet destination for information, services and e-commerce for the
vertical markets we target. We are focusing on building our brand recognition,
increasing customer satisfaction and providing numerous competitive advantages.
We believe that virtual Internet firms without true merchant qualities and
capabilities, such as conducting their own purchasing, merchandising, order
fulfillment, supply-chain management, vendor marketing opportunities and product
technical support functions, will not be able to differentiate themselves moving
forward in the e-commerce marketplace. Our e-commerce plan encompasses the need
to provide our virtual communities with a comprehensive Internet site, offering
relevant content, free services and a quality shopping experience, backed-up by
expert customer service. Key elements of this strategy include:
- Providing a meaningful virtual community destination on the
Internet. By providing the broadest spectrum of resource
information, links and content to serve the needs of the
virtual community, we will provide a critical destination
point for people with common interests to go for news and
information as well as to buy products.
- Offering free value-added services. By providing free services
with real value to the community of customers, we will develop
goodwill and enhance both our VSP traffic and usefulness.
Capturing customer information gleaned from providing these
services in our database, enables us to manage and track
customer trends and preferences, ensuring our ability to
respond quickly.
- Ensuring a secure and convenient shopping experience. Our
e-commerce sites feature secure shopping facilities that are
open 24 hours a day, seven days a week, may be reached from
the customer's home or office and feature extensive browsing
and search capabilities
- Supplying an extensive selection of high quality products. We
intend for customers to have a positive experience, by
ensuring that they find the product of their choice, backed up
by warranty and support services as required.
- Providing efficiently priced products. We are committed to
providing products that are priced very competitively. We are
continually looking for innovative ways to drive cost out of
our products and processes, and passing those cost savings on
to customers, without sacrificing quality service.
- Delivering excellent customer service. We are committed to
providing the highest level of customer service from ordering
to shipping, and offer pre-and post-sales support via the
telephone, e-mail or online, and also offer online order
tracking capabilities.
- Developing customer loyalty. We are focused on developing and
promoting customer loyalty, building repeat purchase
relationships with our customers, leveraging our customer
acquisition costs and maximizing the number of return visits
by our customers.
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- Building brand leadership positioning. We are using aggressive
online and offline integrated marketing strategies to enhance
our brand recognition within each vertical market, which
includes advertising, direct online marketing, trade shows and
public relations activities.
OUR VERTICAL SERVICE PORTALS (VSPS)
As an e-commerce company, our primary asset is our ability to
effectively develop, market and manage our Web sites and develop our e-commerce
initiatives, in addition to the manufacturing of the corresponding branded
computer systems marketed on our sites. We have developed and are operating VSP
sites and are continually developing and updating these sites, as well as
developing new sites as market opportunities are identified. Our VSPs include:
TheLinuxStore.com
The vision for TheLinuxStore.com is to be the definitive source for
"Everything Linux," offering the largest selection of Linux compatible technical
products and related items, including Linux computer systems and servers,
hardware components and peripherals, software, books, resource material,
apparel, training and support services. Through this VSP, we distribute products
from industry leaders such as Lucent, Hewlett Packard, AMD, 3COM, Intel,
Toshiba, Mitsumi, Seagate, Western Digital, Quantum, Compaq, Corel, Caldera, Red
Hat, Cyclades and others.
As a VSP, we provide free services and content that is relevant,
dynamic and timely, designed to engage our customers and facilitate an ongoing
relationship with them. We provide a site where customers can get whatever they
want (obtain news and information, purchase products, download software or
graphics, participate in messaging forums and other community-related
interaction) and motivate them to return often to see what is new and different.
This includes up-to-the-minute Linux Headline News, Linux software downloads, a
message board, job postings, search engine, knowledgebase, TheLinuxLab test
center, a registry of people, jobs and projects, events and links to over 5,000
Web sites and resources available on the Internet.
Our goal is to combine the best of the community interests with
commercial business opportunities of Linux. We intend to enhance and develop our
Linux product offerings, but focus our near-term efforts on developing
partnerships and relationships with manufacturers and suppliers of other Linux
products and distribute them on our site. As a VSP, we also provide additional
services, which will ultimately generate revenue, but more importantly today
provide a valuable customer profile database and trend data.
With site traffic exceeding one million hits per month, there are also
significant opportunities to generate advertising revenue on the site, primarily
from vendors whose products are sold on the site. Near-term revenue
opportunities also include charging a nominal fee for some of the services, such
as dynamic DNS, e-mail forwarding and Web hosting, which are now provided at no
charge.
TheLinuxStore.com has consistently increased traffic since its
inception in April 1999. We have received an average of over one million page
views per month and recently have had as many as one million in one week. Our
audience is comprised of IT and Web development professionals, software
programmers, hardware engineers and Linux enthusiasts, resellers, systems
integrators and VARs.
We are preparing to launch an aggressive marketing and promotion
campaign to increase awareness and traffic to our web site. This includes online
and print media advertising in all key Linux media, online direct marketing,
public relations and trade show promotional activities. We have also implemented
a series of sales promotions, which will continue on an ongoing basis to develop
our
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customer database for marketing purposes. We will implement customer loyalty
programs offering additional benefits and incentives to frequent customers.
We provide customers of TheLinuxStore.com with a positive online
shopping experience, backed up by professional customer support. Our
professional tele-sales team offers pre-sale configuration and engineering
support. First-tier, post-sale technical support and return services are
provided online and toll-free over the telephone. More extensive technical
support may be referred to a specific vendor, although TheLinux Store.com can
provide this service for vendors if desired.
It is one of our fundamental values to participate as an active member
of the Linux community and support open source development projects. Therefore,
since our founding, TheLinuxStore.com has supported the Linux community, both
locally and nationally. We are corporate sponsors of Linux International and
have key staff members who are vital contributors to various open source
projects, most notably, the Stampede Linux Development project. We support the
Debian Linux development efforts, as well as local Linux user groups, the
Arizona Software & Internet Association, Arizona Internet Professionals
Association and Linux expositions and conferences.
Revenue from TheLinuxStore.com is generated from product sales as well
as additional services that include marketing fees paid by vendors, advertising,
service, support and training.
EBIZmart.com
The vision for EBIZmart.com is to provide "Everything for Business"
over the Internet. It is a business-to-business e-commerce portal dedicated to
facilitating the sale of products and services specifically for the business
customer. This includes computer systems, equipment and merchandise. The site
provides content, business news, travel services, stock quotes, weather, a
search engine, resources, links, events, calendar, education and training. This
site is unique and operates as a business-to-business clearinghouse, allowing
vendors to sell their product inventory direct to buyers over the Internet,
without disrupting their existing distribution channels or retail pricing
structures. This site encompasses three primary sales methodologies:
- Auctions - for suppliers to offer products and prospective
buyers to bid (place non-cancelable offers) for the
merchandise;
- Clearinghouse - for vendors to sell listed product inventory
directly to buyers at a specified, below-market price;
- Express Lane - for the sale of products that Ebiz has
purchased, inventoried and resells as in-stock items.
Products are indexed and categorized, promoted and highlighted in
various ways to keep the content dynamic. Currently, there are over 3,000
individual items listed on EBIZmart.com ranging from computer hardware and
software to office supplies, all at wholesale pricing direct to the business
buyer. Other areas of this VSP include distribution of our M2 Systems(TM)
products, e-commerce start-up services, Web development and hosting for start-up
e-commerce companies through the use of MyETool, an e-commerce site development
software kit, and EBIZ Travel, an in-house full service travel agency.
A key asset of this VSP is the membership registration, whereby users
of the site register and receive frequent site updates from us in the form of a
newsletter. They also receive various product and service incentives as rewards
for varying levels of purchases. We currently have a developed database of over
100,000 e-commerce/auction buyers.
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Revenue is generated from the sale of products that we purchase and
resell, as well as from sales of our M2 Systems(TM) product line. We generate
fees for product listings for Auction and Clearinghouse items, as well as the
Web hosting service through MyETool and travel-related commissions from EBIZ
Travel. We also generate advertising revenue from banner ads and links.
This VSP is being marketed to both vendors to list products as well as
potential purchasers through an integrated sales and marketing program, heavily
dependent upon our sales department's interaction with our current customer
base. To generate customer traffic, we promote the site through public
relations, online advertising on business-to-business Web sites (some via
reciprocal advertising and affiliate agreements), professional purchasing
associations, industry-related sites and through direct e-mail marketing.
PlanetPIA.com
This VSP is under development with expected launch prior to year-end.
It is designed as the premier portal for PIA(TM) users, bringing the Internet to
everyone. We anticipate providing complete support for our PIA(TM) brand,
additional PIA(TM) upgrades and products at below conventional market prices
through this VSP. This VSP will be able to be set up as a start-up screen for
PIA(TM) users and will be customizable to access particular interests of the
user.
PlanetPIA.com will provide the PIA(TM) user community with special
services and offers of interest to them. It will provide an interactive Internet
experience, including providing games, educational and family resources, chat,
entertainment, sports and shopping.
We anticipate that this VSP will be a key marketing component of our
PIA(TM) systems. We intend to market this VSP extensively in online and offline
media.
OUR VALUE PRICED PC BRANDS
We believe we have certain advantages over our competitors in the value
price PC market, particularly:
- strict quality controls which assure fewer problems for the
end-user;
- competitive pricing below the $1,000 level; and
- technically proficient help desk for after sales service.
We currently manufacture and distribute two lines, the Element-L(TM)
and the M2Systems(TM) brands and are currently developing the Personal Internet
Appliance or PIA(TM) brand.
- Element-L(TM) Introduced in April 1998, our Element-L(TM) line
offers one of the most comprehensive families of Linux-based
systems on the market. The product line consists of
Linux-based, Internet-ready multimedia desktop and notebook
PCs, workstations, servers and high performance Alpha Systems.
The entry-level Element-L(TM) "Ion" system is believed to be
the lowest priced Linux-based computer system on the market.
- M2 Systems(TM) M2 Systems(TM), introduced in April, 1998, was
the first Internet-marketed sub-$1,000 Windows-based
multimedia PC. These systems, priced from $399-$899, provide
an alternative to expensive, brand-name computer systems and
continue to re-define the low-cost pricing landscape. In
addition to marketing M2 Systems(TM) on our EBIZmart.com and
cpumicromart.com e-commerce Web sites, we have received
production orders from several
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resellers including egghead.com, Fred Meyer Food Stores,
Computer Renaissance Stores and BJ's. In December 1998, we
signed a distribution agreement with dealdeal.com for an
exclusive "front page" listing on its Web portal site and are
negotiating similar strategic relationships with other
e-commerce organizations. We recently received distinction for
our M2 Systems(TM) as being among the top 100 PC manufacturers
as determined by Microsoft and we are in Microsoft's elite
Member '99 program, which honors the top 1% of the system
builders in North America.
- PIA(TM) Ebiz is developing and preparing to launch before
year-end a third product line, the PIA(TM) (Personal Internet
Appliance), which targets consumers and cost-conscious
institutions such as schools and libraries seeking a
full-service Internet access device. The PIA(TM) will be a
highly-stylized fully-configured desktop computer that will
utilize the Linux operating system. The PIA(TM) is designed to
enable users to surf the Web quickly, easily and affordably,
exchange e-mail, play games, chat online and do basic
computing functions, such as word processing and spreadsheets.
Because of the flexibility of the Linux operating system, the
software pre-loaded on the PIA(TM) provides compatibility with
Microsoft Word, Excel and PowerPoint documents. The targeted
retail price is under $400, placing the device well within the
reach of most consumers and institutions. The PIA(TM) product
line extensions will include additional configurations,
upgrades and peripherals.
MARKETING
We accept sales orders directly via a secure shopping cart located on
each of our VSPs. In addition, we employ a dedicated direct sales force who
manage direct corporate and reseller sales opportunities. We also have a
complete inhouse tele-sales department that takes incoming customer calls,
referrals and inquiries generated by our various marketing activities or Web
sites.
Our marketing and promotion strategy is intended to:
- Create, merchandise and manage comprehensive VSPs.
- Build brand recognition and become market leaders with our VSP
sites.
- Generate significant market awareness for our products, our
sites and Ebiz through integrated marketing programs.
- Effectively position and promote our products and our VSP
sites to their target audiences to increase consumer traffic
to our sites, add new customers, stimulate demand and generate
revenue.
- Develop e-commerce and Internet service revenue from technical
support, service and training, advertising fees, links and
content providers.
- Leverage our strategic partnerships with vendors, industry
experts and distribution partners to effectively merchandise,
market and promote our initiatives.
- Establish a comprehensive database in excess of 1,000,000
customers, and build strong customer loyalty to maximize
repeat purchases.
- Establish evaluation and accountability processes to manage
our VSP sites and measure the results of marketing programs
and sales support activities.
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Establish Corporate and Brand Positioning. With our business interests
serving three diverse markets, we believe that it is necessary to quickly
establish and maintain a strong brand presence and communicate corporate and
brand positioning for each of our initiatives. Therefore, we are implementing a
comprehensive sales and marketing program to promote Ebiz and our brand names.
Advertising in online and offline media will be utilized to support all
of our e-commerce initiatives and to build brand recognition. Print media
advertising campaigns are used in targeted trade, business and consumer
publications based on the specific needs of each business unit.
Public and media relations activities have been used extensively,
targeting key online, print and broadcast media to generate visibility and
awareness of our VSP sites, our products and our brands. We distribute
newsworthy information on a timely, consistent basis and produce professional
electronic and printed press materials and manage an accurate media contact
database in-house.
Trade shows are used throughout our marketing program where appropriate
to create brand awareness, primarily among specific vertical market groups or
Internet industry associations. To enhance our corporate positioning and
perception, we intend to expand our presence at the select shows we attend,
providing a multimedia presentation theater format and individual demonstrations
and to interact extensively with the press and sales promotions to generate
traffic and consumer excitement. To ensure consistency of message, all trade
shows revolve around a central theme or concept that is key to the positioning
of our new and featured products.
Direct Marketing and Sales Promotion Programs. We intend to develop
targeted customer retention and promotion programs designed to reward frequent
customers. A Database/Direct Marketing Program has been established for each VSP
site to enable us to develop community databases, which can be marketed to
cross-sell, re-sell and up-sell our products. This will be accomplished through
product registrations, Web customer registrations and newsletter lists. Customer
information will be captured into an enterprise-wide customer database system,
which will then be able to be accessed by the sales team for follow-up and
reporting.
From this database, we intend to address many marketing activities,
including lead management and database marketing. Our goal will be to segment
this database and communicate with key segments on a weekly or bi-weekly basis
at a minimum. We will promote new products and enhancements, promotions,
training opportunities, sales events and other activities, through direct mail,
with a strong, compelling call to action that motivates a direct response that
can be effectively tracked.
Internet Marketing. To direct traffic to our VSP sites, we have created
inbound links that connect directly to our Web sites from search engines and
other sites. Potential customers can simply click on these links to become
connected to our VSPs from search engines and community and affinity sites. In
addition, in order to increase exposure on the Internet and directly generate
sales, we intend to develop an affiliates program, whereby we compensate our
registered affiliates for any sales generated via their link to our Web site.
CUSTOMER SERVICE
Our customer service department includes customer service and technical
support representatives. Our customer service representatives are available from
8:00 a.m. to 6:00 p.m. Mountain Standard Time, Monday through Friday to assist
customers in placing orders, finding desired products and registering credit
card information. Technical support representatives assist customers in setting
up, configuring and troubleshooting our branded products, and provide return
material authorizations for defective products. We provide technical support
over the telephone, via e-mail and online. We also provide comprehensive user
documentation, online tutorials and a detailed database of product-related
problems and solutions.
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Both customer service groups are a valuable source of feedback
regarding user satisfaction. Our VSP sites also contain customer service pages
that outline store policies and provide answers to frequently asked product
questions.
INFORMATION TECHNOLOGY
The market in which we compete is characterized by rapidly changing
technology, evolving industry standards, frequent service and new product
announcements, product enhancements and changing customer demands. Accordingly,
our success depends upon our ability to adapt to rapidly changing technologies,
to adapt our services to evolving industry standards, and to continually improve
the performance, reliability and features of our products and service. We have
implemented a broad array of scaleable site management, search, customer
interaction and distribution services systems that we use to process customers'
orders and payments. These systems use a combination of our own proprietary
technologies and commercially available licensed technologies. The systems that
we use to process customers' orders and payments are integrated with our
accounting and financial reporting systems. We focus our internal development
efforts on creating and enhancing the specialized, proprietary software that is
unique to our business.
Our systems have been designed on industry standard architectures and
have been designed to reduce downtime in the event of outages or catastrophic
occurrences. Our systems provide 24-hour-a-day, seven-day-a-week availability.
Our system hardware is located in our Scottsdale, Arizona facility and is
provided with redundant communications lines and emergency backup located in
Kansas City, Missouri.
COMPETITION
The online commerce market is new, rapidly evolving and intensely
competitive. We expect competition to intensify in the future. We currently or
potentially compete with a variety of other companies in each of our targeted
market niches. Although we believe there may be opportunities for several
providers of products and services similar to ours, a single provider may
dominate any of our markets. We expect that additional companies will offer
competing e-commerce solutions in the future.
The Emergence of Linux Portals. Several Linux based Web site portals
which offer technical news, software downloads, Web site tools, resources, links
and services, as well as product marketing, have been recently developed. The
sites highlight the growing competition in the open-source world, and among
Linux operating system developers in particular. Our research indicates there
are currently 137 companies that have Linux-based Web sites, 49 of which
assemble and/or resell Linux computers, with only 9 offering desktop solutions.
There are numerous Linux portals offering information, software, services and
resources. Each serves a specific purpose, but none have been truly successful
in combining and balancing the community and commercial interests. The sites
that offer some of the same content or services as TheLinuxStore.com include
justlinux.com, LinuxLinks.com, LinuxStart.com, Linux.org, linux.com,
Linuxmall.com, RedHat.com, FirstLinux.com; LinuxToday.com, Slashdot.org,
Freshmeat.com and linuxbandwagon.com.
Now considered a legitimate challenger to Windows and Unix,
particularly as dedicated thin-servers (such as a Web server), Linux itself is
both free of charge and free to modify as any user desires. Several companies
are building business models around Linux by selling customer service, technical
support and applications with the system. Red Hat has dominated this market by
entering into distribution agreements with large hardware makers such as IBM and
Dell resulting in it accounting for approximately 56 percent of operating
systems of all Linux servers shipped last year, according to IDC.
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Low-cost PC/Appliances. In the emerging low-end PC and "appliance"
market, new competitors are emerging with frequency, primarily due to the
bundling and strategic partnerships with online service providers marketing
"free-PC's" with a multi-year service commitment. Current market entrants
include Netpliance, E-Machines, Free PC, Free iMac and Microworkz. Major
competitors in the PC manufacturing segment include Dell Computers, Gateway
Computers, IBM, NEC, Compaq and others. Ebiz intends to compete in the value
priced range of PCs and believes it can be successful by offering uniquely
styled, quality products and effective technical support at competitive prices.
Business-to-Business Auctions, Clearinghouse/Wholesalers. In the
business-to-business clearinghouse market in which EBIZmart.com engages,
numerous sites offer products available for auction and numerous
business-to-business product reselling and resource Web sites are available.
Currently, there is no known e-commerce portal dedicated to providing content,
links, services and business-to-business sales of merchandise through all three
purchasing methods we provide, although we believe additional companies will
offer these solutions in the future. We believe that we are uniquely positioned
to make this VSP successful. Indirect competitors of EBIZmart.com in addition to
those above include a growing list of e-commerce content and merchant sites.
There is a growing number of purchasing utility and assistant programs and sites
attempting to establish themselves as procurement and distribution utilities.
These sites and programs are anticipated to compete with our VSP features and
tools.
We will also compete with several large computer product distributors
including CDW, Gateway Computers, Dell Computers and, to some degree, our
customers and suppliers such as Insight, Hamilton Avnet and others. We intend to
focus on our niche of procuring and merchandising surplus computer products and
believe that we can successfully compete with other distributors in this
segment.
INTELLECTUAL PROPERTY
We rely primarily on trademark and copyright laws to protect our
intellectual property. We also enter into confidentiality and nondisclosure
agreements with our employees and others, and generally control access to our
proprietary information.
We have filed with the United States Patent and Trademark Office for
trademark/service mark registration of "EbizMart," "M2 Systems," "CPU
MicroMart," and others. We are in the process filing registrations for
"Element-L Systems," "TheLinuxStore.com," "PIA," "PlanetPIA.com," "Accelerating
the Alternatives," "Performance to the Next Power" and other trademarks/service
marks used or anticipated to be used in our business. We have registered
Internet domain names for each of our current VSP sites as well as numerous
others. Additional filings and domain registrations are anticipated, including
variations of the above marks and names.
EMPLOYEES
As of September 30, 1999, we had a total of 71 employees, including 34
administrative, 14 sales and 23 manufacturing employees. Our employees are not
covered by any collective bargaining agreements, and we consider our
relationship with our employees to be good.
FACTORS AFFECTING FUTURE PERFORMANCE
Limited Operating History. We essentially re-engineered our operations
through acquisition of Genras' assets and rights to the "CPU MicroMart" name and
operations in 1998. We recently shifted our focus away from the Web auction
channel, which comprised over 90% of fiscal 1998 revenues, to our current
business format. We have also just recently entered the computer manufacturing
industry and have limited results of operations from this segment of our
business. We have even more recently focused on development of our Element-L(TM)
brand of system and are developing our new PIA(TM) brand, each utilizing the
Linux operating systems, and are devoting considerable resources to the
development of these lines
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and to TheLinuxStore.com and PlanetPIA.com VSPs. We will encounter numerous
risks and difficulties encountered by early stage companies in the rapidly
developing e-commerce markets as well as risks associated with manufacturing and
distributing PC computer systems. We may not be successful in addressing these
risks and there can be no assurance that our business strategy will be
successful.
History of Losses and Anticipated Future Losses. For the fiscal years
ended June 30, 1998 and 1999, we sustained net losses of approximately $422,000
and $1,877,000, respectively. Future losses are likely to occur. Our independent
auditors have qualified their audit report regarding our ability to continue as
a going concern. While we have demonstrated the ability to grow revenue, we have
yet to generate and maintain sufficient profitability to sustain or grow
operations without additional external funding. No assurances can be given that
we will be successful in reaching or maintaining profitable operations.
Dependence on Evolution of E-commerce and Growth of Web Usage. We
expect to derive significant revenues from our VSPs "virtual stores" and from
the sales of our computer systems. This strategy anticipates continued growth in
consumer acceptance of on-line shopping and in the demand for our value priced
computer systems. While the trend appears to be toward rapid expansion of
e-commerce and for increased demand for value priced computer systems, this
market has not existed long enough to establish broad acceptance or generate
significant revenue. If this market fails to develop or develops more slowly
than we anticipate, our anticipated revenues could be adversely affected.
Dependence Upon Consumer Acceptance of the Linux System in General and
our PC Systems in Particular. Our entry into the computer system manufacturing
industry is a new line of business in which we have no prior experience. While
we believe the prior experience of our management team will allow us to operate
in this business, there can be no assurance that we will be successful. Our
Element-L(TM) line has just been developed and utilizes the Linux operating
system. Acceptance of the Linux system will be critical to the success of this
product line and to our PIA(TM) product line. Our M2 Systems(TM) line is
relatively new and does not have brand recognition to the same extent of most of
our competitors. There can be no assurance that our computer systems will meet
with consumer acceptance, which could adversely affect our profitability.
Highly Competitive Business. The computer hardware and software
distribution business is an intensely competitive industry, and we will face
increasing competition in every aspect of this business. E-commerce distribution
is relatively new in the industry and is anticipated to attract significantly
more competition. We recently entered the PC manufacturing market, which is also
highly competitive. We plan to create a growing presence in e-commerce
distribution of product categories and will face intense barriers to entry as
the business of selling products via the Internet experiences growth. This
industry is characterized by rapid technological and consumer preference change,
massive capital infusions, and the emergence of a large number of new and well
established companies aspiring to control market share in the Internet
distribution process. A relatively small number of these companies, including
America Online, Yahoo!, MSN, Excite and Lycos, currently control primary and
secondary access to a significant percentage of all Internet users and have a
competitive advantage in marketing to those users. Other large and established
companies, such as major computer manufacturers and distributors, have
established relationships with large customer databases and are rapidly
expanding into Internet distribution. Substantially all of these companies have
financial, technological, promotional and other resources much greater than
ours. There can be no assurances that we will be able to compete effectively in
these marketplaces.
Rapid Growth. We have recently experienced rapid growth in employees,
sales, customers and operations. This growth has brought many challenges and
placed additional pressure on our already limited resources and infrastructure.
No assurances can be given that we will be able to effectively manage this or
future growth. Our future growth may place a significant strain on our
managerial, operational, financial and other resources. Our success will depend
upon our ability to manage growth effectively, which will require that we
continue to implement and improve our operational, administrative
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and financial and accounting systems and controls and continue to expand, train
and manage our employees. Our systems, procedures and controls may not be
adequate to support operations and we may not be able to achieve the rapid
execution necessary to exploit the market for our business model. If we are
unable to manage internal or acquisition-based growth effectively, our business,
results of operations and financial condition will be materially adversely
affected.
Inventory Risk. We carry a significant level of "surplus" inventory,
which by its nature may become quickly outdated. While we obtain this inventory
at competitive prices, if we are unable to dispose of this inventory for a
profit due to a shift in consumer demand or product advances or, if we liquidate
this inventory at low margins or below costs, our profitability will be
adversely affected. It is also critical to our success that we stock sufficient
inventory to meet customer demand for both third party products and our PC
systems. Our inability to adequately stock inventory, due to capital constraints
or procurement difficulties would adversely affect our operating results both on
a quarterly and annual basis.
Difficulty of Forecasting. As a result of our limited operating
history, it is difficult to accurately forecast our net sales and we have
limited meaningful historical financial data upon which to base planned
operating expenses. We base our current and future expense levels on our
operating plans and estimates of future net sales, and our expenses are to a
large extent fixed. Sales and operating results are difficult to forecast
because they generally depend on the volume and timing of the orders we receive.
As a result, we may be unable to adjust our spending in a timely manner to
compensate for any unexpected revenue shortfall. This inability could cause our
net losses in a given quarter to be greater than expected.
Operating Results Subject to Fluctuations. As a result of our limited
operating history, rapid growth and change in business focus, and because of the
emerging nature of the markets in which we compete, our historical financial
data is of limited value in planning future operating expenses. Our expense
levels will be based in part on expectations concerning future revenues. Our
revenue is derived primarily from product sales, which are difficult to forecast
accurately. We may be unable to adjust spending in a timely manner to compensate
for any unexpected shortfall in revenues. A significant shortfall in demand for
our products could have an immediate and material adverse effect on our
business, results of operations and financial condition. Our business
development and marketing expenses may increase significantly as we expand our
operations. To the extent that such expenses precede or are not rapidly followed
by increased revenue, our business, results of operations and financial
condition may be materially adversely affected. Our quarterly operating results
may fluctuate significantly in the future as a result of a variety of factors,
many of which are outside our control. These factors include:
- - the level of demand for our products;
- - the level of demand for conventional and e-commerce marketing;
- - the introduction of new products or services by us or our competitors;
- - our ability to attract and retain personnel with the necessary
strategic, technical and creative skills required for effective
operations;
- - the amount and timing of expenditures by customers;
- - customer budgetary cycles;
- - the amount and timing of capital expenditures and other costs relating
to the expansion of operations;
- - our success in finding and acquiring suitable acquisition candidates;
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- - pricing changes in the industry;
- - technical difficulties with respect to the use of the Internet;
- - economic conditions specific to Internet technology usage;
- - government regulation and legal developments regarding the use of the
Internet; and
- - general economic conditions.
As a strategic response to changes in the competitive environment, we
may from time to time make certain pricing, service, technology or marketing
decisions or business or technology acquisitions that could have a material
adverse effect on our quarterly results. We may also experience seasonality in
our business in the future, resulting in diminished revenues as a consequence of
decreased demand during certain periods of the year. Due to all of these
factors, our operating results may fall below the expectations of securities
analysts and investors in any future quarter. In such event, the trading price
of our common stock will likely be materially and adversely affected.
Capital Constraints. Since inception we have funded operations with
debt and equity capital. Our ability to operate profitably under our current
business plan is largely contingent upon success in obtaining additional sources
of debt and equity capital. There can be no assurance that sources of capital
will be available on satisfactory terms or at all. Under the terms of the
Debenture and related agreements, we are able to access limited capital upon
conversions of the Debenture into common stock. However, the timing of the
access to or amount of this capital is not assured. Without additional capital
we may not be able to fully implement our business, operating and development
plans. No assurance can be given that any such financing, if obtained, will be
adequate to meet our ultimate capital needs. If adequate capital can not be
obtained or obtained on satisfactory terms, our operations could be negatively
impacted.
Failure of Online Security Measures. Our relationship with our
customers may be adversely affected if the security measures that we use to
protect their personal information, such as credit card numbers, are
ineffective. If, as a result, we lose many customers, our net sales and results
of operations would be harmed. We cannot predict whether events or developments
will result in a compromise or breach of the technology we use to protect a
customer's personal information. Furthermore, our servers may be vulnerable to
computer viruses, physical or electronic break-ins and similar disruptions. We
may need to expend significant additional capital and other resources to protect
against a security breach or to alleviate problems caused by any breaches. We
cannot give assurance that we can prevent all security breaches.
Credit Card Fraud. A failure to adequately control fraudulent credit
card transactions would harm our net sales and results of operations because we
do not carry insurance against this risk.
Accounts Receivable Collections. Our greatest difficulty in collections
have historically been from the auction Web site organizations. While we have
reduced this line of distribution, gained significant expertise in dealing with
Internet distribution and collection issues and instituted new credit review and
approval procedures, no assurances can be given that future unexpected problems
and collection risks will not develop from these and other customers which could
materially adversely affect our profitability.
Manufacturing Risks. We are increasingly generating revenues from
manufacturing our own brand of computers. This activity creates a wide variety
of risks associated with manufacturing, including but not limited to defects and
warranty costs exceeding expectations. Also, customer service and technical
support requirements could exceed expectations and have severe adverse effects
on operations. No assurances can be given that we will be able to handle
production and quality control issues as we increase manufacturing activity.
While we perform a substantial amount of pre-delivery testing of our systems and
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believe we have a lower than industry average return of our manufactured
products, we may experience significant returns in the future that could
adversely affect our profitability.
Supplier Risks. We purchase components utilized in our computer
manufacturing operations from various suppliers. If we are unable to obtain
sufficient quantities of components our net sales would be adversely affected.
We are also subject to risks of fluctuations in our component prices. If prices
charged by our vendors escalate, our cost of goods sold and net income would be
adversely affected.
Potential Intellectual Property Claims. We deal in technically complex
products and multi-layered supply and distribution sources. We have limited
proprietary property, and are relying heavily on copyright, trademark, trade
secret, nondisclosure and confidentiality measures to protect these limited
rights. Such protections may not preclude competitors from developing similar
technologies or services competitive with ours. While we do not believe that any
of our proprietary property infringes on proprietary rights of third parties, no
assurance can be given that infringement claims may not be asserted. Litigation
resulting from assertion of our rights or from defense of a third party claim
could be expensive and adversely affect our operations even if we were
ultimately successful. There is no assurance that we will have sufficient
resources to sustain or defend protracted legal actions related to our
proprietary rights.
Rapidly Changing Industry. The computer industry is characterized by
rapid change, frequent new product introductions, changing customer demands,
evolving standards, and many other uncontrollable and unforeseeable trends and
changes. Our future success will greatly depend upon our ability to timely and
effectively address changes in this industry. No assurances can be given that we
will be able to effectively deal with these changes which could have a
materially adverse effect on our operations.
Year 2000 Compliance. We have taken steps to ensure that we will not be
adversely affected by the Year 2000 equipment and software failures that may
arise in software applications and equipment with embedded logic where two-year
digits are used to define the applicable year. A review has been conducted in
all of our computer hardware, software and equipment with embedded logic to
identify those areas. The vendors for our software packages have indicated that
our software is Year 2000 compliant. We do not believe the cost of any necessary
upgrades will be material. Contingency plans are being developed in the event
that systems fail. We have also communicated with our material suppliers,
service providers and customers regarding their compliance with Year 2000
requirements. As a result of such inquiries, no significant deficiencies have
been identified. We will continue to monitor these third parties for Year 2000
compliance, but there can be no assurance that all non-complying equipment and
software will be identified and upgraded on a timely basis. In addition, there
can be no assurance that our customers and suppliers will not be adversely
affected by their own Year 2000 issues, which may indirectly adversely affect
our business.
Concentrated Customer Base. We have historically had a concentration of
both customers and suppliers. In fiscal years 1997 and 1998, two customers
represented over 50% of our sales. In the first quarter of 1999, one customer
represented over 50% of our sales and in the second quarter a different customer
accounted for approximately 35% of our sales. This condition may continue or
re-occur in the future, exposing our operations to material adverse consequences
should disruptions or problems be encountered with a major customer or supplier.
Acquisitions. We have been approached by entities that have proposed
acquiring our operations and by entities desiring to sell businesses to us. One
or more mergers or acquisitions may occur in the future which could have
material adverse consequences to our operations or to our stock value. A
component of our future growth strategy is possible acquisition of other
companies that meet our criteria for strategic fit, geographic location,
revenues, profitability, growth potential and operating strategy. Successful
implementation of this strategy depends on our ability to identify suitable
acquisition candidates, acquire such companies on acceptable terms and integrate
their operations successfully with
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ours. Moreover, in pursuing acquisition opportunities we may compete with other
companies with similar growth strategies, certain of which may be larger and
have financial and other resources greater than ours. Competition for
acquisition targets likely could also result in increased prices of acquisition
targets and a diminished pool of companies available for acquisition.
Acquisitions also involve a number of other risks, including adverse effects on
reported operating results from increases in goodwill amortization, the risks of
acquiring undisclosed or undesired liabilities, acquired in-process technology,
stock compensation expense and increased compensation expense resulting from
newly hired employees, the diversion of management attention, potential disputes
with the seller of one or more acquired entities and the possible failure to
retain key acquired personnel. Any acquired entity or assets could significantly
under-perform relative to our expectations. Our ability to meet these challenges
has not been established.
Dependence on Key Personnel and Ability to Attract Skilled Employees.
While no assurances can be given that our current management resources will
enable Ebiz to succeed as planned, a loss of one or more of our current officers
or key employees could severely and negatively impact our operations. We do not
have employment contracts with any of our key employees. No assurances can be
given that we will not suffer the loss of key human resources for one reason or
another. Our future success also depends on our continuing ability to attract,
retain and motivate highly skilled employees. Competition for employees in the
industry is intense. We may be unable to retain our key employees or to attract,
assimilate or retain other highly qualified employees in the future. We have
experienced difficulty from time to time in attracting the personnel necessary
to support the growth of our business and we may experience similar difficulties
in the future.
Separate Organization of PIA, Inc. We have organized a wholly owned
subsidiary, PIA, Inc., and may transfer our PC manufacturing and marketing
operations to this entity. We believe that the organization of PIA may be a
strategic move to bifurcate and more clearly define our two areas of focus,
e-commerce marketing of third party products, and value price PC system
manufacturing and distribution. We intend to explore possibilities of capital
raising through PIA directly. These efforts may lead to PIA being owned by us
with other shareholders, which would result in indirect dilution of ownership of
PIA by our shareholders. While we believe bifurcation and eventual separation of
our two areas of focus may be in the best interest of our company and its
shareholders, this strategy involves risks including potential diversion of
management resources, conflicts of interest with the business relationship
between the entities and increased costs of operations as the two entities
separate their operations. No assurance can be given that separation of these
operations will ultimately enhance the total probability or value of Ebiz.
Insurance. We anticipate the need to procure additional insurance
coverage related to product liability, officer and directors liability, key man
insurance and other risks currently not adequately covered. Failure to timely
receive additional insurance coverage could have an adverse effect on our
business.
Control of Ebiz Concentrated within Existing Management. Control of
Ebiz is concentrated within a small number of stockholders, who compromise our
executive management. Such management, when acting in concert, can elect or
otherwise designate all members of our Board of Directors. As a practical
matter, current management will continue to control Ebiz into the foreseeable
future.
Potential Delisting From OTC Bulletin Board. Our common stock is
currently traded on the OTC Bulletin Board under the symbol "EBIZ." Our common
stock is subject to delisting on November 4, 1999 if this Form 10-SB has not
been declared effective by such date. In such event, we would anticipate that
our common stock would be traded in the "pink sheets" and relisted on the OTC
Bulletin Board after this Form 10-SB becomes effective.
Volatility of Common Stock Price. The stock market in general and
stocks of small-cap companies such as Ebiz in particular have experienced
volatility which often have been unrelated to results of operations. Our stock
is thinly traded. Any broker/dealer that makes a market in our stock or other
person
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that buys or sells our stock could have a significant influence over its price
at any given time. There can be no assurance that the market in our common stock
will be sustained. As a result, holders of our common stock may be unable to
readily sell the stock they hold or may not be able to sell such stock at all.
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion provides information that we believe is
relevant to an assessment and understanding of Ebiz's results of operations and
financial condition for the fiscal years ended June 30, 1999, 1998 and 1997. The
following discussion should be read in conjunction with the Financial Statements
and related notes. See "Financial Statements." The following discussion as well
as sections of the discussions elsewhere in this prospectus, and "the Factors
Affecting Future Performance," and "Description of The Business" sections,
contain forward-looking statements. While we believe that the forward-looking
statements contained in Form 10-SB are reasonable and are based on assumptions
which we believe are reasonable, our actual results may differ significantly
from those anticipated. Factors that might cause future results to differ
materially from those projected in forward-looking statements include, but are
not limited to, those discussed in "ITEM 1. DESCRIPTION OF THE BUSINESS --
FACTORS AFFECTING FUTURE PERFORMANCE" and elsewhere in this Form 10-SB.
BACKGROUND
Our predecessor, Genras, was incorporated in Arizona in May 1995. On June 1,
1998, Vinculum, a non-operating company with an estimated 700 shareholders,
acquired all the operating assets and liabilities of Genras for 5,000,000 shares
of Vinculum common stock. Vinculum was incorporated in Colorado in May, 1984 as
VDG Capital Corporation and changed its name to Vinculum Incorporated in
December, 1994. Vinculum filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code in August, 1991 and was discharged when its plan of
reorganization was approved in July, 1994. Immediately following the acquisition
of the Genras assets, the former Genras stockholders held approximately 87% of
the outstanding shares of Vinculum's common stock. For financial accounting
purposes, the acquisition was treated as a recapitalization with Genras as the
acquirer. In June 1998, Ebiz was incorporated as a Nevada corporation and a
wholly owed subsidiary of Vinculum. In August 1998 Vinculum merged into Ebiz,
which was the surviving entity. All information below prior to June 1998
reflects the operations of Ebiz's predecessor, Genras.
Ebiz is an early stage operating company with limited operating history
in its current business line upon which an evaluation of its prospects can be
based. Until September of 1998 our Internet sales orders were generated from
third party "virtual store" Web sites such as Zauction.com and OnSale.com where
e-commerce shoppers purchased listed products on-line and orders were
electronically transmitted to us daily. We then directly shipped to their
customers nationwide.
In September 1998 we launched our own Internet e-commerce Web site,
cpumicromart.com, and deployed our own sales staff to generate sales directly
and through third party resellers. In January 1999 we launched another
e-commerce VSP site, EBIZmart.com, which we believe was the first
business-to-business e-commerce clearinghouse portal creating a centralized
procurement location for large quantity liquidation of surplus products. In
April 1998 we began manufacturing our own "white box" PC systems under the brand
name of M(2) Systems(TM) In April 1999 we began manufacturing a second brand of
PCs, Element-L(TM), which features the Linux operating system. Also in April,
1999, we launched a new type of Internet e-commerce Web site, our VSP or
Vertical Service Portal, TheLinuxStore.com which provides services and content
as well as products to a vertically targeted market.
Our objective is to become a leader in e-commerce marketing,
merchandising and distribution of specialized products to fast growing vertical
markets, as well as a nationally recognized manufacturer of value priced
computer products. We anticipate the continued expansion of production and
distribution of our Element-L(TM) and M2 Systems(TM) brands as well as our to be
released PIA(TM) brand line. We believe our
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major competitive advantages include our proven customer databases, the depth
and expertise of our management team and our internal programming and Web
development staff. We expect to utilize these strengths with our extensive
contacts and expertise in computer component and surplus merchandise procurement
and in e-commerce development, distribution and marketing.
RESULTS OF OPERATIONS
Year Ended June 30, 1999 Compared to Year Ended June 30, 1998. Net
revenues were $15,290,202 for the year ended June 30, 1999 compared to
$6,824,967 for the year ended June 30, 1998. The $8,465,235 increase,
approximately 124% over the prior year was due to the introduction of our
Element-L(TM) and the growth in sales of our M2Systems(TM) brands, the opening
of our VSPs and the development of our own sales force.
During fiscal 1999, we were able to substantially broaden our
distribution base and strategically position the company in the e-commerce
market with the launching of our VSP sites, EBIZmart.com and TheLinuxStore.com.
We have de-emphasized sales through third party auction Web sites, and increased
our sales directly to consumers, businesses and institutions through our own
sites. In addition, we developed our own sales capabilities to generate
substantial sales volume for M2Systems(TM) and Element-L(TM) directly to
corporate customers and through selected value added resellers, retailers and
major e-commerce Web sites such as egghead.com. The cost of sales was
$14,358,772 in 1999 compared to $6,157,794 in 1998. The increased sales volume
was the primary reason for the increase. Gross profit margins decreased from
9.8% to 6.1% due to the wind down of the auction business during the first
quarter of 1999 and the ramp-up costs associated with the tripling of system
manufacturing during the second half of 1999.
Selling, General and Administrative expense was $2,512,415 for fiscal
1999, an increase of $1,830,845 from 1998. This increase was due to the building
of our information technology, sales, marketing and administrative
infrastructure and the related expenses required to begin implementing the
company's strategies.
The preceding operational factors resulted in a net loss of $1,877,124
for the fiscal year ending June 30, 1999 as compared to a net loss of $422,457
for the year ended June 30, 1998.
The sales increase in fiscal 1999 also led to an increase in accounts
receivable of $1,396,987 and an increase in inventory of $1,243,617. In
addition, the company invested $489,824 in property and equipment, including
commercial and internally developed software and equipment for its VSPs.
Years Ended June 30, 1998 Compared to Year Ended June 30, 1997. Net
revenues were $6,824,967 for the year ended June 30, 1998 compared to $4,454,764
for the year ended June 30, 1997. The $2,370,203 increase, approximately 53%
over the prior year, was principally attributable to an acceleration of the
Internet auction revenue originated through the third party Web sites of
Zauction.com and OnSale.com. Substantially all of our sales in fiscal year 1998
were generated by small quantity direct ship activity to Internet auction
customers, while substantially all of our sales in fiscal year 1997 were derived
through bulk sales of computer component products.
Prior to establishing warehouse operations in July 1998, the majority
of our shipments in fiscal 1998 were related to the fulfillment of Internet
orders. Until September of 1998, all Internet orders were generated on third
party Web sites such as Zauction.com, OnSale.com and Sandbox.net, where
e-commerce shoppers purchased our products. The orders were electronically
transmitted daily, and we directly shipped the ordered products to e-commerce
shoppers nationwide. An increasing percentage of total sales in fiscal 1999 are
generated directly through our on-line "computer store" Web sites to end users,
as well as through our growing number of authorized resellers. Cost of sales was
$6,157,794 for the year ended June 1998 compared to $3,925,285 for the year
ended June 30, 1997. The increase in sales was
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attributable to higher sales activity while gross margins decreased from 11.9%
to 9.8% due to an emphasis on auction sites which produced lower margins.
Selling and marketing expenses were minimal in both fiscal years as we
desired to conserve our working capital. We expect selling and marketing
expenses to increase substantially in the future as we secure additional
financial resources.
Research and development expenses approximated $100,000 in fiscal year
1998 compared to minimal expenses for the prior period. We prototype our Web
site and Web site tools. These costs were expensed as incurred.
Acquisition advisory fees and costs of our capital raising efforts
approximated $352,000 in fiscal year 1998. These expenses were associated with
our emerging as a publicly traded entity in June 1998 after the reverse
acquisition of Vinculum and were principally comprised of an advisory fee. All
associated costs of this transaction were incurred during fiscal year 1998.
As a result of the factors described above, we experienced an operating
loss of $393,295 for the fiscal year ended June 30, 1998 as compared to
operating income of $156,473 in fiscal year 1997. Net income was $251,767 in
fiscal 1997 compared to a loss of $422,457 for fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES.
From inception until the transaction with Vinculum, our predecessor
financed its operations almost entirely from internally generated working
capital. Concurrent with the Vinculum transaction, we obtained our first
material equity capital of approximately $450,000, net of financing costs, due
to the exercise of previously issued Vinculum warrants. This equity capital,
obtained in June 1998, was primarily deployed during the quarter ending
September 30, 1998 to pay the expenses of moving into our new facility, building
our manufacturing, technology and sales infrastructure and financing the net
loss from activity during that quarter, including the losses generated from the
auction business.
In September 1998, we obtained our first credit facility, a $250,000
revolving line of credit, with a local banking institution. These funds were
utilized to finance increased purchasing requirements to meet demand for our M2
Systems(TM) PCs, finance the general expansion of our working capital and for
other development activity. This credit facility was paid off on August 25,
1999.
In December 1998, we obtained additional equity capital of
approximately $1,195,000 after financing expenses, as a result of additional
shareholder warrant exercises and the sale of additional common stock. These
proceeds were used to pay down the bank line of credit and other indebtedness,
finance increased production requirements, meet other operational needs and
finance the net loss from activity during that quarter. A significant amount of
these net proceeds remained in cash at calendar year end.
In April 1999, we obtained approximately $868,600 of net equity funds
through the sale of 10,895 shares of Series A Preferred Stock. These proceeds
were primarily used for increased inventory and accounts receivable.
On April 19, 1999, we borrowed $500,000 from Aztore Holdings, Inc. for
a one-year term. The note was convertible into shares of common stock. We also
issued Aztore Holdings a warrant to purchase 250,000 shares of our common stock
as a condition to obtain the loan. We utilized the proceeds of this loan for
inventory financing and accounts payable. This loan was repaid in full on August
25, 1999. Under the terms of the repayment, the warrant was cancelled.
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From time to time during fiscal 1999 we borrowed amounts from
individuals, including Jeffrey I. Rassas, our Chief Executive Officer, and
Stephen C. Herman, our President. The loans from Mr. Rassas and Mr. Herman were
used primarily for working capital.
On August 25, 1999, we issued the Debenture and Warrant for a total of
$7,100,000. The proceeds were used to secure a $5,000,000 letter of credit in
favor of the holder of the Debenture, debt repayment and working capital. As the
outstanding balance of the Debenture decreases, the amount of the letter of
credit and corresponding cash collateral required to secure the letter of credit
decrease, resulting in additional proceeds being available for working capital.
Preferred Stock. We are authorized to issue up to 5,000,000 shares of
preferred stock. Our Board of Directors, at its sole discretion, may divide the
shares of preferred stock into series, and determine the dividend rate,
designations, preferences, privileges, ratify powers, if any, and determine the
restrictions and qualifications of the shares of each series of preferred stock
as established. As of June 30, 1999, 10,895 shares of Series A Preferred Stock
were issued and outstanding.
Net Operating Loss Carryforwards. We have a net operating loss carry
forward of approximately $3 million, over $2 million of which pertains to
operations of Vinculum prior to the acquisition via reverse merger with Ebiz in
June 1998. The utilization of the net operating loss incurred prior to June 1998
is subject to limitations, however, and the net operating loss may not be fully
usable prior to its expiration. No deferred tax asset has been recognized in the
Financial Statements due to the uncertainty of utilization.
YEAR 2000 "Y2K" PROBLEM
Ebiz has addressed possible remedial efforts in connection with
computer software that could be affected by the Year 2000 "Y2K" problem. The Y2K
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
The Y2K problem can affect any modern technology used by a business in
the course of its day. Any machine that uses embedded computer technology is
susceptible to this problem, including for example, telephone systems, postage
meters and scales and of course, computers. The impact on a company is
determined to a large extent by the company's dependence on these technologies
to perform their day-to-day operations.
Internally, Ebiz has reviewed all such equipment and has determined
that many of our systems are Y2K compliant. This includes our telephone systems,
postage equipment and our software. We anticipate that all systems and software
will be fully reviewed and brought into compliance by November 1999. If certain
systems are not brought up to Y2K compliance by the end of November 1999, then
the non-compliant technology will be disabled so as not to have an impact on the
systems that are compliant. Any such events would not have a serious impact on
our day-to-day operations, nor would any valuable information be lost. We back
up all computer systems daily to protect against data loss.
The costs of bringing our technology up to Y2K compliance is expected
to be less than $50,000. This is because the majority of the "patches" or
programs designed to make software Y2K compliant can be obtained over the
internet from manufacturers for little or no cost and we do not expect to rely
heavily on outside consultants to upgrade our systems as most of the work can be
performed in-house.
Externally, the Year 2000 problem may impact other entities with which
we transact business. We cannot predict the effect of the Year 2000 problem on
such entities or Ebiz. With regard to those companies with which we do business
on a daily basis, we cannot guarantee that they will be vigilant about their Y2K
plan of action. We have, however, begun mailing out a simple questionnaire to
these
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companies, requesting that they advise us of their Y2K readiness. Should any of
our suppliers or customers experience a disruption due to the Y2K problem, the
most significant impact may be a delay in receiving inventory or a reduction of
purchases. In a worst case scenario, the former may ultimately cause us to incur
higher cost of goods sold, while the latter may cause us to have an interruption
in revenues for several months.
In these unlikely events, our plan of action is to have on hand a cash
reserve at December 31, 1999 to cover both the additional costs and the revenue
shortfall. We have not yet determined the amount or source of such funds. We are
contacting our insurance carriers to determine the extent of insurance coverage,
if any, in the event Y2K problems affect any of our operations.
In the event that Ebiz does experience Y2K problems, it could result in
a decrease of Ebiz's revenues. A decrease of revenues could result in material
losses from operations and a reduction in our working capital. Management is
unable at this time to quantify the impact that the Y2K problem could have on
our results of operations and financial condition.
ITEM 3. DESCRIPTION OF PROPERTY
We currently lease 30,000 square feet of office and warehouse
facilities located in Scottsdale, Arizona. Approximately 10,000 square feet of
the facility are utilized for administrative and sales offices and the remaining
20,000 square feet are utilized for warehouse and manufacturing. The lease on
the facility is for a term through July 2001, with a current annual rental
payment of approximately $175,000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of September 30, 1999, the ownership
of each person known by Ebiz to be the beneficial owner of five percent or more
of Ebiz's Common Stock, each officer and director individually, and all officers
and directors as a group. Ebiz has been advised that each person has sole voting
and investment power over the shares listed below unless otherwise indicated.
<TABLE>
<CAPTION>
PERCENT OF
NAME AND ADDRESS OF OWNER NUMBER OF SHARES BENEFICIAL OWNERSHIP(1)
<S> <C> <C>
Jeffrey I. Rassas(2) 1,828,212 24.65%
15695 North 83rd Way
Scottsdale, Arizona 85260
Stephen C. Herman(3) 1,834,212 24.73%
15695 North 83rd Way
Scottsdale, Arizona 85260
Michael S. Williams(4) 408,118 5.50%
3710 East Kent Drive
Tempe, Arizona 85044
Aztore Holdings, Inc. 391,700 5.28%
3710 East Kent Drive
Tempe, Arizona 85044
All Directors and Officers as a Group
(2 persons) 3,662,424(2) 49.72%
</TABLE>
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(1) Based upon 7,416,197 shares of common stock being issued and
outstanding or committed to be issued as of September 30,
1999.
(2) Mr. Rassas holds his shares beneficially through Hayjour
Family Limited Partnership.
(3) Mr. Herman holds his shares beneficially through Kona
Investments Limited Partnership.
(4) Mr. Williams holds 15,227 shares personally and, as its
president, controls the voting of 391,700 shares held by
Aztore Holdings, Inc. Barbara Williams, his wife, holds 1,191
shares. Mr. Williams disclaims beneficial ownership of the
shares held by Aztore in excess of his percentage ownership of
Aztore.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of Ebiz are:
NAME AGE POSITION
Jeffrey I. Rassas 36 Director and Chief Executive Officer
Stephen C. Herman 45 Director and President
Donald B. Altvater 54 Vice President and Controller
Elizabeth Perrine 35 Vice President, Marketing
Larry Phillips 33 Vice President, Sales
DIRECTORS AND EXECUTIVE OFFICERS
Jeffrey I. Rassas, Director and Chief Executive Officer, is the founder
of Ebiz and has been its Chief Executive Officer since its inception in 1995.
Between 1989 and 1995, Mr. Rassas owned and operated The Wilsaac Group, Inc.,
d/b/a DLC Consulting, an employee leasing and office services outsourcing firm
with offices in Phoenix, Tucson, Los Angeles, Century City and Irvine. He
arranged the sale of the Arizona offices to Dynamex, a division of Air Canada,
in 1993 and the California offices to another buyer in 1995. Prior to DLC
Consulting, from 1985 to 1989, Mr. Rassas co-founded ITS Travel Group, Inc.,
which grew into the third largest travel agency in Arizona before it was sold in
1989. From 1982 to 1985, Mr. Rassas held the position of Magnetics Engineer at
CTM Magnetics. Mr. Rassas holds an Associates degree in electrical engineering.
Stephen C. Herman, Director and President, joined Ebiz in September of
1997. Mr. Herman has approximately 20 years of computer and electronics
distribution and sales experience. Between 1995 and 1997 he was a Vice President
and Divisional General Manager for Globelle Incorporated. From 1992 to 1995, he
was the Vice President of Sales for Insight Direct. His responsibilities
included three specialty divisions. Between 1989 and 1992, Mr. Herman was the
Director of Sales for Technology Marketing Group, a predecessor to Globelle.
Between 1987 and 1989, Mr. Herman also was President and founder of Computer
Solutions, Inc. ("CSI"), a five location corporate reseller servicing Fortune
1000 customers, which grew to $80 million in revenues by its second year. CSI
was sold to Valcom in 1989, and Mr. Herman became President of Valcom Southwest,
a wholly-owned subsidiary of Valcom.
Donald B. Altvater, Vice President and Controller, joined the Ebiz in
January 1999. Mr. Altvater has over 20 years of experience in financial,
operations and marketing management in the electronics and communications
industries with GTE and Fujitsu. He began his career with GTE International in
1971 and held a series of increasingly responsible positions with GTE companies
that culminated in his appointment in 1987 as Vice President - Finance of
Fujitsu GTE Business Systems, a joint venture between those two corporations. In
1989, Mr. Altvater was named Vice President and Chief Financial
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<PAGE> 24
Officer of Federal Business Systems, a Fujitsu subsidiary. After electing early
retirement in 1992, he managed two private companies in which he had an
ownership interest. In 1996, Mr. Altvater became Controller of Refrac Systems, a
privately held metallurgical engineering company and continued in that position
until joining Ebiz in 1999. He holds a Bachelor of Science degree in Mathematics
(magna cum laude) and Economics (cum laude) from Tufts University and an M.B.A.
from the University of Chicago Graduate School of Business.
Elizabeth Perrine, Vice President, Marketing, joined Ebiz in June 1999.
Ms. Perrine is a 17-year veteran in marketing for technology companies. Having
successfully launched nearly 50 products to the US and European markets, Ms.
Perrine's expertise is in driving strategic planning, product marketing,
marketing communications and public relations for companies at their start-up,
IPO and growth phases. Most recently she was Vice President, Marketing with
Vodavi Technology, Inc. where she led the positioning, marketing and branding
for that company's various divisions. Prior to that, from 1990 to 1993, she
served as Director of Marketing at Microtest, Inc., a provider of LAN
certification and connectivity products. In this capacity, she built and managed
worldwide marketing programs. She has also held marketing management positions
with other companies including Time Systems of America, Blue Chip Computers,
Inc., and Executone Information Systems, Inc.
Larry Phillips, Vice President, Sales, joined Ebiz in May 1999 and
brings over a decade of experience in developing sales teams as well as
lucrative business opportunities. He is responsible for developing and managing
sales and customer service operations. Mr. Phillips was the General Sales
Manager of PC Wholesale, Inc., a computer hardware and software distributor from
1997 until he joined Ebiz. Mr. Phillips was responsible for over $60 million in
revenue and recruited, hired and trained staff and ran the day-to-day
operations, including product sourcing and P & L, for the Minneapolis office.
From 1992 to 1997 he served as Director of Sales for Globelle Incorporated,
where he was responsible for nearly $170 million in sales and oversaw five
branch offices. Mr. Phillips began his career with Piper Jaffrey in 1989, where
he was responsible for corporate pension plans and individual investor
portfolios. He holds a Bachelors of Science Degree in Finance and Economics from
St. Cloud State University in Minnesota.
ITEM 6. EXECUTIVE COMPENSATION
The following table is based upon compensation for the calendar years
ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION(1) (2)
NAME
SALARY BONUS
<S> <C> <C> <C>
Jeffrey Rassas,(2) 1998 $ 72,000 $ 10,000
Chief Executive 1997 1997 $ 72,000 $ 60,000
Officer 1996 $ 36,000 $ --
Stephen Herman,(3) 1998 $ 72,000 $ 10,000
President 1997 $ 12,000(3) --
1996 -- --
</TABLE>
(1) Excludes distributions for payment of personal income taxes resulting
from Ebiz electing Subchapter S status, which election was terminated
in June, 1998.
(2) Mr. Rassas and Mr. Herman have received base annual salary of $96,000,
commencing January 1, 1999. Bonuses and other compensation incentives
are anticipated.
(3) Based on employment from September through December 1997.
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STOCK OPTION PLAN
Ebiz's Board of Directors adopted, and its shareholders approved,
effective August 1998, the 1998 Equity Incentive Plan (the "Plan"). The purpose
of the Plan is to promote the interests of Ebiz and to motivate, attract and
retain the services of persons upon whose judgment, efforts and contributions
the success of Ebiz's business depends. A further purpose of the Plan is to
align the personal interests of such persons with the interests of shareholders
of Ebiz through equity participation in its growth and success. The Plan
provides for granting options, incentive stock options and restricted stock
awards, or any combination of the foregoing for up to 1,000,000 shares of Ebiz's
common stock. As of September 30, 1999, a total of 427,000 stock options were
outstanding under the Plan of which 145,500 were vested. A total of 100,000
options to purchase shares under the Plan have been exercised.
EMPLOYMENT AGREEMENTS
Ebiz has no employment agreements with its executive officers.
DIRECTOR COMPENSATION
All authorized out-of-pocket expenses incurred by a director on behalf
of Ebiz are subject to reimbursement. Ebiz is currently negotiating compensation
packages for additional non-management directors to join the Board.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective as of June 1, 1998, Ebiz's predecessor, Vinculum, acquired
substantially all of the assets and assumed the liabilities of Genras in
exchange for 5,000,000 shares of its Common Stock. The 5,000,000 shares were
distributed by Genras to its shareholders as follows: Jeffrey I. Rassas -
2,250,000 shares, Stephen C. Herman - 2,250,000 shares and Thomas A. Cifelli -
500,000 shares. Ebiz also agreed to reimburse, on a net after-tax basis, any
income tax liability of the Genras shareholders related to the period of January
1, 1998 through the date of acquisition. Fox & Company Investments, Inc., a NASD
registered broker-dealer with which Mr. Cifelli was affiliated, received 187,500
shares of common stock in connection with this transaction for investment
banking advice and services related to the transaction. Aztore Holdings, Inc.,
the majority shareholder of Vinculum prior to the acquisition, entered into an
agreement with Ebiz to be compensated in the event Ebiz obtains benefit from a
prior net operating loss of Vinculum.
In November, 1998, Michael S. Williams, then a director of Ebiz, and
Lanny Lang were granted options to purchase 30,000 and 20,000 shares,
respectively, of Ebiz common stock at $1.00 per share. The grant was made under
the Ebiz 1998 Equity Incentive Plan for consulting services performed. The
consulting services were performed by the individuals in their capacities as
employees of Aztore and the options were assigned upon issuance to Aztore.
In April, 1999, Aztore, whose president, Michael S. Williams, was then
a director of Ebiz, loaned $500,000 to Ebiz, which was evidenced by a Secured
Convertible Subordinate Note ("Note"). The Note was issued at a 10% interest
rate, was secured by the grant of a security interest in certain of Ebiz's
assets and was convertible into shares of common stock at one share per $6.00
amount of principal obligation. Ebiz also issued Aztore a Warrant certificate
which entitled Aztore to purchase 250,000 shares of Ebiz's common stock at $6.00
per share. In August 1999, Ebiz and Aztore agreed to cancel the warrant and to
full payment of the Note with interest for total consideration of $629,165.
Aztore also exercised the option, as assigned to it by Messrs Williams and Lang,
to acquire 50,000 shares of Ebiz's common stock for $1.00 per share.
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From time to time Ebiz has borrowed funds from Jeffrey I. Rassas and
Stephen C. Herman to meet working capital needs. These loans generally bear
interest of 10%.
Ebiz's general policy for entering into transactions with directors,
officers and affiliates of the company that have a financial interest in the
transaction is to adhere to Nevada corporate law regarding the approval of such
transactions. In general, a transaction between a Nevada corporation and a
director, officer or affiliate of the corporation in which such person has a
financial interest is not void or voidable if the interest is disclosed and
approved by disinterested directors or shareholders or if the transaction is
otherwise fair to the corporation.
ITEM 8. DESCRIPTION OF SECURITIES
Ebiz is a Nevada corporation and is authorized to issue 70,000,000
shares of common stock, $.001 par value, and 5,000,000 shares of preferred
stock, $.001 par value. As of September 30, 1999, 7,366,197 shares of common
stock were outstanding, 50,000 shares of common stock were pending issuance and
60,000 shares of preferred stock had been designated as Series A Preferred, of
which 10,895 shares were issued and outstanding and convertible into 181,583
shares of common stock.. The rights, preferences, privileges and limitations of
the undesignated preferred stock may be determined by the Board of Directors,
and may be issued in more than one series. As of September 30, 1999, Ebiz had a
total of 427,000 options granted under the Plan outstanding, of which 145,500
were vested, each option and warrant entitling the holder thereof to acquire one
share of Ebiz's common stock. As of September 30, 1999, Ebiz had outstanding
warrants to purchase 461,711 shares of its common stock which were exercisable
at prices ranging from $2.10 to $8.6219 per share, and a debenture which is
convertible into a minimum of 947,260 shares.
COMMON STOCK
The holders of the common stock are entitled to one vote per share on
all matters submitted to a vote of shareholders of Ebiz. In addition, holders
are entitled to ratably receive dividends, if any, as declared from time to time
by the Board of Directors out of funds legally available for payment of
dividends. No dividends are payable on the common stock until all accrued but
unpaid dividends on the outstanding Series A Preferred shares have been paid. In
the event of the dissolution, liquidation or winding up of Ebiz, the holders of
common stock are entitled to share ratably in all assets remaining after payment
of all liabilities of Ebiz and the preference amount distributable to the
holders of the Series A Preferred Shares. All outstanding shares of common stock
are fully paid and non-assessable. The holders of common stock do not have any
subscription, redemption or conversion rights, nor do they have any preemptive
or other rights to acquire or subscribe for additional, unissued or treasury
shares.
Under the terms of Ebiz's bylaws, except for any matters which,
pursuant to Nevada law, require a greater percentage vote for approval, the
holders of a majority of the outstanding common stock, if present in person or
by proxy, are sufficient to constitute a quorum for the transaction of business
at meetings of Ebiz's shareholders. Except as to any matters which, pursuant to
Nevada law, require a greater percentage vote for approval, the affirmative vote
of the holders of a majority of the common stock present in person or by proxy
at any meeting (provided a quorum is present) is sufficient to authorize, affirm
or ratify any act or action, including the election of the Board of Directors.
The holders of the common stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of common
stock can elect all of the directors to be elected in any election, if they
choose to do so. In such event, the holders of the remaining shares of common
stock would not be able to elect any directors. The Board of Directors is
empowered to fill any vacancies on the Board created by the resignation, death
or removal of directors.
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In addition to voting at duly called meetings at which a quorum is
present in person or by proxy, Nevada law and Ebiz's bylaws provide that
shareholders may take action without the holding of a meeting by written consent
or consents signed by the holders of a majority of the outstanding shares of the
capital stock of Ebiz entitled to vote on the action. Prompt notice of the
taking of any action without a meeting by less than unanimous consent of the
shareholders will be given to those shareholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
shareholders and to reduce the corporate expense associated with special
meetings of shareholders.
PREFERRED STOCK
Under Ebiz's Articles of Incorporation, additional shares of preferred
stock may, without any action by the shareholders of Ebiz, be issued by the
Board of Directors from time to time in one or more series for such
consideration and with such relative rights, privileges and preferences as the
Board may determine. Accordingly, the Board of Directors has the power, without
shareholder approval, to fix the dividend rate and to establish the provisions,
if any, relating to voting rights, redemption rate, sinking fund, liquidation
preferences and conversion rights for any series of preferred stock (subject to
the preferences of the Series A Preferred shares discussed below) issued in the
future, which could adversely affect the voting power or other rights of the
holders of common stock.
The Board's authority to issue preferred stock provides a convenient
vehicle in connection with possible acquisitions and other corporate purposes,
but could have the effect of making it more difficult for a person or group to
gain control of Ebiz. Ebiz has no present plans to issue any shares of preferred
stock other than the Series A Preferred.
SERIES A 10% CONVERTIBLE PREFERRED STOCK
The holders of the Series A Preferred have preference in payment of
dividends and in liquidation distributions (to the extent of $100 per share)
over Ebiz's common stock.
Each share of Series A Preferred is convertible into shares of Ebiz's
common stock at a conversion ratio of one share of Series A Preferred to 16 2/3
shares of common stock. The conversion ratio of the Series A Preferred is to be
adjusted to prevent dilution in the event of any stock splits, stock dividends
(except dividends payable on the Series A Preferred) or other adjustments to
Ebiz's capital structure. Ebiz may redeem the shares of Series A Preferred at
$100 each, plus accrued and unpaid dividends, if the closing bid of Ebiz's
common stock is in excess of $9.00 for 20 out of 30 consecutive trading days. In
the event the closing bid of the common stock is at a price equal to or in
excess of $13.50 for 20 out of 30 consecutive trading days, the shares of Series
A Preferred shall automatically convert into common stock of Ebiz.
Each share of Series A Preferred has a $10 (10%) annual, cumulative
dividend accruing each January 1, April 1, July 1 and October 1, commencing on
April 1, 1999. Ebiz may, in its discretion, pay dividends in whole or in part in
common stock. If dividends are paid in Ebiz's common stock, the value is be
based on the five-day average closing bid price ending on the trading day
immediately preceding the accrual date.
In the event of any "Liquidation Event," the holders of the Series A
Preferred will be entitled to receive $100 per share, plus any cumulative but
unpaid dividends accrued thereon before the holders of common stock receive any
distributions. Ebiz may not establish a series of preferred superior to the
Series A Preferred. A "Liquidation Event" means any liquidation, dissolution or
winding-up of Ebiz and, unless approved by the holders of the Series A Preferred
as a class, any consolidation or merger of Ebiz where the holders of Ebiz's
common stock (on a fully diluted basis) own less than a majority of the
outstanding voting stock of the entity resulting from the merger or
consolidation.
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<PAGE> 28
Holders of shares of Series A Preferred will generally vote with the
holders of common stock as a class on all matters except for matters where vote
as a class is specified. The holders of the Series A Preferred are entitled to
16 2/3 votes per share when voting on matters as a class with the holders of the
common stock into which such shares are convertible.
Ebiz is prohibited, unless approval of the holders of a majority of the
Series A Preferred shares are obtained, from (a) entering into any sale, lease
or assignment of substantially all of Ebiz's assets, any consolidation or
merger, any reclassification or recapitalization of its capital stock or any
dissolution, liquidation or winding-up unless the holders receive value equal to
200% of the liquidation preference plus accrued dividends; (b) effectuating any
purchase or redemption of common stock other than purchases upon termination of
employment or affiliation with Ebiz; (c) issuing any shares superior to or on
parity with the Series A Preferred as to liquidation and dividend preferences;
(d) declaring or paying dividends or making any other distribution (other than a
dividend payable on shares of common stock) to holders of the common stock; or
(e) changing the authorized capital stock of Ebiz.
DEBENTURE AND WARRANT
Ebiz has outstanding a $7,100,000 9% Subordinated Convertible Debenture
("Debenture") and a Warrant to Purchase Common Stock ("Warrant").
The Debenture is due February 24, 2002. The Debenture is convertible
into a minimum of 947,260 shares of Ebiz's Common Stock . The holder may convert
up to $394,444 face amount of the Debenture upon issuance and up to $394,444 on
each monthly anniversary date thereafter (each, a "Due Date"). Any amount not
converted accumulates and may be converted thereafter. However, the holder is
prohibited from converting any amount of the Debenture which would cause the
holder's total ownership of common stock to equal five percent or more of the
total shares outstanding. The per share conversion price is equal to the lesser
of (a) $7.4953 or (b) the average of the three lowest closing bid prices of
Ebiz's Common Stock for the 15 consecutive trading days ending on the trading
day immediately preceding submission of a notice to convert by the holder. In
the event the closing bid price of Ebiz's Common Stock is less than $7.4953 per
share at any time during the five trading days preceding a Due Date, Ebiz has
the right to redeem for cash the monthly conversion amount of the Debenture (in
lieu of allowing the holder to convert such amount) at premiums ranging from
105% to 108%. The Debenture is secured by a letter of credit issued by Bank One
Arizona, NA in the initial amount of $5,000,000. The required amount of the
letter of credit decreases by $.7042 for every $1 of principal reduction of the
Debenture whether the reduction occurs by conversion or redemption.
The Warrant is exercisable for the purchase of 245,000 shares of Ebiz's
Common Stock, 60,000 at $7.4723 per share, 60,000 at $8.6219 per share and
125,000 at $6.3227 per share. The Warrant is exercisable at any time prior to
August 22, 2004.
Ebiz is obligated to register for resale all common stock issuable upon
conversion of the Debenture and exercise of the Warrant. Certain penalty
provisions apply if a registration statement covering the shares is not filed by
October 24, 1999 or is not declared effective by the SEC by February 6, 2000.
OPTIONS AND OTHER WARRANTS
As of September 30, 1999, 216,711 warrants in addition to the Warrant
described above were outstanding, which consist of 110,981 Series F Warrants
expiring December 1, 1999 with a $3.00 per share exercise price, and 10,000
warrants expiring on December 21, 2003 with a $3.00 per share exercise price,
86,644 warrants expiring December 10, 2000 with exercise prices ranging from
$2.10 to $3.00 per share, and 9,086 warrants expiring February 28, 2002
exercisable at $7.20 per share. As of September 30, 1999, Ebiz had outstanding
427,000 options granted to employees and consultants with exercise prices
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ranging from $1.00 to $6.00 per share, of which 145,500 had vested. Each
outstanding warrant and option is exercisable for one share of Ebiz's common
stock.
TRANSFER AGENT
The transfer agent for Ebiz's common stock is American Securities
Transfer & Trust, Inc., 12039 West Alameda Parkway, Suite Z-2, Lakewood,
Colorado 80228.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
Our common stock is traded on the OTC Bulletin Board under the symbol
"EBIZ." The following table sets forth the high and low bid prices for Ebiz's
common stock as reported by the OTC Bulletin Board in the periods indicated. The
quotations set forth below reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not reflect actual transactions. Ebiz commenced
its current line of business in June 1998 with the acquisition of Genras. The
stock prices for periods before June 1998 are of our predecessor, Vinculum,
which had no business operations during these periods.
<TABLE>
<CAPTION>
Fiscal 1997 High Low
<S> <C> <C>
First Quarter ended September 30, 1996 6.2500 1.2500
Second Quarter ended December 31, 1996 5.0000 5.0000
Third Quarter ended March 31, 1997 5.0000 5.0000
Fourth Quarter ended June 30, 1997 5.0000 5.0000
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1998 High Low
<S> <C> <C>
First Quarter ended September 30, 1997 3.5000 0.1000
Second Quarter ended December 31, 1997 2.5000 0.1000
Third Quarter ended March 31, 1998 3.1250 0.3125
Fourth Quarter ended June 30, 1998 3.4375 0.3125
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 High Low
<S> <C> <C>
First Quarter ended September 30, 1998 2.1250 0.7500
Second Quarter ended December 31, 1998 11.6250 0.5000
Third Quarter ended March 31, 1999 10.5000 4.5000
Fourth Quarter ended June 30, 1999 9.9375 3.3125
</TABLE>
As of September 30, 1999, there were an estimated 700 beneficial owners
of Ebiz's common stock.
Holders of Ebiz's Common Stock are entitled to receive ratably
dividends, if any, as declared from time to time by the Board of Directors out
of funds legally available for payment of dividends. No dividends are payable on
the common stock until all accrued but unpaid dividends on the outstanding
Series A Preferred shares have been paid. Ebiz has not paid, and does not
currently intend to declare or pay
29
<PAGE> 30
dividends on its Common Stock in the foreseeable future. The current policy of
Ebiz's Board of Directors is to retain all earnings, if any, to provide funds
for operation and expansion of Ebiz's business. The declaration of dividends, if
any, will be subject to the discretion of Ebiz's Board of Directors, which may
consider such factors as results of operations, financial condition, capital
needs and acquisition strategies, among others.
ITEM 2. LEGAL PROCEEDINGS
Certain unresolved disputes remain with miscellaneous product
manufacturers or supply vendors involved previously with Genras, and with a
prior Internet auction site partner which are currently being negotiated.
Management believes that all such matters are within ordinary levels for an
organization of our size and nature, and that these disputes will be resolved
without a materially adverse consequence to Ebiz.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
In June, 1998, our predecessor Vinculum, issued 5,000,000 shares of its
common stock to the three shareholders' of Genras in exchange for all of the
assets, subject to liabilities, of Genras. Fox & Company Investments, Inc., a
NASD registered broker-dealer received an additional 187,500 shares of common
stock for investment banking services related to the transaction. The shares
were issued in reliance on the exemption from registration provided under
Section 4(2) of the Securities Act of 1933, as amended ("Securities Act").
In June, 1998, a total of 14 persons exercised their outstanding
Vinculum warrants to purchase a total of 506,706 shares of common stock at $1.00
per share. The shares were issued under the exemption from registration provided
under Section 1145 of the Bankruptcy Code.
In July, 1998, Vinculum issued a total of 317,943 E Warrants and
317,943 F Warrants to 26 persons for nominal consideration. The E Warrants were
exercisable at $2.00 per share with expiration date of December 1, 1998 and the
F Warrants were exercisable at $3.00 per share with expiration date of June 1,
1999. In December, 1998, Ebiz repriced the E Warrants to $0.75 per share and
allowed the holders to exercise an amount of F Warrants equal to the E Warrants
exercised, also at $0.75 per share. A total of 390,956 E Warrants and F Warrants
wee exercised and 390,956 shares of common stock issued. The remaining
outstanding E Warrants expired. In May, 1999, Ebiz extended the expiration
date of the remaining F Warrants to December 1, 1999. The issuance of the
E Warrants and F Warrants and the common stock issued upon exercise of the
warrants were issued in reliance on the exemption from registration of such
securities provided by Section 4(2) of the Securities Act.
In December, 1998, Ebiz issued a total of 455,781 shares of common
stock for approximately $2.16 per share. The issuance was made in reliance on
Rule 504 of Regulation D as promulgated under the Securities Act. First
Financial Equity Corporation, a NASD broker-dealer, and Fox & Company
Investments, Inc. served as the placement agents in the offering and received
placement agent fees of approximately $86,000 and warrants to purchase 86,644
shares of common stock at $2.10 to $3.00 per share.
In March and April, 1999, Ebiz issued 10,895 shares of its Series A 10%
Convertible Preferred Shares for total consideration of $1,089,500. First
Financial Equity Corporation served as the placement agent and received a
placement fee of $108,950 and warrants to purchase 9,086 shares of common stock
at $7.20 per share. The Series A 10% Convertible Preferred
30
<PAGE> 31
Shares were sold only to "accredited investors" as defined in Regulation D in
reliance on the exemption from registration provided under Rule 506 of
Regulation D.
In April, 1999, Ebiz issued a Secured Convertible Subordinated Note
("Note") and Warrant to Aztore Holdings, Inc. The face amount of the Note was
$500,000 and was convertible into shares of Ebiz common stock. The Warrant
entitled the holder to purchase 250,000 shares of Ebiz's common stock. Ebiz
received a total of $500,000 for the Note and Warrant with no commissions or
discounts. The Note was paid and the Warrant cancelled in August, 1999. The Note
and Warrant were issued in reliance on the exemption from registration provided
by Section 4(2) and Section 4(6) of the Securities Act.
On August 25, 1999, the Company issued a $7,100,000 9% Subordinated
Convertible Debenture ("Debenture") and a Warrant to Purchase Common Stock
("Warrant") to JEM Venture EBIZ, LLC, an affiliate of JE Matthew, LLC. The total
consideration received was $7,100,000 with no commissions or discount. The
issuance was made in reliance upon the exemption from registration of the
securities provided under Rule 506 of Regulation D as promulgated under the
Securities Act.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Our Articles of Incorporation and bylaws require that we indemnify each
of our officers and directors against liabilities and reasonable expenses
incurred in any action or proceeding, including stockholders' derivative
actions, by reason of such person being or having been an officer or director of
Ebiz, to the fullest extent permitted by Nevada law. Under Nevada law, Ebiz has
adopted provisions in its Articles of Incorporation that eliminate, to the
fullest extent possible, the personal liability of our directors and officers
for monetary damages incurred as a result of the breach of their duty of care.
These provisions neither limit the availability of equitable remedies nor
eliminate directors' or officers' liability for engaging in intentional
misconduct or fraud, knowingly violating a law or unlawfully paying a
distribution.
We have been advised that it is the position of the Securities and
Exchange Commission ("SEC") that insofar as the foregoing provision may be
invoked to disclaim liability for damages arising under the Securities Act, such
provision is against public policy as expressed in the Securities Act and is
therefore unenforceable.
31
<PAGE> 32
PART F/S
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report 33
Balance Sheets at June 30, 1999 and 1998 34
Statements of Operations for the Years Ended 35
June 30, 1999 and 1998
Statements of Stockholders' Equity for the Years 36
Ended June 30, 1999 and 1998
Statements of Cash Flows for the Years Ended 37
June 30, 1999 and 1998
Notes to the June 30, 1999 and 1998 38
Financial Statements
32
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To EBIZ Enterprises, Inc.:
We have audited the accompanying balance sheets of EBIZ Enterprises, Inc., a
Nevada corporation, (the Company) as of June 30, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EBIZ Enterprises, Inc. as of
June 30, 1999 and 1998, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company incurred net losses in 1999 and 1998 and has
obtained limited capital needed to achieve management's plans or support its
operations. Three factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Phoenix, Arizona,
September 10, 1999
33
<PAGE> 34
EBIZ ENTERPRISES, INC.
BALANCE SHEETS
JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 76,366 $ 468,651
Accounts receivable, net of allowance for doubtful accounts
of $40,000 and $9,548 in 1999 and 1998, respectively 1,669,816 272,829
Inventory, net of allowance of $10,000 and $0 in 1999 and
1998, respectively 1,568,148 324,531
Prepaid expenses and other current assets 128,184 95,265
Due from officers -- 3,432
------------- -------------
Total current assets 3,442,514 1,164,708
FURNITURE AND EQUIPMENT, net 474,778 53,437
------------- -------------
$ 3,917,292 $ 1,218,145
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,423,178 $ 525,124
Accrued expenses 468,549 --
Line of credit 350,000 --
Notes payable 610,000 --
------------- -------------
Total current liabilities 2,851,727 525,124
------------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Convertible preferred stock; $.001 par value; 5,000,000 shares authorized;
10,895 and 0 shares issued and outstanding at June 30, 1999 and 1998,
respectively; liquidation value $100 per share 868,599 --
Common stock; $.001 par value; 70,000,000 shares authorized;
7,261,715 and 6,256,450 shares issued and outstanding at
June 30, 1999 and 1998, respectively 7,262 6,256
Additional paid-in capital 2,315,832 858,712
Accumulated deficit (2,126,128) (171,947)
------------- -------------
Total stockholders' equity 1,065,565 693,021
------------- -------------
$ 3,917,292 $ 1,218,145
============= =============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
34
<PAGE> 35
EBIZ ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
-------------- -------------
<S> <C> <C>
NET REVENUE $ 15,290,202 $ 6,824,967
COST OF SALES 14,358,772 6,157,794
-------------- -------------
Gross profit 931,430 667,173
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE 2,512,415 681,570
ACQUISITION ADVISORY FEES -- 372,805
DEPRECIATION AND AMORTIZATION 68,483 6,093
-------------- -------------
LOSS FROM OPERATIONS (1,649,468) (393,295)
OTHER INCOME (EXPENSE):
Interest expense (119,291) (32,702)
Interest income 2,538 1,263
Other (110,903) 2,277
-------------- -------------
NET LOSS (1,877,124) (422,457)
DIVIDENDS ON PREFERRED STOCK 77,057 --
-------------- -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,954,181) $ (422,457)
============== =============
NET LOSS PER COMMON SHARE, BASIC AND DILUTED $ (0.29) $ (.08)
============== =============
WEIGHTED AVERAGE COMMON SHARES,
BASIC AND DILUTED 6,821,083 5,619,911
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
EBIZ ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
---------------- ----------------- Paid-in Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Equity
------ -------- --------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30,1997 -- $ -- 5,562,044 $5,562 $ -- $ 250,510 $ 256,072
Common stock issued for services rendered
in connection with reverse acquisition -- -- 187,500 187 352,313 -- 352,500
Common stock issued for warrants exercised -- -- 506,906 507 506,399 -- 506,906
Net loss -- -- -- -- -- (422,457) (422,457)
------ -------- --------- ------ ---------- ----------- -----------
BALANCE, June 30, 1998 -- -- 6,256,450 6,256 858,712 (171,947) 693,021
Sale of common stock, net of offering costs
of $80,000 -- -- 455,781 457 900,845 -- 901,302
Sale of preferred stock, net of offering
costs of $220,901 10,895 868,599 -- -- -- -- 868,599
Common stock issued for services and products
received -- -- 158,528 158 218,593 -- 218,751
Common stock issued for warrants exercised -- -- 390,956 391 293,057 -- 293,448
Deemed dividend on preferred stock for
beneficial conversion feature -- -- -- -- 44,625 (44,625) --
Accrued dividends on preferred stock -- -- -- -- -- (32,432) (32,432)
Net loss -- -- -- -- -- (1,877,124) (1,877,124)
------ -------- --------- ------ ---------- ----------- -----------
BALANCE, June 30, 1999 10,895 $868,599 7,261,715 $7,262 $2,315,832 $(2,126,128) $ 1,065,565
====== ======== ========= ====== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
EBIZ ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,877,124) $ (422,457)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization 68,483 6,093
Common stock issued for services 80,599 352,500
Changes in assets and liabilities:
Accounts receivable (1,396,987) 52,113
Due from officers 3,432 (3,432)
Inventory (1,122,551) (324,531)
Prepaid expenses and other current assets (32,919) (90,440)
Accounts payable 898,054 420,893
Accrued expenses 436,117 --
----------- -----------
Net cash used in operating activities (2,942,896) (9,261)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (472,738) (57,721)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 350,000 --
Borrowings under notes payable 610,000 --
Issuance of common stock, net 1,194,750 506,906
Issuance of preferred stock, net 868,599 --
----------- -----------
Net cash provided by financing activities 3,023,349 506,906
----------- -----------
NET (DECREASE) INCREASE IN CASH (392,285) 439,924
CASH, beginning of year 468,651 28,727
----------- -----------
CASH, end of year $ 76,366 $ 468,651
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 108,765 $ 32,702
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING
ACTIVITIES:
Issuance of common stock for services rendered in connection
with reverse acquisition $ -- $ 352,500
Dividends accrued on preferred stock 32,432 --
Deemed dividend on preferred stock for beneficial
conversion feature 44,625 --
Issuance of common stock for inventory, furniture and
equipment, and services rendered 218,751 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
EBIZ ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(1) ORGANIZATION AND OPERATIONS:
NATURE OF THE BUSINESS
Ebiz Enterprises, Inc. (the Company) is a developer and distributor of computer
systems, components and accessories for personal and business computing. The
systems include the Company's Element-L Systems, which are based on the Linux
operating system and M(2) Systems which utilize the Windows operating system.
These products are sold directly to end users via the Company's own internet
sites www.EBIZmart.com and www.TheLinuxStore.com and to corporate customers by
the Company's own sales force. The Company also sells its systems through
retailers, resellers and major e-commerce web sites such as egghead.com and
onsale.com.
TheLinuxStore.com was opened in March 1999, and has become an e-commerce
distributor of Linux-based systems and accessories. Its products include the
Company's Element-L desk and laptop systems and products from other Linux
manufacturers. TheLinuxStore.com has become a primary focus of the Company as
the Linux operating system has emerged as the low-cost, high-performance
alternative to conventional computing systems.
The Company was originally incorporated in Colorado in May 1984, as VDG Capital
Corporation. Following a reorganization, the Company's name was changed to
Vinculum Incorporated (Vinculum) in August 1994. In June 1998, the Company
acquired the operating assets and liabilities of Genras, Inc. (an Arizona
corporation) and reincorporated in Nevada as CPU Micromart, Inc. In May 1999,
the Company changed its name to Ebiz Enterprises, Inc. The Company's stock is
listed on the Over the Counter Bulletin Board under the symbol EBIZ.
ACQUISITION OF ASSETS AND ASSUMPTION OF LIABILITIES
On June 1, 1998, Vinculum, a publicly-held shell company, acquired all of the
operating assets and liabilities of the Company for 5,000,000 shares of Vinculum
common stock. Immediately following the transaction, the stockholders of the
Company held approximately 87% of the outstanding shares of common stock of
Vinculum. For accounting purposes, the acquisition was treated as a
recapitalization of the Company with the Company as the acquirer (the Reverse
Acquisition). Accordingly, the historical financial statements prior to June 1,
1998, are those of the Company. The Reverse Acquisition is treated as an
issuance of shares for net assets by Vinculum and not as a business combination.
As a result, no pro forma information is presented for the Reverse Acquisition.
In connection with the Reverse Acquisition, the Company issued 187,500 shares of
its common stock, valued at $352,000, for acquisition advisory services. In
addition, the Company paid $20,305 in legal fees associated with the
transaction. The aggregate of $372,805 has been expensed and is included as
acquisition advisory fees in the accompanying statements of operations.
38
<PAGE> 39
MANAGEMENT PLANS
The Company has directed its primary strategic thrust towards the Linux
operating system segment of the market. Management believes that Linux is a fast
growing operating system and that the demand for Linux-based products and
services represent a rapidly growing business opportunity for the Company. The
Company began its entry into the Linux market with the opening of
TheLinuxStore.com and the introduction of its Element-L Systems in 1999. The
Company also plans to continue the sales of its M(2) systems, and components and
accessories to strengthen and broaden its distribution capabilities.
During fiscal year 2000, the Company plans to position TheLinuxStore.com as a
vertical service portal. As such, it will offer daily Linux news, software
downloads, a knowledge base of Linux information and links to other Linux
oriented Internet sites in addition to sales of a large selection of Linux
compatible technical products and related merchandise, including its own systems
and servers.
In the summer of 1999, the Company announced the development of its third
product line, the PIA (or Personal Internet Appliance) which targets
cost-conscious consumers or institutions seeking a full service Internet access
device. The Company plans to introduce the PIA during the fall of 1999. The PIA
is a stylized desktop computer that utilizes the Linux operating system and is
designed to enable users to surf the Web easily, exchange e-mail and perform
basic functions such as word processing and spreadsheets.
To continue the development of its products and the execution of its strategies,
in August 1999, the Company completed a private placement of a $7.1 million
convertible debt facility (the Debenture). In connection with the Debenture, the
Company issued warrants to acquire 245,000 shares of common stock at an exercise
price as defined by a securities purchase agreement. The Company received an
initial infusion of $2.1 million from the Debenture which was utilized to repay
the Company's outstanding debt at June 30, 1999, and to provide working capital.
The remaining $5 million was deposited as a letter of credit with a bank to
serve as collateral for the Debenture. The Debenture is convertible, at the
holder's option, into shares of the Company's common stock over an 18 month
period at approximately $394,000 per month. As the holder converts the
Debenture, at its sole discretion, the Company can draw on the letter of credit
approximately $275,000 per month to fund operations. Although management
believes this funding will be sufficient to fund operations through 2000, the
Company will need to raise additional capital to fund its operations and
continue the execution of its strategy. However, there can be no assurances that
the Company will be successful in obtaining additional capital.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed, the Company incurred
losses in 1999 and 1998 and has obtained limited capital needed to achieve
management's plans and support its operations. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from this
uncertainty.
INDUSTRY ENVIRONMENT
Successful future operations are subject to certain risks and uncertainties
including, among others, actual and potential competition by entities with
larger customer bases, greater financial resources, longer operating histories,
greater name recognition and more established relationships in the industry than
the Company. As a result, certain of these competitors may be able to develop
and expand their network infrastructures more quickly, and take advantage of
acquisitions more readily than can the Company. The Company's future operating
results will depend substantially on the ability of its officers and key
employees to manage changing business conditions. Further risks and
uncertainties relate to technological advancements, the regulatory environment
and the ability of the Company to generate sufficient revenue and obtain
additional financing to fund current operating losses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
39
<PAGE> 40
For purposes of the statements of cash flows, all highly liquid investments with
a maturity of three months or less at the time of purchase are considered to be
cash equivalents.
INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or net realizable
value. Reserves are established against Company-owned inventory for excess,
slow-moving, and obsolete items and for items where the net realizable value is
less than cost.
Inventory consists of the following:
<TABLE>
<CAPTION>
June 30,
-------------------------
1999 1998
---------- ----------
<S> <C> <C>
Components $1,155,981 $ 183,418
Work-in-process 44,947 --
Finished goods 367,220 141,113
---------- ----------
$1,568,148 $ 324,531
========== ==========
</TABLE>
40
<PAGE> 41
FURNITURE AND EQUIPMENT
Furniture and equipment consists primarily of computer equipment and office
furniture. Furniture and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Furniture and equipment at June 30 consists of the following:
<TABLE>
<CAPTION>
Useful
Life 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Furniture, fixtures and office equipment 3 years $295,566 $29,702
Software 3 years 200,495 29,427
Leasehold improvements 2 years 53,293 401
-------- -------
549,354 59,530
Less - accumulated depreciation (74,576) (6,093)
-------- -------
$474,778 $53,437
======== =======
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets in
accordance with Statement of Financial Accounting Standards (SFAS) No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. Under SFAS No. 121, long-lived assets and certain identifiable
intangible assets to be held and used in operations are reviewed for impairment
whenever events or circumstances indicate that the carrying amount of an asset
may not be fully recoverable. An impairment loss is recognized if the sum of the
expected long-term undiscounted cash flows is less than the carrying amount of
the long-lived assets being evaluated. In management's opinion, no such amounts
or changes in circumstances have occurred.
ACCOUNTS PAYABLE
Included in accounts payable is approximately $215,000 of bank overdraft at June
30, 1999.
ACCRUED EXPENSES
Accrued expenses consist primarily of amounts accrued for employee compensation,
customer deposits, professional fees, interest and advertising.
REVENUE RECOGNITION
The Company recognizes revenue from the sale of computer hardware and software
products upon shipment from the vendor to the end user, or when shipped from the
Company, whichever is appropriate. Computer hardware and software sales are
final and are subject to repair and replacement only. System component and
replacement costs are generally covered
41
<PAGE> 42
under the third-party manufacturer's warranty. The Company had an allowance for
warranty repair costs of approximately $8,000 and $0 at June 30, 1999 and 1998,
respectively, related to the sales of its M2 system computers.
ADVERTISING COSTS
Advertising costs are expensed as incurred and are included in sales and
marketing expenses in the accompanying statements of operations. Advertising
expense was approximately $100,000 and $8,000 for the years ended June 30, 1999
and 1998, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
LOSS PER SHARE
During 1998, the Company adopted SFAS No. 128, Earnings Per Share. Pursuant to
SFAS No. 128, basic earnings per common share are computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the year. No outstanding options or warrants were assumed to
be exercised for purposes of calculating diluted earnings per share for the
years ended June 30, 1999 and 1998, as their effect was anti-dilutive. Below are
the disclosures required pursuant to SFAS No. 128 for the years ended June 30,
1999 and 1998. All per share amounts have been adjusted to give effect to the
one for ten reverse stock split effected in June 1998 (in thousands, except per
share data):
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Basic loss per share:
Loss attributable to common stockholders $ (1,954) $ (422)
Weighted average common shares 6,821 5,620
----------- -----------
Loss per common share $ (0.29) $ (.08)
========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Years Ended
June 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Diluted loss per share:
Loss attributable to common stockholders $ (1,954) $ (422)
Weighted average common shares 6,821 5,620
----------- -----------
Total common shares plus assumed conversions 6,821 5,620
----------- -----------
Diluted per share amount $ (0.29) $ (.08)
=========== ===========
</TABLE>
42
<PAGE> 43
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 required a change from the deferred
method of accounting for income taxes to the asset and liability method of
accounting for income taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be recovered or
settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the
enactment date.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially expose the Company to concentrations of
credit risk, as defined by SFAS No. 105, Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk, consist primarily of trade accounts receivable.
The Company does not require collateral upon delivery of its products or
services. The Company derives a significant portion of its total revenue from
relatively few customers. The Company's business is moving towards a more
diversified customer base. The percentage of total revenue of customers to whom
sales exceed 10% of total revenue for the years ended June 30 were as follows:
<TABLE>
<CAPTION>
Accounts
Receivable
Outstanding
at June 30, Sales
------------------------ ----------------------
1999 1998 1999 1998
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Customer #1 $ 441,000 -- 26% 32%
Customer #2 -- -- 19 39
Customer #3 930,000 -- 15 --
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1999 and 1998, the carrying value of cash, accounts receivable,
accounts payable and accrued expenses approximate fair values since they are
short-term in nature or payable upon demand. Notes payable approximate fair
value as they are short-term in nature or have stated interest rates based on
current market rates. It is not practical to estimate fair value of the notes
payable to related parties as the agreements are between related parties.
The Company estimates fair values of financial instruments by using available
market information. Considerable judgment is required in interpreting market
data to develop the estimates of fair value. Accordingly, the estimates may not
be indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions or valuation methodologies
could have a material effect on the estimate fair value amounts.
43
<PAGE> 44
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT
In March 1998, the American Institute of Certified Public Accountants released
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which establishes guidance on
accounting for the costs of computer software developed or obtained for
internal use. The Company adopted this statement in fiscal 1999 and there was
no cumulative catch up upon adoption. The Company amortizes its software on a
straight-line basis over its estimated useful life of three years.
During 1999, the Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which established revised standards for the
reporting of financial and descriptive information about operating segments in
financial statements. The Company has determined that it has one reportable
operating segment. As a result, the Company has determined that it is
appropriate to aggregate its operating segments into one reportable segment
consistent with the guidance in SFAS No. 131. Accordingly, the Company has not
presented separate financial information for its operating segments as the
Company's financial statements present its one reportable segment.
RECENTLY ISSUED ACCOUNTING STATEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. The Company
is required to adopt this statement for the year ending June 30, 2000. SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments as well as other hedging
activities. The Company has not determined the effect, if any, that adoption
will have on its financial position or results of operations.
(3) RELATED PARTY TRANSACTIONS:
AMOUNTS DUE FROM AFFILIATED COMPANY
During fiscal year 1998, members of senior management of the Company
participated in the development and formation of an Internet catalog company
with an unaffiliated corporation. During 1998, the Company advanced the
Internet catalog company an estimated $57,500 in the form of overhead expenses
and accrued compensation. This amount was recorded as a receivable from
affiliate. At June 30, 1998, the Company could not determine the amount, if any,
it will be reimbursed by the parties involved. As a result, the Company wrote
off the receivable.
The Company contracted with a consulting company, controlled by an outside
director of the Company, to supply financial consulting services related to
accounting and financial systems. Under this agreement, as of June 30, 1999 and
1998, the Company had paid an aggregate of $22,700 and $-0-, respectively, and
issued 31,325 and -0- common shares, respectively, of common stock for services
rendered. This agreement ended February 1999.
EXODUS GROUP, LLC
During 1999, certain of the Company's employees and officers purchased a total
of 65% of the available membership units in The Exodus Group, LLC, a franchisee
that purchases products from the Company. Sales to this customer were
approximately $36,000 and $-0- for the years ended June 30, 1999 and 1998,
respectively.
(4) INCOME TAXES:
The Company has cumulative net operating losses as of June 30, 1999, in excess
of $3,500,000. The Company's ability to utilize its net operating losses to
offset future taxable income may be limited under the Internal Revenue Code
Section 382 change in ownership rules. The Company has established a valuation
reserve as it has not determined that it is more likely than not that the
deferred tax asset is realizable.
No provision for income taxes has been presented in the accompanying statements
of operations for the years ended June 30, 1999 and 1998, as the Company was
conducting business as a calendar year-end
44
<PAGE> 45
Sub-Chapter S corporation during 1998 and all income has been reported by the
stockholders on their individual tax returns.
The components of the provision for (benefit from) income taxes consist of the
following:
<TABLE>
<CAPTION>
June 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Current income taxes:
Federal $ -- $ --
State and Provincial -- --
------------ ------------
-- --
------------ ------------
Deferred income taxes:
Federal -- --
State and Provincial -- --
------------ ------------
Total provision for (benefit from)
income taxes $ -- $ --
============ ============
</TABLE>
Differences between the financial statement and tax bases of the Company's
assets and liabilities are not material.
A reconciliation of the federal statutory rate to the Company's effective tax
rate for the years ended June 30 are as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Statutory federal rate (34)% (34)%
State taxes, net of federal benefit (6) (6)
Change in valuation allowance 40 40
-------- --------
Total -- % -- %
======== ========
</TABLE>
(5) BANK LINE OF CREDIT:
In September 1998, the Company obtained a line of credit from a bank for
borrowings in an amount up to $250,000. Interest accrues at prime (8.75% at June
30, 1999) plus 1% and is payable monthly. Principal is due at maturity. In May
1999, the bank increased the line of credit from $250,000 to $350,000 with the
additional $100,000 maturing in May 2000. The line of credit is guaranteed by
the Company's two largest stockholders and is secured by the Company's accounts
receivable and inventory. Availability under this line of credit at June 30,
1999, was $0. The weighted average interest rate on amounts outstanding was
8.75% during the year ended June 30, 1999. $250,000 of the line of credit
expires September 1999. The Company had borrowings under the line of credit of
$350,000 as of June 30, 1999. During August 1999, the Company used proceeds from
the $7.1 million Debenture (see Note 1) to repay the outstanding balance on the
line of credit.
(6) NOTES PAYABLE:
Notes payable at June 30 consist of the following:
45
<PAGE> 46
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. $ 30,000 $ --
Note payable to a stockholder, interest at 10%, due on
demand, unsecured. 30,000 --
Note payable to related party, interest at 10%, principal and interest, due
April 19, 2000, secured by the Company's assets, convertible into
shares of common stock at a rate of $6.00 of note principal convert. 500,000 --
Note payable to an individual, interest at 10%, principal and interest due
September 25, 1999, secured by the Company's assets. 50,000 --
------------- -------------
$ 610,000 $ --
============= =============
</TABLE>
In connection with the $500,000 note above, the Company issued warrants to
purchase 250,000 common shares at an exercise price of approximately $200 per
share. The fair value of each warrant as estimated using the Black Scholes
option pricing model was estimated to be $-0- primarily because the exercise
price was in excess of the then fair value of the common stock. These warrants
are exercisable at any time during the term of the warrants and expire two years
from the note repayment date.
As of August 1999, all the notes payable above were repaid in full using
proceeds obtained from the $7.1 million private placement (see Note 1).
(7) STOCKHOLDERS' EQUITY:
REVERSE STOCK SPLIT
Share amounts in the accompanying financial statements and notes to the
financial statements give retroactive effect to a one-for-ten reverse stock
split effective June 1998.
CAPITALIZATION
The Company amended its Articles of Incorporation in 1999 to authorize the
issuance of up to 70,000,000 shares of Class A common stock. In addition, the
Articles of Incorporation authorize the issuance of up to 5,000,000 shares of
preferred stock. The Board of Directors of the Company, at its sole discretion,
may establish par value, divide the shares of preferred stock into series, and
fix and determine the dividend rate, designations, preferences, privileges,
ratify powers, if any, and determine the restrictions and qualifications of the
shares of each series of preferred stock as established.
PREFERRED STOCK
The Board of Directors has designated 100,000 shares of Series A Convertible
Preferred Stock, (Preferred Stock) and during 1999, the Company issued 10,895
shares of Preferred Stock, at $100 per share. Net proceeds from the issuance of
Preferred Stock was approximately $869,000. These shares have a liquidation
preference of $100 per share, and are entitled to a $10 per share annual and
cumulative dividend, accrued quarterly commencing April 1, 1999, and are payable
at the discretion of the Company. The Company, at its discretion, may redeem the
Preferred Stock whenever the price of its common stock is equal to or greater
than $9.00 per share 20 out of 30 consecutive trading days. Each share of
Preferred Stock may be converted, at the option of the holder into common stock
at a conversion rate of one share for every $6.00 of principal converted. In
addition, the Preferred Stock automatically converts it to common stock whenever
the price of the Company's common stock is equal to or greater than $13.50 per
share 20 out of 30 consecutive trading days.
46
<PAGE> 47
WARRANTS TO PURCHASE COMMON STOCK
As of June 30, 1998, the Company had three series of warrants outstanding
totaling 665,553. Each warrant entitles the holder thereof to purchase one share
of common stock. The 665,553 warrants outstanding at June 30, 1998 comprised of
29,667, 317,943, and 317,943 series C, E and F warrants, respectively. Series C,
E and F had exercise prices of $15.00, $2.00, and $3.00, respectively, and
expired at June 15, 1999, December 1, 1998, and June 1, 1999, respectively. All
three series of warrants are callable by the Company under certain conditions.
In December 1998, Series E and F holders exercised 183,994 and 206,962,
respectively, of the outstanding warrants to purchase common stock for a total
of $293,448. In June 1999, the Company extended the expiration date of the
Series F warrants to December 1, 1999. As of June 30, 1999, 110,981 Series F
warrants are outstanding.
At June 30, 1999, the Company had outstanding warrants, issued in connection
with financing transactions, to purchase 86,644 shares of common stock through
December 2000, at prices ranging from $2.10 to $3.00 per share.
SALE OF COMMON STOCK
In December 1998, the Company sold 455,781 shares of common stock in a private
placement. Net proceeds from the issuance of common stock was approximately
$901,000.
STOCK OPTION PLAN
In November 1998, the Company adopted the CPU MicroMart 1998 Equity Incentive
Plan (the Plan). The Plan will terminate 10 years after the effective date. The
Plan authorizes awards of incentive stock options to employees and non-qualified
stock options to officers, directors, employees, and consultants of the Company.
A total of 1,000,000 shares of common stock was reserved for issuance under the
Plan.
The Plan is administered by a committee appointed by the Board who have the
exclusive authority to administer and interpret the Plan. The committee has the
power to, among other things, designate participants, determine types of awards
to be granted and the price, timing, terms and duration of awards.
The following summarizes the activity under the Company's stock option plan:
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------
1999
-------------------------
Weighted
Average
Number Option Price
of Shares Per Share
--------- ------------
<S> <C> <C>
Options outstanding, beginning of year -- $ --
Granted 663,000 1.96
Canceled/expired -- --
Exercised -- --
--------- ------------
Options outstanding, end of year 663,000 $ 1.96
========= ============
Options exercisable, end of year 140,000 $ 1.28
Options available for grant 337,000
Weighted average fair value of options granted $ 1.29
</TABLE>
Options outstanding and exercisable by price range as of June 30, 1999:
47
<PAGE> 48
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices Outstanding Life Price Exercisable Price
------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.00 522,000 9.13 1.00 130,000 1.00
$4.88 30,000 9.59 4.88 10,000 4.88
$5.50-$6.00 111,000 9.92 5.70 -- --
</TABLE>
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
During 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation, which defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost related to stock options issued to employees under these plans using the
method of accounting prescribed by Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees. Entities electing to
continue accounting for stock-based compensation under in APB No. 25 must make
pro forma disclosures of net income (loss) and earnings (loss) per share, as if
the fair value based method of accounting defined in SFAS No. 123 has been
applied.
The Company has elected to account for its stock-based compensation plans under
APB No. 25; therefore, no compensation cost is recognized in the accompanying
financial statements for stock-based employee awards. However, the Company has
computed for pro forma disclosure purposes the value of all options and Purchase
Plan shares granted during fiscal 1999, using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1999
Options
-----------
<S> <C>
Risk free interest rate 5.26%
Expected dividend yield --
Expected lives 3-5 years
Expected volatility 80%
</TABLE>
The total value and compensation expense which would have been recorded of
options granted was computed to be the following approximate amounts, which
would be amortized on the straight-line basis over the vesting period:
<TABLE>
<CAPTION>
Compensation
Fair Value Expense
---------- ------------
<S> <C> <C>
Year ended June 30, 1999 858,394 143,564
</TABLE>
If the Company had accounted for its stock-based compensation plans using a fair
value based method of accounting, the Company's net loss and basic and diluted
loss per common and common share equivalent would have been as follows (in
thousands, except per share data):
48
<PAGE> 49
<TABLE>
<CAPTION>
Year Ended
June 30,
1999
----------
<S> <C>
Net loss:
As reported $ (1,954)
Pro forma (2,098)
Loss per common and common share equivalent:
As reported - basic (.29)
As reported - diluted (.29)
Pro forma - basic (.31)
Pro forma - diluted (.31)
</TABLE>
The effects of applying SFAS No. 123 for providing pro forma disclosures for
1999 are not likely to be representative of the effects on reported net loss and
loss per common and common share equivalent for future years, because options
vest over several years and additional awards generally are made each year.
(8) COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company entered into a two-year lease in June, 1999 for its office facility
in Scottsdale, Arizona. The Company leases its offices and warehouse space under
leases expiring in April and July 2001, with extension options, and are
cancelable with six months notice. Rental expense related to these leases
amounted to approximately $165,000 and $36,000 for the years ended June 30, 1999
and 1998, respectively.
Future minimum lease payments under these noncancelable leases are approximately
as follows:
<TABLE>
<CAPTION>
Year Ended
June 30,
----------
<S> <C>
2000 $ 291,000
2001 275,000
-----------
$ 566,000
===========
</TABLE>
LITIGATION
In the normal course of its business, the Company is subject to certain
contractual obligations and litigation. In management's opinion, upon
consultation with legal counsel, there is no current litigation which will
materially affect the Company's financial position or results of operations.
49
<PAGE> 50
PART III
ITEM 1. INDEX TO EXHIBITS
2.1 Asset Exchange Agreement by and among Genras, Jeffrey I.
Rassas, Vinculum and Aztore Holdings, dated as of March 18,
1998
3.1 Articles of Incorporation of Ebiz
3.2 Certificate of Amendment to Articles of Incorporation of Ebiz
3.3 Second Certificate of Amendment to the Articles of
Incorporation of Ebiz
3.4 Certificate of Designation / Resolution of Designation -
Series A 10% convertible Preferred Stock
3.45 Bylaws of Ebiz
4.1 Specimen common stock certificate
10.1 Office Building Lease, dated April 16, 1999, between Ebiz and
Van Wagner Properties
10.2 Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3 Securities Purchase Agreement dated as of August 25, 1999, by
and between JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4 Subordinated Convertible Debenture, dated August 25, 1999, in
the amount of $7,100,000, made by Ebiz in favor of JEM
10.5 Warrant to Purchase Common Stock, dated August 25, 1999,
issued by Ebiz to JEM, for 245,000 shares
10.6 Registration Rights Agreement, dated as of August 25, 1999, by
and between Ebiz and JEM, LLC
11.1 Statement re: computation of per share earnings
21.1 Subsidiaries
23.1 Auditor's Consent from Arthur Andersen LLP
27.1 Financial Data Schedule
50
<PAGE> 51
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
EBIZ ENTERPRISES, INC.
(Registrant)
Dated: October 19, 1999 By: /s/ Jeffrey I. Rassas
-------------------------------
Jeffrey I. Rassas
Chief Executive Officer
51
<PAGE> 52
INDEX TO EXHIBITS
2.1 Asset Exchange Agreement by and among Genras, Jeffrey I.
Rassas, Vinculum and Aztore Holdings, dated as of March 18,
1998
3.1 Articles of Incorporation of Ebiz
3.2 Certificate of Amendment to Articles of Incorporation of Ebiz
3.3 Second Certificate of Amendment to the Articles of
Incorporation of Ebiz
3.4 Certificate of Designation / Resolution of Designation -
Series A 10% convertible Preferred Stock
3.45 Bylaws of Ebiz
4.1 Specimen common stock certificate
10.1 Office Building Lease, dated April 16, 1999, between Ebiz and
Van Wagner Properties
10.2 Ebiz 1998 Equity Incentive Plan, Effective December 23, 1998
10.3 Securities Purchase Agreement dated as of August 25, 1999, by
and between JEM Ventures Ebiz, LLC ("JEM") and Ebiz.
10.4 Subordinated Convertible Debenture, dated August 25, 1999, in
the amount of $7,100,000, made by Ebiz in favor of JEM
10.5 Warrant to Purchase Common Stock, dated August 25, 1999,
issued by Ebiz to JEM, for 245,000 shares
10.6 Registration Rights Agreement, dated as of August 25, 1999, by
and between Ebiz and JEM, LLC
11.1 Statement re: computation of per share earnings
21.1 Subsidiaries
23.1 Auditor's Consent from Arthur Andersen LLP
27.1 Financial Data Schedule
<PAGE> 1
Exhibit 2.1
ASSET EXCHANGE AGREEMENT
By and among
GENRAS, INC.
as Seller,
JEFFREY I. RASSAS,
as Selling Shareholder,
VINCULUM INCORPORATED,
as Purchaser,
and
AZTORE HOLDINGS, INC.,
as Purchaser Shareholder
1
<PAGE> 2
Exhibit 2.1
TABLE OF CONTENTS
<TABLE>
<S> <C>
Article 1 Exchange ............................................................................... 1
Section 1.1 Properties and Assets to be Exchanged................................. 1
Section 1.2 Excluded Assets....................................................... 3
Section 1.3 Purchase Price........................................................ 3
Section 1.4 Closing Date.......................................................... 3
Section 1.5 No-Competition Covenants.............................................. 4
Section 1.6 Reorganization Status................................................. 4
Article 2 Representations, Warranties and
Agreements of Seller and Selling Shareholder ............................................ 4
Section 2.1 Authority ............................................................ 4
Section 2.2 Organization and Good Standing........................................ 4
Section 2.3 Condition of Acquired Assets; Damages to the Business................. 4
Section 2.4 Condemnation.......................................................... 5
Section 2.5 Title to Properties................................................... 5
Section 2.6 No Violation.......................................................... 5
Section 2.7 Licenses, Permits and Approvals....................................... 5
Section 2.8 Taxes................................................................. 6
Section 2.9 Contracts............................................................. 6
Section 2.10 Employment Matters.................................................... 6
Section 2.11 Conduct of Business................................................... 6
Section 2.12 Conduct of Business Pending Closing................................... 7
Section 2.13 Insurance............................................................. 7
Section 2.14 Litigation............................................................ 7
Section 2.15 Primary Suppliers..................................................... 7
Section 2.16 Copyrights, Trademarks, Etc........................................... 7
Section 2.17 Utilities............................................................. 8
Section 2.18 Financial Statements.................................................. 8
Section 2.19 Disclosure............................................................ 8
Section 2.20 Investment Intent..................................................... 8
Section 2.21 Updating of Schedules................................................. 9
Section 2.22 Basis for Representations and Warranties.............................. 9
Article 3 Representation and Warranties of the
Purchaser and Purchaser Shareholder...................................................... 9
Section 3.1 Authority and Title................................................... 9
Section 3.2 Organization and Good Standing........................................ 9
Section 3.3 Capitalization........................................................ 10
(a) Authorized Capital Stock......................................... 10
(b) Warrants Outstanding............................................. 10
(c) Duly Issued...................................................... 10
(d) No Pre-Emptive Rights............................................ 10
(e) Modified Capital Structure....................................... 10
Section 3.4 Valid Issue........................................................... 10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
Section 3.5 Taxes................................................................ 10
Section 3.6 Litigation........................................................... 11
Section 3.8 Disclosure........................................................... 11
Section 3.9 Updating of Schedules................................................ 11
Section 3.10 Basis for Representation and Warranties.............................. 11
Article 4 Additional Agreements.................................................................. 12
Section 4.1 Access to Records and Property....................................... 12
Section 4.2 Bulk Sales Laws...................................................... 12
Section 4.3 Reorganization of Capital Structure and Change of
Domicile............................................................. 12
(a) Authorized Capital Stock........................................ 12
(b) Outstanding Stock, Warrants and Liability....................... 12
(c) Warrant Units................................................... 12
(d) Reverse Stock Split............................................. 13
(e) Change of Domicile.............................................. 13
(f) Agreements...................................................... 13
(g) Advisory Fee.................................................... 13
Article 5 Conditions Precedent................................................................... 13
Section 5.1 Conditions Precedent to the Obligations of Purchaser................. 13
(a) Representations, Warranties and Covenants....................... 13
(b) Licenses, Permits, Approvals, Etc............................... 14
(c) Due Diligence of Purchase....................................... 14
(e) Consents........................................................ 14
(f) No Adverse Changes.............................................. 14
(g) Legal Matters................................................... 14
(h) Receipt of Closing Documents.................................... 14
Section 5.2 Conditions Precedent to the Obligation of Seller..................... 15
(a) Representations, Warranties and Covenants....................... 15
(b) Due Diligence of Seller......................................... 15
(c) No Adverse Changes.............................................. 15
(d) Legal Matters................................................... 15
(e) Officers and Directors.......................................... 15
(f) Exercise of Warrants............................................ 16
(g) Receipt of Closing Documents.................................... 16
Article 6 Closing Documents...................................................................... 16
Section 6.1 Documents to Be Delivered by Seller.................................. 16
(a) Bills of Sale, Assignments and Transfers........................ 16
(b) Certificates.................................................... 16
(c) Good Standing Certificate for Seller............................ 16
(d) Consents to Assignments......................................... 16
(e) Certificate of Secretarial Officer of Seller.................... 16
(f) Other Documents................................................. 16
Section 6.2 Documents to Be Delivered by Purchaser............................... 16
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
(a) Certificate..................................................... 16
(b) Good Standing Certificate for Purchaser......................... 17
(c) Opinions........................................................ 17
(d) Certificate of Secretarial Officer of Purchaser................. 17
(e) Other Documents................................................. 17
Article 8 Termination, Amendments, Waiver and Assignment......................................... 17
Section 8.1 Termination.......................................................... 17
Section 8.2 Effect of Termination................................................ 18
Section 8.3 Amendment............................................................ 18
Section 8.4 Waiver............................................................... 18
Section 8.5 Assignment........................................................... 18
Article 9 General Provisions..................................................................... 18
Section 9.1 Survival of Representations and Warranties........................... 18
Section 9.2 Indemnification...................................................... 18
(a) Seller's Indemnification........................................ 18
(b) Purchaser's Indemnification..................................... 19
Section 9.3 Brokerage Commission................................................. 19
Section 9.4 Notices.............................................................. 20
Section 9.5 Expenses............................................................. 20
Section 9.6 Legal Representation................................................. 20
Section 9.7 Further Assurances................................................... 21
Section 9.8 Miscellaneous........................................................ 21
Section 9.9 Gender............................................................... 21
Section 9.10 Illegality........................................................... 21
Section 9.11 Effect of Attachments................................................ 21
</TABLE>
Schedules
Schedule 1.1(a) - Inventories
Schedule 1.1(b) - Furniture, Fixtures and Equipment
Schedule 1.1(d) - Accounts Receivable and Cash
Schedule 1.1(e) - Leases
Schedule 1.1(f) - Equipment Leases
Schedule 1.1(g) - Pre-paid Expenses and Deposits
Schedule 1.1(h) - Contracts
Schedule 1.1(j) - Permits and Licenses Transferable
Schedule 1.3 - Assumed Obligations
Schedule 2.7 - Permits and Licenses
Schedule 2.10 - Employees Not At-Will
Schedule 2.11 - Conduct of Business
Schedule 2.13 - Insurance
Schedule 2.14 - Litigation - Seller
Schedule 2.15 - Vendors and Suppliers
Schedule 2.16 - Copyrights and Trademarks
Schedule 2.18 - Financial Statements - Seller
iii
<PAGE> 5
Schedule 3.6 - Litigation - Purchaser
Schedule 3.7 - Financial Statements - Purchaser
Exhibits
Exhibit 4.3(e) - Purchaser's Pre-Closing Balance Sheet
Exhibit 4.3(f)(i) - Consulting Agreement
Exhibit 4.3(f)(ii) - Promissory Note
Exhibit 4.3(f)(iii) - Lock-Up, Anti-Dilution and Governance Agreement
iv
<PAGE> 6
Exhibit 2.1
ASSET EXCHANGE AGREEMENT
THIS ASSET EXCHANGE AGREEMENT ("Agreement") is entered into as of May
18, 1998, by and among GENRAS, INC. ("Seller"), JEFFREY I. RASSAS ("Selling
Shareholder"), VINCULUM INCORPORATED ("Purchaser") and AZTORE HOLDINGS, INC.
("Purchaser Shareholder").
RECITALS:
A. Seller is an Arizona corporation that operates a computer
and consumer electronics liquidation and assembly business located in
Scottsdale, Arizona (hereinafter referred to as the "Business").
B. Selling Shareholder owns 100% of the outstanding capital
stock of Seller.
C. Purchaser is a Colorado corporation with approximately 300
shareholders of record.
D. Purchaser Shareholder owns approximately 81% of the
outstanding capital stock of Purchaser.
E. Purchaser desires to acquire the assets comprising the
Business and Seller and Selling Shareholder desire to transfer such assets to
Purchaser in exchange for capital stock of Purchaser under the terms and
conditions set forth herein.
AGREEMENT:
Now, THEREFORE, in consideration of the mutual promises and covenants
herein contained, Seller, Selling Shareholder, Purchaser and Purchaser
Shareholder hereby agree as follows:
ARTICLE 1
EXCHANGE
Section 1.1 Properties and Assets to be Exchanged. On the Closing Date
(as defined herein) Seller shall assign and deliver to Purchaser, and Purchaser
shall acquire from Seller, all of the properties and assets comprising the
Business, of every kind and description, real, personal and mixed, tangible and
intangible, wheresoever located, and whether or not carried on the books of
Seller, all as the same shall exist at 12:01 a.m. on June 1, 1998 (the
"Effective Time"), excepting only the Excluded Assets in Section 1.2 hereof
(the "Acquired Assets"). Without limiting the foregoing, but to identify more
particularly certain of the properties and assets to be exchanged hereunder, the
Acquired Assets shall include:
<PAGE> 7
(a) All inventories at or otherwise relating to the Business listed in
SCHEDULE 1.1(a) attached hereto;
(b) All furniture, fixtures, equipment, shelving, office supplies and
miscellaneous items listed in SCHEDULE 1.1(b) attached hereto;
(c) All interest in and to the trade names and trademarks and all other
right of Seller related to the use of the name "CPUMicroMart" or any combination
or variation thereof;
(d) All accounts receivable, cash on hand, bank checking and savings
accounts and certificates of deposit as listed on SCHEDULE 1.1(d) attached
hereto;
(e) All leasehold interests of Seller in the real estate (the
"Premises") as set forth in the lease agreements listed in SCHEDULE 1.1(e)
attached hereto (the "Leases") and all easements, rights of way, licenses,
permits, rights, tenements, appurtenances and privileges owned or used by Seller
in connection with the Business;
(f) All leasehold interests of Seller in personal property as set forth
in the lease agreements listed in SCHEDULE 1.1(f) attached hereto;
(g) All prepaid expenses, insurance premiums and utility and other
deposits listed in SCHEDULE 1.1(g) attached hereto;
(h) All benefits and rights under all contracts, leases, commitments
and agreements, oral or written, to which Seller is a party and which are
described in SCHEDULE 1.1(h) attached hereto;
(i) All transferable permits, certifications, authorizations, licenses,
consents and approvals relating to the Business listed in SCHEDULE 1.1(i)
attached hereto;
(j) All engineering plans, designs and drawings, system maps,
abstracts, blueprints, surveys and reproducible drawings of the facilities and
improvements on the Premises as listed in SCHEDULE 1.1(j) attached hereto;
(k) All warranties and guarantees of manufacturers, contractors,
sellers or suppliers which pertain to the Acquired Assets, the Business or the
Premises;
(l) All interest in and to the telephone numbers and listings of Seller
pertaining to the Business in all telephone books, directories and other
publications;
(m) All computer software and licenses with respect to the Business;
and
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(n) The business of Seller as a going concern, including the goodwill,
and all vendor, employee, payroll and other records, files, data, information
and documents relating to the Business.
Section 1.2 Excluded Assets. Seller shall retain all returns and
records relating to local, state and federal income taxes and may retain copies
of all financial records as related to the Business as necessary for the purpose
of winding-up and liquidating the Seller and distributing its assets after the
Closing Date.
Section 1.3 Purchase Price. In consideration for the Acquired Assets,
Purchaser shall issue to Seller 50,000,000 shares of its common stock and
Purchaser shall assume as of the Effective Time the executory commitments and
obligations related to the Leases set forth in SCHEDULE 1.1(e), the lease
agreements set forth in SCHEDULE 1.1(f), the contracts, leases, commitments and
agreements set forth in SCHEDULE 1.1(h), and the liabilities as listed and in
the amounts set forth on SCHEDULE 1.3 hereto (collectively, the "Assumed
Obligations"). Purchaser shall not assume nor be liable for and Seller expressly
agrees to remain liable for and to pay, perform and discharge all debts,
liabilities and obligations of Seller except for the Assumed Obligations as
existing on or accruing prior to, upon or after the Effective Time (the
"Excluded Obligations"), including, without limitation:
(a) All federal, state and local income taxes which have
accrued or may accrue or become due and payable as a result of income,
gains or revenues received, realized or accrued by Seller or its
shareholders after the Effective Time, together with all interest,
penalties and other charges and fees in connection therewith;
(b) All liabilities, obligations and claims based on or
arising from occurrences, circumstances or events, or exposure to
conditions, existing or occurring prior to or on the Effective Time
arising in connection with the negligence or misconduct of Seller or
any of its directors, officers, employees, contractors, subcontractors
or agents;
(c) All other debts, liabilities, obligations, contracts and
commitments (whether known or unknown, contingent or fixed, liquidated
or unliquidated) arising out of or related to the ownership, operation
or use of any of the Acquired Assets and the Business on or prior to
the Effective Time or the conduct of the business of Seller, whether
incurred before, on or after the Effective Time.
Section 1.4 Closing Date. The sale and purchase provided for herein
shall be consummated and closed (the "Closing") at the offices of Gallagher &
Kennedy, 2600 North Central Avenue, Suite 1800, Phoenix, Arizona 85004, at 1:00
P.M., local time, on June l, 1998, or such time and date as the parties hereto
may agree upon (herein referred to as the "Closing Date"). All Acquired Assets
and the Business
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<PAGE> 9
shall be deemed transferred as of the Effective Time and all documents delivered
on the Closing Date shall reflect the transfer as occurring at the Effective
Time.
Section 1.5 No-Competition Covenants. Upon the Closing, Selling
Shareholder shall become officers and directors of Purchaser and its successor
as contemplated in Section 5.2(e) and Article 7 hereof. For the period of five
years from the Closing Date or three years from termination of service as an
officer and director of Purchaser or its successor, whichever is longer, Seller
and Selling Shareholder agree that they will not be an officer, director,
partner, member, employee, agent, representative, consultant or an owner of any
equity interest in any entity, or directly or indirectly provide any assistance,
financial or otherwise, to, any entity, or an owner of any interest in, or
employee, agent or representative of any other form of business which competes
directly or indirectly with the Business or any component thereof in any
geographic area where the Business is then conducted.
Section 1.6 Reorganization Status. The parties intend that the
transactions contemplated under this Agreement qualify as a "reorganization" as
defined in I. R. C. Section 368(a)(1)(C) and shall file all required elections
and returns to report this transaction consistent with such intent.
ARTICLE 2
REPRESENTATIONS, WARRANTIES AND
AGREEMENTS OF SELLER AND SELLING SHAREHOLDER
As an inducement to Purchaser and Purchaser Shareholder to enter into
and perform this Agreement, Seller and Selling Shareholder covenant, represent
and warrant to, and agree with, Purchaser and Purchaser Shareholder as follows:
Section 2.1 Authority. Seller has the full legal power and authority to
enter into and perform this Agreement, and the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby will not
violate any provision of law, Seller's Articles of Incorporation or bylaws.
Seller has taken all necessary action (including action of Seller's board of
directors and shareholders, as required) to authorize and approve the execution
and delivery of this Agreement and the performance of the transactions
contemplated hereby.
Section 2.2 Organization and Good Standing. Seller is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Arizona, and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted.
Section 2.3 Condition of Acquired Assets; Damages to the Business. To
the best knowledge and belief of Seller and Selling Shareholder, the Premises
and the Acquired Assets are in good condition and free from defects. At the
Effective Time, the inventories set forth on SCHEDULE 1.1(a) had the book value
as determined under generally accepted accounting principles as set forth in
such schedule and the
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<PAGE> 10
accounts receivable set forth on SCHEDULE 1.1(d) are in the amount as set forth
in such schedule and are collectible to the extent thereof, with allowance for
doubtful accounts as set forth in such schedule. At the Closing Date, the
Premises and the Acquired Assets shall be in substantially the same condition as
on the date of this Agreement, excepting ordinary wear and tear. In the event
that prior to the Closing Date any improvements on the Premises or any of the
Acquired Assets shall be destroyed or damaged and provided such improvements or
Acquired Assets are material to the operation of the Business, Purchaser shall
have the option to terminate this Agreement. If Purchaser does not so elect to
terminate this Agreement and proceed to close hereunder, Purchaser shall be
entitled to settle any loss with insurance carriers and to receive from such
carriers the proceeds of all insurance applicable to such loss. Seller shall
execute and deliver any and all such documents and take all such action as may
be necessary or appropriate to comply with the terms of this Section 2.3.
Section 2.4 Condemnation. If, prior to the Closing Date, any part of
the Premises shall be taken by eminent domain or if any proceeding in the nature
of eminent domain is filed against or affecting the Premises, Purchaser shall
become entitled to the award of compensation in any such taking, and Seller
shall thereafter deliver or cause to be delivered all instruments reasonably
required to assign such award to Purchaser.
Section 2.5 Title to Properties. Seller has good title to all Acquired
Assets, free and clear of any mortgages, liens, pledges, charges or other
encumbrances except for the liabilities and liens listed in SCHEDULE 1.3 hereto
and expressly assumed or taken subject to by Purchaser.
Section 2.6 No Violation. Seller has not received notice of any
violation of any applicable zoning regulation, ordinance or other law, order,
regulation or requirement relating to their operations or properties; to the
best knowledge and belief of Seller, no such violation presently exists; and all
buildings, improvements and other structures owned or used by Seller in the
Business conform to all applicable laws, ordinances, codes and regulations,
including, without limitation, the Americans With Disabilities Act ("ADA"). To
the best knowledge and belief of Seller, Seller and its services, practices,
billings, properties, equipment, machinery, buildings and operations relating to
the Business are in full compliance with all applicable federal, state and local
laws, statutes, ordinances, codes, regulations, rules, orders, restrictions and
requirements, governmental, administrative, judicial and otherwise, including,
without limitation, those relating to wages, prices, equal opportunity,
environmental protection, safety, health, building and zoning, and the ADA, and
to the best knowledge and belief of Seller, no changes in any such laws,
statutes, ordinances, codes, regulations, rules, orders, restrictions or
requirements have been proposed or are in prospect with which Purchaser could
not comply after the Closing Date without materially adversely affecting the
Business, and the Acquired Assets or their operation or profitability.
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<PAGE> 11
Section 2.7 Licenses, Permits and Approvals. Seller holds all licenses,
permits, franchises, authorizations, approvals, consents and rights from all
appropriate federal, state, local or other public governmental or administrative
or judicial authorities necessary in connection with the operation of the
Business by Seller, all of which are listed and described in SCHEDULE 2.7
attached hereto and, between the date hereof and the Closing Date, Seller will
maintain all such licenses, permits, franchises, authorizations, approvals,
consents and rights, none of which will be adversely affected by the
transactions contemplated by this Agreement except for those which cannot be
legally transferred to Purchaser under the terms hereof as specifically
described in SCHEDULE 2.7.
Section 2.8 Taxes. Seller has filed with appropriate federal, state and
local governmental agencies all tax returns and reports required to be filed by
Seller and, to the best knowledge of Seller and Selling Shareholder, has paid
all taxes and assessments which became due prior to the date hereof.
Section 2.9 Contracts.
(a) Except as set forth on SCHEDULE 1.1(h) attached hereto, Seller is
not a party to or bound by any contracts, agreements or instruments which relate
to or affect the Business. Seller has provided Purchaser with a true, accurate
and complete copy of each document listed in SCHEDULE 1.1(h).
(b) Seller has, to the best knowledge of Seller and Selling
Shareholder, performed all obligations required to be performed by it to date
and is not in default under, and no event has occurred which, with the lapse of
time or action by a third party, could result in a default under, any
outstanding indenture, mortgage, deed of trust, contract, agreement, lease or
other commitment to which it is a party or by which it is bound and relates to
the Business or under any provision of Seller's Articles of Incorporation or
by-laws.
Section 2.10 Employment Matters. Except as set forth on SCHEDULE 2.10
hereto, all full or part-time employees employed in connection with the
operation of the Business are terminable by Seller at will at any time without
any obligation for severance pay, vacation pay or other liability.
Section 2.11 Conduct of Business. Except as set forth on SCHEDULE 2.11
hereto, Seller
(a) experienced any material adverse change in the assets, liabilities
or business relating to the Business or the Acquired Assets;
(b) suffered the filing, or learned of any basis for the institution
of, any action, suit, proceeding or governmental investigation, with respect to
the business, properties, assets or goodwill relating to the Business or the
Acquired Assets;
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<PAGE> 12
(c) entered into any contract to provide or reserve any future use of
the Business or the Acquired Assets by any persons;
(d) led any accounts relating to the Business in advance or collected
any advance payment or deposit under any contract relating to the future use of
the Business; or
(e) entered into any other transaction relating to the sale, lease or
other disposition of the Business or the Acquired Assets.
Section 2.12 Conduct of Business Pending Closing. From and after the
date hereof and until the Effective Time, with respect to the Business or the
Acquired Assets, Seller will: (a) maintain the Acquired Assets in their present
state of repair, order and condition, reasonable wear and tear excepted; (b)
comply with all laws applicable to the Business; (c) not sell, mortgage, subject
to lien, pledge or encumber or otherwise dispose of any of the Acquired Assets;
(d) not enter into any written or oral contract, lease, plan, commitment or
agreement relating to the Business without the prior consent of Purchaser; and
(e) continue to operate the Business in its normal course.
Section 2.13 Insurance. Seller has in effect the insurance coverage
with respect to the Business described in SCHEDULE 2.13 attached hereto, which
description includes the name of the insurer, the policy number, the name of the
insured, the type and amount of coverage and risks insured, and Seller has
delivered to Purchaser complete and accurate copies of all such insurance
policies. Such insurance coverage, as to amounts and types of coverage and risks
insured, is adequate for the Business as presently conducted.
Section 2.14 Litigation. Except as set forth in SCHEDULE 2.14, Seller
is not engaged in or threatened with any claim, action, litigation,
investigation, audit, arbitration, dispute or proceeding relating to the
Business or the Acquired Assets, and Seller are not now subject to any order,
decree or other governmental restriction adversely affecting the business or
assets of the Business or the Acquired Assets or which would prevent or hamper
the consummation of the transactions contemplated by this Agreement or
Purchaser's intended use or operation of the Acquired Assets.
Section 2.15 Primary Suppliers. SCHEDULE 2.15 ATTACHED hereto contains
a list of all vendors and suppliers of services or goods to the Business.
Section 2.16 Copyrights, Trademarks, Etc. SCHEDULE 2.16 attached hereto
lists and describes all copyrights, trademarks, service marks and trade names
owned or applied for by Seller or used in connection with the operation of the
Business. To the best knowledge of Seller and Selling Shareholder, there are no
claims or demands of any person, firm or corporation pertaining to the
copyrights, trademarks, service marks, trademark or service mark registrations,
trademark or service mark registration applications, label filings or trade
names, or, as the case may be, the
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<PAGE> 13
rights of Seller under trademarks, service marks, label filings or trade names
listed in such SCHEDULE 2.16 as owned by Seller, and no proceedings have been
instituted, or are pending or threatened which challenge the rights of Seller in
respect thereof, and none of the issued trademarks, service marks, trademark
registrations, label filings or trade names or, as the case may be, the rights
granted to Seller in respect thereof and listed in SCHEDULE 2.16 as owned by
Seller, is subject to any outstanding order, decree, judgment, stipulation,
injunction, restriction or agreement restricting the scope of the use of such
patents, copyrights, trademarks, service marks, trademark registrations, label
filings or trade names. To the best knowledge of Seller and Selling Shareholder,
Seller is not infringing or violating, and during the past five years has not
infringed or violated, any adversely held copyright, trademark, service mark or
trade name, nor engaged in any kind of unfair or unlawful competition nor
wrongfully used any confidential information or trade secretes or patentable
inventions of any former employee of Seller or any other person, firm or
corporation. Seller is not wrongfully using any such information nor has any
knowledge of any patented device or application thereof which would materially
and adversely affect any aspect of the Business or its operations.
Section 2.17 Utilities. All utilities necessary for the present use and
operation of the Acquired Assets are available to the Business, including,
without limitation, electric power, natural gas, storm sewer, water, sanitary
sewer and telephone over public rights of way.
Section 2.18 Financial Statements. SCHEDULE 2.18 attached hereto sets
forth the financial statements delivered to Purchaser by Seller. To the best
knowledge of Seller and Selling Shareholder, all such financial statements are
true, accurate and complete and present fairly the financial position of Seller
as of the dates stated and results of operations of Seller for the periods
depicted.
Section 2.19 Disclosure. No representation or warranty made herein by
Seller or Selling Shareholder and no written statement, certificate, schedule or
document, including without limitation any projection, report or summary given
or to be given to Purchaser or Purchaser Shareholder pursuant to this Agreement,
or with respect to the transactions contemplated hereunder, contains or will
contain any untrue statement of a material fact, or will omit to state a
material fact necessary to make the statements contained herein or therein under
the circumstances under which they were made not misleading, and Seller and
Selling Shareholder have made, and will make in good faith through the Closing
Date, full disclosure of all material facts with respect to the Business and the
Acquired Assets, including, without limitation, the operations, assets and
prospects which a prudent purchaser would deem relevant.
Section 2.20 Investment Intent. The shares of Purchaser's common stock
transferred to Seller in exchange for the Acquired Assets and to be distributed
to Selling Shareholder upon the liquidation of Seller are being acquired by
Selling Shareholder for its own account, with the intention of holding for
investment and with no present intention of dividing or allowing others to
participate in this
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investment or of reselling or otherwise participating directly or indirectly in
a distribution of such shares. Selling Shareholder understands that such shares
are "restricted securities" as defined under Rule 144 as promulgated under the
Securities Act of 1933, as amended ("Securities Act") and will bear an
appropriate legend indicating that such shares can not be sold or transferred
without registration under the Securities Act or pursuant to applicable
exemption from such registration. The foregoing shall not apply to the transfer
of shares to persons holding rights to acquire equity interests in Seller
directly or from the Selling Shareholder prior to liquidation but such persons
shall acknowledge a similar investment intent and applicable restrictions on
transfer.
Section 2.21 Updating of Schedules. There has been no material adverse
change in any of the matters reflected in any Schedule made a part of this
Agreement from the respective dates thereof to and including the date of this
Agreement, nor will there be any material adverse change in such matters from
the date hereof to and including the Closing Date. All Schedules attached hereto
are true, accurate and complete in all material respects and will be updated by
Seller to include information as of such date as may be requested by Purchaser
and delivered to Purchaser prior to or on the Closing Date with any and all
changes marked so that all such Schedules are true, accurate and complete in all
respects.
Section 2.22 Basis for Representations and Warranties. Prior to
executing this Agreement, Seller and Selling Shareholder have made such
affirmative and thorough reviews, searches, inspections and inquiries relating
to Seller, the Business and the Acquired Assets, and have consulted with such
third parties, which a prudent person might deem necessary or advisable in order
to gain knowledge concerning the matters to which the representations and
warranties relate. Seller's and Selling Shareholder' best knowledge and belief
with respect to the subject matter of any representation and warranty which is
subject to the "best knowledge and belief' shall be deemed to include matters
which Seller or Selling Shareholder should have known with respect to the
subject matter of such representations and warranties.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE
PURCHASER AND PURCHASER SHAREHOLDER
As an inducement to Seller and Selling Shareholder to enter into and
perform this Agreement, Purchaser, and Purchaser Shareholder covenant, represent
and warrant to, and agrees with, Seller and Selling Shareholder as follows:
Section 3.1 Authority and Title. Purchaser has the full legal power
and authority to enter into and perform this Agreement, and the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby will not violate any provision of law, Purchaser's Articles of
Incorporation or bylaws. Purchaser has taken all necessary action (including
action of Purchaser's board of directors, as required but excluding consent of
Purchaser's shareholders) to authorize
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<PAGE> 15
and approve the execution and delivery of this Agreement and the performance of
the transactions contemplated hereby.
Section 3.2 Organization and Good Standing. Purchaser is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Colorado, is duly registered as a foreign corporation doing business in
Arizona and has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its business as now being conducted.
Section 3.3 Capitalization.
(a) Authorized Capital Stock. As of the date hereof (i) the authorized
capital stock of Purchaser consists of 130,000,000 shares, of which 50,000,000
shares are designated as preferred stock with a par value of $.001 per share,
30,000,000 shares are designated Class A Common Stock with one vote and a par
value of $.005 per share and 50,000,000 shares are designated as Class B Common
Stock with five votes and a par value of $.001 per shares, and (ii) Purchaser
has issued and outstanding a total of 8,345,385 shares of Class A Common Stock,
no shares of Class B Common Stock and no shares of preferred stock.
(b) Warrants Outstanding. As of the date hereof, Purchaser has
outstanding a total of 295,690 A Warrants which entitle the holder thereof to
purchase one share of Purchaser's Class A Common Stock at $0.50 per share and
which expire on June 15, 1998, 1,857,790 B Warrants which entitle the holder
thereof to purchase one share of Purchaser's Class A Common Stock at $1.00 per
share and which expire on June 15, 1998, 1,857,790 C Warrants which entitle the
holder thereof to purchase one share of Purchaser's Class A Common Stock at
$1.50 per share and which expire on June 15, 1999 and 1,561,220 D Warrants which
entitle the holder thereof to purchase one share of Purchaser's Class A Common
Stock at $0.50 per share and which expire on June 15, 1999.
(c) Duly Issued. All of the outstanding shares of capital stock of
Purchaser are duly and validly authorized and issued, fully paid and
non-assessable and all outstanding warrants representing binding obligations of
Purchaser to issue additional shares in accordance with the terms thereof.
(d) No Pre-Emptive Rights. Except for the Warrants, Purchaser has no
outstanding obligations for the issuance of or conversion into any shares of its
capital stock and there are no pre-emptive or other rights held by any current
or former shareholder of Purchaser with respect to the issuance of any shares of
its capital stock.
(e) Modified Capital Structure. Upon the Closing, the capital structure
and outstanding shares of capital stock and warrants shall be modified as
provided in Section 4.3 below.
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Section 3.4 Valid Issue. Upon issuance the 50,000,000 shares of capital
stock of Purchaser issued in exchange for the Acquired Assets shall be duly and
validly authorized and issued, fully paid and non-assessable.
Section 3.5 Taxes. Purchaser has filed with appropriate federal, state
and local governmental agencies all tax returns and reports required to be filed
by Purchaser and has paid all taxes and assessments which became due prior to
the date hereof and shall pay all such taxes and assessments which become due on
or prior to the Effective Time.
Section 3.6 Litigation. Except as set forth in SCHEDULE 3.6, PURCHASER
is not engaged in or threatened with any claim, action, litigation,
investigation, audit, arbitration, dispute or proceeding, and Purchaser is not
now subject to any order, decree or other governmental restriction adversely
affecting its business or assets or which would prevent or hamper the
consummation of the transactions contemplated by this Agreement or Purchaser's
intended use or operation of the Acquired Assets.
Section 3.7 Financial Statements. SCHEDULE 3.7 attached hereto sets
forth the financial statements delivered to Seller by Purchaser. All such
financial statements are true, accurate and complete and present fairly the
financial position of Purchaser as of the dates stated and results of operations
of Seller for the periods depicted.
Section 3.8 Disclosure. No representation or warranty made herein by
Purchaser or Purchasing Shareholder and no written statement, certificate,
schedule or document, including without limitation any projection, report or
summary given or to be given to Seller or Selling Shareholder pursuant to this
Agreement, or with respect to the transactions contemplated hereunder, contains
or will contain any untrue statement of a material fact, or will omit to state a
material fact necessary to make the statements contained herein or therein under
the circumstances under which they were made not misleading, and Purchaser and
Purchasing Shareholder have made, and will make in good faith through the
Closing Date, full disclosure of all material facts with respect to its
operations, assets and prospects which a prudent purchaser would deem relevant.
Section 3.9 Updating of Schedules. There has been no material adverse
change in any of the matters reflected in any Schedule made a part of this
Agreement from the respective dates thereof to and including the date of this
Agreement, nor will there be any material adverse change in such matters from
the date hereof to and including the Closing Date. All Schedules attached hereto
are true, accurate and complete in all material respects and will be updated by
Purchaser to include information as of such date as may be requested by Seller
and delivered to Seller prior to Closing Date with any and all changes marked so
that all such Schedules are true, accurate and complete in all respects.
Section 3.10 Basis for Representations and Warranties. Prior to
executing this Agreement, Purchaser and Purchasing Shareholders have made such
affirmative
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and thorough reviews, searches, inspections and inquiries relating to Purchaser,
and have consulted with such third parties, which a prudent person might deem
necessary or advisable in order to gain knowledge concerning the matters to
which the representations and warranties relate. Purchaser's and Purchasing
Shareholder's best knowledge and belief with respect to the subject matter of
any representation and warranty which is subject to the "best knowledge and
belief" shall be deemed to include matters which Purchaser or Purchasing
Shareholder should have known with respect to the subject matter of such
representations and warranties.
ARTICLE 4
ADDITIONAL AGREEMENTS
Section 4.1 Access to Records and Properties. Upon execution of this
Agreement and through the Closing Date, Purchaser and Seller, and their
respective accountants, counsel and other representatives, shall have full
access to all of the properties, assets, books, records, tax returns, leases,
contracts and agreements, and all information concerning the business and
properties of the other as each may request. Each party shall provide reasonable
assistance to the other in connection with the conduct of the due diligence
review of the business, properties and financial condition of the other.
Section 4.2 Bulk Sales Laws. Purchaser shall assume all trade payables
in connection with the acquisition of the Acquired Assets and shall waive
compliance by Seller with any bulk transfer or other advance notice provisions
to trade creditors as may be required under the applicable bulk transfer laws.
Section 4.3 Reorganization of Capital Structure and Change of Domicile.
Prior to the Closing Date, Purchaser shall take such corporate actions as
necessary, including the calling and holding of special board of directors' and
shareholders' meetings, to cause the following:
(a) Authorized Capital Stock. The authorized capital of the
corporation shall consist of 70,000,000 shares of common stock, $.001
par value, and 5,000,000 shares of "blank check" preferred stock, $.001
par value.
(b) Outstanding Stock, Warrants and Liabilities. At the
Closing and effective immediately prior to the Effective Time,
Purchaser Shareholder shall (i) cancel 2,720,385 (pre-reverse split) of
the outstanding common stock of Purchaser held by Purchaser Shareholder
such that the outstanding capital stock of Purchaser shall consist of
5,625,000 shares (pre-reverse split) prior to issuance of shares as
contemplated under this Agreement or pursuant to the exercise of any
outstanding warrants, (ii) cancel and cause to be cancelled a total of
4,356,954 outstanding warrants (pre-reverse split) of Purchaser such
that there shall be outstanding a total of 1,215,536 warrants
(pre-reverse split) outstanding at the conclusion of the Closing (or
such lesser amount resulting from the exercise of A Units or B Units
modified as contemplated under
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Section 4.3(c) below) and (iii) cancel approximately $13,000 of the
liabilities owed by Purchaser to Purchaser Shareholder. As a result of
the foregoing and such other actions as contemplated, the
capitalization, outstanding warrants and balance sheet of the Purchaser
shall be as set forth on EXHIBIT 4.3(e) hereto.
(c) Warrant Units. The outstanding warrants of the Purchaser
shall be organized into units designated as "A Units" and "B Units."
Each A Unit will consist of one each of its outstanding D Warrants, B
Warrants and C Warrants, each of which will be modified to be
exercisable as a Unit prior to June 15, 1998 at $1.00 per share each
($3.00 per A Unit). Each B Unit will consist of one each of its
outstanding A Warrants, B Warrants and C Warrants, each of which will
be modified to be exercisable as a unit prior to June 15, 1998 at $2.00
per share ($6.00 per B Unit). Any shares acquired by exercise of the A
Unit or B Unit warrants prior to June 15, 1998 shall not be subject to
adjustment under the "reverse split" as contemplated in Section 4.3(d)
below. After June 15, 1998, only the C Warrants and D Warrants shall be
valid (the A Warrants and B Warrants having expired on June 15, 1998)
and shall be exercisable solely under their original terms and subject
to the "reverse split" as contemplated under Section 4.3(d) below.
(d) Reverse Stock Split. The outstanding shares of common
stock of the corporation shall be "reverse split" on a 1 to 10 ratio
immediately following the Closing.
(e) Change of Domicile. The corporation shall be authorized at
a time after the Closing Date to merger into a newly-created wholly
owned subsidiary corporation organized under the laws of the State of
Nevada solely for the purpose of changing the domicile of Purchaser.
(f) Agreements. At the Closing, Purchaser shall (i) enter into
the Consulting Agreement with Purchaser Shareholder in form attached
hereto as EXHIBIT 4.3(f)(i) hereto and (ii) subject to the exercise of
at least 100,000 A Unit warrants (3 warrants per unit), loan Purchaser
Shareholder $50,000 upon delivery of the Promissory Note in form
attached hereto as EXHIBIT 4.3(f)(ii) and (iii) enter into the Lock-Up,
Anti-Dilution and Governance Agreement with Purchaser Shareholder and
Selling Shareholder in form as attached hereto as EXHIBIT 4.3(f)(iii).
(g) Advisory Fee. At the Closing, Purchaser shall issue
1,875,000 shares (prereverse split) of its common stock to Fox &
Company Investments, Inc. as compensation for its advisory services
rendered in connection with the transactions contemplated in this
Agreement.
ARTICLE 5
CONDITIONS PRECEDENT
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<PAGE> 19
Section 5.1 Conditions Precedent to the Obligations of Purchaser.
Notwithstanding any other provision of this Agreement, the obligation of
Purchaser to consummate the transactions hereunder shall be subject to the
satisfaction on the Closing Date of the following conditions precedent, unless
waived in writing by Purchaser:
(a) Representations, Warranties and Covenants. The
representations and warranties of Seller and Selling Shareholder
contained in Article 2 hereof shall be true and correct as of the date
when made and as of the Effective Time and the Closing Date, except to
the extent necessary to reflect the consummation of the transactions
provided for herein and except as otherwise contemplated by this
Agreement. Seller and Selling Shareholder shall have duly performed and
complied with all agreements, covenants and conditions required by this
Agreement to be performed or complied with by them prior to or on the
Closing Date. Seller and Selling Shareholder shall have delivered to
Purchaser a certificate dated the day of the Closing Date to the effect
set forth in this Section 5.1(a).
(b) Licenses, Permits, Approvals, Etc. Purchaser shall have
applied for and obtained all governmental, administrative and other
licenses, permits, approvals, consents and authorizations, which, in
the opinion of Purchaser, are required or desirable in connection with
Purchaser's purchase of the Acquired Assets, and its intended use and
operation of the Acquired Assets and the Business and which could not
be transferred directly from Seller to Purchaser, all of which shall be
in full force and effect and not subject to appeal. Additionally,
Seller shall have delivered to Purchaser all governmental,
administrative and other licenses, permits, approvals, consents and
authorizations which Seller is permitted by applicable law to transfer
directly to Purchaser.
(c) Due Diligence of Purchaser. Purchaser shall have conducted
the due diligence checks as contemplated under Section 1.4 above and
shall have affirmatively elected to proceed with the transactions
contemplated under this Agreement.
(d) Shareholder Consents. The shareholders of Purchaser shall
have consented to this Agreement and approved all corporate actions of
Purchaser as required under applicable law.
(e) Consents. All required consents, authorizations and
approvals of third parties to the consummation of the transactions
contemplated hereby, and the ownership and operation of the Acquired
Assets by Purchaser, shall have been obtained by Seller in form and
substance satisfactory to Purchaser.
14
<PAGE> 20
(f) No Adverse Changes. There shall have been no adverse
changes in the operations, conditions (financial or otherwise),
properties, assets, business or prospects of the Business. Seller shall
have delivered to Purchaser a certificate dated the day of the Closing
Date to the effect set forth in this Section 5.1(f).
(g) Legal Matters. There shall have been furnished to counsel
for Purchaser certified copies of such corporate records of Seller and
copies of such other documents as such counsel may reasonably have
requested. All legal matters and proceedings in connection with this
Agreement and the transactions contemplated hereby shall have been
approved by such counsel.
(h) Receipt of Closing Documents. Purchaser shall have
received all of the closing documents referred to in Section 6.1
hereof.
Section 5.2 Conditions Precedent to the Obligation of Seller.
Notwithstanding any other provision of this Agreement, the obligation of Seller
to consummate the transactions contemplated hereby shall be subject to the
satisfaction on the Closing Date of the following conditions precedent, unless
waived in writing by Seller:
(a) Representations, Warranties and Covenants. The
representations and warranties of Purchaser and Purchaser Shareholder
contained in Article 3 hereof shall be true and correct in all material
respects as of the date when made and as of the Closing Date, except to
the extent necessary to reflect the consummation of the transactions
provided for herein and except as otherwise contemplated by this
Agreement. Purchaser shall have duly performed and complied with all
agreements, covenants and conditions required by this Agreement to be
performed or complied with by Purchaser prior to or on the Closing
Date. Purchaser shall have delivered to Seller a certificate dated the
day of the Closing Date to the effect set forth in this Section 5.2(a).
(b) Due Diligence of Seller. Seller shall have conducted the
due diligence checks as contemplated under Section 1.4 above and shall
have affirmatively elected to proceed with the transactions
contemplated under this Agreement.
(c) No Adverse Changes. There shall have been no adverse
changes in the operations, conditions (financial or otherwise),
properties, assets, business or prospects of the Purchaser. Purchaser
shall have delivered to Seller a certificate dated the day of the
Closing Date to the effect set forth in this Section 5.2(c).
(d) Legal Matters. There shall have been furnished to counsel
for Seller certified copies of such corporate records of Seller and
copies of such other documents as such counsel may reasonably have
requested. All legal
15
<PAGE> 21
matters and proceedings in connection with this Agreement and the
transactions contemplated hereby shall have been approved by such
counsel.
(e) Officers and Directors. Purchaser Shareholder shall cause
Lanny R. Lang to tender his resignation as an officer and director of
the Purchaser and Michael S. Williams as an officer of the Purchaser.
At the conclusion of the Closing, the following persons shall be
members of the Board of Directors and the officers of the corporation:
Jeffrey I. Rassas Chief Executive Officer, Director
Stephen C. Herman President, Director
Thomas A. Cifelli Secretary
Michael S. Williams Director
(f) Exercise of Warrants. At least 166,667 A Units, or such
lesser amount as deemed sufficient by Seller, shall have been acquired
and exercised by such persons as Seller deems appropriate.
(g) Receipt of Closing Documents. Seller shall have received
all of the closing documents referred to in Section 6.2 hereof.
ARTICLE 6
CLOSING DOCUMENTS
Section 6.1 Documents to Be Delivered by Seller. Seller agrees to
deliver to Purchaser on the Closing Date the following:
(a) Bills of Sale, Assignments and Transfers. Good and
sufficient bills of sale, certificates of title, assignments and other
instruments of transfer with covenants of warranty and good title and
in form and substance satisfactory to Purchaser as shall be necessary
or appropriate to assign and transfer to and vest in Purchaser or their
nominee or nominees good and marketable title to all the Acquired
Assets free and clear of any and all liabilities, liens, claims,
restrictions on transfer or encumbrances.
(b) Certificates. A certificate of Seller dated the Closing
Date certifying as to the matters set forth in Sections 5.1(a) and
5.1(f) hereof.
(c) Good Standing Certificate for Seller. A certificate of
good standing of Seller issued by the Corporation Commission of the
State of Arizona, dated not more than 60 days prior to the Closing
Date.
(d) Consents to Assignments. All consents of third parties
which are necessary, in the opinion of Purchaser, to effectively
transfer the Acquired
16
<PAGE> 22
Assets in the manner provided for herein, free and clear of all liens,
claims and encumbrances and in form and substance satisfactory to such
counsel.
(e) Certificate of Secretarial Officer of Seller. Certificate
of the Secretary of Seller dated the Closing Date with respect to
corporate proceedings authorizing this Agreement and the transactions
contemplated thereunder.
(f) Other Documents. Such other documents and showings as
shall reasonably be requested by Purchaser.
Section 6.2 Documents to Be Delivered by Purchaser. Purchaser agrees to
deliver to Seller on the Closing Date the following:
(a) Certificate. A certificate of Purchaser dated the Closing
Date certifying as to matters set forth in Section 5.2(a) hereof.
(b) Good Standing Certificate for Purchaser. A certificate of
good standing of Purchaser issued by the appropriate authority of the
State of Colorado and a certificate of authority to transact business
in the State of Arizona issued by the Arizona Corporation Commission,
dated not more than 60 days prior to the Closing Date.
(c) Opinions. An opinion of counsel to Purchaser regarding the
valid issue of the shares exchanged for the Acquired Assets and the
tradability of the shares issued upon exercise of the outstanding
warrants of Purchaser.
(d) Certificate of Secretarial Officer of Purchaser.
Certificate of the Secretary of Purchaser dated the Closing Date with
respect to corporate proceedings authorizing this Agreement and the
transactions contemplated thereunder.
(e) Other Documents. Such other documents and showings as
shall reasonably be requested by Seller.
ARTICLE 7
POST-CLOSING
Seller, Selling Shareholder, Purchaser and Purchaser Shareholder each
agree that after the occurrence of the Closing, Purchaser shall (a) within 15
days from the Closing Date merge with and into its wholly-owned subsidiary
solely to domesticate Purchaser as a Nevada corporation as contemplated under
Section 4.3(e) above and (b) on or before September 30, 1998, take such actions
as are necessary to cause the common stock of Purchaser to be registered under
the Securities Exchange Act of 1934, as amended.
17
<PAGE> 23
ARTICLE 8
TERMINATION, AMENDMENTS, WAIVER AND ASSIGNMENT
Section 8.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date:
(a) By mutual consent of Purchaser and Seller;
(b) By Purchaser (i) if in good faith opinion of Purchaser,
upon written notice with reasonable rights to cure within a minimum of
five days from such notice, Seller has breached any of the
representations, warranties or covenants of this Agreement or (ii) if
any of the conditions precedent as set forth in Section 5.1 above have
not been performed by the Closing Date;
(c) By Seller (i) if in good faith opinion of Seller, upon
written notice with reasonable rights to cure within a minimum of five
days from such notice, Purchaser has breached any of the
representations, warranties or covenants of this Agreement or (ii) if
any of the conditions precedent as set forth in Section 5.2 above have
not been performed by the Closing Date; or
(d) By Seller in its discretion upon payment of $10,000 to
Purchaser.
Section 8.2 Effect of Termination. In the event of termination of this
Agreement pursuant to Section 8.1 hereof, there shall be no liability on the
part of either party to the other, provided, however, that (a) this Section 8.2
shall not preclude liability attaching to a party who has caused the termination
hereof by willful act or willful failure to act in violation of the terms and
provisions of this Agreement, and (b) termination of this Agreement shall not
terminate or affect the agreements of the parties hereto set forth in Sections
9.3 or 9.5 hereof.
Section 8.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
Section 8.4 Waiver. Any terms or provisions of this Agreement may be
waived in writing at any time by the party which is entitled to the benefits
thereof. The failure of any party at any time or times to require performance of
any provision hereof shall in no manner affect such party's right at a later
time to enforce the same. No waiver by any party of a condition or of the breach
of any term, covenant, representation or warranty contained in this Agreement,
whether by conduct or otherwise, in any one or more instances shall be deemed to
be or construed as a further or continuing waiver of any such condition or
breach or a waiver of any other condition or of the breach of any other term,
covenant, representation or warranty of this Agreement.
18
<PAGE> 24
Section 8.5 Assignment. This Agreement shall not be assigned by either
party without the prior written consent of the other party and any attempted
assignment without such written consent shall be null, void and without legal
effect.
ARTICLE 9
GENERAL PROVISIONS
Section 9.1 Survival of Representations and Warranties. All
representations and warranties herein made by Seller in Article 2 hereof or by
Purchaser under Article 3 hereof, shall be deemed to be remade at and survive
the Closing Date.
Section 9.2 Indemnification.
(a) Seller's Indemnification. Seller and Selling Shareholder
agree to indemnify and hold harmless Purchaser, from and against any
claim, loss, damage, cost or expense whatsoever, including attorneys'
fees and expenses of litigation, which Purchaser may incur or suffer by
reason, either directly or indirectly, of any of the following:
(i) The inaccuracy of any representation or warranty
made by Seller and Selling Shareholder hereunder;
(ii) The breach of any of the agreements or covenants
of Seller contained herein or in any certificate or other
document delivered by Seller to Purchaser in accordance with
the terms hereof
(iii) The failure of Seller to satisfy and discharge
all of the Excluded Obligations; and
(iv) All litigation, suits, claims, demands,
proceedings or matters relating, to the ownership of the
Acquired Assets or the operation of the Business on or prior
to the Closing Date. Purchaser may contest any claim or
liability which, if established, would be the subject of
indemnification hereunder, and in such event all legal fees,
disbursements and other costs and expenses of such contest
shall also be an item of indemnification by Seller and Selling
Shareholder hereunder.
(b) Purchaser's Indemnification. Purchaser and Purchaser
Shareholder agree to indemnify and hold harmless Seller from and
against, any claim, loss, damage, cost or expense whatsoever, including
attorneys' fees and expenses of litigation, which Seller may incur or
suffer by reason, either directly or indirectly of the following:
(i) The inaccuracy of any representation or warranty
made by Purchaser hereunder;
19
<PAGE> 25
(ii) The breach of any of the agreements or covenants
of Purchaser contained herein or in any certificate or other
document delivered by Purchaser to Seller in accordance with
the terms hereof, and
(iii) The failure of Purchaser to satisfy and
discharge the Assumed Obligations.
Seller may contest any claim or liability which, if established, would
be the subject of indemnification hereunder, and in such event all
legal fees, disbursements and other costs and expenses of such contest
shall also be an item of indemnification by Purchaser hereunder.
Section 9.3 Brokerage Commission. Except for the transfer of shares to
Fox & Company Investments, Inc. in accordance with Section 4.3(g) hereof, each
party hereto represents and warrants that it has not had any negotiations or
dealings with any advisors, brokers or finders, and that no obligation or
liability, contingent or otherwise, for advisory, brokerage or finder's
commissions or fees has been incurred in connection with the transactions
contemplated hereunder. The parties each further agree to indemnify and hold the
other harmless from and against the claims of any person, firm or corporation
claiming any brokerage commission, finder's fee or similar compensation based on
any alleged negotiations or dealings with the indemnity contrary to the
foregoing representations.
Section 9.4 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or mailed
by registered or certified mail (return receipt requested) to the parties at the
following addresses (or at such other address for a party as shall be specified
by such party by like notice):
If to Seller or Selling Shareholder:
Genras, Inc.
15895 North 77th Street
Scottsdale, Arizona 85260
Attn: Jeffrey I. Rassas
If to Purchaser:
Vinculum, Incorporated
2117 South 48th Street
Suite 105
Tempe, Arizona 85282
Attn: Michael S. Williams
20
<PAGE> 26
If to Purchaser Shareholder:
Aztore Holdings, Inc.
2117 South 48th Street
Suite 105
Tempe, Arizona 85282
Attn: Michael S. Williams
Written notice given by any other method shall be deemed effective only when
actually received by the party to whom given.
Section 9.5 Expenses. Except as set forth below, the parties shall bear
their own respective legal, accounting, title and other related expenses in
connection with this Agreement and the sale and purchase provided for hereunder.
In the event of termination of this Agreement under Section 8.1(a) or (b),
Seller agrees to reimburse Purchaser $10,000 for legal fees incurred in
connection with preparation of this Agreement and the transactions and corporate
actions contemplated hereunder.
Section 9.6 Legal Representation. The parties hereto acknowledge that
the law firm of Gallagher & Kennedy, P.A. has represented Purchaser in
connection with the negotiation and consummation of this Agreement and the
transactions contemplated herein. Each party has been advised to, and has to the
extent deemed necessary, seek independent legal and accounting advice in
connection with this Agreement and the transactions contemplated herein.
Section 9.7 Further Assurances. After the Closing Date, Seller, at its
own expense, shall do, execute, acknowledge and deliver all further acts,
conveyances, transfers, documents and assurances necessary or proper to vest in
Purchaser good title to the Acquired Assets, free and clear of any liens,
claims, charges or encumbrances whatsoever, and otherwise to effect such sale in
accordance with the provisions of this Agreement.
Section 9.8 Miscellaneous. This Agreement (a) constitutes the entire
agreement and supersedes all other prior agreements and undertakings, both
written and oral, between the parties, with respect to the subject matter
hereof; (b) is not intended to confer upon any other person any rights or
remedies hereunder; (c) shall be binding upon and inure to the benefit of
Purchaser and Seller, and their respective successors and assigns; and (d) shall
be governed in all respects, including validity, interpretation and effect, by
the laws of the State of Arizona as applied without regard to conflict of law
principles. This Agreement may be executed in counterparts which together shall
constitute a single agreement. Article headings and Section headings as
contained in this Agreement are inserted for convenience only and shall not
affect in any way the meaning or interpretation of this Agreement.
21
<PAGE> 27
Section 9.9 Gender. Where in this Agreement masculine pronouns are
used, such words shall be considered feminine or neuter pronouns where the
context indicates the propriety of such use.
Section 9.10 Illegality. In the event that any provision of this
Agreement shall be held to be invalid, illegal or unenforceable, such provision
shall be deemed modified to the least extent necessary to cause such provision
to be valid, legal or enforceable, and the validity, legality and enforceability
of the other provisions of the Agreement shall not be affected or impaired
thereby.
Section 9.11 Effect of Attachments. Each Schedule and Exhibit referred
to herein shall be deemed a part of this Agreement to the same extent as if each
such Schedule and Exhibit was set forth herein in its entirety.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, all as of
the date first written above.
SELLER:
GENRAS, INC.
By: /s/ Jeffrey I. Rassas
--------------------------------------------
Jeffrey I. Rassas, Chief Executive Officer
Attest:
/s/ Thomas A. Cifelli
- -----------------------------
Thomas A. Cifelli, Secretary
SELLING SHAREHOLDER:
/s/ Jeffrey I. Rassas
-----------------------------------------------
Jeffrey I. Rassas
22
<PAGE> 28
PURCHASER:
VINCULUM INCORPORATED
By: /s/ Michael S. Williams
------------------------------------------
Michael S. Williams, President
Attest:
/s/ Lanny R. Lang
- ----------------------------
Lanny R. Lang, Secretary
PURCHASER SHAREHOLDER:
AZTORE HOLDINGS, INC.
By: /s/ Michael S. Williams
------------------------------------------
Michael S. Williams, President
Attest:
/s/ Lanny R. Lang
- ----------------------------
Lanny R. Lang, Secretary
23
<PAGE> 1
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
VINCULUM INCORPORATED
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Nevada (particularly Chapter 78 of the Nevada Revised Statutes and the
acts mandatory thereof and supplemental thereto), hereby declares that:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is:
VINCULUM INCORPORATED
SECOND: The name of the person designated as the resident agent of the
Corporation and the street address of the resident agent where process may be
served upon the Corporation, which is also the mailing address of the resident
agent, is:
Capitol Document Services, Inc.
400 West King Street, Suite 302
Carson City, Nevada 89703
THIRD: The purpose for which the Corporation is organized is to engage
in any lawful act or activity for which corporations may be organized under
Chapter 78 of the Nevada Revised Statutes.
FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is seventy million (70,000,000) shares
of common stock with a par value of one-tenth of one cent ($.001) per share and
five million (5,000,000) shares of preferred stock with a par value of one-tenth
of one cent ($.001) per share, undesignated as to class, powers, designations,
preferences, limitations, restrictions or relative rights. The board of
directors of the Corporation is authorized to fix and determine any class or
series of preferred stock and the number of shares of each class or series and
to prescribe the powers, designations, preferences, limitations, restrictions
and relative rights of any class or series established, all by resolution of the
board of directors and in accordance with Section 78.1955 of the Nevada Revised
Statutes, as the same may be amended and supplemented.
FIFTH: The governing board of this Corporation shall be known as
directors, and the number of directors may from time to time be increased or
decreased in such manner as shall be provided in the Bylaws of this Corporation.
<PAGE> 2
SIXTH: The first board of directors of the Corporation shall consist of
one director whose name and street address are:
Lanny R. Lang
2117 South 48th Street
Suite 105
Phoenix, Arizona 85282
SEVENTH: The name and the mailing address of the incorporator is:
Thomas J. Morgan
2600 North Central Avenue
Phoenix, Arizona 85004
EIGHTH: The personal liability of the directors and officers of the
corporation is hereby eliminated to the fullest extent permitted by the
provisions of the Nevada Revised Statues and particularly Section 78.037.1
thereof, as the same may be amended and supplemented.
NINTH: The Corporation shall, to the fullest extent permitted by the
provisions of Section 78.751 of the Nevada Revised Statutes, as the same may be
amended and supplemented, indemnify any and all persons whom it shall have power
to indemnify under such section from and against any and all of the expenses,
liabilities or other matters referred to in or covered by such section, and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified persons may be entitled under any Bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in such person's official capacity and as to action in any other
capacity while holding such office, and shall continue as to persons who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such persons. The
Corporation shall pay or otherwise advance all expenses of officers and
directors incurred in defending a civil or criminal action, suit or proceeding
as such expenses are incurred and in advance of the final disposition of the
action, suit or proceeding, provided that the indemnified officer or director
undertakes to repay the amounts so advanced if a court of competent jurisdiction
ultimately determines that such officer or director is not entitled to be
indemnified by the Corporation. Nothing herein shall be construed to affect any
rights to advancement of expenses to which personnel other than officers or
directors of the Corporation may be entitled under any contract or otherwise by
law.
TENTH: From time to time any of the provisions of these Articles of
Incorporation may be amended, altered or repealed, and other provisions
authorized by the laws of the State of Nevada at the time in force may be added
or inserted in the manner and at the time prescribed by such laws, and all
rights at any time conferred upon the stockholders of the Corporation by these
Articles of Incorporation are granted subject to the provisions of this Article.
2
<PAGE> 3
THE UNDERSIGNED, being the incorporator hereinabove named, for the
purpose of forming a corporation pursuant to Chapter 78 of the Nevada Revised
Statutes, does make and file these Articles of Incorporation and hereby declares
and certifies that the facts herein stated are true.
DATED this 4th day of June, 1998.
/s/ Thomas J. Morgan
------------------------------
Thomas J. Morgan, Incorporator
STATE OF ARIZONA )
) ss.
COUNTY OF MARICOPA)
The foregoing instrument was acknowledged before me this 4th day of
June, 1998, by Thomas J. Morgan.
/s/ Jane MacPherson
-------------------------------
Notary Public
My Commission Expires: August 25, 2001
------------------------------- [Notarial Seal]
3
<PAGE> 1
Exhibit 3.2
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
VINCULUM INCORPORATED
The undersigned, a natural person, for the purpose of amending the
Articles of Incorporation of Vinculum Incorporated, under the provisions and
subject to the requirements of the laws of the State of Nevada (particularly
Chapter 78 of the Nevada Revised Statutes and the acts mandatory thereof and
supplemental thereto), hereby declares that:
1. The name of the corporation (hereinafter called the "Corporation") is:
VINCULUM INCORPORATED
2. The undersigned is the sole incorporator of the Corporation.
3. The original Articles of Incorporation of the Corporation were filed
with the Secretary of State of Nevada on June 9, 1998.
4. As of the date hereof, no shares of the capital stock of the
Corporation have been issued or are otherwise outstanding.
5. Section First of the Articles of Incorporation of the Corporation shall
be amended in its entirety as follows:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is:
CPU MICROMART, INC.
THE UNDERSIGNED, being the sole incorporator of the Corporation, does make
and file this Certificate of Amendment to the Articles of Incorporation and
hereby declares and certifies that the above statements are true and correct as
of the date hereof.
DATED this 18th day of June, 1998.
/s/ Thomas J. Morgan
------------------------------------
Thomas J. Morgan, Incorporator
<PAGE> 2
STATE OF ARIZONA )
) ss.
COUNTY OF MARICOPA )
The foregoing instrument was acknowledged before me this 18th day of
June, 1998, by Thomas J. Morgan.
/s/ Jane MacPherson
------------------------------------
Notary Public
My Commission Expires: August 25, 2001 [Notarial Seal]
2
<PAGE> 1
Exhibit 3.3
SECOND
CERTIFICATE OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
CPU MICROMART, INC.
THE UNDERSIGNED, for the purpose of amending the Articles of Incorporation
of CPU MicroMart, Inc. ("Corporation") under the provisions and subject to the
requirements of the laws of the State of Nevada (particularly Chapter 78 of the
Nevada Revised Statutes and the acts mandatory thereof and supplemental
thereto), hereby declare that:
1. Section First of the Articles of Incorporation of the Corporation
has been amended in its entirety as follows:
FIRST: The name of the corporation (hereinafter called the
"Corporation") is:
Ebiz Enterprises, Inc.
2. This amendment was adopted by consent of the holders of 4,621,981
shares of the outstanding stock of the Corporation which amount constituted more
than a majority of the outstanding shares of the Corporation entitled to vote
thereon.
THE UNDERSIGNED, being the President and Secretary of the Corporation,
hereby make and file this Second Certificate of Amendment to the Articles of
Incorporation and hereby declare and certify that the above statements are true
and correct as of the date hereof.
DATED this 3rd day of April, 1999.
/s/ Stephen C. Herman
--------------------------------------
Stephen C. Herman, President
Attest:
/s/ Jeffrey I. Rassas
- ----------------------------------
Jeffrey I. Rassas, Secretary
<PAGE> 2
STATE OF ARIZONA )
) ss.
COUNTY OF MARICOPA )
The foregoing instrument was executed before me this 3rd day of April,
1999, by Stephen C. Herman as President of CPU MicroMart, Inc. who acknowledged
that this act was done on behalf of such corporation.
/s/ Kathleen J. Sisk
-------------------------------------------
Notary Public
My Commission Expires: April 17, 2001 [Notarial Seal]
-----------------------
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Exhibit 3.4
CERTIFICATE OF DESIGNATION
1. Name. The name of the corporation is CPU Micro Mart, Inc. (the
"Corporation").
2. Text of Resolution. The Board of Directors (the "Board") of the
Corporation duly adopted a resolution in the form attached hereto as Exhibit A
and incorporated herein by this reference, establishing and designating the
Series A 10% Convertible Preferred Stock of the Corporation, and fixing and
determining the relative preferences, privileges and voting powers of the shares
of such series and the restrictions and qualifications thereof, all as set forth
in such resolution.
3. Statement and Date of Adoption. The aforementioned resolution was
duly adopted by the Board effective as of February 1, 1999.
IN WITNESS WHEREOF, the undersigned hereby certify this 2nd day of March,
1999 that the foregoing statement has been duly adopted by and on behalf of the
Corporation as set forth above.
/s/ Stephen C. Herman
---------------------------------
Stephen C. Herman, President
ATTEST:
/s/ Jeffrey I. Rassas
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Jeffrey I. Rassas, Secretary
ACKNOWLEDGEMENT
STATE OF ARIZONA )
)
COUNTY OF MARICOPA )
On this 2nd day of March, 1999, before me the undersigned Notary Public
personally appeared Stephen C. Herman, known personally to me to be the
President of CPU Micro Mart, Inc., and acknowledged to me the foregoing
instrument was executed for the purposes therein contained, on behalf of the
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
/s/ Shane R. Vick
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Notary Public
November 15, 2001
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My Commission Expires
(Notarial Seal)
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EXHIBIT A
RESOLUTION OF DESIGNATION
OF
SERIES A 10% CONVERTIBLE PREFERRED STOCK
OF
CPU MICROMART, INC.
RESOLVED, that pursuant to the authority granted to the Board and in
accordance with the provisions of the Articles of Incorporation of the Company,
the Board hereby creates a series of preferred stock, designated as Series A 10%
Convertible Preferred Stock, states the number thereof to be 60,000 Shares and
fixes the relative rights, preferences and limitations of such Shares as
follows:
Section 1. Definitions. For purposes of this Resolution, the following
definitions shall apply:
"Accrual Date" shall mean each January 1, April 1, July 1 and October 1
commencing on April 1, 1999 for so long as any Shares remain outstanding.
"Act" shall mean the Securities Act of 1933, as amended.
"Board" shall mean the Board of Directors of the Company.
"Commission" shall mean the United States Securities and Exchange
Commission.
"Common Stock" shall mean the common stock, $.001 par value, of the
Company.
"Company" shall mean CPU MicroMart, Inc. or any successor thereto.
"Conversion Date" shall mean the date on which the Shares are converted to
Common Stock whereby the rights of the Record Holders will cease with respect to
the Shares and certificates for shares of Common Stock will be issued to such
Record Holders who will become the holders of record of the shares of Common
Stock represented thereby.
"Conversion Price" shall initially mean $6.00 per Share and shall be
adjusted from time to time pursuant to Section 5 hereof.
"Conversion Ratio" shall mean the ratio as determined in Section 4(c)
hereof.
"Cumulative Dividend" shall mean a dividend with respect to the Shares
accruing from issuance at the rate of 10% per annum of the Preference Amount
($10 per annum per share).
"Distribution" shall mean the transfer of cash or property without
consideration, by way of dividend or otherwise (except a dividend in shares of
the capital stock of the Company), or the purchase or redemption of shares of
capital stock of the Company for cash or property, excluding the repurchase of
any shares from a terminated employee or consultant of the Company within the
terms of any agreement providing for such repurchase.
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"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Liquidation Event" shall mean any liquidation, dissolution or winding
up of the Company.
"Offering" shall mean the offering of the Shares as described in that
certain Private Placement Memorandum dated February 1, 1999.
"Person" shall mean an individual, a partnership, a joint venture, a
limited liability company, a corporation, a trust, an unincorporated
organization or government or any department or any agency thereof.
"Preference Amount" shall mean $100.00 per Share.
"Registration" shall mean a registration of certain Common Stock under the
terms of Section 7.
"Qualified Conversion Price" shall mean attainment at any time after
issuance of the Shares of a closing bid price for the Company's Common Stock in
an established public market of an amount equal to or in excess of 225% of the
Conversion Price per share for 20 out of 30 consecutive trading days.
"Qualified Redemption Price" shall mean attainment at any time after
issuance of the Shares of a closing bid price for the Company's Common Stock in
an established public market of an amount equal to or in excess of 150% of the
Conversion Price for 20 out of 30 consecutive trading days.
"Record Holder" shall mean any Person who has legal title to the Series A
Preferred Stock as set forth by the stock ownership records of the Company as of
the particular record date.
"Registrable Securities" shall mean the Common Stock issuable on
conversion of the Series A Preferred Stock.
"Registration Expenses" shall mean all registration and filing fees, all
fees and expenses of compliance with securities or blue sky laws, printing
expenses, messenger and delivery expenses, internal expenses (including, without
limitation, all salaries and expenses of the officers and employees of the
Company performing legal or accounting duties), and reasonable fees and
disbursement of counsel for the Company and its independent certified public
accountants, securities acts liability insurance (if the Company elects to
obtain such insurance), the reasonable fees and expenses of any special experts
retained by the Company in connection with such registration, reasonable fees
and expenses of any other persons retained by the Company and the fees and
expenses associated with any required filing with the National Association of
Securities Dealers, Inc.
"Registration Statement" shall mean any registration statement filed with
the Commission under the Act.
"Series A Preferred Stock" shall mean all Series A 10% Convertible
Preferred Stock of the
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Company, the rights and privileges of which are set forth in this Resolution.
"Share" shall mean a share of Series A Preferred Stock.
"Shareholder" shall mean any Person who has legal title to the Common
Stock, Series A Preferred Stock or any other series of preferred stock of the
Company designated with the right to receive liquidation proceeds of the Company
as set forth by the stock ownership records of the Company as of the particular
record date.
Section 2. Dividends.
(a) General Obligation. When and as declared by the Board, the Company
shall pay Cumulative Dividends to the Record Holders. Except as otherwise
provided herein, Cumulative Dividends on each Share will accrue on each Accrual
Date whether or not such dividends have been declared or whether or not there
are profits, surplus or other funds of the Company legally available for the
payment of such dividends, provided, however, dividends will be paid only at
such time as both (i) funds of the Company are legally available for payment
thereof and (ii) the Board declares and authorizes such payment.
(b) Distribution of Partial Dividend Payments. If at any time the Company
pays less than the total amount of Cumulative Dividends then accrued, such
payment will be distributed pro rata among the Record Holders.
(c) Priority. The Series A Preferred Stock is senior to the Common Stock
in right of priority to Distributions paid as dividends or otherwise. No
dividends or other Distribution with respect to the Common Stock or any other
capital stock of the Company that is subordinate to the Series A Preferred Stock
shall be declared or paid prior to the declaration and payment in full of all
Cumulative Dividends accrued as of the last preceding Accrual Date. The Board
shall not designate or establish a series of preferred stock that is superior to
the Series A Preferred Stock with respect to the right to receive Distributions.
(d) Common Stock Dividends. The Board may in its discretion pay Cumulative
Dividends in Common Stock of the Company. The value of such Common Stock for
purposes of satisfying the Cumulative Dividends as accrued shall equal the
five-day average closing bid price of such Common Stock on an established market
for the five trading days immediately preceding the applicable Accrual Date.
Section 3. Liquidation. The Series A Preferred Stock is senior to the
Common Stock in right of priority to Distributions paid in liquidation or
otherwise. Upon occurrence of a Liquidation Event, the Record Holders will be
entitled to be paid, before any payment or other Distribution is made upon the
Common Stock or any other capital stock of the Company that is subordinate to
the Series A Preferred Stock, an amount in cash equal to all unpaid Cumulative
Dividends as of the last preceding Accrual Date and, upon payment of such
Cumulative Dividend in full, the Preference Amount. The Board shall not
designate or establish a series of preferred stock that is superior to the
Series A Preferred Stock with respect to Distributions in liquidation. If upon
any Liquidation Event the assets of the Company to be distributed among the
Record Holders are insufficient to permit payment in full to each such holder,
then the entire assets to be distributed will be distributed ratably among the
Record Holders. The Company will mail written notices of a Liquidation Event not
less than 20 days prior to the payment date stated therein to each Record
Holder.
Section 4. Conversion and Redemption.
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(a) Voluntary Conversion. Record Holders of Shares shall have the right to
convert the Shares at any time into shares of Common Stock in accordance with
the Conversion Ratio in Section 4(c) hereof.
(b) Automatic Conversion. Immediately upon attainment of the Qualified
Conversion Price, all of the Shares shall be converted into fully paid,
nonassessable shares of Common Stock in accordance with the Conversion Ratio set
forth in Section 4(c) hereof.
(c) Conversion Ratio. Upon conversion of the Series A Preferred Stock,
Record Holders shall receive the number of shares of Common Stock equal the
number of Shares multiplied by the Conversion Ratio. The Conversion Ratio shall
equal (i) the Preference Amount (ii) divided by the Conversion Price, as the
Conversion Price shall be adjusted from time to time pursuant to Section 5
hereof.
(d) Mechanics of Conversion. Each Record Holder who converts Shares into
Common Stock shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or of any transfer agent for the Series A
Preferred Stock and shall give written verification to the Company of the number
of Shares of Series A Preferred Stock being converted. Thereupon, the Company
shall promptly issue and deliver at its office to such Record Holder a
certificate or certificates for the number of shares of Common Stock to which
such Record Holder is entitled. Subject to and in accordance with the provisions
of Section 2, the Company shall declare and pay undeclared Cumulative Dividends
on the Shares of Series A Preferred Stock being converted in cash or by the
issuance of additional shares of Common Stock within 30 days after the
Conversion Date or as soon thereafter as possible. Such conversion and issuance
of additional shares of Common Stock, if applicable, shall be deemed to have
been made immediately prior to the close of business on the Conversion Date, and
the Person entitled to receive the shares of Common Stock shall for all purposes
be the Record Holder as of such date.
(e) Fractional Shares. No fractional shares of Common Stock shall be
issued upon the conversion of Series A Preferred Stock and the number of shares
of Common Stock to be issued to any Record Holder shall be rounded down to the
nearest whole number. The Company shall pay cash in lieu of fractional shares in
an amount equal to the fractional share amount multiplied by the closing bid
price for the Company's Common Stock in an established public market as of the
trading day immediately preceding the date of conversion.
(f) Redemption. Upon attainment of the Qualified Redemption Price, the
Company may, upon 30 days notice to the Record Holders, redeem all of the
outstanding Shares at the Preference Amount plus any accrued but unpaid
Cumulative Dividends. Upon receipt of notice of redemption of the Shares by the
Company, the Record Holder may convert the Shares as provided in Section 4(a)
above at any time prior to five business days preceding the date established for
redemption.
(g) Mechanics of Redemption. Each Record Holder whose Shares are redeemed
shall surrender the certificate or certificates evidencing such Shares at the
office of the Company or of any transfer agent for the Series A Preferred Stock
for cancellation and thereupon shall receive all amounts due the Record Holder
under the provisions of Section 4(f) above. The redemption shall be deemed to
have been made on the close of business on the applicable redemption date, the
Shares shall be cancelled on such date and the rights of a Record Holder with
respect to the Shares shall cease upon such date regardless of whether the
certificates representing the Shares are delivered and cancelled provided the
Company has deposited, in a segregated account or with any transfer agent for
the Series A Preferred Stock, cash in an amount sufficient to pay all sums due
the Record Holder with respect to the redemption of the Shares.
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Section 5. Antidilution Adjustment. In the event the Company at any time
or from time to time after the issuance of any Shares shall declare or pay any
dividend on the Common Stock payable in Common Stock (except dividends payable
on the Series A Preferred Stock), effect a split, subdivision or combination of
the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in Common Stock) or take any action to effect, directly or
indirectly, a similar adjustment to the capital structure of the Company, then
and in any such event, the Conversion Price shall be adjusted by multiplying the
Conversion Price prior to the adjustment by the number of shares of Common Stock
outstanding immediately prior to the effective time of such event and dividing
the result by the number of shares of Common Stock outstanding immediately after
the effective time of such event, effective in the case of such dividend,
immediately after the close of business on the record date for the determination
of holders of Common Stock entitled to receive such dividend, or in the case of
a subdivision or combination, at the close of business immediately prior to the
date upon which such corporate action becomes effective.
Section 6. Restrictions and Limitations. So long as any Shares remain
outstanding, the Company shall not, and shall not permit any successor by merger
or consolidation of the Company, without the approval by vote or written consent
of the Record Holders holding a majority of the outstanding Shares to:
(a) (i) sell, lease or assign substantially all of the Company's assets,
(ii) enter into any agreement or participate in any merger or consolidation of
the Company, (iii) approve any reclassification or recapitalization of the
capital stock of the Company, or (iv) approve any Liquidation Event unless the
Record Holders receive value equal to 200% of the preference Amount per Share
plus any accrued but unpaid Cumulative Dividend;
(b) issue any shares of capital stock superior to or on parity with the
Shares or to preference or distribution of dividends of liquidation proceeds;
(c) declare or pay dividends or make any other Distribution on the Common
Stock (other than a dividend payable in shares of Common Stocks) to the holder
of Common Stock; or
(d) change the authorized capital stock of the Company.
Nothing herein shall be construed as limiting the Company's ability to make any
subdivision or combination of the outstanding Common Stock or approving any
merger, consolidation, asset sale or stock sale.
Section 7. Registration of Shares.
7.1 Registration. The Company shall use its best efforts to cause to be
filed with the Commission no later than 60 days after the final closing of the
Offering a Registration Statement on appropriate form registering for resale the
shares of Common Stock into which the Series A Preferred Stock is convertible.
If the Company fails to file such Registration Statement within the 90 days from
the final closing of the Offering, the number of shares of Common Stock that the
Record Holders shall receive upon conversion shall be increased by 10% and if
the Company fails to file such Registration Statement within 120 days of the
final closing of the Offering, the number of shares of Common Stock that the
Record Holders shall receive upon conversion shall be increased by 15%. The
Company shall use its best efforts to have such registration statement declared
effective by the Commission as soon as practicable after such filing. The
Company agrees to use its best efforts to keep the Registration Statement
continuously effective (and to take any and all other actions reasonably
necessary in order to permit public resale of the Common Stock covered by such
Registration Statement in accordance with
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this Agreement) for a period of at least two years after the Registration
Statement is declared effective. The Company further agrees, if necessary, to
supplement or amend the Registration Statement, if required by the rules,
regulations or instructions applicable to the registration form used by the
Company for such Registration Statement or by the Act or by any other rules and
regulations thereunder for registration, and the Company agrees to furnish
notice thereof to the Record Holders of the Shares.
7.2 Registration Expenses.
(a) The Company will bear all reasonable Registration Expenses incident to
the performance of or compliance with its obligations under this Agreement.
Notwithstanding the foregoing, the Company is not required to pay any fees or
expenses of Record Holders, underwriters, brokers, the Record Holder's or any
underwriter's counsel (other than blue sky counsel) or accountant or any other
advisers, including specifically, without limitation, any transfer taxes,
underwriting, brokerage and other discounts and commissions and finders' and
similar fees payable in connection with the conversion of the Shares or sale of
the Common Stock issued upon conversion of the Shares.
(b) Each Record Holder shall pay all costs and expenses incurred by such
Record Holder, including all transfer taxes, underwriting, brokerage and other
discounts and commissions and finders' and similar fees payable in connection
with the conversion of the Shares or sale of the Common Stock issued upon
conversion of the Shares. To the extent that any Registration Expenses properly
payable by the Company are incurred, assumed or paid by any Record Holder or any
placement or sales agent therefor or underwriter thereof with the Company's
prior written consent, the Company shall reimburse such person for the full
amount of the Registration Expenses so incurred, assumed or paid within a
reasonable time after receipt of a written request therefor. Any Registration
Expenses submitted by any Record Holder, placement or sales agent or underwriter
or on behalf of any such person for payment by the Company shall be itemized in
detail and contain clear and accurate receipts of all expenditures made by such
parties.
7.3 Indemnification; Contribution.
(a) The Company agrees to indemnify and hold harmless each Record Holder
and each "person," if any, that controls such Record Holder within the meaning
of Section 15 of the Act for, from and against any and all loss, liability,
claim, damage and expense (including attorneys' fees) to the extent resulting
from any untrue statement or alleged untrue statement of a material fact
contained in any registration statement pursuant to which the Common Stock
issued upon conversion of the Shares were registered under the Act (or any
amendment thereto), including all documents incorporated therein by reference,
or from the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statement therein not misleading
or arising out of any untrue statement or alleged untrue statement of a material
fact contained in any prospectus (or any amendment or supplement thereto),
including all documents incorporated therein by reference, or the omission or
alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except insofar as any such misstatement or omission or
alleged misstatement or omission is made therein in reliance upon and in
conformity with information furnished to the Company by such Record Holder in
writing expressly for use in a registration statement (or any amendment thereto)
or any prospectus (or any amendment or supplement thereto) relating to such
Common Stock. As used in this Section 7.3(a), the term "Record Holder" shall
include its officers, directors and agents.
(b) Each Record Holder agrees to indemnify and hold harmless the Company,
its directors and officers and each "person," if any, who controls the Company
within the meaning of Section 15 of the Act to the same extent as the foregoing
indemnity from the Company to such Record
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Holder, but only with respect to information furnished in writing by such Record
Holder or on such Record Holder's behalf expressly for use in any registration
statement (or any amendment thereto) or any prospectus (or any amendment or
supplement thereto) relating to the Common Stock issued upon conversion of the
Shares, or any amendment or supplement thereto; provided that the obligations or
any Record Holder to indemnify the Company and the other persons referred to
above shall be limited to the proceeds received by such Record Holder from the
sale of such Common Stock pursuant to such registration statement.
(c) If any action or proceeding (including any governmental investigation)
shall be brought or asserted against any person entitled to indemnification
hereunder, the indemnified party shall give prompt written notice to the
indemnifying party, and the indemnifying party shall assume the defense thereof,
including the employment of counsel reasonably satisfactory to the indemnified
party, and shall assume the payment of all expenses in connection with such
defense. The indemnified party or any controlling person of such indemnified
party shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of the indemnified party or such controlling person
unless (i) the indemnifying party shall have agreed to pay such fees and
expenses; or (ii) the indemnifying party shall have failed to assume the defense
for such action or proceeding and to employ counsel reasonably satisfactory to
the indemnified party in any such action or proceeding; or (iii) the named
parties to any such action or proceeding (including any impleaded parties)
include both the indemnified party or such controlling person and the
indemnifying party, and such indemnified party or such controlling person shall
have been advised by counsel that counsel employed by the indemnifying party
would, under applicable professional standards, have a conflict in representing
both the indemnifying party and the indemnified party or such controlling
person, in which case, if such indemnified person or such controlling person
notifies the indemnifying party in writing that it elects to employ separate
counsel at the expense of the indemnifying party, the indemnifying party shall
not have the right to assume the defense of such action or proceeding of
separate but substantially similar or related actions or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, and
shall not be liable for the reasonable fees and expenses of more than one
separate firm of attorneys (together with appropriate local counsel) at any time
for such indemnified party and such controlling persons, which time shall be
designated, if the Record Holders (or their controlling persons) are the
indemnified parties, in writing by the Record Holders of a majority of the
Shares owned by Record Holders who are entitled to such indemnity in connection
with such action or proceeding and if the Company is the indemnified party, by
the Company. No party shall be liable for any settlement of any such action or
proceeding effected without its written consent (which consent shall not be
unreasonably withheld), but if settled with its written consent, or if there is
a final judgment for the plaintiff in any such action or proceeding, the
indemnifying party agrees to indemnify and hold harmless such indemnified party
and such controlling person from and against any loss or liability (to the
extent stated above) by reason of such settlement or judgment.
(d) (i) If the indemnification provided for in this Section 7.3 is
unavailable to an indemnified party hereunder in respect of any losses, claims,
damages, liabilities or expenses, then each such indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of such losses, claims, damages,
liabilities and expenses in such proportion as is appropriate to reflect the
relative fault of the indemnified party and the indemnifying party in connection
with the statements or omissions which resulted in such losses, claims, damages,
liabilities or expenses, as well as any other relevant equitable considerations.
The relative fault of the indemnified party and the indemnifying party shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by such party, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
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(ii) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 7.3(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, expenses, liabilities, or judgements referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7.3(d), no
Record Holder shall be required to contribute any amount in excess of the amount
by which the total price at which the Common Stock received upon conversion of
the Shares of such selling Record Holder were offered to the public pursuant to
such registration statement exceeds the amount of any damages which such selling
Record Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person found guilty
by a court of competent jurisdiction of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not found guilty by a court of competent jurisdiction of such
fraudulent misrepresentation.
(e) Neither the Company nor the Record Holders shall have any obligation
under this Agreement (other than as set forth in this Section 7.3) to provide
the other with indemnification or contribution in respect of any losses, claims,
damages, liabilities or expenses referred to in this Section 7.3; provided,
however, that the provisions of this Section 7.3 shall not relieve an
indemnifying party from liability which it may have to an indemnified party
other than with respect to the matters referred to in this Section 7.3.
7.4 Commission Filings. The Company covenants that it will file the
reports required to be filed by it under the Exchange Act and the rules and
regulations adopted by the Commission thereunder in a timely manner as
determined by applicable rules and interpretations under the Exchange Act. Upon
the written request of any Record Holder of Shares, the Company will deliver to
such Record Holder a written statement as to whether it has complied with such
requirements.
Section 8. Voting Rights. Each Share will vote with the shares of Common
Stock and any other series of preferred stock designated with such right as a
single class on all matters except (a) with respect to all matters specified
herein or which affect rights, preferences or priority of the Series A Preferred
Stock or (b) as otherwise required by Nevada law. Upon any vote with the
outstanding shares of Common Stock as a single class, each Share shall have the
number of votes equal to (a) the Preference Amount (b) divided by the Conversion
Price then in effect.
Section 9. Notices. Record Holders shall receive all notices, reports and
other information submitted to Shareholders. All notices, reports or other
information referred to herein, except as otherwise expressly provided, will be
made by mail, postage prepaid, and will be deemed to have been given when mailed
to the last known address of the Record Holder as set forth on the stock ledger
of the Company.
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Exhibit 3.5
BYLAWS
OF
VINCULUM INCORPORATED
ARTICLE I
OFFICES AND CORPORATE SEAL
I.1 Offices. The registered office of the Corporation in the State of
Nevada shall be located at 400 West King Street, Suite 302, Carson City, Nevada
89703. The Corporation may conduct business and may have such other offices,
either within or without the state of incorporation, as the Board of Directors
may designate or as the business of the Corporation may from time to time
require.
I.2 Corporate Seal. A corporate seal is not required on any instrument
executed for the Corporation. If a corporate seal is used, it shall be either a
circle having on its circumference "Vinculum Incorporated," and in the center
"Incorporated 1997 Nevada," or a circle having on its circumference the words
"Corporate Seal."
ARTICLE II
SHAREHOLDERS
II.1 Annual Meeting. The annual meeting of the shareholders shall be
held at such time and on such day as shall be designated by the Board of
Directors, for the purpose of electing directors and for the transaction of such
other business as may properly come before the meeting. At the annual meeting,
any business may be transacted and any corporate action may be taken, whether
stated in the notice of meeting or not, except as otherwise expressly provided
by statute or the Articles of Incorporation.
II.2 Special Meetings. The Chairman of the Board may and the Chairman
of the Board or the Secretary shall, on written request of two members of the
Board of Directors or of shareholders owning not less than 50 percent of the
outstanding voting shares of the Corporation, call special meetings of the
shareholders, for any purpose or purposes unless otherwise prescribed by
statute. The written request and the notice of the special meeting shall state
the purposes of the meeting and the business transacted at the meeting shall be
limited to the purposes stated in the notice.
II.3 Place of Meeting. The Board of Directors and the Chairman of the
Board or the Secretary shall fix the time and place of all meetings of
shareholders.
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II.4 Notice of Meeting. Written notice stating the place, day and hour
of the meeting and, in case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than 10 nor more than
60 days before the date of the meeting either personally, by facsimile or by
mail to each shareholder of record entitled to vote at such meeting. If mailed,
such notice shall be deemed to be delivered when deposited in the United States
mail, addressed to the shareholder at this address as it appears on the stock
transfer books of the Corporation, with postage thereon prepaid.
II.5 Fixing Date for Determination of Shareholders of Record. To
determine the shareholders entitled to notice of or to vote at any meeting of
shareholders or any adjournment thereof, or entitled to express written consent
to corporate action in writing without a meeting, 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 shares
or for the purpose of any other lawful action, the Board of Directors of the
Corporation may fix, in advance, a record date which shall not be more than 60
days nor less than 10 days before the date of such meeting, nor more than 60
days nor less than 10 days prior to any other action.
II.6 Shareholder List. The officer or agent having charge of the stock
transfer books shall prepare, at least ten days before each meeting of
shareholders, a complete list of the shareholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order with the
address of and the number of shares held by each shareholder of record.
II.7 Quorum. A majority of the outstanding shares of the Corporation
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. All shares represented and entitled to vote on any
single subject matter which may be brought before the meeting shall be counted
for the purposes of a quorum. Only those shares entitled to vote on a particular
subject matter shall be counted for the purposes of voting on that subject
matter. Business may be conducted once a quorum is present and may continue
until adjournment of the meeting notwithstanding the withdrawal or temporary
absence of sufficient shares to reduce the number present to less than a quorum.
Unless otherwise required by law, the affirmative vote of the majority of shares
represented at the meeting and entitled to vote on a subject matter shall
constitute the act of the shareholders; provided, however, that if the shares
then represented are less than required to constitute a quorum, the affirmative
vote must be such as would constitute a majority if a quorum were present and,
provided further, that the affirmative vote of the majority of the shares then
present is sufficient in all cases to adjourn the meeting.
II.8 Proxies. At all meetings of shareholders, a shareholder may vote
in person or by proxy executed in writing by the shareholder or by his duly
authorized attorney-in-fact. No proxy shall be valid after six months from the
date of its execution, unless otherwise provided in the proxy, but in no event
shall the proxy be valid for greater than seven years. Subject to these
restrictions, any proxy properly created is not revoked and continues in full
force and effect until another instrument or transmission revoking it or a
properly created proxy bearing a later date is
2
<PAGE> 3
filed with or transmitted to the Secretary.
II.9 Voting Rights. Unless otherwise provided in the Articles of
Incorporation or by the Nevada Revised Statutes, each outstanding share of
capital stock shall be entitled to one vote on each matter submitted to a vote
at a meeting of shareholders. Directors shall be elected by a plurality of the
votes cast at the election and cumulative voting shall not be permitted. The
candidates receiving the highest number of votes up to the number of directors
to be elected shall be elected.
II.10 Voting of Shares. The following additional provisions shall apply
to the voting of shares:
(a) Shares of its own stock belonging to the Corporation or to
another corporation, if a majority of the shares entitled to vote in the
elections of directors of such other corporation is held by this Corporation,
shall neither be entitled to vote nor counted for quorum purposes. Nothing in
this paragraph shall be construed as limiting the right of this Corporation to
vote its own stock held by it in a fiduciary capacity.
(b) A shareholder may vote either in person or by proxy executed in
writing by the shareholder or by his duly authorized attorney-in-fact. In the
event any instrument granting a proxy shall designate two or more persons to act
as proxy, the majority of such persons present at the meeting, or if only one
should be present then that one, shall have and may exercise all the powers
conferred by such instrument upon all the persons so designated, unless such
instrument shall otherwise provide. No proxy shall be valid after 11 months from
the date of its execution, unless otherwise provided in the proxy. 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 at law to support
an irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the share itself or an
interest in the Corporation generally. A proxy is not revoked by the death or
incapacity of the maker unless, before the vote is counted or quorum is
determined, written notice of the death or incapacity is given to the
Corporation. A proxy may be revoked by an instrument expressly revoking it, a
duly executed proxy bearing a later date, or by the attendance of the person
executing the proxy at the meeting and his voting of his shares personally.
(c) Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the bylaws of such
other corporation may prescribe or, in the absence of such provision, as the
Board of Directors of such other corporation may determine. The Secretary of the
Corporation shall have the authority to require that such documents be filed
with the Secretary of the Corporation as the Secretary shall reasonably require
in order to verify the authority and power of any such officer, agent or proxy
to vote the shares of the Corporation held by any such other corporation.
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<PAGE> 4
(d) Shares held by an administrator, executor, guardian, conservator
or personal representative may be voted by him, either in person or by proxy,
without a transfer of such shares into his name. Shares standing in the name of
a trustee, other than a trustee in bankruptcy, may be voted by him, either in
person or by proxy, but no such trustee shall be entitled to vote shares held by
him without a transfer of such shares into his name. Shares standing in the name
of a receiver, trustee in bankruptcy, or assignee for the benefit of creditors
may be voted by such representative, either in person or by proxy. Shares held
by or under the control of such a receiver or trustee may be voted by such
receiver or trustee, either in person or by proxy, without the transfer thereof
into his name if authority so to do be contained in an appropriate order of the
court by which such receiver or trustee was appointed. The Secretary of the
Corporation shall have the authority to require that such documents be filed
with the Secretary of the Corporation as the Secretary shall reasonably require
in order to verify the authority and power of such representative or other
fiduciary to vote the shares of the Corporation registered in the name of such
other person.
(e) A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee
or unless the pledgee is specifically empowered by such shareholder to vote the
shareholder's shares.
(f) If shares stand in names of two or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety of tenants by community property or otherwise, or if two or more
persons have the same fiduciary relationship respecting the same shares, unless
the Corporation is given written notice to the contrary and is furnished with a
copy of the instrument or order appointing them or creating the relationship
wherein it is so provided, their acts with respect to voting shall have the
following effect:
(i) If only one votes, his acts bind.
(ii) If more than one votes, the act of the majority so voting
binds all.
(iii) If more than one votes, but the vote is evenly split on any
particular matter, each faction may vote the shares in question proportionally.
II.11 Nominations of Directors. Nomination for election to the Board of
Directors of the Corporation at a meeting of shareholders may be made by the
Board of Directors or on behalf of the Board by a nominating committee appointed
by the Board, or by any shareholder of the Corporation entitled to vote for the
election of directors at such meeting. Such nominations, other than those made
by or on behalf of the Board, shall be made by notice in writing delivered or
mailed by United States mail, first class postage prepaid, to the Secretary of
the Corporation, and received by him not less than 30 days nor more than 60 days
prior to any meeting of shareholders called for the election of directors;
provided, however, that if less than 35 days' notice of the meeting is given to
shareholders, such nomination shall have been mailed or delivered to the
Secretary of the Corporation not later than the close of business on the seventh
day following the day on which the
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<PAGE> 5
notice of meeting was mailed. The foregoing notwithstanding, if the Corporation
is subject to the proxy solicitation rules under the Securities Exchange Act of
1934, the timing of nominations by shareholders shall be as determined by the
Board of Directors in compliance with such rules. Such notice shall set forth as
to each proposed nominee who is not an incumbent director (a) the name, age,
business address and telephone number and, if known, residence address of each
nominee proposed in such notice; (b) the principal occupation or employment of
each such nominee; (c) the number of shares of stock of the Corporation which
are beneficially owned by each such nominee and by the nominating shareholder;
and (d) any other information concerning the nominee that must be disclosed with
respect to nominees in proxy solicitations pursuant to the rules, regulations
and forms then promulgated under Section 14(a) of the Securities Exchange Act of
1934. The chairman of the meeting may, if the facts warrant, determine that a
nomination was not made in accordance with the foregoing procedure, and if he
should so determine, he shall so declare to the meeting and the defective
nomination shall be disregarded.
II.12 Informalities and Irregularities. All informalities and
irregularities in any call or notice of a meeting, or in the areas of
credentials, proxies, quorums, voting and similar matters, will be deemed waived
if no objection is made at the meeting.
ARTICLE III
BOARD OF DIRECTORS
III.1 General Powers. The business and affairs of the Corporation shall
be managed by its Board of Directors. The directors shall in all cases act as a
Board, and they may adopt such rules and regulations for the conduct of their
meetings and the management of the Corporation, as they may deem proper, not
inconsistent with these Bylaws and the laws of Nevada.
III.2 Number, Tenure and Qualifications. The Board of Directors shall
consist of a minimum of one, and a maximum of nine, directors. The Board of
Directors shall have the authority to fix the number of directors comprising the
Board within the limits set forth above; provided, however, that no decrease in
the number of directors comprising the Board shall affect the term of any
incumbent director. Each director shall hold office until the next annual
meeting of shareholders and until his successor shall have been elected and
qualified, or until his earlier resignation or removal. Directors need not be
residents of the State of Nevada or shareholders of the Corporation.
III.3 Annual Meetings. The Board of Directors shall hold its annual
meeting immediately following the annual meeting of shareholders at the place
announced at the annual meeting of shareholders. No notice is necessary to hold
the annual meeting, provided a quorum is present. If a quorum is not present,
the annual meeting shall be held at the next regular meeting or as a special
meeting.
III.4 Regular Meetings. The Board of Directors may hold regular
meetings without notice
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<PAGE> 6
at the times and places determined by the Board of Directors.
III.5 Special Meetings. The Chairman of the Board or Secretary may, and
on written request of two directors shall, call special meetings of the Board of
directors on not less than two days' notice to each director personally or by
facsimile or telephone, or on not less than five days' notice to each director
by mail.
III.6 Telephonic Meetings. Regular or special meetings of the Board of
Directors may be held at any place within or without State of Nevada and may be
held by means of conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other,
their participation in such a meeting to constitute presence in person.
III.7 Waiver of Notice. Attendance of a director at a meeting shall
constitute waiver of notice unless the director objects at the commencement of
the meeting that the meeting is not lawfully called or convened. Any director
may waive notice of any meeting by executing a written waiver of notice.
III.8 Quorum. A majority of the directors then serving shall constitute
a quorum for the transaction of business, but if less than said number is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice. The act of a majority of the
directors present at a meeting at which a quorum is present, unless otherwise
provided by the Nevada Revised Statutes, these Bylaws or the Articles of
Incorporation, shall be the act of the Board of Directors.
III.9 Newly Created Directorships. The Board of Directors may increase
the number of directors by a majority vote. Newly created directorships
resulting from an increase in the number of directors may be filled by a
majority vote of the directors then in office. The term of any newly created
directorship shall be determined by the Board of Directors.
III.10 Removal of Directors. At a meeting of shareholders called
expressly for that purpose and by a vote of the holders of not less than
two-thirds of the shares then entitled to vote at an election of the directors,
any director or the entire Board of Directors may be removed, with or without
cause.
III.11 Vacancies. Directors shall be elected to fill any vacancy by a
majority vote of the remaining directors, though not less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy caused by
resignation, death or removal shall be elected to hold office for the unexpired
term of his or her successor.
III.12 Committees of the Board. The Board of Directors, by resolution
adopted by a majority of the Board of Directors, may designate from among its
members an executive committee and one or more other committees each of which,
to the extent provided in such resolution and
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<PAGE> 7
permitted by the Nevada Revised Statutes, shall have and may exercise all the
authority of the Board. The Board, with or without cause, may dissolve any such
committee or remove any member thereof at any time. The designation of any such
committee and the delegation thereto of authority shall not operate to relieve
the Board, or any member thereof, of any responsibility imposed by law. No
committee shall have the power or authority to amend the Articles of
Incorporation or Bylaws; adopt a plan of merger or consolidation, recommend to
the shareholders the sale, lease, or other disposition of all or substantially
all the property and assets of its business, or recommend to the shareholders a
voluntary dissolution of the Corporation. Each committee shall keep regular
minutes of its meetings.
III.13 Action without a Meeting. Any action required or permitted to be
taken by the Board of Directors at a meeting may be taken without a meeting if
all directors consent thereto in writing. Such consent shall have the same
effect as a unanimous vote. The writing or writings shall be filed with the
minutes of the Board of Directors.
III.14 Compensation. The Corporation may pay, or reimburse the
directors for, the expenses of attendance at each meeting of the Board of
Directors. The Corporation may pay the directors a fixed sum for attendance at
each meeting of the Board of Directors and a stated salary as director or
directors may be granted stock options or a combination thereof. The Board of
Directors shall establish and set forth in its minutes the amount or rate of
compensation of directors.
III.15 Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action unless his
dissent shall be entered in the minutes of the meeting or unless he shall file a
written dissent to such action with the Secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered or certified
mail to the Secretary of the Corporation within three business days after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
ARTICLE IV
OFFICERS
IV.1 Number. The officers of the Corporation shall be a Chairman of the
Board, a President, a Secretary and a Treasurer, each of whom shall be appointed
by the Board of Directors. Such other officers, assistant officers and agents as
deemed necessary may be elected or appointed by the Board of Directors. Any two
or more offices may be held by the same person, except the offices of President
and Secretary.
IV.2 Tenure and Duties of Officers. The officers of the Corporation to
be appointed by the Board of Directors at the annual meeting of the Board of
Directors. Officers shall hold office at the pleasure of the Board and shall
exercise the power and perform the duties determined from time to time by the
Board of Directors until his successor shall have been duly elected and shall
have
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<PAGE> 8
qualified or until his death or until he shall resign or shall have been removed
in the manner hereinafter provided.
IV.3 Removal. Any officer or agent elected or appointed by the Board of
Directors may be removed by the affirmative vote of a majority of the directors,
but such removal shall be without prejudice to the contract rights, if any, of
the person so removed.
IV.4 Chairman of the Board. The Chairman of the Board shall be the
chief executive officer of the Corporation and, subject to the control of the
directors, shall in general supervise and control all of the business and
affairs of the Corporation. He shall, when present, preside at all meetings of
the shareholders and of the directors and in general shall perform all duties
incident to the office of Chairman of the Board and such other duties as may be
prescribed by the directors from time to time. Unless otherwise ordered by the
Board of Directors, the Chairman of the Board shall have full power and
authority on behalf of the Corporation to attend and to act and to vote at any
meeting of security holders of other corporations in which the Corporation may
hold securities. At such meeting, the Chairman of the Board shall possess and
may exercise any and all rights and powers incident to the ownership of such
securities which the Corporation might have possessed and exercised if it had
been present. The Board of Directors from time to time may confer similar powers
upon any other person or persons.
IV.5 President. In the absence of the Chairman of the Board or in the
event of his inability or refusal to act, the President shall perform the duties
of the Chairman of the Board, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the Chairman of the Board.
IV.6 Vice Presidents. There shall be as many vice presidents as the
Board of Directors chooses to appoint. Vice Presidents shall perform the duties
assigned to them by the Board of Directors of the Chairman of the Board or the
President. Any one of the vice Presidents, as authorized by the Board of
Directors, shall have all the powers and perform all the duties of President if
the President is temporarily absent or unable to act.
IV.7 Secretary. The Secretary shall attend all meetings of the Board of
Directors and the shareholders and shall keep the minutes of the shareholders'
and of the directors' meetings in one or more books provided for that purpose,
see that all notices are duly given in accordance with the provisions of these
Bylaws or as required by law, have charge of the corporate records, books, and
accounts, and keep a register of the post office address of each shareholder
which shall be furnished to the Secretary by such shareholder, have general
charge of the stock transfer books of the Corporation, sign with the Chairman of
the Board certificates for shares of the Corporation, and in general perform all
duties incident to the office of Secretary, and perform such other duties as
from time to time may be assigned to him by the Board of Directors or the
Chairman of the Board.
IV.8 Treasurer. The Treasurer shall be the chief financial officer of
the Corporation. If
8
<PAGE> 9
required by the Board of Directors, the Treasurer shall give a bond for the
faithful discharge of his duties in such sum and with such surety as the
directors shall determine. He shall have charge and custody of and be
responsible for all funds and securities of the Corporation; receive and give
receipts for monies due and payable to the Corporation from any source
whatsoever, and deposit all such monies in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected by the Board
of Directors and in general perform all of the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Chairman of the Board or by the directors.
ARTICLE V
CERTIFICATES FOR SHARES AND THEIR TRANSFER
V.1 Certificates for Shares.
(a) Certificates representing the shares of the Corporation
shall be in such form as shall be determined by the Board of Directors.
Such certificates shall be signed by the Chairman of the Board or
President and by the Secretary or an Assistant Secretary of the
Corporation. The signatures of such officers upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent or
registered by a registrar, other than the Corporation itself or an
employee of the Corporation. No certificate shall be issued for any
share until such share is fully paid.
(b) If the Corporation is authorized to issue shares of more
than one class, every certificate representing shares issued by the
Corporation shall set forth or summarize upon the face or back of the
certificate, or shall state that the Corporation will furnish to any
shareholder upon request and without charge, a full statement of the
designations, preferences, limitations and relative rights of the
shares of each class authorized to be issued, together with the
variations in the relative rights and preferences between the various
shares.
(c) Each certificate representing shares shall state upon the
face thereof (i) that the Corporation is organized under the laws of
the State of Nevada, (ii) the name of the person to whom issued, (iii)
the number, class and designation of the series, if any, which the
certificate represents, and (iv) the par value of each share
represented by the certificate or a statement that the shares are
without par value; and the (v) date of issue.
(d) Any restriction on the right to transfer shares and any
reservation of lien on the shares shall be noted on the face or the
back of the certificate by providing (i) a statement of the terms of
such restriction or reservation, (ii) a summary of the terms of such
restriction or reservation and a statement that the Corporation will
mail to the shareholder a copy of such restrictions or reservations
without charge within five (5) days after receipt of written notice
therefor, (iii) if the restriction or reservation is contained in the
Articles of
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Incorporation or Bylaws of the Corporation, or in an instrument in
writing to which the Corporation is a party, a statement of that effect
and a statement that the Corporation will mail to the shareholder a
copy of such restriction or reservation without charge within five days
after receipt of written request therefor, or (iv) if each such
restriction or reservation is contained in an instrument in writing to
which the Corporation is not a party, a statement to that effect.
(e) Each certificate for shares shall be consecutively
numbered or otherwise identified.
V.2 Transfers of Shares.
(a) Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority
to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, and cancel the old
certificate; every such transfer shall be entered on the transfer book
of the Corporation.
(b) The Corporation shall be entitled to treat the holder of
record of any shares as the holder in fact thereof, and, accordingly,
shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person whether or not
it shall have express or other notice thereof, except as expressly
provided by the laws of Nevada.
V.3 Lost, Destroyed, Mutilated, or Stolen Certificates. The holder of
any shares of the Corporation shall immediately notify the Corporation of any
loss, destruction, mutilation, or theft of the certificate therefor, and the
Board of Directors, may, in its discretion, cause a new certificate or
certificates to be issued to him, in case of mutilation of the certificate, upon
the surrender of the mutilated certificate, or, in case of loss, destruction, or
theft of the certificate, upon a satisfactory proof of such loss, destruction,
or theft, and, if the Board of Directors shall so determine, the submission of a
properly executed lost security affidavit and indemnity agreement, or the
deposit of a bond in such form and in such sum, and with such surety or
sureties, as the Board may direct.
ARTICLE VI
INDEMNIFICATION
VI.1 Indemnification. Every person who was or is a party or is
threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that he or a person of whom he is the legal representative is or was
a director or officer of the Corporation or is or was serving at the request of
the Corporation or for its benefit as a director or officer of another
corporation, or as its representative in a partnership, joint venture, trust or
other enterprise, shall be indemnified and held harmless to the fullest extent
10
<PAGE> 11
legally permissible under the general corporation law of the State of Nevada
from time to time against all expenses, liability and loss (including attorneys'
fees, judgments, fines and amounts paid or to be paid in settlement) reasonably
incurred or suffered by him in connection therewith. The Board of Directors may
in its discretion cause the expenses of officers and directors incurred in
defending a civil or criminal action, suit or proceeding to be paid by the
Corporation as they are incurred and in advance of the final disposition of the
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director or officer to repay the amount if it is ultimately determined by a
court of competent jurisdiction that he is not entitled to be indemnified by the
Corporation. No such person shall be indemnified against, or be reimbursed for,
any expense or payments incurred in connection with any claim or liability
established to have arisen out of his own willful misconduct or gross
negligence. Any right of indemnification shall not be exclusive of any other
right which such directors, officers or representatives may have or hereafter
acquire and, without limiting the generality of such statement, they shall be
entitled to their respective rights of indemnification under any Bylaws,
agreement, vote of stockholders, provision of law or otherwise, as well as their
rights under this Article.
VI.2 Insurance. The Board of Directors may cause the Corporation 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, or as its
representative in a partnership, joint venture, trust or other enterprise
against any liability asserted against such person and incurred in any such
capacity or arising out of such status, whether or not the Corporation would
have the power to indemnify such person.
VI.3 Right to Amend Indemnification Provisions. The Board of Directors
may from time to time adopt further Bylaws with respect to indemnification and
may amend these and such Bylaws to the full extent permitted by the General
Corporation Law of the State of Nevada.
ARTICLE VII
REPEAL, ALTERATION OR AMENDMENT
These Bylaws may be altered, amended or repealed or new Bylaws may be
adopted by a vote of the majority of the Board of Directors.
CERTIFICATE
I, Thomas A. Cifelli, the duly elected, qualified and acting Secretary
of Vinculum Incorporated, a Nevada corporation, do hereby certify that the above
and foregoing are the Bylaws of this Corporation duly and regularly adopted by
the Board of Directors.
IN WITNESS WHEREOF, I have hereunto set my hand this 18th day of June,
1998.
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/s/ Thomas A. Cifelli
----------------------------------
Thomas A. Cifelli, Secretary
----------------------------------
12
<PAGE> 1
Exhibit 4.1
[Front]
Number ____________ Shares _________
EBIZ ENTERPRISES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEVADA
70,000,000 AUTHORIZED SHARES $.001 PAR VALUE
CUSIP _________________
SEE REVERSE
FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT ____________________________________________
Is The Owner of _____________________________________________
FULLY PAID AND NON-ASSESSABLE SHARES OF $.001 PAR VALUE COMMON STOCK OF
EBIZ ENTERPRISES, INC.
transferable only on the books of the Company in person or by duly authorized
attorney upon surrender of this Certificate properly endorsed. This Certificate
is not valid unless countersigned by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the said Company has caused this Certificate to be
executed by the facsimile signatures of its duly authorized officers and to be
sealed with the facsimile seal of the Company.
Dated: ________________
_______________________________ _______________________________
President CEO
[SEAL]
[Back]
TRANSFER FEE: $20.00 PER NEW CERTIFICATE ISSUED
The following abbreviations when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of ----------------------------------
Survivorship and not as tenants (Cust) (Minor)
in common under Uniform Gifts to Minor
Act
-----------------------------
(State)
Additional abbreviations may also be used though not in the above list
<PAGE> 2
________________________________________________________________________________
FOR VALUE RECEIVED______________________________________________________________
Please insert Social Security or other identifying number of assignee __________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________ Shares
of Common Stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint ________________________________________ attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with
full power of substitution in the premises.
Dated___________________
_____________________________________________________
_____________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
- ------------------------
The signature(s) must be guaranteed by an eligible guarantor institution (Banks,
Stockbrokers, Savings and Loan Associations and Credit Unions with membership in
an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule
17Ad-15.
<PAGE> 1
Exhibit 10.1
OFFICE BUILDING LEASE
BASIC LEASE INFORMATION
DATE OF LEASE: April 16, 1999
LANDLORD: Van Wagner Properties
LANDLORD'S ADDRESS: Mr. Roger Van Wagner
Van Wagner Properties
P.O. Box 1630
Arvada, CO 80001
TENANT: CPU Micromart, a Nevada corporation
TENANT'S ADDRESS: 15695 N. 83rd Way, Scottsdale, Arizona 85260
PREMISES: The entire building located at 15695 North 83rd Way,
Scottsdale, Arizona 85200, consisting of
approximately 18,224 square feet
TERM COMMENCEMENT DATE: May 1, 1999
TERM EXPIRATION DATE: April 30, 2001
OPTION(S) TO RENEW: None
BASE RENT: Months 1 through 12 following $.80 PSF NNN
Commencement Date: 14,579.20
Months 13 through 24 following $.85 PSF NNN
Commencement Date: 15,490.40
SECURITY DEPOSIT: One month's base rent
GUARANTOR: None
LETTER OF CREDIT:
LANDLORD'S BROKER: Mark P. Linsalata
Lee & Associates Arizona
TENANT'S BROKER: Mark P. Linsalata
Lee & Associates Arizona
<PAGE> 2
ARTICLE 1. DEFINITIONS ...................................................
1.1 Definitions ...................................................
ARTICLE 2. Premises ......................................................
2.1 Lease
2.2 Acceptance of Premises ........................................
2.3 Reservation of Rights .........................................
ARTICLE 3. TERM, USE AND RENT ............................................
3.1 Term ..........................................................
3.2 Use ...........................................................
3.3 Base Rent .....................................................
3.4 Adjustment of Base Rent .......................................
3.5 Net Lease .....................................................
3.6 Right of First Offer ..........................................
ARTICLE 4. LANDLORD'S COVENANTS ..........................................
4.1 Repair Obligation .............................................
4.2 Peaceful Enjoyment ............................................
ARTICLE 5. TENANT'S COVENANTS ............................................
5.1 Payments by Tenant ............................................
5.2 Real and Personal Property Taxes ..............................
5.3 Repairs by Tenant .............................................
5.4 Assignment or Sublease ........................................
5.6 Fixtures and Equipment ........................................
5.6 Alterations, Additions and Improvements .......................
5.7 Compliance with Laws and Insurance Standards ..................
5.8 No Nuisance; No Overloading ...................................
5.9 Furnishing of Financial Statements; Tenant's Representations ..
5.10 Entry by Landlord .............................................
5.11 Nondisturbance and Attornment .................................
5.12 Estoppel Certificate ..........................................
5.13 Surrender .....................................................
5.14 Security Deposit ..............................................
6.15 Escrow Account/Letter of Credit ...............................
5.16 Tenant's Remedies .............................................
5.17 Rules and Regulations .........................................
ARTICLE 6. ENVIRONMENTAL MATTERS .........................................
6.1 Hazardous Materials Prohibited ................................
6.2 Right of Entry ................................................
6.3 Notice to Landlord ............................................
ARTICLE 7. INSURANCE, INDEMNITY, CONDEMNATION, DAMAGE AND DEFAULT
7.1 Tenant's Liability Insurance ..................................
7.2 Tenant's Additional Insurance Requirements ....................
7.3 Indemnity and Exoneration .....................................
7.4 Waiver of Subrogation .........................................
7.5 Condemnation ..................................................
7.6 Damage or Destruction .........................................
7.7 Default by Tenant .............................................
<PAGE> 3
ARTICLE 8. MISCELLANEOUS MATTERS
8.1 Parking .......................................................
8.2 Brokers .......................................................
8.3 No Waiver .....................................................
8.4 Recording......................................................
8.5 Holding Over ..................................................
8.6 Transfers by Landlord .........................................
8.7 Attorneys' Fees ...............................................
8.8 Termination; Merger ...........................................
8.9 Amendments; Interpretation ....................................
9.10 Severability ..................................................
8.11 Notices .......................................................
8.12 Force Majeure .................................................
8.13 Independent Covenants .........................................
8.14 Successors and Assigns ........................................
8.15 Further Assurances ............................................
8.16 Incorporation of Prior Agreements .............................
8.17 Applicable Law ................................................
8.18 Time of the Essence ...........................................
8.19 No Joint Venture ..............................................
8.20 Authority .....................................................
8.21 Offer .........................................................
8.22 Tenant Financing ..............................................
8.23 Exhibits; Addenda .............................................
8.24 Waiver of Right to Jury Trial .................................
<PAGE> 4
EXHIBIT C
RULES AND REGULATIONS
1. The sidewalks, doorways, halls, stairways, vestibules and other
Similar areas shall not be obstructed by Tenant or used by it for any purpose
other than ingress to and egress from the Premises, and for going from one part
of the Premises to another part. Corridor doors, when not in use, shall be kept
closed. Before leaving the Premises, Tenant shall ensure that all doors to the
Premises are securely locked and all water faucets and electricity are shut off.
2. Plumbing fixtures shall be used only for their designated purpose,
and no -foreign substances of any kind shall be deposited therein. Damage to any
such fixtures resulting from misuse by Tenant's or any employee or invitee of
Tenant shall be repaired at the expense of Tenant.
3. Tenant shall not mar or deface the Premises in any way. Tenant shall
not place anything on or near the glass of any window, door or wall which may
appear unsightly from outside the Premises.
4. All contractors and technicians rendering any installation service
to Tenant shall be subject to Landlord's approval and supervision prior to
performing services. This applies to all work performed in the Premises,
including, but not limited to installation of telephones, telegraph equipment,
wiring of any kind, and electrical devises, as well as all installations
affecting floors, walls, woodwork, windows, ceilings and any other portion of
the Premises.
5. Landlord shall have the right to limit the weight and size of, and
to designate the location of, all safes and other heavy property brought into
the Premises.
6. Nothing shall birds, fish or animals be swept 11 thrown into the
corridors hall elevator shafts or stairways of any kind shall be brought into or
kept in, on or about the Premises, with the exception of guide dogs where
necessary.
7. No cooking shall be done in the premises except in connection with a
convenience lunch room for the sole use of employees and guests (on a
non-commercial basis) in a manner which complies with all of the provisions of
the Lease and which does not produce fumes or odors.
8. Tenant shall not install or operate on the Premises any electric
heater, stove or similar equipment without Landlord's prior written consent.
Tenant shall not use or keep on the Premises any kerosene, gasoline, or
inflammable or combustible fluid or material other than limited quantities
necessary for the operation and maintenance of office equipment utilized at the
Premises. No explosives shall be brought onto the Premises at any time.
9. Tenant shall be solely responsible for security of the Premises, and
Landlord shall hot be liable to Tenant for losses due to theft or burglary, or
for damage by unauthorized persons in, on or about the Premises, and Tenant
assumes full responsibility for protecting the Premises from theft, robbery and
pilferage, which includes keeping doors locked and other means of entry closed.
10. No additional locks are allowed on any door of the Premises without
Landlord's Prior written consent. Upon termination of this Lease, Tenant shall
surrender to Landlord all keys to the Premises, and give to the Landlord the
combination of all locks for safes and vault doors, if any, in the Premises.
11. Tenant Shall not bring into (or permit to be brought into) the
building any type motor vehicle.
12. Landlord retains the right at any time, without liability to
Tenant, to change the name and street address of the Premises.
13. Landlord reserves the right to rescind any of these rules and
regulations and to make future rules and regulations required for the safety,
protection and maintenance of the Premises, the operation and preservation of
the good order thereof. Such rules and regulations, when made and written notice
thereof given to Tenant, shall be binding as if originally included herein.
Landlord shall not be responsible to Tenant for the non-observance or violation
of these rules and regulations by any party. Landlord reserves the right to
exclude or expel from the Premises any person who, in Landlord's judgment, is
under the influence of liquor or drugs, or who shall in any manner do any act in
violation of any of these rules or regulations.
<PAGE> 5
LEASE
THIS LEASE is entered into as of the date hereof between Landlord and
Tenant.
ARTICLE 1. DEFINITIONS.
1.1 Definitions. Terms used herein shall have the following meanings:
(a) "Additional Rent" shall mean any and all monetary obligations of
Tenant under this Lease other than the obligation for payment of Base Rent.
(b) "Base Rent" shall mean the sums due from time to time as rental for
the Premises as shown in the Basic Lease Information.
(c) "Building" shall mean the building and other improvements
associated therewith located upon the Premises.
(d) "Event of Default" shall have the meaning set forth in Section 7.7
herein.
(e) "Landlord" shall mean the then current owner of the Premises.
(f) "Landlord's Broker" shall mean the individual or corporate broker,
if any, identified on the Basic Lease Information sheet as the broker for
Landlord.
(g) "Premises" shall mean the Premises more particularly shown on the
attached Exhibit A.
(h) "Permitted Use" shall mean general office, warehouse and light
assembly use of a kind appropriate in a building of the type, quality and
location of the Building; provided, however, that Permitted Use shall not
include (a) offices or agencies of any foreign government or political
subdivision thereof; (b) offices of any agency or bureau of any state, county or
city government; (c) offices of any health care professionals; (d) schools or
other training facilities which are not ancillary to corporate, executive or
professional office use; (e) retail or restaurant uses; or (f) communications
firms such as radio and/or television stations.
(i) "Rent" shall mean Base Rent plus additional Rent.
(j) "Security Deposit" shall mean the amount, if any, to be paid by
Tenant to Landlord and held and applied pursuant to Section 5. 14.
(k) "Tenant's Broker" shall mean the individual or corporate broker, if
any, identified on the Basic Lease Information sheet as the broker for Tenant.
(l) "Term or Lease Term" shall mean the period commencing with the Term
Commencement Date and ending at midnight on the Term Expiration Date.
(m) "Term Commencement Date" shall mean the date set forth in the Basic
Lease Information.
(n) "Term Expiration Date" shall mean the date set forth in the Basic
Lease Information.
(o) Other Terms. Other terms used in this Lease and on the Basic Lease
Information sheet shall have the meanings given to them herein and thereon.
ARTICLE 2. PREMISES.
2.1 Lease. Landlord hereby lenses to Tenant and Tenant hereby leases from
Landlord the Premises upon all of the terms, covenants and conditions set forth
in this Lease. This Lease shall become effective immediately upon, and
contemporaneously with, recordation of the special warranty dead transferring
title to the Premises from Tenant to Landlord. In the event that the escrow for
the transfer of title to the Premises from Tenant to Landlord does not close for
any reason, then this Lease shall be of no force or affect, and rights of the
parties shall be governed solely by that certain Purchase and Sale Agreement
dated May 27, 1997 between Landlord, as buyer, and Tenant, as seller.
<PAGE> 6
2.2 Acceptance of Premises. Tenant acknowledges that prior to the Term
Commencement Date, It was in sole possession and control of the Premises as the
owner. As a result of such previous possession and ownership, Tenant accepts the
Premises in its AS IS condition existing on the effective date of this Lease,
subject to all matters of record and applicable laws, ordinances, rules and
regulations. Tenant acknowledges that neither Landlord nor any of Landlord's
agents or representatives has agreed to undertake any alterations or additions
or to perform any maintenance or repair of the Premises.
2.3 Reservation of Rights. Landlord shall have access to the Premises during the
Term during normal business hours and upon reasonable notion to Inspect the
Premises or to show the Premises to prospective buyers of Landlord's interest in
the Premises, and during the last year of the Term to prospective tenants.
Landlord's access hereunder shall not Interfere with Tenant's business
operations.
ARTICLE 3. TERM, USE AND RENT.
3.1 Term. The Term shall commence upon the Term Commencement Date, which date
shall be the date of close of escrow for the transfer of title to the Premises
from Tenant to Landlord, and shelf continue In full fore* for ton (10) years
from the Term Commencement Date. Upon close of escrow, the parties shall execute
Exhibit D in order to confirm the Term Commencement Date and Term Expiration
Date,
3.2 Use. Tenant shall use the Premises solely for the Permitted Use and for no
other use or purpose. Tenant use of the Premises shall be limited by the terms,
conditions and provisions of any covenants, conditions and restrictions
encumbering the Premises, and Tenant agrees to comply with the terms thereof.
3.3 Base Rent.
(a) Tenant shall pay the Base Rent to Landlord in accordance with the
schedule set forth on the Basic Lease Information sheet and in the manner
described below. Tenant shall pay the Base Rent in monthly installments on or
before the first day of each calendar month during the Term and any extensions
or renewals thereof, in advance without demand and without any reduction,
abatement, counterclaim or setoff, in lawful money of the United States, at
Landlord's address specified on the Basic Lease Information sheet or at such
other address as may be designated by Landlord in the manner provided for giving
notice under Section 8.11 hereof.
(b) If the Term commences on other than the first day of a month, then the
Use Rent provided for such partial month shall be prorated based upon a thirty
(30)-day month and the prorated installment shall be paid on the first day of
the calendar month next succeeding the Term Commencement Date together with the
other amounts payable on that day. If the Term terminates on other then the last
day of a calendar month, then the Base Rent provided for such partial month
shall be prorated based upon a thirty (30)-day month and the prorated
installment shall be paid on the first day of the calendar month in which the
date of termination occurs.
3.4 Adjustment of Base Rent. The Base Rent shall be adjusted on the third, sixth
and ninth anniversary (the "Adjustment Dates") of the Lease in the amounts
shown on the Basic Lease Information.
3.5 Net Lease. The parties understand and agree that this is an absolute net
lease, and that Landlord shall receive the Rent without deduction therefrom on
any account whatsoever with respect to the Premises. Except as expressly
provided herein, there shall be no abatement, diminution or reduction of the
Rent herein reserved to Landlord on account of any inconvenience, interruption
or cessation of Tenant's use of the Premises except as caused by the gross
negligence willful misconduct of Landlord, or on account of any loss of business
or change in permitted use or operation of the Premises.
ARTICLE 4. LANDLORD'S COVENANTS.
4.1 Landlord's Repair Obligation. Tenant assumes full and sole responsibility
for the condition, operation, maintenance, repair and replacement of the
Premises. Except as provided in Section 7.6, Landlord shall have no obligation
whatsoever to maintain, repair or replace the Premises. The parties intend that
the terms of this Lease shall govern their respective maintenance and repair
obligations. Tenant expressly waives the benefit of any statute now or hereafter
in effect to the extent it is inconsistent with the terms of this Lease with
respect to such obligations or which affords Tenant the right to make repairs at
the expense of Landlord or terminate this Lease by reason of the condition of
the Premises or any needed repairs. Notwithstanding the foregoing, Landlord
shall have the right, but not the obligation, to undertake works of maintenance,
repair or replacement which Tenant is required to perform under this Lease and
which Tenant fails or refuses to perform within thirty (30) days of Landlord's
notice to Tenant requesting Tenant to perform such work, except
<PAGE> 7
for emergency or safety-related repairs which Landlord may perform at Tenant's
expense upon 24 hours notice. Tenant shall reimburse Landlord upon demand as
Additional Rent, for all costs incurred by Landlord in performing any such
repair for the account of Tenant, together with an amount equal to fifteen
percent (15%) of such costs to reimburse Landlord for its administration and
managerial effort.
4.2 Peaceful Enjoyment. Landlord covenants with Tenant that upon Tenant paying
the Rent and all other charges required under this Lease and performing all of
Tenant's covenants and agreements herein contained, Tenant shall peacefully
have, -hold and enjoy the Premises subject to all of the terms of this Lease.
This covenant and the other covenants of Landlord contained in this * Lease
shall be binding upon Landlord and Its successors only during its or their
respective ownership of the Premises and of Landlord's interest hereunder. This
Lease is subject to any covenants, conditions and restrictions (CC&Rs) or other
agreement to which this Lease may be subordinate. Tenant acknowledges and agrees
that a default by Tenant under the CC&Rs, if any, or any other such superior
agreement shall constitute a default hereunder. All obligations of Landlord
hereunder shall be limited to the extent performance of same is prohibited,
restricted or limited under the CC&Rs or other such superior agreement.
ARTICLE 5. TENANT'S COVENANTS
5.1 Payments by Tenant. Tenant shall pay Rent at the times end in the manner
provided in this Lease. All obligations of Tenant hereunder to make payments to
Landlord shall constitute Rent and failure to pay the same when due shall give
rise to the rights and remedies provided for in Section 7.7. If there is more
then one Tenant, the obligations imposed under this Lease upon Tenant shall be
joint and several.
5.2 Real and Personal Property Taxes.
(a) Tenant shall be responsible for, and shall pay prior to
delinquency, all taxes or governmental service fees, possessory interest taxes,
fees or charges In lieu of any such taxes, capital levies, and any other charges
imposed upon, levied with respect to, or assessed against Tenant's personal
property, and on its interest pursuant to this Lease, and all Real Property
Taxes -which shall be levied or assessed against all or any. portion of the
Premises. The payment of such personal property taxes and Real Property Taxes
shall be Additional Rent hereunder.
(b) "Real Property Taxes" shall include any and all taxes and
assessments imposed, levied or assessed against the Premises, or any portion
thereof, including any reassessment thereof at any subsequent time and including
any transaction privilege tax, whether such taxes are measured in whole or in
part by the value of the Premises or by the amount of any rent paid to Landlord
under this Lease for the use and occupancy thereof. Real Property Taxes shall
include the amount of any surtax or deferred tax which is imposed, levied or
assessed either at the time of any transfer or assignment of the Premises by
Tenant, or any interest therein, or upon the occurrence of any other event,
which surtax or deferred tax is imposed, levied or assessed for the purpose of
recapturing any Real Property Taxes, (i) the imposition, levy or assessment of
which had been previously deferred, and (ii) which would have, but for such
deferral, been previously imposed or levied upon or assessed against the
Premises or any portion thereof, provided, however, that Tenant's share of such
deferred taxes shall be prorated to cover only the period of time within the tax
fiscal year for such deferred taxes during which this Lease was in effect. Real
Property Taxes shall be liberally construed so that Tenant shall pay not only
any and all Real Property Taxes imposed or levied upon or assessed against the
Premises under the low existing as of the date of execution of this Lease, but
any and all other taxes (collectively "in Lieu Taxes") which may hereafter be
imposed, levied or assessed in conjunction with, In lieu of, as an alternative
to, as an offset against or as the result of any deferral, of any such Real
Property Taxes and any other special, unforeseen or extraordinary taxation,
however described, relating to the Premises. Tenant shall be responsible for the
payment of any Real Property Taxes applicable to the Term, regardless of whether
such assessment occurs during or after the Term. The foregoing notwithstanding,
Real Property Taxes shall not include (i) personal property taxes or franchise
taxes payable by Landlord, or (ii) federal, state or local income taxes or
inheritance, gift and estate, taxes, or (iii) any transfer fee or tax arising
from a sale or transfer of the Premises.
(c) Any Real Property Taxes for the first and last years of the Term
shall be prorated between the parties. With respect to any assessment which may
be levied upon the Premises and which under the laws than In force may be
evidenced by bonds payable In installments, the computation of the tax payable
by Tenant hereunder shall be limited to the Installments payable during the
Term.
(d) If the Premises are separately assessed and billed pursuant to a
segregated tax assessment, Tenant shall, upon Landlord's written request,
directly pay the amount of such Real Property Taxes to the tax collector at
least ten (10) days prior to delinquency and provide Landlord with evidence of
such Payment. If the Premises are not separately assessed
<PAGE> 8
and billed pursuant to a segregated tax assessment, Tenant's share of the Real
Property Taxes shall be an equitable proportion of the Real Property Taxes for
all of the land and improvements included within the tax bill, such proportion
to be determined by Landlord from the records of the Tax Assessor of the County
In which the Premises are located. If such records' are not available or are not
sufficiently detailed, (i) Tenant's share of the tax bill for improvements shall
be determined by multiplying the amount allocated to improvements In the tax
bill by a fraction the numerator of which is the Floor Area of Tenant's Building
and the denominator of which is the total Floor Area of buildings included in
the tax bill, whether occupied or not; and (ii) Tenant's share of the tax bill
for land shall be determined by multiplying the amount allocated to land in the
tax bill by a fraction the numerator of which is the square footage of the land
contained in the Premises and the-denominator of which is the square footage of
all land covered by the tax bill.
(e) Notwithstanding anything to the contrary herein contained, if the
Impounding of tax payments is required by any lender of Landlord, or in the
event that Landlord releases the letter of credit described in Section 5.15, and
otherwise upon the occurrence of any Event of Default, Landlord may elect to
require Tenant to pay Real Property Taxes in accordance with the provisions of
this Section 5.2(e). Beginning at the Commencement Date and prior to the
commencement of each calendar year thereafter, Landlord shall furnish to Tenant
a statement setting forth the estimated Real Property Taxes to be levied against
the Premises for the immediately succeeding calendar year or fraction thereof.
Tenant shall pay such estimated Real Property Taxes to Landlord in equal monthly
installments which shall be made concurrently with the payment of each
installment of Base Rent. Within 60 days after the and of each calendar year or
fraction thereof, or within 60 days of any assessment, Landlord shall furnish to
Tenant a statement in writing, certified by Landlord to be correct, showing the
actual Real Property Taxes assessed against the Premises during the immediately
preceding calendar year or fraction thereof or the applicable calendar year, if
there has been a reassessment. At that time an adjustment shall be made between
Landlord and Tenant, so that Tenant's payments of Real Property Taxes for the
preceding year or. fraction thereof shall equal the actual amount of such Real
Property Taxes for the same period. Any overpayment by Tenant upon such
adjustment shall be credited by Landlord to the monthly installments of
estimated Real Property Taxes next falling due, and any underpayment by Tenant
shall be paid to Landlord with the next installment of estimated Real Property
Taxes or if the Term has ended, then promptly upon Tenant's receipt of
Landlord's statement.
(f) Either party will have the right, at its cost and expense, to
contest the legality, validity or amount of any real property taxes or the
assessments upon which same are based by appropriate proceedings prosecuted in
good faith. Landlord will be notified of any such contest by Tenant and will
cooperate with Tenant and, if required, join Tenant in such proceedings at no
cost or expense to Landlord. Such contest may be made in the name of Landlord or
Tenant, or both, and if requested by Tenant, Landlord will actively participate
in such contest at Tenant's sole cost and expense. If Landlord obtains a refund
of any real property taxes for which Tenant has paid a share, Tenant shall
receive a credit against Rent due hereunder in the amount of such refund and any
interest received thereon after deducting therefrom the reasonable costs and
expenses (including experts and attorney fees) of obtaining such refund. If
Tenant obtains a refund of any real property taxes, Tenant will be entitled to
the full amount of such refund, provided however that if such refund includes
amounts paid by Landlord without reimbursement from Tenant, Tenant will promptly
remit to Landlord its share of such refund and any interest received thereon
after deducting therefrom the reasonable costs and expenses (including experts
and attorney fees) of obtaining such refund.
5.3 Repairs by Tenant. Tenant shall, at all times, at its sole cost and expense,
maintain, repair and replace the Premises, including, without limitation, the
maintenance, replacement and repair of the roof, roof membrane, exterior walls,
any doors, Interior and exterior windows, floors, all interior walls,
landscaping, pavement, parking areas, sidewalks, lighting, plumbing, heating,
ventilation and air conditioning (HVAC) facilities and equipment and sanitary
facilities, provided however, that Tenant shall not be required to replace any
of the foregoing unless such replacement is recommended by an independent
professional. Tenant shall enter Into a service contract, with a contractor
approved by Landlord, which provides for the periodic inspection and maintenance
of the HVAC equipment. Tenant's maintenance of the Premises outside the Building
shall include, but not be limited to, (a) cleaning and removing rubbish and
dirt; (b) cleaning, maintaining, repairing, remarking and replacing paved and
unpaved surfaces and curbs (including periodic sealing, re-striping and repaving
of the parking area in order to maintain some in a first class condition),
cleaning, maintaining and repairing directional and other signs, landscaping,
gardening, decorating (permanent or temporary, seasonal or otherwise)
maintaining and repairing lighting facilities, drainage systems, and other
similar items; and (c) maintaining, repairing and replacing utility
Installations underlying such areas If not maintained or replaced by utility
companies. The facilities and fixtures shall be kept, repaired, maintained,
replaced, or supplemented at all times by Tenant in accordance with all
governmental requirements and Insurance requirements as they may now or
hereafter exist, and in all events in a clean, sanitary and orderly condition.
Tenant shall be obligated to surrender the Premises upon expiration of the Term
In the same condition as on the Term Commencement Data, reasonable wear and
tear, taking by condemnation, and damage that is Landlord's responsibility under
Section 7.6 not caused by Tenant, its agents, employees, contractors,
<PAGE> 9
invitees and licensees excepted. Tenant shall not commit or allow any waste or
damage to be committed in any portion of the Premises.
5.4 Assignment or Sublease
(a) Tenant shall not voluntarily or by operation of law assign, sublet,
mortgage pledge, encumber or transfer (collectively "Transfer") all or any part
of Tenant's interest in this Lease or in the Premises without Landlord's prior
written consent given under and subject to the terms of this Section.
(b) If Tenant desires to Transfer this Lease or any interest herein or
sublet the Premises or any part thereof, Tenant shall give Landlord written
notice of such intent. Tenant's notice shall specify the effective data of the
proposed Transfer and be accompanied by the name, address, telephone number and
current financial statement of the proposed assignee or subtenant
("Transferee"), all financial details of the Transfer, the intended use
(including any modification) of the Premises, and exact copies of all of the.
proposed agreement(s) between Tenant and the Transferee. Tenant shall promptly
provide Landlord with (i) such other or additional information or documents
reasonably requested by Landlord, and (ii) an opportunity to meet and interview
the Transferee, if requested by Landlord.
(c) Landlord shall have fifteen (15) days from the date of Tenant's
original notice, or five (5) days from the date of Landlord's interview with the
Transferee and/or receipt of additional information, if requested within the
initial fifteen (15) day period, within which to notify Tenant in writing
whether or not Landlord will permit such Transfer. Landlord's consent to a
Transfer shall not be unreasonably withheld. Reasonable grounds for denying
consent include any of the following: (i) Transferee's character, reputation,
credit history, or business is not consistent with the character or quality of
the Premises; (ii) Transferee is either a government agency or an
instrumentality of one; (iii) Transferee's intended use of the Premises is
inconsistent with the Permitted Use or will materially and adversely effect
Landlord's interest; (iv) Transferee's financial condition is or may be
inadequate to support the Lease obligations of Transferee under the Transfer
documents; (v) Transferee does not intend to occupy the entire Premises and
conduct business there for a substantial portion of the term of the Transfer,
(vi) the Transferee's anticipated use of the Premises involves the generation,
storage, use, treatment, or disposal of, Hazardous Material (excluding standard
office and janitorial supplies in limited quantities as provided in Article 8
herein); (vii) the Transferee has been required by any prior landlord, lender or
governmental authority to take remedial action in connection with Hazardous
Material contaminating a property if the contamination resulted from
Transferee's actions or use of the property in question; or (viii) the
Transferee is subject to an enforcement order issued by any governmental
authority in connection with the generation, storage, use, treatment or disposal
of a involves the generation, storage, use, treatment, or disposal of Hazardous
Material. Landlord may impose any reasonable condition upon its consent to a
Transfer, including but not limited to that the Transferee execute assumption
documentation as Landlord shall require. Notwithstanding any other' provision in
this Lease, Landlord may withhold its consent, in its sole discretion, to any
proposed Transfer of Tenant's interest in the Premises by way of a mortgage,
pledge or other encumbrance.
(d) In the event Tenant shall request the consent of Landlord to a
Transfer hereunder, Tenant shall reimburse Landlord for Landlord's reasonable
expenses incurred in connection therewith, including but not limited to
attorneys' fees, regardless of whether Landlord approves such request. Landlord
may condition its approval upon the prior payment of such fees and costs. If not
otherwise paid, such fees and costs shall be deemed Additional Rent under this
Lease and shall be payable within ton (10) days of written request.
(e) In any assignment or subletting undertaken by Tenant, Tenant shall
diligently seek to obtain not less than fair market rent for the space so
assigned or sublet.
(f) The consent of Landlord to any Transfer shall not constitute a
consent to any subsequent Transfer by Tenant or to any subsequent or successive
Transfer by the Transferee. Such action shall not relieve Tenant or any such
other party from liability under this Lease or a sublease.
(g) No Transfer by Tenant shall relieve Tenant of any obligation under
this Lease. In the event of default by a Transferee of Tenant or any successor
of Tenant in the performance of any of the terms hereof, Landlord may proceed
directly against Tenant without the necessity of exhausting remedies against
such Transferee or successor. Any Transfer which conflicts with the provisions
hereof shall be void and, at Landlord's option, shall constitute a default under
this Lease.
(h) In the event Tenant sublet the entire Premises or any part thereof,
Tenant shall deliver to Landlord fifty percent (50.00%) of any excess rent
within thirty (30) days of Tenant's receipt thereof pursuant to such subletting.
As used herein,
<PAGE> 10
"excess rent" shall mean any sums or economic consideration per square foot of
the Premises received by Tenant pursuant to such subletting in excess of the
amount of the rent per square foot of the Premises payable by Tenant under this
Lease applicable to the part or parts of the Premises so sublet, provided,
however, that no such excess rent shall be payable until Tenant shall have
recovered therefrom Tenant's reasonable costs incurred in conjunction with such
subletting.
(i) In the event Tenant assigns this Lease, Tenant shall deliver to
Landlord fifty percent (50.00%) of any excess payment within thirty (30) days
of Tenant's receipt thereof pursuant to such assignment. As used herein, "excess
payment" shall mean the amount of payment received for such assignment of this
Lease in excess of the rent payable by Tenant under this Lease; provided,
however, that no excess payment shall be payable until Tenant shall have
recovered therefrom Tenant's reasonable costs incurred in conjunction with such
assignment.
(j) Notwithstanding the other provisions of this Section, Tenant may
assign this Lease or sublet the Premises or a portion thereof, Without
Landlord's consent, but with prior written notice, to any corporation,
partnership, individual or other entity which controls, is controlled by or is
under common control with Tenant; or to any corporation, partnership, Individual
or other entity, resulting from the merger or consolidation with Tenant, or to
any person or entity which purchases all or substantially all of the assets or
stock of Tenant, provided that (i) the Transferee assumes, in full, the
obligations of Tenant under this Lease, (ii) Tenant remains fully liable under
this Lease, and (iii) the use of the Premises remains unchanged. If Tenant is a
corporation whose stock is publicly traded on a national exchange, the transfer
of stock in Tenant on such exchange shall not be considered an assignment,
sublease or transfer under the Lease.
(k) Other then an assignment in the manner provided in Section 5.4(j)
above, the right of first offer provided in Section 3.4 herein shall not be
assignable, and such right shall expire and become of no force or affect upon an
assignment of this Lease by Tenant.
5.5 Fixtures and Equipment. Provided that Tenant has first obtained any
necessary governmental permits or approvals, Tenant may install in the Premises
such trade fixtures and equipment-as Tenant deems advisable for the conduct of
Its business. Tenant shall not place a load upon any portion of the Building
exceeding the structural and load-bearing specifications for which the Building
was designed or which may be allowed by law. Landlord reserves the right to
prescribe the weight and position of all heavy equipment and to prescribe the
reinforcing necessary, if any, which in the opinion of a professional retained
by Landlord may be required under the circumstances, such reinforcing to be at
Tenant's expense. Notwithstanding any provisions of this Lease to the contrary,
Tenant may install or furnish in and to the Premises all furniture, furnishings,
business equipment and trade fixtures necessary or desirable for the conduct of
its business, all or any part of which may be removed by Tenant during or upon
expiration of the Term, provided that Tenant repairs any damage caused by such
removal.
5.6 Alterations, Additions and Improvements.
(a) Tenant shall not make or allow to be made any alterations,
additions or improvements ("Alterations") in or to the Premises other than the
installation of moveable furnishings and equipment without first obtaining
Landlord's approval. Tenant shall provide Landlord with written notice of the
proposed alterations, including copies of the plans and specifications, copies
of all construction contracts or other agreements for the proposed Alterations,
the name and address of any contractor or subcontractor to be employed on the
Alterations, and the proposed time for performance of such work. Landlord's
consent shall be given for any proposed Alterations which: (i) comply with all
applicable laws, ordinances, rules and regulations; (ii) are compatible with the
Building and its mechanical, electrical, HVAC and life safety systems; (iii)
will not affect the structural portions of the Building; (iv) will not trigger
any additional costs to Landlord; (v) will not require roof penetration; (vi)
will not require the use of asbestos or other hazardous materials; (vii) are
approved by Landlord's lender, if required under the terms of any mortgage or
dead of trust encumbering the Premises; (viii) will not cause a reduction in the
value of Landlord's interest in the Premises; and (ix) will not exceed Fifty
Thousand and No/100th Dollars ($50,000.00) in cost in the aggregate In any
colander year. Landlord will not unreasonably withhold it consent to Alterations
which exceed $50,000.00 in cost in any calendar year provided that the remaining
conditions in the preceding sentence are satisfied. Tenant shall supply to
Landlord any additional documents and information requested by Landlord related
to Tenant's request for consent hereunder. Tenant shall reimburse Landlord for
any reasonable fees and costs incurred reviewing proposed Alterations,
including, but not limited to architect's and engineer's fees.
(b) Any consent given by Landlord under this Section shall be deemed
conditioned upon: (i) Tenant's acquiring all applicable permits required by
governmental authorities; (ii) Tenant's furnishing to Landlord copies of such
permits, together with copies of the approved final plans and specifications,
prior to commencement of the work thereon; (iii) Tenant's timely compliance With
the conditions of all applicable permits and approvals; (iv) Tenant's delivery
of proof of
<PAGE> 11
the Alterations, in form reasonably satisfactory to Landlord.
(c) Tenant shall provide Landlord with not less than ten (10) days
prior written notice of commencement of the work so as to enable Landlord to
post and record appropriate notices of non-responsibility. All Alterations
permitted hereunder shall be made and performed by Tenant without cost or
expense to Landlord. Tenant shall pay all amounts due to any contractors and
suppliers on a timely basis and keep the Premises from any mechanic, materialmen
or other lien or claim arising out of any work performed, materials furnished or
obligations incurred by or for Tenant. In the event Tenant's proposed
Alterations exceed Fifty Thousand Dollars ($50,000.00) in cost, Landlord may
require, at its sole option, that Tenant provide to Landlord, at Tenant's
expense, a completion bond (or similar bond or insurance acceptable to Landlord)
in an amount equal to at least one and one half (1 1/2) times the total
estimated cost of any Alterations be made in or to the Premises, to protect
Landlord against any liability for any mechanic, materialmen or other lien or
claim, and to ensure timely completion of the work. If any lien attaches to the
Premises as a result of any act or omission by Tenant, Tenant shall cause such
lien to be immediately released and removed of record, or shall post a bond
adequate for the full payment of such lien, including any interest, attorneys
fees and costs recoverable in the event such lien claimant prevails. If the lien
is not released and removed, or bonded over, within thirty (30) days after
Landlord, delivers notice of the lien to Tenant, Landlord may immediately take
all action necessary to release and remove the lien, without any duty to
investigate the validity of it. All expenses (including reasonable attorney
fees) incurred by Landlord in connection with the lien, plus an administrative
fee equal to fifteen percent (15%) of all such expenses, shall be considered
Additional Rent under this Lease and shall be due and payable by Tenant within
ten (10) days of Landlord's written request.
(d) All Alterations permitted under this Section shall be constructed
diligently, in a good and workmanlike manner with now, good and sufficient
materials of at least the same quality as those used i the construction of the
existing improvements, and in compliance with all applicable laws, ordinances,
rules and regulations (including, without limitation, building codes and the
Americans With Disabilities Act). Tenant shall ensure that all work is performed
in a manner that does not obstruct access to or through the Premises or its
common areas or interfere either with other tenants' use of their Premises or
with any other work being undertaken in the Premises. Tenant shall, promptly
upon completion of the work, furnish Landlord with "as built" drawings for the
Alterations.
(e) Any and all Alterations made to the Premises by Tenant shall become
the property of Landlord upon installation and shall be surrendered to Landlord
without compensation to Tenant upon the termination of this Lease by lapse of
time or otherwise unless (i) Landlord conditioned its approval of such
Alterations on Tenant's agreement to remove them or (ii) Landlord notifies
Tenant prior to (or promptly after) the Term Expiration Date that the
Alterations must be removed, in which case Tenant shall by the Term Expiration
Date Car promptly thereafter), remove such Alterations, repair any damage
resulting from such removal and restore the Premises to their condition existing
prior to the date of installation of such Alterations. Tenant shall repair at
its sole cost and expanse all damage caused to the Premises by removal of
Tenant's movable equipment or furniture and such other Alterations as Tenant
shall be required or allowed by Landlord to remove from the Premises.
Notwithstanding anything contained herein, any tenant Improvements existing as
of the Term Commencement Date shall not be constitute Alterations for the
purposes of this Lease.
5.7 Compliance With Laws and Insurance Standards.
(a) Tenant shall not cause or permit any portion of the Premises to be
occupied or used in a manner that violates any applicable law, ordinance, code,
rule, regulation or order of any governmental authority, including the Americans
with Disabilities Act, now or hereafter existing ("Applicable Laws"). Tenant
shall promptly make, at Tenant's sole expense, all repairs, replacements,
alterations or improvements needed to comply with all Applicable Laws.
(b) Tenant shall not occupy or use, or permit any portion of the
Premises to be occupied or used in a manner that violates any covenant, easement
or restriction of record, or the reasonable recommendations of Landlord's
engineers or consultants, relating in any manner to the Premises, or for any
business or purpose which is disreputable or productive of fire hazard. Tenant
shall not do or permit anything to be done which would result in the
cancellation, or in any way increase the cost of any insurance coverage on the
Premises and/or its contents.
5.8 No Nuisance: No Overloading. Tenant shall use and occupy the Premises, and
control its agents, employees, contractors, invitees and visitors in such manner
so as not to create any nuisance, or interfere with, annoy or disturb (whether
by noise, odor, vibration or otherwise) any other party. Tenant shall not place
or permit to be placed any loads upon the floors, walls or ceilings in excess of
the maximum designed load specified by Landlord or which might damage the
Premises, or any portion thereof.
<PAGE> 12
5.9 Furnishing of Financial Statements; Tenant's Representations. In order to
induce Landlord to enter into this Lease, Tenant agrees that it shall promptly
furnish to Landlord, from time to time, within ten (10) business days of
Tenant's preparation thereof, its annual report to shareholders, its 1OK report
and 10Q report, and further agrees to provide Landlord with copies of any other
financial reports prepared for its shareholders and/or any government agency
within ten (10) days of written request by Landlord. Tenant represents and
warrants that all such financial statements, records and information furnished
by Tenant to Landlord in connection with this Lease are and shall be true,
correct and complete in all respects.
5.10 Entry by Landlord. Landlord, its employees, agents and consultants, shall
have the right to enter the Premises at any time, in cases of an emergency, and
otherwise, upon reasonable advance written notice to inspect the same,
including, as provided in Section 6.2 herein, to deal with emergencies, to post
such notices as may be permitted or required by law to prevent the perfection of
liens against Landlord's interest in the Premises or to show the Premises to
prospective tenants, purchasers, encumbrances or others, or for any other
purpose as Landlord may deem necessary or desirable; provided, however, that
Landlord shall not interfere with Tenant's business operations in the Premises.
Tenant shall not be entitled to any abatement of Rent or damages by reason of
the exercise of any such right of entry.
5.11 Nondisturbance and Attornment. This Lease and the rights of Tenant
hereunder shall be subject and subordinate to the lien of any dead of trust,
mortgage or other hypothecation or security instrument (collectively, a
"Security Device") now or hereafter placed upon, affecting or encumbering the
Premises or any part thereof or interest therein, provided that the holder of
such Security Device agrees that Tenant's possession under the Lease shall not
be disturbed so long as Tenant faithfully performs all of its obligations under
this Lease and attorns to the record owner of the Premises. Tenant agrees to
execute within fifteen (15) days of Landlord's request any Subordination,
Nondisturbance and Attornment Agreement ("Subordination Agreement") which does
not substantially differ from the form attached hereto as Exhibit B, and which
is not otherwise inconsistent with the terms of this Lease. Failure by Tenant to
execute and deliver any such Subordination Agreement within the time requested
shall constitute a material default under this Lease. Notwithstanding anything
herein to the contrary, any holder of a Security Device may unilaterally and
without Tenant's consent subordinate the lien of its Security Device to this
Lease by written notice to Tenant or by recording a written subordination in the
Official Records of the County in which the Premises are located, in which case
this Lease shall be unaffected by the foreclosure of the subordinated Security
Device, notwithstanding the relative dates of the documentation or recordation
thereof. Tenant agrees to attorn to and recognize as the Landlord under this
Lease the holder or beneficiary under a Security Device or any other party that
acquires ownership of the Premises by reason of a foreclosure or sale under any
Security Device (or deed in lieu thereof). The new owner following such
foreclosure, sale or deed shall not be (i) liable for any act or omission of any
prior landlord or with respect to events occurring prior to acquisition of
ownership; (ii) subject to any offsets or defenses which Tenant might have
against any prior landlord; (iii) bound by prepayment of more than one (1)
month's Rent; or (iv) liable to Tenant for any security deposit not actually
received by such new owner. Each holder of a Security Device shall be an express
third party beneficiary of the provisions of this Section 5.11 and any other
provisions of this Lease that are for the benefit of such holder.
5.12 Estoppel Certificate. Within fifteen (15) days following Landlord's
request, Tenant shall execute, acknowledge and deliver written estoppel
certificates addressed to (i) any mortgagee or prospective mortgagee of
Landlord, or (ii) any purchaser or prospective purchaser of all or any portion
of, or interest in, the Premises, on a form specified by Landlord, certifying
such facts and agreeing to such notice provisions and other matters as such
mortgagee(s) or purchaser(s) may reasonably require, including, without
limitation, the following: (a) that this Lease is unmodified and in full force
and effect (or in full force and effect as modified, and stating the
modifications); (b) the amount of, and date to which Rent and other charges have
been paid in advance; (c) the amount of any Security Deposit, and (d)
acknowledging that Landlord is not in default under this Lease (or, if Landlord
is claimed to be in default, stating the nature of the alleged default). Any
such estoppel certificate may be relied upon by any such mortgagee or purchaser.
Failure by Tenant to execute and deliver any such estoppel certificate within
the time requested shall constitute a material default under this Lease.
Landlord agrees that upon Tenant's request, Landlord will execute an estoppel
certificate and deliver same to Tenant certifying such matters as Tenant may
reasonably request, including without limitation the following: (a) that this
Lease is unmodified and in full force and affect (or in full force and effect as
modified, and stating the modifications); (b) the amount of, and date to which
Rent and other charges have been paid in advance; (c) the amount of any Security
Deposit; and (d) acknowledging that Tenant is not in default under this Lease
(or, if Tenant is claimed to be in default, stating the nature of the alleged
default),
5.13 Surrender. On the Term Expiration Date (or earlier termination of this
Lease), Tenant shall quit and surrender possession of the Premises to Landlord
in as good order and condition as they were in on the Term Commencement Date,
reasonable wear and tear, taking by condemnation and repairs which are
Landlord's responsibility under Section 7.6 herein excepted. Reasonable wear and
tear shall not include any damage or deterioration that would have been
<PAGE> 13
prevented by good maintenance practice, or by Tenant performing all of Its
obligations under this Lease. Tenant shall, without cost to Landlord, remove all
furniture, equipment, trade fixtures, debris and articles of personal property
owned by Tenant in the Premises, and shall repair any damage to the Premises
resulting from such removal and restore the Premises to their original
condition, reasonable wear and tear excepted. Any such property not removed by
Tenant by the Term Expiration Date (or earlier termination of this Lease) shall
be considered abandoned, and Landlord may remove any or all such items and
dispose of same In any lawful manner or store some In a public warehouse or
elsewhere, for the account and at the expense and risk of Tenant. If Tenant
fails to pay the cost of storing any such property after storage for thirty (30)
days or more, Landlord may sell any or all of such property at public or private
sale, in such manner and at such times and places as Landlord may doom proper,
without notice to or demand upon Tenant. Landlord shall apply the proceeds of
any such sale as follows: first, to the costs of such sale, including its
attorneys' fees; second, to the costs of storing any such property, third, to
the payment of any other sums of money which may then or thereafter be due to
Landlord from Tenant under this Lease; and fourth, the balance, if any, to
Tenant.
5.14 Security Deposit. On or prior to the Term Commencement Date, Tenant shall
pay to Landlord the amount of the Security Deposit shown in the Basic Lease
Information as security for the full and faithful performance of Tenant's
obligations under this Lease. If at any time during the Term, Tenant shall be in
default in the payment of. Rent or In default for any other reason beyond the
applicable notice period provided In Section 7.7, Landlord may use, apply or
retain all or part of the Security Deposit for payment of any amount due
Landlord or to cure such default or to reimburse or compensate Landlord for any
liability, loss, cost, expense or damage (including attorneys' fees) which
Landlord may suffer or incur by reason of any default by Tenant. Tenant hereby
waives the benefit of the provisions of any provision of law now or hereafter in
force to the extent such provisions limit Landlord's ability to apply the
Security Deposit to any liability, lose, cost, expense or damage arising from a
default by Tenant under this Lease. If Landlord uses or applies all or any part
of the Security Deposit, Tenant shall, within ten (10) days of Landlord's
written demand, pay to Landlord a sum sufficient to restore the Security Deposit
to the full amount required by this Lease. Any time the Base Rent Increases
during the Term, Tenant shall (within ten (10) business days of receipt of a
request therefor from Landlord) deposit additional monies with Landlord
sufficient to maintain the same ratio between the Security Deposit and Base Rent
as that which was required as of the Term Commencement Date. Upon expiration of
the Term or earlier termination of this Lease and after Tenant has vacated the
Leased Premises, Landlord shall return the Security Deposit to Tenant, reduced
by such amounts as may be required by Landlord to remedy any defaults by Tenant
and/or to clean the Leased Premises. The portion of the deposit not so required
shall be paid over to Tenant (or, at Landlord's option, to the last assignee of
Tenant's interest in this Lease) within thirty (30) days after expiration of the
Term or an earlier termination hereof. Landlord shall have no obligation to
segregate the Security Deposit from its general funds or to pay Interest In
respect thereof. No part of the Security Deposit shall be considered to be hold
In trust, or to be prepayment of any monies to be paid by Tenant under this
Lease. Upon any sale or transfer by Landlord of its interest In the Premises,
Landlord shall deliver the Security Deposit to Landlord's successor In Interest
and shall thereupon be relieved of any further liability to Tenant with respect
thereto as provided in Section 8.6 herein.
5.15 [Intentionally Omitted]
5.16 Tenant's Remedies. Landlord shall not be deemed In breach of this Lease
unless Landlord fails within a reasonable time to perform an obligation required
to be performed by Landlord. For purposes of this Section 5.16, a reasonable
time shall in no event be less than thirty (30) days after receipt by Landlord,
and by the holders of any ground lease, deed of trust or mortgage covering the
Premises whose name and address shall have been furnished Tenant in writing for
such purpose, of written notice specifying wherein such obligation of Landlord
has not been performed; provided, however, that if the nature of Landlord's
obligation is such that more then thirty (30) days after such notice are
reasonably required for its performance, then Landlord shall not be In breach of
this Lease if performance is commenced within said thirty (30)-day period
thereafter diligently pursued to completion, provided that In no event shall
such cure period exceed ninety (90) additional days. If Landlord falls to cure
such default within the time provided for In this Lease, the holder of any such
ground lease, dead of trust or mortgage shall have an additional thirty (30)
days to cure such default; provided that if such default cannot reasonably be
cured within that thirty (30) day period, then such holder shall have such
additional time to cure the default an Is reasonably necessary under the
circumstances, provided that such party shall provide Tenant with a written
commitment to cure such default. Tenant shall look solely to the assets of
Landlord for recovery of any judgment. No trustees, directors, officers, agents,
employees or representatives of Landlord (or, if Landlord is a partnership, its
partners, whether general or limited) shall ever be personally liable for any
such judgment. Any lien obtained to enforce any such judgment and any levy of
execution thereon shall be subject and subordinate to any lien, dead of trust or
mortgage to which Section 5.11 applies or may apply. Tenant shall not have the
right to withhold, reduce or offset any amount against any payments of Rent due
and payable under this Lease by reason of a breach of this Lease by Landlord.
<PAGE> 14
5.17 Rules and Regulations. Tenant shall comply with the rules and regulations
for the Premises attached as Exhibit C and, in the event that there is more than
one tenancy at the Premises, such reasonable amendments thereto as Landlord may
adopt from time to time with prior notice to Tenant.
ARTICLE 6. ENVIRONMENTAL MATTERS.
6.1 Hazardous Materials Prohibited.
(a) Tenant shall not cause of permit any Hazardous Material (as defined
In Section 6.1(b) below) to be brought, kept, used, generated, released or
disposed in, on, under or about the Premises by any person or party whatsoever,
provided, however, that Tenant may use, store and dispose of, In accordance with
applicable Laws, limited quantities of standard office and janitorial supplies,
but only to the extent reasonably necessary for Tenant's operations in the
Premises. Tenant hereby indemnifies Landlord from and against any breach by
Tenant of the obligations stated in the preceding sentence, and hereby agrees to
defend and hold Landlord harmless from and against any and all claims,
liability, losses, damages, costs and/or expenses (including, without
limitation, diminution in value of the Premises, or any portion thereof, damages
for the loss or restriction on use of rentable or usable space or of any amenity
of the Premises, damages arising from any adverse impact on marketing of space
In the Premises, and sums paid in settlement of claims, fines, penalties,
attorneys' fees, consultants' fees and experts' fees) which arise during or
after the Term as a result of such breach, This indemnification of Landlord by
Tenant includes, without limitation, death of or injury to person, damage to any
property or the environment and costs incurred in connection with any
investigation of site conditions or any cleanup, remedial, removal, or
restoration work required by any federal, state or local governmental agency or
political subdivision because of any Hazardous Material present In, on, under or
about the Premises (including soil and ground water contamination) which results
from such a breach. Without limiting the foregoing, If the presence of any
Hazardous Material In, on, under or about the Premises caused or permitted by
Tenant results In any contamination of the Premises, Tenant shall promptly take
all actions at its sole expense as are necessary to return the some to the
condition existing prior to the introduction of such Hazardous Material;
provided that Landlord's approval of such actions, and the contractors to be
used by Tenant in connection therewith, shall first be obtained. This
indemnification of Landlord by Tenant shall survive the expiration or sooner
termination of this Lease.
(b) As used in this Lease, the term "Hazardous Material" means any
hazardous or toxic substance, material or waste which is or becomes regulated by
any local governmental authority, the State of Arizona or the United States
Government. The term "Hazardous Material" includes, without limitation, any
substance, material or waste which is (i) defined as a "hazardous waste" or
similar term under the law's of the jurisdiction where the Premises is located;
(ii) designated as a "hazardous substance" pursuant to Section 311 of the
Federal Water Pollution Control Act (33 U.S.C. Section 1317); (iii) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource, Conservation
and Recovery Act, 42 U.S.C. Section 6901; et seq. (42 U.S.C. Section 6903), (iv)
defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601;
et seq. (42 U.S.C. Section 9601); (v) hydrocarbons, petroleum, gasoline, crude
oil of any products, by-products or fractions thereof, or (vi) asbestos In any
form or condition.
(c) As used in this Article 6, the term "Laws" means any applicable
federal, state or local laws, ordinances, rules or regulations relating to any
Hazardous Material affecting the Premises, Including, without limitation, the
specific laws, ordinances and regulations referred to in Section 6.1(b) above.
References to specific Laws shall also be references to any amendments thereto
and to any applicable successor Laws.
6.2 Right of Entry. Landlord, its employees, agents and consultants, shall have
the right to enter the Premises at any time, in case of an emergency, and
otherwise, during reasonable hours and upon reasonable written notice to Tenant,
in order to conduct periodic environmental Inspections and tests to determine
whether any Hazardous Materials are present. The costs and expenses of such
inspections shall be paid by Landlord unless a default or breach of this Lease,
violation of Laws or contamination caused or permitted by Tenant is found to
exist. In such event, Tenant shall reimburse Landlord upon demand, as Additional
Rent, for the costs and expenses of such Inspections plus a fifteen percent
(15%) administrative fee.
6.3 Notice to Landlord. Tenant shall Immediately notify Landlord In writing of:
(i) any enforcement, clean-up, removal or other governmental or regulatory
action Instituted or threatened regarding the Premises pursuant to any Laws;
(ii) any claim made or threatened by any. person against Tenant or the Premises
relating to damage, contribution, cost recovery, compensation, loss or Injury
resulting from or claimed to result from any Hazardous Material; and (iii) any
reports made to or received from any governmental agency arising out of or in
connection with any Hazardous Material In or removed from the Premises,
including any complaints, notices. warnings or asserted violations in connection
therewith. Tenant
<PAGE> 15
shall also supply to Landlord as promptly as possible, and In any event within
three (3) business days after Tenant first receives or sends the some, copies of
all claims, reports, complaints, notices, warnings, asserted violations or other
communications relating in any way. to the condition of the Premises or any of
the matters described In this Article 6.
ARTICLE 7. INSURANCE, INDEMNITY, CONDEMNATION, DAMAGE AND DEFAULT.
7.1 Tenant's Insurance.
(a) Tenant shall, at its sole cost and expense, during the Term
maintain in effect "All Risks" insurance against damage by fire, vandalism,
malicious mischief and other perils contained within the classification of "All
Risks" for an amount of up to one hundred percent (100%) of the full replacement
cost the Premises and the Building, all improvements constructed thereon and any
additions thereto or replacements thereof, covering the Premises, exclusive of
foundation and excavation costs, together with rental Interruption Insurance on
the Premises against loss by perils covered by such insurance in amounts of up
to one year's full rental value, the proceeds of which shall be payable to
Landlord and any Mortgagee, as their interests may appear. Said insurance shall
not contain a co-insurance or contribution provision, and shall contain a
replacement cost endorsement reasonably acceptable to Landlord. Tenant may
maintain a deductible of $5,000 on such policy, or such other deductible
reasonably acceptable to Landlord, provided however, that in the event of any
loss hereunder, Tenant shall be obligated to pay to Landlord such deductible
amount.
(b) Tenant shall secure and maintain, at its own expense, at all times
during the Term, a policy or policies of commercial general liability Insurance
protecting Tenant and naming Landlord, the holders of any deeds of trust,
mortgages or ground losses on the Premises, and Landlord's representatives
(which term, whenever used in this Article 7, shall be doomed to Include
Landlord's partners, trustees, ancillary trustees, officers, directors,
shareholders, beneficiaries, agents, employees and property manager) as
additional insureds against claims based upon, involving or arising out of
Tenant's i operations, assumed liabilities or Tenant's use, occupancy or
maintenance of the Premises. Such insurance shall provide for a minimum amount
of Two Million Dollars ($2,000,000.00) for property damage or injury to or death
of one or more than one person in any one accident or occurrence, The coverage
required to be carried shall include personal Injury liability (libel, slander,
false arrest and wrongful eviction), broad form property damage liability,
products liability, fire legal liability, advertising injury, completed
operations coverage (as well as owned, non-owned and hired automobile liability
If an exposure exists), and the broadest form of contractual liability coverage
available. It is the parties intention that Tenant's policy provide coverage of
Tenant's contractual obligations under this Lease, including the Indemnification
obligations contained in Section 7.3, to the maximum extent possible. The
commercial general liability policy shall contain an exception to any pollution
exclusion which exception insures damage or Injury arising out of heat, smoke
or fumes from a hostile fire. Such Insurance shall be written on an occurrence
basis and contain a separation of insureds provision or cross-liability
endorsement acceptable to Landlord.
(c) Tenant shall secure and maintain, at Tenant's expense, at all times
during the Term, a policy of physical damage insurance on all of Tenant's
fixtures, furnishings, equipment, machinery, merchandise and personal property
In the Premises and on any Alterations (as defined in Section 5.6) made by or
for Tenant upon the Premises, all for the full replacement cost thereof without
deduction for depreciation of the covered items and In amounts that meet any
co-insurance clauses of the policies of Insurance. Such insurance shall insure
against those risks Customarily covered In an "all risk" policy of insurance
covering physical loss or damage. Tenant shall use the proceeds from such
Insurance for the replacement. of fixtures, furnishings, equipment and personal
property and for the restoration of Alterations to the Premises. In addition,
Tenant shall secure and maintain, at all times during the Term, loss of income,
business interruption and extra expense insurance In such amounts as will
reimburse Tenant for direct or indirect loss of earnings and incurred costs
attributable to all perils commonly insured against by prudent tenants or
attributable to prevention of access to the Premises as a result of such perils.
(d) Tenant shall secure and maintain at all times during the Term
workers' compensation Insurance in such amounts as are required. by law,
employer's liability insurance in the amount of One Million Dollars
($1,000,000.00) per occurrence, and all such other insurance as may be required
by applicable low or as may be reasonably required by Landlord. In the event
Tenant makes any Alterations to the Premises, prior to commencing any work in
the Premises, Tenant shall secure 'builder's all risk' insurance which shall be
maintained throughout the course of construction, such policy being an all risk
builder's risk completed value form, in an amount approved by Landlord, but not
less than the total contract price for the construction of such Alterations and
covering the construction of such Alterations,' and such other insurance as
Landlord may require, it being understood and agreed that all of such
Alterations shall be Insured by Tenant pursuant to this Section 7.1 Immediately
upon completion thereof.
<PAGE> 16
7.2 Tenant's Additional Insurance Requirements.
(a) Tenant shall provide Landlord with an original certificate of
insurance, executed by an authorized agent of the Insurer(s), confirming
compliance with all Insurance requirements hereunder, and copies of such
policies if requested by Landlord. The certificate shall indicate that the
insurance provided specifically recognizes the liability assumed by Tenant under
this Lease (including without limitation Tenant's Indemnification obligations
under Section 7.3) and that Tenant's insurance Is primary to and not
contributory with any other Insurance maintained by Landlord, whose Insurance
shall be considered excess insurance only. The certificate shall also confirm
that the waiver of subrogation required to be obtained pursuant to Section 7.4
is permitted by the insurer.
(b) Payment of premiums for all insurance policies required under this
Lease shall he deemed Additional Rent. In the event that Tenant fails to cure an
event of default within the applicable notice period, Landlord may thereafter
require that all Insurance policies required hereunder to be paid in advance
with a single, annual premium. All such policies shall be issued by and binding
upon a reputable insurance company of good financial standing licensed to do
business in the State of Arizona with a rating of at least A-VII in the most
currently available issue of Best's Insurance Guide, or such other rating as may
be required by a lender having a lien on the Premises. Evidence of Insurance
provided to Landlord shall include an endorsement showing that Landlord,
Landlord's representatives and the holders of any deeds of trust, mortgages or
ground leases on the Premises are Included as additional insureds on general
liability insurance, and as loss payees for property insurance, to the extent
required. hereunder, and an endorsement whereby the insurer agrees not to
cancel, non-renew or materially alter the policy without at least thirty (30)
days prior written notice to Landlord and any mortgages of Landlord. Tenant
shall, at least thirty (30) days prior to the expiration of any policy of
insurance required to be maintained. by Tenant under this Lease, furnish
Landlord with an "insurance binder" or other satisfactory evidence of renewal
thereof.
(c) It is the intention of the parties hereto to protect Landlord and
the Premises from any type or amount of risk for which Insurance can be
reasonably obtained throughout the Term. If in the opinion of any mortgages of
the Premises or an insurance broker retained by Landlord, the amount or type of
any insurance coverage then in effect is not adequate to protect the Interests
6f Landlord, Landlord's mortgagee or Landlord's representatives, then Tenant
shall Increase or broaden Its Insurance coverage in the manner requested within
thirty (30) days of Landlord's written notice. Notwithstanding anything
contained herein, Tenant assumes full responsibility for adequately insuring
Itself against all risks and obligations under this Lease and Its use of the
Premises. Tenant's obligations shall not be limited or relieved in any manner as
a result of Tenant's satisfaction of the minimum Insurance requirements under
this Lease.
(d) Tenant shall not do or permit anything to be done that would
Invalidate the Insurance policies referred to in this Article 7. Tenant shall,
at Tenant's sole expense, comply with (i) all requirements of Tenant's and
Landlord's insurers and (ii) all rules, orders, regulations or requirements of
the American Insurance Association and with any similar body that pertain to
Tenant's business operations or use of the Premises.
(e) In the event that Tenant fails to provide evidence of Insurance
required to be provided by Tenant under this Lease, prior to commencement of the
Term, and thereafter during the Term, within five (5) days following Landlord's
request therefor, and thirty (30) days prior to the expiration date of any such
policy of coverage, Landlord shall be authorized (but not required) to procure
such policy at Tenant's expense, The costs of such policy, plus a fifteen
percent (15%) administrative fee, shall be payable as Additional Rent within
ten (10) days of Landlord's written notice.
7.3 Indemnity and Exoneration.
(a) To the extent not prohibited by law, Landlord and Landlord's
representatives shall not be liable for any lose, injury or damage to person or
property of Tenant, Tenant's agents, employees, contractors, customers, invitees
or any other person, in or about the Premises, whether such damage or injury
caused by fire, steam, electricity. gas, water or rain, or from the breakage,
leakage or other defects of sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures, or by theft, acts of God, acts of the public
enemy, riot, strike, insurrection, war, court order, requisition or order of
governmental body or authority or from any other cause, whether said damage or
Injury results from conditions arising upon the Premises or from other sources
or places, and regardless of whether the cause of such damage or Injury or the
means of repairing the same is inaccessible to Tenant, or which may arise
through repair, alteration or maintenance of any part of the Premises (except as
expressly provided below and in Sections 7.5 and 7.6) or the failure to make any
such repair, from any condition or defect in, on or about the Premises,
including the presence of any Hazardous Material, as defined in Section 6.1, or
from any other condition or cause whatsoever. Landlord shall not be liable for
any loss, injury or damage arising from any act or omission of any other
occupant of the Premises or any other party, nor shall Landlord be liable under
any circumstances for damage or Inconvenience to Tenant's business or for any
losses of income or profit
<PAGE> 17
therefrom, except in the event of Landlord's active gross negligence or willful
misconduct, or Landlord's affirmative, active negligence (excluding any
omissions to act) in the event Landlord enters upon the Premises, but only to
the extent of affirmative negligent acts committed while upon the Premises
(b) Tenant shall indemnify, protect, defend and hold the Premises,
Landlord and Landlord's representatives, harmless of and from any and all
claims, liability, costs, penalties, fines, damages, injury, expenses (including
without limitation attorneys' fees, consultant fees, testing and Investigation
fees, expert fees and court costs) arising out of or In any way related to or
resulting directly or Indirectly from (i) use or occupancy of the Premises, (ii)
the activities of any person or party In or about the Premises, Including but
not limited to work or labor performed, materials or supplies furnished to or at
the request of or for the account of Tenant, (iii) any failure to comply with
any applicable law, and (iv) any default or breach by Tenant of any obligation
under this Lease, provided, however, that the foregoing indemnity shall not be
applicable to claims arising by reason of the active gross negligence or willful
misconduct of Landlord, or Landlord's active negligence (excluding any omissions
to act) in the event Landlord enters upon the Premises, but only to the extent
of affirmative negligent note committed while upon the Premises.
(c) The provisions of this Section 7.3 shall survive the expiration or
sooner termination of this Lease. BY SIGNING ITS INITIALS BELOW, TENANT
ACKNOWLEDGES THAT IT HAS READ AND UNDERSTANDS THE MEANING AND RAMIFICATIONS OF
THE PROVISIONS SET FORTH IN THIS SECTION 7.3 AND FURTHER ACKNOWLEDGES THAT SUCH
PROVISIONS WERE SPECIFICALLY NEGOTIATED.
/s/ JIR
______________________
Tenant's Initials
7.4 Waiver of Subrogation. Anything in this Lease to the contrary
notwithstanding, Landlord and Tenant each waived all rights of recovery, claim,
action or cause of action against the other, its agents (including partners,
both general and limited), trustees, officers, directors, and employees, for any
lose or damage that may occur to any person or to the Premises, or any
improvements thereto, or the Premises or any personal property of such party
therein, by reason of any cause required to be Insured against under this Lease
to the extent of such coverage, regardless of cause or origin, Including
negligence of the other party hereto, provided that such party's insurance is
not Invalidated thereby; and each party covenants that, to the fullest extent
permitted by law, no insurer shall hold any right of subrogation against such
other party. Tenant shall advise Its insurers of the foregoing and such waiver
shall be a part of each policy required to be maintained by Tenant hereunder.
7.5 Condemnation
(a) It there is any taking of or damage to all or any part of the
Premises or any Interest therein because of the exercise of the power of eminent
domain or Inverse condemnation, whether by condemnation proceedings or
otherwise, or any transfer of any part of the Premises or any interest therein
made In avoidance thereof (all of the foregoing are hereinafter referred to as a
"Taking") before or during the Term, the rights and obligations of the parties
with respect to such Taking shall be as provided In this Section 7.5. For
purposes of this Section 7.5 the 'date of Taking' means the date of entry into
possession by, or the vesting of title In, the condemning authority, whichever
is earlier.
(b) If there is a Taking of all of the Premises, this Lease shall
terminate automatically as of the date of Taking. If this Lease Is terminated as
to a portion of the Premises, such partial termination shall be effective as of
the date of Taking.
(c) If twenty-five percent (26%) or more, but less than one hundred
percent (100%), of the Floor Area of the Building shall be taken, either party
may terminate this Lease. The terminating party shall give the other party
notice of such election not later than thirty (30) days after the date of
Taking. If neither party gives such notice, this Lease shall remain in full
force and effect and Base Rent shall be adjusted as provided In Section 7.5(f).
(d) If twenty-five percent (25%) or more of the parking spaces In the
parking area an the Premises shall be taken, or If a Taking of a portion of the
parking area results in a violation of or noncompliance With governmental
requirements, then either Landlord or Tenant may terminate this Lease. The
terminating party shall give written notice to the other party of such election
not later than thirty (30) days after the date of Taking. If Tenant gives such
written notice of termination to Landlord, Landlord shall have the right, within
thirty (30) days after receipt of such notice, to give written notice to Tenant
of Landlord's intention to provide additional parking to Tenant, which parking
shall be located within a reasonable distance from the boundary of the Premises.
If such additional parking is thereafter made available to Tenant, or if neither
party given such notice, this Lease shall remain in full force and affect.
<PAGE> 18
(e) If this Lease is not terminated pursuant to this Section 7.5,
Landlord shall restore with reasonable diligence the remainder of the Premises
so for as practicable to a complete unit of similar quality, character, and
condition as that which existed immediately prior to the Taking, provided that
the scope of work shall not exceed the original scope of work done by Landlord
In constructing the Premises, and further provided that Landlord shall not be
obligated to expand more then the amount which was awarded and received by
Landlord for such purpose In connection with the Taking.
(f) If this Lease is not terminated as provided In this Section 7.5,
the Base Rent shall be reduced in proportion to the ratio of the floor Area
taken from the Building to the total Floor Area of the Building immediately
before the Taking.
(g) The entire award or compensation In such proceedings, whether for a
total or partial Taking or for diminution In the value of the leasehold or for
the fee shall belong to and be the property of Landlord. Tenant hereby assigns
its right to any such award to Landlord; provided that Tenant shall be entitled
to receive from the condemnor such compensation as may be separately awarded by
the condemnor to Tenant or recoverable from the condemnor by Tenant In its own
right for the taking of trade fixtures and equipment owned by Tenant (meaning
personal property, whether or not attached to real property, Which may be
removed without Injury to the Premises), for Tenant's business goodwill
unrelated to the Leave, and for the expense of removing and relocating Tenant's
personal property, Tenant shall not be compensated for the "bonus value" of its
lease if the date of Taking occurs after the end of the fifth year of the
Initial Term. If the Premises are restored In accordance with Section 7.5(e),
any awards received shall be made available for such restoration.
(h) In the event of a temporary Taking of all or a portion of the
Premises, there shall be no abatement of Rent and Tenant shall remain fully
obligated for performance of all of the covenants and obligations on its part to
be performed pursuant to the terms of this Lease. All proceeds awarded or paid
with respect thereto shall belong to Tenant.
7.6 Damage or Destruction. In the event of a fire or other casualty in the
Premises, Tenant shall Immediately give notice thereof to Landlord. The
following provisions shall then apply:
(a) If the damage to the Premises can, in Landlord's reasonable
opinion, be made tenantable with all damage repaired within nine (9) months from
the date of damage, then Landlord shall be obligated to rebuild the same to
substantially their former condition (subject to reasonable changes which
Landlord shall deem desirable and such changes-as may be required by applicable
low) and shall proceed with reasonable diligence to do so and this Lease shall
remain in full force and effect, provided, however, that Landlord shall have no
obligation to repair or restore any tenant Improvements except to the extant
that Landlord realizes insurance proceeds, If any, sufficient for such purpose
and for all other restoration and repair purposes. Landlord shall provide
written notice (the "Repair Notice") to Tenant indicating the anticipated period
for repairing the damage, within thirty (30) days of the later of (i) the date
that Landlord determines the full extent of the damage, or (ii) the extant of
Insurance proceeds available to effectuate repairs. Tenant shall deposit with
Landlord within ten (10) days of Landlord's sending the Repair Notice the
difference, if any, between the estimated costs of repair and the amount of
insurance proceeds payable to Landlord. Landlord may, at its election, refrain
from commencing any repair work until Tenant has deposited such additional sums
with Landlord. In such event, Landlord's time for completing the repairs shall
be extended for a time period equal to such delay in payment by Tenant. The
Repair Notice shall state, if applicable, Landlord's election to either repair
the Premises or terminate the Lease.
(b) Notwithstanding anything to the contrary contained In Section
7.6(a), Landlord shall not have any obligation whatsoever to repair, reconstruct
or restore the Premises when any damage thereto occurs during the lost eighteen
(18) months of the Term. Under such circumstances, if Landlord elects not to
rebuild, Landlord shall notify Tenant of its decision not to rebuild in the
Repair Notice, whereupon the Lease shall terminate as of the later of the date
of such notice or Tenant's vacating and surrendering the Premises and paying the
difference, If any, between the estimated costs of repair and the amount of
Insurance proceeds payable to Landlord.
(c) If the Premises can not be repaired within nine (9) months from the
date of damage, Landlord shall so notify Tenant within thirty (30) days of the
later of (i) the date that Landlord determines the full extent of the damage, or
(ii) the extent of Insurance proceeds available to effectuate repairs. Tenant or
Landlord may terminate this Louse within thirty (30) days after the date of such
notice, such termination notice to be effective upon Tenant's vacating and
surrendering the Premises and paying the difference, If any, between the
estimated costs of repair and the amount of insurance proceeds payable to
Landlord. If neither party elects to terminate, Landlord shall proceed with
reasonable diligence to rebuild the Premises to substantially their former
condition (subject to reasonable changes which Landlord shall deem desirable and
such changes as may be required by applicable law).
<PAGE> 19
(d) During any period when Tenant's use of the Premises is
significantly impaired by damage or destruction, Base Rent shall abate in
proportion to the degree to which Tenant's use of the Premises is impaired until
such time as the Premises are made tenantable as reasonably determined by
Landlord; provided that no such rental abatement shall he permitted if the
casualty is the result of the negligence or willful misconduct of Tenant or
Tenant's employees, agents, contractors or invitees, or If Tenant has failed to
maintain the rental interruption insurance required under Section 7.1 (a).
(e) The proceeds from any insurance paid by reason of damage to or
destruction of the Premises or any part thereof insured by Landlord shall belong
to and be paid to Landlord, subject to the rights of any mortgagee of Landlord's
interest in the Premises or the beneficiary of any dead of trust which
constitutes an encumbrance thereon. Tenant shall be responsible at Its sole cost
and expense for the repair, restoration and replacement of (i) its fixtures,
furnishings, equipment, machinery, merchandise and personal property in the
Premises, and (ii) its Alterations, unless Landlord realizes Insurance proceeds
sufficient for such purpose and agrees to undertake such work.
(f) Landlord's repair and restoration obligations under this Section
7.8 shall not impair or otherwise offset the rights and obligations of the
parties set forth elsewhere in this Lease. Landlord shall not be liable for any
inconvenience or annoyance to Tenant, its employees, agents, contractors or
invitees, or injury to Tenant's business resulting in any way from such damage
or the repair thereof. Landlord and Tenant agree that the terms of this Lease
shall govern the effect of any damage to or destruction of the Premises with
respect to the termination of this Lease and hereby waive the provisions of any
present of future statute or law to the extent inconsistent therewith.
7.7 Default by Tenant.
(a) Events Of Default. The occurrence of any of the following shall
constitute an event of default ("Event of Default") on the part of Tenant:
(1) Abandonment. Vacating the Premises without the intention
to reoccupy come, or abandonment of the Premises for a continuous period of
fourteen (14) days.
(2) Nonpayment of Rent. Failure to pay any installment of Rent
due and payable hereunder on the date, when payment is due, such failure
continuing for a period of three (3) days after written notice of such failure;
provided, however, that Landlord shall not be required to provide such notice
more then four (4) times during the Term with respect to non-payment of Base
Rent or Additional Rent, the fifth such non-payment constituting default without
requirement of notice. Tenant shall pay to Landlord, as Additional Rent
hereunder and In addition to a late charge, If applicable, and any attorneys
fees which Landlord may Incur, a charge of Seventy-Five Dollars ($75.00) for the
preparation of a written demand for delinquent Rent to reimburse Landlord for
its administrative costs thereof.
(3) Other Obligations. Failure to perform any obligation,
agreement or covenant under this Lease other than those matters; SPECIFIED IN
SUBSECTIONS 7.7(a)(1) and 73(a)(2), such failure continuing for a period of
fifteen (15) business days after written notice of such failure (or such longer
period, up to but not exceeding an additional ninety (90) days, as is reasonably
necessary to remedy such default, provided that Tenant 'commences the remedy
within such fifteen (16)-day period and continuously and diligently pursues such
remedy at all times during the additional ninety (90)-day period).
(4) General Assignment. Any general arrangement or assignment
by Tenant for the benefit of creditors.
(5) Bankruptcy. The filing of any voluntary petition in
bankruptcy by Tenant, or the filing of an Involuntary petition against Tenant,
which Involuntary petition remains undischarged for a period of sixty (60) days.
In the event that under applicable law the trustee In bankruptcy or Tenant has
the right to affirm this Lease and continue to perform the obligations of Tenant
hereunder, such trustee or Tenant shall, within such time period as may be
permitted by the bankruptcy court having jurisdiction, cure all defaults of
Tenant hereunder outstanding as of the date of the affirmance of this Lease and
provide to Landlord such adequate assurances as may be necessary to ensure
Landlord of the continued performance of Tenant's obligations under this Lease.
(6) Receivership. The appointment of a trustee or receiver to
take possession of all or substantially all of Tenant's, assets or the Premises,
where possession is not restored to Tenant within thirty (30) days.
(7) Attachment The attachment, execution or other judicial
seizure of all or substantially. all of Tenant's assets or the Premises, It such
attachment or other seizure remains undismissed or undischarged for a period of
thirty (30) days after the levy thereof.
<PAGE> 20
(8) Insolvency. The admission by Tenant in writing of its
Inability to pay its debts as they become due; the filing by Tenant of a
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, the filing by Tenant of an answer admitting or failing timely
to contest a material allegation of a petition filed against Tenant In any such
proceeding; or, If within sixty (60) days after the commencement of any
proceeding against Tenant seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceeding shall not have been
dismissed.
(9) Letter of Credit. If the performance of Tenant's
obligations under this Lease Is secured by a Letter of Credit. (i) the
termination of the Letter of Credit, (ii) the Issuing bank's becoming Insolvent
or the subject of a bankruptcy filing, or (iii) the Issuing bank's refusal to
honor the Letter of Credit, combined with Tenant's failure, within fifteen (15)
days following written notice by or on behalf of Landlord to Tenant of any such
event, to provide Landlord with an alternative letter of credit or other
substitute security acceptable to Landlord In its sole discretion.
(10) Guarantor. If the performance of Tenant's obligations
under this Lease Is guaranteed: (i) the death of a guarantor, (ii) the
termination of a guarantor's liability with respect to this Lease other than in
accordance with the terms of such guaranty; (iii) a guarantor's becoming
Insolvent or the subject of a bankruptcy filing; (iv) a guarantor's refusal to
honor the guaranty; or (A guarantor's breach of Its guaranty obligation on an
anticipatory breach basis, and Tenant's failure, within thirty (30) days
following written notice by or on behalf of Landlord to Tenant of any such
event, to provide Landlord with written alternative assurance or security,
which, when coupled with the then existing resources of Tenant, equals or
exceeds the combined financial resources of Tenant and the guarantor(s) that
existed at the time, of execution of this Lease.
(11) Partner. If Tenant is a partnership or consists of more
then one (1) person or entity, if any partner of the partnership or any person
or entity constituting Tenant is Involved In any of the events or acts described
in subsections 7.7(a)(4) through (8).
(12) Misrepresentation. The discovery by Landlord that any
representation, warranty or financial statement given to Landlord by Tenant or
any guarantor of Tenant's obligations under this Lease was materially false or
misleading.
(b) Remedies Upon Default. If an event of default by Tenant occurs,
then, In addition to any other remedies available to Landlord at law or In
equity, all of which rights and remedies shall be cumulative, with the exercise
of one or more rights or remedies not to Impair Landlord's rights to exercise
any other right or remedy, and all of which may be exercised pursuant to legal
process as then may be provided or permitted by the laws of the State of
Arizona, Landlord shall have the following remedies:
(1) Termination. If an event of default occurs, Landlord shall
have the right, with or without notice or demand, Immediately upon expiration of
any applicable grace period specified herein, to terminate this Lease, and at
any time thereafter recover possession of the Premises or any part thereof and
expel and remove therefrom Tenant and any other person occupying the same by any
lawful means, and repossess and enjoy the Premises without prejudice to any of
the remedies that Landlord may have under this Lease. If Landlord elects to
terminate the Lease, Landlord shall also have the right to reenter the Premises
and take possession of and remove all equipment and fixtures of Tenant in the
Premises.
(2) Continuation After Default. Even though Tenant has
broached this Lease, and/or abandoned the Premises, this Lease shall continue in
effect for so long as Landlord does not terminate Tenant's right to possession
under Section 7.7(b)(1) hereof In writing, and Landlord may enforce all of Its
rights and remedies under this Lease, Including (but without limitation) the
right to recover Rent as It becomes due, and Landlord, without terminating this
Lease, may exercise all of the rights and remedies of a landlord under Arizona
law. Acts of maintenance or preservation, efforts to relet the Premises or the
appointment of a receiver upon application of Landlord to protect Landlord's
Interest under this Lease shall not constitute an election to terminate Tenant's
right to possession unless expressly stated by Landlord. Notwithstanding any
such reletting without such termination, Landlord may at any time thereafter
elect to terminate Tenant's right to possession and this Loose. If Landlord
elects to relet the Premises for the account of Tenant, the rent received by
Landlord from such reletting shall be applied as follows: first, to the payment
of any costs of such reletting (Including, without limitation, attorneys fees,
brokers' fees and tenant improvement costs); second, to the payment of any
Indebtedness other than Rent due hereunder from Tenant to Landlord; third, to
the payment of Rent due and unpaid hereunder, and the balance, if any, shall be
hold by Landlord and applied in payment of future Rent as it becomes due. If
that portion of rent received from the reletting which is applied against the
Rent due hereunder Is less than the amount of the Rent due, Tenant shall pay the
deficiency to Landlord promptly upon demand by Landlord. Such deficiency shall
be
<PAGE> 21
calculated and paid monthly. Tenant shall also pay to Landlord, as soon as
determined, any costs and expenses incurred by Landlord in connection with such
reletting or in making alterations and repairs to the Premises, which are not
covered by the rent received from the reletting.
(c) Indemnification. Nothing In this Section 7.7 shall be doomed to
affect Tenant's obligation to indemnity Landlord under Section 7.3 of this
Lease, and such obligation shall survive the termination or expiration of this
Lease.
(d) Waiver of, Notice/Performance by Landlord. Notwithstanding any
provision of this Section 7.7, (a) if Tenant is required to comply with any
governmental requirement, Tenant shall not be entitled to notice of default from
Landlord and right to cure beyond the period within which such compliance may be
required by applicable law; or (b) if In Landlord's reasonable determination the
'continuance of' any default by Tenant for the full period of notice provided
for herein will constitute a threat of injury or harm to persons or property,
Landlord may, with or without notice, elect to perform those acts with respect
to which Tenant is in default for the account and at the expense of Tenant. If
by reason of such governmental requirement or default by Tenant, Landlord is
compelled or elects to PAY any sum of money (including without limitation
attorneys' fees, consultant fees, tasting and investigation fees, expert fees
and court costs), such sums so paid by Landlord, plus an administrative charge
of fifteen percent (15%) of such sums, shall be due as Additional Rent from
Tenant within ten (10) days of written demand from Landlord.
(e) Late Charge. If any payment required to be made by Tenant under
this Lease is not received by Landlord within five (5) days of the date the same
Is due, Tenant shall pay to Landlord an amount equal to five percent (5%) of the
delinquency as Additional Rent. The parties agree that Landlord would incur
costs not contemplated by this Lease by virtue of such delinquencies, Including
without limitation administrative, collection, processing and accounting
expenses, the amount of which would be extremely difficult to compute, and that
the foregoing sum represents a reasonable estimate of landlord's damages for
late payment. Acceptance of such late charge by Landlord shall in no event
constitute a waiver of Tenant's breach or default With respect to such
delinquency, or prevent Landlord from exercising any of Landlord's other rights
and remedies.
(f) Interest. Tenant hereby acknowledges that late payment by Tenant to
Landlord of Base Rent and Additional Rent and other sums due hereunder will
cause Landlord to Incur costs not contemplated by this Lease, the exact amount
of which will he extremely difficult to ascertain. Such costs include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by the terms of any mortgage or trust deed covering the
Premises, Accordingly, all sums accruing to Landlord under the terms And
provisions of this Lease Which shall not be paid when duo shall bear interest at
the lesser of eighteen percent (18%) per annum or the maximum rate allowed under
Arizona law, from the date the some becomes due and payable by the terms and
provisions of this Lease until paid, such interest constituting Additional Rent
hereunder. In the event that there are any sums payable by Landlord to Tenant
under the terms and provisions of this Lease which shall not be paid when due,
such sums shall bear interest at the lessor of eighteen percent (18%) per annum
or the maximum rate allowed under Arizona law, from the date the same becomes
due and payable by the terms and provisions of this Lease until paid.
(g) Tenant's Subleases. If Landlord elects to terminate this Lease an
account of any default by Tenant, Landlord may: (1) terminate any sublease,
license, concession, or other consensual arrangement for possession entered into
by Tenant and affecting the Premises, or (h) choose to succeed to Tenant's
interest in such arrangement. If Landlord elects to succeed to Tenant's Interest
In such arrangement, Tenant shall, as of the date of notice by Landlord of that
election, have no further right to, or interest in, any rent or other
consideration receivable under that arrangement.
(h) Form of Payment After Default. If Tenant falls to pay any amount
due under this Lease within three (3) days after written notice or If Tenant
draws a check on an account with, insufficient funds, Landlord shall have the
right to require that any subsequent amounts paid by Tenant to Landlord under
this Lease (to cure, a default or otherwise) be paid In the form of cash, money
order, cashier's or certified check drawn on an Institution acceptable to
Landlord, or other form approved by Landlord, despite any prior practice of
accepting payments In a different form.
(i) ACCEPTANCE of Rent Without Waiving Rights. No payment by Tenant
shall be deemed to be other then on account of the earliest sum due from Tenant
hereunder, nor shall any endorsement or statement on any check or any letter
accompanying such payment be deemed an accord and satisfaction. As further
provided In Section 8.3 herein, Landlord may accept Tenants payments without
waiving any right or remedy under this Lease, including the right to commence
and pursue an action to enforce rights and remedies under a previously served
notice of default, without giving Tenant any further notice or demand.
<PAGE> 22
(j) Waiver by Tenant. Tenant hereby waives all claims for damages that
may be caused by Landlord's lawful reentering and taking possession of the
Premises in accordance with the provisions of this Lease or removing and storing
the property of Tenant as herein provided.
(k) Remedies Cumulative. All rights, privileges and elections or
remedies of Landlord are cumulative and not alternative with all other rights
and remedies at law or in equity to the fullest extent permitted by law.
ARTICLE 8. MISCELLANEOUS MATTERS.
8.1 Parking. In the event that there is more then one tenancy at the Premises,
Landlord reserves the right: (i) to change the configuration, design and layout
of the parking area, (ii) to close off or restrict access to the parking area
from time to time to facilitate construction, alteration, or improvements,
without incurring any liability to Tenant and without any abatement of Rent
under this Lease, and (iii) to adopt reasonable rules and regulations for the
parking area from time to time. Only automobiles no larger then full size
passenger automobiles or pick-up trucks may be parked in the Premises parking
area. Tenant shall not permit or allow any vehicles to be loaded, unloaded or
parked In areas other then those designated by Landlord for such activities.
8.2 Brokers. Landlord and Tenant each represent to the other that neither party
has had any dealings with any broker in connection with the negotiation of this
Lease and the consummation of the transaction contemplated hereby, other than
Eric J. Wichterman of Grubb & Ellis, who acted as the selling broker in the sale
of the Premises by Tenant to Landlord, and who will be compensated solely by
Tenant. Landlord and Tenant hereby agree to Indemnify, defend and hold each
other free and harmless from and against other liability for compensation or
charges which may be claimed by any other agent, broker, finder or similar party
by reason of any dealings with or actions of the indemnifying party in
connection with the negotiation of this Lease and the consummation of this
transaction, including any costs, expenses and attorneys' fees Incurred with
respect thereto.
8.3 No Waiver. No waiver by either Landlord or Tenant of the default or breach
of any term, covenant or condition of this Lease shall be deemed a waiver of any
other term, covenant or condition hereof, or of any subsequent default or branch
of the same or of any other term, covenant or condition hereof. The consent to,
or approval of, any act by a party shall not be deemed to render unnecessary the
obtaining of such party's consent to, or approval of, any subsequent or similar
act, or be construed as the basis of an estoppel to enforce any provision of
this Lease requiring such consent. Landlord's knowledge of a default or breach
at the time of accepting any payment from Tenant shall not be a waiver of any
such default, or breach by Tenant other than the failure of Tenant to pay the
particular obligation to which such payment in applied by Landlord. Any payment
made by Tenant may be accepted by Landlord on account of any monies or damages
due Landlord, notwithstanding any qualifying statements or conditions made by
Tenant in connection therewith, which statements and/or conditions shall be of
no force or effect whatsoever unless specifically agreed to in writing by
Landlord at or before the time of deposit of such payment.
8.4 Recording. A memorandum of this Lease may be recorded, provided that the
form of such memorandum is first approved by Landlord, In Landlord's reasonable
discretion.
8.5 Holding Over. If Tenant holds over after expiration or termination of this
Lease without the written consent of Landlord, Tenant shall pay for each month
of hold-over tenancy one hundred fifty percent (150%) of the Base Rent which
Tenant was obligated to pay for the month immediately preceding the and of the
Term for each month or any part thereof of any such hold-over period, together
with all other amounts due hereunder. No holding over by Tenant after the Term
shall operate to extend the Term. In the event of any unauthorized holding over,
Tenant shall Indemnify, defend and hold Landlord harmless from and against all
claims, demands, liabilities, losses, costs, expanses (including attorneys'
fees), injury and damages incurred by Landlord as a result of Tenant's delay in
vacating the Premises.
8.6 Transfers by Landlord. If Landlord transfers, in whole or in part, Its
rights and obligations under this Lease or in the Premises, upon Its
transferee's assumption of Landlord's obligations hereunder and delivery to such
transferee of any unused Security Deposit then hold by Landlord, Landlord shall
be automatically released from any liability or obligations accruing under the
Lease after the date of such transfer,
8.7 Attorneys' Fees. If Landlord or Tenant (the "indemnified party") becomes a
party to any action or dispute concerning the Premises as a result of any act or
omission by the other party (the "indemnified party") the indemnifying party
shall be liable for all costs incurred by the indemnified party In connection
with such dispute (including without limitation attorneys' fees, consultant
fees, testing and Investigation fees, expert fees and court costs), whether or
not litigation is commenced. In the event either party places the enforcement of
this Lease, or any part of It, or the collection of any Rent due or to
<PAGE> 23
become due hereunder, or recovery of the possession of the Premises, in the
hands of an attorney, or files suit upon the same, the prevailing party shall
recover Its reasonable attorneys' fees, costs and expenses, including those
which may be Incurred in connection With any mediation, arbitration, bankruptcy
proceeding or upon appeal. Such fees may be awarded in the same suit or
recovered In a separate suit, whether or not suit is filed or any suit that may
be filed is pursued to decision or judgment. The term "prevailing party" shall
include, without limitation, a party who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by. the other party of its claim or defense. The attorneys'
fee award shall not be computed In accordance with any court fee schedule, but
shall be such as to fully reimburse all attorneys' fees reasonably Incurred.
8.8 Termination; Merger. No act or conduct of Landlord, Including, without
limitation, the acceptance of keys to the Premises, shall constitute an
acceptance of the surrender of the Premises by tenant before the scheduled Term
Expiration Date. Only a written notice from Landlord to Tenant expressly
accepting a surrender of the Premises and acknowledging a termination of this
Lease shall be effective. Unless specifically stated otherwise In writing by
Landlord, the termination of this Lease for any reason shall automatically
terminate any sublease or lesser estate In the Premises; provided, however, that
Landlord shall have the option to continue any or oil existing subtenancies.
8.9 Amendments; Interpretation. This Lease may not be altered, changed or
amended, except by an instrument in writing signed by the parties in interest at
the time of the modification. The captions of this Lease era for convenience
only and shall not be used to define or limit any of its provisions.
8.10 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 (including the application of such
provision to any other person or circumstance) shall not be affected thereby.
This Lease shall in all events be construed and Interpreted so as to remain
enforceable In accordance with the express terms contained herein to the fullest
extent permitted by law.
8.11 Notices. All notices, demands, consents and approval* which are required or
permitted by this Lease to be given by either party to the other shall be in
writing and shall be deemed to have been fully given by personal delivery or by
recognized overnight courier service or when deposited In the United States
mail, certified or registered, with postage prepaid, and addressed to the party
to be notified at the address for such party specified on the Basic Lease
Information shoot, or to such other place as the Party to be notified may from
time to time designate by at least fifteen (16) days' notice to the notifying
party given In accordance with this Section 8.11, except that upon Tenant's
taking Possession of the Premises, the Premises shall irrevocably constitute
Tenant's address for notice purposes until Landlord has accepted Tenant's
surrender of the Premises. A copy of all notices given to Landlord under this
Lease shall be concurrently transmitted to such party or parties at such
addresses as Landlord may from time to time hereafter designate by notice to
Tenant.
Any notice sent by registered or certified mail, return receipt
requested, shall be deemed given on the date of delivery shown on the receipt
card, or if no delivery date is shown, the postmark thereon. Notices delivered
by recognized overnight courier shall be deemed given twenty-four (24) hours
after delivery of the same to the courier. If notice is received on a Saturday,
Sunday or legal holiday. It shall be deemed received on the next business day.
8.12 Force Majeure. Any prevention, delay or stoppage of work to be performed
by Landlord or Tenant which is due to strikes, labor disputes, inability to
obtain labor, materials, equipment or reasonable substitutes therefor, acts of
God, governmental restrictions or regulations or controls, judicial orders,
enemy or hostile government actions, civil commotion, or other causes beyond the
reasonable control of the party obligated to perform hereunder, shall excuse
performance of the work by that party for a period equal to the duration of that
prevention, delay or stoppage. Nothing In this Section 8.12 shall excuse or
delay Tenant's obligation to pay Rent or other charges due under this Lease.
8.13 Independent Covenants. Each and every covenant, agreement or other
provision of this Lease on Tenant's part to be performed shall be doomed and
construed as a separate and Independent covenant of Tenant, not dependent an any
other provision of this Lease or on any other covenant or agreement of Landlord
set forth herein.
<PAGE> 24
8.14 Successors and Assign. This Lease shall be binding upon and inure to the
benefit of Landlord; its successors and assigns (subject to Section 8.6 herein),
and shall be binding upon and inure to the benefit of Tenant, Its successors,
and to the extent a Transfer under Section 5.4 may be approved by Landlord,
Tenant's successors and assigns.
8.15 Further Assurances. Landlord and Tenant each ogres to promptly sign all
documents reasonably requested to give effect to the provisions of this Lease.
8.16 Incorporation of Prior Agreements. This Lease, Including the exhibits and
addends attached to It, contains all agreements of Landlord and Tenant with
respect to any matter referred to herein. No prior agreement or understanding
pertaining to such matters shall be effective.
8.17 Applicable Law. This Lease shall be governed by, construed and enforced In
accordance with the laws of the State of Arizona.
8.18 Time of the Essence. Time Is of the essence of each and every covenant of
this Lease.
8.19 No Joint Venture. This Lease shall not be doomed or construed to create or
establish any relationship of partnership or joint venture or similar
relationship between Landlord and Tenant hereunder.
8.20 Authority. If Tenant Is a corporation, trust, general or limited
partnership, limited liability company or other business entity, each individual
executing this Lease on behalf of Tenant represents and warrants that he or she
is duly authorized to execute and deliver this Lease on Tenant's behalf and that
this lease is binding upon Tenant in accordance with its terms. If Tenant is a
corporation, trust, partnership, limited liability company or other business
entity, Tenant shall, within ten (10) business days after request by Landlord,
deliver to Landlord evidence satisfactory to Landlord of such authority.
Landlord shall within ten (10) business days after request by Tenant, deliver to
Tenant evidence of Landlord's authority to execute and deliver this Lease.
8.21 Offer. Preparation of this Leave by Landlord or Landlord's agent and
submission of same to Tenant shall not be deemed an offer to lease to Tenant.
This Lease is not intended to be binding and shall not be effective until fully
executed by both Landlord and Tenant
8.22 Tenant Financing. Landlord agrees to execute and deliver from time to time,
if requested by Tenant, and so long as Tenant is not in default hereunder,
Instruments for the benefit of Tenant and any bank, trust company or other
parson ("Lender") extending loans or other financial accommodations to Tenant.
Such Instruments may provide that: (i) Landlord waives any landlord's liens that
may be Imposed against or encumber any of Tenant's personal property located on
the Premises (but excluding Alterations, as defined in Section 5.6 herein, or
any other leasehold or tenant improvements); (ii) In the event of any default by
Tenant under the Lease, Landlord will deliver by mail to Lender copies of any
notices of default contemporaneously with the delivery thereof to Tenant, (iii)
Lender will have a right to cure any of Tenant's defaults upon the same basis as
Tenant, and (iv) in the event that Lender timely cures Tenant's defaults, Lender
shall have a license to occupy the Premises for a period of up to ninety (90)
days following the cure of such default, provided that such license may be
revoked upon Lender's failure to thereafter timely pay all sums due under the
Lease or timely perform all other obligations to be performed by Tenant
hereunder during the period of Lander's occupancy.
8.23 Exhibits; Addenda. All the Exhibits and addenda which are referenced herein
or are to attached to this Leave are incorporated In and made a part of this
Lease.
8.24 Waiver of Right to Jury Trial. Landlord and Tenant waive their respective
rights to trial by jury of any contract or tort claim, counterclaim,
cross-complaint, or cause of action in any action, proceeding, or hearing
brought by either party against the other on any matter arising out of or in any
way connected with this Lease, the relationship of Landlord and Tenant, or
Tenant's use or occupancy of the Premises, including any claim of injury or
damage or the enforcement of any remedy under any current or future law,
statute, regulation, code or ordinance.
/s/ JIR
- --------------------------------- -----------------------------------
(Landlord's initials) (Tenant's initials)
<PAGE> 25
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the
day and year first written above.
"LANDLORD"
Van Wagner Properties
By:
------------------------------------------
"TENANT"
CPU Micromart, a Nevada corporation
By: /s/ Jeffrey I. Rassas
------------------------------------------
Its: CEO
------------------------------------------
<PAGE> 26
EXHIBIT "A"
Lot 4, Sun Airpark Corporate Center Two, according to Book 352 of Maps Page 48,
Records of Maricopa County, Arizona.
<PAGE> 27
EXCLUSIVE AUTHORIZATION TO SUBLEASE
SUBLESSOR hereby grants to Lee & Associates Arizona Commercial Real Estate
Service Company ("Broker") this exclusive right to negotiate a sublease or
subleases on the subject property for a period commencing November 1, 1999 and
ending at midnight on November 30, 1999. Said sublease(s) shall be at the
monthly rental of One and No/100 (NNN) per square foot Dollars (1.00/SF NNN).
The sublease term shall be for no longer a term than that specified in the
Master Lease which farm expires on ________, _____, and unless stated otherwise,
subject to the terms and conditions of the Master Lease under which the
Sublessor herein Is the Lessee. The subject property Is in the City of
Scottsdale, County of Maricopa, State of Arizona, located at 15685 North
Greenway-Hayden Loop, Scottsdale, Arizona 85260 and further described as an
approximate 10,000 square foot office, showroom, warehouse facility. The terms
of the Sublease(s) shall be as follows: See Master Lease attached.
In consideration of this EXCLUSIVE AUTHORIZATION TO SUBLEASE and the Broker's
agreement to diligently pursue the procurement of a subtenant or subtenants for
the subject property, Sublessor agrees to pay Broker a leasing commission In
accordance with the appropriate provisions of the SCHEDULE OF COMMISSIONS
attached hereto and which is fully and completely incorporated herein by this
reference.
Sublessor shall pay the commission to Broker If: (a) the subject property is
subleased to tenant(s) whether through the Broker, or by the Sublessor, or by or
through anyone else prior to the expiration of this Authorization or any
extension thereof; or (b) a satisfactory tenant is procured or introduced who is
ready, willing and able to sublease the subject property on the terms above
stated or other terms acceptable to Sublessor prior to the expiration of this
Authorization or any extension thereof, whether procured or introduced by Broker
or by the Sublessor or by or through anyone else; or (e) any contract for the
sublease of the subject property Is made directly or Indirectly by the Sublessor
prior to the expiration of this Authorization or any extension thereof; or (d)
within one hundred eighty (180) days after the expiration of this Authorization
or any extension thereof, the subject property Is subleased to any person or
entity with whom Broker has negotiated or to whom Broker has submitted the
Property prior to such expiration in on effort to affect a transaction and whose
name appears on any list of such persons or entities which Broker shall have
mailed to Sublessor at the address stated below at any time within ten (10) days
immediately following such expiration; provided, however, if Broker has
submitted a written proposal to sublease, then it shall not be necessary to
include the offeror's name on the list.
It is further agreed that if Sublessor receives a cash bonus in connection with
any sublease within the terms hereof, then in addition to a leasing commission,
a commission shall be paid to Broker an said cash bonus calculated at the some
commission rate set forth in the attached SCHEDULE OF COMMISSIONS and shall be
paid at the same time ask the leasing commission. In addition, if in lieu of a
sublease the Master Lessor relieves the Sublessor of any future rental
liability, then a leasing commission shall be paid by the Sublessor to the
extent of the rental relief.
Sublessor agrees to cooperate with Broker in affecting subleases of the
property, to immediately refer to Broker all Inquiries of any party Interested
in the property, and to exercise diligent and good faith efforts towards
obtaining any and all approvals of the Master Lessor that may be necessary for a
sublease. All negotiations are to be through Broker. Broker is authorized to
accept a deposit from any prospective subtenant. Subject to the terms and
conditions of the Master Lease, Broker in further authorized to advertise the
property and shall have the exclusive right to place a sign on the property If,
in Broker's opinion, such would facilitate the subleasing of said property.
It is understood that it is illegal for either Sublessor or Broker to refuse to
display or sublease to any person because of race, color, religion, national
origin, sex, marital status or physical disability,
Sublessor warrants that he has the right to possession of the subject property
and has the full legal authority to execute this Authorization, Sublessor agrees
to hold Broker harmless from any liability, costs or damages and/or expenses,
including without limitation attorney's fees, arising from any incorrect
information supplied by Sublessor or any Information which Sublessor falls to
supply, or any incorrect representation of Sublessor herein, Sublessor
acknowledges receipt of a copy of this EXCLUSIVE AUTHORIZATION TO SUBLEASE and
the attached SCHEDULE OF COMMISSIONS, each of which Sublessor has read, fully
understands, and has executed.
Broker hereby acknowledges receipt of a copy of the Master Lease attached
hereto.
No amendments at alterations in the terms hereof or withdrawal of this
Authorization shall be valid or binding unless made In writing and signed by
both Sublessor and Broker, and Sublessor and Broker agree that there are no
statements, representations, inducements or Premises made or relied upon by one
or the other, except as expressly stated herein.
<PAGE> 28
ARBITRATION OF DISPUTES
In the event any controversy related to, concerning at arising out of this
EXCLUSIVE AUTHORIZATION TO SUBLEASE and/or the attached SCHEDULE OF COMMISSION,
or any facts based upon or involving same such claim or controversy shall be
settled by final, binding arbitration In accordance with the Commercial
Arbitration Rules of the American Arbitration Association, which rules are
incorporated herein by reference; provided, however, that all persons nominated
to act as arbitrators of such claim or CONTROVERSY SHALL BE ATTORNEYS AT LAW
DUTY LICENSED TO PRACTICE court having jurisdiction thereof. Depositions may he
taken and other discovery may be obtained during SUCH ARBITRATION PROCEEDINGS TO
THE SAME extent authorized in civil judicial proceedings. The unsuccessful party
shall pay the costs of conducting the arbitration. In THE EVENT ANY ARBITRATION
PROCEEDING AT LEGAL ACTION to ENFORCE AN ARBITRATION AWARD IS COMMENCED to
recover compensation hereunder, the prevailing party shall be entitled to
recover its expenses and reasonable attorney's fees incurred therein from the
unsuccessful party.
Sublessor hereby acknowledges that neither Broker nor any salesperson associated
with Broker is qualified or authorized to give legal or tax advice; if Sublessor
desires such advice he a hall consult with an attorney or accountant. Sublessor
hereby authorizes Broker to represent and serve as agent for any tenant or
subtenant, or prospective tenant or subtenant of premises within the Property,
and Sublessor hereby wolves any conflict of Interests which might arise as a
result thereof.
In the event that any prospective tenant or subtenant is interested in leasing
Premises within the Property for a term greater then the unexpired term of the
Master Lease, Broker is hereby authorized to solicit from the Master Lessor
and/or the prospective tenant or subtenant an agreement authorizing Broker to
represent the Master Lessor and/or prospective tenant or subtenant in connection
with SUCH LEASE NEGOTIATIONS AND AGREEING to pay Broker a commission with
respect to such transaction. Such commission shall be to compensate Broker with
respect to the leasing of the Property for a period Wending beyond the term of
the Matter Lease and shall not relieve Sublessor of its obligations hereunder.
Receipt of a copy hereof is acknowledged.
Dated: , 19 Dated: , 19
SUBLESSOR: CPU Micro Mart BROKER: Lee & Associates Arizona
Commercial Real Estate Services
Company, an Arizona corporation
By: /s/ Jeffrey I. Rassas By:
------------------------------- ------------------------------------
Jeffrey Rassas, CEO James B. Watkins, Designated Broker
Address: 15695 North 83rd Way Address: 3200 E. Camelback Road, Suite 100
Scottsdale, AZ 85260 Phoenix, AZ 85018
Telephone: (480) 850-4100 Telephone: (602) 956-7777
<PAGE> 29
LEE & ASSOCIATES - ARIZONA
Schedule of Commissions
PROPERTY SALES - LAND OR BUILDING
Transactions under $500,000 7% of the sales price
$500,000 to $1,000,000 6% of the sales price
Over $1,000,000 5% of the sales price
LEASING SCHEDULES
Net Leases Gross Leases
6% Years 1-5 6% Years 1-5
3% Years 6-10 3% Years 6-10
2% Over 10 Years 2% Over 10 Years
Extension of Lease or Additional Space Taken: Should the term of the lease be
extended or the tenant occupy additional space, then a leasing commission shall
be paid when aid term is extended or sold additional specs is occupied. The
leasing commission shall be computed in accordance with the provisions of this
Schedule and by using the rates applicable as if the initial term of lease had
included said extension period or the premises initially demised had Included
said additional space.
Purchase of Property by Tenant: Should tenant, his successors, or assignees
purchase the subject property during the term of the lease or any extension
thereof or within 180 days after expiration thereof, than a sales commission
shall be paid when the purchase is effected. Said sales commission shall be
computed in accordance with the provisions of this Schedule, less the amount of
paid leasing commissions related to that portion of the lease term EXTENDING
BEYOND THE EFFECTIVE DATA OF SAID PURCHASE.
PAYMENT OF EARNED COMMISSIONS
Commissions shall be paid through escrow upon the closing of SALES AND EXCHANGE
TRANSACTIONS; ABSENT ANY ESCROW: commissions shall be paid upon recordation of a
deed or upon delivery of such dead or other conveyance if recordation is
deferred more than one month thereafter. In the event of a contract or AGREEMENT
OF SALES, JOINT VENTURE AGREEMENT, BUSINESS opportunity or other transaction not
involving the delivery of a deed, commissions shall be paid upon execution and
delivery of the instrument or conveyance or establishment of the entitlement of
ownership.
One-half of leasing and subleasing commissions shall be paid upon THE MUTUAL
EXECUTION OF A LEASE/SUBLEASE BY LESSOR/SUBLESSOR AND TENANT/SUBTENANT, AND THE
BALANCE SHALL BE PAID ON THE DATE SPECIFIED IN THE LEASE FOR THE COMMENCEMENT OF
THE TERM.
Broker Is hereby authorized to deduct its commission pursuant to this Schedule
from funds hold In its trust account; Owner shall promptly pay any difference in
cash In accordance herewith.
MISCELLANEOUS
If during the term of the attached agreement an option or RIGHT OF FIRST REFUSAL
TO PURCHASE OR LEASE THE PROPERTY OR ANY INTEREST THEREIN IS GRANTED OR AN
ESCROW IS OPENED OR NEGOTIATIONS INVOLVING THE SALE, TRANSFER, CONVEYANCE OR
LEASE of the Property HAVE COMMENCED AND ARE CONTINUING, THEN THE TERM OF THE
ATTACHED AGREEMENT SHALL BE EXTENDED WITH RESPECT TO SUCH TRANSACTION(S) AND
NEGOTIATIONS FOR A PERIOD THROUGH THE EXERCISE OF SUCH option or
<PAGE> 30
right of first refusal, the closing of such escrow, the termination of such
negotiations or the consummation of such transaction.
In the event any arbitration proceeding or legal action to ENFORCE AN
ARBITRATION AWARD IS COMMENCED TO RECOVER COMPENSATION HEREUNDER AND THE
ATTACHED AGREEMENT, THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER ITS
EXPENSES AND REASONABLE ATTORNEYS' FEES INCURRED THEREIN from the unsuccessful
party.
Broker shall share commission with Qualified Cooperative Brokers. For purposes
hereof, a Qualified Cooperative Broker shall mean a person or entity which
satisfies all of the following criteria;
(a) a person or entity duly licensed by the State of Arizona as a
real estate broker;
(b) a person or entity not a principal in the transaction;
(c) a person or entity who is identified as a cooperative broker
in an initial conference between Broker and such prospective
purchaser or prospective tenant; and
(d) a person or entity who made the initial introduction of the
Property to the prospective purchaser or the prospective
tenant.
Broker shall not be required to short a commission with any person or entity who
in not a Qualified Cooperative Broker.
The understanding hereby acknowledges receipt of a copy of this schedule and
agrees to pay a commission(s) as provided herein.
Dated: , 19 Dated: , 19
Owner, Lessor or
Sublessor: Broker: Lee & Associates Arizona
Commercial Real Estate Services
Company, an Arizona corporation
By: By:
------------------------------- ------------------------------------
Jeffrey I. Rassas James B. Watkins, Designated Broker
Address: 15695 North 83rd Way Address: 3200 E. Camelback Road, Suite 100
Scottsdale, AZ 85260 Phoenix, AZ 85019
Telephone: (480) 850-4100 Telephone: (602) 956-7777
<PAGE> 1
Exhibit 10.2
CPU MICROMART
1998 EQUITY INCENTIVE PLAN
ARTICLE 1.0: PURPOSE
1.1 General. The purpose of the CPU MicroMart 1998 Equity Incentive
Plan (the "Plan") is to promote the interests of CPU MicroMart (the "Company")
and to motivate, attract, and retain the services of persons upon whose
judgment, efforts, and contributions the success of the Company's business
depends. The plan is further intended to align the personal interests of such
persons with the interests of shareholders of the Company through equity
participation in the Company's growth and success. Capitalized terms not
otherwise defined in the text are defined in Article 13.
ARTICLE 2.0: TERM
2.1 Effective Date. The effective date of the Plan is December 23, 1998
(the "Effective Date"), which is the date as of which the Plan was approved by
the Board of Directors and stockholders of the Company.
2.2 Term. This Plan shall terminate on the tenth (10th) anniversary of
the Effective Date, subject to Article 11.
ARTICLE 3.0: SHARES SUBJECT TO TIME PLAN
3.1 Number of Shares. The aggregate number of shares of Stock reserved
and available for Awards shall initially be 1.0 million shams (the "Shares") of
Stock.
3.2 Lapsed Awards. To the extent that an Award terminates, expires or
lapses for any reason, any shares of Stock subject to the Award will again be
available for the grant of an Award under the Plan other than an Award that
includes Incentive Stock Options, in each case to the full extent available
pursuant to the applicable rules and interpretations of the Securities Exchange
Act of 1934, as amended (the "Exchange Act").
3.3 Payments in Stock. Any shares of Stock tendered to or withheld by
the Company in connection with payment for Stock purchased pursuant to the Plan
or withholding taxes thereon shall be added bark to the aggregate number of
shares reserved and available for Awards under the Plan other than an Award that
includes Incentive Stock Options, in each case to the fullest extent permitted
under the applicable rules and interpretations of the Exchange Act.
3.4 Stock Distributed. Any Stock distributed pursuant to an Award may
consist, in whole or in pad, of authorized and unissued Stock, treasury Stock,
or Stock purchased on the open market.
<PAGE> 2
ARTICLE 4.0: ELIGIBILITY
4.1 General. Awards may be granted only to an individual who is an
employee (including an employee who also is a director or officer), officer,
director, consultant, independent contractor, or adviser of the Company or a
Subsidiary, as determined by the Board.
ARTICLE 5.0: ADMINISTRATION
5.1 Board. The Plan shall be administered by the Board or a Committee
appointed by the Board to administer the Plan at any time or from time to time.
If the Company has a class of equity securities registered under Section 12 of
the Exchange Act, the Plan shall be administered by the Board or a Committee of
the Board that consists of two or more individuals, each of whom Is a member of
the Board and neither of whom is an officer or employee of the Company. Once
appointed, the Committee shall continue to serve until otherwise directed by the
Board. From time to time, the Board may increase the size of the Committee and
appoint additional members thereof, remove members (with or without cause),
appoint new members in substitution therefor, and fill vacancies however caused.
5.2 Authority of Board. The Board has the exclusive power, authority,
and discretion
(a) Designate Participants;
(b) Determine the type or types of Awards to be granted to
each Participant;
(c) Determine the number of Awards to be granted and the
number of shares of Stock subject to an Award;
(d) Prescribe the form of each Award Agreement, which need not
be identical for each Participant;
(e) Determine the terms and conditions of any Award granted
under the Plan, including but not limited to, the exercise price, grant price,
or purchase price, any restrictions or limitations on the Award, any schedule
for lapse of forfeiture restrictions or restrictions on the exercisability of an
Award and accelerations or waivers thereof, and any modification or amendment of
any Award previously granted, based in each case on such considerations as the
Board in its sole discretion determines;
(f) Determine whether, to what extent and under what
circumstances an Award may be settled in, or the exercise price of an Award may
be paid in, cash, Stock, other Awards, or other property, or an Award may be
canceled, forfeited, or surrendered;
(g) Determine whether, to what extent, and under what
circumstances cash, Stock, other Awards, other property, and other amounts
payable with respect to an Award shall be deferred either automatically or at
the election of the holder thereof or of the Board;
<PAGE> 3
(h) Decide all other matters that must be determined in
connection with an Award;
(i) Establish, adopt, or revise any rules and regulations as
it may deem necessary or advisable to administer the Plan;
(j) interpret the Plan, any Award, and any Award Agreement in
its discretion; and
(k) Make, all other decisions and determinations that may be
required under the Plan or as the Board deems necessary or advisable to
administer the Plan.
5.3 Decisions Binding. All decisions, interpretations, and
determinations by the Board with respect to the Plan, any Award, and any Award
Agreement are final, binding, and conclusive on all parties.
ARTICLE 6.0 STOCK OPTIONS
6.1 General. The Board is authorized to grant Options to participants
on the following terms and conditions:
(a) Exercise Price. The exercise price per share of Stock
under an Option shall be determined by the Board.
(b) Payment. Payment for Stock issued upon exercise of an
Option shall be made in accordance with Article 8 of the Plan.
(c) Time and Conditions of Exercise. The Board shall determine
the time or times at which an Option may be exercised in whole or in part,
provided that no Option may be exercisable prior to six months following the
date of the grant of such Option if and to the extent such limitation is
necessary or required under Rule 16b-3, or successor legislation, under the
Exchange Act.
(d) Evidence of Option. All, Options shall be evidenced by a
written Award Agreement between the Company and the Participant. The Award
Agreement shall include such provisions as may be specified by the Board.
6.2 Incentive Stock Options. The terms of any Incentive Stock Options
granted under the Plan must comply with the following additional rules:
(a) Employees Only. Incentive Stock Options may only be
granted to employees (including officers and directors who are also employees)
of the Company or a Subsidiary.
<PAGE> 4
(b) Exercise Price. The exercise price per share of Stock
shall be set by the Board, provided that the exercise price for any Incentive
Stock Option may not be less than the Fair Market Value as of the date of the
grant.
(c) Exercise. In no event way any Incentive Stock Option be
exercisable for more than ten yam from the date of its grant.
(d) Individual Dollar Limitation. The aggregate Fair Market
Value (determined as of the time an Award is made) of all shams of Stock with
respect to which Incentive Stock Options are first exercisable by any one
Participant in any calendar year may not exceed $100,000.00. Options granted in
excess of this limitation shall be deemed to be Non-Qualified Stock Options.
(e) Ten Percent Owners. An Incentive Stock Option may be
granted to a Ten Percent owner, provided that at the time such option is granted
the exercise price per share of Stock shall not be less than I 10% of the Fair
Market Value and such option by its terms is not exercisable after the
expiration of five (5) years from the date of its grant.
(f) Expiration of Incentive Stock Options. No Award of an
Incentive Stock option may be made pursuant to this Plan after the expiration of
ten (10) years from the Effective Date.
(g) Right to Exercise. During a Participant's lifetime, an
Incentive Stock Option may be exercised only by the Participant.
(h) Tax-Qualified ISOP Options. All provisions of the Plan
relating to Incentive Stock Options shall be administered and interpreted in
accordance, and so as to comply, with the provisions of Section 422 of the Code.
6.3 Termination of Participant. Notwithstanding the exercise periods
set forth in any Award Agreement, Options shall be subject to the following:
(a) An Option shall lapse ten years after it is granted,
unless an earlier time is set in the Award Agreement.
(b) If a Participant's employment is terminated due to (i)
Disability, (ii) Retirement, or (iii) for any other reason other than for Cause,
such Participant may exercise his or her Incentive Stock Options only to the
extent that such Incentive Stock Options would have been exercisable on the
Termination Date; provided, that such exercise is made prior to the earlier of
(i) the expiration of three (3) months (six (6) months in the case of
Disability) after the Termination Date or (ii) the expiration date of the Option
so forth in the Award Agreement. * If a Participant's employment is terminated
due to Cause, the Participant's Incentive Stock Options shall automatically
lapse and not be exercisable by the Participant, whether or not such Options
were vested.
<PAGE> 5
(c) Except as otherwise provided in the Award Agreement or
thereafter determined by the Board in writing, if a Participants employment,
contractual or other relationship with the Company is terminated due to (i)
Disability, (ii) Retirement, or (iii) for any other reason other than for Cause,
such Participant may exercise his or her Non-Qualified Stock Options, only to
the extent that such Options would have been exercisable on the Termination
Date; provided, that such exercise is made within six months after the
Termination Date, or such other time period as set forth in the Award Agreement.
If a Participant's employment, contractual or other relationship is terminated
due to Cause, the Participant's Non-Qualified Stock Options shall automatically
lapse and not be exercisable by the Participant, whether or not such Options
were vested.
(d) If a Participant dies before his or her Options lapse
pursuant to this Section, then the Participant's Options may be exercised, only
to the extent that such Options would have been exercisable on the date of the
Participants death; provided that such exercise is made prior to- the earlier of
(i) the first anniversary of such Participant's death or (ii) the expiration
date of the Option set forth in the Award Agreement, Upon the Participant's
death, any exercisable Options may be exercised by the Participant's legal
representative or representatives.
ARTICLE 7.0: RESTRICTED STOCK AWARDS
7.1 Restricted Stock Awards. The Board is authorized to make Awards of
Restricted Stock to Participants either in the form of a grant of Stock or an
offer to sell Stock to a Participant, in such amounts and subject to such terms,
conditions and restrictions as may be selected by the Board. All Awards of
Restricted Stock shall be evidenced by an Award Agreement. An Award Agreement
may specify whether, and to what extent, holders of Restricted stock Awards
shall have voting, dividend and other rights of holders of Stock.
7.2 Issuance and Restrictions. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions, including without
limitation "vesting" or forfeiture restrictions, as the Board may impose. These
restrictions may lapse separately or in combination at such times, under such
circumstances, in such installments. or otherwise, as the Board determines at
the time of the grant of the Award or thereafter.
7.3 Forfeiture. Except as otherwise determined by the Board at the time
of the grant of the Award or thereafter, upon termination of employment during
the applicable restriction period, Restricted Stock that is at that time subject
to restrictions shall be forfeited and reacquired by Company; provided, however,
that Board may provide in any Award Agreement that restrictions or forfeiture
conditions relating to Restricted Stock will be waived in whole or in part in
specified circumstances, and the Board may in other cases waive in whole or in
part restrictions or forfeiture conditions shall be forfeited and reacquired by
the Company; provided, however, that the Board may provide in any Award
Agreement that restrictions or forfeiture conditions relating to Restricted
Stock will be waived in whole or in part in specified circumstances, and the
Board may in other cases waive in whole or in part restrictions or forfeiture
conditions relating to Restricted Stock.
<PAGE> 6
7.4 Payment and Certificates for Restricted Stock. If a Restricted
Stock Award Provides for the purchase of Stock by a Participant, payment shall
be pursuant to Article 8 of the Plan. Restricted Stock granted under the Plan
may be evidenced in such manner as the Board shall determine. To the extent that
an Award is granted in the form of newly issued Restricted Stock, the Award
recipient, as a condition to the grant of such an Award, shall be required to
pay to the Company in cash, cash equivalents or other legal consideration an
amount equal to the par value of such Restricted Stock. To the extent that an
Award is granted in the form of Restricted Stock from the Company's treasury, no
such cash consideration shall be required of the Award recipients. If
certificates representing shares of Restricted Stock are registered in the name
of the Participant, certificates must bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock and
the Company shall retain physical possession of the certificate until such time
as all applicable restrictions lapse.
ARTICLE 8.0: PAYMENT FOR STOCK PURCHASES; WITHHOLDING TAXES; RELOAD OPTIONS
8.1 Payment. Payment for Stock purchased pursuant to the Plan may be
made in cash (by check) or, where expressly approved for the Participant by the
Board in an Award Agreement or otherwise in writing and where permitted by law:
(a) by cancellation of indebtedness of the Company to the
Participant;
(b) by surrender of (or attestation to the ownership of) Stock
valued at Fair surrender on the date new Stock is purchased under the Plan;
provided, however, that such or attestation shall not be Permitted if such
action would cause the Company to recognize compensation expense (or additional
compensation expense) with respect to the Award for financial reporting
purposes;
(c) by waiver of compensation due or accrued to Participant
for services by tender of property acceptable to the Board;
(d) by tender of property acceptable to the Board;
(e) with respect only to purchases upon exercise of public
market for the Stock then exists:
(i) through a "same day sale" commitment from
Participant and a broker-dealer that is a member of the National Association of
Securities Dealers (a "NASD Dealer") whereby Participant irrevocably elects to
exercise the Option and to sell a portion of the Stock so purchased to pay for
the exercise price (and any applicable withholding taxes), and whereby the NASD
Dealer irrevocably commits upon receipt of such Stock to forward the exercise
price and any such withholding taxes directly to the Company;
(ii) through a "margin" commitment from Participant
and a NASD Dealer whereby Participant irrevocably elects to exercise the Option
and to pledge the Stock so purchased to the NASD Dealer in a margin account as
security for a loan from the NASD Dealer
<PAGE> 7
in the amount of the exercise price (and any applicable withholding
taxes), and whereby the NASD Dealer irrevocably commits upon receipt of such
Stock to forward the exercise price and any such withholding taxes directly to
the Company; or
(iii) through any other "cashless exercise" procedure
approved by the Board; or
(iv) by any combination of the foregoing, or any
other method of payment acceptable to the Board in its sole discretion.
8.2 Loan Guarantees. The Board may, in its discretion, help the
Participant pay for Shares purchased under the Plan by authorizing a guarantee
by the Company of a third-party loan to the Participant.
8.3 Tax Withholding. The Company or any Subsidiary shall have the
authority and the right to deduct or withhold, or require a Participant to remit
to the Company, an amount sufficient to satisfy federal, state, and local taxes
(including the Participant's FICA obligation) required by law to be withheld
with respect to any taxable event arising as a result of this Plan. Whenever,
under the Plan, payments in satisfaction of Awards are to be made in cask such
payment shall be net of an amount sufficient to satisfy federal, state, and
local withholding tax requirements. With respect to withholding required upon
any taxable event relating to the issuance of Stock under the Plan, Participants
may elect (the "Election"), on or prior to the date of such taxable event, to
satisfy the withholding requirement, in whole or in part, by having the Company
or any Subsidiary withhold shares of Stock having a Fair Market Value on the
date of withholding equal to the amount to be withheld for tax purposes. The
Board may disapprove any Election or may suspend or terminate the right to make
Elections. An Election is irrevocable. The Board may, at the time any Award is
granted, require that any and all applicable tax withholding requirements be
satisfied by the withholding of shares of Stock as set forth above.
8.4 Reload Options. Award Agreements may contain a provision pursuant
to which a Participant who pays all or a portion of the exercise price: of an
Option or the tax required to be withheld pursuant to an exercise of an Option
by surrendering shams of Stock pursuant to Sections 8.1 or 8.3. respectively,
shall be automatically granted an Option for the purchase of Stock equal to the
number of shares surrendered (a "Reload Option"). The grant of the Reload Option
shall be effective on the date the Participant surrenders the shares of Stock in
respect of which the Reload Option is granted (the "Reload Date"). The Reload
Option shall have an exercise price equal to the Fair Market Value of the Stock
on the Reload Date, and shall have a term which is no longer, and which shall
lapse no later, than the original term of the underlying option. If Stock
otherwise available under an Incentive Stock Option is withhold pursuant to
Section 8.3, any Reload Option granted in connection with the withholding shall
be treated as a new Incentive Stock Option, subject to the rules set forth in
Section 6.2.
ARTICLE 9.0: PROVISIONS APPLICABLE TO AWARDS
9.1 Stand Alone, Tandem, and Substitute Awards. Awards granted under
the Plan may, in the discretion of the Board, be granted either alone or in
addition to, in tandem with, or
<PAGE> 8
in substitution for, any other Award granted under the Plan. Awards granted in
addition to or in tandem with other Awards may be granted either at the same
time as or at a different time from the grant of such other Awards.
9.2 Modification or Assumption of Awards. Within the limitations of the
Plan, the Board may modify, extend or assume outstanding Awards or may accept
the cancellation of outstanding Awards (whether granted by the Company or by
another issuer) in return for the grant of new Awards for the same or a
different number of shares and at the same or a different exercise price. The
foregoing notwithstanding, no modification of ail Award shall, without the
consent of the Participant alter or impair his or her rights or obligations
under such Award.
9.3 Exchange Provisions. The Board may at any time offer to exchange or
buy out any previously granted Award for a payment in cash, Stock, or another
Award, based on the terms and conditions the Board determines and communicates
to the Participant at the time the offer is made.
9.4 Term of Award. The term of each Award shall be for the period as
determined by the Board, provided that in no event $hall the term of any
Incentive Stock Option exceed a period of ten yens from the date of its grant.
9.5 Form of Payment for Awards. Subject to the terms of the Plan and
any applicable law or Award. Agreement, payments or transfers to be made by the
Company or a Subsidiary on the grant or exercise of an Award may be made in such
forms as the Board determines at or after the time of grant including without
limitation, cash, Stock, other Awards, or other property, or any combination,
and may be made in a single payment or transfer, in installments, or on a
deferred basis, in each case determined in accordance with rules adopted by, and
at the discretion of the Board.
9.6 Limits on Transfer. No right or interest of a Participant in any
Award may be pledged, encumbered, or hypothecated to or in favor of any party
other than the Company or a Subsidiary, or shall be subject to any lien,
obligation, or liability of such Participant to any other party other than the
Company or a Subsidiary. Except as otherwise provided below, to Award shall be
assignable or transferable by a Participant other than by will or the laws of
descent and distribution or, except in the case of an Incentive Stock Option.
pursuant to a "domestic relations order" as defined in the Code or Title I of
the Employee Retirement Income Security Act, or the rules thereunder. In the
Award Agreement for any Award other than an Award that includes an incentive
Stock Option, the Board may allow a Participant to assign or otherwise transfer
all or a portion of the rights represented by the Award to specified individuals
or classes of individuals, or to a trust benefiting such individuals or classes
of individuals, subject to such restrictions, limitations, or conditions as the
Board deems appropriate. At the discretion of the Board, the Company may reserve
to itself or its assignees in any Award (a) a right of first refusal to purchase
any Stock which a Participant may propose to transfer to a third party and/or
(b) a right to repurchase any and all Stock held by a Participant upon the
Participant's termination of employment or other relationship With the Company
or its Parent or Subsidiary for any reason, including Death or Disability, at a
price for such Stock as determined by the Board,
<PAGE> 9
9.7 Lock-up Agreement. In addition to any other restrictions on
transfer, a Participant shall not, without the prior written consent of the
Board in its discretion, offer or sell any Stock acquired pursuant to the Plan
for at least one hundred eighty (180) days after (a) the closing of the initial
public offering of securities of the Company registered under the Securities Act
or (b) in the event that subsequent to such initial public offering the Stock is
not listed and traded upon a recognized securities exchange or quoted on a
recognized national market system, the closing of each offering of securities of
the Company registered under the Securities Act subsequent to such initial
public offering through and including the offering after which the Stock is
listed and traded upon such exchange or system.
9.8 Stock Certificates. All Stock certificates delivered under the Plan
are subject to any stop-transfer orders and other restrictions as the Board
deems necessary or advisable to comply with federal or state securities laws,
rules, and regulations and the rules of any national securities exchange or
automated quotation system on which the Stock is listed, quoted, or traded. The
Board may place legends on any Stock certificate to reference restrictions
applicable to the Stock.
ARTICLE 10: CHANGES IN CAPITAL STRUCTURE
10.1 General; Adjustments. In the event of a subdivision of the
outstanding Stock, a declaration of a dividend payable in Stock, a declaration
of a dividend payable in a form other than Stock in an amount that has a
material effect on the price of the Stock, a combination or consolidation of the
outstanding Stock (by classification or otherwise) into a lesser number of
shares of Stock, a recapitalization, a spin-off or a similar occurrence, the
Board shall make such adjustments as it, in its sole discretion, deems
appropriate in one or more of (a) the number of shares of Stock available for
future Awards under Article 3, (b) the limitations set forth in Article 3, (c)
the number and kind of shares of Stock covered by each outstanding Award or (d)
the exercise price under each outstanding Option and other Award in the nature
of rights that may be exercised. Except as provided in this Article 10, a
Participant shall have no rights by reason of any issue by the Company of stock
of any class or securities convertible into stock of my class, any subdivision
or consolidation of shares of stock of any class, the payment of any stock
dividend or any other increase or decrease in the number of shares of stock of
any class.
10.2 Dissolution or Liquidation. To the extent not previously
exercised, Awards shall terminate immediately prior to the dissolution or
liquidation of the Company
10.3 Reorganizations. In the event that the Company is a party to a
merger, consolidation or other reorganization, outstanding Awards shall be
subject to the agreement of merger, consolidation or reorganization. The Board
may cause such agreement to provide, without limitation, (a) for the
continuation of outstanding Awards by the Company (if the Company is a surviving
corporation), (b) for their assumption by the surviving corporation or its
parent or subsidiary, (c) or the substitution by the surviving corporation or
its parent or subsidiary of its own awards for such Awards, (d) for accelerated
vesting, accelerated expiration and/or lapse of restrictions, or (e) for
settlement in cash or cash equivalents. If the Board does not cause such
agreement to provide for one of the alternatives in (a), (b), (c), (d) or (e)
above, then all outstanding Options and other Awards in the nature of rights
that may be exercised shall
<PAGE> 10
become fully exercisable and all restrictions on other Awards shall lapse, upon
the effectiveness of the transactions contemplated by such agreement.
ARTICLE 11: AMENDMENT, MODIFICATION, AND TERMINATION
11.1 Amendment, Modification, and Termination. With the approval of the
Board, at any time and from time to time, the Board way terminate, attend or
modify the Plan. An amendment or modification of the Plan shall be subject to
the approval of the shareholders of the Company only to the extent required by
applicable laws, regulations and rules.
11.2 Awards Previously Granted. No termination, amendment, or
modification of the Plan shall adversely affect in any material way any Award
previously granted under the Plan, without the written consent of the
Participant.
ARTICLE 12: GENERAL PROVISIONS
12.1 No Rights to Awards. No Participant or employee shall have any
claim to be granted any Award under the Plan, and neither the Company nor the
Board is obligated to treat Participants and employees uniformly.
12.2 No Stockholder Rights. No Award gives the Participant any of the
rights of a shareholder of the Company unless and until shares of Stock are in
fact issued to such person in connection with such Award.
12.3 No Right to Employment Nothing in the Plan or any Award Agreement
shall interfere with or limit in any way the "at will" nature of any
Participant's employment or other relationship with the Company or any
Subsidiary, nor confer upon any Participant any right to continue in the
employment or any other relationship of the Company or any Subsidiary, and the
Company and each Subsidiary reserve the right to terminate any Participant's
employment or other relationship at any time.
12.4 Unfunded Status of Awards. The Plan is intended to be an
"unlimited" plan for incentive and deferred compensation. With respect to any
payments not yet made to a Participant pursuant to an Award, nothing contained
in the Plan or any Award Agreement shall give the Participant any rights that
are greater than those of a general creditor of the Company or any Subsidiary.
12.5 Relationship to Other Benefits No payment under the Plan shall be
taken into account in determining any benefits under any pension, retirement,
savings, profit sharing, group insurance, welfare or other benefit plan of the
Company or any Subsidiary.
12.6 Expenses. The expenses of administering the Plan shall be borne by
the Company and its Subsidiaries.
<PAGE> 11
12.7 Titles and Headings. The titles and headings of the Articles and
Sections in the Plan are for convenience of reference only, and in the event of
any conflict, the text of the Plan, rather than such titles or headings, shall
control.
12.8 Fractional Shares. No fractional shares of stock shall be issued
and the Board shall determine, in its discretion, whether cash shall be given in
lieu of fractional shares or whether such fractional shares shall be eliminated
by rounding up.
12.9 Securities Law Compliance. With respect to any person who is, on
the relevant date, obligated to file reports under Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with all applicable
conditions of Section 16 or its successors under the Exchange Act. To the extent
any provision of the Plan or any Award Agreement or any action by the Board
fails to so comply, it shall be void to the extent required by law and voidable
as deemed advisable by the Board.
12.10 Government and Other Regulations. The obligation of the Company
to make payment of awards in Stock or otherwise shall be subject to a applicable
laws, rules, and regulations and to such approvals by government agencies as way
be required. The Company shall be under no obligation to register under the
Securities Act any of the shares of Stock paid under the Plan. If the shares of
Stock paid under the Plan may in certain circumstances be exempt from
registration under the Securities Act, the Company may restrict the transfer of
such shares in such manner as it deems advisable to ensure the availability of
any such exemption.
12.11 Governing Law. The Plan and all Award Agreements shall be
construed in accordance with and governed by the laws of the State of Arizona.
12.12 Nonexclusivity of the Plan. Neither the adoption of the Plan nor
the submission of the Plan to the shareholders of the Company for approval shall
be construed as creating any limitations upon the right and authority of the
Board to adopt such other incentive compensation arrangements (which
arrangements may be applicable either generally to a Class or classes of
individuals or specifically to a particular individual or individuals) as the
Board in its discretion determines desirable, Including, without limitation, the
granting of stock options or other lights otherwise than under the Plan.
ARTICLE 13: DEFINITIONS
13.1 Definitions. The following words and phrases shall have the
following meanings for purposes of this Plan:
(a) "Award" means any Option, or any Restricted Stock Award or
any other right or interest relating to Stock, cash or property, grunted to a
Participant under the Plan,
(b) "Award Agreement" means any written agreement, contract or
other instrument or document evidencing an Award.
<PAGE> 12
(c) "Board" means the Board of Directors of the Company or, if
the context so requires, a Committee thereof appointed pursuant to Article 5.
(d) "Cause" means (i) conviction of any crime involving fraud
or gross misconduct, (ii) noncompliance with reasonable directives of the Board
or its designees, (iii) violation of Company rules, policies or procedures or of
the Plan or any applicable Award Agreement.
(e) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Committee" means the committee of the Board described in
Article 5.
(g) "Disability" means the following: A Participant shall be
disabled if he or she is unable to perform the duties of his customary position
of employment by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which can be expected to
last for a continuous period of not less than 12 months. The Board may require
such medical or other evidence as it deems necessary to judge the nature and
permanency of the Participant's condition.
(h) "Fair Market Value" means with respect to Stock or any
other property, die fair market value of such Stock or other property determined
by the Board in good faith using such methods or procedures as may be
established from time to time by the Board. Unless otherwise determined by the
Board the Fair Market Value of Stock as of any date shall be the mean between
the bid and asked quotations for the Stock on that date as reported by the
National Association of Securities Dealers Automated Quotation System (NASDAQ)
or, if there are no bid or asked quotations on such date, the mean between the
bid and asked quotations on the nod preceding date for which quotations are
available. If the Stock is subsequently listed and traded upon a recognized
securities exchange or shall be quoted on a recognized national market system,
the Fair Market Value shall be the closing price on such date or, if no closing
price is so reported for that date, the closing price on the next preceding date
for which a closing price was reported.
(i) "Incentive Stock Option" means an Option that is intended
to meet the requirements of Section 422 of the Code or any successor provision
thereto.
(j) "Non-Qualified Stock Option" means an Option that is not
intended to be an Incentive Stock Option.
(k) "Option" means a right granted to a Participant under
Article 6 of the Plan to purchase Stock at a specified price during specified
time periods An Option may be either an Incentive Stock Option or a
Non-Qualified Stock Option.
(1) "Participant" means a person who, as an employee, officer,
director, consultant, independent. contractor, or adviser of the Company or any
Subsidiary, has been granted an Award under the Plan.
<PAGE> 13
(m) "Plan" means the CPU MicroMart 1998 Equity Incentive Plan,
as amended from time to time.
(n) "Restricted Stock Award" means Stock granted to a
Participant or offered for sale to a Participant under Article 7.
(o) "Retirement" means a Participant's termination of
employment with the Company after attaining any normal or early retirement age
specified in any pension, profit sharing, or other retirement program sponsored
by the Company, if any.
(p) "Securities Act" means the Securities Act of 1933, as
amended.
(q) "Stock" means Common Stock ($.001 par value) of the
Company.
(r) "Subsidiary" means any corporation of which a majority of
the outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Company.
(s) "Ten Percent Owner" means any individual who, at the date
of grant of an Incentive Stock Option, owns stock possessing more than ten
percent of the total combined voting power of all classes of Stock of the
Company or a Subsidiary. For purposes of determining such percentage, the
following rules shall apply:
(i) The individual with respect to whom such
percentage is being determined shall be considered as owning the Stock owned,
directly or indirectly, by or for his brothers and sisters (whether by the whole
or half blood), spouse, ancestors, and lineal descendants; and
(ii) Stock owned, directly or indirectly, by or for a
corporation, partnership, estate, or trust, shall be considered as being owned
proportionately by or for its shareholders, partners, or beneficiaries.
(t) "Termination Date" means the date on which the employment
(or other service or relationship in the case of a Participant who is not an
employee of the Company) of a Participant terminates for any reason or no
reason.
<PAGE> 1
Exhibit 10.3
SECURITIES PURCHASE AGREEMENT
DATED AS OF AUGUST 25, 1999
BY AND BETWEEN
JEM VENTURES EBIZ, LLC
AND
EBIZ ENTERPRISES, INC.
<PAGE> 2
TABLE OF CONTENTS
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ARTICLE 1 PURCHASE AND SALE OF DEBENTURE AND WARRANT -2-
1.1 Purchase of Debenture and Warrant -2-
1.2 Closing Date -2-
1.3 Form of Payment -2-
ARTICLE 2 BUYER'S REPRESENTATIONS AND WARRANTIES -2-
2.1 Investment Purpose -2-
2.2 Accredited Investor Status -2-
2.3 Reliance on Exemptions -3-
2.4 Information -3-
2.5 No Governmental Review -3-
2.6 Transfer or Resale -3-
2.7 Legends -3-
2.8 Validity; Enforcement -4-
2.9 Residency -4-
2.10 Brokerage Fees -4-
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY -5-
3.1 Organization and Qualification -5-
3.2 Authorization; Enforcement; Validity -5-
3.3 Capitalization -5-
3.4 Issuance of Securities -6-
3.5 No Conflicts -7-
3.6 Financial Statements -7-
3.7 Absence of Certain Changes -8-
3.8 Absence of Litigation -8-
3.9 Acknowledgment Regarding Buyer's Purchase of Securities -8-
3.10 No Undisclosed Events, Liabilities, Developments or
Circumstances -8-
3.11 No General Solicitation -8-
3.12 No Integrated Offering -9-
3.13 Dilutive Effect -9-
3.14 Employee Relations -9-
3.15 Intellectual Property Rights -9-
3.16 Environmental Laws -10-
3.17 Title; Liens -10-
3.18 Insurance -10-
3.19 Regulatory Permits -10-
3.20 Internal Accounting Controls -11-
3.21 No Materially Adverse Contracts, Etc -11-
3.22 Tax Status -11-
</TABLE>
i
<PAGE> 3
<TABLE>
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<S> <C>
3.23 Transactions With Affiliates -11-
3.24 Application of Takeover Protections -11-
3.25 Rights Agreement -12-
3.26 Foreign Corrupt Practices -12-
3.27 Year 2000 Compliance -12-
3.28 Brokerage Fees -12-
ARTICLE 4 COVENANTS -12-
4.1 Best Efforts -12-
4.2 Form D and Blue Sky -13-
4.3 Reporting Status -13-
4.4 Use of Proceeds -13-
4.5 Financial Information -13-
4.6 Reservation of Shares -13-
4.7 Additional Financing; Right of First Refusal -14-
4.8 Listing -15-
4.9 Expenses -15-
4.10 Transactions With Affiliates -15-
4.11 Limitation on Filing Registration Statements -16-
4.12 Letters of Credit -16-
ARTICLE 5 TRANSFER AGENT INSTRUCTIONS -16-
ARTICLE 6 CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL -17-
6.1 Delivery of Documents -17-
6.2 Purchase Price -17-
6.3 Representations and Warranties -17-
ARTICLE 7 CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE -18-
7.1 Delivery of Documents -18-
7.2 Trading of Common Stock -18-
7.3 Representations and Warranties -18-
7.4 Opinion -18-
7.5 Debenture/Warrant -18-
7.6 Board Approval -18-
7.7 Reservation of Shares -18-
7.8 Transfer Agent -18-
7.9 Good Standing -19-
7.10 Officer's Certificate -19-
7.11 Securities Laws -19-
7.12 Other -19-
ARTICLE 8 INDEMNIFICATION -19-
</TABLE>
ii
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<TABLE>
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<S> <C>
ARTICLE 9 GOVERNING LAW; MISCELLANEOUS -20-
9.1 Governing Law; Jurisdiction; Jury Trial -20-
9.2 Counterparts -20-
9.3 Headings -20-
9.4 Severability -20-
9.5 Entire Agreement; Amendments -21-
9.6 Notices -21-
9.7 Successors and Assigns -22-
9.8 No Third Party Beneficiaries -23-
9.9 Survival -23-
9.10 Publicity -23-
9.11 Further Assurances -23-
9.12 Termination -23-
9.13 Knowledge -24-
9.14 No Strict Construction -24-
9.15 Remedies -24-
9.16 Payment Set Aside -24-
</TABLE>
iii
<PAGE> 5
SCHEDULES
Schedule 3.1 Subsidiaries
Schedule 3.3 Capitalization
Schedule 3.3(i) Preemptive Rights
Schedule 3.3(ii) Debt Securities
Schedule 3.3(iii) Convertible Securities and Warrants Outstanding
Schedule 3.3(iv) Registration Rights
Schedule 3.3(v) Securities Subject to Redemption
Schedule 3.3(vi) Anti-Dilution Triggered
Schedule 3.3(vii) SAR and Phantom Stock Rights
Schedule 3.5 Conflicts
Schedule 3.7 Material Changes
Schedule 3.8 Litigation
Schedule 3.15 Intellectual Property
Schedule 3.17 Title; Liens
Schedule 3.23 Transactions with Affiliates
EXHIBITS
Exhibit A Form of Debenture
Exhibit B Form of Warrant
Exhibit C Form of Registration Rights Agreement
Exhibit D Form of Letter of Credit
Exhibit E Form of Officer's Certificate
Exhibit F Form of Company Counsel Opinion
Exhibit G Form of Irrevocable Transfer Agent Instructions
4
<PAGE> 6
GLOSSARY OF DEFINED TERMS
<TABLE>
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Page
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<S> <C>
1933 Act -1-
Affiliate -15-
Agreement -1-
Business Day -2-
By-laws -6-
Certificate of Incorporation -6-
Closing -2-
Closing Date -2-
Common Stock -1-
Company -1-
Control -16-
controls -16-
Conversion Shares -1-
Environmental Laws -10-
Indemnified Liabilities -19-
Indemnitees -19-
Irrevocable Transfer Agent Instructions -16-
Lock-Up Period -14-
Material Adverse Effect -5-
Principal Market -15-
Purchase Price -2-
Registration Period -13-
Registration Rights Agreement -1-
Regulation D -1-
Related Party -15-
Rule 144 -3-
SEC -1-
Securities -2-
Subsidiaries -5-
Transaction Documents -5-
Warrant Shares -1-
</TABLE>
5
<PAGE> 7
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (this "AGREEMENT"), dated as of August 25,
1999, by and between JEM VENTURES EBIZ, LLC, a Delaware limited liability
company (the "BUYER") and EBIZ ENTERPRISES, INC., a Nevada corporation, with its
principal executive office located at 15695 N. 83rd Way, Scottsdale, Arizona
85260 (the "COMPANY").
RECITALS
WHEREAS, the Company and Buyer are executing and delivering this Agreement
in reliance upon the exemption from securities registration afforded by Rule 506
of Regulation D ("REGULATION D") as promulgated by the United States Securities
and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended
and the rules and regulations of the SEC promulgated thereunder (the "1933
ACT");
WHEREAS, the Company has authorized the issuance of a $7,100,000 9.0%
Subordinated Convertible Debenture, which shall be convertible into shares of
the Company's common stock, $.001 par value per share (the COMMON STOCK") (as
converted, the CONVERSION SHARES"), in accordance with the terms of the
Subordinated Convertible Debenture, substantially in the form attached hereto as
Exhibit A (the "DEBENTURE");
WHEREAS, the Company has authorized the issuance of stock purchase
warrants, in substantially the form attached hereto as Exhibit B (the WARRANT"),
to purchase an aggregate of 245,000 shares of Common Stock at certain exercise
prices as described therein (as exercised, collectively, the "WARRANT SHARES");
and
WHEREAS, Buyer desires to purchase, and the Company desires to issue and
deliver to Buyer, the Debenture and the Warrant, all upon the terms and
conditions stated in this Agreement;
WHEREAS, upon the closing of the transactions contemplated by this
Agreement, the parties hereto will execute and deliver a Registration Rights
Agreement, in substantially the form attached hereto as Exhibit C (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to
provide certain registration rights under the 1933 Act and applicable state
securities laws.
NOW THEREFORE, in consideration of the mutual covenants of the parties set
forth in this Agreement and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company and Buyer hereby
agree as follows:
6
<PAGE> 8
ARTICLE 1
PURCHASE AND SALE OF DEBENTURE AND WARRANT
1.1 Purchase of Debenture and Warrant. Subject to the satisfaction (or
waiver) of the conditions set forth in ARTICLE 6 and ARTICLE 7 below, the
Company shall issue and sell to Buyer, and Buyer agrees to purchase from the
Company, the Debenture and the Warrant at the Closing (the "CLOSING"). The
aggregate purchase price (the "PURCHASE PRICE") for the Debenture and the
Warrant at the Closing shall be $7,100,000.
1.2 Closing Date. The date and time of the Closing (the "CLOSING Date")
shall occur, subject to notification of satisfaction (or waiver) of the
conditions to the Closing set forth in ARTICLE 6 and ARTICLE 7 hereof, on August
25, 1999 or such other date as is mutually agreed to by the Company and the
Buyer. The Closing shall occur on the Closing Date at the offices of Katten
Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois
60661-3693.
1.3 Form of Payment. On the Closing Date, (i) Buyer shall pay the Purchase
Price to the Company for the Debenture and the Warrant, less costs and expenses
as described in SECTION 4.9, by wire transfer of immediately available funds in
accordance with the Company's written wire instructions, as delivered to the
Buyer within two Business Days prior to the Closing, and (ii) the Company shall
deliver to Buyer, the Debenture and the Warrant hereunder, duly executed on
behalf of the Company and registered in the name of Buyer or its designee.
"BUSINESS DAY" shall mean any day other than a Saturday or Sunday or a day on
which commercial banks in the City of Chicago, Illinois are authorized or
required by law or executive order to remain closed.
ARTICLE 2
BUYER'S REPRESENTATIONS AND WARRANTIES
Buyer hereby represents and warrants to the Company that:
2.1 Investment Purpose. Buyer (i) is acquiring the Debenture and the
Warrant, (ii) upon conversion of the Debenture, will acquire the Conversion
Shares then issuable, and (iii) upon exercise of the Warrant, will acquire the
Warrant Shares issuable upon exercise thereof (the Debenture, the Conversion
Shares, the Warrant and the Warrant Shares collectively are referred to herein
as the "SECURITIES"), for its own account for investment only and not with a
view towards, or for resale in connection with, the public sale or distribution
thereof, except pursuant to sales registered or exempted under the 1933 Act;
provided, however, that by making the representations herein, Buyer does not
agree to hold any of the Securities for any minimum or other specific term and
reserves the right to dispose of the Securities at any time in accordance with
or pursuant to a registration statement or an exemption under the 1933 Act.
2.2 Accredited Investor Status. Buyer is an "accredited investor" as that
term is defined in Rule 501(a) of Regulation D.
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<PAGE> 9
2.3 Reliance on Exemptions. Buyer understands that the Securities are
being offered and sold to it in reliance on specific exemptions from the
registration requirements of United States federal and state securities laws and
that the Company is relying in part upon the truth and accuracy of, and Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of Buyer to acquire such
Securities.
2.4 Information. Buyer and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company
and materials relating to the offer and sale of the Securities which have been
requested by Buyer. Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company. Neither such inquiries nor any
other due diligence investigations conducted by Buyer or its advisors, if any,
or its representatives shall modify, amend or affect Buyer's right to rely on
the Company's representations and warranties as set forth herein. Buyer
understands that its investment in the Securities involves a high degree of
risk. Buyer has sought such accounting, legal and tax advice as it has
considered necessary to make an informed investment decision with respect to its
acquisition of the Securities.
2.5 No Governmental Review. Buyer understands that no United States
federal or state agency or any other government or governmental agency has
passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
2.6 Transfer or Resale. Buyer understands that except as provided in the
Registration Rights Agreement: (i) the Securities have not been and are not
being registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) Buyer shall have delivered to the Company an opinion
of counsel, in a generally acceptable form, to the effect that such Securities
to be sold, assigned or transferred may be sold, assigned or transferred
pursuant to an exemption from such registration, or (C) Buyer provides the
Company with reasonable assurance that such Securities can be sold, assigned or
transferred pursuant to Rule 144 promulgated under the 1933 Act, as amended (or
a successor rule thereto) ("RULE 144"); (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder.
2.7 Legends. Buyer understands that the certificates or other instruments
representing the Debenture and the Warrant and, until such time as the sale of
the Conversion Shares and the Warrant Shares have been registered under the 1933
Act as contemplated by the Registration Rights Agreement, the stock certificates
representing the Conversion Shares and the Warrant Shares, except as set forth
below, shall bear a restrictive legend in substantially the following form (and
a stop-transfer order may be placed against transfer of such stock
certificates):
8
<PAGE> 10
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY
NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS,
OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES
LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) such
Securities are registered for sale under the 1933 Act, (ii) in connection with a
sale transaction, such holder provides the Company with an opinion of counsel,
in a generally acceptable form, to the effect that a public sale, assignment or
transfer of the Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that the
Securities can be sold pursuant to Rule 144.
2.8 Validity; Enforcement. This Agreement has been duly and validly
authorized, executed and delivered on behalf of Buyer and is a valid and binding
agreement of Buyer enforceable against Buyer in accordance with its terms,
subject as to enforceability to general principles of equity and to applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation and other
similar laws relating to, or affecting generally, the enforcement of applicable
creditors' rights and remedies.
2.9 Residency. Buyer is a resident of Illinois.
2.10 Brokerage Fees. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by Buyer directly with
the Company without the intervention of any person on behalf of Buyer in such
manner as to give rise to a valid claim by any person against Buyer, the Company
or any Subsidiary of the Company for a finder's fee, brokerage commission or
similar payment.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Buyer that:
3.1 Organization and Qualification. The Company and its "SUBSIDIARIES"
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest) are corporations duly organized and validly existing in good standing
under the laws of the jurisdiction in which they are incorporated, and have the
requisite corporate power and authorization to own their properties and to carry
on their
9
<PAGE> 11
business as now being conducted. Each of the Company and its Subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which its ownership of property or the nature of the
business conducted by it makes such qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not have
a Material Adverse Effect. As used in this Agreement, "MATERIAL ADVERSE EFFECT"
means any material adverse effect on the business, properties, assets,
operations, results or operations, financial condition or prospects of the
Company and its Subsidiaries, if any, taken as a whole, or on the transactions
contemplated hereby or by the agreements and instruments to be entered into in
connection herewith, or on the authority or ability of the Company to perform
its obligations under the Transaction Documents (as defined below). The Company
has no Subsidiaries except as set forth on SCHEDULE 3.1.
3.2 Authorization; Enforcement; Validity. (i) The Company has the
requisite corporate power and authority to enter into and perform this
Agreement, the Debenture, the Warrant, the Registration Rights Agreement, its
obligations pursuant to the Irrevocable Transfer Agent Instructions (as defined
in ARTICLE 5), and each of the other agreements entered into by the parties
hereto in connection with the transactions contemplated by this Agreement
(collectively, the "TRANSACTION DOCUMENTS"), and to issue the Securities in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
the Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby, including, without limitation the
issuance of the Debenture and the Warrant, and the reservation for issuance and
the issuance of the Conversion Shares and the Warrant Shares issuable upon
conversion or exercise thereof, have been duly authorized by the Company's Board
of Directors and no further consent or authorization is required by the Company,
its Board of Directors or its stockholders, (iii) the Transaction Documents have
been duly executed and delivered by the Company, and (iv) the Transaction
Documents constitute the valid and binding obligation of the Company enforceable
against the Company in accordance with their terms, except as such
enforceability may be limited by general principles of equity or applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws
relating to, or affecting generally, the enforcement of creditors' rights and
remedies.
3.3 Capitalization. As of the date hereof, the authorized capital stock of
the Company consists of (i) 70,000,000 shares of Common Stock, of which as of
the date hereof, 7,363,797 shares are issued and outstanding, 1,000,000 shares
are reserved for issuance pursuant to the Company's stock option and purchase
plans and 762,006 shares are issuable and reserved for issuance pursuant to
securities (other than the Debenture and the Warrant) exercisable or
exchangeable for, or convertible into, shares of Common Stock and (ii) 5,000,000
shares of preferred stock, of which as of the date hereof, 10,845 shares
designated as Series A 10% Convertible Preferred, which may be converted into
181,583 shares of Common Stock are issued and outstanding. All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. Except as disclosed on SCHEDULE 3.3, (i) no shares
of the Company's capital stock are subject to preemptive rights or any other
similar rights or any liens or encumbrances suffered or permitted by the
Company, (ii) there are no outstanding debt securities, (iii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is or may
10
<PAGE> 12
become bound to issue additional shares of capital stock of the Company or any
of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, (iv) there are no agreements or arrangements under which the
Company or any of its Subsidiaries is obligated to register the sale of any of
their securities under the 1933 Act (except the Registration Rights Agreement),
(v) there are no outstanding securities or instruments of the Company or any of
its Subsidiaries which contain any redemption or similar provisions, and there
are no contracts, commitments, understandings or arrangements by which the
Company or any of its Subsidiaries is or may become bound to redeem a security
of the Company or any of its Subsidiaries, (vi) there are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by the issuance of the Securities as described in this Agreement, and
(vii) the Company does not have any stock appreciation rights or "phantom stock"
plans or agreements or any similar plan or agreement. The Company has furnished
to the Buyer true and correct copies of the Company's Certificate of
Incorporation, as amended and as in effect on the date hereof (the "CERTIFICATE
OF INCORPORATION"), and the Company's By-laws, as amended and as in effect on
the date hereof (the "BY-LAWS"), and the terms of all securities convertible
into or exercisable for Common Stock and the rights of the holders thereof in
respect thereto.
3.4 Issuance of Securities. Upon issuance, the Debenture and the Warrant
will be, and upon conversion or exercise in accordance with the Debenture or the
Warrant, as the case may be, the Conversion Shares and the Warrant Shares will
be, validly issued, fully paid and non-assessable and free from all taxes, liens
and charges with respect to the issue thereof, with the holders being entitled
to all rights accorded to a holder of Common Stock. At least 2,241,887 shares of
Common Stock (subject to adjustment pursuant to the Company's covenant set forth
in SECTION 4.6 below) have been duly authorized and reserved for issuance upon
conversion of the Debenture and upon exercise of the Warrant. Provided that the
representations and warranties of the Buyer set forth in SECTIONS 2.1 and 2.2
are true and correct when made and as of the Closing, issuance by the Company of
the Securities will be and is exempt from registration under the provisions of
Rule 506 as promulgated under the 1933 Act.
3.5 No Conflicts. Except as disclosed on SCHEDULE 3.5, the execution,
delivery and performance of the Transaction Documents by the Company and the
consummation by the Company of the transactions contemplated hereby and thereby
(including, without limitation, the reservation for issuance and issuance of the
Conversion Shares and the Warrant Shares) will not (i) result in a violation of
the Certificate of Incorporation or the By-laws or (ii) conflict with, or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations) applicable to the
Company or any of its Subsidiaries or by which any property or asset of the
Company or any of its Subsidiaries is bound or affected. Except as disclosed on
SCHEDULE 3.5, neither the Company nor its Subsidiaries is in violation of any
term of or in default under its Certificate of Incorporation or By-laws or their
organizational charter or by-laws, respectively. Except as disclosed on SCHEDULE
3.5, neither the Company nor any of its Subsidiaries is in violation of any term
of or in default under any contract, agreement, mortgage, indebtedness,
indenture, instrument, judgment, decree or order or any statute, rule or
regulation applicable to Company or its Subsidiaries. The
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<PAGE> 13
business of the Company and its Subsidiaries is not being conducted, and shall
not be conducted, in violation of any law, ordinance, regulation of any
governmental entity. Except as specifically contemplated by this Agreement and
as required under the 1933 Act or applicable state securities laws, the Company
is not required to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency or any regulatory
or self-regulatory agency in order for it to execute, deliver or perform any of
its obligations under or contemplated by this Agreement or any other of the
Transaction Documents, in each case in accordance with the terms hereof or
thereof. Except as disclosed on SCHEDULE 3.5, all consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date hereof. The Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
3.6 Financial Statements. The Company's balance sheet and statements of
income and cash flows for the fiscal years ended June 30, 1997 and 1998, and the
Company's balance sheet as of March 31, 1999 and the related statement of income
for the period then ended (all such financial statements being hereinafter
referred to as the "FINANCIAL STATEMENTS") each of which has been previously
delivered to the Buyer, have been prepared in accordance with United States
generally accepted accounting principles, consistently applied ("GAAP"), during
the periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes, may be condensed or
summary statements or may be subject to normal year-end adjustments or accruals
consistent with past practice) and fairly present in all respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the periods then ended (subject, in the case of
unaudited statements, to normal year-end audit adjustments or accruals
consistent with past practice). No other information provided by or on behalf of
the Company to the Buyer which is not included in the Financial Statements,
including, without limitation, information referred to in SECTION 2.4 of this
Agreement, contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstance under which they are or were made, not misleading.
3.7 Absence of Certain Changes. Except as disclosed on SCHEDULE 3.7, since
June 30, 1998 there has been no material adverse change and no material adverse
development in the business, properties, operations, financial condition,
results of operations or prospects of the Company or its Subsidiaries. The Board
of Directors of the Company has not discussed, and the Company has not taken any
steps, and does not currently expect to take any steps, to seek protection
pursuant to any bankruptcy law nor does the Company or any of its Subsidiaries
have any knowledge or reason to believe that its creditors intend to initiate
involuntary bankruptcy proceedings.
3.8 Absence of Litigation. There is no action, suit, proceeding, inquiry
or investigation before or by any court, public board, government agency,
self-regulatory organization or body pending or, to the knowledge of the Company
or any of its Subsidiaries, threatened against or affecting the Company, the
Common Stock or any of the Company's Subsidiaries or any of the Company's or the
Company's Subsidiaries' officers or directors in their capacities as such,
except as set forth in SCHEDULE 3.8.
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3.9 Acknowledgment Regarding Buyer's Purchase of Securities. The Company
acknowledges and agrees that the Buyer is acting solely in the capacity of arm's
length purchaser with respect to the Transaction Documents and the transactions
contemplated hereby and thereby. The Company further acknowledges that Buyer is
not acting as a financial advisor or fiduciary of the Company (or in any similar
capacity) with respect to the Transaction Documents and the transactions
contemplated hereby and thereby and any advice given by Buyer or any of its
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to Buyer's
purchase of the Securities. The Company further represents to Buyer that the
Company's decision to enter into the Transaction Documents has been based solely
on the independent evaluation by the Company and its representatives.
3.10 No Undisclosed Events, Liabilities, Developments or Circumstances. No
event, liability, development or circumstance has occurred or exists, or is
contemplated to occur, with respect to the Company or its Subsidiaries or their
respective business, properties, prospects, operations or financial condition,
that would be required to be disclosed by the Company under applicable
securities laws on a registration statement filed with the SEC relating to an
issuance and sale by the Company of its Common Stock and which has not been
publicly announced.
3.11 No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
3.12 No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated, nor will
the Company or any of its Subsidiaries take any action or steps that would
require registration of any of the Securities under the 1933 Act or cause the
offering of the Securities to be integrated with other offerings that would
require such registration.
3.13 Dilutive Effect. The Company understands and acknowledges that the
number of Conversion Shares issuable upon conversion of the Debenture or Warrant
Shares issuable upon exercise of the Warrant will increase in certain
circumstances. The Company further acknowledges that its obligation to issue
Conversion Shares upon conversion of the Debenture in accordance with this
Agreement and the Debenture and its obligation to issue the Warrant Shares upon
exercise of the Warrant in accordance with this Agreement and the Warrant, is,
in each case, absolute and unconditional regardless of the dilutive effect that
such issuance may have on the ownership interests of other stockholders of the
Company.
3.14 Employee Relations. Neither the Company nor any of its Subsidiaries
is involved in any labor dispute nor, to the knowledge of the Company or any of
its Subsidiaries, is any such
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dispute threatened. None of the Company's or its Subsidiaries' employees is a
member of a union, neither the Company nor any of its Subsidiaries is a party to
a collective bargaining agreement, and the Company and its Subsidiaries believe
that their relations with their employees are good. No executive officer (as
defined in Rule 501(f) of the 1933 Act) has notified the Company that such
officer intends to leave the Company or otherwise terminate such officer's
employment with the Company. No executive officer, to the best knowledge of the
Company and its Subsidiaries, is, or is now expected to be, in violation of any
term of any employment contract, confidentiality, disclosure or proprietary
information agreement, non-competition agreement, or any other contract or
agreement or any restrictive covenant, and the continued employment of each such
executive officer does not subject the Company or any of its Subsidiaries to any
liability with respect to any of the foregoing matters.
3.15 Intellectual Property Rights. To the knowledge of the Company and its
Subsidiaries, the Company and its Subsidiaries own or possess adequate rights or
licenses to use all material trademarks, trade names, service names, service
marks, service mark registrations, service names, patent rights, copyrights,
inventions, licenses, approvals, governmental authorizations, trade secrets and
rights necessary to conduct their respective businesses as now conducted except
as set forth on SCHEDULE 3.15. Except as set forth on SCHEDULE 3.15, none of the
Company's material trademarks, trade names, service marks, service mark
registrations, service names, patents, patent rights, copyrights, inventions,
licenses, approvals, government authorizations, trade secrets or other
intellectual property rights have expired or terminated, or are expected to
expire or terminate within two years from the date of this Agreement. The
Company and its Subsidiaries do not have any knowledge of any infringement by
the Company or its Subsidiaries of trademark, trade name rights, patents, patent
rights, copyrights, inventions, licenses, service names, service marks, service
mark registrations, trade secret or other similar rights of others, or of any
such development of similar or identical trade secrets or technical information
by others and, except as set forth on SCHEDULE 3.15, there is no claim, action
or proceeding being made or brought against, or to the Company's knowledge,
being threatened against, the Company or its Subsidiaries regarding trademark,
trade name, patents, patent rights, invention, copyright, license, service
names, service marks, service mark registrations, trade secret or other
infringement, and the Company and its Subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.
3.16 Environmental Laws. The Company and its Subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or
other approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval where, in each of the three
foregoing cases, the failure to so comply would have, individually or in the
aggregate, a Material Adverse Effect.
3.17 Title; Liens. The Company and its Subsidiaries have good and
marketable title to all personal property owned by them which is material to the
business of the Company and its Subsidiaries, in each case free and clear of all
liens, encumbrances and defects except such as are described in SCHEDULE 3.17 or
such as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company and
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any of its Subsidiaries. The Company and its Subsidiaries do not own any real
property. Any real property and facilities held under lease by the Company and
any of its Subsidiaries are held by them under valid, subsisting and enforceable
leases with such exceptions as are not material and do not interfere with the
use made and proposed to be made of such property and buildings by the Company
and its Subsidiaries.
3.18 Insurance. The Company and each of its Subsidiaries are insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company and its Subsidiaries are
engaged. Neither the Company nor any such Subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
Subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its Subsidiaries, taken as a whole.
3.19 Regulatory Permits. The Company and its Subsidiaries possess all
certificates, authorizations and permits issued by the appropriate federal,
state or foreign regulatory authorities necessary to conduct their respective
businesses, and neither the Company nor any such Subsidiary has received any
notice of proceedings relating to the revocation or modification of any such
certificate, authorization or permit.
3.20 Internal Accounting Controls. The Company and each of its
Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with GAAP and to maintain asset accountability, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
3.21 No Materially Adverse Contracts, Etc. Neither the Company nor any of
its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
3.22 Tax Status. The Company and each of its Subsidiaries has made or
filed all federal and state income and all other tax returns, reports and
declarations required by any jurisdiction to which it is subject (unless and
only to the extent that the Company and each of its Subsidiaries has set aside
on its books reserves reasonably adequate for the payment of all unpaid and
unreported taxes) and has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books reserves reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which
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such returns, reports or declarations apply. There are no unpaid taxes in any
material amount claimed to be due by the taxing authority of any jurisdiction,
and the officers of the Company know of no basis for any such claim.
3.23 Transactions With Affiliates. Except as set forth on SCHEDULE 3.23
and other than the grant of stock options disclosed on SCHEDULE 3.3, none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for the rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
3.24 Application of Takeover Protections. The Company and its Board of
Directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the state of the Company's incorporation and such other state, to the extent
allowed under such state law, if any, where the Company conducts its principal
operation which is or could become applicable to the Buyer as a result of the
transactions contemplated by this Agreement, including, without limitation, the
Company's issuance of the Securities and Buyer's ownership of the Securities.
3.25 Rights Agreement. The Company has not adopted a shareholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
Common Stock or a change in control of the Company.
3.26 Foreign Corrupt Practices. Neither the Company, nor any of its
Subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any of its Subsidiaries has, in the course of its
actions for, or on behalf of, the Company or any of its Subsidiaries used any
corporate funds for any unlawful contribution, gift, entertainment or other
unlawful expenses relating to political activity; made any direct or indirect
unlawful payment to any foreign or domestic government official or employee from
corporate funds; violated or is in violation of any provision of the U.S.
Foreign Corrupt Practices Act of 1977, as amended; or made any unlawful bribe,
rebate, payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government official or employee.
3.27 Year 2000 Compliance. The Company has initiated a review and
assessment of all areas within its and each Subsidiaries' business and
operations that could be adversely affected by the "Year 2000 Problem" (that is,
the risk that computer applications used by the Company or any of the
Subsidiaries may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to, and any date after, December 31,
1999). Based on the foregoing, the Company believes that all of its and its
Subsidiaries' computer applications are reasonably expected to be able to
perform properly date-sensitive functions for all dates before and after January
1, 2000, except to the extent that a failure to do so would not reasonably be
expected to have a Material Adverse Effect.
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3.28 Brokerage Fees. All negotiations relative to this Agreement and the
transactions contemplated hereby have been carried out by the Company directly
with Buyer without the intervention of any person on behalf of the Company in
such manner as to give rise to a valid claim directly by any person against
Buyer, the Company or any Subsidiary of the Company for a finder's fee,
brokerage commission or similar payment.
ARTICLE 4
COVENANTS
4.1 Best Efforts. Each party to this Agreement shall use its best efforts
to timely satisfy each of the conditions to be satisfied by it as provided in
ARTICLE 6 and ARTICLE 7 of this Agreement.
4.2 Form D and Blue Sky. The Company agrees to file a Form D with respect
to the Securities as required under Regulation D and to provide a copy thereof
to Buyer promptly after such filing. The Company shall, on or before the Closing
Date, take such action as the Company shall reasonably determine is necessary in
order to obtain an exemption for or to qualify the Securities for sale to the
Buyer at the Closing pursuant to this Agreement under applicable securities or
"Blue Sky" laws of the states of the United States, and shall provide evidence
of any such action so taken to the Buyer on or prior to the Closing Date. The
Company shall make all filings and reports relating the offer and sale of the
Securities required under applicable securities or "Blue Sky" laws of the states
of the United States following the Closing Date.
4.3 Reporting Status. Until the earlier of (i) the date which is one year
after the date as of which the Investors (as that term is defined in the
Registration Rights Agreement) may sell all of the Conversion Shares and the
Warrant Shares without restriction pursuant to Rule 144(k) promulgated under the
1933 Act (or successor thereto), or (ii) the date on which (A) the Investors
shall have sold all the Conversion Shares and the Warrant Shares and (B) no
amounts under the Debenture are due and owing and no Warrants are outstanding
(the "REGISTRATION PERIOD"), the Company shall file all reports required to be
filed with the SEC pursuant to the 1934 Act, and the Company shall not terminate
its status as an issuer required to file reports under the 1934 Act even if the
1934 Act would otherwise permit such termination.
4.4 Use of Proceeds. The Company will use the proceeds from the sale of
the Debenture and the related Warrant for the retirement of amounts owed to Home
National Bank and Aztore Holdings, Inc. as set forth on SCHEDULE 3.3(II) and for
general corporate purposes, as determined by the Company.
4.5 Financial Information. The Company agrees to send the following to
each Buyer (and their permitted transferees, if any) during the Registration
Period: (i) within two (2) days after the filing thereof with the SEC, a notice
of filing its Annual Report on Form 10-KSB (or other required form), its
Quarterly Reports on Form 10-QSB (or other required form), any Current Reports
on Form 8-K and any registration statements (other than on Form S-8) or
amendments filed pursuant to the 1933 Act; provided, that if any such report is
not filed with the SEC through EDGAR then the Company shall deliver a copy of
such report to Buyer by
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facsimile within two days after such report is filed with the SEC; and (ii)
copies of any notices and other information made available or given to the
stockholders of the Company generally, contemporaneously with the making
available or giving thereof to the stockholders.
4.6 Reservation of Shares. At the Closing, the Company shall take all
action necessary to have authorized, and reserved for the purpose of issuance,
no less than 150% of the number of shares of Common Stock needed to provide for
the issuance of the shares of Common Stock upon conversion of the Debenture and
100% of the number of shares of Common Stock needed to provide for the issuance
of the shares of Common Stock upon exercise of the entire Warrant. Following the
Closing Date, the Company shall take all actions necessary to at all times have
authorized, and reserved for the purpose of issuance, no less than 130% of the
number of shares of Common Stock needed to provide for the issuance of the
shares of Common Stock upon conversion of the Debenture and 100% of the shares
of Common Stock needed to provide for the issuance of the shares of Common Stock
upon exercise of the entire Warrant.
4.7 Additional Financing; Right of First Refusal.
(a) The Company agrees that during the period beginning on the date hereof
and ending on the date that no amounts are due and owing under the Debenture,
neither the Company nor its Subsidiaries will negotiate or contract with any
party to issue any variable-priced debt financing with an equity component or
issue any securities convertible or exchangeable into or for equity securities
of the Company or any Subsidiary (including debt securities with an equity
component) in any form without the express prior written consent of Buyer.
(b) In addition, subject to the exceptions described below, the Company
agrees that during the two (2) year period beginning on the date hereof (the
"LOCK-UP PERIOD"), the Buyer shall have a right of first refusal with respect to
any equity or debt financings by the Company or any Subsidiary in any form
("FUTURE OFFERINGS"). With respect to each Future Offering, the Company or its
Subsidiaries shall not consummate a transaction with a buyer or investor unless
the Company or such Subsidiary first obtains a legally enforceable written offer
for such transaction (the "OFFER") and gives the Buyer or its designee written
notice of the intent to accept such Offer, which notice shall set forth the name
and address of the proposed buyer or investor and all the terms and conditions
of the Offer, and which notice shall constitute an offer to the Buyer or its
designee to participate (x) in full but not in part in such Future Offering (to
the extent such Future Offering is a debt offering or an equity offering for an
amount not in excess of $5,000,000) or (y) in full or in part (to the extent
such Future Offering is an equity offering in excess of $5,000,000) in such
Future Offering, on the same terms and conditions as those contained in the
notice. The Buyer (or its designee) may exercise its right of first refusal by
giving written notice to the Company of its intention to fund or participate in
such Future Offering within five (5) calendar days following the Buyer's receipt
of such notice, which notice to the Company shall state the quantity of
securities to be purchased by the Buyer in such Future Offering. In the event
the Buyer or its designee fails to exercise its right of first refusal and the
Future Offering is not consummated with such third party within forty-five (45)
calendar days of the date of the notice to the Buyer of the Future Offering, the
Company may not consummate the Future Offering unless the offer from the third
party shall be deemed to be a new offer and the right to participate in such
Future Offering is reoffered to the Buyer in accordance with the foregoing
procedure. The Buyer shall not be required to participate or exercise its right
of first
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refusal with respect to a particular Future Offering in order to exercise its
right of first refusal with respect to later Future Offerings. The right of
first refusal with respect to Future Offerings as described in this SECTION 4.7
shall not apply to (i) any transaction involving the Company's issuances of
securities (A) as consideration in a merger or consolidation, (B) in connection
with any strategic partnership or joint venture (the primary purpose of which is
not to raise equity capital), or (C) as consideration for the acquisition of a
business, product, license or other assets by the Company, (ii) the issuance of
Common Stock in an underwritten public offering (including a "best efforts"
underwritten public offering), (iii) the issuance of securities upon exercise or
conversion of the Company's options, warrants or other convertible securities
outstanding as of the date hereof and listed on SCHEDULE 3.3, or (iv) the grant
of additional options or warrants, or the issuance of additional securities,
under any existing Company stock option plan, restricted stock plan or stock
purchase plan for the benefit of the Company's employees or directors, as in
effect on the date hereof without amendment hereafter, the material terms of
which are set forth on SCHEDULE 3.3.
4.8 Listing. The Company shall use its best efforts to promptly secure the
listing of all of the Registrable Securities (as defined in the Registration
Rights Agreement) on The Nasdaq SmallCap Market or other comparable national
exchange or trading market (the "PRINCIPAL MARKET") (subject to official notice
of issuance) and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents. The Company shall
promptly solicit stockholder approval of the Company's issuance of all of the
Securities described in this Agreement, if such approval will facilitate prompt
listing of the Registrable Securities on the Principal Market. Upon such listing
on the Principal Market neither the Company nor any of its Subsidiaries shall
take any action which would be reasonably expected to result in the delisting or
suspension of the Common Stock on the Principal Market. The Company shall
promptly, and in no event later than the following Business Day, provide to
Buyer copies of any notices it receives from the Principal Market regarding any
continued eligibility of the Common Stock for listing on such automated
quotation system or securities exchange. The Company shall pay all fees and
expenses in connection with satisfying its obligations under this SECTION 4.8.
4.9 Expenses. Subject to SECTION 9.17, at the Closing, the Company shall
reimburse the Buyer for the Buyer's unreimbursed expenses (including attorneys'
fees and expenses) in due diligence and negotiating and preparing the
Transaction Documents and consummating the transactions contemplated hereby and
thereby. The parties acknowledge and agree that the $15,000 deposit previously
paid to the Buyer by the Company shall operate as an offset to the payment of
such expenses at the Closing.
4.10 Transactions With Affiliates. So long as (i) any amounts under the
Debenture are outstanding or (ii) Buyer owns Conversion Shares or Warrant Shares
with a market value equal to or greater than $500,000, the Company shall not,
and shall cause each of its subsidiaries not to, enter into, amend, modify or
supplement, or permit any subsidiary to enter into, amend, modify or supplement,
any agreement, transaction, commitment or arrangement with any of its or any
subsidiary's officers, directors, persons who were officers or directors at any
time during the previous two years, stockholders who beneficially own 5% or more
of the Common Stock, or affiliates or with any individual related by blood,
marriage or adoption to any such individual or
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with any entity in which any such entity or individual owns a 5% or more
beneficial interest (each a "RELATED PARTY"), except for (a) customary
employment arrangements and benefit programs on reasonable terms, (b) any
agreement, transaction, commitment or arrangement on an arms-length basis on
terms no less favorable than terms which would have been obtainable from a
person other than such Related Party, or (c) any agreement, transaction,
commitment or arrangement which is approved by a majority of the disinterested
directors of the Company. For purposes hereof, any director who is also an
officer of the Company or any subsidiary of the Company shall not be a
disinterested director with respect to any such agreement, transaction,
commitment or arrangement. "AFFILIATE" or "AFFILIATE" for purposes hereof means,
with respect to any person or entity, another person or entity that, directly or
indirectly, (i) has a 5% or more equity interest in that person or entity, (ii)
has 5% or more common ownership with that person or entity, (iii) controls that
person or entity, or (iv) shares common control with that person or entity.
"CONTROL" or "CONTROLS" for purposes hereof means that a person or entity has
the power, direct or indirect, to conduct or govern the policies of another
person or entity.
4.11 Limitation on Filing Registration Statements. Except in connection
with existing registration obligations set forth on SCHEDULE 3.3(IV) or with
respect to any Future Offering permitted under SECTION 4.7(b), the Company shall
not file a registration statement (other than the Registration Statement (as
defined in the Registration Rights Agreement) or a registration statement on
Form S-8) covering the sale or resale of shares of Common Stock with the SEC
during the period beginning on the date hereof and ending on the date which is
the later of (a) 12 months from the date hereof and (b) 270 days after the
Registration Statement has been declared effective by the SEC.
4.12 Letters of Credit. The Company covenants and agrees that so long as
any amounts are outstanding under the Debenture, it will procure an irrevocable
Letter of Credit in an amount equal to $5,000,000 and maintain an irrevocable
Letter of Credit in an amount equal to the lesser of $5,000,000 or 70.42% of the
outstanding principal balance of the Debenture, as calculated from time to time,
for the benefit of Buyer, and which Letter of Credit has been issued by a bank
satisfactory to Buyer in its sole discretion and in the form attached hereto as
EXHIBIT D. The Company further covenants and agrees that upon any Event of
Default (as defined in the Debenture) under the Debenture, Buyer shall be
permitted to pursue any and all remedies available to Buyer as the beneficiary
of such Letter of Credit, without regard to amounts and penalties which may
otherwise be due and owing to Buyer under the terms of such Debenture, or any
other remedies available to Buyer as a result of such Event of Default, whether
pursuant to such Debenture, this Agreement or otherwise.
ARTICLE 5
TRANSFER AGENT INSTRUCTIONS
The Company shall issue irrevocable instructions to its transfer agent,
and any subsequent transfer agent, to issue certificates, registered in the name
of Buyer or its respective nominee(s), for the Conversion Shares and the Warrant
Shares in such amounts as specified from time to time by the Buyer to the
Company upon conversion of amounts outstanding under the Debenture or exercise
of the Warrant (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). Prior
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to registration of the Conversion Shares and the Warrant Shares under the 1933
Act, all such certificates shall bear the restrictive legend specified in
SECTION 2.7 of this Agreement. Upon such registration of the Common Shares and
the Warrant Shares under the 1933 Act, the Company shall promptly notify the
transfer agent that any Common Shares and Warrant Shares issued and subject to
resale pursuant to the Registration Statement after the effective date of such
Registration Statement shall be issued without such restrictive legend. The
Company warrants that no instruction other than the Irrevocable Transfer Agent
Instructions referred to in this ARTICLE 5, and stop transfer instructions to
give effect to SECTION 2.6 hereof (in the case of the Conversion Shares and the
Warrant Shares, prior to registration of the Conversion Shares and the Warrant
Shares under the 1933 Act) will be given by the Company to its transfer agent
and that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. Nothing in this ARTICLE 5 shall affect in any way
the Buyer's obligations and agreements set forth in SECTION 2.7 to comply with
all applicable prospectus delivery requirements, if any, upon resale of the
Securities. If the Buyer provides the Company with an opinion of counsel, in a
generally acceptable form, to the effect that a public sale, assignment or
transfer of the Securities may be made without registration under the 1933 Act
or the Buyer provides the Company with reasonable assurances that the Securities
can be sold pursuant to Rule 144, the Company shall permit the transfer, and, in
the case of the Conversion Shares and the Warrant Shares, promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by Buyer and without any restrictive legend. The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the Buyer by vitiating the intent and purpose of the
transaction contemplated hereby. Accordingly, the Company acknowledges that the
remedy at law for a breach of its obligations under this ARTICLE 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this ARTICLE 5, that the Buyer shall be entitled,
in addition to all other available remedies, to an order and/or injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
ARTICLE 6
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
The obligation of the Company hereunder to issue and sell the Debenture
and the Warrant to the Buyer at the Closing is subject to the satisfaction, at
or before the Closing Date, of each of the following conditions, provided that
these conditions are for the Company's sole benefit and may be waived by the
Company at any time in its sole discretion by providing Buyer with prior written
notice thereof:
6.1 Delivery of Documents. The Buyer shall have executed each of the
Transaction Documents to which it is a party and delivered the same to the
Company.
6.2 Purchase Price. The Buyer shall have delivered to the Company the
Purchase Price for the Debenture and the Warrant being purchased by the Buyer at
the Closing by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Company.
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6.3 Representations and Warranties. The representations and warranties of
the Buyer shall be true and correct in all material respects as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and the Buyer
shall have performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be performed,
satisfied or complied with by the Buyer on or prior to the Closing Date.
ARTICLE 7
CONDITIONS TO BUYER'S OBLIGATION TO PURCHASE
The obligation of the Buyer hereunder to purchase the Debenture and the
Warrant at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for Buyer's sole benefit and may be waived by the Buyer at any time in its sole
discretion by providing the Company with prior written notice thereof:
7.1 Delivery of Documents. The Company shall have executed each of the
Transaction Documents and delivered the same to the Buyer.
7.2 Trading of Common Stock. The Common Stock shall be quoted on the
OTC BB.
7.3 Representations and Warranties. The representations and warranties of
the Company shall be true and correct as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties that speak as of a specific date) and the Company shall have
performed, satisfied and complied with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or complied
with by the Company on or prior to the Closing Date. The Buyer shall have
received a certificate, executed by each of the Chief Executive Officer and the
Chief Financial Officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by
the Buyer including, without limitation, an update as of the Closing Date
regarding the representation contained in SECTION 3.3 above, in the form
attached hereto as EXHIBIT E.
7.4 Opinion. The Buyer shall have received the opinion of the Company's
counsel dated as of the Closing Date, in form, scope and substance reasonably
satisfactory to the Buyer and in substantially the form of EXHIBIT F attached
hereto.
7.5 Debenture/Warrant. The Company shall have executed and delivered to
the Buyer the Debenture and the Warrant being purchased by the Buyer at the
Closing.
7.6 Board Approval. The Board of Directors of the Company shall have
adopted resolutions consistent with SECTION 3.2 above and in a form reasonably
acceptable to the Buyer.
7.7 Reservation of Shares. As of the Closing Date, the Company shall have
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting the
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conversion of the Debenture and the exercise of the Warrant, at least 2,241,887
shares of Common Stock.
7.8 Transfer Agent. The Irrevocable Transfer Agent Instructions, in the
form of EXHIBIT G attached hereto, shall have been delivered to and acknowledged
in writing by the Company's transfer agent.
7.9 Good Standing. The Company shall have delivered to the Buyer a
certified copy of the Certificate of Incorporation and a certificate of good
standing of the Company and each Subsidiary, in such corporation's state of
incorporation issued by the Secretary of State of such state of incorporation as
of a date within 10 days of the Closing Date.
7.10 Officer's Certificate. The Company shall have delivered to the Buyer
a secretary's certificate, dated as the Closing Date, as to (i) the resolutions
described in SECTION 7.6, and (ii) the Bylaws, each as in effect at the Closing.
7.11 Securities Laws. The Company shall have made all filings under all
applicable federal and state securities laws necessary to consummate the
issuance of the Securities pursuant to this Agreement in compliance with such
laws.
7.12 Other. The Company shall have delivered to the Buyer such other
documents relating to the transactions contemplated by this Agreement as the
Buyer or its counsel may reasonably request.
ARTICLE 8
INDEMNIFICATION
In consideration of the Buyer's execution and delivery of the Transaction
Documents and acquiring the Securities thereunder and in addition to all of the
Company's other obligations under the Transaction Documents, the Company shall
defend, protect, indemnify and hold harmless the Buyer and each other holder of
the Securities and all of their stockholders, officers, directors, employees and
direct or indirect investors and any of the foregoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in the Transaction Documents or
any other certificate, instrument or document contemplated hereby or thereby,
(c) any cause of action, suit or claim brought or made against such Indemnitee
and arising out of or resulting from the execution, delivery, performance or
enforcement of the Transaction Documents or any
23
<PAGE> 25
other certificate, instrument or document contemplated hereby or thereby,
(d) any transaction financed or to be financed, in whole or in part, directly or
indirectly, with the proceeds of the issuance of the Securities or (e) the
status of the Buyer or such other holder of the Securities as an investor in the
Company. To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution to
the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.
ARTICLE 9
GOVERNING LAW; MISCELLANEOUS
9.1 Governing Law; Jurisdiction; Jury Trial. The corporate laws of the
State of Nevada shall govern all issues concerning the relative rights of the
Company and its stockholders. All other questions concerning the construction,
validity, enforcement and interpretation of this Agreement shall be governed by
the internal laws of the State of Illinois, without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of Illinois or
any other jurisdictions) that would cause the application of the laws of any
jurisdictions other than the State of Illinois. Each party hereby irrevocably
submits to the non-exclusive jurisdiction of the state and federal courts
sitting in the City of Chicago, for the adjudication of any dispute hereunder or
in connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO
REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN
CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION
CONTEMPLATED HEREBY.
9.2 Counterparts. This Agreement may be executed in two or more identical
counterparts, all of which shall be considered one and the same agreement and
shall become effective when counterparts have been signed by each party and
delivered to the other party; provided that a facsimile signature shall be
considered due execution and shall be binding upon the signatory thereto with
the same force and effect as if the signature were an original, not a facsimile
signature.
9.3 Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
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<PAGE> 26
9.4 Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement in that
jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
9.5 Entire Agreement; Amendments. This Agreement supersedes all other
prior oral or written agreements between the Buyer, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor the Buyer makes any representation, warranty,
covenant or undertaking with respect to such matters. No provision of this
Agreement may be amended other than by an instrument in writing signed by the
Company and the Buyer, and no provision hereof may be waived other than by an
instrument in writing signed by the party against whom enforcement is sought.
9.6 Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one business day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
EBIZ Enterprises, Inc.
15695 N. 83rd Way
Scottsdale, Arizona 85260
Telephone: (480) 778-1000
Facsimile: (480) 778-1002
Attention: Jeffrey I. Rassas
Chief Executive Officer
With a copy to:
Lewis and Roca, LLP
40 North Central
Phoenix, Arizona 85004-4429
Telephone: (602) 262-5712
Facsimile: (602) 734-3911
Attention: Thomas J. Morgan, Esq.
If to the Transfer Agent:
American Securities Transfer and Trust, Inc.
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<PAGE> 27
12039 West Alameda Parkway, Suite Z-2
Lakewood, CO 80228
Telephone: (303) 986-5400
Facsimile: (303) 986-2444
Attention: John Harmann
If to the Buyer:
JEM Ventures EBIZ, LLC
600 Central Avenue
Suite 214
Highland Park, Illinois 60035
Telephone: (847)681-8600
Facsimile: (847)681-1541
Attention: John Fern
With a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Telephone: 312-902-5200
Facsimile: 312-577-8648
Attention: David J. Kaufman, Esq.
or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party five days prior to the effectiveness of such change. Written
confirmation of receipt (A) given by the recipient of such notice, consent,
waiver or other communication, (B) mechanically or electronically generated by
the sender's facsimile machine containing the time, date, recipient facsimile
number and an image of the first page of such transmission or (C) provided by a
nationally recognized overnight delivery service shall be rebuttable evidence of
personal service, receipt by facsimile or receipt from a nationally recognized
overnight delivery service in accordance with clause (i), (ii) or (iii) above,
respectively.
9.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their respective successors and assigns. The
Company shall not assign this Agreement or any rights or obligations hereunder
without the prior written consent of the Buyer (if Buyer has not assigned all of
its rights hereunder) and Buyer's permitted assigns, if any, including by
merger, consolidation or reorganization, except pursuant to a Special Event,
merger, consolidation or reorganization (as defined in Section 2(b)(ii) of the
Debenture) with respect to which the Company has satisfied its obligations under
Section 2 of the Debenture. Buyer may assign all or any part of its rights
hereunder to any affiliate of Buyer or to any lender used by Buyer to finance
the transactions contemplated hereby, without the consent of the Company;
provided, however, that any such assignment shall not release the Buyer from its
obligations hereunder unless such obligations are assumed by such assignee and
the Company
26
<PAGE> 28
has consented to such assignment and assumption. Notwithstanding anything to the
contrary contained in the Transaction Documents, Buyer shall be entitled to
pledge the Securities in connection with a bona fide margin account or to any
lender used by Buyer to finance the transactions contemplated hereby.
9.8 No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person.
9.9 Survival. Unless this Agreement is terminated under SECTION 9.12, the
representations and warranties of the Company and the Buyer contained in
ARTICLES 2 and 3, the agreements and covenants set forth in ARTICLE 9, and the
indemnification provisions set forth in ARTICLE 8 shall survive the Closing for
the period that the Debenture remains outstanding, and the agreements and
covenants set forth in ARTICLES 4 and 5 shall survive the Closing for the longer
of the period that Buyer holds any Securities, or such time as such agreements
and covenants are no longer enforceable under applicable statutes of
limitations.
9.10 Publicity. The Buyer shall have the right to approve before issuance
any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the Company shall be
entitled, without the prior approval of Buyer, to make any press release or
other public disclosure with respect to such transactions as is required by
applicable law and regulations (although the Buyer shall be consulted by the
Company in connection with any such press release or other public disclosure
prior to its release and shall be provided with a copy thereof).
9.11 Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
9.12 Termination. In the event that the Closing shall not have occurred on
or before ten (10) business days from the date hereof due to the Company's or
the Buyer's failure to satisfy the conditions set forth in ARTICLES 6 and 7
above (and the nonbreaching party's failure to waive such unsatisfied
condition(s)), the nonbreaching party shall have the option to terminate this
Agreement with respect to such breaching party at the close of business on such
date without liability of any party to any other party; provided, however, that
if this Agreement is terminated pursuant to this SECTION 9.12, the Company shall
remain obligated to reimburse the nonbreaching Buyer for the expenses described
in SECTION 4.9 above.
9.13 Knowledge. As used herein "knowledge" shall mean, with respect to a
person, information that is possessed, or should have been possessed after due
inquiry, by such person.
9.14 No Strict Construction. The language used in this Agreement will be
deemed to be the language chosen by the parties to express their mutual intent,
and no rules of strict construction will be applied against any party.
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<PAGE> 29
9.15 Remedies. The Buyer and each holder of the Securities shall have all
rights and remedies set forth in the Transaction Documents and the Debenture and
all rights and remedies which such holders have been granted at any time under
any other agreement or contract and all of the rights which such holders have
under any law. Any person having any rights under any provision of this
Agreement shall be entitled to enforce such rights specifically (without posting
a bond or other security), to recover damages by reason of any breach of any
provision of this Agreement and to exercise all other rights granted by law.
9.16 Payment Set Aside. To the extent that the Company makes a payment or
payments to the Buyer hereunder or pursuant to the Debenture or Warrant or the
Buyer enforces or exercises its rights hereunder or thereunder, and such payment
or payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set
aside, recovered from, disgorged by or are required to be refunded, repaid or
otherwise restored to the Company, a trustee, receiver or any other person under
any law (including, without limitation, any bankruptcy law, state or federal
law, common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied
shall be revived and continued in full force and effect as if such payment had
not been made or such enforcement or setoff had not occurred.
* * * * * *
28
<PAGE> 30
IN WITNESS WHEREOF, the Buyer and the Company have caused this Agreement
to be duly executed and delivered as of the date first written above.
COMPANY:
EBIZ ENTERPRISES, INC.
By: /s/ Jeffrey I. Rassas
__________________________
Jeffrey I. Rassas
Chief Executive Officer
BUYER:
JEM VENTURES EBIZ, LLC
By: /s/ David A. White
___________________________
David A. White , an authorized signatory
___________________________
29
<PAGE> 31
EXHIBIT A
FORM OF DEBENTURE
30
<PAGE> 32
EXHIBIT B
FORM OF WARRANT
31
<PAGE> 33
EXHIBIT C
FORM OF REGISTRATION RIGHTS AGREEMENT
32
<PAGE> 34
EXHIBIT D
FORM OF LETTER OF CREDIT
33
<PAGE> 35
EXHIBIT E
FORM OF OFFICER'S CERTIFICATE
34
<PAGE> 36
EXHIBIT F
FORM OF COMPANY COUNSEL OPINION
35
<PAGE> 37
EXHIBIT G
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS
36
<PAGE> 1
Exhibit 10.4
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS
OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. ANY TRANSFEREE OF THIS
DEBENTURE SHOULD CAREFULLY REVIEW THE TERMS OF THIS DEBENTURE, INCLUDING SECTION
2(e)(vi) HEREOF. THE PRINCIPAL AMOUNT AND THE INTEREST THEREON REPRESENTED BY
THIS DEBENTURE MAY BE LESS THAN THE AMOUNTS SET FORTH ON THE FACE HEREOF
PURSUANT TO SECTION 2(e)(vi) OF THIS DEBENTURE.
SUBORDINATED CONVERTIBLE DEBENTURE
Chicago, Illinois
August 25, 1999 $7,100,000
FOR VALUE RECEIVED, EBIZ ENTERPRISES, INC., a Nevada corporation (the
"COMPANY"), hereby promises to pay to the order of JEM VENTURES EBIZ, LLC, a
Delaware limited liability company, or registered assigns in accordance with
SECTION 20 hereof ("HOLDER") the principal amount of Seven Million One Hundred
Thousand Dollars ($7,100,000), on February 24, 2002 (the "MATURITY DATE"), and
to pay interest on the unpaid principal balance hereof until payment in full
thereof at the rate of 9.0% per annum from the date hereof (the "ISSUANCE DATE")
until the same becomes due and payable, whether at maturity or upon acceleration
or by conversion or redemption in accordance with the terms hereof or otherwise.
Interest on this Debenture shall commence accruing on the Issuance Date and
shall be computed on the basis of a 365-day year and actual days elapsed and
shall be payable at the time of optional or mandatory conversion of the
principal to which such interest relates in accordance with SECTION 1 hereof;
provided, that until the Registration Statement contemplated by the Securities
Purchase Agreement and Registration Rights Agreement (as defined in the
Securities Purchase Agreement) is declared effective by the Securities and
Exchange Commission, such interest shall be payable in accordance with the last
sentence of SECTION 1 hereof. Any amount of this Debenture which is not paid
when due shall bear interest at the rate of 2.5% per month (prorated for partial
months) until the same is paid in full ("DEFAULT INTEREST").
1. Payments of Principal and Interest. All payments of principal and
interest on this Debenture (to the extent such principal and/or interest is not
converted into Common Stock in accordance with the terms hereof) shall be made
in lawful money of the United States of America by wire transfer of immediately
available funds as follows: American National Bank and Trust, 120 South LaSalle
Street, Chicago, IL 60603, ABA 071 000 770, FBO JEM Ventures EBIZ, LLC, A/C
5330055857, or to such other account as Holder may from time to time
<PAGE> 2
designate by written notice in accordance with the provisions of this Debenture.
Whenever any amount expressed to be due by the terms of this Debenture is due on
any day which is not a Business Day (as defined below), the same shall instead
be due on the next succeeding day which is a Business Day and, in the case of
any interest payment date which is not the date on which this Debenture is paid
in full, the extension of the due date thereof shall not be taken into account
for purposes of determining the amount of interest due on such date. For
purposes of this Debenture, "BUSINESS DAY" shall mean any day other than a
Saturday, Sunday or a day on which commercial banks in the City of Chicago,
Illinois are authorized or required by law or executive order to remain closed.
Each capitalized term used herein, and not otherwise defined, shall have the
meaning ascribed thereto in the Securities Purchase Agreement, dated August 25,
1999, pursuant to which this Debenture was originally issued (the "SECURITIES
PURCHASE AGREEMENT"). Notwithstanding anything to the contrary set forth herein,
interest due and payable with respect to the first $5,000,000 of principal
amount of this Debenture shall be payable on a monthly basis in cash by wire
transfer of immediately available funds to the account designated above in this
SECTION 1 until such time as the Registration Statement contemplated by the
Securities Purchase Agreement and Registration Rights Agreement (as defined in
the Securities Purchase Agreement) is declared effective by the Securities and
Exchange Commission.
2. Conversion of Debenture. This Debenture shall be convertible into
shares of the Company's common stock, $.001 par value per share (the "COMMON
STOCK"), on the terms and conditions set forth in this SECTION 2.
(a) Certain Defined Terms. For purposes of this Debenture, the
following terms shall have the following meanings:
(i) "CLOSING BID PRICE" means, for any security as of
any date, the last closing bid price for such security on the
Principal Market (as defined below) as reported by Bloomberg
Financial Markets ("BLOOMBERG"), or, if the Principal Market
is not the principal securities exchange or trading market for
such security, the last closing bid price of such security on
the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if
the foregoing do not apply, the last closing bid price of such
security in the over-the-counter market on the electronic
bulletin board for such security as reported by Bloomberg, or,
if no last closing bid price is reported for such security by
Bloomberg, the last closing trade price for such security as
reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the
bid prices of any market makers for such security as reported
in the "pink sheets" by the National Quotation Bureau, Inc. If
the Closing Bid Price cannot be calculated for such security
on such date on any of the foregoing bases, the Closing Bid
Price of such security on such date shall be the fair market
value as mutually determined by the Company and Holder. If the
Company and Holder are unable to agree upon the fair market
value of the Common Stock, then such dispute shall be resolved
pursuant to SECTION 2(e)(iii) below with the term "Closing Bid
Price" being substituted for the term "Market Price." All such
determinations to be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such
period.
2
<PAGE> 3
(ii) "CONVERSION AMOUNT" means the sum of (A) the
principal amount of this Debenture to be converted, redeemed
or otherwise with respect to which this determination is being
made, and (B) accrued and unpaid interest thereon, calculated
as the principal amount to be converted in (A) times .090
times (N/365) and (C) Default Interest, if any.
(iii) "CONVERSION PRICE" means, as of any Conversion
Date (as defined below) or other date of determination and
subject to adjustment as provided herein, a price equal to the
lesser of (A) the Fixed Conversion Price (as defined below)
and (B) the Variable Conversion Price (as defined below).
(iv) "DUE DATE" means the Issuance Date and each
monthly anniversary after the Issuance Date.
(v) "FIXED CONVERSION PRICE" means a price equal to
130% of the average of the Closing Bid Price of the Common
Stock for the ten consecutive trading days immediately
preceding the Issuance Date, subject to adjustment as provided
herein.
(vi) "ISSUANCE DATE" means the date of issuance of
this Debenture.
(vii) "N" means the number of days from, but
excluding, the Issuance Date through and including the
Conversion Date for any portion of this Debenture for which
conversion is being elected.
(viii) "PERSON" means a natural person, a
partnership, a corporation, a limited liability company, an
association, a joint stock company, a trust, a joint venture,
an unincorporated organization or a governmental or any
department, agency or political subdivision thereof.
(ix) "PRINCIPAL MARKET" means the OTC Bulletin Board,
or The Nasdaq SmallCap Market or other comparable national
exchange or trading market.
(x) "VARIABLE CONVERSION PRICE" means a price equal
to 100% of the average of the three lowest Closing Bid Prices
of the Common Stock (as reported by Bloomberg) for the fifteen
consecutive trading days ending on the trading day immediately
preceding the date of submission of a Conversion Notice by the
Holder.
(b) Holder's Monthly Conversion Right; Conversion Upon Special
Event. Holder shall have the right, at the Holder's option, to convert
the outstanding and unpaid principal amount of this Debenture into
shares of the Company's Common Stock, on the following terms and
conditions:
(i) Monthly Conversion Amount. Subject to the
provisions of SECTION 2(d) and SECTION 3 below, on each Due
Date, Holder shall be entitled to convert $394,444 of the
outstanding and unpaid principal amount of this Debenture
(together with accrued and unpaid interest thereon) into fully
paid and
3
<PAGE> 4
nonassessable shares of Common Stock in accordance with
SECTION 2(e), at the Conversion Rate (as defined below) (the
"MONTHLY CONVERSION AMOUNT"). Delivery of such shares in
accordance with SECTION 2(e)(ii) shall be considered payment
in full of that portion of the Debenture.
(ii) Conversions Upon Special Event. Notwithstanding
the Holder's option to convert the Monthly Conversion Amount
described in item (i) above and in addition to all other
rights of Holder contained herein, upon the occurrence of any
Special Event (as described below), 100% of the remaining
principal balance hereunder, plus accrued and unpaid interest
thereon, shall become subject to conversion, at the option of
Holder, without any restriction or limitation. A "SPECIAL
EVENT" shall be deemed to have occurred at such time as any of
the following events:
(A) the consolidation, merger or other
business combination of the Company with or into
another Person (other than solely pursuant to a
migratory merger effected solely for the purpose of
changing the jurisdiction of incorporation of the
Company);
(B) the sale or transfer of 50% or more of
the Company's assets;
(C) a purchase, tender or exchange offer
made to holders of more than 30% of the outstanding
shares of Common Stock; or
(D) any event constituting an Event of
Default pursuant to SECTION 9(a) hereof.
(iii) Fractional Shares. The Company shall not issue
any fraction of a share of Common Stock upon any conversion.
All shares of Common Stock (including fractions thereof)
issuable upon conversion of this Debenture by a holder thereof
shall be aggregated for purposes of determining whether the
conversion would result in the issuance of a fraction of a
share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a
fraction of a share of Common Stock, the Company shall round
such fraction of a share of Common Stock up or down to the
nearest whole share.
(c) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of a Conversion Amount of this Debenture
pursuant to SECTION 2(b) shall be determined according to the following
formula (the "CONVERSION RATE"):
Conversion Rate = Conversion Amount
Conversion Price
(d) Limitation on Beneficial Ownership. The Company shall not
effect any conversion of this Debenture and Holder shall not have the
right to convert any portion of this Debenture pursuant to SECTION
2(b)(i) to the extent that after giving effect to such conversion such
Person (together with such Person's affiliates) would beneficially own
in excess of 4.99% of the outstanding shares of the Common Stock
following such
4
<PAGE> 5
conversion. For purposes of the foregoing sentence, the number of
shares of Common Stock beneficially owned by a Person and its
affiliates or acquired by a Person and its affiliates, as the case may
be, shall include the number of shares of Common Stock issuable upon
conversion of this Debenture with respect to which the determination of
such sentence is being made, but shall exclude the number of shares of
Common Stock which would be issuable upon (i) conversion of the
remaining, nonconverted portion of this Debenture beneficially owned by
such Person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the
Company (including, without limitation, any warrants) subject to a
limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by such Person and its affiliates.
Except as set forth in the preceding sentence, for purposes of this
SECTION 2(d), beneficial ownership shall be calculated in accordance
with Section 13(d) of the Securities Exchange Act of 1934, as amended.
Notwithstanding anything to the contrary contained herein, each
Conversion Notice (as defined below) shall constitute a representation
by Holder that, after giving effect to such Conversion Notice, Holder
will not beneficially own (as determined in accordance with this
SECTION 2(d)) a number of shares of Common Stock in excess of 4.99% of
the outstanding shares of Common Stock (1) as reflected in the
Company's most recent shareholder list, which list shall be provided to
Holder by the Company on a quarterly basis and certified by the Company
as true, complete and accurate as of the date thereof, or (2) at such
time as the Company is a Reporting Company under the Securities
Exchange Act of 1934, as reflected in the Company's most recent Form
10-Q or Form 10-K, as the case may be, or more recent public press
release by the Company or other notice by the Company to Holder setting
forth the number of shares of Common Stock outstanding, but after
giving effect to conversions of this Debenture (including the
conversion with respect this determination is being made) by Holder
since the date as of which such number of outstanding shares of Common
Stock was disclosed.
(e) Mechanics of Conversion. The conversion of this Debenture
shall be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert this
Debenture into shares of Common Stock on any date (the
"CONVERSION DATE"), Holder hereof shall (A) transmit by
facsimile (or otherwise deliver), for receipt on or prior to
11:59 p.m., Central Time on such date, a copy of a fully
executed notice of conversion in the form attached hereto as
EXHIBIT I (the "CONVERSION NOTICE") to the Company's
designated transfer agent (the "TRANSFER AGENT") with a copy
thereof to the Company and (B), subject to SECTION 2(e)(vi),
surrender to a common carrier for delivery to the Transfer
Agent as soon as practicable following such date the original
Debenture being converted (or an indemnification undertaking
with respect to such Debenture in the case of its loss, theft
or destruction).
(ii) Company's Response. Upon receipt by the Company
of a copy of a Conversion Notice, the Company shall as soon as
practicable, but in no event later than one (1) Business Day
after receipt of such Conversion Notice, send, via facsimile,
a confirmation of receipt of such Conversion Notice to Holder
and the Transfer Agent, which confirmation shall constitute an
instruction to the Transfer
5
<PAGE> 6
Agent to process such Conversion Notice in accordance with the
terms herein. Upon receipt by the Transfer Agent of a copy of
the executed Conversion Notice, the Transfer Agent shall, no
later than the second trading day following the date of
receipt by it of the Conversion Notice, (A) issue and
surrender to a common carrier for overnight delivery to
Holder's brokerage account #_________________ (the "JEM
Brokerage Account") with Spear, Leeds and Kellogg (the
"Broker"), a certificate, registered in the name of Holder or
its designee, for the number of shares of Common Stock to
which Holder shall be entitled, or (B) in the event the
Transfer Agent is participating in The Depository Trust
Company ("DTC") Fast Automated Securities Transfer Program,
upon the request of the Holder, credit such aggregate number
of shares of Common Stock to which Holder shall be entitled to
the Broker's balance account with DTC through its Deposit
Withdrawal Agent Commission system to be further credited to
the JEM Brokerage Account by the Broker. Subject to SECTION
2(e)(vi), if less than the principal amount of this Debenture
is submitted for conversion, then the Company shall, as soon
as practicable and in no event later than three business days
after receipt of this Debenture and at its own expense, issue
and deliver to Holder or its designee a new Debenture for the
outstanding principal amount not converted.
(iii) Dispute Resolution. In the case of a dispute as
to the determination of the Conversion Price or the arithmetic
calculation of the Conversion Rate, the Company shall instruct
the Transfer Agent to issue to Holder the number of shares of
Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the
Holder via facsimile within one (1) Business Day of receipt of
Holder's Conversion Notice. If Holder and the Company are
unable to agree upon the determination of the Conversion Price
or arithmetic calculation of the Conversion Rate within one
(1) Business Day of such disputed determination or arithmetic
calculation being submitted to Holder, then the Company shall
within one (1) Business Day submit via facsimile (A) the
disputed determination of the Conversion Price to an
independent, reputable investment bank selected by the Company
and approved by Holder or (B) the disputed arithmetic
calculation of the Conversion Rate to the Company's
independent, outside accountant. The Company shall cause the
investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the
Company and Holder of the results no later than the fifth
(5th) day after the date it receives the disputed
determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be,
shall be binding upon all parties absent manifest error.
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion
of this Debenture shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the
Conversion Date.
(v) Company's Failure to Timely Convert.
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<PAGE> 7
(A) Cash Damages. If within five (5)
Business Days after Holder's delivery of the
Conversion Notice (subject to extension in accordance
with SECTION 2(e)(iii) for a good faith dispute made
in accordance with the terms of SECTION 2(e)(iii))
(the "SHARE DELIVERY PERIOD") the Transfer Agent
shall fail to issue a certificate to Holder or credit
Holder's balance account with The Depository Trust
Company for the number of shares of Common Stock to
which Holder is entitled upon Holder's conversion of
this Debenture (a "CONVERSION FAILURE"), in addition
to all other available remedies which Holder may
pursue hereunder and under the Securities Purchase
Agreement (including indemnification pursuant to
Article 8 thereof), the Company shall pay additional
damages to Holder on each day after such fifth (5th)
Business Day such conversion is not timely effected
and/or such Debenture is not delivered in an amount
equal to 2.0% of such principal amount of this
Debenture submitted for conversion by Holder.
(B) Void Conversion Notice; Adjustment to
Conversion Price. If for any reason Holder has not
received all of the shares of Common Stock prior to
the tenth (10th) Business Day after the expiration of
the Share Delivery Period with respect to a
conversion of this Debenture, then Holder, upon
written notice to the Transfer Agent, with a copy to
the Company, may void its Conversion Notice with
respect to, and retain or have returned, as the case
may be, any principal amount of this Debenture that
has not been converted pursuant to Holder's
Conversion Notice; provided, that the voiding of
Holder's Conversion Notice shall not affect the
Company's obligations to make any payments which have
accrued prior to the date of such notice pursuant to
SECTION 2(e)(v)(A) or otherwise. Thereafter, the
Fixed Conversion Price of the principal amount of
this Debenture returned or retained by Holder for
failure to timely convert shall be adjusted to the
lesser of (I) the Conversion Price as in effect on
the date on which the Holder submitted the Conversion
Notice and (II) the lowest trade price for the Common
Stock during the period beginning on the Conversion
Date and ending on the date Holder voided the
Conversion Notice.
(vi) Book-Entry. Notwithstanding anything to the
contrary set forth herein, upon conversion of any portion of
this Debenture in accordance with the terms hereof, Holder
shall not be required to physically surrender this Debenture
to the Company unless the full Conversion Amount represented
by this Debenture is being converted. Holder and the Company
shall maintain records showing the Conversion Amount so
converted and the dates of such conversions or shall use such
other method, reasonably satisfactory to Holder and the
Company, so as not to require physical surrender of this
Debenture upon each such conversion. In the event of any
dispute or discrepancy, such records of the Company shall be
controlling and determinative in the absence of manifest
error. Notwithstanding the foregoing, if this Debenture is
converted as aforesaid, Holder may not transfer this Debenture
unless Holder first physically surrenders this Debenture to
the Company, whereupon the Company will forthwith issue and
deliver upon the
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<PAGE> 8
order of Holder a new Debenture of like tenor, registered as
Holder may request, representing in the aggregate the
remaining Conversion Amount represented by this Debenture.
Holder and any assignee, by acceptance of this Debenture or
such new Debenture, acknowledge and agree that, by reason of
the provisions of this paragraph, following conversion of any
portion of this Debenture, the Conversion Amount (including
the principal of this Debenture) represented by this Debenture
may be less than the principal amount and the accrued interest
set forth on the face hereof.
(f) Taxes. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Stock upon
the conversion of this Debenture.
3. Redemption. This Debenture shall be subject to mandatory redemption
upon the occurrence of certain events and optional redemption at the option of
the Company, each as discussed below.
(a) Mandatory Monthly Redemption. Upon the occurrence of a
Mandatory Redemption Event, and on each month anniversary
thereafter until such Mandatory Redemption Event shall have
been cured, if any, the Company will be required to redeem the
Monthly Conversion Amount for such month at a price equal to
120% of such Monthly Conversion Amount plus accrued and unpaid
interest thereon (the "MANDATORY REDEMPTION PRICE"). For
purposes of this Debenture, "MANDATORY REDEMPTION EVENT" means
any of the following events:
(i) the failure of the Company to satisfy any listing
criteria of its Principal Market necessary to maintain the
continued listing of the Common Stock, without regard to any
grace period or other timing issues;
(ii) the suspension of the Common Stock from trading
for five (5) consecutive trading days or for a total of
fifteen (15) trading days out of the preceding 365 days; or
(iii) if for any reason pursuant to the registration
statement (the "REGISTRATION STATEMENT") covering the resale
of shares of Common Stock issuable upon conversion of this
Debenture and the exercise of the Warrants required to be
filed by the Company pursuant to the Registration Rights
Agreement between the Company and Holder (the "REGISTRATION
RIGHTS AGREEMENT") sales cannot be made following the date
such Registration Statement has been declared effective by the
SEC (whether because of a failure to keep the Registration
Statement effective, to disclose such information as is
necessary for sales to be made pursuant to the Registration
Statement, to register sufficient shares of Common Stock, or
otherwise) for five (5) consecutive trading days or for a
total of fifteen (15) trading days out of the preceding 365
days.
(b) Optional Monthly Redemption. At any time during the five
(5) trading days prior to each Due Date (other than the Issuance Date),
if the Closing Bid Price of the Common Stock on each such trading day
is less than the Fixed Conversion Price on such
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<PAGE> 9
day then the Company shall have the option to redeem (the "OPTIONAL
MONTHLY REDEMPTION RIGHT") the Monthly Conversion Amount for such month
at a price equal to the Applicable Optional Redemption Price times the
Monthly Conversion Amount, plus all accrued and unpaid interest
thereon. The "APPLICABLE OPTIONAL REDEMPTION PRICE" shall be calculated
as follows: (i) 105% for each of the first and second months in which
the Company exercises such Optional Redemption Right; (ii) 106.5% for
each of the third and fourth months in which the Company exercises such
Optional Monthly Redemption Right; (iii) 108% for the fifth month and
each month thereafter in which the Company exercises its Optional
Monthly Redemption Right.
(c) Mechanics of Company Redemption. Within one (1) day after
the occurrence of a Mandatory Redemption Event, or upon a determination
by the Company to exercise its Optional Monthly Redemption Right, the
Company shall deliver a written notice thereof via facsimile and
overnight courier ("NOTICE OF REDEMPTION") to Holder, which notice
shall specify the type of redemption (and the nature of event with
respect to any Mandatory Redemption), the date such redemption is to be
effective and the Mandatory Full Redemption Price or Applicable
Optional Redemption Price, as appropriate (in any case, the "REDEMPTION
PRICE"). The Company shall pay the Redemption Price to Holder in cash
by wire transfer simultaneously with the delivery of the Notice of
Redemption as provided in the immediately preceding sentence, which
Redemption Price shall be delivered to Holder by wire transfer as
follows: American National Bank and Trust, 120 South LaSalle Street,
Chicago, IL 60603, ABA 071 000 770, FBO JEM Ventures EBIZ, LLC, A/C
5330055857, or to such other account or accounts as Holder may
designate in writing to the Company from time to time.
(d) Void Redemption. In the event that the Company does not
pay the Mandatory Full Redemption Price to Holder on a timely basis as
described in this SECTION 3, in addition to any remedy otherwise
available to the Holder hereunder or under the Securities Purchase
Agreement, such unpaid amount shall bear interest at the Default Rate
until paid in full. In the event that the Company does not pay the
Applicable Optional Redemption Price within the time period set forth
in SECTION 3(c), at any time thereafter and until the Company pays such
unpaid Applicable Optional Redemption Price in full, Holder shall have
the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of
redemption, require the Company to rescind the Notice of Redemption for
that portion of the Debenture for which the Applicable Optional
Redemption Price (together with any interest thereon) has not been
paid, by sending written notice thereof to the Company via facsimile
(the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the Company's receipt of
such Void Optional Redemption Notice, (i) the Notice of Redemption
pursuant to the Company's optional redemption rights as described in
SECTION 3(c), shall be null and void with respect to that portion of
the Debenture subject to the Void Optional Redemption Notice, (ii) the
Company shall immediately rescind such Redemption Notice, and (iii) the
Conversion Price of that portion of the Debenture returned shall be
adjusted to the lesser of (A) the Conversion Price as in effect on the
date on which the Void Optional Redemption Notice is delivered to the
Company and (B) the lowest trade price for the Common Stock (as
reported by Bloomberg) during the period beginning on the date on which
the Notice of Redemption is delivered to the Holder and ending on the
date on which the Void Optional Redemption Notice is delivered to the
Company.
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<PAGE> 10
(e) Disputes; Miscellaneous. In the event of a dispute as to
the determination of the lowest trade price or the arithmetic
calculation of the Redemption Price, such dispute shall be resolved
pursuant to SECTION 2(e)(iii) above with the term "lowest trade price"
being substituted for the term "Conversion Price" and the term
"Redemption Price" being substituted for the term "Conversion Rate."
Holder's delivery of a Void Optional Redemption Notice and exercise of
its rights following such notice shall not affect the Company's
obligations to make any payments which have accrued prior to the date
of such notice. In the event of a redemption pursuant to this SECTION 3
of less than all of the principal amount and interest of this Debenture
and subject to SECTION 2(e)(vi), the Company shall promptly cause to be
issued and delivered to Holder a new Debenture representing the
remaining unpaid principal amount which has not been redeemed.
4. Other Rights of Holder.
(a) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the
Company's assets to another Person or other transaction which is
effected in such a way that holders of Common Stock are entitled to
receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is
referred to herein as "ORGANIC CHANGE." Prior to the consummation of
any (i) sale of all or substantially all of the Company's assets to an
acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the
Person purchasing such assets or the successor resulting from such
Organic Change (in each case, the "ACQUIRING ENTITY") a written
agreement (in form and substance satisfactory to Holder) to deliver to
Holder in exchange for this Debenture, a security of the Acquiring
Entity evidenced by a written instrument substantially similar in form
and substance to this Debenture, and satisfactory to Holder. Prior to
the consummation of any other Organic Change, the Company shall make
appropriate provision (in form and substance satisfactory to Holder) to
insure that Holder will thereafter have the right to acquire and
receive in lieu of or in addition to (as the case may be) the shares of
Common Stock immediately theretofore acquirable and receivable upon the
conversion of Holder's Debenture such shares of stock, securities or
assets that would have been issued or payable in such Organic Change
with respect to or in exchange for the number of shares of Common Stock
which would have been acquirable and receivable upon the conversion of
Holder's Debenture as of the date of such Organic Change (without
taking into account any limitations or restrictions on the
convertibility of the Debenture).
(b) Purchase Rights. If at any time the Company grants, issues
or sells any options, convertible securities or rights to purchase
stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the "PURCHASE RIGHTS"), then
Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which Holder could have
acquired if Holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Debenture (without taking
into account any limitations or restrictions on the convertibility of
the Debenture) immediately before the date on which a record is taken
for the grant, issuance or sale of such Purchase Rights, or, if no such
record is
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<PAGE> 11
taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
11
<PAGE> 12
Exhibit 10.4
5. Reservation of Shares. The Company shall, so long as any principal
amount of the Debenture is outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Debenture, such number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all of the principal
amount of the Debenture then outstanding; provided that the number of shares of
Common Stock so reserved shall at no time be less than 130% of the number of
shares of Common Stock for which the principal amount of the Debenture are at
any time convertible.
6. Voting Rights. Holder shall have no voting rights, except as
required by law, including but not limited to the General Corporation Law of the
State of Nevada, and as expressly provided in this Debenture.
7. Restriction on Redemption and Cash Dividends. Until all of the
outstanding principal amount of this Debenture has been converted, redeemed or
otherwise satisfied as provided herein, the Company shall not, directly or
indirectly, redeem, or declare or pay any cash dividend or distribution on, its
capital stock without the prior express written consent of Holder.
8. Reissuance of Debenture. Subject to SECTION 2(e)(vi) in the event of
a conversion or redemption pursuant to this Debenture of less than all of the
Conversion Amount represented by this Debenture, the Company shall promptly
cause to be issued and delivered to Holder, upon tender by Holder of the
Debenture converted or redeemed, a new debenture of like tenor representing the
remaining principal amount of this Debenture which has not been so converted or
redeemed.
9. Defaults and Remedies.
(a) Events of Default. An "EVENT OF DEFAULT" is: (i) failure
of the Company's Registration Statement to be declared effective within
180 days following the Issuance Date, (ii) default in payment of
principal, interest or Default Interest on this Debenture when and as
due; (iii) failure by the Company (A) for thirty (30) days after notice
to it to comply with any other material provision of this Debenture
except for delivery of a replacement Debenture within three business
days as described in Section 2(e)(ii); or (B) for five (5) business
days after notice to it to comply with the replacement Debenture
delivery requirement set forth in Section 2(e)(ii); (iv) any default
under or acceleration prior to maturity of any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any indebtedness for money borrowed by the Company
or for money borrowed the repayment of which is guaranteed by the
Company, whether such indebtedness or guarantee now exists or shall be
created hereafter; (v) a Closing Bid Price for the Common Stock on any
trading day of less than ten cents ($0.10) per share; (vi) failure by
the Company to deliver a replacement irrevocable letter of credit with
a term of not less than 13 months within 20 days prior to the
expiration of the letter of credit delivered to Holder on the Issuance
Date (the "Initial Letter of Credit"), which replacement letter of
credit shall contain the same terms and conditions as the Initial
Letter of Credit and be issued by Bank One or such other bank
satisfactory to Holder in its sole discretion, (vii) if the Company
pursuant to or within the meaning of any Bankruptcy Law: (A) commences
a voluntary case; (B) consents to the entry of an order for relief
against it in an involuntary case; (C) consents to the appointment of a
Custodian of it or for all or substantially all of its property; (D)
makes a
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<PAGE> 13
Exhibit 10.4
general assignment for the benefit of its creditors; or (E) admits in
writing that it is generally unable to pay its debts as the same become
due; or (vii) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that: (1) is for relief against the
Company in an involuntary case; (2) appoints a Custodian of the Company
or for all or substantially all of its property; or (3) orders the
liquidation of the Company or any subsidiary, and the order or decree
remains unstayed and in effect for ninety (90) days. The term
"BANKRUPTCY LAW" means Title 11, U.S. Code, or any similar Federal or
State Law for the relief of debtors. The term "CUSTODIAN" means any
receiver, trustee, assignee, liquidator or similar official under any
Bankruptcy Law.
(b) Remedies. If an Event of Default occurs and is continuing,
Holder may declare all of this Debenture, including any interest and
Default Interest and other amounts due, to be due and payable
immediately, except that in the case of an Event of Default arising
from events described in clauses (iv) and (vii) of SECTION 9(a), this
Debenture shall become due and payable without further action or
notice. Holder may not enforce the agreements contained in this
Debenture except as provided herein. In addition to any remedy Holder
may have under this Debenture and the Securities Purchase Agreement,
such unpaid amount shall bear interest at the Default Rate until paid
in full.
10. Vote to Change the Terms of this Debenture. This Debenture and any
provision hereof may only be amended by an instrument in writing signed by the
Company and Holder. The term "Debenture" and all reference thereto, as used
throughout this instrument, shall mean this instrument as originally executed,
or if later amended or supplemented, then as so amended or supplemented.
11. Lost or Stolen Debenture. Upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Debenture, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the holder to the Company in a form reasonably acceptable to the
Company and, in the case of mutilation, upon surrender and cancellation of the
Debenture, the Company shall execute and deliver a new debenture of like tenor
and date; provided, however, the Company shall not be obligated to re-issue the
Debenture if Holder contemporaneously requests the Company to convert such
remaining principal amount into Common Stock.
12. Payment of Collection, Enforcement and Other Costs. If: (i) this
Debenture is placed in the hands of an attorney for collection or enforcement or
is collected or enforced through any legal proceeding; or (ii) an attorney is
retained to represent the Holder of this Debenture in any bankruptcy,
reorganization, receivership or other proceedings affecting creditors' rights
and involving a claim under this Debenture; or (iii) an attorney is retained to
represent the Holder of this Debenture in any other proceedings whatsoever in
connection with this Debenture, then the Company shall pay to Holder all
attorneys' fees, costs and expenses incurred in connection therewith, in
addition to all other amounts due hereunder.
13. Cancellation. After all principal and accrued interest at any time
owed on this Debenture has been paid in full, this Debenture shall automatically
be deemed canceled, shall be surrendered to the Company for cancellation and
shall not be reissued.
14. Debenture Exchangeable for Different Denominations. This Debenture
is exchangeable, upon the surrender hereof by Holder at the principal office of
the Company, for a
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<PAGE> 14
new Debenture or Debenture (in principal amounts of at least $1,000) containing
the same terms and conditions and representing in the aggregate the principal
amount of this Debenture, and each such new Debenture will represent such
portion of such principal amount as is designated by Holder at the time of such
surrender. The date the Company initially issues this Debenture will be deemed
to be the "Issuance Date" hereof regardless of the number of times a new
Debenture shall be issued.
15. Waiver of Notice. To the extent permitted by law, the Company
hereby waives demand, notice, protest and all other demands and notices in
connection with the delivery, acceptance, performance, default or enforcement of
this Debenture and the Securities Purchase Agreement.
16. Governing Law. This Debenture shall be construed and enforced in
accordance with, and all questions concerning the construction, validity,
interpretation and performance of this Debenture shall be governed by, the laws
of the State of Illinois, without giving effect to provisions thereof regarding
conflict of laws.
17. Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Debenture shall be cumulative
and in addition to all other remedies available under this Debenture, at law or
in equity (including a decree of specific performance and/or other injunctive
relief), no remedy contained herein shall be deemed a waiver of compliance with
the provisions giving rise to such remedy and nothing herein shall limit
Holder's right to pursue actual damages for any failure by the Company to comply
with the terms of this Debenture. The Company covenants to Holder that there
shall be no characterization concerning this instrument other than as expressly
provided herein. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to Holder and that the remedy
at law for any such breach may be inadequate. The Company therefore agrees that,
in the event of any such breach or threatened breach, Holder shall be entitled,
in addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
18. Specific Shall Not Limit General; Construction. No specific
provision contained in this Debenture shall limit or modify any more general
provision contained herein. This Debenture shall be deemed to be jointly drafted
by the Company and Holder and shall not be construed against any person as the
drafter hereof.
19. Failure or Indulgence Not Waiver. No failure or delay on the part
of this Debenture in the exercise of any power, right or privilege hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise of
any such power, right or privilege preclude other or further exercise thereof or
of any other right, power or privilege.
20. Transfer. This Debenture and the rights granted to the Holder are
transferable without the consent of the Company in whole or in part, upon notice
and surrender of this Debenture to the Company. The Company shall maintain at
its principal executive offices (or such other office or agency of the Company
as it may designate by notice to the Holder), a register for this Debenture, in
which the Company shall record the name and address of the
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<PAGE> 15
person in whose name this Debenture has been issued, as well as the name and
address of each transferee. The Company may treat the person in whose name the
Debenture is registered on the register as the owner and Holder for all
purposes, notwithstanding any notice to the contrary, but in all events
recognizing any transfers made in accordance with the terms of this Debenture.
[Signature Page Follows]
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<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Debenture to be duly
executed and delivered by Jeffrey I. Rassas, its Chief Executive Officer, as of
the 25th day of August, 1999.
EBIZ ENTERPRISES, INC.
By: /s/ Jeffrey I. Rassas
---------------------------
Jeffrey I. Rassas
Chief Executive Officer
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EXHIBIT I
ISSUER
CONVERSION NOTICE
Reference is made to the Debenture issued by EBIZ ENTERPRISES, INC. (the
"DEBENTURE"). In accordance with and pursuant to the Debenture, the undersigned
hereby elects to convert the principal amount of the Debenture, indicated below
into shares of common stock, no par value per share (the "COMMON STOCK"), of the
Company, by tendering the Debenture amount specified below as of the date
specified below.
DATE ___________________________________
CURRENTLY OUTSTANDING PRINCIPAL ___________________________________
CURRENT VALUE OF LETTER OF CREDIT ___________________________________
ACCRUED BUT UNPAID INTEREST ___________________________________
CONVERSION AMOUNT ___________________________________
(divided by)
CONVERSION PRICE ___________________________________
(equals)
CONVERSION SHARES ___________________________________
ACCRUED INTEREST CONVERTED ___________________________________
PRINCIPAL CONVERTED ___________________________________
(times) LETTER OF CREDIT RATIO ___________________________________
(equals) LETTER OF CREDIT REDUCTION ___________________________________
NEW OUTSTANDING PRINCIPAL ___________________________________
NEW LETTER OF CREDIT AMOUNT ___________________________________
AGREED TO:
JEM Ventures EBIZ, LLC EBIZ ENTERPRISES, INC.
______________________________________ ___________________________________
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Exhibit 10.5
THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
REASONABLY ACCEPTABLE TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144
UNDER SAID ACT. ANY SUCH OFFER, SALE, ASSIGNMENT OR TRANSFER MUST ALSO COMPLY
WITH THE APPLICABLE STATE SECURITIES LAWS. NOTWITHSTANDING THE FOREGOING, THIS
SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT.
EBIZ ENTERPRISES, INC.
WARRANT TO PURCHASE COMMON STOCK
Warrant No.: G-001 Number of Shares: 245,000
Date of Issuance: August 25, 1999
EBIZ Enterprises, Inc., a Nevada corporation (the "COMPANY"), hereby certifies
that, for Ten United States Dollars ($10.00) and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,JEM
Ventures EBIZ, LLC, a Delaware limited liability company, the registered holder
hereof or its permitted assigns, is entitled, subject to the terms set forth
below, to purchase from the Company upon surrender of this Warrant, at any time
or times on or after the date hereof, but not after 11:59 P.M. Central Time on
the appropriate Expiration Date (as defined herein), an aggregate of Two Hundred
Forty Five Thousand (245,000) fully paid nonassessable shares of Common Stock
(as defined herein) of the Company (the "WARRANT SHARES") at the purchase prices
per share provided in SECTION 1(b) below; provided, however, that in no event
shall the holder be entitled to exercise this Warrant to the extent that after
giving effect to such exercise such holder (together with such person's
affiliates) would beneficially own in excess of 4.99% of the outstanding shares
of the Common Stock following such exercise. For purposes of the foregoing
sentence, the number of shares of Common Stock beneficially owned by a holder
and its affiliates or acquired by such holder and its affiliates, as the case
may be, shall include the number of shares of Common Stock issuable upon
exercise of this Warrant with respect to which the determination of such
sentence is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) exercise of the remaining, nonexercised portion
of this Warrant beneficially owned by such holder and its affiliates and (ii)
exercise or conversion of the unexercised or unconverted portion
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<PAGE> 2
of any other securities of the Company (including, without limitation, any
convertible notes) subject to a limitation on conversion or exercise analogous
to the limitation contained herein beneficially owned by such holder and its
affiliates. Except as set forth in the preceding sentence, for purposes of this
paragraph, beneficial ownership shall be calculated in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended. Notwithstanding
anything to the contrary contained herein, each Exercise Notice (as defined
below) shall constitute a representation by the holder submitting such Exercise
Notice that, after giving effect to such Exercise Notice, (A) the holder will
not beneficially own (as determined in accordance with this paragraph) in excess
of 4.99% of the outstanding shares of Common Stock and (B) the holder will not
have acquired, through exercise of this Warrant or otherwise, a number of shares
of Common Stock which, when added to the number of shares of Common Stock
beneficially owned at the beginning of the 60-day period ending on and including
the applicable date of exercise of this Warrant, is in excess of 4.99% of the
outstanding shares of the Common Stock following such exercise during the 60-day
period ending on and including such date of exercise. For purposes of this
paragraph, in determining the number of the outstanding shares of Common Stock
the holder of this Warrant may rely on the number of outstanding shares of
Common Stock (1) as reflected in the Company's most recent shareholder list,
which list shall be provided to Holder by the Company on a quarterly basis and
certified by the Company as true, complete and accurate as of the date thereof,
or (2) at such time as the Company is a Reporting Company under the Securities
Exchange Act of 1934, as reflected in the Company's most recent Form 10-Q or
Form 10-K, as the case may be, or a more recent public announcement by the
Company or other notice by the Company or its transfer agent setting forth the
number of shares of Common Stock outstanding. In any case, the number of
outstanding shares of Common Stock shall be determined after giving effect to
exercises of this Warrant (including the exercise with respect this
determination is being made) by the holder since the date as of which such
number of outstanding shares of Common Stock was disclosed or reported.
Section 1.
(a) Securities Purchase Agreement. This Warrant has been issued
pursuant to the terms of that certain Securities Purchase Agreement dated as of
August 25, 1999, between the Company and the Buyer referred to therein
(the"SECURITIES PURCHASE AGREEMENT").
(b) Definitions. The following words and terms as used in this Warrant
shall have the following meanings:
(i) "APPROVED STOCK PLAN" shall mean any employee benefit plan which has
been approved by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer, director or
consultant for services provided to the Company.
(ii) "CLOSING BID PRICE" means, for any security as of any date, the last
closing bid price for such security on the Principal Market (as defined below)
as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Principal
Market is not the principal securities exchange or trading market for such
security, the last closing bid price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or if the foregoing do not apply, the last closing bid
price of such
2
<PAGE> 3
Exhibit 10.5
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no last closing bid price is
reported for such security by Bloomberg, the last closing trade price for such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and Holder. If the Company and Holder are unable to agree upon
the fair market value of the Common Stock, then such dispute shall be resolved
pursuant to SECTION 2(a) below with the term "Closing Bid Price" being
substituted for the term "Market Price." All such determinations to be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.
(iii) "COMMON STOCK" means (i) the Company's common stock, $.001 par
value, and (ii) any capital stock into which such Common Stock shall have been
changed or any capital stock resulting from a reclassification of such Common
Stock.
(iv) "CONVERTIBLE SECURITIES" means any stock or securities
(other than Options) directly or indirectly convertible into or exchangeable for
Common Stock, other than the Debenture.
(v) "DEBENTURE" means the Convertible Subordinated Debenture issued
pursuant to the Securities Purchase Agreement.
(vi) "EXPIRATION DATE" means the date which is five (5) years from the
date of this Warrant; provided, if any such date falls on a Saturday, Sunday or
other day on which banks are required or authorized to be closed in the City of
Chicago or the State of Illinois or on which trading does not take place on the
principal exchange or automated quotation system on which the Common Stock is
traded (a "HOLIDAY"), the next date that is not a Holiday.
(vii) "GROUP ONE WARRANTS" means the 60,000 five year stock purchase
warrants issued pursuant to the terms hereof.
(viii) "GROUP TWO WARRANTS" means the 60,000 five year stock purchase
warrants issued pursuant to the terms hereof.
(ix) "GROUP THREE WARRANTS" means the 125,000 five year stock purchase
warrants issued pursuant to the terms hereof.
(x) "OPTIONS" means any rights, warrants or options to subscribe for or
purchase Common Stock or Convertible Securities.
(xi) "OTHER SECURITIES" means (i) those warrants of the Company issued
prior to, and outstanding on, the date of issuance of this Warrant, (ii) the
Debenture and (iii) the shares of Common Stock issued upon conversion of the
Debenture.
3
<PAGE> 4
Exhibit 10.5
(xii) "PERSON" means a natural person, a partnership, a
corporation, a limited liability company, an association or a joint stock
company, a trust, a joint venture, an unincorporated organization or a
governmental agency or any department, or agency or political subdivision
thereof.
(xiii) "PRINCIPAL MARKET" means the OTC Bulletin Board,
or The Nasdaq SmallCap Market or other comparable national exchange or trading
market.
(xiv) "SECURITIES ACT" means the Securities Act of 1933, as
amended and the rules and regulations promulgated thereunder.
(xv) "WARRANT" means the Group One Warrants, Group Two
Warrants and Group Three Warrants of this Warrant, and all warrants issued in
exchange, transfer or replacement of any thereof.
(xvi) "WARRANT EXERCISE PRICE" means as determined by the
holder upon exercise, (A) for the Group One Warrants, 130% of the average of the
Closing Bid Price of the Common Stock for the fifteen (15) consecutive trading
days prior to the date hereof, (B) for the Group Two Warrants, 150% of the
average of the Closing Bid Price of the Common Stock for the fifteen (15)
consecutive trading days prior to the date hereof, and (C) for the Group Three
Warrants, the lesser of 110% of the average of the Closing Bid Price of the
Common Stock for the fifteen (15) consecutive trading days prior to date hereof
and $7 but in any event not less than $6, in each case subject to adjustment as
provided in SECTION 2(e) and SECTION 8.
(xxxii)Capitalized terms used herein not otherwise defined herein shall have
the respective meanings set forth in the Securities Purchase Agreement.
Section 2. Exercise of Warrant.
(a) Subject to the terms and conditions hereof, this Warrant may be
exercised by the holder hereof then registered on the books of the Company, in
whole or in part, at any time on any business day on or after the opening of
business on the date hereof and prior to 11:59 P.M. Central Time on the
Expiration Date by (i) delivery of a written notice, in the form of the
subscription notice attached as EXHIBIT A hereto (the "EXERCISE NOTICE"), of
such holder's election to exercise this Warrant, which notice shall specify the
number of Warrant Shares to be purchased and whether the Warrants to be
exercised are Group One Warrants, Group Two Warrants or Group Three Warrants,
(ii) (A) payment to the Company of an amount equal to the appropriate Warrant
Exercise Price multiplied by the number of Warrant Shares as to which this
Warrant is being exercised (plus any applicable issue or transfer taxes) (the
"AGGREGATE EXERCISE PRICE") in cash or by check or wire transfer or (B) by
notifying the Company that this Warrant is being exercised pursuant to a
Cashless Exercise (as defined in SECTION 2(e)), and (iii) the surrender to a
common carrier for delivery to the Company as soon as practicable following such
date, this Warrant (or an indemnification undertaking with respect to this
Warrant in the case of its loss, theft or destruction); provided, that if such
Warrant Shares are to be issued in any name other than that of the registered
holder of this Warrant, such issuance shall be deemed a transfer and the
provisions of SECTION 7 shall be applicable. In the event of any
4
<PAGE> 5
exercise of the rights represented by this Warrant in compliance with this
SECTION 2(a), a certificate or certificates for the Warrant Shares so purchased,
in such denominations as may be requested by the holder hereof and registered in
the name of, or as directed by, the holder, shall be delivered at the Company's
expense to, or as directed by, such holder as soon as practicable, and in no
event later than two business days, after the Company's receipt of the Exercise
Notice, the Aggregate Exercise Price and this Warrant (or an indemnification
undertaking with respect to this Warrant in the case of its loss, theft or
destruction). Upon delivery of the Exercise Notice and Aggregate Exercise Price
referred to in CLAUSE (II)(A) above or notification to the Company of a Cashless
Exercise referred to in SECTION 2(f), the holder of this Warrant shall be deemed
for all corporate purposes to have become the holder of record of the Warrant
Shares with respect to which this Warrant has been exercised, irrespective of
the date of delivery of this Warrant as required by CLAUSE (III) above or the
certificates evidencing such Warrant Shares. In the case of a dispute as to the
determination of the Warrant Exercise Price, the Closing Bid Price, the last
reported sale price (as reported by Bloomberg) or the arithmetic calculation of
the Warrant Shares, the Company shall promptly issue to the holder the number of
shares of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile within one
business day of receipt of the holder's subscription notice. If the holder and
the Company are unable to agree upon the determination of the Warrant Exercise
Price, the Closing Bid Price, the last reported sale price (as reported by
Bloomberg) or arithmetic calculation of the Warrant Shares within three business
days of such disputed determination or arithmetic calculation being submitted to
the holder, then the Company shall within two business days submit via facsimile
(i) the disputed determination of the Warrant Exercise Price, the Closing Bid
Price, or the last reported sale price (as reported by Bloomberg) to an
independent, reputable investment banking firm or (ii) the disputed arithmetic
calculation of the Warrant Shares to its independent, outside accountant. The
Company shall use all commercially reasonable efforts to require the investment
banking firm or the accountant, as the case may be, to perform the
determinations or calculations and notify the Company and the holder of the
results no later than forty-eight (48) hours from the time it receives the
disputed determinations or calculations. Such investment banking firm's or
accountant's determination or calculation, as the case may be, shall be deemed
conclusive absent manifest error.
(b) Unless the rights represented by this Warrant shall have expired
or shall have been fully exercised, the Company shall, as soon as practicable
and in no event later than five business days after any exercise and at its own
expense, issue a new Warrant identical in all respects to this Warrant except it
shall represent rights to purchase the number of Warrant Shares purchasable
immediately prior to such exercise under this Warrant, less the number of
Warrant Shares with respect to which such Warrant is exercised.
(c) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock issued
upon exercise of this Warrant shall be rounded up or down to the nearest whole
number.
(d) If the Company shall fail for any reason or for no reason to
issue (subject to extension in accordance with SECTION 2(a) for a good faith
dispute made in accordance with SECTION 2(a)) to the holder (i) within five (5)
business days after the Company's receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant, a certificate for the number of shares of
Common Stock to which the holder is entitled upon the holder's exercise of this
5
<PAGE> 6
Exhibit 10.5
Warrant or (ii) if this Warrant is being exercised for less than all of the
number of shares of Common Stock covered by this Warrant, within ten (10)
business days after the Company's receipt of the Exercise Notice, the Aggregate
Exercise Price and this Warrant, a new Warrant for the number of shares of
Common Stock to which such holder is entitled pursuant to SECTION 2(b) hereof,
the Company shall, in addition to any other remedies under this Warrant or the
Securities Purchase Agreement or otherwise available to such holder, including
any indemnification under Section 8 of the Securities Purchase Agreement, pay as
additional damages in cash to such holder on each day such fifth (5th) business
day such exercise is not timely effected and/or after the tenth (10th) business
day such new Warrant is not delivered, as the case may be, an amount equal to
0.5% of the product of (A) the sum of the number of shares of Common Stock not
issued to the holder on a timely basis and to which the holder is entitled
and/or, the number of shares represented by the portion of this Warrant which is
not being converted, as the case may be, and (B) the average of the Closing Bid
Prices of the Common Stock for the three consecutive trading days immediately
preceding the last possible date which the Company could have issued such Common
Stock or Warrant, as the case may be, to the holder without violating this
SECTION 2.
(e) If the registration statement (the "REGISTRATION STATEMENT")
covering the resale of the Warrant Shares issuable upon conversion of this
Warrant required to be filed by the Company pursuant to the Registration Rights
Agreement between the Company and the original purchasers of this Warrant (the
"REGISTRATION RIGHTS AGREEMENT") is not (A) filed with the Securities and
Exchange Commission (the "SEC") on or before the Filing Deadline (as defined in
the Registration Rights Agreement), or (B) if after the Registration Statement
has been declared effective by the SEC, sales cannot be made pursuant to the
Registration Statement (whether because of a failure to keep the Registration
Statement effective, to disclose such information as is necessary for sales to
be made pursuant to the Registration Statement, to register sufficient shares of
Common Stock or otherwise), then, as partial relief for the damages to the
holder of this Warrant by reason of any such delay in or reduction of its
ability to sell the underlying shares of Common Stock (which remedy shall not be
exclusive of any other remedies available at law or in equity), the Warrant
Exercise Prices shall be adjusted as follows: each Warrant Exercise Price in
effect at such time shall be reduced by an amount equal to the product of (A)
the Warrant Exercise Price in effect as of the original issuance date of this
Warrant and (B) the sum of (I) with respect to the first 30 Registration Default
Days (as defined below), the product of (x) .00167 multiplied by (y) the sum of
the (i) the number of days after the Filing Deadline that the relevant
Registration Statement has not been filed with the SEC, (ii) the number of days
after the Effectiveness Deadline that the Registration Statement has not been
declared effective by the SEC and (iii) the number of days that sales cannot be
made pursuant to the Registration Statement in accordance with the Registration
Rights Agreement after the Registration Statement has been declared effective
(the days set forth in the preceding clauses (I), (II) and (III) collectively
are referred to herein as "REGISTRATION DEFAULT DAYS"), plus (II) the product of
.0025 and the number of Registration Default Days in excess of 30.
(f) Notwithstanding anything contained herein to the contrary, the
holder of this Warrant may, at its election exercised in its sole discretion,
exercise this Warrant in whole or in part and, in lieu of making the cash
payment otherwise contemplated to be made to the Company upon such exercise in
payment of the Aggregate Exercise Price, elect instead to receive upon
6
<PAGE> 7
Exhibit 10.5
such exercise the "NET NUMBER" of shares of Common Stock determined according to
the following formula (a "CASHLESS EXERCISE"):
Net Number = (A x B) - (A x C)
-----------------
B
For purposes of the foregoing formula:
A= the total number of shares with respect to which this
Warrant is being exercised.
B= the last reported sale price (as reported by
Bloomberg) of the Common Stock on the date
immediately preceding the date of the subscription
notice.
C= the Warrant Exercise Price(s) then in effect at
the time of such exercise.
Section 3. Covenants as to Common Stock. The Company hereby covenants and agrees
as follows:
(a) This Warrant is, and any Warrants issued in substitution for
or replacement of this Warrant will upon issuance be, duly authorized and
validly issued.
(b) All Warrant Shares which may be issued upon the exercise
of the rights represented by this Warrant will, upon issuance, be validly
issued, fully paid and nonassessable and free from all taxes, liens and charges
with respect to the issue thereof.
(c) During the period within which the rights represented by this
Warrant may be exercised, the Company will at all times have authorized and
reserved at least 100% of the number of shares of Common Stock needed to provide
for the exercise of the rights then represented by this Warrant and the par
value of said shares will at all times be less than or equal to the applicable
Warrant Exercise Price.
(d) The Company shall promptly secure the listing of the shares of Common
Stock issuable upon exercise of this Warrant upon each national securities
exchange or automated quotation system, if any, upon which shares of Common
Stock are then listed (subject to official notice of issuance upon exercise of
this Warrant) and shall maintain, so long as any other shares of Common Stock
shall be so listed, such listing of all shares of Common Stock from time to time
issuable upon the exercise of this Warrant; and the Company shall so list on
each national securities exchange or automated quotation system, as the case may
be, and shall maintain such listing of, any other shares of capital stock of the
Company issuable upon the exercise of this Warrant if and so long as any shares
of the same class shall be listed on such national securities exchange or
automated quotation system.
7
<PAGE> 8
Exhibit 10.5
(e) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. The Company (i) will not increase the par value of any shares of
Common Stock receivable upon the exercise of this Warrant above any Warrant
Exercise Price then in effect, and (ii) will take all such actions as may be
necessary or appropriate in order that the Company may validly and legally issue
fully paid and nonassessable shares of Common Stock upon the exercise of this
Warrant.
(f) This Warrant will be binding upon any entity succeeding to the
Company by merger, consolidation or acquisition of all or substantially all of
the Company's assets.
Section 4. Taxes. The Company shall pay any and all
taxes which may be payable with respect to the issuance and delivery of Warrant
Shares upon exercise of this Warrant.
Section 5. Warrant Holder Not Deemed a Stockholder. Except as
otherwise specifically provided herein, no holder, as such, of this Warrant
shall be entitled to vote or receive dividends or be deemed the holder of shares
of the Company for any purpose, nor shall anything contained in this Warrant be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote, give or withhold consent to any
corporate action (whether any reorganization, issue of stock, reclassification
of stock, consolidation, merger, conveyance or otherwise), receive notice of
meetings, receive dividends or subscription rights, or otherwise, prior to the
issuance to the holder of this Warrant of the Warrant Shares which he or she is
then entitled to receive upon the due exercise of this Warrant. In addition,
nothing contained in this Warrant shall be construed as imposing any liabilities
on such holder to purchase any securities (upon exercise of this Warrant or
otherwise) or as a stockholder of the Company, whether such liabilities are
asserted by the Company or by creditors of the Company. Notwithstanding this
SECTION 5, the Company will provide the holder of this Warrant with copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.
Section 6. Representations of Holder. The holder of this Warrant, by
the acceptance hereof, represents that it is acquiring this Warrant and the
Warrant Shares for its own account for investment only and not with a view
towards, or for resale in connection with, the public sale or distribution of
this Warrant or the Warrant Shares, except pursuant to sales registered or
exempted under the Securities Act; provided, however, that by making the
representations herein, the holder does not agree to hold this Warrant or any of
the Warrant Shares for any minimum or other specific term and reserves the right
to dispose of this Warrant and the Warrant Shares at any time in accordance with
or pursuant to a registration statement or an exemption under the Securities
Act. The holder of this Warrant further represents, by acceptance hereof, that,
as of this date, such holder is an "accredited investor" as such term is defined
in Rule 501(a) of Regulation D promulgated by the Securities and Exchange
Commission under the Securities
8
<PAGE> 9
Exhibit 10.5
Act (an "ACCREDITED INVESTOR"). Upon exercise of this Warrant, the holder shall
if requested by the Company, confirm in writing, in a form satisfactory to the
Company, that the Warrant Shares so purchased are being acquired solely for the
holder's own account and not as a nominee for any other party, for investment,
and not with a view toward distribution or resale and that such holder is an
Accredited Investor. If such holder cannot make such representations because
they would be factually incorrect, it shall be a condition to such holder's
exercise of this Warrant that the Company receive such other representations as
the Company considers reasonably necessary to assure the Company that the
issuance of its securities upon exercise of this Warrant shall not violate any
United States or state securities laws.
Section 7. Ownership and Transfer.
(a) The Company shall maintain at its principal executive offices
(or such other office or agency of the Company as it may designate by notice to
the holder hereof), a register for this Warrant, in which the Company shall
record the name and address of the person in whose name this Warrant has been
issued, as well as the name and address of each transferee. The Company may
treat the person in whose name any Warrant is registered on the register as the
owner and holder thereof for all purposes, notwithstanding any notice to the
contrary, but in all events recognizing any transfers made in accordance with
the terms of this Warrant.
(b) This Warrant and the rights granted to the holder hereof are
transferable, in whole or in part, upon surrender of this Warrant, together with
a properly executed warrant power in the form of EXHIBIT B attached hereto;
provided, however, that any transfer or assignment shall be subject to the
conditions set forth in SECTION 7(c) below.
(c) The holder of this Warrant understands that this Warrant has not
been and is not expected to be, registered under the Securities Act or any state
securities laws, and may not be offered for sale, sold, assigned or transferred
unless (a) subsequently registered thereunder, or (b) such holder shall have
delivered to the Company an opinion of counsel, in generally acceptable form, to
the effect that the securities to be sold, assigned or transferred may be sold,
assigned or transferred pursuant to an exemption from such registration;
provided that (i) any sale of such securities made in reliance on Rule 144
promulgated under the Securities Act may be made only in accordance with the
terms of said Rule and further, if said Rule is not applicable, any resale of
such securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the Securities Act) may require compliance with some other exemption
under the Securities Act; and (ii) neither the Company nor any other person is
under any obligation to register this Warrant under the Securities Act or any
state securities laws or to comply with the terms and conditions of any
exemption thereunder.
(d) The Company is obligated to register the Warrant Shares for resale
under the Securities Act pursuant to the Registration Rights Agreement and the
initial holder of this Warrant (and certain assignees thereof) is entitled to
the registration rights in respect of the Warrant Shares as set forth in the
Registration Rights Agreement.
9
<PAGE> 10
Exhibit 10.5
Section 8. Adjustment of Warrant Exercise Price and Number of Shares.
The Warrant Exercise Prices and the number of shares of Common Stock issuable
upon exercise of this Warrant shall be adjusted from time to time as follows:
(a) Adjustment of Warrant Exercise Price upon Subdivision or Combination of
Common Stock. If the Company at any time after the date of issuance of this
Warrant subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Warrant Exercise Prices in effect immediately
prior to such subdivision will be proportionately reduced and the number of
shares of Common Stock obtainable upon exercise of this Warrant will be
proportionately increased. If the Company at any time after the date of issuance
of this Warrant combines (by combination, reverse stock split or otherwise) one
or more classes of its outstanding shares of Common Stock into a smaller number
of shares, the Warrant Exercise Price in effect immediately prior to such
combination will be proportionately increased and the number of shares of Common
Stock obtainable upon exercise of this Warrant will be proportionately
decreased.
(b) Certain Events. If any event occurs of the type contemplated by the
provisions of this SECTION 8 but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Warrant Exercise
Price and the number of shares of Common Stock obtainable upon exercise of this
Warrant so as to protect the rights of the holders of the Warrants; provided
that no such adjustment will increase the Warrant Exercise Price or decrease the
number of shares of Common Stock obtainable as otherwise determined pursuant to
this SECTION 8.
(c) Notices.
(i) As soon as practicable, but in no event later than the second
business day, after any adjustment of the Warrant Exercise Price pursuant to
this SECTION 8 or SECTION 2(e), the Company will give written notice thereof to
the holder of this Warrant, setting forth in reasonable detail, and certifying,
the calculation of such adjustment.
(ii) The Company will give written notice to the holder of this Warrant
at least ten (10) days prior to the date on which the Company closes its books
or takes a record (A) with respect to any dividend or distribution upon the
Common Stock, (B) with respect to any pro rata subscription offer to holders of
Common Stock or (C) for determining rights to vote with respect to any Organic
Change (as defined below), dissolution or liquidation, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
(iii) The Company will also give written notice to the holder of this
Warrant at least ten (10) days prior to the date on which any Organic Change,
dissolution or liquidation will take place, provided that such information shall
be made known to the public prior to or in conjunction with such notice being
provided to such holder.
10
<PAGE> 11
Exhibit 10.5
Section 9. Purchase Rights; Reorganization, Reclassification,
Consolidation, Merger or Sale.
(a) In addition to any adjustments pursuant to SECTION 8 above, if
at any time the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the "PURCHASE
RIGHTS"), then the holder of this Warrant will be entitled to acquire, upon the
terms applicable to such Purchase Rights, the aggregate Purchase Rights which
such holder could have acquired if such holder had held the number of shares of
Common Stock acquirable upon complete exercise of this Warrant immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.
(b) Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's assets
to another Person or other transaction which is effected in such a way that
holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as "ORGANIC CHANGE." Prior to
the consummation of any (i) sale of all or substantially all of the Company's
assets to an acquiring Person or (ii) other Organic Change following which the
Company is not a surviving entity, the Company will secure from the Person
purchasing such assets or the successor resulting from such Organic Change (in
each case, the "ACQUIRING ENTITY") written agreement (in form and substance
satisfactory to the holder of this Warrant) to deliver to such holder, in
exchange for such Warrant, a security of the Acquiring Entity evidenced by a
written instrument substantially similar in form and substance to this Warrant
and satisfactory to the holder hereof (including, an adjusted warrant exercise
price equal to the value for the Common Stock reflected by the terms of such
consolidation, merger or sale, and exercisable for a corresponding number of
shares of Common Stock acquirable and receivable upon exercise of the Warrant,
if the value so reflected is less than the Warrant Exercise Prices in effect
immediately prior to such consolidation, merger or sale). Prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance satisfactory to the holder of this Warrant) to
insure that the holder hereof will thereafter have the right to acquire and
receive in lieu of or in addition to (as the case may be) the shares of Common
Stock immediately theretofore acquirable and receivable upon the exercise of
such holder's Warrant, such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the exercise of this Warrant as of the date of
such Organic Change (without taking into account any limitations or restrictions
on the exercise ability of this Warrant).
Section 10. Lost, Stolen, Mutilated or Destroyed Warrant. If this
Warrant is lost, stolen, mutilated or destroyed, the Company shall, on receipt
of an indemnification undertaking, issue a new Warrant of like denomination and
tenor as this Warrant so lost, stolen, mutilated or destroyed.
11
<PAGE> 12
Exhibit 10.5
Section 11. Notice. Any notices, consents, waivers or other
communications required or permitted to be given under the terms of this Warrant
must be in writing and will be deemed to have been delivered: (i) upon receipt,
when delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one business day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
EBIZ Enterprises, Inc.
15695 N. 83rd Way
Scottsdale, Arizona 85260
Telephone: (480) 778-1000
Facsimile: (480) 778-1002
Attention: Jeffrey Rassas
Chief Executive Officer
with a copy to:
Lewis and Roca, LLP
40 North Central
Phoenix, Arizona 85004-4429
Telephone: (602) 262-5712
Facsimile: (602) 734-3911
Attention: Thomas Morgan, Esq.
If to the holder of this Warrant:
JEM Ventures EBIZ, LLC
600 Central Avenue, Suite 214
Highland Park, Illinois 60035
Telephone: 847-681-8600
Facsimile: 847-681-1541
Attention: John Fern
with a copy to:
Katten Muchin & Zavis
525 West Monroe Street
Suite 1600
Chicago, Illinois 60661
Telephone: 312-902-5200
Facsimile: 312-577-8648
Attention: David J. Kaufman, Esq.
12
<PAGE> 13
Exhibit 10.5
or to such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by prior written notice given
to each other party five days prior to the effective date of such change.
Written confirmation of receipt (A) given by the recipient of such notice,
consent, waiver or other communication, (B) mechanically or electronically
generated by the sender's facsimile machine containing the time, date, recipient
facsimile number and an image of the first page of such transmission or (C)
provided by a nationally recognized overnight delivery service shall be
rebuttable evidence of personal service, receipt by facsimile or receipt from a
nationally recognized overnight delivery service in accordance with clause (i),
(ii) or (iii) above, respectively.
Section 12. Amendments. This Warrant and any term hereof may be
changed, waived, discharged, or terminated only by an instrument in writing
signed by the party or holder hereof against which enforcement of such change,
waiver, discharge or termination is sought.
Section 13. Limitation on Number of Warrant Shares. The Company shall
not be obligated to issue any Warrant Shares upon exercise of this Warrant if
the issuance of such shares of Common Stock would cause the Company to exceed
that number of shares of Common Stock which the Company may issue upon exercise
of this Warrant (the "EXCHANGE CAP") without breaching the Company's obligations
under the rules or regulations of the Principal Market, except that such
limitation shall not apply in the event that the Company obtains the approval of
its stockholders as required by the Principal Market (or any successor rule or
regulation) for issuances of Common Stock in excess of such amount. In the event
the Company is prohibited from issuing Warrant Shares as a result of the
operation of this SECTION 13, the Company shall redeem for cash those Warrant
Shares which can not be issued, at a price equal to the difference between the
last reported sale price (as reported by Bloomberg) and the Exercise Price of
such Warrant Shares as of the date of the attempted exercise.
Section 14. Date. The date of this Warrant is August 25, 1999. This
Warrant, in all events, shall be wholly void and of no effect after the close of
business on the Expiration Date, except that notwithstanding any other
provisions hereof, the provisions of (a) SECTION 2(g) shall continue in full
force and effect after such date as to any additional amounts due and payable to
the holder as a result of any adjustment to the definition of Intrinsic Value;
and (b) of SECTION 7 shall continue in full force and effect after such date as
to any Warrant Shares or other securities issued upon the exercise of this
Warrant.
Section 15. Amendment and Waiver. The provisions of this Warrant may
only be amended upon a written instrument executed by the Company and the
holders hereof.
Section 16. Descriptive Headings; Governing Law. The descriptive
headings of the several Sections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The corporate
laws of the State of Nevada shall govern all issues concerning the relative
rights of the Company and its stockholders. All other questions concerning the
construction, validity, enforcement and interpretation of this Warrant shall be
governed by the internal laws of the State of Illinois, without giving effect to
any choice of law or conflict of law provision or rule (whether of the State of
Illinois or any other jurisdictions) that would cause the application of the
laws of any jurisdictions other than the State of Illinois.
13
<PAGE> 14
Exhibit 10.5
Section 17. Successors and Assigns. This Warrant shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of this Warrant. The Company shall not assign
this Warrant or any rights or obligations hereunder without the prior written
consent of the holder of this Warrant, including by merger, consolidation or
reorganization, except pursuant to a Special Event (as defined in Section
2(b)(ii) of the Debenture) consolidation or reorganization with respect to which
the Company has satisfied its obligations under Section 2 of the Debenture and
SECTION 9(b). The holder of this Warrant may assign some or all of its rights
hereunder to (i) without the consent of the Company, any person or entity who,
immediately prior to such assignment, is an affiliate of such holder (a
"PERMITTED ASSIGNEE") and (ii) with the prior written consent of the Company,
which consent shall not be unreasonably withheld, to any person or entity which
is not a Permitted Assignee; provided, however, that any such assignment shall
not release the holder of this Warrant from its obligations hereunder unless
such obligations are assumed by such assignee and the Company has consented to
such assignment and assumption, which consent shall not be unreasonably
withheld. Notwithstanding anything to the contrary contained herein, the holder
of this Warrant shall be entitled to pledge the this Warrant and the shares of
Common Stock issuable upon exercise of this Warrant in connection with a bona
fide margin account.
EBIZ ENTERPRISES, INC.
By: /s/ Jeffrey I. Rassas
-------------------------
Jeffrey I. Rassas
Chief Executive Officer
14
<PAGE> 15
Exhibit 10.5
EXHIBIT A TO WARRANT
--------------------
SUBSCRIPTION FORM
TO BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT
EBIZ ENTERPRISES, INC.
The undersigned holder hereby exercises the right to purchase
_________________ of the shares of Common Stock ("WARRANT SHARES") of EBIZ
Enterprises, Inc., a Nevada corporation (the "COMPANY"), evidenced by the
attached Warrant (the "WARRANT"). Capitalized terms used herein and not
otherwise defined shall have the respective meanings set forth in the Warrant.
1. Type of Warrants. The aggregate number of Warrants exercised
pursuant to this Subscription Form shall be comprised of __________ Group One
Warrants __________, Group Two Warrants and ___________ Group Three Warrants.
2. Form of Warrant Exercise Price. The Holder intends that payment of
the Warrant Exercise Price shall be made as:
____________ a CASH EXERCISE with respect to
__________ Group One Warrant Shares
,__________ Group Two Warrant
Shares; and __________ Group Three
Warrant Shares, and/or
____________ a CASHLESS EXERCISE with respect to
__________ Group One Warrant Shares,
__________ Group Two Warrant Shares
and __________ Group Three Warrants
(to the extent permitted by the
terms of the Warrant).
3. Payment of Warrant Exercise Price. In the event that the holder has
elected a Cash Exercise with respect to some or all of the Warrant Shares to be
issued pursuant hereto, the holder shall pay the sum of $___________________ to
the Company in accordance with the terms of the Warrant.
4. Delivery of Warrant Shares. The Company shall deliver to the holder
__________ Warrant Shares in accordance with the terms of the Warrant.
Date: _______________ __, ______
-------------------------
Name of Registered Holder
15
<PAGE> 16
Exhibit 10.5
By: ________________________
Name:
Title:
EXHIBIT B TO WARRANT
FORM OF WARRANT POWER
FOR VALUE RECEIVED, the undersigned does hereby assign and transfer to
________________, Federal Identification No. __________, a warrant to purchase
____________ shares of the capital stock of EBIZ Enterprises, Inc., a Nevada
corporation, represented by warrant certificate no. _____, standing in the name
of the undersigned on the books of said corporation. The undersigned does hereby
irrevocably constitute and appoint ______________, attorney to transfer the
warrants of said corporation, with full power of substitution in the premises.
Dated: _________, ____
__________________________
By: _____________________________
Its: _____________________________
16
<PAGE> 1
Exhibit 10.6
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of August 25,
1999, by and between EBIZ ENTERPRISES, INC., a Nevada corporation, with
headquarters located at 15695 N. 83rd Way, Scottsdale, Arizona 85260 (the
"COMPANY"), and JEM VENTURES EBIZ, LLC, a Delaware limited liability company
(the "BUYER").
RECITALS
WHEREAS, in connection with the Securities Purchase Agreement by and among
the parties hereto dated as of August 25, 1999 (the "SECURITIES PURCHASE
AGREEMENT"), the Company has agreed, upon the terms and subject to the
conditions of the Securities Purchase Agreement, to (i) issue and sell to the
Buyer a 9.0% Subordinated Convertible Debenture (the "DEBENTURE"), which will be
convertible into shares of the Company's common stock, $.001 par value per share
(the "COMMON STOCK") (as converted, the "CONVERSION SHARES") in accordance with
the terms of such Debenture, and (ii) issue Warrants (the "WARRANTS") which will
be exercisable to purchase shares of Common Stock (the "WARRANT SHARES"); and
WHEREAS, to induce the Buyer to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 ACT"), and applicable state securities laws.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Buyer hereby
agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means the Buyer, any transferee or assignee thereof to
whom Buyer assigns its rights under this Agreement and who agrees to become
bound by the provisions of this Agreement in accordance with SECTION 9 and any
transferee or assignee thereof to whom a transferee or assignee assigns its
rights under this Agreement and who agrees to become bound by the provisions of
this Agreement in accordance with SECTION 9.
b. "PERSON" means a natural person, a partnership, corporation, a
limited liability company, an association, a joint stock company, a trust, a
joint venture, an unincorporated organization or a governmental agency or any
department, agency or political subdivision thereof.
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements (as defined below) in
<PAGE> 2
compliance with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any
successor rule providing for offering securities on a continuous basis ("RULE
415"), and the declaration or ordering of effectiveness of such Registration
Statement(s) by the United States Securities and Exchange Commission (the
"SEC").
d. "REGISTRABLE SECURITIES" means the Conversion Shares and the
Warrant Shares issued or issuable upon conversion of the Debenture and exercise
of the Warrants, respectively, and any shares of capital stock issued or
issuable with respect to the Conversion Shares, the Warrant Shares, the Warrants
or the Debenture as a result of any stock split, stock dividend,
recapitalization, exchange or similar event or otherwise, without regard to any
limitation on conversion of the Debenture or the exercise of the Warrants.
e. "REGISTRATION STATEMENT" means a registration statement of the
Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, as soon
as practicable but in no event later than 60 days after the date of issuance of
the Debenture (the "FILING DEADLINE"), file with the SEC a Registration
Statement or Registration Statements (as is necessary) on Form SB-2 covering the
resale of all of the Registrable Securities. The initial Registration Statement
prepared pursuant hereto shall register for resale at least that number of
shares of Common Stock equal to the product of (x) 1.5 and (y) the number of
Registrable Securities as of the date immediately preceding the date the
Registration Statement is initially filed with the SEC, subject to adjustment as
provided in SECTION 3(b). The Company shall use its best efforts to have the
Registration Statement declared effective by the SEC as soon as practicable, but
in no event later than 180 days after the Issuance Date (as defined in the
Debenture).
b. Allocation of Registrable Securities. The initial number of
Registrable Securities included in any Registration Statement and each increase
in the number of Registrable Securities included therein shall be allocated pro
rata among the Investors based on the number of Registrable Securities held by
each Investor at the time the Registration Statement covering such initial
number of Registrable Securities or increase thereof is declared effective by
the SEC. In the event that an Investor sells or otherwise transfers any of such
Person's Registrable Securities, each transferee shall be allocated a pro rata
portion of the then remaining number of Registrable Securities included in such
Registration Statement for such transferor. Any shares of Common Stock included
in a Registration Statement and which remain allocated to any Person which
ceases to hold any Registrable Securities shall be allocated to the remaining
Investors, pro rata based on the number of Registrable Securities then held by
such Investors.
c. Legal Counsel. Subject to SECTION 5 hereof, the Buyer shall have
the right to select one legal counsel to review any offering pursuant to this
SECTION 2 ("LEGAL COUNSEL"), which shall be Katten Muchin & Zavis or such other
counsel as thereafter designated by the
2
<PAGE> 3
holders of a majority of Registrable Securities. The Company shall reasonably
cooperate with Legal Counsel in performing the Company's obligations under this
Agreement.
d. Form SB-2. The Company shall (i) initially register the sale of
the Registrable Securities on Form SB-2 (or such other form if Form SB-2 is not
available) and (ii) undertake to promptly register the Registrable Securities on
Form S-3 as soon as such form is available, provided that the Company shall
maintain the effectiveness of the Registration Statement then in effect until
such time as a Registration Statement on Form S-3 covering the Registrable
Securities has been declared effective by the SEC.
e. Sufficient Number of Shares Registered. Following the filing of
the initial Registration Statement pursuant to SECTION 2(a), in the event the
number of shares available under a Registration Statement filed pursuant to
SECTION 2(a) is insufficient to cover all of the Registrable Securities or an
Investor's allocated portion of the Registrable Securities pursuant to SECTION
2(b), the Company shall amend the Registration Statement, or file a new
Registration Statement (on the short form available therefor, if applicable), or
both, so as to cover at least 130% of such Registrable Securities (based on the
market price of the Common Stock), in each case, as soon as practicable, but in
any event not later than fifteen (15) days after the necessity therefor arises.
The Company shall use it best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof. For purposes of the foregoing provision, the number of shares
available under a Registration Statement shall be deemed "insufficient to cover
all of the Registrable Securities" if at any time the number of Registrable
Securities issued or issuable upon conversion of the Debenture and exercise of
the Warrants is greater than the quotient determined by dividing (i) the number
of shares of Common Stock available for resale under such Registration Statement
by (ii) 1.3. For purposes of the calculation set forth in the foregoing
sentence, any restrictions on the convertibility of the Debenture or
exercisability of the Warrants shall be disregarded and such calculation shall
assume that the Debenture and the Warrants are then convertible and exercisable,
respectively, into shares of Common Stock at the then prevailing Conversion Rate
(as defined in the Debenture) and Warrant Exercise Price (as defined in the
Warrant), respectively, if applicable.
f. Penalty for No Effective Registration Statement. In the event the
initial Registration Statement has not been declared effective by the SEC on the
one hundred sixty fifth (165th) day following the Issuance Date (the
"EFFECTIVENESS DEADLINE"), the Company shall pay to the Investor a penalty equal
to two percent (2%) of the outstanding principal amount of the Debenture, and
shall continue to accrue, and pay in cash on each monthly anniversary thereafter
until the earlier of (i) the date the Registration Statement is declared
effective by the SEC and (ii) the one hundred eightieth (180th) day following
the Issuance Date, an additional three percent (3%) per month (prorated for
partial months) of the outstanding principal amount of the Debenture.
3
<PAGE> 4
3. RELATED OBLIGATIONS.
At such time as the Company is obligated to file a Registration Statement
with the SEC pursuant to SECTION 2(A) or SECTION 2(E), the Company will use its
best efforts to effect the registration of the Registrable Securities in
accordance with the intended method of disposition thereof and, pursuant
thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the sixtieth (60th) day after the date of issuance of the Debenture for the
registration of Registrable Securities pursuant to SECTION 2(a)) and use its
best efforts to cause such Registration Statement relating to the Registrable
Securities to become effective as soon as possible after such filing (but in no
event later than 180 days after the Issuance Date, and keep such Registration
Statement effective pursuant to Rule 415 at all times until the earlier of (i)
the date as of which the Investors may sell all of the Registrable Securities
without restriction pursuant to Rule 144(k) promulgated under the 1933 Act (or
successor thereto) or (ii) the date on which (A) the Investors shall have sold
all the Registrable Securities and (B) none of the Debenture or Warrants is
outstanding (the "REGISTRATION Period"), which Registration Statement (including
any amendments or supplements thereto and prospectuses contained therein) shall
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein, or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading. The term
"best efforts" as used in the first sentence of this SECTION 3(a) shall mean,
among other things, that the Company shall submit to the SEC, within two
business days after the Company learns that no review of a particular
Registration Statement will be made by the staff of the SEC or that the staff
has no further comments on the Registration Statement, as the case may be, a
request for acceleration of effectiveness of such Registration Statement to a
time and date not later than 48 hours after the submission of such request.
b. The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with such Registration
Statement, which prospectus is to be filed pursuant to Rule 424 promulgated
under the 1933 Act, as may be necessary to keep such Registration Statement
effective at all times during the Registration Period, and, during such period,
comply with the provisions of the 1933 Act with respect to the disposition of
all Registrable Securities of the Company covered by such Registration Statement
until such time as all of such Registrable Securities shall have been disposed
of in accordance with the intended methods of disposition by the seller or
sellers thereof as set forth in such Registration Statement. In the case of
amendments and supplements to a Registration Statement which are required to be
filed pursuant to this Agreement (including pursuant to this SECTION 3(b)) by
reason of the Company filing a report on Form 10-K, Form 10-Q or Form 8-K or any
analogous report under the Securities Exchange Act of 1934, as amended (the
"1934 ACT"), the Company shall file such amendments or supplements with the SEC
on the same day on which the 1934 Act report is filed which created the
requirement for the Company to amend or supplement the Registration Statement.
c. The Company shall permit Legal Counsel to review and comment upon
a Registration Statement and all amendments and supplements thereto at least
seven (7) days prior
4
<PAGE> 5
to their filing with the SEC, and not file any document in a form to which Legal
Counsel reasonably objects. The Company shall not submit a request for
acceleration of the effectiveness of a Registration Statement or any amendment
or supplement thereto without the prior approval of Legal Counsel, which consent
shall not be unreasonably withheld. The Company shall furnish to Legal Counsel,
without charge, (i) any correspondence from the SEC or the staff of the SEC to
the Company or its representatives relating to any Registration Statement, (ii)
promptly after the same is prepared and filed with the SEC, one copy of any
Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits and (iii) upon the effectiveness of any Registration Statement, one
copy of the prospectus included in such Registration Statement and all
amendments and supplements thereto.
d. The Company shall furnish to each Investor whose Registrable
Securities are included in any Registration Statement, without charge, (i)
promptly after the same is prepared and filed with the SEC, at least one copy of
such Registration Statement and any amendment(s) thereto, including financial
statements and schedules, all documents incorporated therein by reference and
all exhibits, (ii) upon the effectiveness of any Registration Statement, ten
(10) copies of the prospectus included in such Registration Statement and all
amendments and supplements thereto (or such other number of copies as such
Investor may reasonably request) and (iii) such other documents, including
copies of any preliminary or final prospectus, as such Investor may reasonably
request from time to time in order to facilitate the disposition of the
Registrable Securities owned by such Investor.
e. The Company shall use reasonable efforts to (i) register and
qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as Legal Counsel or any Investor reasonably requests, (ii) prepare and
file in those jurisdictions, such amendments (including post-effective
amendments) and supplements to such registrations and qualifications as may be
necessary to maintain the effectiveness thereof during the Registration Period,
(iii) take such other actions as may be necessary to maintain such registrations
and qualifications in effect at all times during the Registration Period, and
(iv) take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this SECTION 3(E), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
Legal Counsel and each Investor who holds Registrable Securities of the receipt
by the Company of any notification with respect to the suspension of the
registration or qualification of any of the Registrable Securities for sale
under the securities or "blue sky" laws of any jurisdiction in the United States
or its receipt of actual notice of the initiation or threatening of any
proceeding for such purpose.
f. As promptly as practicable after becoming aware of such event
(but in no event later than one business day thereafter), the Company shall
notify Legal Counsel and each Investor in writing of the happening of any event
as a result of which the prospectus included in a Registration Statement, as
then in effect, includes an untrue statement of a material fact or omission to
state a material fact required to be stated therein or necessary to make the
statements
5
<PAGE> 6
therein, in light of the circumstances under which they were made, not
misleading, and promptly prepare a supplement or amendment to such Registration
Statement to correct such untrue statement or omission, and deliver one (1) copy
of such supplement or amendment to Legal Counsel and each Investor (or such
other number of copies as Legal Counsel or such Investor may reasonably
request). The Company shall also promptly notify Legal Counsel and each Investor
in writing (i) when a prospectus or any prospectus supplement or post-effective
amendment has been filed, and when a Registration Statement or any
post-effective amendment has become effective (notification of such
effectiveness shall be delivered to Legal Counsel and each Investor by facsimile
on the same day of such effectiveness and by overnight mail), (ii) of any
request by the SEC for amendments or supplements to a Registration Statement or
related prospectus or related information, and (iii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement would
be appropriate.
g. The Company shall use its best efforts to prevent the issuance of
any stop order or other suspension of effectiveness of a Registration Statement,
or the suspension of the qualification of any of the Registrable Securities for
sale in any jurisdiction and, if such an order or suspension is issued, to
obtain the withdrawal of such order or suspension at the earliest possible
moment and to notify Legal Counsel and each Investor who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
h. At the request of any Investor, the Company shall furnish to such
Investor, on the date of the effectiveness of the Registration Statement and
thereafter from time to time on such dates as an Investor may reasonably request
(i) a letter, dated such date, from the Company's independent certified public
accountants in form and substance as is customarily given by independent
certified public accountants to underwriters in an underwritten public offering,
addressed to the Investors, and (ii) an opinion, dated as of such date, of
counsel representing the Company for purposes of such Registration Statement, in
form, scope and substance as is customarily given in an underwritten public
offering, addressed to the Investors.
i. The Company shall make available for inspection by (i) any
Investor, (ii) Legal Counsel and (iii) one firm of accountants or other agents
retained by the Investors (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request;
provided, however, that each Inspector shall hold in strict confidence and shall
not make any disclosure (except to an Investor) or use of any Record or other
information which the Company determines in good faith to be confidential, and
of which determination the Inspectors are so notified, unless (a) the disclosure
of such Records is necessary to avoid or correct a misstatement or omission in
any Registration Statement or is otherwise required under the 1933 Act, (b) the
release of such Records is ordered pursuant to a final, non-appealable subpoena
or order from a court or government body of competent jurisdiction, or (c) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement of which
the Inspector has knowledge. Each Investor agrees that it shall, upon learning
that disclosure of such Records is sought in or by a court or governmental body
of competent jurisdiction or through other means, give prompt notice to the
Company and allow the
6
<PAGE> 7
Company, at its expense, to undertake appropriate action to prevent disclosure
of, or to obtain a protective order for, the Records deemed confidential.
j. The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
k. The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by a Registration Statement to be listed on
each securities exchange on which securities of the same class or series 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) secure
designation and quotation of all the Registrable Securities covered by the
Registration Statement on the Nasdaq SmallCap Market and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Securities. The Company shall pay all fees
and expenses in connection with satisfying its obligation under this SECTION
3(k).
l. The Company shall cooperate with the Investors who hold
Registrable Securities being offered to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case may
be, as the Investors may reasonably request and registered in such names as the
Investors may request.
m. The Company shall provide a transfer agent and registrar of all
such Registrable Securities not later than the effective date of such
Registration Statement.
n. If requested by an Investor, the Company shall (i) immediately
incorporate in a prospectus supplement or post-effective amendment such
information as an Investor requests to be included therein relating to the sale
and distribution of Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities being offered
or sold, the purchase price being paid therefor and any other terms of the
offering of the Registrable Securities; (ii) make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; and (iii) supplement or make amendments to any Registration Statement
if requested by a holder of such Registrable Securities.
7
<PAGE> 8
o. The Company shall use its best efforts to cause the Registrable
Securities covered by the applicable Registration Statement to be registered
with or approved by such other governmental agencies or authorities as may be
necessary to consummate the disposition of such Registrable Securities.
p. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
q. The Company shall otherwise use its best efforts to comply with
all applicable rules and regulations of the SEC in connection with any
registration hereunder.
r. Within two (2) business days after the Registration Statement
which includes the Registrable Securities is declared effective by the SEC, the
Company shall deliver, and shall cause legal counsel for the Company to deliver,
to the transfer agent for such Registrable Securities (with copies to the
Investors whose Registrable Securities are included in such Registration
Statement) confirmation that the Registration Statement has been declared
effective by the SEC in the form attached hereto as EXHIBIT A.
s. The Company shall take all other reasonable actions necessary to
expedite and facilitate disposition by the Investors of Registrable Securities
pursuant to a Registration Statement.
4. OBLIGATIONS OF THE INVESTORS.
a. At least seven (7) business days prior to the first anticipated
filing date of the Registration Statement, the Company shall notify each
Investor in writing of the information the Company requires from each such
Investor if such Investor elects to have any of such Investor's Registrable
Securities included in such Registration Statement. It shall be a condition
precedent to the obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Registrable Securities of a
particular Investor that such Investor shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as shall
be reasonably required to effect the registration of such Registrable Securities
and shall execute such documents in connection with such registration as the
Company may reasonably request.
b. Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of any Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from such Registration Statement.
c. Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in SECTION 3(g) or
the first sentence of SECTION 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to
8
<PAGE> 9
any Registration Statement(s) covering such Registrable Securities until such
Investor's receipt of the copies of the supplemented or amended prospectus
contemplated by SECTION 3(g) or the first sentence of SECTION 3(f).
Notwithstanding anything to the contrary, the Company shall cause its transfer
agent to deliver unlegended shares of Common Stock to a transferee of an
Investor in accordance with the terms of the Debenture and the Warrants in
connection with any sale of Registrable Securities with respect to which an
Investor has entered into a contract for sale prior to the Investor's receipt of
a notice from the Company of the happening of any event of the kind described in
SECTION 3(g) or the first sentence of SECTION 3(f) and for which the Investor
has not yet settled.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
brokerage commissions, incurred in connection with registrations, filings or
qualifications pursuant to SECTION 2 and SECTION 3, including, without
limitation, all registration, listing and qualifications fees, printers and
accounting fees, and fees and disbursements of counsel for the Company, and all
fees and disbursements of Legal Counsel, shall be paid by the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will, and
hereby does, indemnify, hold harmless and defend each Investor who holds such
Registrable Securities, the directors, officers, partners, employees, agents,
representatives of, and each Person, if any, who controls any Investor within
the meaning of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED PERSON"),
against any losses, claims, damages, liabilities, judgments, fines, penalties,
charges, costs, attorneys' fees, amounts paid in settlement or expenses, joint
or several, (collectively, "CLAIMS") incurred in investigating, preparing or
defending any action, claim, suit, inquiry, proceeding, investigation or appeal
taken from the foregoing by or before any court or governmental, administrative
or other regulatory agency, body or the SEC, whether pending or threatened,
whether or not an indemnified party is or may be a party thereto ("INDEMNIFIED
DAMAGES"), to which any of them may become subject insofar as such Claims (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 a material fact in a Registration Statement or any post-effective
amendment thereto or in any filing made in connection with the qualification of
the offering under the securities or other "blue sky" laws of any jurisdiction
in which Registrable Securities are offered ("BLUE SKY FILING"), or the omission
or alleged omission to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus if used prior to the effective date of such Registration
Statement, or contained in the final prospectus (as amended or supplemented, if
the Company files any amendment thereof or supplement thereto with the SEC) or
the omission or alleged omission to state therein any material fact necessary to
make the statements made therein, in light of the circumstances under which the
statements therein were made, not misleading, (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any other law,
9
<PAGE> 10
including, without limitation, any state securities law, or any rule or
regulation thereunder relating to the offer or sale of the Registrable
Securities pursuant to a Registration Statement or (iv) any material violation
of this Agreement (the matters in the foregoing clauses (i) through (iv) being,
collectively, "VIOLATIONS"). The Company shall reimburse the Indemnified
Persons, promptly as such expenses are incurred and are due and payable, for any
legal fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
SECTION 6(a) (i) shall not apply to a Claim by an Indemnified Person arising out
of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by such Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to SECTION 3(d);
(ii) shall not be available to the extent such Claim is based on a failure of
the Investor to deliver or to cause to be delivered the prospectus made
available by the Company, if such prospectus was timely made available by the
Company pursuant to SECTION 3(d); and (iii) shall not apply to amounts paid in
settlement of any Claim if such settlement is effected without the prior written
consent of the Company, which consent shall not be unreasonably withheld. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of the Indemnified Person and shall survive the transfer of
the Registrable Securities by the Investors pursuant to SECTION 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in SECTION 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act
(collectively and together with an Indemnified Person, an "INDEMNIFIED PARTY"),
against any Claim or Indemnified Damages to which any of them may become
subject, under the 1933 Act, the 1934 Act or otherwise, insofar as such Claim or
Indemnified Damages arise out of or are based upon any Violation, in each case
to the extent, and only to the extent, that such Violation occurs in reliance
upon and in conformity with written information furnished to the Company by such
Investor expressly for use in connection with such Registration Statement; and,
subject to SECTION 6(d), such Investor will reimburse any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such Claim; provided, however, that the indemnity agreement
contained in this SECTION 6(b) and the agreement with respect to contribution
contained in SECTION 7 shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided, further,
however, that the Investor shall be liable under this SECTION 6(b) for only that
amount of a Claim or Indemnified Damages as does not exceed the net proceeds to
such Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of such Indemnified Party
and shall survive the transfer of the Registrable Securities by the Investors
pursuant to SECTION 9. Notwithstanding anything to the contrary contained
herein, the indemnification agreement contained in this SECTION 6(b) with
respect to any prospectus shall not inure to the benefit of any Indemnified
Party if the untrue statement or omission of material fact contained in the
prospectus was corrected on a timely basis in the prospectus, as then amended or
supplemented.
10
<PAGE> 11
c. Promptly after receipt by an Indemnified Person or Indemnified
Party under this SECTION 6 of notice of the commencement of any action or
proceeding (including any governmental action or proceeding) involving a Claim,
such Indemnified Person or Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party under this SECTION 6,
deliver to the indemnifying party a written notice of the commencement thereof,
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the defense thereof with counsel
mutually satisfactory to the indemnifying party and the Indemnified Person or
the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the consent of the Indemnified Party or Indemnified Person, consent to entry of
any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this SECTION 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
d. The indemnification required by this SECTION 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 Indemnified Damages are incurred.
e. The indemnity agreements contained herein shall be in addition to
(i) any cause of action or similar right of the Indemnified Party or Indemnified
Person against the indemnifying party or others, and (ii) any liabilities the
indemnifying party may be subject to pursuant to the law.
11
<PAGE> 12
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under SECTION 6 to the fullest extent permitted by law; provided, however, that:
(i) no seller of Registrable Securities guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any seller of Registrable Securities who was not guilty of
fraudulent misrepresentation; and (ii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities pursuant to the
Registration Statement.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of
Rule 144 promulgated under the 1933 Act or any other similar rule or regulation
of the SEC that may at any time permit the Investors to sell securities of the
Company to the public without registration ("RULE 144"), the Company agrees to:
a. make and keep public information available, as those terms
are understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4.3 of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the investors to sell such securities pursuant to Rule 144 without
registration.
12
<PAGE> 13
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement shall be automatically assignable by
the Investors to any transferee of all or any portion of Registrable Securities
if the Investor agrees in writing with the transferee or assignee to assign such
rights and the Company is, within a reasonable time after such transfer or
assignment, furnished with written notice of (a) the name and address of such
transferee or assignee, and (b) the securities with respect to which such
registration rights are being transferred or assigned, provided that further
disposition of such securities by the transferee or assignee shall be restricted
under the 1933 Act and applicable state securities laws, and the transferee or
assignee shall be bound by all of the provisions contained herein.
Notwithstanding the foregoing, the rights under this Agreement shall not be
assignable if the amount of Registrable Securities to be assigned is less than
$250,000, based on the Conversion Price or Warrant Exercise Price of such
securities (as applicable) at the time of such assignment.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who then hold two-thirds (2/3) (beta) of the Registrable
Securities. Any amendment or waiver effected in accordance with this SECTION 10
shall be binding upon each Investor and the Company. No such amendment shall be
effective to the extent that it applies to less than all of the holders of the
Registrable Securities. No consideration shall be offered or paid to any Person
to amend or consent to a waiver or modification of any provision of any of this
Agreement unless the same consideration also is offered to all of the parties to
this Agreement.
11. MISCELLANEOUS.
a. A Person is deemed to be a holder of Registrable Securities
whenever such Person owns or is deemed to own of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more Persons with respect to the same Registrable
Securities, the Company shall act upon the basis of instructions, notice or
election received from the registered owner of such Registrable Securities.
13
<PAGE> 14
b. Any notices, consents, waivers or other communications required
or permitted to be given under the terms of this Agreement must be in writing
and will be deemed to have been delivered: (i) upon receipt, when delivered
personally; (ii) upon receipt, when sent by facsimile (provided confirmation of
transmission is mechanically or electronically generated and kept on file by the
sending party); or (iii) one business day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
EBIZ Enterprises, Inc.
15695 N. 83rd Way
Scottsdale, Arizona 85260
Telephone: (480) 778-1000
Facsimile: (480) 778-1000
Attention: Jeffrey Rassas
Chief Executive Officer
With a copy to:
Lewis and Roca
40 North Central
Phoenix, Arizona 85004-4429
Telephone: (602) 262-5712
Facsimile: (602) 734-3911
Attention: Thomas J. Morgan, Esq.
If to Legal Counsel:
Katten Muchin & Zavis
525 West Monroe Street, Suite 1600
Chicago, Illinois 60661-3693
Telephone: 312-902-5200
Facsimile: 312-577-8648
Attention: David J. Kaufman, Esq.
If to Buyer:
JEM Ventures EBIZ, LLC
600 Central Avenue, Suite 214
Highland Park, Illinois 60035
Telephone: 847-681-8600
Facsimile: 847-681-1541
Attention: John Fern
or at such other address and/or facsimile number and/or to the attention of such
other person as the recipient party has specified by written notice given to
each other party five days prior to the
14
<PAGE> 15
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.
c. Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
d. The corporate laws of the State of Nevada shall govern all issues
concerning the relative rights of the Company and its stockholders. All other
questions concerning the construction, validity, enforcement and interpretation
of this Agreement shall be governed by the internal laws of the State of
Illinois, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of Illinois or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than the
State of Illinois. Each party hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting within the City of Chicago,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
Each party hereby irrevocably waives any right it may have, and agrees not to
request, a jury trial for the adjudication of any dispute hereunder or in
connection herewith or arising out of this Agreement or any transaction
contemplated hereby.
e. This Agreement, the Securities Purchase Agreement, the Warrants,
the Debenture and the Security Agreement constitute the entire agreement among
the parties hereto with respect to the subject matter hereof and thereof. There
are no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement, the Securities Purchase
Agreement, the Warrants, the Debenture, and the Security Agreement supersede all
prior agreements and understandings among the parties hereto with respect to the
subject matter hereof and thereof.
f. Subject to the requirements of SECTION 9, this Agreement shall
inure to the benefit of and be binding upon the permitted successors and assigns
of each of the parties hereto.
15
<PAGE> 16
g. The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in identical counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
j. All consents and other determinations to be made by the Investors
pursuant to this Agreement shall be made, unless otherwise specified in this
Agreement, by Investors holding a majority of the Registrable Securities,
determined as if the principal amount of the Debenture then outstanding and all
of the Warrants issuable, have been converted into or exercised for Registrable
Securities without regard to any limitation on conversion of the Debenture or
the exercise of the Warrants.
k. The language used in this Agreement will be deemed to be the
language chosen by the parties to express their mutual intent and no rules of
strict construction will be applied against any party.
l. This Agreement is intended for the benefit of the parties hereto
and their respective permitted successors and assigns, and is not for the
benefit of, nor may any provision hereof be enforced by, any other Person.
* * * * * *
16
<PAGE> 17
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed and delivered as of day and year first above
written.
COMPANY:
EBIZ ENTERPRISES, INC.
By: /s/ Jeffrey I. Rassas
____________________________
Name: Jeffrey I. Rassas
Its: Chief Executive Officer
BUYER:
JEM VENTURES EBIZ, LLC
By: /s/ David A. White
____________________________
Name: David A. White
Its: President
17
<PAGE> 18
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
[TRANSFER AGENT]
ATTN:____________________________________
RE: EBIZ ENTERPRISES, INC.
Ladies and Gentlemen:
We are counsel to EBIZ ENTERPRISES, INC., a Nevada corporation (the
"COMPANY"), and have represented the Company in connection with that certain
Securities Purchase Agreement (the "PURCHASE AGREEMENT") entered into by and
among the Company and the Buyer named therein (the "HOLDER") pursuant to which
the Company issued to the Holder a Subordinated Convertible Debenture (the
"DEBENTURE") convertible into shares of the Company's common stock, no par value
per share (the "COMMON STOCK"), and warrants to purchase an aggregate of 245,000
shares of the Common Stock, subject to adjustment (the "WARRANTS"). Pursuant to
the Purchase Agreement, the Company also has entered into a Registration Rights
Agreement with the Holders (the "REGISTRATION RIGHTS AGREEMENT") pursuant to
which the Company agreed, among other things, to register the Registrable
Securities (as defined in the Registration Rights Agreement), including the
shares of Common Stock issuable upon conversion of the Debenture and exercise of
the Warrants, under the Securities Act of 1933, as amended (the "1933 ACT"). In
connection with the Company's obligations under the Registration Rights
Agreement, on ____________ ___, 1999, the Company filed a Registration Statement
on Form ___ (File No. 333-_____________) (the "REGISTRATION STATEMENT") with the
Securities and Exchange Commission (the "SEC") relating to the Registrable
Securities which names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
[ISSUER'S COUNSEL]
By:________________________
cc: JEM VENTURES EBIZ, LLC
18
<PAGE> 1
Exhibit 11.1
EBIZ ENTERPRISES, INC.
COMPUTATION OF BASIC EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <S> <S>
Shares:
Weighted average of common shares outstanding 6,821,083 5,619,911
Net income (loss) ($1,954,181) ($422,457)
=========== =========
Basic earnings (loss) per share ($0.29) ($.08)
=========== =========
</TABLE>
<PAGE> 2
EBIZ ENTERPRISES, INC.
COMPUTATION OF DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
Shares:
Weighted average of common shares
outstanding 6,821,083 5,619,911
Additional shares assuming
conversion of:
Stock options -- --
Warrants -- --
Preferred stock -- --
Weighted average shares outstanding 6,821,083 5,619,911
Net income (loss) ($1,954,181) ($422,457)
============ ==========
Diluted earnings (loss) per share ($0.29) ($.08)
======= ======
</TABLE>
<PAGE> 1
Exhibit 21.1
EBIZ ENTERPRISES, INC.
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION OWNERSHIP
---- ----------------------------- ---------
<S> <C> <C>
PIA, Inc. Nevada 100%
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this registration statement of our report dated
September 10, 1999, included in Ebiz Enterprises, Inc's Form 10-SB for the year
ended June 30, 1999, and to all references to our Firm included in this
registration statement.
/s/ ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 76,366
<SECURITIES> 0
<RECEIVABLES> 1,709,816
<ALLOWANCES> (40,000)
<INVENTORY> 1,568,148
<CURRENT-ASSETS> 3,442,514
<PP&E> 549,354
<DEPRECIATION> (74,576)
<TOTAL-ASSETS> 3,917,292
<CURRENT-LIABILITIES> 2,851,727
<BONDS> 0
0
868,599
<COMMON> 7,262
<OTHER-SE> 189,704
<TOTAL-LIABILITY-AND-EQUITY> 3,917,292
<SALES> 15,290,202
<TOTAL-REVENUES> 15,290,740
<CGS> (14,358,772)
<TOTAL-COSTS> (2,512,415)
<OTHER-EXPENSES> (298,677)
<LOSS-PROVISION> (40,000)
<INTEREST-EXPENSE> (119,291)
<INCOME-PRETAX> (1,954,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,954,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,954,181)
<EPS-BASIC> (0.29)
<EPS-DILUTED> (0.29)
</TABLE>
