<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL , 2000
REGISTRATION NO. 333-95905
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/X/ Pre-Effective Amendment No. 2
/ / Post-Effective Amendment No.
--------------------------
MGI2, INC.
(Exact name of registrant as specified in its charter)
9821 KATY FREEWAY, SUITE 500
HOUSTON, TEXAS 77024
(Address (Number, Street, City, State and Zip Code) of Principal Executive
Office)
(800) 315-6979
(Registrant's Telephone Number, including Area Code)
CARY M. GROSSMAN
CHIEF EXECUTIVE OFFICER
9821 KATY FREEWAY, SUITE 500
HOUSTON, TEXAS 77024
(800) 315-6979
(Name and Address (Number, Street, City, State, Zip Code) of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C>
ANDREWS & KURTH L.L.P. CONNER & WINTERS,
600 Travis, Suite 4200 A Professional Corporation
Houston, Texas 77002 One Leadership Square
(713) 220-4200 211 North Robinson, Suite 1700
Attn: Christopher S. Collins Oklahoma City, Oklahoma 73102
(405) 272-5750
Attn: Irwin H. Steinhorn
</TABLE>
------------------------
APPROXIMATE DATE OF THE PROPOSED PUBLIC OFFERING
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered in connection with a dividend reinvestment
plan, check the following box: / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED APRIL 24, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. MGI2 MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SEC IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS
NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR
SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
- --------------------------------------------------------------------------------
1,900,000 SHARES
[LOGO]
MGI2, INC.
COMMON STOCK
-------------------------------------------------------------------------
MGi2, Inc. is offering 1,900,000 shares of its common stock in an initial
public offering. Prior to this offering, there has been no public market for
MGi2's common stock. The U.S. underwriters are offering shares in the
U.S., and the European manager is offering shares primarily outside the
U.S.
We are an internally managed, non-diversified closed-end investment company
that has elected to be regulated as a business development company under the
Investment Company Act of 1940. Our primary business focus is to create or
identify, and then incubate and grow, businesses that intend to benefit from the
expected growth of business to business, or B2B, e-commerce. We intend to invest
capital in, and provide merchant banking and incubation services to, these
companies.
Our merchant banking and incubation services will include strategic business
and financial advisory services, and investment banking services. Our investment
objective is to achieve capital appreciation from equity investments in our
portfolio companies and from equity we receive for rendering advisory services
to our portfolio companies.
We currently anticipate that the public offering price will be between $7.00
and $9.00 per share. We intend to list our shares on the American Stock Exchange
under the symbol "MGE."
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to MGi2.......................... $ $
</TABLE>
We estimate that our total expenses of issuance and distribution will be
$700,000, in addition to the non-accountable expense allowance of 2.5% of the
gross proceeds to be paid to the managing underwriter. See
"Underwriting--Non-accountable Expense Allowance."
The underwriters may purchase up to 285,000 additional shares from us at the
public offering price, less underwriting discounts and commissions. The
underwriters expect to deliver and pay for the shares on or about ,
2000. See "Underwriting" for the maximum and minimum information based on the
purchase of shares subject to the underwriters' over-allotment option. This
offering also includes 190,000 shares of common stock issuable upon exercise of
a warrant issued to one of the underwriters.
Shares of closed-end investment companies have in the past exhibited a
tendency to trade at discounts from their underlying net asset values and public
offering prices. The risk of loss associated with this tendency may be greater
for investors who expect to sell the securities offered hereby soon after the
offering concludes.
There will be immediate, substantial and significant dilution of $3.70 in
connection with this offering. See "Dilution."
SEE "RISK FACTORS" ON PAGES 9 TO 17 FOR FACTORS THAT SHOULD BE CONSIDERED
BEFORE INVESTING IN THE SHARES OF MGI2.
This prospectus concisely provides the information that you should know
about us before investing in shares of our common stock. You should read this
prospectus carefully and retain it for future reference.
- --------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
CAPITAL WEST SECURITIES, INC.
I-BANKERS SECURITIES, INC.
(EUROPEAN MANAGER)
WESTPORT RESOURCES INVESTMENT
SERVICES, INC.
APS FINANCIAL CORPORATION
The date of this prospectus is April , 2000.
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form N-2 (together
with amendments, schedules and exhibits thereto, the "registration statement")
under the Securities Act of 1933 with respect to this offering. This prospectus
sets forth concisely the information that you should know about us before
investing in our shares. This prospectus, filed as a part of the registration
statement, does not contain all the information contained in the registration
statement, certain portions of which have been omitted in accordance with the
rules and regulations of the SEC. For further information with respect to MGi2
and our offering of common stock, please refer to the registration statement
including the attached exhibits and schedules. Statements made in the prospectus
as to the contents of any contract, agreement or other document are not
necessarily complete; with respect to each such contract, agreement or other
document filed as an exhibit to the registration statement, please refer to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The registration statement and the attached exhibits may be inspected,
without charge, at the public reference facilities maintained by the SEC at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
these materials can also be obtained from the Public Reference Section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
SEC maintains a website on the Internet (http:/www.sec.gov) that contains
reports and other information regarding users that file electronically with the
SEC through the Electronic Data Gathering, Analysis and Retrieval System or
"EDGAR."
MGi2 has filed a registration statement under the Securities Exchange Act of
1934. As a result of this offering, we will also become subject to the full
informational requirements of the Exchange Act. We will fulfill our obligations
with respect to those requirements by filing periodic reports and other
information with the SEC. We intend to furnish our stockholders with annual
reports containing audited financial statements examined by an independent
accounting firm for each fiscal year.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Where You Can Find More Information.... i
Prospectus Summary..................... 1
Risk Factors........................... 9
Forward-Looking Statements............. 18
Use of Proceeds........................ 19
Dividend Policy........................ 20
Capitalization......................... 21
Dilution............................... 22
Selected Financial Data................ 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 25
Senior Securities...................... 29
Business............................... 31
Portfolio Companies; Equity
Investments.......................... 41
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Company Act Regulation...... 43
Management............................. 45
Certain Transactions................... 55
Control Persons and Principal
Stockholders......................... 57
Investment Advisory Services........... 58
Brokerage Allocation and Other
Practices............................ 58
Federal Income Tax Matters............. 58
Description of Capital Stock........... 59
Shares Eligible for Future Sale........ 62
Underwriting........................... 64
Legal Matters.......................... 67
Experts................................ 67
Custodian, Transfer Agent and
Registrar............................ 67
Change in Independent Accountants...... 67
</TABLE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information or
additional information. We are not making an offer of these securities in any
jurisdiction where the offer or sale is not permitted. You should not assume
that the information contained in this prospectus is accurate as of any date
other than the date on the front of this prospectus.
As used in this prospectus any reference to the "Company," "MGi2," "we,"
"us," or "our" means MGi2, Inc. with respect to time periods following the
consummation of the offering and to McFarland, Grossman & Company, Inc., MGi2's
wholly owned subsidiary, with respect to time periods prior to consummation of
the offering, unless otherwise indicated.
ii
<PAGE>
PROSPECTUS SUMMARY
MGI2 WAS FORMED IN FEBRUARY 2000. UPON EFFECTIVENESS OF THE OFFERING,
MCFARLAND, GROSSMAN & COMPANY, INC. WILL BECOME A WHOLLY OWNED SUBSIDIARY OF
MGI2 THROUGH A SHARE EXCHANGE OF 2 SHARES OF MGI2 COMMON STOCK FOR EVERY 1 SHARE
OF OUTSTANDING MCFARLAND, GROSSMAN COMMON STOCK.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE FINANCIAL
DATA AND RELATED NOTES, BEFORE MAKING AN INVESTMENT IN SHARES OF OUR COMMON
STOCK. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE MAKING AN INVESTMENT. UNLESS OTHERWISE INDICATED, THE FINANCIAL
INFORMATION, SHARE AND PER SHARE DATA IN THIS PROSPECTUS (1) HAVE BEEN ADJUSTED
FOR THE SHARE EXCHANGE AMONG THE STOCKHOLDERS OF MGI2 AND MCFARLAND, GROSSMAN
AND (2) ASSUME THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED.
OUR BUSINESS
Our primary business focus is to create or identify, and then incubate and
grow, businesses that aim to benefit from the expected growth of business to
business, or B2B, e-commerce, including:
- INTERNET INFRASTRUCTURE SERVICE PROVIDERS, such as companies that design
local and wide-area networks and provide telecommunications and internet
access services;
- INTERNET MARKET MAKERS who connect buyers and sellers by creating
Internet-based markets and exchanges for the marketing and sale of goods
and services via the Internet; and
- INTERNET SOLUTION PROVIDERS that develop and provide business solutions to
users of e-commerce, including:
- website design,
- web-based software enablers, such as application service providers,
- application integration software, and
- Internet services such as consulting and systems integration.
We intend to invest in and provide merchant banking and incubation services
to our clients in the B2B e-commerce market. Our merchant banking and incubation
services will include strategic business and financial advisory services, and
investment banking services. Through our funding and services, we intend to
enhance our clients' growth opportunities. As opportunities arise or market
emphasis shifts, we may invest in, and provide these services to, high growth
businesses which are not involved in the Internet or e-commerce. We will be
compensated for our services in several ways. We will receive cash fees for the
investment banking services we provide to our client and portfolio companies. We
will also earn warrants or other equity compensation in connection with
providing our other services.
Our policy is to dispose of our investments when a liquid market exists.
However, if a portfolio company becomes publicly traded, subject to the
discretion of our board of directors and any required SEC approval, we may
distribute those equity securities to our stockholders.
We have adopted a policy to use reasonable efforts to provide our
stockholders with the right to invest in the initial public offerings of
portfolio companies. These opportunities will depend on the nature of our role
with the portfolio company and whether the managing underwriter of the initial
public offering of our portfolio company does not object to offering our
stockholders the right to invest in the offering.
We are an internally managed, non-diversified closed-end investment company
that has elected to be regulated as a business development company under the
Investment Company Act of 1940. Our investment objective is to achieve capital
appreciation from equity investments in our portfolio companies and from equity
we receive for rendering advisory services to our portfolio companies. Our
management will implement our investment objective and strategies and will
determine our strategic and operational direction. We may, in the future, seek
to become exempt from registration under the Investment Company Act.
1
<PAGE>
Currently, our principal operating subsidiary is McFarland, Grossman &
Company, Inc. McFarland, Grossman, a registered broker-dealer, was formed in
1991 to provide investment banking services to rapidly expanding service
businesses or service businesses active in consolidating industries. McFarland,
Grossman has a history of forming and incubating new businesses, providing
financial advisory services to, and financing for, client and portfolio
companies. Since its inception, McFarland, Grossman has completed engagements in
10 states involving the private placement of more than $88 million in private
equity and mezzanine financing, $181 million of senior debt, and more than 20
mergers and acquisitions. Since 1997, McFarland, Grossman has focused on the
formation and incubation of new businesses and other engagements where it
receives equity, in addition to cash fees, for providing merchant banking
services. To that end, McFarland, Grossman has been instrumental in the
formation of five companies since 1997, three of which are now publicly traded
on national securities exchanges. See "Business--Our Company."
After the offering, we intend to conduct operations through McFarland,
Grossman and through two operating divisions--the MGi2 Ventures division and the
MGi2 Capital division. McFarland, Grossman will render financial advisory and
investment banking services. The MGi2 Ventures division will provide incubation,
business consulting and other related services. The MGi2 Capital division will
provide management services to venture capital funds and other private equity
funds that we establish. See "Business--Our Corporate Structure."
OUR MARKET OPPORTUNITY
The Internet is rapidly becoming a critical resource for business. Companies
that successfully establish an online presence can more effectively conduct
business with partners and suppliers, communicate with customers and employees
and address the rapidly growing, global base of online customers. Forrester
Research, an independent research firm, predicts that the number of United
States online businesses will grow from 1.8 million (or 29% of all U.S.
enterprises) in 1998 to 4.3 million (or 55% of all U.S. enterprises) by 2003.
Forrester Research also projects that the U.S. B2B e-commerce market, which they
define as the intercompany trade of hard goods over the Internet, will grow from
$43 billion in 1998 to $1.3 trillion by 2003.
We believe that the emergence of this "New Economy" presents us with
significant opportunities to provide merchant banking services and incubation
services to emerging or development stage companies that have the potential to
succeed in the New Economy. In addition, we believe an opportunity exists to
provide these services to companies that are located in underserved geographic
regions. According to a recent survey published by PricewaterhouseCoopers,
approximately 69% of the venture capital invested during the first nine months
of 1999 was invested in California and New England. Our efforts will be directed
to assisting companies in underserved markets, such as Texas and other
southwestern states, as opposed to companies located in Silicon Valley, New
England and other areas near primary venture capital centers. However, we may
make investments in other geographic areas depending on the availability of
business opportunities. See "Business--Our Market Opportunity."
OUR OPERATING STRATEGY
Our operating strategy is to create value for our stockholders primarily by
creating or identifying, and then incubating and growing, businesses that are
poised to benefit from the growth of the Internet as a commercial exchange, such
as companies that will provide online B2B services. We believe our portfolio
companies will benefit from our collective experience and resources and, as a
result, be in a better position to succeed in the New Economy.
Our principal resources include the experience and industry relationships of
our management team, our directors and our advisory board. Our management team
includes experienced professionals with varied backgrounds which include
strategy consulting, investment banking and public accounting. Our directors and
advisory board members are senior level executives with experience building and
managing businesses in the technology, e-commerce and telecommunications
industries.
2
<PAGE>
Our principal merchant banking and incubation services include:
- Strategic guidance and business planning;
- Organizational development and operational support;
- Investment banking and financial advisory services; and
- Providing seed capital and later-stage growth capital.
See "Business--Our Operating Strategy."
OUR INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve capital appreciation from equity
investments in our portfolio companies and from equity we receive for rendering
advisory services to our client and portfolio companies. We expect to receive
equity interests in portfolio companies both through the activities of MGi2 and
of McFarland, Grossman. We also expect to receive current income from certain of
our advisory activities. See "Business--Our Merchant Banking and Incubation
Services."
Our criteria for selecting target clients are:
- INDUSTRY. Businesses involved in or enabling the development of B2B
e-commerce, such as infrastructure service providers, market makers and
solution providers.
- GEOGRAPHY. Companies located outside of the primary venture capital
centers such as Silicon Valley and New England, including but not limited
to Texas and other southwestern states.
- COMPANY STAGE. Newly formed companies that need assistance in developing
their business strategies and management teams, and require "seed" level
investment capital, and companies that are developed and require
investment banking services to arrange later stage financing or mergers
and acquisitions or other financial advisory services.
- SOLID CORE MANAGEMENT TEAM. Relevant industry experience, a history of
accomplishment, and skills for managing a high growth business.
- REASONABLE VALUATION. Businesses which we believe have a reasonable
valuation in light of the value of the current business and the risks
involved in its development.
We intend to assist in the growth of our portfolio companies by providing
them with management assistance in strategy formation and development, executive
recruiting and general business operations.
The selection of portfolio investments and the day-to-day management of our
investments, including our investment practices and techniques, will be the
responsibility of certain of our officers who serve under the direction of our
board of directors. We have not adopted a fixed policy concerning the types of
business we can invest in, the types of securities we will hold or the amount of
funds which can be invested in any one portfolio company. We reserve the freedom
to invest in any kind of security or asset and to engage in business operations
to the extent considered beneficial in achieving our investment objective. Our
investments in clients may take many forms, including preferred or common
equity, debt, debt with equity features, warrants or options, convertible
securities and other forms of ownership interests. See "Business--Our Investment
Objective and Principal Strategies." We may change our investment objective and
policies without a vote of the holders of a majority of our common stock.
OUR GROWTH STRATEGY
Our strategy to grow our business is as follows:
- Expand our financial advisory and merchant banking activities in our
client and portfolio companies and earn significant equity positions in
our portfolio companies;
- Increase our focus on the formation and development of new businesses;
- Selectively provide capital to clients in exchange for equity interests;
and
- Participate in late-stage financing of our clients' expansion by managing
a venture fund.
See "Business--Our Growth Strategy."
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock MGi2 is offering................ 1,900,000 shares
Common stock that will be outstanding after
the offering............................... 3,550,000 shares
Use of proceeds.............................. We intend to use the net proceeds from this
offering to invest in portfolio companies and
for general corporate purposes. See "Use of
Proceeds."
Proposed American Stock Exchange trading
symbol..................................... MGE
</TABLE>
The number of outstanding shares of common stock shown above does not
include:
- 165,000 shares issuable upon exercise of options, which will be
outstanding following this offering. See "Management--2000 Stock Plan;"
- 190,000 shares issuable upon exercise of warrants issued to the managing
underwriter; or
- 285,000 shares issuable upon exercise of the underwriters' over-allotment
option.
PRINCIPAL RISK FACTORS
You should carefully consider all of the information in this prospectus. In
particular, you should evaluate the specific factors set forth under "Risk
Factors" on pages 9 to 17 of this prospectus for risks involved with an
investment in our common stock, including but not limited to risks associated
with the following:
- our ability to attract new clients;
- our dependence on key personnel;
- the financial advisory industry;
- the competitive nature of investment banking and merchant banking;
- our ability to establish a private equity fund;
- the need to obtain SEC exemptive relief regarding various policies; and
- our investment in early stage companies.
DIVIDENDS
We intend to retain our earnings, if any, to support and finance the
expansion of our business and do not anticipate paying any cash dividends in the
foreseeable future. However, if a portfolio company becomes publicly traded,
subject to the discretion of our board and any required SEC approval, we may
distribute those equity securities to our stockholders. See "Dividend Policy."
CERTAIN ANTI-TAKEOVER PROVISIONS
Our charter and bylaws, as well as certain statutory and regulatory
requirements, contain certain provisions that may have the effect of
discouraging a third party from making an acquisition proposal for MGi2 or of
otherwise initiating a change in control of MGi2. See "Description of Capital
Stock--Certificate of Incorporation and Bylaws Provisions."
4
<PAGE>
FEDERAL INCOME TAX MATTERS
We do not intend to elect pass-through treatment under subchapter M of the
Internal Revenue Code, but will expect to be taxed at regular corporate rates on
ordinary income and recognized gains on sales, exchanges or distributions of
appreciated property. See "Federal Income Tax Matters."
CORPORATE INFORMATION
MGi2 was incorporated under the laws of the State of Delaware in February
2000. Our corporate office is located at 9821 Katy Freeway, Suite 500, Houston,
Texas 77024, and our telephone number is (800) 315-6979.
5
<PAGE>
FEE TABLE AND SYNOPSIS
You can expect to bear, directly or indirectly, the following costs and
expenses in connection with an investment in shares of our common stock.
OFFERING EXPENSES
STOCKHOLDER TRANSACTION EXPENSES(1)
TRANSACTION EXPENSES (AS A PERCENTAGE OF THE OFFERING PRICE PER SHARE)
<TABLE>
<S> <C>
Sales Commission
Underwriting discounts and commissions............ 9.0%
Non-accountable expense allowance................. 2.5%
-----
Total Stockholder Transaction Expenses.......... 11.5%
=====
</TABLE>
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(1) Does not include offering expenses incurred in connection with MGi2's
organization, which are estimated to be $700,000 and which will be paid from
the net proceeds of this offering.
ANNUAL EXPENSES
ANNUAL EXPENSES
ANNUAL EXPENSES (AS A PERCENTAGE OF NET ASSETS ATTRIBUTABLE TO COMMON
SHARES)
<TABLE>
<S> <C>
Operating expenses(2)
Salaries and Compensation........................ 7.81%
Professional Fees................................ 0.16%
General and Administrative....................... 2.34%
Total Annual Expenses.......................... 10.31%
======
</TABLE>
- ------------------------
(2) "Operating expenses" represents the estimated operating expenses of MGi2 for
the current fiscal year, as a percentage of net assets, including estimated
net proceeds from the offering.
EXAMPLE OF COSTS AND EXPENSES CALCULATION
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<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
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<S> <C> <C> <C> <C>
Assuming a 5% annual return, you can expect to
pay the following expenses on a $1,000
investment..................................... $101 $288 $457 $ 813
</TABLE>
Our actual rate of return may be greater or less than the hypothetical 5%
return used above. The 5% return is merely a hypothetical return that is
required by law to be used to demonstrate the costs and expenses of an
investment in shares of our common stock, and does not reflect our expectation
of the actual return that you may or may not realize from an investment in our
shares.
6
<PAGE>
SUMMARY FINANCIAL DATA
MGI2
MGi2 has not conducted any operations that have generated revenues or
expenses since its formation in February 2000. Following MGi2's election to be
treated as a business development company, MGi2 will be required to report
McFarland, Grossman as a portfolio company. We have derived the following
financial information for MGi2 as of April 19, 2000 (assuming completion of the
exchange of shares of MGi2 common stock for shares of McFarland, Grossman common
stock and MGi2's election to become a business development company) from the
audited balance sheet and related notes of MGi2:
BALANCE SHEET DATA:
<TABLE>
<S> <C>
Investment in McFarland, Grossman........................... $2,500,000
Total Assets................................................ $3,207,500
Total Stockholder's Equity.................................. $2,505,000
</TABLE>
MCFARLAND, GROSSMAN
We have derived the following summary financial information of McFarland,
Grossman for the years ended December 31, 1995 through 1999 from the audited
financial statements and the related notes of McFarland, Grossman. The audited
financial statements for the years ended December 31, 1997 through 1999 are
included in this prospectus. The audited financial statements for the years
ended December 31, 1995 and 1996 are not included in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenues:
Investment banking fees............................. $1,114,455 $1,100,426 $1,813,995 $2,824,594 $1,082,946
Net gain (loss) on securities....................... (1,036) 105,425 496,845 70,373 (4,145)
Dividends and interest.............................. 3,183 3,678 6,079 87,712 54,567
Other income........................................ 144,325 123,250 148,850 66,820 6,636
---------- ---------- ---------- ---------- ----------
Total revenues.................................... $1,260,927 $1,332,779 $2,465,769 $3,049,499 $1,140,004
---------- ---------- ---------- ---------- ----------
Operating expenses:
Compensation and benefits........................... $ 921,443 $ 770,289 $1,250,207 $2,327,942 $1,192,315
Other operating expenses............................ 344,277 435,315 398,962 497,054 386,862
---------- ---------- ---------- ---------- ----------
Total expenses.................................... $1,265,720 $1,205,604 $1,649,169 $2,824,996 $1,579,177
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income
taxes............................................... $ (4,793) $ 127,175 $ 816,600 $ 224,503 $ (439,173)
---------- ---------- ---------- ---------- ----------
Net income (loss)..................................... $ (6,670) $ 96,424 $ 522,152 $ 137,780 $ (297,397)
========== ========== ========== ========== ==========
Net income (loss) per share
Basic............................................... $ (0.01) $ 0.13 $ 0.69 $ 0.18 $ (0.40)
========== ========== ========== ========== ==========
Diluted............................................. $ (0.01) $ 0.11 $ 0.60 $ 0.16 $ (0.40)
========== ========== ========== ========== ==========
Shares used in computing net income (loss) per share
Basic............................................... 750,000 750,000 750,000 750,000 750,000
========== ========== ========== ========== ==========
Diluted............................................. 750,000 840,393 862,675 866,867 750,000
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets.......................................... $ 269,675 $ 390,032 $1,236,061 $1,375,606 $1,157,243
========== ========== ========== ========== ==========
Total debt(1)......................................... $ 6,986 $ 3,881 $ 776 $ 180,000 $ 192,100
========== ========== ========== ========== ==========
Total stockholders' equity............................ $ 219,547 $ 323,704 $ 881,675 $ 918,555 $ 621,158
========== ========== ========== ========== ==========
</TABLE>
- ------------------------------
(1) See "Senior Securities" on page 29 for more information regarding McFarland,
Grossman's level of indebtedness.
Since 1997, McFarland, Grossman has assigned most of its interest in client
securities which it received as fees for its services to its employees as
compensation. In addition, McFarland, Grossman
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participated in the formation of new businesses and allowed its employees,
rather than it, to purchase the founders' stock, which is generally issued for
nominal consideration. MGi2 has now adopted a policy that any client securities
to be received in connection with the services we provide, and shares to be
acquired as founders' stock in companies that we incubate or assist in
incubation, are to be paid or issued directly to us. Subject to review and
approval by the SEC, once granted or issued to us, our compensation committee,
which is comprised of independent directors, may distribute or allocate up to
30% of these securities among our officers and employees as additional
compensation. We cannot assure you that the SEC will grant its approval. In
addition, we are not aware of any precedent where the SEC has granted such
relief.
If this policy had been in effect in prior years, McFarland, Grossman would
have retained additional securities which are now publicly traded and which had
a value of approximately $1,523,000 as of December 31, 1999. This valuation does
not include the value of privately held securities which were previously granted
to McFarland, Grossman's officers and employees as compensation. See "Risk
Factors--Risks Associated with Our Operations, Including the Operations of
McFarland, Grossman--Our policy of granting a percentage of the securities
received as compensation to our officers and employees could result in a
conflict of interest" and "--Failure to obtain SEC exemptive relief of various
policies could negatively affect our operations."
GENERAL
You should read the foregoing summary financial information in conjunction
with the more detailed financial statements and related notes contained in this
prospectus. You should also read "Use of Proceeds" on page 19, "Capitalization"
on page 21, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" beginning on page 25.
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RISK FACTORS
YOU SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS PROSPECTUS, THE FOLLOWING FACTORS BEFORE PURCHASING ANY SHARES
OF OUR COMMON STOCK. PURCHASING SHARES OF OUR COMMON STOCK CARRIES SIGNIFICANT
RISK OF LOSING SOME OR ALL OF YOUR INVESTMENT.
RISKS ASSOCIATED WITH OUR OPERATIONS, INCLUDING THE OPERATIONS OF MCFARLAND,
GROSSMAN
WE HAVE A LIMITED OPERATING HISTORY WORKING WITH INFORMATION TECHNOLOGY,
INTERNET AND E-COMMERCE COMPANIES.
We have limited experience advising information technology, Internet and
e-commerce companies and have no significant operating history with respect to
these types of companies upon which you may evaluate our business. We cannot
assure you that our management will be able to effectively manage, promote or
finance Internet-related companies or implement our strategies.
OUR SUCCESS DEPENDS ON OUR ABILITY TO ATTRACT NEW CLIENTS.
Many of our engagements are one-time representations and do not result in
follow-on business or revenues. We have a limited number of client engagements,
and our success will depend on our ability to identify, attract and maintain
clients for our services in the future. We cannot assure you that we will be
able to attract client and portfolio companies or that our services will be
required on fee terms or on equity-for-services terms satisfactory to us.
WE DEPEND ON KEY PERSONNEL, THE LOSS OF WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS.
For the foreseeable future, we will place substantial reliance upon the
personal efforts and abilities of Clifford E. McFarland and Cary M. Grossman,
the co-founders of MGi2, along with other members of our management team. The
loss of the services of either of Messrs. McFarland or Grossman likely would
have a material adverse effect on our business, operations, revenues and/or
prospects. Our success also depends on our ability to retain and hire additional
highly skilled personnel and upon the continued assistance of our directors and
advisory board members. Competition for experienced personnel in our business is
intense. We cannot assure you that we will be able to retain our personnel or
hire and retain additional qualified and skilled personnel. See
"Business--Competition" and "Management." We currently have key man life
insurance policies on Messrs. McFarland and Grossman in the amount of $500,000
each.
WE COULD EXPERIENCE LOSSES IN THE FUTURE.
McFarland, Grossman had a net loss of $297,397 for the twelve months ended
December 31, 1999 resulting largely from reduced revenues, increased expenses
and unrealized losses on investments. We cannot assure you that we will be able
to generate profits in the future, and we could continue to incur losses.
IF WE HAVE LIMITED ACCESS TO ADDITIONAL FUNDS, OUR GROWTH COULD BE LIMITED.
We cannot assure you that our business will generate sufficient cash flow
from operations to fund our liquidity needs in the future. If we do not have
sufficient cash or borrowing capacity, our growth could be limited, our capital
impaired and/or our ability to carry out our operating and growth strategy could
be severely limited unless we are able to obtain additional cash from the sale
of equity or the incurrence of debt.
WE ARE SUBJECT TO GOVERNMENT REGULATION BECAUSE OF OUR STATUS AS A BUSINESS
DEVELOPMENT COMPANY.
We have elected to be regulated as a business development company under the
Investment Company Act. Although the business development company provisions
relieve business development companies
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from compliance with many of the provisions of the Investment Company Act,
business development companies are subject to certain restrictions on permitted
types of investments. Moreover, the applicable provisions of the Investment
Company Act impose numerous restrictions on our activities, including
restrictions on the nature of our investments and transactions with affiliates.
We cannot assure you that these business development company provisions will be
interpreted or administratively implemented in a manner consistent with our
objectives and manner of operations. If our election to operate as a business
development company is rejected, or if we otherwise fail to qualify as a
business development company, we would be subject to the substantially greater
regulation applicable to a registered investment company under the Investment
Company Act, unless we can establish an exemption. Compliance with these
regulations would significantly increase our costs of doing business and would
limit our ability to comply with our operating and growth strategy.
If we lose our status as a business development company and are unable to
obtain a ruling from the SEC that we are not an investment company, we may have
to take actions which are not in our best interests or which could be contrary
to our operating and growth strategy in order to avoid being a registered
investment company and having to register under the Investment Company Act. See
"Investment Company Act Regulation."
If we lose our status as a business development company and are unable to
obtain a ruling from the SEC that we will not be an investment company, we may
further be required, in order to avoid being an investment company, to sell
assets which we could otherwise want to retain and may be unable to sell assets
which we would otherwise want to sell. Further, we may be forced to acquire
additional income generating or loss generating assets that we would not
otherwise acquire, in order to avoid being an investment company. If we are
required to do the above, we believe that it could have a material adverse
effect on our ability to carry out and perform our business and operating
strategy. See "Business--Government Regulation" and "Investment Company Act
Regulation."
OUR EQUITY POSITIONS IN PORTFOLIO COMPANIES WILL HAVE VOLATILE VALUES.
As a result of our merchant banking activities and receipt of equity for
services, we expect to hold equity interests in various portfolio companies.
These securities may take on any of a number of forms but would likely consist
principally of stock and warrants, most of which will be restricted and
non-marketable for varying periods of time. Each accounting period, as required
by generally accepted accounting principles for broker-dealers and business
development companies, our publicly traded securities will be marked-to-market,
i.e., valued at market value or a percentage thereof, with resulting unrealized
gains and losses being reported in earnings. Our investments in the securities
of non-public companies are valued, under the supervision and authority of our
board of directors, by management based upon valuation models commonly used in
the venture capital industry, which include various factors such as multiples of
revenues, earnings, cash flow and other factors. Values of securities are
volatile and fluctuations may have a material adverse effect on our earnings.
See "Business--Our Merchant Banking and Incubation Services," "--Our Prior
Incubation and Merchant Banking Experience" and "--Determination of Net Asset
Value."
WE MAY LOSE ALL OF OUR INVESTMENT IN A CLIENT COMPANY IF IT IS NOT SUCCESSFUL.
We cannot assure you that any of our investments in our portfolio companies
will be successful. We may realize substantially less value than anticipated
from the equity positions we hold in portfolio companies and we may lose our
entire investment in any or all of our portfolio companies.
THE SECURITIES IN WHICH WE INVEST ARE GENERALLY ILLIQUID AND WE MAY NOT BE ABLE
TO SELL OUR INVESTMENTS.
A venture capital investment typically takes at least several years before
the portfolio company is in a position to sell its shares in a public offering
or engage in a sale or merger. The securities of our portfolio
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companies will generally be "restricted" under Rule 144 of the Securities Act
and thus cannot be sold unless we satisfy the requirements of Rule 144. In
addition, it is conceivable that certain of our equity positions could be
subject to lock-up agreements and other restrictions on transfer, which impact
liquidity. Accordingly, it could be several years before we are able to sell our
investments.
OUR INVESTMENTS IN DEBT SECURITIES MAY BEAR RISKS RELATING TO REPAYMENT, DEFAULT
AND INTEREST RATES.
To the extent we invest in debt securities, those investments may be
considered to be predominantly speculative with respect to the portfolio
company's capacity to pay interest and repay principal. These securities may
also involve a risk of default. Adverse changes in economic conditions or
developments regarding the individual portfolio company are more likely to
weaken the capacity of issuers of debt securities to make principal and interest
payments. Non-payment would result in a reduction of income to us and a
reduction in the value of the investments experiencing non-payment. In addition,
the market for these securities may be thinner and less liquid than for equity
securities.
INVESTMENT BANKING AND MERCHANT BANKING IS HIGHLY COMPETITIVE.
We expect to encounter competition in all aspects of our business and to
compete directly with other investment banking and merchant banking firms, a
significant number of which have greater capital and other resources than us. In
addition to competition from firms currently in the investment banking, merchant
banking and private equity businesses, recently there has been increasing
competition from other sources, such as commercial banks, insurance companies
and other businesses offering financial services. See "Business--Competition."
GOVERNMENT REGULATION OF THE INTERNET AND DATA TRANSMISSION OVER THE INTERNET
COULD AFFECT OUR BUSINESS.
Laws and regulations directly applicable to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding children's privacy,
copyrights, taxation and the transmission of sexually explicit material. The law
of the Internet, however, remains largely unsettled, even in areas where there
has been some legislative action. It may take years to determine whether and how
existing laws such as those governing intellectual property, privacy, libel and
taxation apply to the Internet. In addition, the growth and development of the
market for online commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad, that may impose
additional burdens on companies conducting business on the Internet. The
adoption or modification of laws or regulations relating to the Internet could
adversely affect our business.
OUR SHARES MAY TRADE AT A DISCOUNT TO NET ASSET VALUE.
Shares of many closed-end investment companies tend to trade at discounts
from their underlying net asset values and their initial public offering prices.
The shares offered hereby may follow that pattern. The risk of loss associated
with this tendency of closed-end investment companies may be greater for
investors expecting to sell the shares offered hereby soon after the offering is
completed.
THE MARKET PRICE OF OUR SHARES MAY BE VOLATILE.
After completion of the offering, the market price of our common stock could
be subject to significant fluctuations due to variations in response to numerous
factors, including:
- variations in our annual or quarterly financial results or those of our
competitors;
- changes by financial research analysts in their estimates of our future
earnings, conditions in the economy in general or in our industry in
particular;
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- unfavorable publicity or changes in applicable laws or regulations (or
judicial or administrative interpretations thereof) affecting us or the
investment banking industry; and
- fluctuations in the market price of the companies in which we hold, or
have the right to acquire, equity or other interests.
WE MAY NOT BE ABLE TO ESTABLISH A PRIVATE EQUITY FUND.
A part of our operating strategy is to attempt to establish a venture
capital fund which we would manage. There is substantial competition for fund
capital and we may not be able to establish a fund in the next 12 to 18 months
or at all. Also there can be no assurances that we will be able to structure a
private venture capital fund which will be in compliance with the provisions of
the Investment Company Act. If we are unable to develop a venture capital fund,
our future revenues could be negatively impacted and we could be required to
change our operating strategy. Additionally, the time required to establish a
fund could distract our management from its other duties.
OUR TRANSACTIONS WITH AFFILIATES MAY BE LIMITED.
The Investment Company Act restricts joint transactions with, and
transactions between, us and any of our affiliates, including our officers,
directors or employees and principal stockholders. In many cases, the Investment
Company Act prohibits joint transactions with, and transactions between, such
persons and ourselves unless we first apply for and obtain an exemptive order
from the SEC. Delays and costs in obtaining necessary approvals may decrease or
even eliminate any profitability of such transactions or make it impracticable
or impossible to consummate such transactions. These affiliations could cause
circumstances which would require the SEC's approval in advance of proposed
transactions by us in portfolio companies.
OUR POLICY OF GRANTING A PERCENTAGE OF THE SECURITIES RECEIVED AS COMPENSATION
TO OUR OFFICERS AND EMPLOYEES COULD RESULT IN A CONFLICT OF INTEREST.
We have, subject to receiving SEC approval, adopted a policy stating that up
to 30% of the client securities received by us as compensation or acquired by us
as founding stockholders will be distributed by our compensation committee among
our officers and employees as additional compensation. This policy could result
in a conflict of interest between us and our officers and employees in
structuring our compensation arrangements with our portfolio companies. See
"Certain Transactions."
FAILURE TO OBTAIN SEC EXEMPTIVE RELIEF OF VARIOUS POLICIES COULD NEGATIVELY
AFFECT OUR OPERATIONS.
Due to certain restrictions contained in the Investment Company Act, our
proposed compensation program requires that we obtain the approval of the SEC to
implement certain facets of our proposed compensation program. We intend to seek
exemptive relief in order to issue options to directors, advisory board members
and employees, to make stock grants to directors and advisory board members and
to periodically distribute 30% of the equity securities in portfolio companies
received by us to our officers and employees. We cannot assure you that the SEC
will grant the relief we request. Specifically, with regard to the distribution
of equity securities, we are unaware of any precedent where the SEC has granted
such relief. If exemptive relief is not granted, we may have to restructure our
compensation program to make cash payments and other permitted incentives to
directors, advisory board members, officers and employees. Any failure to obtain
the required SEC approval or successfully restructure the compensation program
could result in us being unable to attract or maintain our management team,
directors, advisory directors and employees.
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FLUCTUATIONS IN OUR QUARTERLY FINANCIAL RESULTS, AND IN THE QUARTERLY FINANCIAL
RESULTS OF OUR PORTFOLIO COMPANIES, MAY ADVERSELY AFFECT OUR STOCK PRICE.
We expect that our quarterly results and the quarterly results of our
portfolio companies may fluctuate significantly due to many factors, including:
- the rate of growth in e-commerce markets;
- the level of competition from other firms providing financial advisory
services and merchant banking services to e-commerce companies;
- the operating results of our portfolio companies in which we have an
equity interest; and
- the non-recurring nature of our client relationships.
RISKS ASSOCIATED WITH MCFARLAND, GROSSMAN
MCFARLAND, GROSSMAN IS SUBJECT TO RISKS INHERENT IN THE FINANCIAL ADVISORY
BUSINESS.
The financial advisory business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the ownership of securities. McFarland, Grossman's activities and
their profitability are affected by many factors, including:
- the volatility and price level of the securities markets;
- the demand for financial advisory and merchant banking services;
- the level and volatility of interest rates;
- legislation affecting the business and financial communities; and
- the economy in general.
These conditions may lead to periods of reduced activities. Sudden declines
in market values of securities and the failure of issuers to meet their
obligations can result in substantial losses. Down markets, if prolonged, may
also lower our revenues. Further, under applicable securities laws and court
decisions with respect to financial advisor liability and limitations on
indemnification by issuers, McFarland, Grossman may be exposed to substantial
securities liability arising out of our involvement in private offerings of
equity and debt instruments. See "Business--Our Merchant Banking and Incubation
Services."
MCFARLAND, GROSSMAN'S BROKER-DEALER ACTIVITIES WILL SUBJECT US TO EXTENSIVE
REGULATION.
McFarland, Grossman's business is subject to extensive regulation at both
the federal and state levels. In addition, self-regulatory organizations, such
as the NASD, require strict compliance with their rules and regulations. The
extensive regulatory framework applicable to broker-dealers, the purpose of
which is to protect customers and the integrity of the securities markets,
imposes significant compliance burdens on us. Failure to comply with any of the
laws, rules or regulations of any independent, state or federal regulatory
authority could result in fines, injunction, suspension or expulsion from the
industry, which could have a material adverse impact upon McFarland, Grossman.
The SEC and the NASD also have provisions with respect to net capital
requirements applicable to the operation of securities firms. Furthermore,
amendments to existing statutes and regulations or the adoption of new statutes
and regulations could require McFarland, Grossman to alter its methods of
operation at costs which could be substantial. See "Business--Government
Regulation."
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RISKS ASSOCIATED WITH OUR PORTFOLIO COMPANIES
MOST OF OUR CLIENTS WILL HAVE LIMITED OPERATING HISTORIES.
Most of the clients to whom we will provide services will be start-up or
emerging growth companies with little or no operating history. Our business and
prospects must be viewed in light of the risks inherent in early development
companies, particularly companies in new or rapidly evolving markets such as
e-commerce. These risks include the risk that this e-commerce market will not
develop into a widely accepted vehicle for commercial exchange.
IF WE ARE UNABLE OR UNWILLING TO PROVIDE PORTFOLIO COMPANIES WITH THE
SIGNIFICANT ADDITIONAL FINANCING THEY MAY NEED, OUR INTEREST IN THEM MAY BE
DILUTED OR THEY MAY FAIL.
We anticipate that most of the companies we advise or receive equity in will
be in the early stages of their development. Our portfolio companies will likely
be competing with larger, established companies, with greater access to, and
resources for, capital and further development. As a result, these companies may
require significant amounts of additional capital to compete successfully, meet
their business objectives and produce revenues and profits. We may not be able
to accurately predict these capital needs, and we may be unable or unwilling to
provide the additional capital they require. If these companies receive capital
from other sources, our ownership interest may be diluted. If these companies
are unable to obtain additional capital, they may fail.
OUR PORTFOLIO COMPANIES CONSIST PRIMARILY OF SMALL AND MEDIUM SIZED
PRIVATELY-OWNED BUSINESSES, ENGAGED IN B2B E-COMMERCE. BY LIMITING OUR
INVESTMENTS TO THESE TYPES OF BUSINESSES, THE RISK TO OUR COMPANY, AND THEREBY
YOUR INVESTMENT, IS INCREASED.
Our portfolio companies consist primarily of small and medium sized,
privately-owned businesses. There is generally no publicly available information
about such companies, and we must rely on our own employees and agents to obtain
information to make our investment decisions. Typically, small and medium sized
businesses depend on the talents and efforts of one or two persons or a small
group of persons, and the death, disability or resignation of one or more of
these persons could have a material adverse impact on the related business. In
addition, such businesses frequently have smaller product lines and market
shares than their competition, may be more vulnerable to economic downturns and
often need substantial additional capital to expand or compete. Such businesses
may also experience substantial variations in operating results. Accordingly,
investments in small and medium sized businesses should be considered
speculative. Further, because our investments will be primarily concentrated in
securities of Internet B2B companies, the investment risk is greater than if we
were invested in a more diversified manner among various industries. To the
extent we do not diversify our portfolio with investments in larger, more stable
companies in a broader range of sectors, your investment in our company should
also be considered speculative.
MANY OF OUR PORTFOLIO COMPANIES WILL BE EARLY STAGE COMPANIES WHICH WILL
ENCOUNTER RISKS AND DIFFICULTIES FREQUENTLY FACED BY EARLY STAGE COMPANIES IN
NEW AND RAPIDLY EVOLVING MARKETS.
An investor in our common stock must consider the risks and difficulties
frequently encountered by early stage companies in new and rapidly evolving
markets. These challenges include their:
- Need to be the first to market or an early entrant in their market;
- Need to increase brand name awareness;
- Need to attract and retain customers at a reasonable cost;
- Dependence on website and transaction processing performance and
reliability;
- Need to manage changing and expanding operations;
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- Need to compete effectively; and
- Need to establish themselves as an important participant in the evolving
market for products and services on the Internet.
In addition, because of their limited operating history, these portfolio
companies may have limited insight into trends that may emerge and affect their
businesses. We cannot be certain that their business strategies will be
successful or that they will successfully address these risks. Any failure to do
so would seriously harm our business and operating results.
RISKS ASSOCIATED WITH OUR INDUSTRY
WE AND MANY OF OUR PORTFOLIO COMPANIES DEPEND ON CONTINUED USE OF THE INTERNET
AND THE GROWTH OF ITS USE AS A COMMERCIAL TOOL.
Our future revenues and profits, if any, substantially depend upon the
widespread acceptance and use of the Internet as an effective medium for
business and communication between businesses and their customers. Rapid growth
in the use of and interest in the Internet has occurred only recently. As a
result, acceptance and use may not continue to develop at historical rates, and
a sufficiently broad base of businesses and consumers may not adopt, and
continue to use, the Internet and other online services as a medium of commerce.
Demand and market acceptance for recently introduced services and products over
the Internet are subject to a high level of uncertainty, and few proven services
and products exist.
The Internet may not be accepted as a viable long-term commercial
marketplace for a number of reasons, including potentially inadequate
development of the necessary network infrastructure or delayed development of
enabling technologies and performance improvements. Our success and the success
of our portfolio companies will depend, in large part, upon third parties
maintaining the Internet infrastructure to provide a reliable network platform
with the speed, data capacity, security and hardware necessary for reliable
Internet access and services.
COMPETITION AMONG INTERNET PRODUCTS AND SERVICES IS INTENSE.
As the market for e-commerce grows, we expect that competition will
intensify. Barriers to entry are minimal, and competitors can offer products and
services at a relatively low cost. If the client or portfolio companies we
advise or receive equity in fail to adapt to changes in technology and customer
and supplier demands, they may not be competitive. We cannot assure you that the
products and services of these companies will achieve market acceptance or
commercial success, nor can we assure you that the businesses of these companies
will be successful.
WE AND OUR PORTFOLIO COMPANIES MAY NOT BE ABLE TO ADAPT TO RAPID CHANGES IN THE
E-COMMERCE INDUSTRY.
The success of many of the companies for which we will provide advisory
services and in which we may acquire an equity interest will depend on their
ability to adapt to the rapidly changing e-commerce marketplace. The e-commerce
market is characterized by:
- rapidly changing technology;
- evolving industry standards;
- frequent new product and service introductions;
- shifting distribution channels; and
- changing customer demands.
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Our business will suffer if the companies we advise or receive equity in as
compensation for services are unable to adapt to this rapidly evolving
marketplace. They may not be able to adequately or economically adapt their
products and services, develop new products and services or establish and
maintain effective distribution channels for their products and services. In
addition, we and these companies may be unable or unwilling to respond to the
technology changes occurring in Internet products and services in an
economically efficient manner, and our businesses may become or remain
unprofitable.
RISKS ASSOCIATED WITH THIS OFFERING
YOU WILL EXPERIENCE IMMEDIATE, SUBSTANTIAL DILUTION IN THE NET ASSET VALUE OF
THE SHARES YOU PURCHASE.
The common stock offered by this prospectus will experience immediate
dilution in net asset value per share. To the extent outstanding options or
warrants are exercised, you may experience further dilution. We may issue
additional shares of common stock in the future to raise capital to carry out
our business strategy, fund acquisitions or to incentivize management. These
issuances may cause further dilution to our stockholders. See "Dilution."
WE HAVE NO PRIOR PUBLIC MARKET FOR OUR SHARES.
Prior to the offering, no public market for our common stock has existed.
The initial public offering price for the common stock was determined by
negotiation between us and the underwriters and may bear no relationship to the
price at which the common stock will trade after the offering. See
"Underwriting" for the factors considered in determining the initial public
offering price. We have applied to list our common stock on the American Stock
Exchange. However, we cannot assure you that an active trading market will
develop subsequent to the offering or, if developed, that it will continue to
exist.
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL INITIALLY HAVE SIGNIFICANT VOTING
RIGHTS.
Following the consummation of this offering, our executive officers and
directors and entities affiliated with them will own approximately 46% of the
outstanding shares of our common stock. This group, if acting in concert, will
be able to influence decisions affecting our affairs including the election of
directors and other matters submitted to the stockholders for a vote. This could
discourage, inhibit or delay any takeover attempt. See "Description of Capital
Stock" and "Control Persons and Principal Stockholders."
OUR CHARTER HAS PROVISIONS THAT DISCOURAGE CORPORATE TAKEOVERS AND COULD PREVENT
STOCKHOLDERS FROM REALIZING A PREMIUM ON THEIR INVESTMENT.
Our charter authorizes our board to issue, without stockholder approval, one
or more series of preferred stock having rights as our board may determine.
Subject to the requirement that MGi2 have an asset coverage of at least 200%
after the issuance of senior securities, including preferred stock and debt, the
issuance of this "blank-check" preferred stock could render more difficult or
discourage an attempt to obtain control of MGi2. Our charter and bylaws also
include other provisions, such as extraordinary voting percentages for
stockholder action, which could inhibit or delay a takeover attempt. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE MAY AFFECT THE PRICE OF COMMON STOCK.
Upon consummation of the offering, 3,550,000 shares of common stock will be
outstanding. The 1,900,000 shares sold in the offering, other than shares which
may be purchased by affiliates of MGi2, will be freely tradable. The remaining
outstanding shares may be resold publicly only following their registration
under the Securities Act, or under an available exemption from registration. One
exemption provided by Rule 144 allows stockholders to sell unregistered shares
following a one year holding period. The officers and directors, representing
1,650,000 shares of these remaining unregistered shares, have agreed
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with the underwriters that they will not sell, transfer or otherwise dispose of
any of their shares for periods varying from one to three years following the
consummation of the offering. Sales, or the availability for sale, of
substantial amounts of common stock in the public market could adversely affect
prevailing market prices and our future ability to raise equity capital. See
"Shares Eligible for Future Sale" and "Underwriting."
WE HAVE A RESTRICTIVE DIVIDEND POLICY.
We do not anticipate paying dividends in the foreseeable future. If you need
current income from your investments, you should not buy our common stock.
Further, our ability to pay dividends in the future could be limited or
prohibited by regulatory requirements. See "Dividend Policy."
OUR MANAGEMENT HAS BROAD DISCRETION IN INVESTING THE PROCEEDS OF THIS OFFERING.
Except as set forth in "Use of Proceeds," our management has broad
discretion in the application of the proceeds of this offering. We have not
identified any particular use for the net proceeds of this offering.
Accordingly, purchasers of our securities must rely on the ability of our
management in making portfolio investments consistent with our objectives.
Investors will not have the opportunity to evaluate personally the relevant
economic, financial and other information that will be utilized by management in
deciding whether or not to make a particular investment.
WE MAY INVEST IN NON-ELIGIBLE ASSETS OR NON-INTERNET FOCUSED BUSINESS WHICH MAY
FACE RISKS THAT DIFFER FROM OTHER RISKS WE HAVE DESCRIBED.
We may, but do not intend to, invest in non-eligible assets up to 30% of our
total adjusted assets in accordance with the Investment Company Act, such as
publicly traded securities. In addition, we may invest in non-Internet focused
businesses. To the extent that we make such investments, they will be subject to
risks specific to the industry or type of security. At this time, it is not
possible for us to describe specific risks that may, or to predict which risks
are more likely to, apply. See "Investment Company Act Regulation."
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements other
than statements of historical facts contained in this prospectus are
forward-looking statements including statements regarding:
- our clients benefitting from our experience and resources;
- our future financial position;
- our operating and growth strategy;
- our investment objectives and principal strategies;
- opportunities to provide our services to companies that have a potential
to succeed in the New Economy;
- objectives of management for future operations; and
- our ability to raise or manage private equity.
Although we believe our expectations reflected in these forward-looking
statements are based on reasonable assumptions, we cannot assure you that these
expectations will prove to be correct.
Important factors that could cause actual results to differ materially from
the expectations reflected in the forward-looking statements include, among
other things:
- the risk factors discussed in this prospectus;
- the volatility of prices and activity in the e-commerce industry;
- acceptance of the Internet by businesses and consumers as a medium for
commercial transactions;
- demand for Internet and e-commerce services;
- general economic, market or business conditions;
- the nature or lack of business opportunities that may be presented to and
pursued by us;
- the risks of required registration under the Investment Company Act;
- obtaining or retaining qualified employees;
- changes in laws or regulations; and
- other factors, most of which are beyond our control.
In some cases, you can identify forward-looking statements by terminology
such as "may," "will," "should," "could," "would," "expect," "plan,"
"anticipate," "believe," "continue," or the derivative of these terms or other
similar expressions. All forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified by the cautionary
statements included in this prospectus. We undertake no obligation to update or
revise our forward-looking statements, whether as a result of new information,
future events or otherwise. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur.
This prospectus also contains statistical data regarding, among other
things, venture capital investing in the United States and the past and
projected growth of e-commerce. We have taken this data from information
published by sources specializing in research of the relevant subject matter.
However, this data is by its nature imprecise, and we caution you not to unduly
rely on it.
18
<PAGE>
USE OF PROCEEDS
Based on an initial public offering price of $8.00, we estimate our net
proceeds from the sale of the shares of common stock offered by this prospectus,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us, to be approximately $12,752,000 (approximately
$14,769,800 if the underwriters exercise their over-allotment option in full).
We intend to use approximately $750,000 of net proceeds for general working
capital purposes. We expect to use the remainder to invest in portfolio
companies and provide capital to support our merchant banking activities as
follows: approximately 20% to 25% at or about six months from the offering date,
approximately 50% at or about one year from the offering date, and full
investment at or about two years from the offering date. We cannot assure you
that we will be able to achieve our targeted investment pace. Until we have
identified appropriate investments in accordance with our investment objective,
we may invest all of our excess cash in short-term, interest-bearing
investment-grade securities or guaranteed obligations of the U.S. government.
None of the proceeds from this offering will be directed to, or for the benefit
of, McFarland, Grossman.
We expect that the proceeds from this offering, combined with our cash and
our ability to generate cash from the sale of marketable securities, will be
adequate to meet our capital and liquidity requirements for the next eighteen
months.
19
<PAGE>
DIVIDEND POLICY
We intend to retain all our earnings, if any, to support and finance the
expansion of our business and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. In the future, subject to the board's
discretion and any required SEC approval, we may distribute to our stockholders
equity interests we receive from our portfolio companies if the portfolio
company becomes publicly traded. Any future dividends will be at the discretion
of our board after taking into account various factors, including, among others:
- our financial condition;
- results of operations;
- cash flows from operations;
- current and anticipated cash needs and expansion plans;
- the income tax laws then in effect;
- the performance of securities we hold in our portfolio companies;
- regulatory prohibitions and limitations; and
- the requirements of Delaware law.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources" and "Federal Income Tax
Matters."
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of April 19, 2000 on an
actual and as adjusted basis. The "Actual" column reflects the capitalization of
MGi2 as of April 19, 2000 restated to reflect the exercise of certain employee
stock options and the exchange of the stock of McFarland, Grossman for stock of
MGi2 at a ratio of 2 shares of MGi2 for every 1 share of McFarland, Grossman.
The "As Adjusted" column reflects our restated capitalization as of April 19,
2000 assuming the receipt of the estimated net proceeds from this offering of
common stock of $8.00 per share.
The table below should be read in conjunction with MGi2's balance sheet as
of April 19, 2000 and the related notes, which are included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 1,650,000 shares issued and outstanding;
3,550,000 shares issued and outstanding as adjusted..... $ 16,500 $ 35,500
Additional paid-in-capital.................................. 2,488,500 15,221,500
---------- -----------
Total stockholders' equity.................................. 2,505,000 15,257,000
========== ===========
Total capitalization...................................... $2,505,000 $15,257,000
========== ===========
</TABLE>
The as adjusted numbers of shares of issued and outstanding common stock
exclude:
- 165,000 shares issuable upon exercise of options that will be outstanding
following this offering; See "Management--2000 Stock Plan;"
- 190,000 shares issuable upon exercise of warrants issued for cash to the
managing underwriter; and
- 285,000 shares issuable upon exercise of the underwriters' over-allotment
option.
The actual and as adjusted numbers of shares of issued and outstanding
common stock include 150,000 shares issued to employees upon exercise of options
prior to the exchange transaction.
21
<PAGE>
DILUTION
Net asset value per share is our adjusted net assets (total assets less
total liabilities) divided by the number of shares of common stock outstanding.
Net asset value dilution per share represents the difference between the amount
per share paid by purchasers of shares of common stock in the offering and the
pro forma net asset value per share after the offering. After giving effect to
the sale of the shares of common stock in this offering (at a price of $8.00 per
share and after deducting underwriting discounts and commissions and estimated
offering expenses), our pro forma net asset value at April 19, 2000 would have
been $15,257,000 or $4.30 per share, representing an immediate increase in net
asset value of $2.78 per share to existing stockholders and an immediate
dilution of $3.70 per share to new investors purchasing the shares in this
offering. The following table illustrates the dilution to new investors:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share..................... $8.00
Net asset value per share before this offering............ $1.52
Increase attributable to new investors.................... 2.78
-----
Pro forma net asset value per share after this offering..... 4.30
-----
Dilution per share to new investors......................... $3.70
=====
</TABLE>
The following table sets forth as of the date of this prospectus the number
of shares of common stock purchased from us, the total consideration to us and
the average price per share paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders........... 1,650,000 46.5% $ 212,850 1.4% $0.13
New investors................... 1,900,000 53.5% 15,200,000 98.6% 8.00
--------- ----- ----------- -----
Total......................... 3,550,000 100.0% $15,412,850 100.0% $4.34
========= ===== =========== =====
</TABLE>
The number of shares does not include:
- 165,000 shares of common stock issuable upon exercise of options, which
will be outstanding following this offering; See "Management--2000 Stock
Plan;"
- 190,000 shares of common stock issuable upon exercise of the warrants
issued for cash to the managing underwriter; and
- 285,000 shares of common stock issuable upon exercise of the underwriters'
over-allotment option.
22
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial information should be read in conjunction
with the financial statements and the notes to the financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation," which are included elsewhere in this prospectus.
MGI2
MGi2 has not conducted any operations that have generated revenues or
expenses since its formation in February 2000. Following MGi2's election to be
treated as a business development company, MGi2 will be required to report
McFarland, Grossman as a portfolio company. We have derived the following
financial information for MGi2 as of April 19, 2000 (assuming completion of the
exchange of shares of MGi2 common stock for shares of McFarland, Grossman common
stock and MGi2's election to become a business development company) from the
audited balance sheet and related notes of MGi2:
BALANCE SHEET DATA:
<TABLE>
<S> <C>
Investment in McFarland, Grossman........................... $2,500,000
==========
Total Assets................................................ $3,207,500
==========
Total Stockholder's Equity.................................. $2,505,000
==========
</TABLE>
MCFARLAND, GROSSMAN
We have derived the selected financial information of McFarland, Grossman
for the years ended December 31, 1995 through 1999 from the audited financial
statements and the related notes of McFarland, Grossman. The audited financial
statements for the years ended December 31, 1997 through 1999 are included in
this prospectus. The audited financial statements for the years ended December
31, 1995 and 1996 are not included in this prospectus. McFarland, Grossman's
financial statements for the year ended December 31, 1999, were audited by
Arthur Andersen LLP. McFarland Grossman's financial statements for the years
ended December 31, 1995 through 1998 were audited by Weinstein Spira & Company,
P.C.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenues:
Investment banking fees................................... $1,114,455 $1,100,426 $1,813,995 $2,824,594 $1,082,946
Net gain (loss) on securities............................. (1,036) 105,425 496,845 70,373 (4,145)
Dividends and interest.................................... 3,183 3,678 6,079 87,712 54,567
Other income.............................................. 144,325 123,250 148,850 66,820 6,636
---------- ---------- ---------- ---------- ----------
Total revenues........................................ $1,260,927 $1,332,779 $2,465,769 $3,049,499 $1,140,004
---------- ---------- ---------- ---------- ----------
Operating expenses:
Compensation and benefits................................. $ 921,443 $ 770,289 $1,250,207 $2,327,942 $1,192,315
Other operating expenses.................................. 344,277 435,315 398,962 497,054 386,862
---------- ---------- ---------- ---------- ----------
Total expenses........................................ $1,265,720 $1,205,604 $1,649,169 $2,824,996 $1,579,177
---------- ---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for income taxes... $ (4,793) $ 127,175 $ 816,600 $ 224,503 $ (439,173)
---------- ---------- ---------- ---------- ----------
Net income (loss)........................................... $ (6,670) $ 96,424 $ 522,152 $ 137,780 $ (297,397)
========== ========== ========== ========== ==========
Net income (loss) per share
Basic..................................................... $ (0.01) $ 0.13 $ 0.69 $ 0.18 $ (0.40)
========== ========== ========== ========== ==========
Diluted................................................... $ (0.01) $ 0.11 $ 0.60 $ 0.16 $ (0.40)
========== ========== ========== ========== ==========
Shares used in computing net income (loss) per share
Basic..................................................... 750,000 750,000 750,000 750,000 750,000
========== ========== ========== ========== ==========
Diluted................................................... 750,000 840,393 862,675 866,867 750,000
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets................................................ $ 269,675 $ 390,032 $1,236,061 $1,375,606 $1,157,243
========== ========== ========== ========== ==========
Total debt(1)............................................... $ 6,986 $ 3,881 $ 776 $ 180,000 $ 192,100
========== ========== ========== ========== ==========
Total stockholders' equity.................................. $ 219,547 $ 323,704 $ 881,675 $ 918,555 $ 621,158
========== ========== ========== ========== ==========
</TABLE>
- ------------------------------
(1) See "Senior Securities" for more information regarding McFarland, Grossman's
level of indebtedness.
23
<PAGE>
Since 1997, McFarland, Grossman has assigned most of its interest in client
securities it received as fees for its services to its employees as
compensation. In addition, McFarland, Grossman has participated in the formation
of new businesses and allowed its employees, rather than it, to purchase the
founders' stock, which is generally issued for nominal consideration. MGi2 has
now adopted a policy that any client securities to be received in connection
with the services we provide, and shares to be acquired as founders' stock in
companies that we incubate or assist in incubation, are to be paid or issued
directly to us. Subject to review and approval by the SEC, once granted or
issued to us, our compensation committee, which is comprised of independent
directors, may distribute or allocate up to 30% of these securities among our
officers and employees as additional compensation. We cannot assure you that the
SEC will grant its approval. In addition, we are not aware of any precedent
where the SEC has granted such relief.
If this policy had been in effect in prior years, McFarland, Grossman would
have retained additional securities, which are now publicly traded, and which
had a value of approximately $1,523,000 as of December 31, 1999. This valuation
does not include the value of privately held securities which were previously
granted to McFarland, Grossman's officers and employees as compensation. See
"Risk Factors--Risks Associated with Our Operations, Including the Operations of
McFarland, Grossman--Our policy of granting a percentage of the securities
received as compensation to our officers and employees could result in a
conflict of interest" and "--Failure to obtain SEC exemptive relief of various
policies could negatively affect our operations."
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW AND BACKGROUND
We expect to derive a substantial part of our revenues from investment
banking and financial advisory fees, and from realized and unrealized gains on
our investments, including securities received from clients. We will generally
receive our fees in cash, in securities of our client companies or in
combinations of cash and client securities. We will be involved in the formation
and incubation of new businesses in which we acquire common stock as founding
stockholders for nominal consideration. Most of our client engagements will be
non-recurring in nature. We carry our equity positions, which are primarily
client securities, at market value in accordance with generally accepted
accounting principles. Because these equity interests are often securities of
early-stage enterprises or are illiquid, and because of the uncertain nature of
variations in the value of publicly traded securities, the market value of our
equity interests may fluctuate by material amounts between accounting periods.
Our securities in non-public companies are valued by management based upon
valuation models commonly used in the venture capital industry, which include
various factors such as multiples of revenues, earnings, cash flow and other
factors. Due to the inherent uncertainty of the valuation process, estimated
values at the end of an accounting period may differ significantly from the
values that would have been realized in a sale at that date had a ready market
for the securities existed, and the differences may be material. Because of the
combination of the non-recurring nature of our revenues and the fluctuation in
the market value of our investments, our revenues may vary materially between
accounting periods.
We have elected to be regulated as a business development company under the
Investment Company Act. Our investment objective is to achieve capital
appreciation from equity investments in our portfolio companies and from equity
we receive for rendering advisory services to our portfolio companies.
Since 1997, McFarland, Grossman has assigned most of its interest in the
client securities it received as fees for its services to its employees as
compensation. In addition, McFarland, Grossman has participated in the formation
of new businesses and allowed its employees, rather than it, to purchase the
founders' stock, which is generally issued for nominal consideration. MGi2 has
now, subject to review and approval by the SEC, adopted a policy that any client
securities to be received in connection with the services we provide, and shares
to be acquired as founders' stock in companies that we incubate or assist in
incubation, are to be paid or issued directly to us. Once granted or issued to
us, our compensation committee, which is comprised of independent directors, may
distribute or allocate up to 30% of these securities among our officers and
employees as additional compensation. If this policy had been in effect in prior
years, McFarland, Grossman would have retained additional securities which are
now publicly traded and which had a value of approximately $1,523,000 as of
December 31, 1999. This valuation does not include the value of privately held
securities which were previously granted to its officers and employees as
compensation. See "Risk Factors--Risks Associated with Our Operations--Our
policy of granting a percentage of the securities received as compensation to
our officers and employees could result in a conflict of interest" and
"--Failure to obtain SEC exemptive relief of various policies could negatively
affect our operations."
Our operating expenses consist primarily of salaries and related employee
benefits, office occupancy and operating expenses, travel expenses, research
related expenses and professional fees.
The following discussion and analysis of financial condition and results of
operations to the extent applicable to historical operations refers to the
financial condition and operations of McFarland, Grossman.
25
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1999 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1998
Revenues for the year ended December 31, 1999 totaled $1,140,004 compared to
$3,049,499 for the year ended December 31, 1998, representing a decrease of
62.6%.
Investment banking fees decreased from $2,824,594 in 1998 to $1,082,946 in
1999, a decrease of 61.7%. The decrease was primarily due to a reduction in the
number and size of completed investment banking transactions in 1999 compared to
1998.
McFarland, Grossman incurred a net loss on securities of $4,145 in 1999
compared to a net gain of $70,373 in 1998. The net loss in 1999 was primarily
the result of unrealized losses of approximately $44,000 on its equity position
in Pentacon, Inc., partially offset by gains on its equity positions in
Transcoastal Marine Services, Inc., TALX Corporation, Brightstar Information
Technologies Group, Inc., and other small investments. In 1998, the gain was
primarily the result of the additional increase in the market value of its
equity position in Pentacon and Brightstar following their initial public
offerings, offset by a decline in the value of its equity position in
Transcoastal.
Dividend and interest income decreased from $87,712 in 1998 to $54,567 in
1999. The decrease was primarily due to a default on the payment of
approximately $25,000 of accrued interest on certain notes receivable from
former employees, secured by marketable securities held by McFarland, Grossman,
and the modification of the principal amount and interest rate of certain notes
receivable from its principal officers, Messrs. Grossman and McFarland, secured
by marketable securities held by McFarland, Grossman, which resulted in a
decrease of approximately $30,000 from the interest which would have been
received had the notes not been modified, partially offset by the fact that
these notes were outstanding for all of 1999 and approximately seven months in
1998. See "Certain Transactions." The balance of the decrease was primarily the
result of lower interest bearing cash balances in 1999 compared to 1998.
Other income decreased from $66,820 in 1998 to $6,636 in 1999, a decrease of
$60,184. The decrease is primarily due to a decline in fees received from mutual
funds of $54,411 as customer accounts from McFarland, Grossman's discontinued
retail brokerage and retail investment advisory businesses were moved to other
brokerage and investment management firms.
Total expenses for the fiscal year 1999 were $1,579,177 compared to
$2,824,996 for fiscal year 1998, a decrease of $1,245,819 or 44.1%.
Compensation and benefits decreased from $2,327,942 in 1998 to $1,192,315 in
1999, a decrease of $1,135,627 or 48.8%. The decrease was primarily due to a
decrease of $1,063,652 in cash compensation to two principal executive officers
and reduced cash compensation to other professionals, partially offset by an
increase in non-cash compensation to officers and employees in the form of
distributions of warrants in portfolio companies.
Other expenses decreased from $497,054 in 1998 to $386,862 in 1999, a
decrease of $110,192. The decrease was primarily due to decreases in expenses
for referral fees, clearing costs from the discontinued brokerage and investment
management business, telecommunications expenses, professional fees, travel
expenses, and promotional expenses, and changes in the levels of other expenses,
partially offset by interest expense of $23,315 in 1999.
McFarland, Grossman's fiscal 1999 income tax benefit was $141,776 and
represented an effective tax rate of 32.3%. In fiscal 1998, the income tax
provision was $86,723 and represented an effective tax rate of 38.6%. The 1999
benefit reflects the amount of an expected income tax refund resulting from a
net operating loss carry-back in the approximate amount of $112,000 combined
with a reduction in deferred income taxes resulting primarily from a decrease in
the carrying value of marketable securities held as collateral for notes
receivable from related parties and investments, partially offset by a reduction
in deferred taxes due to the realization of gains from the sale of certain
investments.
26
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1998 COMPARED TO FISCAL YEAR ENDED DECEMBER 31,
1997
Revenues for the year ended December 31, 1998 totaled $3,049,499 compared to
$2,465,769 for the year ended December 31, 1997, representing an increase of
23.7%.
Investment banking fees increased from $1,813,995 in 1997 to $2,824,594 in
1998 or 55.7%. The increase was primarily because two engagements in 1998
generated aggregate fees of approximately $2.2 million. The fees earned from
these engagements are more than McFarland, Grossman's historical average. In
1997, one of its engagements generated fees of $1.2 million.
Net gain on securities decreased from $496,845 in 1997 to $70,373 in 1998.
The gain in 1997 was primarily due to the increase in market value of the equity
position in Pentacon and Brightstar, both of which were about to complete
initial public offerings at the end of 1997. In 1998, the gain was primarily the
result of the additional increase in the market value of the equity position in
the same two companies, offset by a decline in the value of the equity position
in Transcoastal.
Dividend and interest income increased from $6,079 in 1997 to $87,712 in
1998. The increase was primarily due to interest earned on notes receivable
secured by marketable securities held by McFarland, Grossman. These notes
generated interest income of approximately $58,000 in 1998. The balance of the
increase is primarily due to interest earned on cash balances which were
generally greater in 1998 than in 1997.
Other income decreased from $148,850 in 1997 to $66,820 in 1998. The
decrease is primarily due to the decline in commissions and investment advisory
fees of $73,935 following the discontinuance of the retail brokerage and retail
investment advisory businesses in 1998, and a non-recurring management fee of
$19,700 received in 1997 from an affiliate.
Total expenses for the fiscal year 1998 were $2,824,996 compared to
$1,649,169 for fiscal year 1997, an increase of $1,175,827 or 71.3%.
Compensation and benefits increased from $1,250,207 in 1997 to $2,327,942 in
1998. The increase was primarily due to an increase in compensation to two
executive officers of $1,005,152 and increased bonuses to other key employees.
The increase was partially offset by a reduction in payroll associated with
discontinuing the retail brokerage and investment advisory businesses.
Other expenses increased from $398,962 in 1997 to $497,054 in 1998, an
increase of $98,092. The increase was primarily due to the payment of referral
fees of $53,268 in 1998, and increases in the amount paid for rent, travel and
professional fees.
McFarland, Grossman's fiscal 1998 income tax provision was $86,723 and
represented an effective tax rate of 38.6%. In fiscal 1997, the income tax
provision was $294,448 and represented an effective tax rate of 36.1%. The
greater effective tax rate in 1998 was the result of a greater percentage of
taxable income being subject to the phase out of the surtax exemption, and
subject to a 39% tax rate rather than the statutory rate of 34%.
LIQUIDITY AND CAPITAL RESOURCES
McFarland, Grossman had liquid assets consisting of cash, cash equivalents
and marketable securities of $297,173 at December 31, 1999, compared to $593,596
at December 31, 1998 and $530,097 at December 31, 1997.
Net cash used in operations was $130,000 for the year ended December 31,
1999, primarily due to the loss incurred in 1999. Cash used in investing
activities for the purchase of property and equipment was $32,000 for the year
ended December 31, 1999.
27
<PAGE>
Included in liquid assets at December 31, 1999, is the value of the
investment in Pentacon of approximately $56,000 and other marketable securities
of $26,000. In December 1999, McFarland, Grossman held certain notes receivable
from several former employees, secured by additional shares in Pentacon that
were in default. In January 2000, McFarland, Grossman exercised its right to
foreclose on the marketable securities held as collateral securing the notes and
obtained possession of an additional 45,000 shares of Pentacon, which were added
to its marketable securities. The value of these securities was $146,250 as of
December 31, 1999.
During 1999, three clients accounted for approximately $724,000, or 67%, of
McFarland, Grossman's total investment banking fees. During 1998, three clients
accounted for approximately $2.6 million, or 91%, of total investment banking
fees. During 1997, two clients accounted for approximately $1.6 million, or 86%,
of total investment banking fees.
On December 18, 1998, McFarland, Grossman received the proceeds of two loans
from principal stockholders and executive officers in the amount of $90,000
each. In March of 1999, these loans were converted to "satisfactory
subordination agreements", as defined by the National Association of Securities
Dealers. The loans bear interest at the rate of 13.5% per annum. The principal
and accrued interest are due on April 30, 2002 and repayment is subordinated to
the claims of other creditors and subject to certain net capital requirements as
set forth by the NASD. On June 7, 1999, McFarland, Grossman redeemed the
interest of certain former employees in its Class B non-voting common stock with
a cash payment of $4,858, and the delivery of promissory notes in the principal
amount of $14,520. The notes are payable in monthly principal installments over
three years and bear interest at 8% per annum.
As of December 31, 1999, McFarland, Grossman had a federal income tax refund
due of approximately $112,000 as the result of a carry-back of its 1999 net
operating loss.
We believe that our cash and our ability to generate cash from the sale of
marketable securities combined with the proceeds from the offering will be
adequate to meet our capital and liquidity requirements for the next eighteen
months.
FACTORS THAT MAY AFFECT OUR FUTURE OPERATING RESULTS
Our future operating results could fluctuate as a result of a number of
factors. These include, among others, the timing and non-recurring nature of our
investment banking revenues, the degree to which we encounter competition in our
markets, general economic conditions, and variations in and the timing of
recognition of realized and unrealized gains or losses. As a result of these
factors, our results for any one quarter should not be relied upon as being
indicative of our performance in future quarters.
MARKET RISK
We do not hold derivative financial instruments which could expose us to
significant market risk, other than investments in warrants which expose us to
market value risk. We do not have exposure to market risk for changes in
interest rates on our borrowings, which have fixed interest rates.
EFFECTS OF INFLATION
Inflationary conditions in the United States have been moderate and have not
had a material impact on our results of operations or financial condition.
28
<PAGE>
SENIOR SECURITIES
MGi2 has not issued any senior securities. Certain information about the
various classes of senior securities issued by McFarland, Grossman is set forth
in the following table.
<TABLE>
<CAPTION>
TOTAL
AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF LIQUIDATING AVERAGE MARKET
TREASURY ASSET COVERAGE PREFERENCE PER VALUE PER
CLASS AND YEAR SECURITIES(1) PER UNIT(2) UNIT(3) UNIT(4)
- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
INSTALLMENT NOTES
1991................................... $ -- $ -- N/A N/A
1992................................... 27,925 (.06) N/A N/A
1993................................... 14,297 1.30 N/A N/A
1994................................... 10,091 2.04 N/A N/A
1995................................... 6,986 32.43 N/A N/A
1996................................... 3,881 84.41 N/A N/A
1997................................... 776 1,137.18 N/A N/A
1998................................... -- N/A N/A
1999................................... 12,100 4.23 N/A N/A
LIABILITIES SUBORDINATED TO CLAIMS OF
GENERAL CREDITORS
1991................................... $ -- $ -- N/A N/A
1992................................... -- -- N/A N/A
1993................................... 65,000 1.30 N/A N/A
1994................................... 90,275 2.04 N/A N/A
1995................................... -- -- N/A N/A
1996................................... -- -- N/A N/A
1997................................... -- -- N/A N/A
*1998................................... 180,000 6.10 N/A N/A
1999................................... 180,000 4.23 N/A N/A
- ------------------------
* Converted on March 31, 1999 from an unsecured note.
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
TOTAL
AMOUNT
OUTSTANDING INVOLUNTARY
EXCLUSIVE OF LIQUIDATING AVERAGE MARKET
TREASURY ASSET COVERAGE PREFERENCE PER VALUE PER
CLASS AND YEAR SECURITIES(1) PER UNIT(2) UNIT(3) UNIT(4)
- -------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SERIES A PREFERRED STOCK
1991................................... $ -- $ -- $-- N/A
1992................................... -- -- -- N/A
1993................................... -- -- -- N/A
1994................................... -- -- -- N/A
1995................................... 20,000 12.33 1.00 N/A
1996................................... 35,006 12.09 1.17 N/A
1997................................... -- -- -- N/A
1998................................... -- -- -- N/A
1999................................... -- -- -- N/A
SERIES B PREFERRED STOCK
1991................................... $ -- $ -- $-- N/A
1992................................... -- -- -- N/A
1993................................... -- -- -- N/A
1994................................... -- -- -- N/A
1995................................... -- -- -- N/A
1996................................... -- -- -- N/A
1997................................... 97,500 10.05 1.00 N/A
1998................................... -- -- -- N/A
1999................................... -- -- -- N/A
</TABLE>
- ------------------------
(1) Total amount of each class of senior securities outstanding at the end of
the year presented.
(2) The asset coverage ratio for a class of senior securities representing
indebtedness is calculated as consolidated total assets less all liabilities
and indebtedness not represented by senior securities, divided by senior
securities representing indebtedness. This asset coverage ratio is
multiplied by $1,000 to determine the Asset Coverage Per Unit. The asset
coverage ratio for a class of senior securities that is preferred stock is
calculated as consolidated total assets less all liabilities and
indebtedness not represented by senior securities, divided by senior
securities representing indebtedness plus the involuntary liquidation
preference of the preferred stock (see footnote 3). The Asset Coverage Per
Unit is expressed in terms of dollar amounts per share.
(3) The amount to which such class of senior security would be entitled upon the
voluntary liquidation of the issuer in preference to any security junior to
it.
(4) Not applicable, as senior securities are not registered for public trading.
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BUSINESS
OUR COMPANY
We were incorporated in the State of Delaware in February 2000. Our primary
business focus is to create or identify, and then incubate and grow, businesses
that aim to benefit from the expected growth of business to business, or B2B,
e-commerce, including:
- INTERNET INFRASTRUCTURE SERVICE PROVIDERS, such as companies that design
local and wide-area networks and provide telecommunications and internet
access services;
- INTERNET MARKET MAKERS who connect buyers and sellers by creating
Internet-based markets and exchanges for the marketing and sale of goods
and services via the Internet; and
- INTERNET SOLUTION PROVIDERS that develop and provide business solutions to
users of e-commerce, including website design, web-based software
enablers, such as application service providers; application integration
software; and Internet services such as consulting and systems
integration.
We intend to invest in and provide merchant banking and incubation services
to our clients in the B2B e-commerce market. Our merchant banking and incubation
services will include strategic business and financial advisory services and
investment banking services. Through our funding and services, we intend to
enhance our clients' growth opportunities. As opportunities arise or market
emphasis shifts, we may invest in and provide these services to, high growth
businesses which are not involved in the Internet or e-commerce. We will be
compensated for our services in several ways. We will receive cash fees for the
advisory services we provide to our client and portfolio companies. We will also
earn warrants or other equity compensation in connection with providing our
other services. We expect to receive equity interests in portfolio companies
both through the activities of MGi2 and of McFarland, Grossman.
Our policy is to dispose of our investments when a liquid market exists.
However, if a portfolio company becomes publicly traded, subject to the
discretion of our board of directors and subject to SEC approval, we may
distribute those equity securities to our stockholders.
We have adopted a policy to use reasonable efforts to provide our
stockholders with the right to invest in the initial public offerings of our
portfolio companies. These opportunities will depend on the nature of our role
with the portfolio company and whether the managing underwriter of the initial
public offering of our portfolio company does not object to offering our
stockholders the right to invest in the offering.
We are an internally managed, non-diversified closed-end investment company
that has elected to be regulated as a business development company under the
Investment Company Act. Our investment objective is to achieve capital
appreciation from equity investments in our portfolio companies and from equity
we receive for rendering advisory services to our portfolio companies. Our
management will implement our investment objective and strategies, and will
determine our strategic and operational direction.
Currently, our principal operating subsidiary is McFarland, Grossman &
Company, Inc. McFarland, Grossman, a registered broker-dealer, was formed in
1991 to provide investment banking services to rapidly expanding service
businesses or service businesses active in consolidating industries. McFarland,
Grossman has a history of forming and incubating new businesses, providing
financial advisory services to, and financing for, client companies. Since its
inception, McFarland, Grossman has completed engagements in 10 states involving
the private placement of more than $88 million in private equity and mezzanine
financing, $181 million of senior debt, and more than 20 mergers and
acquisitions. Since 1997, McFarland, Grossman has focused on the formation and
incubation of new businesses and other engagements where it receives equity, in
addition to cash fees, for the provision of merchant banking services. To that
end, McFarland, Grossman has been instrumental in the formation of five
companies since 1997, three of which are now publicly traded on national
securities exchanges.
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After the offering, we also intend to conduct operations through McFarland,
Grossman and two operating divisions--the MGi2 Ventures division and the MGi2
Capital division. McFarland, Grossman will render financial advisory and
investment banking services. The MGi2 Ventures division will provide incubation,
business consulting and other related services. The MGi2 Capital division will
provide management services to venture capital funds and other private equity
funds, if any, that we establish. See "--Our Corporate Structure."
CURRENT INCUBATION AND MERCHANT BANKING ACTIVITIES
McFarland, Grossman is currently engaged in a number of investment banking
relationships which include merger and acquisition advisory services and other
financial advisory services. Following is a summary of McFarland, Grossman's
current, active incubation and merchant banking engagements:
INCUBATION CLIENTS
RE-EXG.COM, INC.
Re is a development stage Internet-based, reinsurance exchange and financial
clearinghouse where direct insurers and reinsurers will meet to buy and sell
risk coverage. Re's objective is to fundamentally reshape the insurance
industry's costly, manual risk transfer business process so that insurers and
reinsurers will migrate from the current broker-driven reinsurance process to
electronic risk exchange. Re has initially targeted the $100 billion property
and casualty reinsurance market. Subsequently, it plans to include the
$20+ billion life and health reinsurance market.
McFarland, Grossman has entered into an agreement with Re to provide a
combination of incubation and investment banking services. As a part of its
incubation services, McFarland, Grossman is arranging $1 million of seed
financing for Re. McFarland, Grossman and its employees have acquired 18.7% of
Re's initial ownership, with MGi2's ownership interest being approximately
11.11%. McFarland, Grossman has the right to earn investment banking fees and a
warrant for additional equity upon the successful completion of additional
equity financing. See "Portfolio Companies; Equity Investments."
ZMAIL MEDIA, INC.
Zmail intends to provide public Internet access terminals in high traffic
public facilities such as airports. Revenues are to be derived from access fees,
advertising and other Internet commerce transactions. Zmail is in its
development stage and is currently negotiating various site access agreements
and is negotiating with various equipment suppliers and technology service
providers.
McFarland, Grossman conceived Zmail and formed it with a partner who has
taken responsibility for managing the day-to-day business activities during the
development stage. McFarland, Grossman and its employees have acquired 75% of
Zmail's initial ownership, with McFarland, Grossman's ownership interest being
approximately 25.05%. Our agreement with Zmail provides us the right to earn
investment banking fees and a warrant for additional equity upon the successful
completion of additional equity financing. The initial seed capital was provided
by one of our officers and our partner. If Zmail proceeds with its development,
we will have the opportunity to invest in its next round of financing. See
"Portfolio Companies; Equity Investments."
MERCHANT BANKING CLIENTS
INWAREHOUSE.COM, INC.
inwarehouse is creating a global Internet exchange and information resource
for the public and contract warehouse industry. inwarehouse believes it is the
first company to create an online exchange for the $1 billion U.S. warehousing
industry. It has contracted with four warehousing companies to develop and
install its beta-solution, and has entered into a design relationship with a
nationally recognized Internet software company.
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McFarland, Grossman has entered into an agreement with inwarehouse to
arrange $1.5 million in seed financing. Its compensation includes an investment
banking fee and a warrant in inwarehouse for successful completion of the
proposed financing.
ST2EP, LLC
St2ep is an international specialty engineering and consulting company that
provides technologies, services, personnel, and training to engineering and
construction companies, process industry companies, and financial institutions.
St2ep's revenues have grown from approximately $5.3 million in 1998, its first
year in business, to approximately $10.3 million in 1999.
St2ep has engaged McFarland, Grossman to raise approximately $10 million of
capital to support rapid growth in international sales and provide working
capital for new joint ventures. Its compensation includes an investment banking
fee and a warrant in St2ep for successful completion of the proposed financing.
OPENCON SYSTEMS, INC.
OpenCon is a leading supplier of solutions for the telecommunications
industry. OpenCon's products include embedded network management system
solutions for transmission equipment, such as Synchronous Optical NETwork and
Synchronous Digital Hierarchy fiber loop multiplexers. OpenCon also provides
network management solutions for other Network Elements ranging from access
codes to mediation devices, and GR-303 Integrated Access implementation for Next
Generation Digital Loop Carrier solutions and applications.
OpenCon has engaged McFarland, Grossman to raise approximately $15 million
of capital to support rapid growth. Its compensation includes an investment
banking fee and a warrant in OpenCon for successful completion of the proposed
financing.
DIRECT INVESTMENTS
SUPPLIERONE.COM, INC.
SupplierOne intends to become a leading e-marketplace for outsourced
manufacturing of components for original equipment manufacturers. The management
team includes the former chief executive officer and executive vice president of
a publicly traded $2 billion industrial distribution company, as well as several
noted technologists. SupplierOne's seed capital was provided by members of its
management team. It is currently seeking approximately $12 million in venture
financing.
McFarland, Grossman has secured the right to co-invest not less than
$250,000 or more than $1 million in SupplierOne's venture financing.
OUR MARKET OPPORTUNITY
The Internet has experienced significant growth due in large part to the
development of faster and more reliable networks, the emergence of innovative
commercial trading applications and a more widespread acceptance of the Internet
as a means of conducting various e-commerce transactions. Companies that
successfully establish an online presence can more effectively conduct business
with partners and suppliers, communicate with customers and employees and
address the rapidly growing, global base of online customers. Forrester
Research, an independent research firm, predicts that the number of United
States online businesses will grow from 1.8 million (or 29% of all U.S.
enterprises) in 1998 to 4.3 million (or 55% of all U.S. enterprises) by 2003.
Forrester Research also projects that the U.S. B2B e-commerce market, which they
define as the intercompany trade of hard goods over the Internet, will grow from
$43 billion in 1998 to $1.3 trillion by 2003.
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We believe that the Internet's substantial growth and the willingness of
businesses to shift their marketing efforts from conventional marketing
platforms to the Internet will create significant opportunities to provide
merchant banking services and incubation services to emerging or development
stage companies that have the potential to succeed in the New Economy. In
addition, we believe that opportunities exist to provide these services to
companies that are located in underserved geographic regions. According to a
recent survey published by PricewaterhouseCoopers, approximately 69% of the
venture capital invested during the first nine months of 1999 was invested in
California and New England. Our efforts will be directed to assisting companies
in underserved markets, such as Texas and other southwestern states, as opposed
to companies located in Silicon Valley, New England and other areas near primary
venture capital centers. However, we may make investments in other geographic
areas depending on the availability of business opportunities.
OUR OPERATING STRATEGY
Our operating strategy is to create value for our stockholders primarily by
creating or identifying, and then incubating and growing, businesses that are
poised to benefit from growth of the Internet as a commercial exchange, such as
companies that will provide online B2B services. We believe our portfolio
companies will benefit from our collective experience and resources and, as a
result, be in a better position to succeed in the New Economy.
Our principal resources include the experience and industry relationships of
our management team, our directors and our advisory board. Our management team
includes experienced professionals with varied backgrounds which include
strategy consulting, investment banking and public accounting. Our directors and
advisory board members are senior level executives with experience building and
managing businesses in the technology, e-commerce and telecommunications
industries.
OUR MERCHANT BANKING AND INCUBATION SERVICES
Our merchant banking and incubation services include:
STRATEGIC GUIDANCE AND BUSINESS PLANNING
We assist our clients in developing and refining business strategies to
maximize potential to be successful, reduce risk of failure, and accelerate time
to market. However, there can be no assurance that our assistance will enable
our clients to achieve those results. We also provide assistance with business
strategy, marketing strategy and competitive positioning.
ORGANIZATIONAL DEVELOPMENT AND OPERATIONAL SUPPORT
Once the business plan is complete, we assist our clients in organizational
development and executive recruiting. We can provide temporary office facilities
if needed; we assist in selecting and engaging technical and professional
service providers through the resources of our directors, advisory board members
and management team; and we provide technical consulting through the experience
and resources of our directors and advisory board members.
INVESTMENT BANKING AND FINANCIAL ADVISORY SERVICES
We assist in the planning and development of capital structures, assist in
arranging financing and when appropriate, provide merger and acquisition
advisory services. Our investment banking services have primarily consisted of
arranging private equity placements between $5 and $25 million, arranging debt
financing between $5 and $50 million, providing merger and acquisition and
advisory services, and providing valuations and fairness opinions. We expect to
provide these services primarily to businesses which intend to use the Internet
as a primary vehicle for delivery of a product or service, i.e., B2B e-commerce;
however we reserve the right to service other businesses. We anticipate that
financial advisory services and investment banking activities will generally be
conducted through McFarland, Grossman.
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PROVIDING SEED CAPITAL AND LATER-STAGE GROWTH CAPITAL
As part of our merchant banking activities, we expect, from time to time and
as opportunities arise, to provide seed capital, later stage investment capital
and other types of capital infusions and financing to certain of our portfolio
companies. These activities will typically generate significant equity positions
in portfolio companies for us.
OUR INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to achieve capital appreciation from equity
investments in our portfolio companies and from equity we receive for rendering
advisory services to our portfolio companies. We intend to focus on investments
in early development stage companies that have the greatest potential for
growth.
We apply several screening criteria when selecting target clients,
including:
INDUSTRY-- Businesses involved in or enabling the development of B2B
e-commerce such as infrastructure service providers, market makers and solution
providers. We intend to select clients that have the following characteristics:
(1) the opportunity to be at the forefront of new or developing markets,
(2) the potential to participate in large markets opportunities, (3) unique
ideas, and (4) dynamic, intellectually strong founders with experience within
their industry.
GEOGRAPHY-- Companies located outside of the primary venture capital centers
such as Silicon Valley and New England, including but not limited to Texas and
other southwestern states. We believe that many good business opportunities
exist in secondary markets which do not have access to financial advisory
services and capital.
COMPANY STAGE-- Newly formed companies that (1) need assistance developing
their business strategies and management teams and require "seed" or early stage
capital investments, and (2) companies that are developed and require investment
banking services such as arranging expansion financing or require merger and
acquisition or other financial advisory services.
SOLID CORE MANAGEMENT TEAM-- Relevant industry experience, a history of
accomplishment, and skills for managing a high growth business.
REASONABLE VALUATION-- Businesses which we believe have a reasonable
valuation in light of the current stage of the business and the risks involved
in its development.
We intend to assist in the growth of our portfolio companies by providing
them with management assistance in strategy formation and development, executive
recruiting and general business operations.
The selection of portfolio investments and the day-to-day management of our
investments, including our investment practices and techniques, will be the
responsibility of certain of our officers who serve under the direction of our
board of directors. We have not adopted a fixed policy concerning the types of
business we can invest in, the types of securities we will hold or the amount of
funds which can be invested in any one portfolio company. We will issue senior
securities, if we determine that the issuance of senior securities would be
appropriate in the future, subject to restrictions imposed by the Investment
Company Act, which Act requires, among other things, that each class of senior
security has an asset coverage of at least 200% immediately after issuance.
Further, we may issue more than one class of senior securities representing
indebtedness, as well as warrants or options, to the extent permitted under the
Investment Company Act. We can sell securities short or purchase securities on
margin or write puts or calls, except that we will limit our activities in each
of these areas to not more than 5% of our assets respectively, to the extent
permitted under the Investment Company Act. We will not purchase or sell
(i) real estate or real estate mortgage loans or (ii) commodities or commodity
contracts, including futures contracts. MGi2 also will not act as an underwriter
of securities (except to the extent we may be deemed to be an "underwriter," as
defined in the Securities Act, with respect to securities we purchase in private
transactions). Where
35
<PAGE>
necessary, we may make short- or long-term loans to portfolio companies to
protect our initial investment, except that we will not make loans in excess of
50% of our assets. We also may borrow money for short-term business purposes but
such borrowings will comply with the asset coverage requirement with respect to
senior securities that we may issue under the Investment Company Act.
Our investments in clients may take many forms, including preferred or
common equity, debt, debt with equity features, warrants or options, convertible
securities and other forms of ownership interests. We may change our investment
objective and policies without a vote of the holders of a majority of our common
stock. See "Risk Factors--Risks Associated With Our Operations, Including the
Operations of McFarland, Grossman" and "Risks Associated With Our Industry."
OUR CORPORATE STRUCTURE
We are internally managed through the efforts of our officers under the
supervision of our board of directors. After the offering, we intend to operate
through three operating divisions:
MCFARLAND, GROSSMAN & COMPANY, INC.--a separate corporate subsidiary and
registered broker-dealer, will provide financial advisory and investment banking
services; and private placement services.
THE MGI2 VENTURES DIVISION--will provide business consulting services;
enterprise and organizational consulting services; merchant banking services;
and incubation services.
THE MGI2 CAPITAL DIVISION--will provide management services to venture
capital funds and other private equity funds that we establish.
Our revenues and profits will be derived from:
- financial advisory and consulting fees;
- investment banking fees, including equity interests we earn in portfolio
companies;
- capital appreciation and income derived from ownership interests in our
portfolio companies; and
- management fees and earned carried interests in managed venture capital
and other private equity funds that we establish.
OUR GROWTH STRATEGY
Our strategy to grow our business is as follows:
EXPAND OUR FINANCIAL ADVISORY AND MERCHANT BANKING ACTIVITIES
We plan to expand our financial advisory and merchant banking activities by
increasing our exposure to the public, adding to our professional staff,
utilizing our increased capital resources, and through the collective contacts
of our directors and advisory board members.
INCREASE OUR FOCUS ON THE FORMATION AND DEVELOPMENT OF NEW BUSINESSES
We intend to focus on development stage businesses where our experience,
resources and capital can assist our clients and provide us with the opportunity
to generate fees and equity interests.
SELECTIVELY PROVIDE CAPITAL TO CLIENTS
As part of our merchant banking activities, we expect, from time to time and
as opportunities arise, to provide seed capital, early stage investment capital
and other types of financing in exchange for significant equity interests in
certain of our portfolio companies.
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ENGAGE IN VENTURE CAPITAL MANAGEMENT
We plan to establish a private venture capital fund. We believe that the
ability to selectively provide expansion capital to our clients will further
benefit the client and provide us with the opportunity to profit from venture
management fees and earned carried interests. In structuring any such private
equity fund it is possible that we would be requested to be registered as an
investment adviser under the Investment Advisers Act of 1940. Further, we would
use reasonable efforts in structuring such fund so to avoid conflicts of
interest between the private venture fund and us, particularly as it relates to
specific investment opportunities. The private equity fund will be established
by us only to the extent that such fund can be formed and operated in compliance
with the Investment Company Act. We may need to seek exemptive relief from the
SEC in order to co-invest with the fund. We cannot assure you that the SEC will
grant us relief.
OUR PRIOR INCUBATION AND MERCHANT BANKING EXPERIENCE
The following table presents the merchant banking transactions that
McFarland, Grossman has completed over the past five years and in which it has
received equity. McFarland, Grossman has transferred most of the equity to its
officers and employees as compensation.
<TABLE>
<CAPTION>
BUSINESS STATUS
- -------- -----------------------------------------
<S> <C>
Telecommunications(1).................... Completed financing and IPO
Consumer Products(2)..................... Completed financing
Software(3).............................. Completed financing and IPO
Transportation(4)........................ Abandoned
Energy services(5)....................... Completed IPO
Inventory management/distribution(6)..... Completed IPO
IT Services(7)........................... Completed IPO
Telecommunications(8).................... Arranging next financing
Specialty retail and Internet Completed financing
auction(9).............................
Internet-financial information(10)....... Seeking strategic buyer
Plastics manufacturing(11)............... Completed financing
Public Internet access terminals(12)..... Development stage
</TABLE>
- ------------------------
1. We arranged two rounds of senior debt financing and provided merger and
acquisition advisory services for Teletouch Communications, Inc., a wireless
telecommunications company. We received cash and common stock in Teletouch.
2. We were the principal adviser to Loadhandler Industries, Inc., a
manufacturer of accessories for sport utility vehicles. We received a cash
fee and a warrant to purchase shares of common stock in Loadhandler. We
believe that the warrant currently has no value because Loadhandler is in
bankruptcy proceedings.
3. We were the principal advisor to TALX Corporation in a $4 million financing
of subordinated notes with warrants. TALX is engaged in the development of
software and provides related services. We received a cash fee and warrants
to purchase common stock in TALX. The warrants were exercised following an
initial public offering by TALX.
4. We incubated Consolidated Coach, Inc., arranged seed financing, and later
abandoned the project at a loss after determining continued development
unwarranted.
5. We were the principal advisor and participated in the incubation of
Transcoastal Marine Services, Inc., a marine construction company. We
received a cash fee and a warrant to purchase shares of common stock of
Transcoastal.
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6. We originated and incubated Pentacon, Inc. which distributes fasteners and
small components and provides inventory management solutions. We received a
cash fee and, along with our employees and consultants, were founding
stockholders of Pentacon.
7. We were the principal advisor and participated in the incubation of
BrightStar Information Technology Group, an information technology services
company. We were involved in conceiving the concept for the business,
introducing the management team and assembling some of the acquired
companies. We received a cash fee and a warrant to purchase shares of common
stock of BrightStar.
8. We arranged a private placement for Omniplex Communications Group, LLC, a
telecommunications company. We earned a cash fee and warrants to purchase
interests in Omniplex.
9. We arranged a private placement of subordinated notes for Antiqueland
USA, Inc., a consolidator of antique malls. We earned a cash fee and
warrants to purchase preferred stock of Antiqueland.
10. We assisted in the formation of Altair Corp. which provides financial
information via the Internet. We recruited part of its management team, and
arranged its seed financing. Our employees were founding stockholders in
Altair.
11. We arranged a private placement of subordinated notes for Cass
Polymers, Inc., a manufacturer of polymer coatings. We received a cash fee
and a warrant to purchase common stock in Cass.
12. We conceived the concept for Zmail Media, which is in the development
stage. Zmail intends to provide courtesy internet access in airports and
other high traffic venues. We and our employees were founding stockholders.
GOVERNMENT REGULATION
The securities and investment businesses are subject to extensive and
frequently changing federal and state laws and substantial regulation under such
laws by the SEC and various state agencies and self-regulatory organizations,
such as the NASD. Regulation by the SEC, state agencies and self-regulatory
organizations does not mean that these entities have approved or passed upon the
propriety of an investment in MGi2.
BROKER-DEALER REGULATION
McFarland, Grossman is registered as a broker-dealer with the SEC and is a
member firm of the NASD. Much of the regulation of broker-dealers has been
delegated to self-regulatory organizations, principally the NASD, which has been
designated by the SEC as McFarland, Grossman's primary regulator. The NASD
adopts rules, which are subject to approval by the SEC, that govern its members
and conducts periodic examinations of member firms' operations. Securities firms
are also subject to regulation by state securities administrators in those
states in which they conduct business. McFarland, Grossman is registered as a
broker-dealer in 10 states. Broker-dealers are subject to regulations which
cover all aspects of the securities business, including:
- sales methods and supervision;
- trading practices among broker-dealers;
- use and safekeeping of customer's funds and securities;
- capital structure of securities firms; and
- recordkeeping and the conduct of directors, officers and employees.
Additional legislation, changes in rules promulgated by the SEC and
self-regulatory organizations, or changes in the interpretation or enforcement
of existing laws and rules, may directly affect the mode of operation and
profitability of broker-dealers. The SEC, self-regulatory organizations and
state securities commissions may conduct administrative proceedings which can
result in censure, fine, the issuance of cease and desist orders or the
suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the integrity of the securities markets.
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As a registered broker-dealer and member firm of the NASD, McFarland,
Grossman is subject to the SEC's net capital rule. The net capital rule, which
specifies minimum net capital requirements for registered brokers and dealers,
is designed to measure the general financial integrity and liquidity of a
broker-dealer and requires that at least a minimum part of its assets be kept in
relatively liquid form. Net capital is essentially defined as net worth or
assets minus liabilities, plus qualifying subordinated borrowings and less
certain mandatory deductions that result from excluding assets not readily
convertible into cash and from valuing certain other assets, such as a firm's
positions in securities, conservatively. Among these deductions are adjustments
in the market value of securities to reflect the possibility of a market decline
prior to disposition.
Failure to maintain the required net capital may subject a firm to
suspension or expulsion by the NASD, the SEC and other regulatory bodies and
ultimately may require its liquidation. The net capital rule also prohibits
payments of dividends, redemption of stock and the prepayment or payment in
respect of principal of subordinated indebtedness if net capital, after giving
effect to the payment, redemption or repayment, would be less than 120% of the
minimum net capital requirement. Compliance with the net capital rule could
limit the operations of McFarland, Grossman.
INVESTMENT ADVISERS ACT
We may be required to register as an investment adviser, which would subject
us to regulation under the Investment Advisers Act of 1940 and regulations
promulgated thereunder.
INVESTMENT COMPANY ACT
We have elected to be regulated as a business development company under the
Investment Company Act. As a business development company, we will be subject to
various restrictions on our activities as provided in the Investment Company
Act. See "Risk Factors" and "Investment Company Act Regulation."
COMPETITION
The business in which we are engaged is highly competitive. Competition is
based primarily on the quality of service and performance history. We will be
competing with a large number of investment banking and merchant banking firms,
as well as private equity funds, on a regional and local basis, many of which
may have greater financial resources than we do. In addition, recently there has
been increasing competition from other sources, such as commercial banks,
insurance companies and consulting firms offering financial services.
PERSONNEL
At the closing of the offering, we had 8 full-time employees. None of our
personnel is covered by a collective bargaining agreement. We consider our
relationships with our employees to be good.
McFarland, Grossman is party to a client services agreement, or CSA, with
Administaff Companies, Inc. The CSA establishes a three party relationship where
Administaff and McFarland, Grossman act as co-employers of McFarland, Grossman's
employees. Under the CSA, Administaff assumes responsibility for personnel
administration and compliance with most employment-related governmental
regulations while McFarland, Grossman retains the employees' services in its
business and remains the employer for various other purposes. Administaff
charges a comprehensive service fee which is invoiced along with each periodic
payroll of McFarland, Grossman. The fee is based upon the gross payroll of
McFarland, Grossman and Administaff's estimated cost of providing the services.
Concurrently with the close of the offering, McFarland Grossman will assign its
rights and obligations under the CSA to MGi2 or McFarland Grossman and
Administaff will terminate the CSA and MGi2 and Administaff will enter into a
new client services agreement with substantially the same term as the current
CSA.
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PROPERTIES
The principal executive offices of MGi2 and its subsidiaries are located at
9821 Katy Freeway, Suite 500, Houston, Texas 77024 where McFarland, Grossman
leases approximately 4,669 square feet of office space. The lease expires on
March 31, 2001.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, other than ordinary
litigation incidental to our business. Management believes that none of these
proceedings would have a material adverse effect on our business, financial
condition or results of operations.
DETERMINATION OF NET ASSET VALUE
We will determine the net asset value per share of our common stock
quarterly. The net asset value per common share is equal to the value of our
total assets minus total liabilities and preferred stock, if any, divided by the
total number of common shares outstanding.
Both public and private securities that we receive from companies are valued
at their fair values as determined by our board of directors under our valuation
policies. With respect to private securities, each investment is valued using
industry valuation benchmarks. When an external event such as a purchase
transaction, public offering, or subsequent sale occurs, the pricing indicated
by the external event is used to corroborate our private valuation. Securities
in public companies that carry certain restrictions on sale are generally valued
at a discount from the public market value of the securities. Restricted and
unrestricted publicly traded securities may also be valued at discounts due to
the size of our investment or market liquidity concerns.
Determination of fair value involves subjective judgments. Due to the
inherent uncertainty of the valuation process, estimated values at the end of an
accounting period may differ significantly from the values that would have been
realized in a sale at that date had a ready market for the securities existed.
PORTFOLIO TRANSACTIONS
The capital stock we receive from portfolio companies is expected to be
acquired primarily in private transactions negotiated directly with the
portfolio company or with an affiliate thereof. Our management will continue to
be principally responsible for conducting negotiations with respect to our
investments. We make available significant managerial assistance to our
portfolio companies.
We may invest a portion of our other assets in the publicly traded
securities of public companies. Such investments and other investments which are
not "qualifying assets" may not exceed 30% of the value of our total assets at
the time of any such investment.
Based on the amount of existing available funds together with the proceeds
from this offering, it is not likely that we will be able to acquire securities
in a large number of companies. As a result, we do not anticipate that our
investments will be diversified.
40
<PAGE>
PORTFOLIO COMPANIES; EQUITY INVESTMENTS
The following is a listing of companies in which McFarland, Grossman had an
equity investment at February 29, 2000.
<TABLE>
<CAPTION>
RELATIONSHIP OF
TYPE OF % OF CLASS VALUE OF PORTFOLIO COMPANIES
NAME/ADDRESS NATURE OF ITS BUSINESS SECURITIES HELD(1) SECURITIES HELD TO MGI2
- ------------ ------------------------- -------------- ---------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
Pentacon, Inc. .............. Wholesale Distribution of Common Stock 0.1% $149,625 Cary Grossman is a
10375 Richmond Ave. Fasteners director. Cary
Suite 700 Grossman and
Houston, TX 77042 Clifford McFarland
are stockholders.(5)
ACR Group, Inc. ............. Wholesale Distribution of Common Stock 0.02% 2,938 None.
3200 Wilcrest Drive Heating and Air
Suite 440 Conditioning Equipment
Houston, TX 77042
Antiqueland USA, Inc. ....... Operate Antique Malls Warrant 3.5% 100 Cary Grossman is a
5000 Bee Cave Road, director. Cary
Suite 200 Grossman and
Austin, TX 78746 Clifford McFarland
are stockholders.(5)
Altair Corp. ................ Financial Information Common Stock .7% -0- Cary Grossman is a
5757 Memorial Drive Services director. Cary
Houston, TX 77007 Grossman and
Clifford McFarland
are stockholders.(5)
McFarland, Grossman ......... Investments(3) Series B Units 2.0% 50 McFarland, Grossman
Capital III, L.C. is manager;
9821 Katy Freeway, Suite Cary Grossman is
500 president;
Houston, TX 77024 Clifford McFarland
is vice president
and secretary. Cary
Grossman and
Clifford McFarland
are stockholders.(5)
Zmail Media, Inc. ........... Provider of public Common Stock 25.05% 251 Cary Grossman is a
24 Greenway Plaza, Suite Internet access director. Cary
1826 terminals in public Grossman and
Houston, TX 77046 facilities(2) Clifford McFarland
are stockholders.(5)
Re-Exg.com, Inc. ............ Internet-based, Common Stock 11.11% 249,900 Clifford McFarland
9821 Katy Freeway, Suite reinsurance exchange is a director. Cary
500 and financial Grossman and
Houston, TX 77024 clearinghouse(2) Clifford McFarland
are stockholders.(5)
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
RELATIONSHIP OF
TYPE OF % OF CLASS VALUE OF PORTFOLIO COMPANIES
NAME/ADDRESS NATURE OF ITS BUSINESS SECURITIES HELD(1) SECURITIES HELD TO MGI2
- ------------ ------------------------- -------------- ---------- --------------- --------------------
<S> <C> <C> <C> <C> <C>
McFarland, Grossman ......... Investments(4) Series B Units 70% 1,750 McFarland, Grossman
Capital Ventures IV, L.C. is manager;
9821 Katy Freeway, Suite Cary Grossman is
500 president;
Houston, TX 77024 Clifford McFarland
is vice president
and secretary. Cary
Grossman and
Clifford McFarland
are stockholders.(5)
</TABLE>
- ------------------------------
(1) Percentages shown for warrants and options held represent the percentage of
class of security we may own, on a fully diluted basis, assuming we exercise
our warrants or options.
(2) See "Business--Our Current Incubation and Merchant Banking Activities" for
further description regarding the nature of the business in this portfolio
company.
(3) This company was formed to hold investments in Antiqueland USA, Inc.
(4) This company was formed to hold investments in Re-Exg.com, Inc.
(5) In addition to the ownership of Cary Grossman and Clifford McFarland,
certain employees are directly or indirectly stockholders of the portfolio
companies. As a result of the ownership of the officers and employees, both
MGi2 and the officers and employees may be prohibited from making further
investments in, or selling or liquidating, their respective positions in
such companies unless the SEC grants exemptive relief.
42
<PAGE>
INVESTMENT COMPANY ACT REGULATION
We have elected to be regulated as a business development company under the
Investment Company Act. We are a unique kind of investment company that focuses
on investing in or lending to small private companies and making managerial
assistance available to them. A business development company may use capital
provided by public shareholders and from other sources to invest in long-term,
private investments in emerging and development stage business. A business
development company provides its shareholders the ability to retain the
liquidity of a publicly traded stock, while sharing in the possible benefits, if
any, of investing in privately owned growth companies.
As a business development company, we must:
- have at least 70% of our investments in qualifying assets before investing
in non-eligible assets;
- provide or make available significant managerial assistance to client
companies;
- have a class of equity securities registered under the Securities Act
of 1934 or have filed a registration statement with the SEC; and
- have a majority of directors who are not "interested persons," as such
term is used under the Investment Company Act.
Eligible assets for investment include:
- securities of an eligible portfolio company which are purchased from that
company in a private transaction. An eligible portfolio company is a U.S.
company that:
-- subject to certain narrowly defined exceptions, is not itself a
registered investment company;
-- has no class of securities listed on a national securities exchange
or on a dealers' margin list;
-- is actively controlled by a business development company, either
alone or acting as part of a controlling group, and an affiliate of
the business development company serves on the company's board of
directors; or
-- meets certain other criteria as may be established from time to time
by the SEC pursuant to its rule-making authority.
- securities received by the business development company in connection with
its ownership of securities of an eligible portfolio company; and
- cash, cash items, government securities, or high quality debt securities
maturing in one year or less from the time of investment.
Significant managerial assistance includes:
- any arrangement in which a business development company offers to provide,
and, if accepted, provides, significant guidance and counsel concerning
the management, operations, or business objectives and policies of a
portfolio company; or
- the exercise by a business development company of a controlling influence
over the management or policies of a portfolio company by the business
development company acting individually or as part of a group acting
together which controls the portfolio companies.
The Investment Company Act prohibits us from investing in certain types of
companies such as brokerage firms, insurance companies, investment banking firms
and investment companies.
We may also be prohibited under the Investment Company Act from conducting
certain transactions with our affiliates without the prior approval of our
disinterested directors and, in some cases, the SEC.
43
<PAGE>
As a business development company, we may not change the nature of our
business so as to cease being a business development company, or withdraw from
our election as a business development company, without first obtaining the
approval of a majority of our "outstanding voting securities" as defined in the
Investment Company Act. We may, in the future, seek to become exempt from
registration under the Investment Company Act.
As a business development company, we are entitled to issue senior
securities in the form of stock or senior securities representing indebtedness,
as long as each class of senior security has an asset coverage of at least 200%
immediately after each such issuance. We may sell our securities at a price that
is below the net asset value per share after approval of the disinterested
directors and upon approval of a majority of our outstanding voting securities,
provided the Investment Company Act generally requires that such price closely
approach market value less applicable discounts and commissions. As defined in
the 1940 Act, the term "majority of the outstanding voting securities" means the
vote of (i) 67 percent or more of the Company's common stock present at the
meeting, if the holders of more than 50 percent of the outstanding common stock
are present or represented by proxy or (ii) more than 50 percent of the
Company's common stock, whichever is less.
We have adopted a Code of Ethics that establishes procedures for personal
investments and restricts certain transactions by MGi2 personnel. See "Where You
Can Find More Information."
Should we lose our status as a business development company, we would become
subject to the more stringent regulations under the Investment Company Act as
applicable to investment companies unless we could obtain an exemption from
Investment Company Act regulation. See "Risk Factors."
We are also prohibited by the Investment Company Act from knowingly
participating in a joint transaction, including co-investment in a portfolio
company with an affiliated person, including any of our directors, advisory
directors, officers, employees or any entity managed by any of them. To allow
co-investments with directors, officers and employees, we intend to apply to the
SEC for exemptive relief from this provision of the Investment Company Act. We
cannot assure you that the SEC will grant the exemptive relief we request. In
addition, we are not aware of any precedent where the SEC has granted such
relief. See "Risk Factors--Risks Associated With Our Operations, Including the
Operations of McFarland, Grossman--Failure to obtain SEC exemptive relief of
various policies could negatively affect our operations."
44
<PAGE>
MANAGEMENT
Our board of directors manages, or directs the management of, the property,
affairs and business of MGi2. Under Delaware law, our board may exercise all
powers of MGi2. Our board maintains an audit committee and a compensation
committee, and may establish additional committees in the future.
Our executive officers, under the direction of our board, among other
things, are responsible for the day-to-day management and investment decisions
involving our portfolio. We have no executive or investment committee. The
company is responsible for the payment of expenses incurred by it.
The following table contains certain biographical information with respect
to our executive officers and directors as of the date of this prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Cary M. Grossman.......................... 46 Chairman of the Board, Chief Executive
Officer and Chief Financial Officer(1)
Clifford E. McFarland..................... 45 President and Director(1)
Evans S. Attwell.......................... 39 Senior Vice President(2)
David W. Chamblee......................... 33 Senior Vice President(2)
Robert M. Chiste.......................... 52 Director(3)
Glyn J. Meek.............................. 49 Director(4)
Robert G. Solomon......................... 37 Director(5)
</TABLE>
- ------------------------
(1) Interested person as defined in Section 2(a)(19) of the Investment Company
Act. Messrs. Grossman and McFarland are interested persons because they are
officers and employees of MGi2 and each own more than five percent of the
outstanding securities of MGi2. The address for each of these persons is c/o
MGi2, Inc., 9821 Katy Freeway, Suite 500, Houston, Texas 77024.
(2) The address for each of these persons is c/o MGi2, 9821 Katy Freeway, Suite
500, Houston, Texas 77024.
(3) The address for Mr. Chiste is c/o FuelONE, Inc./FuelQUEST.com, 700
Louisiana, Suite 3900, Houston, Texas 77002.
(4) The address for Mr. Meek is c/o TriActive, Inc., 4301 Westbank Drive,
Building B, Suite 200, Austin, Texas 78731.
(5) The address for Mr. Solomon is c/o USOL Holdings, Inc., 10300 Metric Blvd.,
Austin, TX 78758.
CARY M. GROSSMAN--CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER AND
DIRECTOR. Mr. Grossman co-founded McFarland, Grossman in 1991. Since
co-founding McFarland, Grossman, he has had overall responsibility for managing
numerous public and private debt and equity financings with aggregate proceeds
of more than $125 million, as well as numerous mergers and acquisitions.
Mr. Grossman was a co-founder of Pentacon, Inc. (a distributor of fasteners and
other small components), its President from December 1997 until March 1998, and
President of McFarland, Grossman Capital Ventures II, L.C., the founding
shareholder of Pentacon. In those capacities, he was principally responsible for
arranging the acquisition of five companies with approximately $150 million in
revenues, negotiating and managing a $52 million initial public offering, and
arranging a $50 million credit facility. Mr. Grossman was engaged in the
practice of public accounting from 1977 through 1991. He is a director of
several public and private companies including Pentacon, Inc. (NYSE: JIT) and
Omniplex Communications Corp., a telecommunications services company.
Mr. Grossman is a Certified Public Accountant and earned a Bachelor of Business
Administration in Accounting from The University of Texas in 1976.
CLIFFORD E. MCFARLAND--PRESIDENT AND DIRECTOR. Mr. McFarland co-founded
McFarland, Grossman in 1991. Mr. McFarland co-founded The Watkins Group, a
merchant banking firm in Little Rock, Arkansas,
45
<PAGE>
where he served as a Managing Director from 1986 until 1991. Prior to that, he
was a co-founder of McFarland & Jones, a management consulting firm in the
franchise industry. Mr. McFarland is a director of Teletouch Communications
Group, Inc. (AMEX: TLL). He earned a Bachelor of Science in Business/ Public
Affairs from the University of Houston/Clear Lake.
EVANS S. ATTWELL--SENIOR VICE PRESIDENT. Mr. Attwell joined McFarland,
Grossman in April 1999 and heads its merger & acquisition practice. From 1988
through 1998, he was employed by Chase Bank of Texas in the Merger & Acquisition
Group. Prior to that, he was a Financial Analyst from 1983 through 1986 at
Rauscher Pierce Refsnes (investment banking firm). Mr. Attwell earned his
undergraduate degree at Washington & Lee University and his Masters Degree in
Business Administration from the University of Texas.
DAVID W. CHAMBLEE--SENIOR VICE PRESIDENT. Prior to joining McFarland,
Grossman in September 1998, Mr. Chamblee was a management consultant in the
Dallas office of Booz-Allen & Hamilton, a global strategy consulting firm, where
he had been employed since 1994. Prior to attending graduate school,
Mr. Chamblee was an associate in the commercial office building division of
Coldwell Banker Commercial. He earned his undergraduate degree from Vanderbilt
University in 1984, and a Masters of Business Administration from the University
of Texas in 1994.
ROBERT M. CHISTE--DIRECTOR. Mr. Chiste is currently involved with several
Internet related businesses. Since September 1999, he has served as Chairman of
FuelQUEST, Inc., a development stage B2B e-commerce enterprise focusing on
commerce, content and community within the $200 billion industry of fuels,
lubricants, propane and solvents. Since September 1999, Mr. Chiste has also
served as the Vice-Chairman, President and Chief Executive Officer of
FuelONE, Inc., an ongoing consolidation of fuel and lubricant wholesale
distribution companies with annual projected revenues in excess of $1 billion.
FuelONE is a minority owner of FuelQUEST. Since July 1998, Mr. Chiste has served
as Chairman of the Board of Directors of TriActive Technologies, Inc., a venture
funded Application Service Provider providing systems management services over
the Internet to mid-sized companies. Mr. Chiste is a co-founder of FuelQUEST,
FuelONE and TriActive as well as a founding investor in iMark.com, a leading
auction site for industrial equipment. Mr. Chiste was the President, Industrial
Services Group, of Philip Services Corp. (provider of industrial and
environmental services) from August 1997 to June 1998. In June 1999,
approximately one year after Mr. Chiste had left the company, Philip Services
filed a voluntary petition to reorganize under Chapter 11 of the United States
Bankruptcy Code. He served as Vice Chairman of Allwaste, Inc., a provider of
industrial and environmental services, from May 1997 through July 1997,
President and Chief Executive Officer of Allwaste from November 1994 through
July 1997 and a director of Allwaste from January 1995 through August 1997.
Philip Services Corp. acquired Allwaste effective July 31, 1997. Mr. Chiste
served as Chief Executive Officer and President of American National
Power, Inc., a successor company of Transco Energy Ventures Company, from its
creation in 1986 until August 1994. During the same period, he served as Senior
Vice President of Transco Energy Company. Mr. Chiste also serves as a director
of Franklin Credit Management Corp., a New York-based financial services
company, Pentacon, Inc., and Innovative Valve Technology, Inc. (distributor of
industrial values). Mr. Chiste received a B.A. in mathematics from the College
of New Jersey, as well as a J.D. and an M.B.A. from Rutgers University.
GLYN J. MEEK--DIRECTOR. Mr. Meek has served as President and Chief
Executive Officer of TriActive Technologies, Inc. since August 1999. From
January 1997 to July 1999, Mr. Meek was the Chief Operating Officer of
Collective Technologies Inc., a consulting company providing systems management
services in the UNIX and Windows NT marketplaces to Fortune 1000 clients. From
January 1995 to January 1997, Mr. Meek served as Vice President--Technical
Services at Tivoli Systems Inc., a subsidiary of IBM providing Enterprise
Systems Management Software. From January 1994 to January 1995, Mr. Meek was a
Senior Manager--Strategy Consulting at Andersen Consulting, responsible for the
sale and delivery of information technology consulting to Fortune 500
corporations. From January 1991 to May 1993,
46
<PAGE>
Mr. Meek served as Vice President Information Systems of Dell Computer
Corporation, where he was responsible for all of Dell's information systems in
the sales, technical support, networking and telecommunications areas. Mr. Meek
received a B.S. in chemistry from The University of Hull, England and two M.S.
degrees in computer science from Imperial College, London, England.
ROBERT G. SOLOMON--DIRECTOR. Mr. Solomon currently serves as Chairman and
Chief Executive Officer of USOL Holdings, Inc. (NASDAQ: USOL) and
TheResidentClub.com, a subsidiary company. USOL is an integrated provider of
telecommunications and entertainment services to the multi-family housing
industry. From March 1998 through July 1999 Mr. Solomon served as Founder and
Chief Executive Officer of U.S. Online Communications, Inc. and from May 1994
through March 1998 as Founder and Chief Executive Officer of predecessor
companies. From 1987 to 1995 Mr. Solomon served as Director, officer and
principal stockholder of CS Management, Inc., a real estate firm headquartered
in Austin, Texas with a core concentration in multi-family housing investment
and management. Mr. Solomon serves on the Executive Board of the Independent
Cable and Telephone Association, the leading industry trade group for the
Residential Multi-Tenant Service Industry. He is a graduate of the University of
Texas, where he received the degree of Bachelor of Business Administration.
OTHER KEY EMPLOYEES
CHRISTOPHER A. REINECKER--ASSOCIATE. Mr. Reinecker joined McFarland,
Grossman in August 1999. He was employed by Ernst & Young, LLP from 1991 to
1994, and from 1997 until joining McFarland, Grossman. Between his employment
periods at Ernst & Young, Mr. Reinecker was the Chief Financial Officer of
Hermann Eye Center, a physician practice management company. He is a Certified
Public Accountant and received his undergraduate and graduate degrees in
business at the University of Texas.
QUYEN DU--ANALYST. Ms. Du joined McFarland, Grossman in October 1999 after
being employed at Lehman Brothers, Inc. as an Investment Banking Analyst in the
Global Media and Telecom Group. She graduated from the University of California,
Berkeley in 1997 with a Bachelor of Science in Business Administration and a
Bachelor of Arts in Economics.
ADVISORY BOARD
Our advisory board members do not have policy-making authority but consult
with management and provide strategic guidance in methods for developing and
expanding our business and analyzing client opportunities. Members of the
advisory board are appointed, and may be removed with or without cause, by our
board of directors.
47
<PAGE>
The following table contains certain biographical information with respect
to our advisory directors:
<TABLE>
<CAPTION>
NAME AGE POSITION ADDRESS
- ---- -------- -------- ------------------------------
<S> <C> <C> <C>
Mary D. Bass.............. 43 Advisory Board Member Spencer Stuart
1111 Bagby, Suite 1616
Houston, TX 77002
Richard C. Cilento, Jr.... 37 Advisory Board Member The Bollard Group
700 Louisiana, Suite 3900
Houston, TX 77002
Ralph H. Freeman, Ph.D.... 52 Advisory Board Member Splitrock
9012 New Trails Drive
The Woodlands, TX 77381
James A. Nolen, Jr........ 47 Advisory Board Member CFO Services, Inc.
P.O. Box 27162
Austin, TX 78731
Brett Perlman............. 40 Advisory Board Member McKinsey & Company, Inc.
2 Houston Center, Suite 3500
Houston, TX 77010
Claude J. Pumilia......... 32 Advisory Board Member emerging.com
3355 W. Alabama, Suite 1100
Houston, TX 77098
Louis A. Waters, Jr....... 33 Advisory Board Member The Waters Group
520 Post Oak Blvd., Suite 850
Houston, TX 77027
</TABLE>
MARY D. BASS. Ms. Bass has served as a Principal of Spencer Stuart, an
executive search firm, since October 1997. In this position, Ms. Bass works
extensively with emerging growth companies and prominent private equity groups
helping them recruit executive officers for their portfolio companies, and
experienced investment professionals for their firms. Since October 1987,
Ms. Bass has been a general partner in Triad Ventures LTD, a $40 million venture
capital fund specializing in investing in Texas-based emerging growth companies.
Since January 1993, Ms. Bass has been general partner in The AM Fund, a venture
fund specializing in investing in technology businesses. From June 1983 to
October 1987, Ms. Bass was employed by Allied Bancshares & Capital Corp., now
part of Wells Fargo Bank, first as a credit analyst and then an investment
officer in its venture capital fund. From January 1981 to May 1983, Ms. Bass was
employed by Mississippi Chemical Corp., a $250 million fertilizer manufacturer.
Ms. Bass is a former President of the Houston Venture Capital Association and is
on the steering committee of the Dallas Private Equity Forum. She attended
Mississippi State University, and received a B.S. with "distinction" and a
M.B.A. in corporate finance.
RICHARD C. CILENTO, JR. Mr. Cilento co-founded and is President and Chief
Executive Officer of FuelQUEST, Inc., a development stage B2B e-commerce
enterprise focusing on commerce, content and community within the $200 billion
industry of fuels, lubricants, propane and solvents. Mr. Cilento also co-founded
FuelONE. Mr. Cilento is a board member for the investment services company
Bollard Group, LLC, formed to provide investment-banking services and to develop
and pursue attractive, high-growth business ventures specializing in technology
and industry consolidations. Mr. Cilento is also a member of the Board of
Advisors to TriActive Technologies Inc. From June 1998 to January 1999,
Mr. Cilento was Vice President of Strategic Services for Xerox Connect Solutions
and was responsible for computer outsourcing services and end user support
services. From October 1996 to June 1998, Mr. Cilento was Vice President
Corporate Services for XLConnect Solutions prior to its acquisition by Xerox.
From April 1995 to October 1996, Mr. Cilento was National Director--Remote
Network Management Center for The
48
<PAGE>
Future Now. From February 1988 to April 1995, Mr. Cilento was Program Manager
and Lead Engineer for Space Shuttle Flight Planning for NASA Johnson Space
Center. Mr. Cilento received his B.S. in Aerospace Engineering from the
University of Illinois and an M.B.A. from the University of Houston.
RALPH H. FREEMAN, PH.D. Dr. Freeman has served as the Senior Vice President
and Chief Information Officer for ConnectSouth Communications, Inc., a provider
of high-speed Internet connectivity and web hosting services, since April 2000.
From February 2000 to April 2000, Dr. Freeman served as Vice
President--Information Systems of Splitrock Services, Inc. (telecommunications
services company). From December 1996 to February 1999, Dr. Freeman served as
Vice President, Information Technology/Chief Information Officer of Logix
Communication Enterprise/American Telco, Inc. (telecommunications services
company), where he was responsible for the development or acquisition of all
computer services, hardware and software. From April 1996 to November 1996,
Dr. Freeman was Director of Information Services for GDS Engineers, Inc., where
he was responsible for direction of software development and information
technology projects including LAN architecture and the company's first Internet
access portal. Dr. Freeman served twenty years in the United States Air Force,
retiring with the rank of Lieutenant Colonel. Dr. Freemen received his B.S.
degree in Engineering Management from the United States Air Force Academy, his
M.S. degree in Business Administration, Computer Methods from U.C.L.A. and his
Ph.D. in Information Technology from George Mason University.
JAMES A. NOLEN, JR. Mr. Nolen has served as a senior lecturer at the
University of Texas, Department of Finance since 1980. In this capacity,
Mr. Nolen teaches multiple undergraduate and graduate courses related to the
financial management of small businesses. Mr. Nolen is the Associate Director of
The University of Texas' Center for Small & Middle Sized Enterprises and the
Associate Director of The University of Texas' Community MBA Program. Since
1989, Mr. Nolen has also served as the President of CFO Services, Inc., which
offers capital, financial and operational consulting services to small and
middle-sized business owners. From 1995 to 1996, he served as interim Chief
Financial Officer of MetalOptics, Inc., a manufacturer of energy efficient light
fixtures and specular reflectors. Mr. Nolen received his Bachelor of Business
Administration and Masters of Business Administration in finance from the
University of Texas.
BRETT PERLMAN. Mr. Perlman has served as Commissioner of the Public Utility
Commission of Texas since his appointment by Governor George W. Bush on
January 11, 1999. From September 1993 to January 1999 Mr. Perlman was a
management consultant with McKinsey & Company, a global management consulting
firm. At McKinsey, Mr. Perlman specialized in strategic planning for Fortune 500
technology companies in identifying new market opportunities and developing
corporate strategies. From September 1985 to September 1990, Mr. Perlman
practiced law with the Washington D.C. office of Akin, Gump, Strauss, Hauer &
Feld, and from September 1990 to August 1991 with the Houston office of
Jenkins & Gilcrest. Mr. Perlman has provided strategic planning for Texas'
Telecommunications Infrastructure Fund Board, which is responsible for Texas'
$1.5 billion fund for wiring schools for the Internet. In 1998, Mr. Perlman
helped found the Houston Technology Center, where he serves on the Finance
Committee, and the Houston Area Technology Advisory Council. He is a Board
member of the MIT Enterprise Forum of Houston and an Advisory Board member of
the Houston International Theatre School. Mr. Perlman graduated Phi Beta Kappa
in economics from Northwestern University in Evanston, Ill. He received a law
degree from the University of Texas Law School where he was associate editor of
the Texas Law Review. He also holds a Master's degree in Public Administration
from the John F. Kennedy School of Government at Harvard University where his
studies focused on business and policy issues involving information technology,
the telecommunications industry and the Internet.
CLAUDE J. PUMILIA. Mr. Pumilia serves as Chief Financial Officer and Vice
President of Business Development of emerging.com, an e-services company
dedicated to the rapid creation and deployment of digital businesses.
emerging.com specializes in building strategic e-business solutions for
start-ups which intend to revolutionize their market segments. The company
offers strategic advice, creative design, and
49
<PAGE>
technology development and deployment. emerging.com recently received venture
funding from Austin Ventures and Benchmark Capital. From September 1996 to
December 1999, Mr. Pumilia led several strategy and business development teams
at Compaq Computer Corporation. As Director of Strategic Planning at Compaq,
Mr. Pumilia led the strategy and planning function for Compaq North America.
During the course of his three year tenure, he participated in the formation and
growth of Compaq's e-Commerce Solutions Group by building the strategy and
business development team responsible for partnerships with leading e-commerce
and security firms. From 1994 through September 1996, Mr. Pumilia worked as a
consultant with McKinsey & Co., serving the technology, energy, and health care
industries. Mr. Pumilia received a Bachelor of Arts degree in Economics and
Managerial Studies magna cum laude from Rice University and a J.D. from the
University of Virginia Law School.
LOUIS A. WATERS, JR. Mr. Waters currently manages ESI Partners Ltd., a
private investment partnership which focuses on investing in early-stage
companies in a variety of fields. From 1990 to 1996, Mr. Waters owned and
operated a contract engineering and technology development firm. This company
completed development projects with aggregate budgets of over $30 million, and
provided turnkey services and program management for clients ranging from
start-ups to international corporations in the fields of biotechnology
software-based automation, advanced manufacturing, and consumer electronics. In
September 1996, Mr. Waters sold his engineering company to K*Tec Electronics,
the contract manufacturing subsidiary of Kent Electronics (NYSE: KNT).
Mr. Waters joined K*Tec as director of engineering, reorganizing the company's
engineering program. In January 1997, Mr. Waters assumed the additional
responsibility of general manager of K*Tec's advanced manufacturing group in the
Silicon Valley where he completed a fast-track turnaround program to restore the
branch to profitability. He left K*Tec in September 1997 to attend graduate
school. Additionally, Mr. Waters is a founding partner and director of Hardy
Construction Technologies LC, which develops and manufactures technology
products for the construction industry, and serves on an advisory basis to
Tracey Technologies, which develops laser-based instruments for ophthalmic care.
While a student at Rice University, Mr. Waters assisted in the startup of the
Rice Robotics Laboratory and led development of surface exploration vehicle
technology and telepresence systems for NASA. Mr. Waters holds a B.S. in
Mechanical Engineering from Rice University and an M.B.A. from Insead, located
in Fontainbleau, France.
BOARD COMMITTEES
Our board of directors has established a compensation committee and an audit
committee.
Our compensation committee reviews and makes recommendations to the board
regarding compensation to be provided to our Chief Executive Officer and our
directors. In addition, our compensation committee reviews compensation
arrangements for our other executive officers. Our compensation committee also
administers our equity compensation plans and determines the allocation among
our officers and employees of the client securities we receive as compensation.
Upon the consummation of the offering, the members of our compensation
committee, all of whom are independent directors, will be Messrs. Chiste, Meek
and Solomon, with Mr. Solomon serving as Chairman.
Our audit committee reviews and monitors our corporate financial reporting,
external audits, internal control functions and compliance with laws and
regulations that could have a significant effect on our financial condition or
results of operations. In addition, our audit committee has the responsibility
to consider and recommend the appointment of, and to review fee arrangements
with, our independent auditors. Upon the consummation of the offering, the
members of our audit committee, all of whom are independent directors, will be
Messrs. Chiste, Meek and Solomon, with Mr. Chiste serving as Chairman.
EXECUTIVE COMPENSATION
MGi2 has not paid any compensation to its directors or officers since its
formation in February 2000. The following table reflects the cash compensation
paid by McFarland, Grossman as well as certain other
50
<PAGE>
compensation paid or accrued, during the fiscal years ended December 31, 1999,
1998 and 1997 to the Chief Executive Officer of McFarland, Grossman and the
other executive officers whose compensation is $60,000 or greater during the
fiscal year ended December 31, 1999. McFarland, Grossman's directors did not
receive any separate or additional compensation for serving as directors during
the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
- --------------------------- -------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Cary M. Grossman(1)...................... 1999 $ 94,500 $150,000 -- $37,427(2)
Chairman of the Board, Chief 1998 $103,152 $677,500 -- $14,864(2)
Executive Officer and Chief 1997 $102,000 $181,500 -- $12,814(2)
Financial Officer
Clifford E. McFarland(1)................. 1999 $114,000 $150,000 -- $37,427(2)
President and Director 1998 $114,000 $677,500 -- $14,864(2)
1997 $102,000 $181,500 -- $12,814(2)
Evans S. Attwell......................... 1999 $ 57,590 $ 40,000 (3) $10,055(2)
Senior Vice President
David W. Chamblee........................ 1999 $ 72,000 $ 78,000 (3) $ 8,423(2)
Senior Vice President 1998 $ 20,216 $ 17,000 (3) $ 2,994(2)
</TABLE>
- ------------------------
(1) The employment agreements of Messrs. McFarland and Grossman provide,
respectively, that in no event shall the annual total cash compensation of
salary and bonus of such person exceed $500,000 in any one year.
(2) In the fiscal years ended 1999, 1998 and 1997, Messrs. Grossman, McFarland,
Attwell and Chamblee each received additional compensation in the form of
warrants and equity interests in portfolio companies.
(3) Each of Messrs. Attwell and Chamblee received 75,000 options to purchase
shares in McFarland, Grossman at a purchase price equal to the fair market
value of the underlying common stock as of the date of grant. See
"--Officers' Compensation." Each option will be exercised prior to the
exchange transaction whereby McFarland, Grossman becomes a wholly owned
subsidiary of MGi2. See "--2000 Stock Plan."
During the year ended December 31, 1999, the following grants of options to
purchase shares of McFarland, Grossman were made to executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
NUMBER OF PERCENT OF TOTAL AT ASSUMUED
SECURITIES OPTIONS/SARS EXERCISE ANNUAL RATES OF
UNDERLYING GRANTED TO OR STOCK APPRECIATION
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION FOR OPTION TERM
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ------------ ---------------- ---------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David W. Chamblee......... 30,000 36.4% $1.34 April 12, 2004 25,282 64,068
Evans S. Attwell.......... 37,500 45.5% $1.34 April 12, 2004 31,602 80,086
</TABLE>
51
<PAGE>
Since 1997, McFarland, Grossman has assigned most of our interest in client
securities it received as fees for its services to its employees as
compensation. In addition, McFarland, Grossman has participated in the formation
of new businesses and allowed its employees, rather than it, to purchase the
founders' stock, which is generally issued for nominal consideration. MGi2 has
now adopted a policy that any client securities to be received in connection
with the services we provide, and shares to be acquired as founders' stock in
companies that we incubate or assist in incubation, are to be paid or issued
directly to us. Once granted or issued to us, our compensation committee, which
is comprised of independent directors, may distribute or allocate up to 30% of
these securities among certain officers and employees as additional
compensation. Our compensation committee will also determine the proportionate
allocation of such equity interests among our officers and employees. This
policy of distributing portfolio securities to officers and employees is subject
to review and approval by the SEC. We cannot assure you that the SEC will grant
us relief. In addition, we are unaware of any precedent where the SEC has
granted such relief. See "Risk Factors Associated with the Offering--Risks
Associated With Our Operations, Including the Operations of McFarland,
Grossman--Failure to obtain SEC Approval of various policies could negatively
affect our operations" and "--Our policy granting a percentage of the securities
received as compensation to our officers and employees could result in a
conflict of interest."
DIRECTORS' AND ADVISORY BOARD MEMBERS' COMPENSATION
Directors who are employees of MGi2 will not receive additional compensation
for serving as directors. Directors of MGi2 will be reimbursed for out-of-pocket
expenses incurred in attending meetings of the board of directors or committees
of the board, and for other expenses incurred in their capacity as directors of
MGi2. Each non-employee director will receive $1,000 per board meeting and $500
per committee meeting (or $1,000 if the chairman of such committee). If the
non-employee director ceases to serve as a director prior to the full vesting of
the restricted stock, the portion of the non-vested restricted stock grant will
revert to Messrs. Grossman and McFarland. In addition, each non-employee
director will, subject to SEC review and approval, receive an initial option
grant of 25,000 shares of common stock in connection with his or her election to
the board followed by an annual option to purchase 5,000 shares of common stock.
Non-employee directors will also, subject to SEC review and approval, receive an
annual retainer paid in the form of an unregistered common stock grant equal to
$16,000 in value determined using the average closing price of the common stock
for the five Fridays prior to the grant date.
Advisory board members will be reimbursed for all out-of-pocket expenses
incurred in attending meetings of the advisory board and for other expenses
incurred in their capacity as advisory board members. Each advisory board member
will receive $1,000 for attendance at each meeting. In addition, each advisory
board member will, subject to SEC review and approval, receive an initial option
to purchase 10,000 shares of common stock in connection with his or her
appointment as an advisory board member followed by an annual option to purchase
5,000 shares of common stock. Advisory board members will, subject to SEC review
and approval, also receive an annual retainer paid in the form of an
unregistered common stock grant equal to $4,000 in value determined using the
average closing price of the common stock for the five Fridays prior to the
grant date.
The issuance of options and restricted shares to our directors and advisory
board members require the exemptive relief of the SEC. We intend to seek the
approval of, or exemptive relief from, the SEC with respect to the issuance of
such options and securities. There can be no assurance that such relief will be
granted. See "Risk Factors Associated with the Offering--Failure to obtain SEC
approval of various policies could negatively affect our operations."
OFFICERS' COMPENSATION
We anticipate that during calendar 2000 annualized base salaries of each of
our most highly compensated executive officers will be $175,000 for
Messrs. McFarland and Grossman and $120,000 for Messrs. Attwell and Chamblee.
Options for a total of 37,500 shares of common stock of McFarland,
52
<PAGE>
Grossman at the price of $1.34 per share have previously been granted to
Mr. Attwell and options for a total of 37,500 shares of common stock at the
weighted average price of $1.58 per share have previously been granted to
Mr. Chamblee. Prior to the exchange transaction and the consummation of this
offering, each of Messrs. Attwell and Chamblee will exercise his options and
receive common stock which is subject to certain restrictions. See "--2000 Stock
Plan" and "Control Persons and Principal Stockholders." In addition, subject to
SEC approval, our compensation committee may allocate to one or more of such
officers an aggregate of up to 30% of the equity securities we receive from our
portfolio companies. See "--Executive Compensation."
EMPLOYMENT AGREEMENTS
We currently have employment agreements with Messrs. McFarland and Grossman.
The employment agreements prohibit the officers from disclosing our confidential
information and trade secrets. Mr. McFarland's and Mr. Grossman's employment
agreements have an initial term of three years. The employment agreements are
terminable by us for "good cause" and without "cause" or for "good reason" by
the officer upon thirty days' written notice. All employment agreements provide
that if the officer's employment is terminated by us without "good cause," the
officer will be entitled to receive a lump-sum severance payment at the
effective time of termination in an amount equal to base compensation which
would have been payable over the remainder of the term of the employment
agreement or one year's base salary, if greater. The employment agreements also
provide that the unvested portion of any of the officer's awards of stock
options or stock grants will immediately vest if the officer is terminated
without "cause" or if the officer resigns for "good reason."
The employment agreements provide for a severance payment to the officer in
the event of the disability of such officer, such payment to equal the base
salary for the remaining term provided the period will not exceed one year.
The employment agreements of Messrs. McFarland and Grossman contain certain
provisions concerning a change-in-control of MGi2, including the following:
(1) in the event that the executive is not notified by the acquiring company
that it will assume our obligations under the employment agreement at least five
days in advance of the transaction giving rise to the change-in-control, the
change-in-control will be deemed a termination of the employment agreement by
MGi2 without "cause," and the provisions of the employment agreement governing
the same will apply; and (2) in any change-in-control situation, such officer
may elect to terminate his employment by giving ten days' written notice prior
to the anticipated closing of the transaction giving rise to the
change-in-control, which will be deemed a termination of the employment
agreement by us without "cause," and the provisions of the employment agreement
governing the same will apply. The change-of-control provisions in the
employment agreements may discourage bids to acquire us or reduce the amount an
acquiror is willing to pay for us.
The employment agreements of Messrs. McFarland and Grossman, respectively,
provide that in no event shall such employee's annual total cash compensation of
salary and bonus exceed $500,000 in any one year. See "--Executive
Compensation."
2000 STOCK PLAN
The board of directors has adopted, and the stockholders have approved, the
MGi2, Inc. 2000 Stock Plan. The purpose of the 2000 Stock Plan is to provide
directors, advisory board members, officers, key employees and certain other
persons who will be instrumental in our success with additional incentives by
increasing their ownership in MGi2. The aggregate amount of common stock with
respect to which awards may be granted may not exceed 650,000 shares, subject to
adjustment to reflect stock splits.
The Investment Company Act limits the aggregate amount of voting securities
that may result from the exercise of all of our outstanding warrants, options
and rights at the time of issuance, or from the issuance of stock grants, to 25%
of our outstanding voting securities. If the amount of voting securities that
53
<PAGE>
would result from the exercise of the outstanding warrants, options and rights
issued to our officers, directors and employees exceeds 15% of our outstanding
voting securities, then the total amount of voting securities that would result
from the exercise of our outstanding warrants, options and rights at the time of
issuance are limited to 20% of our outstanding voting securities. These
restrictions could restrict our ability to issue the options we want to issue,
from time to time, to incentivize our management and employees. In addition, any
stock awards that are made under the plan will also be included in the
percentages discussed above.
The 2000 Stock Plan will be administered by our compensation committee,
which will be composed of non-employee directors. Subject to the terms of the
2000 Stock Plan, the compensation committee generally determines to whom awards
will be granted, the types of awards that will be granted and the terms and
conditions of the awards. The exercise price per share of all options granted
under the 2000 Stock Plan shall be the fair market value of our common stock on
the date of the grant of such option. Options granted under the 2000 Stock Plan
may be either non-qualified stock options, or may qualify as incentive stock
options or "ISOs," provided that the aggregate fair market value, determined at
the time the ISO is granted, of the common stock with respect to which ISOs are
exercisable for the first time by any employee during any calendar year under
all of our plans shall not exceed $100,000. The compensation committee
determines the period over which awards vest, provided that all awards become
immediately exercisable upon death of the grantee, as defined in our 2000 Stock
Plan.
The 2000 Stock Plan also provides for option grants to directors and
advisory board members who are not otherwise employed by MGi2 or its
subsidiaries. See "--Directors' and Advisory Board Members' Compensation."
Awards that are not vested at the time of a voluntary termination of the
grantee's employment or directorship or in the case of a termination "for cause"
are immediately forfeited. In no event may an ISO be granted to a person who is
not an employee of the MGi2 or any subsidiary.
We anticipate that upon or after the closing of this offering, and subject
to any required SEC approval, we will grant under the 2000 Stock Plan:
- options to purchase an aggregate of 20,000 shares of common stock to
certain of our employees;
- options to purchase an aggregate of 75,000 shares of common stock to three
non-employee directors; and
- options to purchase an aggregate of 70,000 shares of common stock to seven
advisory board members.
See "Shares Eligible For Future Sale."
401(K) PLAN
Administaff maintains a 401(k) Plan for our eligible employees. An employee
participant may contribute up to 15% of his or her total annual compensation to
the 401(k) Plan, up to a legal annual limit. The annual limit for calendar year
2000 is $10,500. Each participant is fully vested in his or her deferred salary
contributions. Previously, McFarland, Grossman had maintained such a plan, which
was terminated in May 1999.
54
<PAGE>
CERTAIN TRANSACTIONS
RELATED PARTY TRANSACTIONS
Cary M. Grossman and Clifford E. McFarland are parties to a Shareholders'
Agreement dated December 27, 1995, which, among other things, provides for
restrictions on transfer, and rights of first refusal with respect to the
Class A common stock of McFarland, Grossman. On November 24, 1998,
Mr. Grossman's interest was transferred to the Grossman Family Limited
Partnership which became a party to the agreement. The Shareholders' Agreement
will be terminated when this offering closes.
Since 1997, McFarland, Grossman has assigned most of its interest in client
securities it received as fees for its services to its employees as
compensation. In addition, McFarland, Grossman has participated in the formation
of new businesses and allowed its employees, rather than it, to purchase the
founders' stock, which is generally issued for nominal consideration. MGi2 has
now adopted a policy that any client securities to be received in connection
with the services we provide and shares to be acquired as founders' stock in
companies that we incubate or assist in incubation, are to be paid or issued
directly to us. Subject to review and approval by the SEC, once granted or
issued to us, our compensation committee, which is comprised of independent
directors, may distribute or allocate up to 30% of these securities among our
officers and employees as additional compensation. See "Risk Factors--Risks
Associated with Our Operations, Including the Operations of McFarland,
Grossman--Our policy of granting a percentage of the securities received as
compensation to our officers and employees could result in a conflict of
interest" and "--Failure to obtain SEC exemptive relief of various policies
could negatively affect our operations."
From time to time since January 1, 1997, McFarland, Grossman has authorized
the transfer of warrants to purchase equity in portfolio companies to
Messrs. McFarland and Grossman as follows:
<TABLE>
<CAPTION>
YEAR ASSIGNED AND VALUE
AT TIME OF ASSIGNMENT
WARRANTS ------------------------------
COMPANY ASSIGNED(1) 1997 1998 1999
- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C>
Transcoastal Marine Services, Inc..................... 10,000 0
SkillMaster, Inc...................................... 19,125 $12,814
BrightStar Information Technology Group, Inc.......... 14,250 0
-------
$12,814
=======
Omniplex Communications Group, LLC.................... 37,000 $ 5,550
Omniplex Communications Group, LLC.................... 155,232 9,314
-------
$14,864
=======
Antiqueland USA, Inc.................................. 182,419 $16,418
Cass Polymers, Inc.................................... 786 21,010
-------
$37,428
=======
</TABLE>
- ------------------------
(1) The number of shares underlying warrants assigned to each of
Messrs. McFarland and Grossman.
In 1997 and 1998, McFarland, Grossman engaged McFarland, Grossman Insurance
Services, Inc., a corporation owned by Cary Grossman, to provide consulting
services to McFarland, Grossman. The services included a review of employee
benefits including key man life and disability coverage, retirement plans, and
group medical insurance coverage. In 1997 and 1998, McFarland, Grossman paid
consulting fees of $21,000 and $19,000, respectively, to McFarland, Grossman
Insurance Services. In 1995 and 1997, McFarland, Grossman received management
fees from McFarland, Grossman Insurance Services of approximately $68,000 and
$19,700, respectively. McFarland, Grossman Insurance Services was dissolved in
1998.
55
<PAGE>
In June 1998, McFarland, Grossman sold 190,000 shares of Pentacon common
stock to seven of its then employees at a purchase price equal to approximately
$9.98 per share, including Messrs. McFarland and Grossman. Each purchaser issued
a promissory note to McFarland, Grossman in consideration of the full purchase
price of the Pentacon shares. The notes provided for payment of interest at an
annual rate of 5.51%, payable on December 31, 1998 and 1999, with the principal
and accrued interest due and payable on July 14, 2000. Each of these notes was
secured by the shares in Pentacon. During 1999, two employees defaulted on their
notes, and McFarland, Grossman exercised its right to foreclose on the
collateral securing these notes. As of December 1999, three notes from three
former employees were in default and in January 2000, McFarland, Grossman
exercised its right to foreclose on the collateral securing the notes. As a
result, McFarland, Grossman acquired 45,000 additional shares of Pentacon. Only
the notes issued by Cary M. Grossman and Clifford E. McFarland currently remain
outstanding. In March 1999, due to a precipitous decline in the value of the
Pentacon common stock, the terms of the original sale to Messrs. McFarland and
Grossman were modified to reduce the purchase price to $3.05 per share. At the
time, McFarland, Grossman modified Messrs. Grossman and McFarland's notes,
increased the interest rate to 8% per annum and extended the maturity date to
December 31, 2001. The current principal balance on each of the promissory notes
from Messrs. Grossman and McFarland is $213,500.
In December 1998, Cary M. Grossman and Clifford E. McFarland, two of
McFarland, Grossman's principal stockholders and executive officers each loaned
$90,000 to McFarland, Grossman. The notes originally bore interest at 10% per
annum and were payable by January 31, 2000. These notes were modified in 1999 to
be subordinated to the claims of general creditors and changed the interest rate
to 13.5% with the principal and accrued interest due on April 30, 2002.
On June 7, 1999, McFarland, Grossman redeemed the interest of certain former
employees in our Class B non-voting common stock with a cash payment of $4,858,
and the delivery of promissory notes in the principal amount of $14,520. The
notes are payable in monthly principal installments over three years and bear
interest at 8% per annum.
In August 1999, McFarland, Grossman sold its beneficial interest in a
warrant to purchase 20,000 shares of common stock of Transcoastal Marine
Services to Messrs. McFarland and Grossman for $14,000. Messrs. McFarland and
Grossman each issued a $7,000 promissory note to McFarland, Grossman. The notes
were due and payable in full with interest at the rate of 8% per annum on
December 31, 1999, and were paid in full.
In February 2000, McFarland, Grossman acquired 18.7% of Re-Exg's initial
ownership. McFarland, Grossman has assigned approximately 7.59% of Re-Exg's
initial ownership to its employees, including Messrs. McFarland and Grossman;
however, the exact allocation among employees has not been determined.
Upon effectiveness of the offering, McFarland, Grossman will become our
wholly owned subsidiary pursuant to a share exchange of 2 shares of our common
stock for every 1 share of McFarland, Grossman common stock. In order to comply
with certain provisions of the Investment Company Act, Messrs. Chamblee and
Attwell will exercise their options covering an aggregate 75,000 shares prior to
the exchange. Accordingly, immediately prior to the exchange the stockholders of
McFarland, Grossman will be Messrs. McFarland, Grossman, Chamblee and Attwell.
We have made loans of approximately $90,000 and $70,000, respectively, to
Messrs. Chamblee and Attwell in connection with the exercise of their options,
which loans mature in 5 years.
We have entered into indemnification agreements with our directors,
executive officers and advisory board members which indemnify them to the
fullest extent permitted by law. See "Description of Capital Stock--Limitation
on Director's Liabilities and Indemnification."
COMPANY POLICY
We expect any future transactions with our directors, officers, employees or
affiliates will be minimal and will be approved in advance by a majority of
disinterested members of our board, and, if required under the Investment
Company Act, by the SEC. See "Risk Factors--Risks Associated With Our
Operations--Our transactions with affiliates may be limited."
56
<PAGE>
CONTROL PERSONS AND PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of our common stock, after giving effect to the issuance of shares of
common stock in the offering, by
- each person or group of persons known to us to be the beneficial owner of
5% or more of the outstanding common stock;
- each director and nominee for director;
- each executive officer; and
- all officers and directors as a group.
Certain facets of our compensation program, such as granting stock options
and making stock grants to directors, advisory board members and employees,
require exemptive relief from the SEC. We cannot assure you that the SEC will
grant us relief. If we do not obtain SEC approval of our compensation program,
the beneficial ownership of the persons holding stock options and stock grants
as reported in the following table will likely decrease. See "Risk
Factors--Risks Associated With Our Company--Failure to obtain SEC exemptive
relief of various policies could negatively affect our operations."
Unless otherwise indicated, the address for each such person is c/o MGi2,
9821 Katy Freeway, Suite 500, Houston, TX 77024. All persons listed have sole
voting and investment power with respect to their shares of common stock unless
otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL AND RECORD
OWNERSHIP
AFTER OFFERING
-----------------------
SHARES PERCENT(1)
---------- ----------
<S> <C> <C>
Clifford E. McFarland(3).................................... 657,500 18.5%
Cary M. Grossman(2)(3)...................................... 657,500 18.5%
Evans S. Attwell(3)......................................... 130,000 3.7%
David W. Chamblee(3)........................................ 130,000 3.7%
Robert M. Chiste(4)......................................... 25,000 *
Glyn J. Meek(4)............................................. 25,000 *
Robert G. Solomon(4)........................................ 25,000 *
All executive officers and directors (7 persons)(3)(4)...... 1,650,000 46.5%
</TABLE>
- ------------------------
* Less than 1%
1. Based on a total of 3,550,000 shares of MGi2 common stock issued and
outstanding upon the consummation of this offering.
2. All of the stock attributed to Mr. Grossman is held by the Grossman Family
Limited Partnership. Mr. Grossman disclaims beneficial ownership of the
shares which are attributable to the interests in the Partnership held by
Mr. Grossman's children and spouse.
3. The shares beneficially owned by Messrs. Attwell and Chamblee include 50,000
shares and 40,000 shares, respectively, received upon exercise of their
options, which are restricted. Such shares vest one-half on the second
anniversary of the grant date and one-half on the third anniversary of the
grant date. The shares beneficially owned by Messrs. Attwell and Chamblee
also include 55,000 restricted stock shares granted to each individual by
Messrs. McFarland and Grossman which vest 20% in year 1, 40% in year 2 and
100% in year 3. Upon any failure of the vesting of the 55,000 restricted
stock shares, including a termination of employment, such shares would
revert to Messrs. McFarland and Grossman.
4. Includes 25,000 shares of restricted stock granted by Messrs. McFarland and
Grossman which vest equally over three years. Upon any failure of the
vesting, including the cessation of service as a director, these shares
would revert to Messrs. McFarland and Grossman.
Current management of MGi2 will own, directly and indirectly, approximately
46% of the MGi2's common stock after the offering. Consequently, these
stockholders may be in a position to effectively control our affairs, including
the election of all our directors and the approval or prevention of certain
corporate transactions which require majority stockholder approval. This
concentration of ownership may have the effect of delaying or preventing a
change in control of us.
57
<PAGE>
INVESTMENT ADVISORY SERVICES
We are internally managed by our officers under the supervision of our board
of directors. We therefore have no investment advisory, administrative or
similar agreements with any person or entity.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Since we expect generally to acquire and dispose of our investments in
portfolio companies in privately negotiated transactions, we expect to
infrequently use brokers in the normal course of business.
When we sell the securities we receive in exchange for portfolio companies,
our management will arrange for the execution of such transactions and the
allocation of brokerage services and commissions. In executing transactions in
the securities we receive for portfolio companies, our management will seek to
obtain the most favorable execution, that is, the best combination of net price
and prompt reliable execution. In management's opinion it is not possible to
determine in advance that any particular broker will actually be able to effect
the most favorable execution because, in the context of an often changing
market, order execution involves judgments as to the price, volume, trend and
breadth of the market, possibility of a block transaction, and the broker's
activity in the security as well as its general record for prompt, competent and
reliable service in all aspects of order processing, execution and settlement as
well as anticipated commission rates.
Certain of the securities which we receive in exchange for our portfolio
companies may be traded in the over-the-counter markets, and we intend to deal
directly with the dealers who make markets in the securities involved, except in
those circumstances where better prices and execution are otherwise available.
Under the Investment Company Act, persons affiliated with our company are
prohibited from dealing with us as a principal in the purchase and sale of
securities. Transactions in over-the-counter markets usually involve
transactions with dealers acting as principal for their own account. We will not
deal with affiliated persons as principal; however, affiliated persons of our
company such as McFarland, Grossman, our subsidiary, may serve as our broker in
over-the-counter markets and other transactions conducted on an agency basis in
accordance with the Investment Company Act, except that if an affiliated person
is a market maker in the securities of a company then the affiliated person will
not serve as our broker in the purchase of such securities.
Our management has no obligation to deal with any broker or group of brokers
in the execution of transactions.
FEDERAL INCOME TAX MATTERS
For Federal and state income tax purposes, we are taxed at regular corporate
rates on ordinary income and recognized gains on sales, exchanges or
distributions of appreciated property. We are not entitled to the special tax
treatment available to regulated investment companies because, among other
reasons, we do not distribute at least 90% of "investment company taxable
income" as required by the Internal Revenue Code for such treatment.
Distributions of cash or property by us to our stockholders, if any, will be
taxable as dividends only to the extent that we have current or accumulated
earnings and profits. Distributions in excess of current or accumulated earnings
and profits will be treated first as a return of capital to the extent of the
holder's tax basis in our common stock and then as gain from the sale or
exchange of property.
Each investor is urged to consult with his tax advisor concerning the United
States Federal, state and local, and foreign tax consequences of his investment
in our company.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $0.01 per share and 10,000,000 shares of preferred stock, par value
$0.01 per share. Immediately prior to the closing of this offering, there will
be 1,650,000 shares of common stock outstanding, which are held of record by
seven stockholders and no shares of preferred stock outstanding. After the
closing of the offering, 3,550,000 shares of common stock will be issued and
outstanding, 840,000 shares of common stock will be reserved for issuance upon
exercise of options and warrants and, immediately after this offering there will
be no shares of preferred stock outstanding. The following summary of the terms
and provisions of our capital stock is not complete and is qualified in its
entirety by reference to our Certificate of Incorporation as amended and Bylaws,
which have been filed as exhibits to our registration statement, of which this
prospectus is a part, and applicable law.
COMMON STOCK
Holders of our common stock each have one vote for each share held on all
matters to which they are entitled to vote, including the election of directors.
Cumulative voting for the election of directors is not permitted. Any director,
or the entire board, may be removed at any time, by 66 2/3% of the aggregate
number of votes that may be cast by the holders of outstanding shares of common
stock entitled to vote for the election of directors.
Subject to the rights of any then outstanding shares of preferred stock, our
common stockholders are entitled to receive ratably dividends, if any, as may be
declared in the discretion of the board out of funds legally available for the
payment of dividends. See "Dividend Policy." Our common stockholders are
entitled to share ratably in our net assets upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
preferred stock then outstanding. Our common stockholders have no preemptive
rights to purchase any shares of our common stock. Our common stock is not
subject to any redemption provisions and is not convertible into any other
securities of MGi2. All outstanding shares of our common stock are fully paid
and non-assessable.
PREFERRED STOCK
Our preferred stock may be issued from time to time by the board as shares
of one or more classes or series. Subject to the provisions of our Certificate
of Incorporation, as amended and limitations prescribed by the Investment
Company Act and applicable law, the board may adopt resolutions to
- issue the shares;
- fix the number of shares;
- change the number of shares constituting any series; and
- provide for or change the rights or restrictions of each series, including
dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares
constituting any class or series, in each case without any further action
or vote by the stockholders.
We have no current plans to issue any shares of preferred stock of any class or
series.
One of the effects of undesignated preferred stock may be to enable our
board to render more difficult or to discourage an attempt to obtain control of
us by means of a tender offer, proxy contest, merger or otherwise, and thereby
to protect the continuity of our management. The issuance of shares of preferred
stock may adversely affect the rights of our common stockholders. For example,
preferred stock may rank prior to the common stock as to dividend rights,
liquidation preference or both, may have full or
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<PAGE>
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
the common stock at a premium or may otherwise adversely affect the market price
of the common stock. In order for MGi2 to issue any shares of preferred stock it
must, immediately after the issuance and sale, have an asset coverage of at
least 200%.
WARRANTS
Prior to this offering, we have sold to Capital West warrants covering an
aggregate of up to 190,000 shares of common stock exercisable at a price of 165%
of the initial offering price per share. Capital West has paid a purchase price
of $5,000 for the warrants. Capital West may exercise these warrants as to all
or any lesser number of the underlying shares of common stock commencing on the
first anniversary of the date of this offering until the fifth anniversary of
the date of this offering. The exercise price of these warrants and the number
of shares of common stock for which these warrants are exercisable are subject
to adjustment to protect the warrant holders against dilution in certain events.
Capital West was employed by McFarland, Grossman prior to the offering to
provide certain consulting services in advising McFarland, Grossman respecting
the feasibility of forming an Internet focused investment banking firm and was
paid $5,500 in connection with those advisory services. See
"Underwriting--Underwriters' Warrants."
OUTSTANDING SECURITIES
The following chart indicates the Common Stock and Preferred Stock of MGi2
outstanding immediately prior to the closing of this offering:
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AMOUNT HELD BY EXCLUSIVE OF AMOUNT
AMOUNT MGI2 OR HELD BY MGI2
TITLE OF CLASS AUTHORIZED FOR ITS ACCOUNT FOR ITS ACCOUNT
- -------------- ---------- --------------- -------------------
<S> <C> <C> <C>
Common Stock.................... 50,000,000 -- 1,650,000
Preferred Stock of MGi2......... 10,000,000 -- --
</TABLE>
STATUTORY BUSINESS COMBINATION PROVISION
As a Delaware corporation we are subject to the provisions of Section 203 of
the Delaware General Corporation Law. Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or an associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless:
- the transaction resulting in a person becoming an interested stockholder,
or the business combination, is approved by the board of directors of the
corporation before the person becomes an interested stockholder;
- the interested stockholder acquired 85% or more of the outstanding voting
stock of the corporation in the same transaction that makes such person an
interested stockholder, excluding shares owned by persons who are both
officers and directors of the corporation, and shares held by certain
employee stock ownership plans; or
- on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors
and by the holders of at least 66 2/3% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by
the interested stockholder.
Under Section 203, an "interested stockholder" is defined as any person who owns
15% or more of the outstanding voting stock of the corporation or an affiliate
or associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the three-year
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period immediately prior to the date on which it is sought to be determined
whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by including in its certificate of incorporation or by-laws by
action of its stockholders to exempt itself from coverage. We have not adopted
such an amendment to our Certificate of Incorporation or Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to our Certificate of Incorporation and under Delaware law, our
directors are not liable to us or our stockholders for monetary damages for
breach of fiduciary duty, except for liability in connection with a breach of
the duty of loyalty, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for dividend payments or
stock repurchases illegal under Delaware law or any transaction in which a
director has derived an improper personal benefit. We have entered into
indemnification agreements with our directors, advisory board members and
executive officers which indemnify such persons to the fullest extent permitted
by our Certificate of Incorporation, our Bylaws, the Delaware General
Corporation Law and the Investment Company Act. Notwithstanding the foregoing,
for as long as the Company is regulated as a business development company under
the Investment Company Act, the foregoing indemnification rights shall not
include indemnification for actions or matters for which directors cannot be
indemnified under the provisions of the Investment Company Act. See "Certificate
of Incorporation and Bylaw Provisions--Limitation for Disabling Conduct."
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our Certificate of Incorporation and Bylaws include provisions that may have
the effect of discouraging, delaying or preventing a change in control of MGi2
or an unsolicited acquisition proposal that a stockholder might consider
favorable, including a proposal that might result in the payment of a premium
over the market price for the shares held by stockholders. These provisions are
summarized in the following paragraphs.
SUPERMAJORITY VOTING. Except as required under the Investment Company Act,
our Certificate of Incorporation requires the approval of the holders of at
least 75% of the then outstanding shares of our capital stock entitled to vote
thereon, among other things, certain amendments to the Certificate of
Incorporation. The board may amend any bylaws without the assent or vote of the
stockholders, but any bylaws made by the board may be amended upon the
affirmative vote of at least 66 2/3% of the stock entitled to vote thereon.
AUTHORIZED BUT UNISSUED OR UNDESIGNATED CAPITAL STOCK. Our authorized
capital stock will consist of 50,000,000 shares of common stock and 10,000,000
shares of preferred stock. After the offering, MGi2 will have outstanding
3,550,000 shares of common stock (assuming the underwriters' over-allotment
options are not exercised). The authorized but unissued (and in the case of
preferred stock, undesignated) stock may be issued by our board in one or more
transactions. In this regard, our Certificate of Incorporation grants the board
broad power to establish the rights and preferences of authorized and unissued
preferred stock. The issuance of shares of preferred stock pursuant to the
board's authority described above could decrease the amount of earnings and
assets available for distribution to holders of common stock and adversely
affect the rights of such holders and may also have the effect of delaying,
deferring or preventing a change in control of MGi2. The board does not
currently intend to seek stockholder approval prior to any issuance of preferred
stock, unless otherwise required by law.
SPECIAL MEETING OF STOCKHOLDERS. Our Certificate of Incorporation and
Bylaws provide that special meetings of stockholders of MGi2 may only be called
by the Chairman of the board of directors upon the written request of the board
pursuant to a resolution approved by a majority of the whole board.
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<PAGE>
STOCKHOLDER ACTION BY WRITTEN CONSENT. Our Certificate of Incorporation and
Bylaws generally provide that any action required or permitted by the
stockholders of MGi2 must be effected at a duly called annual or special meeting
of the stockholders and may not be effected by any written consent of the
stockholders.
NOTICE PROCEDURES. Our Bylaws establish advance notice procedures with
regard to, among other things, stockholder proposals relating to the nomination
of candidates for election as director, the removal of directors and amendments
to the Certificate of Incorporation or Bylaws to be brought before annual
meetings of our stockholders. These procedures provide that notice of such
stockholder proposals must be timely given in writing to our secretary prior to
the annual meeting. Generally, to be timely, notice must be received at our
principal executive offices not less than 80 days prior to an annual meeting (or
if fewer than 90 days' notice or prior public disclosure of the date of the
annual meeting is given or made by us, not later than the tenth day following
the date on which the notice of the date of the annual meeting was mailed or
such public disclosure was made). The notice must contain certain information
specified in the Bylaws, including a brief description of the business desired
to be brought before the annual meeting and certain information concerning the
stockholder submitting the proposal.
LIMITATION FOR DISABLING CONDUCT. Our Bylaws provide that we may not
indemnify any director or officer against liability to us or our stockholders to
which he or she might otherwise be subject by reason of such person's willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office unless a determination is made by
final decision of a court, by vote of a majority of a quorum of directors who
are disinterested, non-party directors or by independent legal counsel that the
liability for which indemnification is sought did not arise out of such
disabling conduct.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could be adversely affected by the sale
of substantial amounts of common stock in the public market. Upon consummation
of the offering there will be 3,550,000 shares of common stock issued and
outstanding, assuming the underwriters' over-allotment option is not exercised.
All of the 1,900,000 shares sold in the offering, except shares acquired by our
affiliates, will be freely tradable.
None of the 1,650,000 shares of common stock outstanding at the time of the
offering were issued in a transaction registered under the Securities Act, and,
accordingly, such shares may not be sold except in transactions registered under
the Securities Act or an exemption from registration, including the exemption
contained in Rule 144 under the Securities Act.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned his or her shares for at
least one year, or a person who may be deemed an "affiliate" of MGi2 who has
beneficially owned shares for at least one year, would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of 1% of the then outstanding shares of the common stock or the average
weekly trading volume of the common stock during the four calendar weeks
preceding the date on which notice of the proposed sale is sent to the SEC.
Sales under Rule 144 are also subject to certain manner of sale provisions,
notice requirements and the availability of current public information about
MGi2. A person who is not deemed to have been an affiliate of MGi2 at any time
for 90 days preceding a sale and who has beneficially owned his shares for at
least two years would be entitled to sell such shares under Rule 144 without
regard to the volume limitations, manner of sale provisions, notice requirements
or the availability of current public information about MGi2.
We have authorized the issuance of up to 650,000 shares of our common stock
in accordance with the terms of the 2000 Stock Plan. We anticipate that upon or
after the closing of this offering, and subject to any required SEC approval we
will grant under the 2000 Stock Plan:
- options to purchase an aggregate of 20,000 shares of common stock to
certain of our employees;
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- options to purchase an aggregate of 75,000 shares of common stock to three
non-employee directors; and
- options to purchase an aggregate of 70,000 shares of common stock to seven
advisory board members.
See "Management--2000 Stock Plan."
We intend to file a registration statement on Form S-8 under the Securities
Act registering the issuance of shares upon exercise of options granted under
the 2000 Stock Plan. As a result, these shares will be eligible for resale in
the public market.
We have agreed not to sell or offer any shares of common stock or options,
rights or warrants to acquire any common stock for a period of 180 days after
the consummation of the offering without the prior written consent of the
managing underwriter, except for shares issued pursuant to the exercise of
options granted under the 2000 Stock Plan, the over-allotment option granted to
the underwriters and the warrants granted to the managing underwriter. Further,
certain of our executive officers, employee directors and major stockholders
(Cary M. Grossman, the Grossman Family Limited Partnership and Clifford E.
McFarland) who beneficially own approximately 1,650,000 shares in the aggregate
have agreed not to directly or indirectly sell or offer for sale or otherwise
dispose of any common stock for a period of 36 months after the date of this
prospectus without the prior written consent of the managing underwriter. After
12 months, each of these parties may sell or dispose of up to 10% of the shares
of common stock owned by such party; provided, however, if after such 12-month
period, the market price per share of our common stock is at least two times the
initial public offering price per share of our common stock for a period of 20
consecutive trading days, then such party may dispose of any or all shares of
common stock owned by such party subject to applicable securities laws. Each of
our outside directors and advisory board members have agreed not to directly or
indirectly sell or offer for sale or otherwise dispose of any common stock for a
period of one year after the date of this prospectus without the prior written
consent of the managing underwriter.
Prior to this offering, there has been no established trading market for the
common stock, and no predictions can be made as to the effect that sales of
common stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of common stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of common stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Those sales may also make it more difficult
for us to issue or sell equity securities or equity-related securities in the
future at a time and price that it deems appropriate. See "Risk Factors--Risks
Associated With This Offering--Shares eligible for future sale may affect the
price of common stock."
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among us and the underwriters, each of the underwriters named below, for whom
Capital West Securities, Inc. is acting as a representative, has severally
agreed to purchase from us the number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER PRINCIPAL BUSINESS ADDRESS SHARES
- ----------- ------------------------------ ---------
<S> <C> <C>
Capital West Securities, Inc....... 211 North Robinson
Suite 200
Oklahoma City, OK 73102
I-Bankers Securities, Inc.......... 122 W. Carpenter Freeway
Suite 465
Irving, TX 75039
Westport Resources Investment
Services, Inc.................... 315 Post Road West
Westport, CT 06880
APS Financial Corporation.......... 1301 Capital of Texas Highway
Suite B-220
Austin, TX 78746
---------
Total.......................... 1,900,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions. The nature of the underwriters' obligations
is that they are committed to purchase and pay for all of the above shares of
common stock if any are purchased.
PUBLIC OFFERING PRICE AND DEALERS CONCESSION
The underwriters propose initially to offer the shares of common stock
offered by this prospectus to the public at the public offering price per share
set forth on the cover page of this prospectus and to certain dealers, who are
members of the NASD, at that price less a concession not in excess of $ per
share. The underwriters may allow, and these dealers may reallow, a discount not
in excess of $ per share on sales to certain other NASD member dealers. After
commencement of this offering, the offering price, discount price and
reallowance may be changed by the underwriters. No such change will alter the
amount of proceeds to be received by us as set forth on the cover page of this
prospectus.
OVER-ALLOTMENT OPTION
We have granted the underwriters an option, which may be exercised within
45 days after the date of this prospectus, to purchase up to 285,000 additional
shares of common stock to cover over-allotments, if any, at the initial public
offering price, less the underwriting discount set forth on the cover page of
this prospectus. If the underwriters exercise their over-allotment option to
purchase any of these additional 285,000 shares of common stock, these
additional shares will be sold by the underwriters on the same terms as those on
which the shares offered by this prospectus are being sold. We will be
obligated, pursuant to the over-allotment option, to sell shares to the
underwriters if the underwriters exercise their over-allotment option. The
underwriters may exercise their over-allotment option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered by this prospectus. To the extent that the underwriters exercise this
option, each underwriter will have an obligation, subject to certain conditions,
to purchase a number of shares of common stock proportionate to each
underwriter's obligation set forth in the foregoing table.
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NON-ACCOUNTABLE EXPENSE ALLOWANCE
We have agreed to pay the managing underwriter, Capital West, a
non-accountable expense allowance of 2.5% of the gross proceeds derived from the
sale of the shares of common stock underwritten (including the sale of any
shares of common stock that the underwriters' may sell to cover over-allotments,
if any, pursuant to the over-allotment option), $40,000 of which has been paid
as of the date of this prospectus. We have also agreed to pay all expenses in
connection with qualifying the common stock offered hereby for sale under the
laws of such states as we and the underwriters may designate and registering the
offering with the NASD, including filing fees and expenses of counsel retained
for these purposes.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................ $ $ $ $
Expenses payable by us.................. $ $ $ $
</TABLE>
INDEMNIFICATION OF UNDERWRITERS
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in connection with these
liabilities.
UNDERWRITERS' WARRANTS
In connection with the formation of MGi2, we sold to Capital West warrants
covering an aggregate of up to 190,000 shares of common stock exercisable at a
price equal to 165% of the initial public offering price per share. Capital West
paid a purchase price of $5,000 for the warrants. Capital West may exercise
these warrants as to all or any lesser number of the underlying shares of common
stock commencing on the first anniversary of the date of this offering until the
fifth anniversary of the date of this offering. The exercise price of these
warrants and the number of shares of common stock for which these warrants are
exercisable are subject to adjustment to protect the warrant holders against
dilution in certain events. Capital West may assign these warrants to the other
underwriters and certain affiliates.
LOCK-UP AGREEMENTS
In connection with this offering, each of our directors, officers, certain
major stockholders and affiliates have entered into lock-up agreements with the
managing underwriter. Under the terms of the lock-up agreements, our executive
officers, employee directors and certain major stockholders (Cary M. Grossman,
the Grossman Family Limited Partnership and Clifford E. McFarland) have agreed
not (without the approval of the managing underwriter) to sell, transfer or
otherwise dispose of any shares of our common stock owned by them or issuable to
them pursuant to options, warrants or otherwise for a period of 36 months from
the date of this prospectus, except that after 12 months from the date of this
prospectus each of these parties, may sell or otherwise dispose of up to 10% of
our shares of common stock owned by such party; provided, however, if after such
12-month period, the market price per share of our common stock is at least two
times the initial public offering price per share of our common stock for a
period of 20 consecutive trading days, then such party may dispose of any or all
shares of common stock owned by such party subject to applicable securities
laws. Under the lock-up agreements with our non-employee directors and advisory
board members, our non-employee directors and advisory board members have agreed
not (without the approval of the managing underwriter) to sell, transfer or
otherwise dispose of any shares of our common stock owned by them or issuable to
them pursuant to the exercise of any options or warrants for a period of
12 months from the date of this prospectus. We have also agreed
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that, without the prior consent of Capital West, we will not issue or otherwise
offer or sell any shares of common stock or any options or warrants to purchase
common stock for a period of 180 days following the consummation of the
offering, other than pursuant to the 2000 Stock Plan, the over-allotment option
or the warrants issued to the underwriters.
CONSULTING SERVICES
Capital West was employed by McFarland, Grossman prior to the offering to
provide certain consulting services to McFarland, Grossman regarding the
feasibility of forming an Internet focused investment banking firm, and was paid
$5,500 in connection with such services.
COORDINATION
The underwriters have entered into an agreement that provides for the
coordination of their activities. Pursuant to the agreement, the underwriters
are permitted to sell shares of common stock to each other for purposes of
resale at the public offering price, less an amount not greater than the selling
concession.
No action has been or will be taken in any jurisdiction (except the United
States) that would permit a public offering of the shares of our common stock,
or the possession, circulation or distribution of this prospectus or any other
material relating to us or shares of our common stock in any jurisdiction where
action for that purpose is required. Accordingly, the shares of our common stock
may not be offered or sold, directly or indirectly, and neither this prospectus
nor any other offering material or any advertisement in connection with the
shares of our common stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of any such country or jurisdiction.
STABILIZATION AND OTHER TRANSACTIONS
In connection with this offering, Capital West, as managing underwriter may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the common stock. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M under the
Exchange Act, pursuant to which Capital West may bid for, or purchase, common
stock for the purpose of stabilizing the market price. Capital West also may
create a short position by selling more common stock in connection with this
offering than it is committed to purchase from us, and in such case may purchase
common stock in the open market following completion of this offering to cover
all or a portion of such short position. In addition, Capital West may impose
"penalty bids" whereby it may reclaim from a dealer participating in this
offering, the selling concession with respect to the common stock that it
distributed in this offering, but which was subsequently purchased for the
accounts of the underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
common stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in the paragraph is required, and, if
they are undertaken, they may be discontinued at any time.
DISCRETIONARY ACCOUNTS
The underwriters have informed us that they do not intend to confirm sales
to any account over which they exercise discretionary authority.
DETERMINATION OF OFFERING PRICE
Prior to this offering, there has been no market for our common stock.
Accordingly, the initial public offering price for the common stock was
determined by negotiation between us and the underwriters. Among the factors
considered in determining the initial public offering price were our results of
operations, our current financial condition, our future prospects, the state of
the markets for our services,
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<PAGE>
the experience of our management, the economics of the e-commerce industry in
general, the general condition of the equity securities market and the demand
for similar securities of companies considered comparable to us.
LEGAL MATTERS
Certain legal matters in connection with the common stock being offered
hereby and the validity of the shares of common stock being offered hereby will
be passed upon for MGi2 by Andrews & Kurth L.L.P., Houston, Texas. Certain legal
matters in connection with the offering will be passed upon for the Underwriters
by Conner & Winters, a Professional Corporation, Oklahoma City, Oklahoma.
EXPERTS
The financial statements included in this prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP and Weinstein Spira & Company,
P.C. independent public accountants, and are included herein in reliance upon
the authority of said firms as experts in giving said reports.
CUSTODIAN, TRANSFER AGENT AND REGISTRAR
Southwest Bank of Texas, N.A., 5 Post Oak Park, 2nd Floor, 440 Post Oak
Parkway, Houston, Texas 77027 will act as custodian of our portfolio securities
in compliance with applicable regulations under the Investment Company Act.
Harris Trust & Savings Bank, 311 West Monroe Street, Chicago, Illinois 60606,
will act as our transfer agent and registrar.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective January 4, 2000, Arthur Andersen LLP was engaged as our
independent auditors and replaced Weinstein Spira & Company, P.C. who were
dismissed as our independent accountants on the same date. The decision to
change auditors was approved by our board of directors on December 29, 1999.
Prior to their termination, our former auditors issued a report dated
January 22, 1999 on the periods ended December 31, 1997 and December 31, 1998.
The report of our former auditors did not contain an adverse opinion or
disclaimer of opinion nor was it qualified or modified as to any uncertainty,
audit scope or accounting principle. In connection with the audit for the period
from 1997 through 1998, there were no disagreements with our former auditors on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedure, which, if not resolved to the satisfaction of
our former auditors, would have caused them to refer to such disagreement in
their report on the financial statements for such period. Prior to January 4,
2000, we had not consulted with Arthur Andersen LLP on items that involved our
accounting principles or the form of audit opinion to be issued on our financial
statements. We have requested that our former auditors furnish us with a letter
addressed to the SEC stating whether or not they agree with the above
statements. A copy of this letter, dated January 11, 2000, is filed as
Exhibit n(3) to the registration statement of which this prospectus is a part.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MGi2, Inc.
Report of Independent Public Accountants.................. F-2
Balance sheet--April 19, 2000............................. F-3
Notes to Balance Sheet.................................... F-4
McFarland, Grossman & Company, Inc.
Report of Arthur Andersen LLP, Independent Public
Accountants............................................. F-7
Weinstein Spira & Company, P.C. Independent Auditors'
Report.................................................. F-8
Statements of Financial Condition......................... F-9
Statements of Income (Loss)............................... F-10
Statements of Stockholders' Equity........................ F-11
Statements of Cash Flow................................... F-12
Notes to Financial Statements............................. F-13
</TABLE>
F-1
<PAGE>
After the exchange discussed in Note 1 to MGi2, Inc.'s financial statement is
effected, we expect to be in a position to render the following audit report.
/s/ Arthur Andersen LLP
Houston, Texas
April 20, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MGi2, Inc.:
We have audited the accompanying balance sheet of MGi2, Inc. (a Delaware
corporation), as of April 19, 2000. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statement
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statement. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
As explained in Note 1, the financial statement includes a portfolio
investment valued at $2,500,000, the value of which has been estimated by the
Company's board of directors in the absence of readily ascertainable market
values. However, because of the inherent uncertainty of valuation, the estimated
value may differ significantly from the value that would have been used had a
ready market for the portfolio investment existed, and the differences could be
material.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of MGi2, Inc., as of April 19,
2000, in conformity with accounting principles generally accepted in the United
States.
Houston, Texas
April 20, 2000 (except with respect to the matters
discussed in Note 1, as to which the date is , 2000.)
F-2
<PAGE>
MGI2, INC.
BALANCE SHEET--APRIL 19, 2000
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<S> <C>
ASSETS
PORTFOLIO INVESTMENT AT FAIR VALUE:
McFarland, Grossman & Company, Inc........................ $2,500
CASH........................................................ 8
DEFERRED ISSUANCE COSTS..................................... 700
------
Total assets............................................ $3,208
======
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES.................... $ 553
DUE TO RELATED PARTIES...................................... 150
------
Total liabilities....................................... 703
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 1,650,000 shares issued and outstanding..... 17
Additional paid-in capital................................ 2,488
------
Total liabilities and stockholders' equity.............. $3,208
======
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-3
<PAGE>
MGI2, INC.
NOTES TO BALANCE SHEET
APRIL 19, 2000
1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
MGi2, Inc. (MGi2 or the Company), is an internally managed, nondiversified
closed-end investment company that has elected to be regulated as a business
development company under the Investment Company Act of 1940. The Company's
primary business focus is to create or identify, and then incubate and grow,
businesses that intend to benefit from the expected growth of business to
business, or B2B, eCommerce. MGi2 intends to invest capital in, and provide
merchant banking and incubation services to, these companies. The merchant
banking and incubation services of the Company will include strategic business
and financial advisory services and investment banking services. The Company was
formed on February 1, 2000, as a Delaware company, owned by the same individuals
that own McFarland, Grossman & Company, Inc. (McFarland, Grossman). Prior to or
concurrent with the effective date of the Company's registration statement filed
with the Securities and Exchange Commission (the "Registration Statement"), in
which the Company is offering for sale 1,900,000 shares of common stock,
(i) MGi2 will elect to be treated as a business development company under the
Investment Company Act of 1940 (the "BDC Election"), (ii) options held by
employees of McFarland, Grossman covering 75,000 shares of McFarland, Grossman
common stock will be exercised (the Option Exercise) and (iii) MGi2 will
exchange two shares of its common stock for every one share of the outstanding
common stock of McFarland, Grossman, with the effect that McFarland, Grossman
will become a wholly owned portfolio investment of MGi2 (the "Exchange").
The accompanying balance sheet reflects the BDC Election, the Option
Exercise and the Exchange as if they occurred on April 19, 2000. For the period
from its inception on February 1, 2000, through April 19, 2000, the Company has
not commenced operations that would generate revenues and expenses.
McFarland, Grossman, a Texas C Corporation, is a private investment banking
firm and fully disclosed securities broker-dealer. McFarland, Grossman is
registered as a broker-dealer with the Securities and Exchange Commission and is
a member of the National Association of Securities Dealers, Inc. McFarland,
Grossman was registered with the Securities and Exchange Commission as an
investment advisor until 1998, when McFarland, Grossman discontinued its retail
investment advisory business and withdrew its registration.
The success of the Company involves a high degree of risk. Those risks
include, but are not limited to, dependence on key personnel and an operating
strategy for the Company that is focused on working with information technology,
Internet and eCommerce companies, many of which will have limited operating
histories and all of which face intense competition. Success of the Company also
depends on the Company achieving profitable operations, raising adequate
capital, operating within regulatory constraints and effectively competing with
other investment banking firms that have greater resources and access to capital
than the Company. For a more complete description of the Company's risks, see
"Risk Factors" included elsewhere in the prospectus included in the Registration
Statement.
STATEMENT PRESENTATION
The unclassified balance sheet is presented in accordance with industry
standards.
F-4
<PAGE>
MGI2, INC.
NOTES TO BALANCE SHEET
APRIL 19, 2000
VALUATION OF PORTFOLIO INVESTMENT
The Company's portfolio investment in 825,000 shares of common stock of
McFarland, Grossman is carried at fair value as determined by the board of
directors under the Company's valuation policy.
The investment, for which there is no public market, is valued based on
various factors, including its history of earnings before interest, taxes,
depreciation and amortization, the market value of comparable companies and
other pertinent factors. Future changes in the fair value of McFarland, Grossman
will be recorded as unrealized gains or losses as part of the Company's
operations. Valuation of portfolio investments in the absence of readily
ascertainable market values is inherently uncertain. The estimated value may
differ significantly from the value that would have been used had a ready market
for the portfolio investment existed, and the difference could be material. As
of the effective date of the offering, the fair value of McFarland, Grossman as
determined by the board of directors was $2,500,000, and this amount was
recorded as the value of the stock exchange between the Company and McFarland,
Grossman.
DEFERRED ISSUANCE COSTS
Deferred issuance costs are based on the estimated costs the Company has
incurred to date in conjunction with the Registration Statement. These costs
will be netted against the proceeds of the offering of the Company's Common
Stock described above.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, its portfolio
investment at fair value, accounts payable and accrued liabilities, and amounts
due to related parties. The Company believes that the carrying value of these
instruments on the accompanying balance sheet approximates their fair value.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in determining the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statement. Actual results could differ from those estimates.
Significant estimates are involved in determining the fair value of portfolio
investments.
2. STOCKHOLDERS' EQUITY:
The Company was initially capitalized by its stockholders with $100. The
initial shares issued were cancelled in connection with the Exchange as
discussed in Note 1.
The Company has issued warrants covering an aggregate of up to 190,000
shares of common stock with an exercise price of 165 percent of the initial
public offering price (estimated to be $13.20) to Capital West Securities, Inc.,
the managing underwriter of the offering. This sales price was deemed to be the
fair value of the warrants at the date of sale by the Company's board of
directors. These warrants have been included in the accompanying balance sheet
in additional paid-in capital.
3. STOCK OPTION PLAN:
The Company has adopted a stock option plan, the MGi2, Inc. 2000 Stock Plan
(the Plan). The aggregate amount of common stock with respect to which awards
may be granted may not exceed 650,000
F-5
<PAGE>
MGI2, INC.
NOTES TO BALANCE SHEET
APRIL 19, 2000
shares, subject to adjustment to reflect stock splits. Options granted under the
Plan may be either nonqualified stock options or may qualify as incentive stock
options. At April 19, 2000, no awards had been granted under the Plan.
4. TRANSACTIONS WITH RELATED PARTIES:
At inception, McFarland, Grossman provided $2,500 of funding to the Company.
At April 19, 2000, this amount remains a liability of the Company.
In connection with this offering, approximately $147,000 was paid on behalf
of the Company by a related party for certain offering expenses. At April 19,
2000, this amount remains a liability of the Company.
F-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To McFarland, Grossman & Company, Inc.:
We have audited the accompanying statement of financial condition of
McFarland, Grossman & Company, Inc., as of December 31, 1999, and the related
statements of income (loss), stockholders' equity and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of McFarland, Grossman &
Company, Inc., as of December 1999, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
January 14, 2000.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
McFarland, Grossman & Company, Inc.
We have audited the accompanying Statements of Financial Condition of
McFarland, Grossman & Company, Inc. as of December 31, 1998, and the related
Statements of Income, Shareholders' Equity and Cash Flows for the two years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 McFarland, Grossman &
Company, Inc. as of December 31, 1998, and the results of its operations and
cash flows for the two years then ended, in conformity with generally accepted
accounting principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
January 22, 1999
F-8
<PAGE>
MCFARLAND, GROSSMAN & COMPANY, INC.
STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................... $ 377 $ 215
ACCOUNTS RECEIVABLE......................................... 5 51
MARKETABLE SECURITIES HELD AS COLLATERAL FOR NOTES
RECEIVABLE FROM RELATED PARTIES........................... 615 568
SECURITIES OWNED:
Marketable................................................ 217 82
Not readily marketable.................................... 31 --
PROPERTY AND EQUIPMENT, net................................. 74 69
FEDERAL INCOME TAX RECEIVABLE............................... 47 112
OTHER ASSETS................................................ 9 60
------ ------
Total assets................................ $1,375 $1,157
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses..................... $ 36 $ 134
Notes payable to related parties.......................... 180 192
Deferred federal income tax............................... 241 210
------ ------
Total liabilities........................... 457 536
------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, no par value, 10,000,000 shares
authorized, 750,000 shares issued and outstanding....... 103 103
Retained earnings......................................... 815 518
------ ------
Total stockholders' equity.................. 918 621
====== ======
Total liabilities and stockholders'
equity.................................... $1,375 $1,157
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
MCFARLAND, GROSSMAN & COMPANY, INC.
STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Investment banking fees................................ $ 1,814 $ 2,824 $ 1,083
Dividends and interest................................. 6 88 54
Net gain (loss) on securities.......................... 497 70 (4)
Other income........................................... 149 67 7
---------- ---------- ----------
Total revenues........................... 2,466 3,049 1,140
COMPENSATION AND BENEFITS................................ 1,251 2,328 1,192
OTHER OPERATING EXPENSES................................. 399 497 387
---------- ---------- ----------
INCOME (LOSS) BEFORE TAXES............................... 816 224 (439)
FEDERAL INCOME TAX PROVISION (BENEFIT):
Current................................................ 124 48 (111)
Deferred............................................... 170 39 (31)
---------- ---------- ----------
294 87 (142)
---------- ---------- ----------
NET INCOME (LOSS)........................................ 522 137 (297)
PREFERRED STOCK DIVIDENDS................................ 6 3 --
---------- ---------- ----------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS.... $ 516 $ 134 $ (297)
========== ========== ==========
INCOME (LOSS) PER SHARE:
Basic.................................................. $ .69 $ .18 $ (.40)
---------- ---------- ----------
Diluted................................................ $ .60 $ .16 $ (.40)
========== ========== ==========
SHARES USED IN COMPUTING BASIC INCOME (LOSS) PER SHARE... 750,000 750,000 750,000
========== ========== ==========
SHARES USED IN COMPUTING DILUTED INCOME (LOSS) PER
SHARE.................................................. 862,675 866,867 750,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
MCFARLAND, GROSSMAN & COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B SERIES A SERIES B TOTAL
COMMON COMMON PREFERRED PREFERRED RETAINED STOCKHOLDERS'
STOCK STOCK STOCK STOCK EARNINGS EQUITY
------------ -------- --------- --------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996............... $103 $ -- $ 35 $ -- $ 185 $ 323
Net income............................. -- -- -- -- 522 522
Issuance of 97,500 shares of preferred
stock for cash....................... -- -- -- 97 (15) 82
Accretion of preferred stock........... -- -- 5 -- (5) --
Dividends paid on preferred stock...... -- -- -- -- (6) (6)
Redemption of 10,000 shares of
preferred stock...................... -- -- (40) -- -- (40)
---- ---- ---- ---- ----- -----
BALANCE, December 31, 1997............... 103 -- -- 97 681 881
Net income............................. -- -- -- -- 137 137
Dividends paid on preferred stock...... -- -- -- -- (3) (3)
Redemption of 97,500 shares of
preferred stock...................... -- -- -- (97) -- (97)
---- ---- ---- ---- ----- -----
BALANCE, December 31, 1998............... 103 -- -- -- 815 918
Net loss............................... -- -- -- -- (297) (297)
Exercise of employee stock options..... -- 19 -- -- -- 19
Repurchase of common stock and
retirement........................... -- (19) -- -- -- (19)
---- ---- ---- ---- ----- -----
BALANCE, December 31, 1999............... $103 $ -- $ -- $ -- $ 518 $ 621
==== ==== ==== ==== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
MCFARLAND, GROSSMAN & COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 522 $ 137 $(297)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization......................... 24 32 37
Bad debt expense...................................... 1 6 9
Deferred income tax provision (benefit)............... 170 39 (31)
Changes in assets and liabilities-
Accounts receivable................................. (12) 39 (55)
Marketable securities held as collateral for notes
receivable from related parties................... -- (124) 47
Securities owned.................................... (601) 47 166
Federal income tax receivable....................... 2 (47) (65)
Other assets........................................ (1) 5 (51)
Accounts payable and accrued expenses............... 1 4 98
Federal income tax payable.......................... 120 (120) --
Notes for the repurchase of employee stock.......... -- -- 12
----- ------ -----
Net cash provided by (used in) operating
activities...................................... 226 18 (130)
----- ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (33) (52) (32)
----- ------ -----
Net cash used in investing activities............. (33) (52) (32)
----- ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments on) notes payable to related
parties................................................. (3) 179 --
Proceeds from sale of preferred stock, net of issuance
costs................................................... 82 -- --
Redemption of preferred stock............................. (40) (97) --
Dividends paid............................................ (6) (3) --
----- ------ -----
Net cash provided by financing activities......... 33 79 --
----- ------ -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 226 45 (162)
CASH AND CASH EQUIVALENTS, beginning of year................ 106 332 377
----- ------ -----
CASH AND CASH EQUIVALENTS, end of year...................... $ 332 $ 377 $ 215
===== ====== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ 1 $ 1 $ 5
Cash paid during the year for taxes, net of refunds....... 2 215 --
NONCASH FINANCING ACTIVITY:
Accretion of preferred stock preference value............. 5 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements
F-12
<PAGE>
MCFARLAND, GROSSMAN & COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
McFarland, Grossman & Company, Inc. (the Company) a Texas C Corporation, is
a private investment banking firm and fully disclosed securities broker-dealer.
The Company is registered as a broker-dealer with the Securities and Exchange
Commission and is a member of the National Association of Securities
Dealers, Inc. The Company was registered with the Securities and Exchange
Commission as an investment advisor until 1998, when the Company discontinued
its retail investment advisory business and withdrew its registration.
STATEMENT PRESENTATION
The unclassified statements of financial condition are presented in
accordance with industry standards.
REVENUE RECOGNITION
Revenues for investment banking services are recognized when all of the
following have occurred: a contract has been entered into with a client,
services have been rendered, the fee amount has been determined and
collectibility is reasonably assured. Fees received in the form of equity
securities are recorded at the fair market value of the securities received.
Earnings are charged with a provision for doubtful accounts based on collection
experience and current review of collectibility of accounts. Accounts deemed
uncollectible are applied against the allowance for doubtful accounts.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents.
SECURITIES OWNED
Marketable securities, consisting of equity securities, are stated at market
value. Not readily marketable securities are valued by management based upon
valuation models commonly used in the venture capital industry, which include
various factors such as multiples of revenues, earnings and cash flow. Due to
the inherent uncertainty of the valuation process, estimated values at the end
of an accounting period may differ significantly from the values that would have
been realized in a sale at that date had a ready market for the securities
existed, and the differences may be material. The increase or decrease in net
unrealized appreciation or depreciation is charged to operations as part of net
gain (loss) on securities.
PROPERTY AND EQUIPMENT
The Company records its property and equipment at cost, less accumulated
depreciation and amortization. Depreciation is computed on accelerated methods
over estimated useful lives of five to seven years or, in the case of leasehold
improvements, amortized over the remaining term of the lease. Maintenance and
repairs that do not improve or extend the life of assets are expensed as
incurred.
F-13
<PAGE>
INCOME TAXES
The Company accounts for income taxes using the liability method in which
deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts based on enacted tax laws and statutory tax rates applicable
to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. The provision for income taxes is
the income tax payable for the year and the change during the year in deferred
tax assets and liabilities.
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
marketable securities held as collateral for notes receivable from related
parties, securities owned, accounts payable and notes payable. The Company
believes that the carrying value of these instruments on the accompanying
statements of financial condition approximates their fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of cash deposits and accounts
receivable. The Company maintains cash balances at financial institutions which
may at times be in excess of federally insured levels. The Company has not
incurred losses related to these balances to date. In addition, the Company
maintains an allowance account on its accounts receivable that has been adequate
to cover losses incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining 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. Significant
estimates are involved in determining the fair value of equity securities
received for fees and the carrying value of not readily marketable securities
owned.
NEW PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which is effective for fiscal years beginning after
June 15, 2000. Management of the Company does not anticipate that this statement
will have any significant impact on the Company's results of operations or
financial condition because the Company records its investments, including
derivative investments, at fair market value with changes in fair values
included in earnings.
2. MARKETABLE SECURITIES HELD AS COLLATERAL FOR NOTES RECEIVABLE FROM RELATED
PARTIES:
In June 1998, the Company sold 190,000 shares of its investment in Pentacon,
Inc., common stock to seven of its then stockholders and employees at a purchase
price equal to approximately $9.98 per share. Each purchaser issued a promissory
note to the Company in consideration of the full purchase price of the shares.
The notes provided for payment of interest at an annual rate of 5.51 percent,
payable on December 31, 1998 and 1999, with the principal balance and accrued
interest due and payable on July 14, 2000. Each of these notes was secured by
the common shares of Pentacon, Inc. In March 1999, due to a precipitous decline
in the value of the Pentacon, Inc., common stock, the terms of the original sale
of the
F-14
<PAGE>
common stock to three of the employees were modified by reducing the purchase
price to $3.05 per share, increasing the interest rate on the note to 8 percent
per annum and extending the maturity date of the note to December 31, 2001.
During 1999, two employees defaulted on their notes, and the Company exercised
its right to foreclose on the collateral securing the notes. At December 31,
1999, notes from three former employees were in default and, subsequently, the
Company exercised its right to foreclose on the collateral securing these notes.
The current principal balance on each of the two remaining modified promissory
notes is $213,500.
The following details notes receivable from the Company's stockholders and
employees as of December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Contractual balance of promissory notes from stockholders
and employees, secured by equity securities............... $ 1,869 $ 876
Less--Valuation allowance to reduce value of notes
receivable to fair market value of securities pledged as
collateral.............................................. (1,254) (308)
------- -----
$ 615 $ 568
======= =====
</TABLE>
For accounting purposes, this sale has not been recognized and the shares of
the Pentacon, Inc., common stock are carried at the lesser of fair market value
or the contractual note balance in the accompanying statements of financial
condition. Changes in the fair value of the shares are reflected in earnings as
net gain (loss) on securities.
3. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1998 and 1999, consist of the
following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES 1998 1999
------------ -------- --------
<S> <C> <C> <C>
Computers and software............................. 5 years $ 80 $ 110
Furniture and fixtures............................. 5-7 years 89 91
Leasehold improvements............................. 2 years 3 3
---- -----
Total.......................................... 172 204
Less- Accumulated depreciation..................... (98) (135)
---- -----
Property and equipment, net.................... $ 74 $ 69
==== =====
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following at
December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accounts payable, trade..................................... $17 $ 16
Accrued bonus............................................... -- 40
Accrued professional fees................................... 10 60
Other accrued expenses...................................... 9 18
--- ----
Total................................................... $36 $134
=== ====
</TABLE>
F-15
<PAGE>
5. NOTES PAYABLE TO RELATED PARTIES:
Notes payable to related parties as of December 31, 1998 and 1999, consists
of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Subordinated notes payable to stockholders, interest of
13.5%, principal and interest due in April 2002........... $180 $180
Notes payable to former employees, interest of 8.0%, monthly
installments of principal and interest, with final payment
due in June 2002.......................................... -- 12
---- ----
Total................................................... $180 $192
==== ====
</TABLE>
The original notes payable to stockholders were modified effective March 8,
1999, to be subordinated agreements, whereby the principal amounts remained the
same, the interest rate increased from 10 percent to 13.5 percent and the
maturity date changed from January 31, 2000, to April 30, 2002. These notes are
subordinated to the claims of the general creditors of the Company.
The subordinated notes are available in computing net capital under the
SEC's uniform net capital rule. To the extent that such borrowings are required
for the Company's continued compliance with minimum net capital requirements,
they may not be repaid.
The aggregate maturities of notes payable to related parties as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<S> <C>
2000........................................... $ 5
2001........................................... 5
2002........................................... 182
----
$192
====
</TABLE>
6. INCOME TAXES:
The provision (benefit) for income taxes differs from an amount computed at
the statutory rate as follows for the years ended December 31, 1997, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal income tax provision (benefit) at statutory
rates.................................................. $278 $76 $(149)
Nondeductible items...................................... 3 3 3
Other.................................................... 13 8 4
---- --- -----
$294 $87 $(142)
==== === =====
</TABLE>
F-16
<PAGE>
The significant items giving rise to the deferred tax assets and liabilities
are as follows as of December 31, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets--
Accrued expenses.......................................... $ -- $ 6
Allowance for doubtful accounts receivable................ 1 3
---- ----
Total deferred tax assets........................... 1 9
---- ----
Deferred tax liabilities--
Bases differences in property and equipment............... 8 17
Unrealized gains and losses............................... 234 202
---- ----
Total deferred tax liabilities...................... 242 219
---- ----
Net deferred tax liability.......................... $241 $210
==== ====
</TABLE>
7. EARNINGS PER SHARE:
The following reconciles the income and shares used in the basic and diluted
earnings per share calculations (in thousands, except share and per share data):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss)............................. $ 522 $ 137 $ (297)
Less--Preferred stock dividends............. (6) (3) --
-------- -------- --------
Net income (loss) attributable to common
stockholders $ 516 $ 134 $ (297)
======== ======== ========
Weighted average number of shares
outstanding................................. 750,000 750,000 750,000
======== ======== ========
Net earnings (loss) per basic share........... $ .69 $ .18 $ (.40)
======== ======== ========
DILUTED EARNINGS PER SHARE
Net income (loss)............................. $ 522 $ 137 $ (297)
Less--Preferred stock dividends............. (6) (3) --
-------- -------- --------
Net earnings (loss) attributable to common
stockholders................................ $ 516 $ 134 $ (297)
======== ======== ========
Weighted average number of shares
outstanding................................. 750,000 750,000 750,000
Dilutive effect, stock options................ 112,675 116,867 --
======== ======== ========
862,675 866,867 750,000
======== ======== ========
Net income (loss) per diluted share........... $ .60 $ .16 $ (.40)
======== ======== ========
</TABLE>
There were 75,000 options excluded from the computation of diluted earnings
per share in 1999 as their inclusion would have had an antidilutive effect on
the computation.
8. SIGNIFICANT CLIENTS:
During the year ended December 31, 1997, two clients accounted for
approximately 20 and 66 percent, respectively of total investment banking fees
earned by the Company. During the year ended
F-17
<PAGE>
December 31, 1998, three clients accounted for approximately 33, 47 and 11
percent, respectively, of total investment banking fees earned by the Company.
Three clients accounted for approximately 24, 29 and 14 percent, respectively,
of total investment banking fees for the year ended December 31, 1999.
9. OPERATING LEASES:
The Company leases office and off-site storage space and equipment through
lease agreements that expire between 2000 and 2001. Total expenses incurred
under these agreements for the years ended December 31, 1997, 1998 and 1999,
were approximately $88,000, $93,000 and $84,000, respectively.
Future minimum lease payments are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
For the year ending December 31--
2000............................................... $ 81
2001............................................... 22
----
$103
====
</TABLE>
10. NET CAPITAL REQUIREMENTS:
Pursuant to the net capital provisions of Rule 15c3-1 of the Securities
Exchange Act of 1934, the Company is required to maintain a minimum net capital,
as defined under such provisions. Net capital and the related net capital ratio
may fluctuate on a daily basis.
At December 31, 1999, the Company had net capital of approximately $140,000
and a net capital requirement of $50,000. The Company's ratio of aggregate
indebtedness to net capital was .91 to 1. The Securities and Exchange Commission
permits a ratio for the Company at this time of no greater than 15 to 1.
11. PROFIT-SHARING PLAN:
Effective January 1, 1993, the Company adopted a profit-sharing plan with
401(k) provisions. This plan calls for discretionary contributions by the
Company as determined by the board of directors. Employee contributions are made
to the plan by electing to defer from 1 percent to 15 percent of an employee's
compensation. The employer is not required to make a matching contribution.
Employees are eligible to participate in the plan after they have attained 21
years of age and have completed six months of service. The Company made
contributions to the plan of approximately $1,800 and $9,200 during the years
ended December 31, 1997 and 1998, respectively. This plan was terminated in
May 1999. The Company then entered into an agreement with Administaff, the
Company's outside payroll administrator, to maintain the Company's 401(k) plan
for eligible employees under the same terms of the Company's former plan. The
Company made no contributions to the plan during the year ended December 31,
1999.
12. CAPITAL STOCK:
SERIES A NONVOTING CUMULATIVE, PREFERRED STOCK
On December 1, 1995, the Company designated 300,000 shares of its
nonconvertible preferred stock as Series A cumulative, preferred stock. The
shares were redeemable at the option of the Company at amounts and conditions as
defined by the Company's resolution that established the shares. Dividends were
payable quarterly beginning December 31, 1995, at an annual rate of $0.08 per
share. In the event of liquidation, the holders of the preferred stock were
entitled to the initial par value for each share held, plus an amount equal to
17 percent their initial investment, compounded on an annual basis, plus any
accrued but unpaid dividends. During the year ended December 31, 1995, the
Company sold 20,000 shares of Series A preferred stock for $20,000. Pursuant to
unanimous approval of the board of directors, the Company issued an additional
10,000 shares of preferred stock for $10,000 in March 1996.
F-18
<PAGE>
On November 30, 1997, the Company elected to redeem the outstanding
Series A preferred stock at its preference amount of $40,461. Effective
January 1998, the Company revised its Articles of Incorporation to eliminate the
Series A preferred stock.
SERIES B NONVOTING CUMULATIVE, PREFERRED STOCK
On June 24, 1997, the Company designated 500,000 shares of its
nonconvertible preferred stock as Series B cumulative, preferred stock at $1.00
par value per share. The shares were redeemable at the option of the Company at
amounts and conditions as defined by the Company's resolution that established
the shares. Dividends were payable quarterly beginning September 30, 1997, at an
annual rate of $0.0825 per share. In the event of liquidation, the holders of
the preferred stock were entitled to the initial par value for each share held
plus any accrued but unpaid dividends. During the year ended December 31, 1997,
the Company sold four units, each consisting of 24,375 shares of Series B
preferred stock and a limited partnership interest in MGCO Investments, Ltd., a
related party. Each unit sold for $25,000, which was allocated $24,375 to the
preferred stock and $625 to the limited partnership interest.
On June 1, 1998, the Company elected to redeem the outstanding Series B
preferred stock at its preference amount of $97,500. Effective July 1998, the
Company revised its Articles of Incorporation to eliminate the Series B
preferred stock.
13. STOCK OPTION PLAN:
On December 13, 1995, the Company adopted its 1995 stock option plan (the
1995 Plan) and authorized the issuance of 700,000 stock options. For each
option, the exercise price may not be less than the fair market value of a share
on the date the option is granted, vesting occurs ratably over periods ranging
from one to five years and expiration occurs between five and 10 years from the
date of grant. Upon termination or resignation of an employee, all options must
be exercised and the Company is required to purchase all of the stock of the
departing employee at its fair market value. Option grants may include stock
appreciation rights in order to allow for cashless option exercises. During
1999, three employees owning 100 percent vested options resigned and exercised
their rights to cashless option exercises. At the date of the cashless exercise,
the excess of the fair market value over the exercise price of the options of
approximately $19,000 has been recorded as compensation expense in the
accompanying statement of income (loss) for the year ended December 31, 1999.
Information with respect to options granted under the 1995 Plan is as
follows for the years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
PRICE PER WEIGHTED AVERAGE
OPTIONS SHARE EXERCISE PRICE
-------- ------------- ----------------
<S> <C> <C> <C>
Outstanding on December 31, 1996...... 111,250 $1.00 - $1.14 $1.13
Granted............................. 22,500 $ 1.00 $1.00
--------
Outstanding on December 31, 1997...... 133,750 $1.00 - $1.14 $1.11
Granted............................. 57,500 $1.33 - $2.55 $1.49
Forfeited........................... (42,000) $1.00 - $1.14 $1.12
--------
Outstanding on December 31, 1998...... 149,250 $1.00 - $2.55 $1.25
Granted............................. 82,500 $1.34 - $2.50 $1.56
Exercised........................... (126,800) $1.00 - $1.33 $1.19
Forfeited........................... (29,950) $1.14 - $2.54 $1.84
--------
Outstanding on December 31, 1999...... 75,000 $1.14 - $2.55 $1.44
========
</TABLE>
F-19
<PAGE>
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Options exercisable on
December 31...................... 79,050 82,550 7,500
Weighted average contractual
life............................. 7.3 years 7.6 years 5 years
Exercise Price per share--
Exercisable on December 31....... $1.00 - $1.14 $1.00 - $1.14 $ 2.55
Unexercised on December 31....... $1.00 - $1.14 $1.00 - $2.55 $1.14 - $2.55
Weighted average price of
exercisable options............ $ 1.08 $ 1.10 $ 2.55
Weighted average fair value of
options granted during the
year........................... $ 0.13 $ 0.12 $ 0.30
</TABLE>
The Company accounts for its employee stock options under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for
which no compensation expense is recognized for employee stock options if there
is no intrinsic value at the date of grant.
Had the Company elected to apply Financial Accounting Standards Board SFAS
No. 123, "Accounting for Stock-Based Compensation," using the fair value-based
method, the Company's net income (loss) and net income (loss) per share amounts
would have been decreased (increased) to the following pro forma amounts (in
thousands, except for per share amounts).
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)--
As reported........................................... $522 $137 $(297)
Pro forma............................................. 513 126 (303)
Net income (loss) per share, basic--
As reported........................................... $.69 $.18 $(.40)
Pro forma............................................. .68 .17 (.40)
Net income (loss) per share, diluted--
As reported........................................... $.60 $.16 $(.40)
Pro forma............................................. .59 .15 (.40)
</TABLE>
The fair value of the options at date of grant was estimated for 1997, 1998
and 1999 using the Black-Scholes Model with the following assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate...................... 5.88% 5.25% 5.0%
Expected life................................ 5 years 2-5 years 2-5 years
Expected dividends........................... None None None
</TABLE>
The Black-Scholes option valuation model and other existing models were
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of and are highly sensitive to subjective assumptions,
including the expected stock price volatility. The Company's employee stock
options have characteristics significantly different from those of traded
options, and changes in the subjective input assumptions can materially affect
their fair value estimate.
14. ADDITIONAL TRANSACTIONS WITH RELATED PARTIES:
In connection with the Series B preferred stock offering, the Series B
stockholders also received limited partnership interests in MGCO Investments,
Ltd., a Texas limited partnership of which the Company was the sole general
partner. The Company had a securities sharing agreement, dated July 1997, with
MGCO Investments, Ltd., whereby MGCO Investments, Ltd., would receive 1 percent
of all securities
F-20
<PAGE>
that the Company earned for each $10,000 of Series B preferred stock sold plus
1.01 percent of the above-determined percentage. During 1997, MGCO Investments,
Ltd., received warrants to purchase 5,000 shares of a client under this
arrangement. This arrangement was terminated during 1998.
From time to time, the Company receives warrants, options or shares of stock
as a portion of fees for its services. It has generally been the Company's
policy to give certain of these securities to its employees as a form of
compensation. During 1999, warrants valued by the Company at approximately
$100,000 were received as fees from customers and subsequently given to
employees. The related fees and compensation expense are recorded in investment
banking fees, and compensation and benefits in the accompanying statement of
income (loss) for the year ended December 31, 1999.
In 1999, two stockholders purchased warrants with a fair value of $14,000
which were reflected as securities owned at the time of purchase. The warrants
were purchased in exchange for two promissory notes totaling $14,000. The notes
were paid off by the employees prior to December 31, 1999.
The Company received fees of approximately $20,000, $933,000 and none from
related parties during 1997, 1998 and 1999, respectively.
The Company paid insurance consulting fees of approximately $21,000 and
$19,000 during 1997 and 1998, respectively, to a company owned by the
stockholders of the Company. This company was dissolved in late 1998.
Interest income on notes receivable from related parties was approximately
$58,000 and $44,000 during 1998 and 1999, respectively.
Interest expense related to the notes payable to related parties was
approximately $900 and $23,000 during 1998 and 1999, respectively.
15. SUBSEQUENT EVENTS: (UNAUDITED)
During 1999, the Company was named as a defendant in a lawsuit in which the
plaintiff claimed he was wrongfully deprived of a specific ownership percentage
in TransCoastal, a former client company that subsequently became publicly
traded. In February 2000, the Company was removed from this legal action. The
Company has instituted a legal action against TransCoastal to enforce the
indemnification provision of the financial advisory agreement between the
Company and TransCoastal. The Company believes, based on currently available
information, that the results of this action will not have a material adverse
effect on its results of operations or financial condition.
In April 2000 the Company revised the 1995 Plan to accelerate vesting on all
non-vested options and to allow employees to exercise their options by entering
into interest bearing note agreements with the Company.
F-21
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MGI2, INC.
[LOGO]
CAPITAL WEST SECURITIES, INC.
I-BANKERS SECURITIES, INC.
(EUROPEAN MANAGER)
WESTPORT RESOURCES INVESTMENT
SERVICES, INC.
APS FINANCIAL CORPORATION
UNTIL , ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1. Financial Statements
The following financial statement of MGi2, Inc. (the "Registrant") is
included in the Prospectus:
<TABLE>
<C> <S>
Report of Arthur Andersen LLP, Independent Public
Accountants
Balance Sheet as of April 19, 2000
Notes to Balance Sheet
</TABLE>
The following financial statements of McFarland, Grossman & Company, Inc.
are included in the Prospectus:
<TABLE>
<C> <S>
Report of Arthur Andersen LLP, Independent Public
Accountants
Independent Auditors' Report of Weinstein Spira & Company,
P.C.
Statements of Financial Condition
Statements of Income (Loss)
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
</TABLE>
2. Exhibits:
<TABLE>
<C> <S>
+ a(1) Certificate of Incorporation
a(2) Certificate of Amendment
b Bylaws
c Not applicable
d Specimen Common Stock Certificate
e Not applicable
f Not applicable
g Not applicable
h(1) Form of Underwriting Agreement
h(2) Form of Agreement Among Underwriters
h(3) Form of Warrant Agreement
i MGi2, Inc. 2000 Stock Plan
j(1) Form of Corporate Custody Agreement with Southwest Bank of
Texas, N.A.
k(1) Form of Employment Agreement with Cary M. Grossman
k(2) Form of Employment Agreement with Clifford E. McFarland
k(3) Form of Officer and Director Indemnification Agreement
k(4) Form of Lock Up Agreement with MGi2
k(5) Form of Lock Up Agreement with Non-employee Directors
k(6) Form of Lock Up Agreement with Officers and Certain
Affiliates
k(7) Form of Lock Up Agreement with Advisory Board Members
</TABLE>
C-1
<PAGE>
<TABLE>
<C> <S>
k(8) Power of Attorney (included on signature page)
l Opinion of Andrews & Kurth L.L.P.
m Not applicable
n(1) Consent of Arthur Andersen LLP
n(2) Consent of Weinstein Spira & Company, P.C.
+ n(3) Letter from Weinstein Spira & Company, P.C. regarding change
in Certifying Accountant
n(4) Consent of Andrews & Kurth L.L.P. (included in Exhibit l)
+ n(5) Consent of Robert M. Chiste to be appointed director
+ n(6) Consent of Glyn J. Meek to be appointed director
+ n(7) Consent of Robert G. Solomon to be appointed director
o Not applicable
p Not applicable
q Not applicable
r Code of Ethics
</TABLE>
- ------------------------
* to be filed by amendment.
+ previously filed.
ITEM 25. MARKETING ARRANGEMENTS
Not applicable. See "Underwriting"
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below are the expenses (other than underwriting discounts,
commissions and non-accountable expense allowance) we expect to incur in
connection with the issuance and distribution of the securities registered
hereby. With the exception of the SEC registration fee, the NASD filing fee and
the AMEX filing fee, the amounts set forth below are estimates:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee........................................ $ 4,129
NASD filing fee............................................. 1,860
American Stock Exchange listing fee......................... 25,000
Printing and engraving expenses............................. 135,000
Legal fees and expenses..................................... 275,000
Accounting fees and expenses................................ 185,000
Transfer agent and registrar fees........................... 7,500
Miscellaneous............................................... 66,511
--------
TOTAL................................................... $700,000
========
</TABLE>
C-2
<PAGE>
ITEM 27. PERSONS CONTROLLED OR UNDER CONTROL WITH REGISTRANT
<TABLE>
<CAPTION>
COMPANY JURISDICTION BASIS OF COMMON CONTROL
------- ------------ -----------------------
<S> <C> <C>
McFarland, Grossman & Company, Inc. Texas 100% owned by MGi2
McFarland, Grossman Capital III, L.C. Texas 2% owned by McFarland,
Grossman
McFarland, Grossman Capital Ventures IV, Texas 70% owned by McFarland,
L.C. Grossman
</TABLE>
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
As of March 31, 2000
<TABLE>
<CAPTION>
TITLE OF CLASS HOLDERS OF RECORD
- -------------- -----------------
<S> <C>
Common stock 2
</TABLE>
ITEM 29. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the Delaware General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation, by reason of the fact that he
is or was a director, officer, employee or agent of the corporation), or is or
was serving at the request of the corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Section 145(b) provides that a corporation similarly may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Delaware Court of Chancery or the other
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all of the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
or in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of
C-3
<PAGE>
any other rights to which the indemnified party may be entitled; that
indemnification provided by Section 145 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of such person's
heirs, executors and administrators, and empowers the corporation to purchase
and maintain insurance on behalf of a director or officer of the corporation
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liabilities under Section
145.
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director (1) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (2) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (3) under Section
174 of the Delaware General Corporation Law or (4) for any transaction from
which the director derived an improper personal benefit.
MGi2's bylaws provide that indemnification shall be to the fullest extent
permitted by the DGCL for all current or former directors or officers of MGi2.
As permitted by the DGCL, the certificate of incorporation provides that
directors of MGi2 shall have no personal liability to MGi2 or its stockholders
for monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to MGi2 or its
stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of the law, (3) under Section 174 of
the DGCL or (4) for any transaction from which a director derived an improper
personal benefit.
In addition, MGi2 has entered into agreements with various of its officers,
directors and advisory directors which provide for indemnification of those
individuals. MGi2 and certain other persons may be entitled under agreements
entered into with agents or underwriters to indemnification by such agents or
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or to contribution with respect to payments which MGi2
or such persons may be required to make in respect thereof. Notwithstanding the
foregoing, for as long as the Company is regulated as a business development
company under the Investment Company Act, the foregoing indemnification rights
shall not include indemnification for actions or matters for which directors and
officers cannot be indemnified under the provisions of the Investment Company
Act.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
None.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
MGi2, Inc.
9821 Katy Freeway, Suite 500
Houston, Texas 77024
(800) 315-6979
ITEM 32. MANAGEMENT SERVICES
None.
C-4
<PAGE>
ITEM 33. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions
described in Item 29, or otherwise, the registrant has been advised
that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
(b) To provide to the underwriter(s) at the closing specified in the
underwriting agreements, certificates in such denominations and
registered in such names as required by the underwriter(s) to permit
prompt delivery to each purchaser.
(c) For purpose of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in the form of prospectus filed by the registrant pursuant to Rule
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(d) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(e) To suspend the offering of shares until the prospectus is amended if
(1) subsequent to the effective date of the registrant's registration
statement, the net asset value declines more than ten percent from
the registrant's net asset value as of the effective date of the
registration statement or (2) the net asset value increases to an
amount greater than its net proceeds as stated in the prospectus.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Houston, in
the State of Texas, on April 21, 2000.
<TABLE>
<S> <C> <C>
MGi2, INC.
By: /s/ CARY M. GROSSMAN
-----------------------------------------
Cary M. Grossman
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below appoints Cary M. Grossman and
Clifford E. McFarland, and each of them, any of whom may act without the joinder
of the other, as his true and lawful attorneys-in-fact and agents with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this registration statement and any registration
statement (including any amendment thereto) for this offering that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the SEC, granting unto said
attorneys-in-fact and agents full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or would do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents or any of them or their or his
substitute and substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities indicated below on April 21, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ CARY M. GROSSMAN Chairman, Chief Executive Officer and Chief
------------------------------------------- Financial Officer and Director (Principal
Cary M. Grossman Executive, Financial and Accounting Officer)
/s/ CLIFFORD E. MCFARLAND
------------------------------------------- President and Director
Clifford E. McFarland
/s/ ROBERT M. CHISTE
------------------------------------------- Director
Robert M. Chiste
/s/ GLYN J. MEEK
------------------------------------------- Director
Glyn J. Meek
/s/ ROBERT G. SOLOMON
------------------------------------------- Director
Robert G. Solomon
</TABLE>
C-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------------- -----------
<C> <S>
+ a(1) Certificate of Incorporation
a(2) Certificate of Amendment
b Bylaws
c Not applicable
d Specimen Common Stock Certificate
e Not applicable
f Not applicable
g Not applicable
h(1) Form of Underwriting Agreement
h(2) Form of Agreement Among Underwriters
h(3) Form of Warrant Agreement
i MGi2, Inc. 2000 Stock Plan
j(1) Form of Corporate Custody Agreement with Southwest Bank of
Texas, N.A.
k(1) Form of Employment Agreement with Cary M. Grossman
k(2) Form of Employment Agreement with Clifford E. McFarland
k(3) Form of Officer and Director Indemnification Agreement
k(4) Form of Lock Up Agreement with MGi2
k(5) Form of Lock Up Agreement with Non-employee Directors
k(6) Form of Lock Up Agreement with Officers and Certain
Affiliates
k(7) Form of Lock Up Agreement with Advisory Board Members
k(8) Power of Attorney (included on signature page)
l Opinion of Andrews & Kurth L.L.P.
m Not applicable
n(1) Consent of Arthur Andersen LLP
n(2) Consent of Weinstein Spira & Company, P.C.
+ n(3) Letter from Weinstein Spira & Company, P.C. regarding change
in Certifying Accountant
n(4) Consent of Andrews & Kurth L.L.P. (included in Exhibit l)
+ n(5) Consent of Robert M. Chiste to be appointed director
+ n(6) Consent of Glyn J. Meek to be appointed director
+ n(7) Consent of Robert G. Solomon to be appointed director
o Not applicable
p Not applicable
q Not applicable
r Code of Ethics
</TABLE>
- ------------------------
* to be filed by amendment.
+ previously filed.
L-1
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
MGi2, INC.
MGi2, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies:
FIRST: That the Board of Directors of the Corporation, at a
meeting held on April 7, 2000, adopted resolutions approving the following
amendment to the Certificate of Incorporation of the Corporation:
NOW, THEREFORE, BE IT RESOLVED, that the second paragraph of
Article VIII of the Corporation's Certificate of Incorporation be amended,
effective as soon as practicable, to read in its entirety as follows:
Notwithstanding the foregoing, for so long as the Corporation
is regulated as a business development company under the Investment
Company Act of 1940, as amended from time to time (the "1940 Act"),
neither this Certificate of Incorporation nor the bylaws of the
Corporation shall limit the liability of, or indemnify, any director or
officer of the Corporation for actions or matters for which such
limitation or indemnification is prohibited by the 1940 Act.
SECOND: That said amendments were duly adopted by the
stockholders of the Corporation in accordance with the provisions of Section 242
of the General Corporation Law of the State of Delaware.
THIRD: That said amendments were duly adopted in accordance
with the provisions of Sections 141(f), 211 and 242 of the General Corporation
Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this
certificate to be executed this ____ day of April, 2000.
MGI2, INC.
By:
-------------------------------------
Name:
Title:
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<PAGE>
B Y L A W S
OF
MGi2, INC.
DATED: April 7, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1.
Offices
Section 1.1 Offices........................................................................1
ARTICLE 2.
Stockholders' Meetings
Section 2.1 Annual Meeting.................................................................1
Section 2.2 Special Meetings...............................................................1
Section 2.3 Notice of Meetings and Adjourned Meetings......................................1
Section 2.4 Voting Lists...................................................................2
Section 2.5 Quorum.........................................................................2
Section 2.6 Organization...................................................................3
Section 2.7 Voting.........................................................................3
Section 2.8 Stockholders Entitled to Vote..................................................4
Section 2.9 Order of Business..............................................................4
Section 2.10 Authorization of Proxies.......................................................5
Section 2.11 No Stockholder Consents........................................................6
ARTICLE 3.
Directors
Section 3.1 Management.....................................................................6
Section 3.2 Number and Term................................................................6
Section 3.3 Quorum and Manner of Action....................................................6
Section 3.4 Vacancies......................................................................7
Section 3.5 Resignations...................................................................7
Section 3.6 Removals.......................................................................7
Section 3.7 Annual Meetings................................................................7
Section 3.8 Regular Meetings...............................................................8
Section 3.9 Special Meetings...............................................................8
Section 3.10 Organization of Meetings.......................................................8
Section 3.11 Place of Meetings..............................................................8
Section 3.12 Action by Unanimous Written Consent............................................8
Section 3.13 Participation in Meetings by Telephone.........................................8
Section 3.14 Nominations....................................................................9
ARTICLE 4.
Committees of the Board
Section 4.1 Membership and Authorities....................................................10
Section 4.2 Minutes.......................................................................10
Section 4.3 Vacancies.....................................................................10
Section 4.4 Telephone Meetings............................................................10
Section 4.5 Action Without Meeting........................................................11
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ARTICLE 5.
Officers
Section 5.1 Number and Title..............................................................11
Section 5.2 Term of Office; Vacancies.....................................................11
Section 5.3 Removal of Elected Officers...................................................11
Section 5.4 Resignations..................................................................11
Section 5.5 The Chairman of the Board.....................................................12
Section 5.6 Chief Executive Officer.......................................................12
Section 5.7 President, Managing Directors and Vice Presidents............................12
Section 5.8 Secretary.....................................................................12
Section 5.9 Assistant Secretaries.........................................................13
Section 5.10 Treasurer.....................................................................13
Section 5.11 Assistant Treasurers..........................................................13
Section 5.12 Subordinate Officers..........................................................14
Section 5.13 Salaries and Compensation.....................................................14
ARTICLE 6.
Capital Stock
Section 6.1 Certificates of Stock.........................................................14
Section 6.2 Lost Certificates.............................................................15
Section 6.3 Fixing Date for Determination of Stockholders of Record for Certain Purposes..15
Section 6.4 Dividends.....................................................................15
Section 6.5 Transfer of Stock.............................................................16
ARTICLE 7.
Miscellaneous Provisions
Section 7.1 Fiscal Year...................................................................16
Section 7.2 Checks, Drafts, Notes.........................................................16
Section 7.3 Notice and Waiver of Notice...................................................16
Section 7.4 Examination of Books and Records.............................................17
Section 7.5 Voting Upon Shares Held by the Corporation...................................17
Section 7.6 Interested Directors and Officers.............................................17
ARTICLE 8.
Indemnification
Section 8.1 Third Party Actions...........................................................18
Section 8.2 Actions By or in the Right of the Corporation.................................19
Section 8.3 Expenses......................................................................20
Section 8.4 Non-exclusivity...............................................................20
Section 8.5 Insurance.....................................................................20
Section 8.6 Survival......................................................................21
Section 8.7 Amendment.....................................................................21
Section 8.8 Definitions...................................................................21
Section 8.9 Limitation for Disabling Conduct..............................................22
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<PAGE>
ARTICLE 9.
Amendments
Section 9.1 Amendments....................................................................23
</TABLE>
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<PAGE>
MGi2, INC.
B Y L A W S
ARTICLE 1.
OFFICES
SECTION 1.1 OFFICES. The Corporation may have offices at such
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE 2.
STOCKHOLDERS' MEETINGS
SECTION 2.1 ANNUAL MEETING. The annual meeting of the holders
of shares of each class or series of stock as are entitled to notice thereof and
to vote thereat pursuant to applicable law and the Corporation's Certificate of
Incorporation for the purpose of electing Directors and transacting such other
proper business as may come before it shall be held in each year, at such time,
on such day and at such place, within or without the State of Delaware, as may
be designated by the Board of Directors.
SECTION 2.2 SPECIAL MEETINGS. In addition to such special
meetings as are provided by law or the Corporation's Certificate of
Incorporation, special meetings of the holders of any class or series or of all
classes or series of the Corporation's stock for any purpose or purposes, may be
called at any time by the Board of Directors (as provided herein) and may be
held on such day, at such time and at such place, within or without the State of
Delaware, as shall be designated by the Board of Directors. Special meetings of
the stockholders of the Corporation may be called only by the Chairman of the
Board of Directors or if one has not been designated, by the Chief Executive
Officer and shall be called within ten (10) days after receipt of the written
request of the Board of Directors, pursuant to a resolution approved by a
majority of the whole Board of Directors.
SECTION 2.3 NOTICE OF MEETINGS AND ADJOURNED MEETINGS. Except
as otherwise provided by law, written notice of any meeting of Stockholders (i)
shall be given either by personal delivery or by mail to each Stockholder of
record entitled to vote thereat, (ii) shall be in such form as is approved by
the Board of Directors, and (iii) shall state the date, place and hour of the
meeting, and, in the case of a special meeting, the purpose or purposes
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<PAGE>
for which the meeting is called. Unless otherwise provided by law, such written
notice shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting. Except when a Stockholder attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business on the ground that the meeting is not lawfully
called or convened, presence in person or by proxy of a Stockholder shall
constitute a waiver of notice of such meeting. Further, a written waiver of any
notice required by law or by these Bylaws, signed by the person entitled to
notice, whether before or after the time stated therein, shall be deemed
equivalent to notice. Except as otherwise provided by law, the business that may
be transacted at any such meeting shall be limited to and consist of the purpose
or purposes stated in such notice. If a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken;
PROVIDED, HOWEVER, that if the adjournment is for more than thirty (30) days, or
if after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each Stockholder of record
entitled to vote at the meeting.
SECTION 2.4 VOTING LISTS. The officer or agent having charge
of the stock transfer books for shares of the Corporation shall keep a complete
list of Stockholders entitled to vote at meetings or any adjournments thereof,
arranged in alphabetical order, in accordance with applicable law and shall make
same available prior to and during each Stockholders' meeting for inspection by
the Corporation's Stockholders as required by law. The Corporation's original
stock transfer books shall be PRIMA FACIE evidence as to who are the
Stockholders entitled to examine such list or transfer books or to vote at any
meeting of Stockholders.
SECTION 2.5 QUORUM. Except as otherwise provided by law or by
the Corporation's Certificate of Incorporation, the holders of a majority of the
Corporation's stock issued and outstanding and entitled to vote at a meeting,
present in person or represented by proxy, without regard to class or series,
shall constitute a quorum at all meetings of the Stockholders for the
transaction of business. If, however, such quorum shall not be present or
represented at any meeting of the Stockholders, the holders of a majority of
such shares of stock, present in person or represented by proxy, may adjourn any
meeting from time to time without notice other than announcement at the meeting,
except as otherwise required by these Bylaws, until a quorum shall be present or
represented. At any such
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<PAGE>
adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally called.
SECTION 2.6 ORGANIZATION. Meetings of the Stockholders shall
be presided over by the Chairman of the Board of Directors, if one shall be
elected, or in his absence, by the Chief Executive Officer, President or by any
Managing Director or Vice President, or, in the absence of any of such officers,
by a chairman to be chosen by a majority of the Stockholders entitled to vote at
the meeting who are present in person or by proxy. The Secretary, or, in his
absence, any Assistant Secretary or any person appointed by the individual
presiding over the meeting, shall act as secretary at meetings of the
Stockholders.
SECTION 2.7 VOTING. Each Stockholder of record, as determined
pursuant to Section 2.8, who is entitled to vote in accordance with the terms of
the Corporation's Certificate of Incorporation and in accordance with the
provisions of these Bylaws, shall be entitled to one vote, in person or by
proxy, for each share of stock registered in his name on the books of the
Corporation. The right to cumulate votes in the election of Directors shall be
expressly prohibited. Every Stockholder entitled to vote at any Stockholders'
meeting may authorize another person or persons to act for him by proxy pursuant
to Section 2.10, provided that no such proxy shall be voted or acted upon after
three years from its date, unless the proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and if,
and only so long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A Stockholder's attendance at any meeting shall not have
the effect of revoking a previously granted proxy unless such Stockholder shall
in writing so notify the Secretary of the meeting prior to the voting of the
proxy. Unless otherwise provided by law, no vote on the election of Directors or
any question brought before the meeting need be by ballot unless the chairman of
the meeting shall determine that it shall be by ballot or the holders of a
majority of the shares of stock present in person or by proxy and entitled to
participate in such vote shall so demand. In a vote by ballot, each ballot shall
state the number of shares voted and the name of the Stockholder or proxy
voting. Except as otherwise provided by law, by the Corporation's Certificate of
Incorporation or these Bylaws, all elections of Directors and all other matters
before the Stockholders shall be decided by the vote of the holders of a
majority of the shares of stock present in person or by proxy at the meeting and
entitled to vote in the election or on the question.
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<PAGE>
SECTION 2.8 STOCKHOLDERS ENTITLED TO VOTE. The Board of
Directors may fix a date not more than sixty (60) days nor less than ten (10)
days prior to the date of any meeting of Stockholders, or, in the case of
corporate action by written consent, not prior to the date upon which the
resolution of the Board of Directors fixing the record date is adopted and not
more than ten (10) days after the date upon which the resolution of the Board of
Directors fixing the record date is adopted, as a record date for the
determination of the Stockholders entitled to notice of and to vote at such
meeting and any adjournment thereof, or to act by written consent, and in each
case such Stockholders and only such Stockholders as shall be Stockholders of
record on the date so fixed shall be entitled to notice of and to vote at such
meeting and any adjournment thereof, or to act by written consent, as the case
may be, notwithstanding any transfer of any stock on the books of the
Corporation after such record date fixed as aforesaid.
SECTION 2.9 ORDER OF BUSINESS. The order of business at all
meetings of Stockholders shall be as determined by the chairman of the meeting
or as is otherwise determined by the vote of the holders of a majority of the
shares of stock present in person or by proxy and entitled to vote without
regard to class or series at the meeting.
At an annual meeting of the Stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (i) specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (ii) otherwise properly brought before the meeting by or
at the direction of the Board of Directors, or (iii) otherwise properly brought
before the meeting by a Stockholder. For business to be properly brought before
an annual meeting by a Stockholder, the Stockholder must have given timely
notice thereof in writing to the Secretary of the Corporation. To be timely, a
Stockholder's notice must be delivered to or mailed to and received at the
principal executive offices of the Corporation not less than eighty (80) days
prior to the meeting; PROVIDED, HOWEVER, that in the event that less than ninety
(90) days' notice or prior public disclosure of the date of the meeting is given
or made to Stockholders, notice by the Stockholder to be timely must be so
received not later than the close of business on the tenth (10th) day following
the date on which such notice of the date of the annual meeting was mailed or
such public disclosure made.
A Stockholder's notice to the Secretary shall set forth as to
each matter the Stockholder proposes to bring before the annual meeting (a) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (b)
the name and address, as they appear on the
-4-
<PAGE>
Corporation's books, of the Stockholder proposing such business, (c) the class
and number of shares of the Corporation which are beneficially owned by the
Stockholder, and (d) any material interest of the Stockholder in such business.
Notwithstanding anything in the Bylaws to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 2.9.
The presiding officer of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with this Section 2.9, and if the
presiding officer should so determine, the presiding officer shall so declare to
the meeting and any such business not properly brought before the meeting shall
not be transacted.
SECTION 2.10 AUTHORIZATION OF PROXIES. Without limiting the
manner in which a Stockholder may authorize another person or persons to act for
him as proxy, the following are valid means of granting such authority. A
Stockholder may execute a writing authorizing another person or persons to act
for him as proxy. Execution may be accomplished by the Stockholder or his
authorized officer, director, employee or agent signing such writing or causing
his or her signature to be affixed to such writing by any reasonable means
including, but not limited to, by facsimile signature. A Stockholder may also
authorize another person or persons to act for him as proxy by transmitting or
authorizing the transmission of a telecopy, telegram, cablegram, or other means
of electronic transmission to the person who will be the holder of the proxy or
to a proxy solicitation firm, proxy support service organization or like agent
duly authorized by the person who will be the holder of the proxy to receive
such transmission, provided that any such telecopy, telegram, cablegram or other
means of electronic transmission must either set forth or be submitted with
information from which it can be determined that the telecopy, telegram,
cablegram or other electronic transmission was authorized by the Stockholder. If
it is determined that such telecopies, telegrams, cablegrams or other electronic
transmissions are valid, the inspectors or, if there are no inspectors, such
other persons making that determination shall specify the information upon which
they relied. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the writing or transmission could be used, provided
that such copy, facsimile telecommunication or other reproduction shall be a
complete reproduction of the entire original writing or transmission.
-5-
<PAGE>
SECTION 2.11 NO STOCKHOLDER CONSENTS. After April 1, 2000, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of stockholders of
the Corporation and may not be effected by any consent in writing of such
stockholders.
ARTICLE 3.
DIRECTORS
SECTION 3.1 MANAGEMENT. The property, affairs and business of
the Corporation shall be managed by or under the direction of the Board of
Directors which may exercise all powers of the Corporation and do all lawful
acts and things as are not by law, by the Corporation's Certificate of
Incorporation or by these Bylaws, directed or required to be exercised or done
by the Stockholders.
SECTION 3.2 NUMBER AND TERM. The number of Directors may be
fixed from time to time by resolution of the Board of Directors adopted by the
affirmative vote of a majority of the members of the entire Board of Directors,
but shall consist of not less than one (1) member nor more than fifteen (15)
members who shall be elected annually by the Stockholders except as provided in
Section 3.4. Directors need not be Stockholders. No decrease in the number of
Directors shall have the effect of shortening the term of office of any
incumbent Director.
SECTION 3.3 QUORUM AND MANNER OF ACTION. At all meetings of
the Board of Directors a majority of the total number of Directors holding
office shall constitute a quorum for the transaction of business AND THE ACT OF
A MAJORITY OF THE DIRECTORS PRESENT AT ANY MEETING AT WHICH THERE IS A QUORUM
SHALL BE THE ACT OF THE BOARD OF DIRECTORS, EXCEPT AS MAY BE OTHERWISE
SPECIFICALLY PROVIDED BY LAW, BY THE CORPORATION'S CERTIFICATE OF INCORPORATION
OR THESE BYLAWS. WHEN THE BOARD OF DIRECTORS CONSISTS OF ONE DIRECTOR, THE ONE
DIRECTOR SHALL CONSTITUTE A MAJORITY AND A QUORUM. IF AT ANY MEETING OF THE
BOARD OF DIRECTORS THERE SHALL BE LESS THAN A QUORUM PRESENT, A MAJORITY OF
THOSE PRESENT MAY ADJOURN THE MEETING FROM TIME TO TIME UNTIL A QUORUM IS
OBTAINED, AND NO FURTHER NOTICE THEREOF NEED BE GIVEN OTHER THAN BY ANNOUNCEMENT
AT SUCH ADJOURNED MEETING. ATTENDANCE BY A DIRECTOR AT A MEETING SHALL
CONSTITUTE A WAIVER OF NOTICE OF SUCH MEETING EXCEPT WHERE A DIRECTOR ATTENDS A
MEETING FOR THE EXPRESS PURPOSE OF OBJECTING, AT THE BEGINNING OF THE MEETING,
TO THE TRANSACTION OF ANY BUSINESS ON THE GROUND THAT THE MEETING IS NOT
LAWFULLY CALLED OR CONVENED.
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<PAGE>
SECTION 3.4 VACANCIES. Except as otherwise provided by law or
the Corporation's Certificate of Incorporation, in the case of any increase in
the authorized number of Directors or of any vacancy in the Board of Directors,
however created, the additional Director or Directors may be elected, or, as the
case may be, the vacancy or vacancies may be filled by majority vote of the
Directors remaining on the whole Board of Directors although less than a quorum,
or by a sole remaining Director. In the event one or more Directors shall
resign, effective at a future date, such vacancy or vacancies shall be filled by
a majority of the Directors who will remain on the whole Board of Directors,
although less than a quorum, or by a sole remaining Director. Any Director
elected or chosen as provided herein shall serve until the sooner of: (i) the
unexpired term of the directorship to which he is appointed; (ii) until his
successor is elected and qualified; or (iii) until his earlier resignation or
removal.
SECTION 3.5 RESIGNATIONS. A Director may resign at any time
upon written notice of resignation to the Corporation. Any resignation shall be
effective immediately unless a certain effective date is specified therein, in
which event it will be effective upon such date and acceptance of any
resignation shall not be necessary to make it effective.
SECTION 3.6 REMOVALS. Any Director or the entire Board of
Directors may be removed only with cause, and another person or persons may be
elected to serve for the remainder of his or their term by the holders of a
majority of the shares of the Corporation entitled to vote in the election of
Directors unless a higher percentage is required in the Certificate of
Incorporation of the Corporation. In case any vacancy so created shall not be
filled by the Stockholders at such meeting, such vacancy may be filled by the
Directors as provided in Section 3.4.
SECTION 3.7 ANNUAL MEETINGS. The annual meeting of the Board
of Directors shall be held, if a quorum be present, immediately following each
annual meeting of the Stockholders at the place such meeting of Stockholders
took place, for the purpose of organization and transaction of any other
business that might be transacted at a regular meeting thereof, and no notice of
such meeting shall be necessary. If a quorum is not present, such annual meeting
may be held at any other time or place that may be specified in a notice given
in the manner provided in Section 3.9 for special meetings of the Board of
Directors or in a waiver of notice thereof.
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<PAGE>
SECTION 3.8 REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such places and times as shall be
determined from time to time by resolution of the Board of Directors. Except as
otherwise provided by law, any business may be transacted at any regular meeting
of the Board of Directors.
SECTION 3.9 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chief Executive Officer, President, or by the
Secretary on the written request of one-third (1/3) of the members of the whole
Board of Directors stating the purpose or purposes of such meeting. Notices of
special meetings, if mailed, shall be mailed to each Director not later than two
(2) days before the day the meeting is to be held or if otherwise given in the
manner permitted by these Bylaws, not later than the day before such meeting.
Neither the business to be transacted at, nor the purpose of, any special
meeting need be specified in any notice or written waiver of notice unless so
required by the Corporation's Certificate of Incorporation or by these Bylaws.
Any and all business may be transacted at a special meeting, unless limited by
law, the Corporation's Certificate of Incorporation or by these Bylaws.
SECTION 3.10 ORGANIZATION OF MEETINGS. At any meeting of the
Board of Directors, business shall be transacted in such order and manner as
such Board of Directors may from time to time determine, and all matters shall
be determined by the vote of a majority of the Directors present at any meeting
at which there is a quorum, except as otherwise provided by these Bylaws or
required by law.
SECTION 3.11 PLACE OF MEETINGS. The Board of Directors may
hold their meetings and have one or more offices, and keep the books of the
Corporation, outside the State of Delaware, at any office or offices of the
Corporation, or at any other place as they may from time to time by resolution
determine.
SECTION 3.12 ACTION BY UNANIMOUS WRITTEN CONSENT. Unless
otherwise restricted by law, the Corporation's Certificate of Incorporation or
these Bylaws, any action required or permitted to be taken at any meeting of the
Board of Directors or of any committee thereof may be taken without a meeting if
all members of the Board of Directors or of such committee, as the case may be,
consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the Board of Directors or the committee.
SECTION 3.13 PARTICIPATION IN MEETINGS BY TELEPHONE. Unless
otherwise restricted by the Corporation's Certificate of Incorporation or these
Bylaws, members of the Board of Directors or of any committee thereof may
participate in a meeting of such Board of Directors or committee by means of
conference telephone or
-8-
<PAGE>
similar communications equipment by means of which all persons participating in
the meeting can hear each other. Participation in a meeting in such manner shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds that
the meeting is not lawfully called or convened.
SECTION 3.14 NOMINATIONS. Subject to the rights of holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, nominations for the election of Directors may be
made by the Board of Directors or a committee appointed by the Board of
Directors or by any Stockholder entitled to vote in the election of Directors
generally. Any Stockholder entitled to vote in the election of Directors
generally may nominate one or more persons for election as Directors at a
meeting only if written notice of such Stockholder's intent to make such
nomination or nominations has been given, either by personal delivery or by
United States mail, postage prepaid, to the Secretary of the Corporation not
later than eighty (80) days prior to the date of any annual or special meeting.
In the event that the date of such annual or special meeting was not publicly
announced by the Corporation by mail, press release or otherwise more than
ninety (90) days prior to the meeting, notice by the Stockholder to be timely
must be delivered to the Secretary of the Corporation not later than the close
of business on the tenth (10th) day following the day on which such announcement
of the date of the meeting was communicated to the Stockholders.
Each such notice shall set forth: (a) the name and address of
the Stockholder who intends to make the nomination and of the person or persons
to be nominated; (b) a representation that the Stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or understandings
between the Stockholder and each nominee and any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the Stockholder; (d) such other information regarding each nominee
proposed by such Stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board of Directors, and (e) the consent of each nominee to serve as a Director
of the Corporation if so elected.
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If the presiding officer of the meeting for the election of
Directors determines that a nomination of any candidate for election as a
Director at such meeting was not made in accordance with the applicable
provisions of these Bylaws, such nomination shall be void.
ARTICLE 4.
COMMITTEES OF THE BOARD
SECTION 4.1 MEMBERSHIP AND AUTHORITIES. The Board of Directors
may, by resolution or resolutions passed by a majority of the whole Board of
Directors, designate one (1) or more Directors to constitute such committees as
the Board of Directors may determine, each of which committee to the extent
provided in said resolution or resolutions or in these Bylaws, shall have and
may exercise all the powers of the Board of Directors in the management of the
business and affairs of the Corporation, except in those cases where the
authority of the Board of Directors is specifically denied to such committee or
committees by law, the Corporation's Certificate of Incorporation or these
Bylaws, and may authorize the seal of the Corporation to be affixed to all
papers that may require it. The designation of a committee and the delegation
thereto of authority shall not operate to relieve the Board of Directors, or any
member thereof, of any responsibility imposed upon it or him by law.
SECTION 4.2 MINUTES. Each committee designated by the Board
of Directors shall keep regular minutes of its proceedings and report the
same to the Board of Directors when required.
SECTION 4.3 VACANCIES. The Board of Directors may designate
one (1) or more of its members as alternate members of any committee who may
replace any absent or disqualified member at any meeting of such committee.
If no alternate members have been appointed, the committee member or members
thereof present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any absent or
disqualified member. The Board of Directors shall have the power at any time
to fill vacancies in, to change the membership of, and to dissolve, any
committee.
SECTION 4.4 TELEPHONE MEETINGS. Members of any committee
designated by the Board of Directors may participate in or hold a meeting by
use of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to
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this Section 4.4 shall constitute presence in person at such meeting, except
where a person participates in the meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
SECTION 4.5 ACTION WITHOUT MEETING. Any action required or
permitted to be taken at a meeting of any committee designated by the Board of
Directors may be taken without a meeting if a consent in writing, setting forth
the action so taken, is signed by all the members of the committee and filed
with the minutes of the committee proceedings. Such consent shall have the same
force and effect as a unanimous vote at a meeting.
ARTICLE 5.
OFFICERS
SECTION 5.1 NUMBER AND TITLE. The elected officers of the
Corporation shall be chosen by the Board of Directors and shall be a Chief
Executive Officer, a Secretary and a Treasurer. The Board of Directors may also
choose a Chairman of the Board, who must be a Board member of the Board of
Directors, a President, Managing Directors, Vice Presidents, Assistant
Secretaries and/or Assistant Treasurers and such other officers as may be
established and approved by the Board of Directors. One person may hold any two
or more of these offices and any one or more of the Vice Presidents may be
designated as an Executive Vice President or Senior Vice President.
SECTION 5.2 TERM OF OFFICE; VACANCIES. So far as is
practicable, all elected officers shall be elected by the Board of Directors at
the annual meeting of the Board of Directors in each year, and except as
otherwise provided in this Article 5, shall hold office until the next such
meeting of the Board of Directors in the subsequent year and until their
respective successors are elected and qualified or until their earlier
resignation or removal. All appointed officers shall hold office at the pleasure
of the Board of Directors. If any vacancy shall occur in any office, the Board
of Directors may elect or appoint a successor to fill such vacancy for the
remainder of the term.
SECTION 5.3 REMOVAL OF ELECTED OFFICERS. Any elected officer
may be removed at any time, with or without cause, by affirmative vote of a
majority of the whole Board of Directors, at any regular meeting or at any
special meeting called for such purpose.
SECTION 5.4 RESIGNATIONS. Any officer may resign at any time
upon written notice of resignation to the Chief Executive Officer, Secretary or
Board of Directors of the Corporation. Any resignation shall be effective
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immediately unless a date certain is specified for it to take effect, in which
event it shall be effective upon such date, and acceptance of any resignation
shall not be necessary to make it effective, irrespective of whether the
resignation is tendered subject to such acceptance.
SECTION 5.5 THE CHAIRMAN OF THE BOARD. The Chairman of the
Board, if one shall be elected, shall preside at all meetings of the
Stockholders and Board of Directors. In addition, the Chairman of the Board
shall perform whatever duties and shall exercise all powers that are given to
him by the Board of Directors.
SECTION 5.6 CHIEF EXECUTIVE OFFICER. The Chief Executive
Officer shall be the chief executive officer of the Corporation; shall (in the
absence of the Chairman of the Board, if one be elected) preside at meetings of
the Stockholders and Board of Directors; shall be EX OFFICIO a member of all
standing committees; shall have general and active management of business of the
corporation; shall implement the general directives, plans and policies
formulated by the Board of Directors; and shall further have such duties,
responsibilities and authorities as may be assigned to him by the Board of
Directors. He may sign, with any other proper officer, certificates for shares
of the Corporation and any deeds, bonds, mortgages, contracts and other
documents which the Board of Directors has authorized to be executed, except
where required by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or these Bylaws, to some other officer or agent of the Corporation.
SECTION 5.7 PRESIDENT, MANAGING DIRECTORS AND VICE PRESIDENTS.
The President, Managing Directors and Vice Presidents shall have such powers and
duties as may be assigned to them by these Bylaws and as may from time to time
be assigned to them by the Board of Directors and may sign, with any other
proper officer, certificates for shares of the Corporation; PROVIDED, HOWEVER,
that a Managing Director, as such, shall not be a member of the Board of
Directors by reason of holding such office; PROVIDED, FURTHER, that there shall
be no prohibition on a Managing Director also serving on the Corporation's Board
of Directors.
SECTION 5.8 SECRETARY. The Secretary, if available, shall
attend all meetings of the Board of Directors and all meetings of the
Stockholders and record the proceedings of the meetings in a book to be kept for
that purpose and shall perform like duties for any committee of the Board of
Directors as shall designate him to serve. He shall give, or cause to be given,
notice of all meetings of the Stockholders and meetings of the Board of
Directors and
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committees thereof and shall perform such other duties incident to the office of
secretary or as may be prescribed by the Board of Directors or the Chief
Executive Officer, under whose supervision he shall be. He shall have custody of
the corporate seal of the Corporation and he, or any Assistant Secretary, or any
other person whom the Board of Directors may designate, shall have authority to
affix the same to any instrument requiring it, and when so affixed it may be
attested by his signature or by the signature of any Assistant Secretary or by
the signature of such other person so affixing such seal.
SECTION 5.9 ASSISTANT SECRETARIES. Each Assistant Secretary
shall have the usual powers and duties pertaining to his office, together with
such other powers and duties as may be assigned to him by the Board of
Directors, the Chief Executive Officer or the Secretary. The Assistant Secretary
or such other person as may be designated by the Chief Executive Officer shall
exercise the powers of the Secretary during that officer's absence or inability
to act.
SECTION 5.10 TREASURER. The Treasurer shall have the custody
of and be responsible for the corporate funds and securities, shall keep full
and accurate accounts of receipts and disbursements in the books belonging to
the Corporation and shall deposit all monies and other valuable effects in the
name and to the credit of the Corporation in such depositories as may be
designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements, and shall render to the Chief Executive Officer and the
Board of Directors, at its regular meetings, or when the Board of Directors so
requires, an account of all his transactions as Treasurer and of the financial
condition of the Corporation and he shall perform all other duties incident to
the position of Treasurer, or as may be prescribed by the Board of Directors or
the Chief Executive Officer. If required by the Board of Directors, he shall
give the Corporation a bond in such sum and with such surety or sureties as
shall be satisfactory to the Board of Directors for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation.
SECTION 5.11 ASSISTANT TREASURERS. Each Assistant Treasurer
shall have the usual powers and duties pertaining to his office, together with
such other powers and duties as may be assigned to him by the Board of
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Directors, the Chief Executive Officer or the Treasurer. The Assistant Treasurer
or such other person designated by the Chief Executive Officer shall exercise
the power of the Treasurer during that officer's absence or inability to act.
SECTION 5.12 SUBORDINATE OFFICERS. The Board of Directors may
(i) appoint such other subordinate officers and agents as it shall deem
necessary who shall hold their offices for such terms, have such authority and
perform such duties as the Board of Directors may from time to time determine,
or (ii) delegate to any committee or officer the power to appoint any such
subordinate officers or agents.
SECTION 5.13 SALARIES AND COMPENSATION. The salary or other
compensation of officers shall be fixed from time to time by the Board of
Directors. The Board of Directors may delegate to any committee or officer the
power to fix from time to time the salary or other compensation of subordinate
officers and agents appointed in accordance with the provisions of Section 5.12.
ARTICLE 6.
CAPITAL STOCK
SECTION 6.1 CERTIFICATES OF STOCK. Certificates of stock shall
be issued to each Stockholder certifying the number of shares owned by him in
the Corporation and shall be in a form not inconsistent with the Certificate of
Incorporation and as approved by the Board of Directors. The certificates shall
be signed by the Chairman of the Board, the Chief Executive Officer, the
President, a Managing Director or a Vice President and by the Secretary or an
Assistant Secretary, or the Treasurer or an Assistant Treasurer and may be
sealed with the seal of the Corporation or a facsimile thereof. Any or all of
the signatures on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
If the Corporation shall be authorized to issue more than one
(1) class of stock or more than one (1) series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided by statute, in lieu of the foregoing
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requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each Stockholder
who so requests the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.
SECTION 6.2 LOST CERTIFICATES. The Board of Directors may
direct a new certificate to be issued in place of any certificate theretofore
issued by the Corporation alleged to have been lost, stolen or destroyed, upon
the making of an affidavit of that fact by the owner of such certificate or his
legal representative. When authorizing the issuance of a new certificate, the
Board of Directors may in its discretion, as a condition precedent to the
issuance thereof, require the owner, or his legal representative, to give a bond
in such form and substance with such surety as it may direct, to indemnify the
Corporation against any claim that may be made on account of the alleged loss,
theft or destruction of such certificate or the issuance of such new
certificate.
SECTION 6.3 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF
RECORD FOR CERTAIN PURPOSES. In order that the Corporation may determine the
Stockholders 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 capital stock or for the purpose of any other
lawful action, the Board of Directors may fix, in advance, a record date, which
shall not be more than sixty (60) days prior to the date of payment of such
dividend or other distribution or allotment of such rights or the date when any
such rights in respect of any change, conversion or exchange of stock may be
exercised or the date of such other action. In such a case, only Stockholders of
record on the date so fixed shall be entitled to receive any such dividend or
other distribution or allotment of rights or to exercise such rights or for any
other purpose, as the case may be, notwithstanding any transfer of any stock on
the books of the Corporation after any such record date fixed as aforesaid.
If no record date is fixed, the record date for determining
Stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
SECTION 6.4 DIVIDENDS. Subject to the provisions of the
Corporation's Certificate of Incorporation, if any, and except as otherwise
provided by law, the Directors may declare dividends upon the capital stock of
the Corporation as and when they deem it to be expedient. Such dividends may be
paid in cash, in property
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or in shares of the Corporation's capital stock. Before declaring any dividend
there may be set apart out of the funds of the Corporation available for
dividends, such sum or sums as the Directors from time to time in their
discretion think proper for working capital or as a reserve fund to meet
contingencies or for equalizing dividends, or for such other purposes as the
Directors shall determine to be conducive to the interests of the Corporation
and the Directors may modify or abolish any such reserve in the manner in which
it was created.
SECTION 6.5 TRANSFER OF STOCK. Transfers of shares of the
capital stock of the Corporation shall be made only on the books of the
Corporation by the registered owners thereof, or by their legal representatives
or their duly authorized attorneys. Upon any such transfers, the old
certificates shall be surrendered to the Corporation by the delivery thereof to
the person in charge of the stock transfer books and ledgers, by whom they shall
be cancelled and new certificates shall thereupon be issued.
ARTICLE 7.
MISCELLANEOUS PROVISIONS
SECTION 7.1 FISCAL YEAR. The fiscal year of the Corporation
shall be fixed by resolution of the Board of Directors.
SECTION 7.2 CHECKS, DRAFTS, NOTES. All checks, drafts or other
orders for the payment of money, notes or other evidences of indebtedness issued
in the name of the Corporation shall be signed by such officer or officers,
agent or agents of the Corporation, and in such manner as shall from time to
time be determined by resolution (whether general or special) of the Board of
Directors or may be prescribed by any officer or officers, or any officer and
agent jointly, thereunto duly authorized by the Board of Directors.
SECTION 7.3 NOTICE AND WAIVER OF NOTICE. Whenever notice is
required to be given to any Director or Stockholder under the provisions of
applicable law, the Corporation's Certificate of Incorporation or these Bylaws,
such notice shall be in writing and delivered either (i) personally or (ii) by
registered or certified mail or (iii) by telegram, telecopy, or similar
facsimile means (delivered during the recipient's regular business hours). Such
notice shall be sent to such Director or Stockholder at the address or telecopy
number as it appears on the records of the Corporation, unless prior to the
sending of such notice he has designated, in a written request to the Secretary
of the Corporation, another address or telecopy number to which notices are to
be sent. Notices shall be deemed given when
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received, if sent by telegram, telex, telecopy or similar facsimile means
(confirmation of such receipt by confirmed facsimile transmission being deemed
receipt of communications sent by telex, telecopy or other facsimile means); and
when delivered and receipted for (or upon the date of attempted delivery where
delivery is refused), if hand-delivered, sent by express courier or delivery
service or sent by certified or registered mail. Whenever notice is required to
be given under any provision of law, the Corporation's Certificate of
Incorporation or these Bylaws, a waiver thereof in writing, by telegraph, cable
or other form of recorded communication, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business on the ground that the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Stockholders, Directors, or
members of a committee of Directors need be specified in any written waiver of
notice unless so required by the Corporation's Certificate of Incorporation or
these Bylaws.
SECTION 7.4 EXAMINATION OF BOOKS AND RECORDS. The Board of
Directors shall determine from time to time whether, and if allowed, when and
under what conditions and regulations the accounts and books of the Corporation
(except such as may by statute be specifically opened to inspection) or any of
them shall be open to inspection by the Stockholders, and the Stockholders'
rights in this respect are and shall be restricted and limited accordingly.
SECTION 7.5 VOTING UPON SHARES HELD BY THE CORPORATION. Unless
otherwise provided by law or by the Board of Directors, the Chairman of the
Board of Directors, if one shall be elected, or the President, if a Chairman of
the Board of Directors shall not be elected, acting on behalf of the
Corporation, shall have full power and authority to attend and to act and to
vote at any meeting of Stockholders of any corporation in which the Corporation
may hold stock and, at any such meeting, shall possess and may exercise any and
all of the rights and powers incident to the ownership of such stock which, as
the owner thereof, the Corporation might have possessed and exercised, if
present. The Board of Directors by resolution from time to time may confer like
powers upon any person or persons.
SECTION 7.6 INTERESTED DIRECTORS AND OFFICERS. (a) No contract
or transaction between the Corporation and one or more of its Directors or
officers, or between the Corporation and any other corporation,
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partnership, association, or other organization in which one or more of its
Directors or officers are Directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the Director
or officer is present at or participates in the meeting of the board or
committee thereof which authorizes the contract or transaction, or solely
because his or their votes are counted for such purposes, if;
(i) the material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
Board of Directors or the committee, and the board or committee in good
faith authorizes the contract or transaction by the affirmative votes
of a majority of the disinterested Directors, even though the
disinterested Directors be less than a quorum; or
(ii) the material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the
Stockholders entitled to vote thereon, and the contract for transaction
is specifically approved in good faith by vote of the Stockholders; or
(iii) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by
the Board of Directors, a committee thereof, or the Stockholder.
(b) Common or interested Directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE 8.
INDEMNIFICATION
SECTION 8.1 THIRD PARTY ACTIONS. The Corporation (i) shall, to
the maximum extent permitted from time to time under the laws of the State of
Delaware, indemnify every person who is or was a party or is or was threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the Corporation), by reason of the fact that
such person is or was a director or officer of the Corporation or any of its
direct or indirect subsidiaries or is or was serving at the request of the
Corporation or any of its direct or indirect subsidiaries as a director, officer
or fiduciary of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, and (ii) may, to the maximum extent permitted
from time to time under the laws of the State of Delaware, indemnify every
person who is or was a party or is or was threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
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whether civil, criminal, administrative or investigative (other than an action
by or in the right of the Corporation), by reason of the fact that such person
is or was an employee or agent of the Corporation or any of its direct or
indirect subsidiaries or is or was serving at the request of the Corporation or
any of its direct or indirect subsidiaries as an employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including counsel fees), judgments, fines and
amounts paid or owed in settlement, actually and reasonably incurred by such
person or rendered or levied against such person in connection with such action,
suit or proceeding, if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
Corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its equivalent shall not, in itself, create a
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Corporation or, with respect to any criminal action or proceeding, that the
person had reasonable cause to believe that his conduct was unlawful. Any person
seeking indemnification under this Section 8.1 shall be deemed to have met the
standard of conduct required for such indemnification unless the contrary is
established.
SECTION 8.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation (i) shall, to the maximum extent permitted from time to time under
the laws of the State of Delaware, indemnify every person who is or was a party
or who is or was threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that such person is or was a
director or officer of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation or any of
its direct or indirect subsidiaries as a director, officer or fiduciary of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, and (ii) may, to the maximum extent permitted from time to
time under the laws of the State of Delaware, indemnify every person who is or
was a party or who is or was threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor by reason of the fact that such person is or was
an employee or agent of the Corporation or any of its direct or indirect
subsidiaries or is or was serving at the request of the Corporation or any of
its direct or indirect subsidiaries as an employee or agent of another
corporation, partnership, joint venture, trust,
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employee benefit plan or other enterprise, AGAINST expenses (including counsel
fees) actually and reasonably incurred by such person in connection with the
defense or settlement or such action or suit if such person acted in good faith
and in a manner such person reasonably believed to be in or not opposed to the
best interests of the Corporation; PROVIDED, HOWEVER, that no indemnification
shall be made with respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation unless and only to the
extent that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnification.
SECTION 8.3 EXPENSES. Expenses incurred by a director or
officer of the Corporation or any of its direct or indirect subsidiaries in
defending a civil or criminal action, suit or proceeding shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article 8.
Such expenses incurred by other employees and agents of the Corporation and
other persons eligible for indemnification under this Article 8 may be paid upon
such terms and conditions, if any, as the Board of Directors deems appropriate.
SECTION 8.4 NON-EXCLUSIVITY. The indemnification and
advancement of expenses provided by, or granted pursuant to, this Article 8
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any provision
of law, the Certificate of Incorporation, the certificate of incorporation or
bylaws or other governing documents of any direct or indirect subsidiary of the
Corporation, under any agreement, vote of stockholders or disinterested
directors or under any policy or policies of insurance maintained by the
Corporation on behalf of any person or otherwise, both as to action in his
official capacity and as to action in another capacity while holding any of the
positions or having any of the relationships referred to in this Article 8.
SECTION 8.5 INSURANCE. The Board of Directors may authorize,
by a vote of the majority of the whole Board, the Corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
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asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article 8.
SECTION 8.6 SURVIVAL. The provisions of this Article 8 shall
continue as to any person who has ceased to be a director or officer of the
Corporation and shall inure to the benefit of the estate, executors,
administrators, heirs, legatees and devisees of any person entitled to
indemnification under this Article 8.
SECTION 8.7 AMENDMENT. No amendment, modification or repeal of
this Article 8 or any provision hereof shall in any manner terminate, reduce or
impair the right of any past, present or future director or officer of the
Corporation to be indemnified by the Corporation, nor the obligation of the
Corporation to indemnify any such director or officer, under and in accordance
with the provisions of this Article 8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising, in whole or in
part, from a state of facts extant on the date of, or relating to matters
occurring prior to, such amendment, modification or repeal, regardless of when
such claims may arise or be asserted.
SECTION 8.8 DEFINITIONS. For purposes of this Article 8, (i)
reference to any person shall include the estate, executors, administrators,
heirs, legatees and devisees of such person, (ii) "employee benefit plan" and
"fiduciary" shall be deemed to include, but not be limited to, the meaning set
forth, respectively, in sections 3(3) and 21(A) of the Employee Retirement
Income Security Act of 1974, as amended, (iii) references to the judgments,
fines and amounts paid or owed in settlement or rendered or levied shall be
deemed to encompass and include excise taxes required to be paid pursuant to
applicable law in respect of any transaction involving an employee benefit plan
and (iv) references to the Corporation shall be deemed to include any
predecessor corporation or entity and any constituent corporation or entity
absorbed in a merger, consolidation or other reorganization of or by the
Corporation which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, employees, agents and
fiduciaries so that any person who was a director, officer, employee, agent or
fiduciary of such predecessor or constituent corporation or entity, or served at
the request of such predecessor or constituent corporation or entity as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
shall stand in the same position under the provisions of this Article 8 with
respect to the
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Corporation as such person would have with respect to such predecessor or
constituent corporation or entity if its separate existence had continued.
SECTION 8.9 LIMITATION FOR DISABLING CONDUCT.
(a) Notwithstanding anything to the contrary in Section 8.1 or
8.2 hereof, the Corporation may not indemnify any director or officer of the
Corporation against any liability, nor shall any director or officer of the
Corporation be exculpated from any liability, to the Corporation or its
stockholders to which such director or officer might otherwise be subject by
reason of "disabling conduct" (as hereinafter defined). Accordingly, each
determination with respect to the permissibility of indemnification of a
director or officer of the Corporation because such director or officer has met
the applicable standard of conduct shall include a determination that the
liability for which such indemnification is sought did not arise by reason of
such person's disabling conduct. The determination required by this Section
8.9(a) may be based on:
(i) a final decision on the merits by a court or other body
before whom the action, suit or proceeding was brought that the person
to be indemnified was not liable by reason of disabling conduct; or
(ii) in the absence of such a decision, a reasonable
determination, based on a review of the facts, that the person to be
indemnified was not liable by reason of such person's disabling conduct
by: (A) the vote of a majority of a quorum of directors who are
"disinterested, non-party directors" (as hereinafter defined); or (B)
an "independent legal counsel" (as hereinafter defined) in a written
opinion. In making such determination, such disinterested, non-party
directors or independent legal counsel, as the case may be, may deem
the dismissal for insufficiency of evidence of any disabling conduct of
either a court action or an administrative proceeding against a person
to be indemnified to provide reasonable assurance that such person was
not liable by reason of disabling conduct.
(b) For the purpose of this Section 8.9:
(i) "disabling conduct" of a director or officer shall mean
such person's willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office
or any other conduct prohibited under Section 17(h) of the 1940 Act or
any other applicable securities laws;
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(ii) "disinterested, non-party director" shall mean a director
of the Corporation who is neither an "interested person" of the
Corporation as defined in Section 2(a)(19) of the 1940 Act nor a party
to the action, suit or proceeding in connection with which
indemnification is sought;
(iii) "independent legal counsel" shall mean an
attorney-at-law admitted to practice in one or more jurisdictions of
the United States who is not, and for at least two (2) years prior to
his or her engagement to render the opinion in question has not been,
employed or retained by the Corporation, by any investment adviser to
or principal underwriter for the Corporation, or by any person
affiliated with any of the foregoing; and
(c) The Corporation may advance legal fees and other expenses
to or for the benefit of a director or officer of the Corporation pursuant to
Section 8.3 hereof so long as, in addition to the other requirements therefor,
the Corporation either:
(i) obtains security for the advance from the person
to be indemnified;
(ii) has insurance against losses arising by reason of
lawful advances; or
(iii) it shall be determined, pursuant to the means set
forth in Section 8.9(a)(ii) hereof, that there is reason to believe
that the person to be indemnified ultimately will be found entitled to
indemnification.
(d) Notwithstanding anything to the contrary in Section 8.5
hereof, the Corporation may not obtain insurance for the purpose of indemnifying
any disabling conduct.
ARTICLE 9.
AMENDMENTS
SECTION 9.1 AMENDMENTS. Except as otherwise expressly provided
in the Corporation's Certificate of Incorporation, the Directors, by the
affirmative vote of a majority of the entire Board of Directors and without the
assent or vote of the Stockholders, may at any meeting make, repeal, alter,
amend or rescind any of these Bylaws. The Stockholders shall not make, repeal,
alter, amend or rescind any of the provisions of these Bylaws except by the
holders of not less than 66 2/3% of the total voting power of all shares of
stock of the Corporation entitled to vote in the election of Directors,
considered for purposes of this Article 9 as one class.
-23-
<PAGE>
MGi2, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
C CUSIP 552897 10 0
SEE REVERSE FOR CERTAIN DEFINITIONS
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $0.01 PAR VALUE, OF
MGi2, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed.
This Certificate is not valid until countersigned and registered by the Transfer
Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Date:
PRESIDENT
ASSISTANT SECRETARY MGi2, Inc. COUNTERSIGNED AND REGISTERED:
CORPORATE SEAL HARRIS TRUST AND SAVINGS BANK
DELAWARE TRANSFER AGENT AND REGISTRAR,
BY
AUTHORIZED SIGNATURE.
<PAGE>
MGi2, INC.
The Corporation shall furnish, without charge, to each stockholder who so
requests, a full statement of the powers, designations, preferences, limitations
and relative rights of the shares of each class of stock or series thereof and
the variations in the relative rights and preferences between the shares of each
series, and the qualifications, limitations or restrictions of such preferences
or such rights and the authority of the board of directors to fix and determine
the relative rights and preferences of subsequent series.
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:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT___________Custodian___________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of
survivorship and not as tenants Under Uniform Gifts to Minors Act
in common
-------------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED,______________HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFICATION NUMBER OF ASSIGNEE
- ---------------------------
- ---------------------------
- --------------------------------------------------------------------------------
(Please Print or Typewrite Name and Address, Including Zip Code, of Assignee)
Shares
- --------------------------------------------------------------------------
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
--------------------------
NOTICE: X
-------------------------------
(Signature)
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN X
UPON THE FACE OF THE CERTIFICATE IN EVERY -------------------------------
PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT (Signature)
OR ANY CHANGE WHATEVER.
--------------------------------
THE SIGNATURE(S) MUST BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION AS DEFINED
IN RULE 17Ad-15 UNDER THE
SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED.
--------------------------------
SIGNATURE(S) GUARANTEED BY:
--------------------------------
-2-
<PAGE>
1,900,000 Shares
Common Stock
MGi2, INC.
(a Delaware corporation)
UNDERWRITING AGREEMENT
April ___, 2000
Capital West Securities, Inc.
One Leadership Square, 2nd Floor
211 North Robinson
Oklahoma City, Oklahoma 73102
Ladies and Gentlemen:
MGi2, Inc., a Delaware corporation (the "Company"), hereby confirms its
agreement with Capital West Securities, Inc. ("Capital West") and additional
underwriters for whom Capital West is acting as managing underwriter (along with
Capital West, each an "Underwriter and, collectively, the "Underwriters") as
follows.
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 1,900,000
shares (the "Firm Shares") of its authorized and unissued common stock, $.01 par
value (the "Common Stock"), to the Underwriters. The Company also proposes to
grant to the Underwriters an option to acquire an additional 285,000 shares of
common stock (the "Option Shares") for the purpose of covering over-allotments
in connection with the sale of the Firm Shares as provided in paragraph 8
hereof. Prior to the execution hereof, the Company has granted to Capital West a
warrant to acquire an additional 190,000 shares of Common Stock (the "Warrant
Shares") pursuant to the terms of a Warrant Agreement, dated March 28, 2000, by
and between the Company and Capital West ("Warrant Agreement"). As used in this
Agreement, the term "Shares" includes the Firm Shares, the Option Shares, the
Warrant Shares, and, if the Company has filed or is required pursuant to the
terms hereof to file a registration statement pursuant to Rule 462(b) under the
Securities Act of 1933, as amended (the "Securities Act") registering additional
shares of Common Stock, such additional shares of Common Stock.
2. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS OF THE COMPANY. The Company
represents and warrants to, and agrees with, each Underwriter, as follows:
2.1 REGISTRATION STATEMENT. A registration statement on Form N-2
(File No. 333-95905 with respect to the Shares, including a
prospectus subject to completion, has been carefully and
accurately prepared by the Company in conformity with the
requirements of the Securities Act and the applicable rules
and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") under
the Securities Act and the Investment Company Act of 1940, as
amended (the
<PAGE>
"Investment Company Act") (the Securities Act and the
Investment Company Act are collectively, the "Acts"), and such
registration statement has been filed with the Commission.
Such amendments to such registration statement and such
amended prospectuses subject to completion, as may have been
required prior to the date hereof have been similarly prepared
and filed with the Commission. The Company will file such
additional amendments to such registration statement and such
amended prospectuses subject to completion, as may hereafter
be required. Copies of the Registration Statement and any
amendments and of each related prospectus subject to
completion have been delivered to the Company.
2.1.1 REGISTRATION STATEMENT DEFINED. The term
"Registration Statement" as used in this Agreement
means the registration statement described in
paragraph 2.1 above including financial statements,
schedules and exhibits, in the form in which it
became or becomes, as the case may be, effective
(including, if the Company omitted information from
the registration statement pursuant to Rule 430A(a)
of the Rules and Regulations, the information deemed
to be a part of the registration statement at the
time it became effective pursuant to Rule 430A(b) of
the Rules and Regulations) and, in the event of any
amendment thereto after the effective date of such
registration statement, shall also mean (from and
after the effectiveness of such amendment) such
registration statement as so amended. If the Company
has filed or is required pursuant to the terms hereof
to file a registration statement pursuant to Rule
462(b) under the Securities Act registering
additional shares of Common Stock (a "Rule 462(b)
Registration Statement"), then, unless otherwise
specified, any reference herein to the term
"Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
2.1.2 PROSPECTUS DEFINED. The term "Prospectus" as used in
this Agreement means the prospectus relating to the
Shares as included in the Registration Statement at
the time it becomes effective (including, if the
Company omitted information from the Registration
Statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of
the Registration Statement at the time it became
effective pursuant to Rule 430A(b) of the Rules and
Regulations). Notwithstanding the foregoing sentence,
if any revised prospectus is provided to the
Underwriters by the Company for use in connection
with the offering of the Shares that differs from the
Prospectus on file with the Commission at the time
the Registration Statement became or becomes, as the
case may be, effective (whether or not such revised
prospectus is required to be filed with the
Commission pursuant to Rule 424(b) of the Rules and
Regulations), the term "Prospectus" will refer to
such revised prospectus from and after the time it is
first provided to the Underwriters for such use.
2.2 462(b) REGISTRATION STATEMENT. If requested by Capital West,
the Company shall file a Rule 462(b) Registration Statement
with the Commission registering shares of Common Stock in
compliance with Rule 462(b) by 5:30 P.M., New York City time,
on the date of this Agreement and to pay to the Commission the
filing fee for such
-2-
<PAGE>
Rule 462(b) Registration Statement at the time of the filing
thereof or to give irrevocable instructions for the payment of
such fee pursuant to Rule 111(b) under the Securities Act.
2.3 CERTAIN AMENDMENTS. If the Registration Statement has been
declared effective under the Acts by the Commission, the
Company will prepare and promptly file with the Commission the
information omitted from the Registration Statement pursuant
to Rule 430A(a) of the Rules and Regulations or as part of a
post-effective amendment to the Registration Statement
(including a final form of Prospectus). If the Registration
Statement has not been declared effective under the Acts by
the Commission, the Company will prepare and promptly file a
further amendment to the Registration Statement, including a
final form of Prospectus.
2.4 PRELIMINARY PROSPECTUS. The Commission has not issued any
order preventing or suspending the use of any preliminary
prospectus or instituted proceedings for that purpose, and
each such preliminary prospectus has conformed in all material
respects to the requirements of the Acts and the Rules and
Regulations.
2.5 COMPLIANCE WITH THE ACTS. Each preliminary prospectus, as of
its date, has not included any untrue statement of a material
fact or omitted to state a material fact necessary to make the
statements therein, or necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading. If the Company is required to file
a Rule 462(b) Registration Statement after the effectiveness
of this Agreement, such Rule 462(b) Registration Statement and
any amendments thereto, when they become effective (a) will
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 not misleading and
(b) will comply in all material respects with the Acts. At the
time the Registration Statement became or becomes, as the case
may be, effective and at all times subsequent thereto up, to
and on the Closing Date (as defined in paragraph 3.3 hereof)
and on any later date on which Option Shares are to be
purchased, (i) the Registration Statement and the Prospectus,
and any amendments or supplements thereto, contained and will
contain all material information required to be included
therein by the Acts and the Rules and Regulations and will in
all material respects conform to the requirements of the Act
and the Rules and Regulations, and (ii) neither the
Registration Statement nor the Prospectus, nor any amendments
or supplements thereto, will include any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made,
not misleading.
2.6 COMPLIANCE WITH EXCHANGE ACT. The Company has, at its expense,
carefully and accurately prepared, in conformity with the
requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), a Form 8-A registration
statement ("Form 8-A"), and such Form 8-A has been filed with
the Commission in order for the Company to be a reporting
person under the Exchange Act. The Company is in compliance
with the requirements of the Exchange Act, and all rules and
regulations promulgated thereunder, and neither the Company
nor any of its employees, directors,
-3-
<PAGE>
stockholders, or affiliates (as defined by the Rules and
Regulations) of any of the foregoing) have taken or will take,
directly or indirectly, any action designed to, or which has
constituted or which might be expected to cause or result in,
under the Exchange Act, or otherwise, stabilization or
manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares.
2.7 ORGANIZATION. The Company and its Subsidiary (as such term is
defined in Rule 405 under the Securities Act), McFarland,
Grossman & Company, Inc., a Texas corporation ("MGCO"), have
been duly incorporated and are validly existing as
corporations in good standing under the laws of the
jurisdiction of their respective organization, with full
corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the
Registration Statement. Each of the Company and its Subsidiary
are duly qualified to do business as a foreign corporation and
is in good standing in each jurisdiction in which the
ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure
to be so qualified or to be in good standing would not have a
material adverse effect on the condition (financial or
otherwise), earnings, operations, business or business
prospects of the Company and its Subsidiaries considered as a
whole.
2.8 ABILITY TO CONDUCT BUSINESS. The Company and its Subsidiaries
are in possession of, and operating in compliance with, all
authorizations, licenses, certificates, consents, orders and
permits from state, federal, foreign and other regulatory
authorities which are material to the conduct of its business,
all of which are valid and in full force and effect. Neither
the Company nor any of its Subsidiaries is in violation of its
charter or bylaws or in default in the performance or
observance of any material obligation, agreement, covenant or
condition contained in any material indenture, mortgage, deed
of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any material lease,
contract, joint venture, or other agreement or instrument to
which it is a party or by which its property is bound or in
violation of any law, order, rule, regulation, writ,
injunction, judgment or decree of any government, governmental
agency or body or court, domestic or foreign, except such
failures to comply as would not, individually or in the
aggregate, have a material adverse effect on the Company and
its Subsidiaries considered as a whole. The disclosures in the
Registration Statement concerning the effects of federal,
state and local regulation on the business of the Company and
its Subsidiary, as currently conducted and as contemplated,
are correct in all material respects and do not omit to state
a material fact.
2.9 AUTHORITY. The Company has full legal right, power and
authority to enter into this Agreement and to perform the
transactions contemplated hereby. This Agreement and the
Warrant Agreement have been duly authorized, executed and
delivered by the Company and are valid and binding agreements
on the part of the Company, enforceable in accordance with
their respective terms, except as rights to indemnification
and contribution hereunder and thereunder may be limited by
applicable law and except as the enforcement hereof and
thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws
-4-
<PAGE>
relating to or affecting creditors' rights generally, or by
general equitable principles. The performance of this
Agreement and the Warrant Agreement and the consummation of
the transactions herein and therein contemplated will not
result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (a) any material
indenture, mortgage, deed of trust, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness,
or any material lease, contract, joint venture or other
agreement or instrument to which the Company is a party or by
which the property of the Company is bound including any
licenses from third parties, or (b) the charter and bylaws of
the Company or its Subsidiaries, or (c) any law, order, rule,
regulation, writ, injunction, judgment or decree of any
government or governmental agency or body or court, domestic
or foreign, having jurisdiction over the Company or its
Subsidiaries or over the properties of the Company or its
Subsidiary, except for breaches, violations or defaults that
individually or in the aggregate, would not have a material
adverse effect on the Company. No consent, approval,
authorization or order of any court or governmental agency or
body is required for the consummation of the transactions in
this Agreement or the Warrant Agreement contemplated, except
such as may be required under the Acts, the Exchange Act, or
under state or other securities or Blue Sky laws, all of which
requirements have been satisfied in all material respects.
Except as disclosed in the Prospectus and except for
restrictions which arise in the ordinary course under the
Investment Company Act (none of which are expected by the
Company to have a material adverse effect on the Company), to
the best of our knowledge after due inquiry, there are no
restrictions, limitations or regulations which materially and
adversely affect the ability of the Company to conduct its
business as described in the Prospectus.
2.10 INVESTMENT COMPANY ACT. Subject to the matters for which the
Company is seeking SEC approval or relief all of which are
described in the Prospectus, the operations of the Company and
its Subsidiaries are in compliance in all material respects
with the provisions of the Investment Company Act applicable
to business development companies and the rules and
regulations of the Commission thereunder, except as will not
result, individually or in the aggregate, in a material
adverse effect on the Company and its Subsidiaries, taken as a
whole. The Company is currently organized and operated in
conformance with the requirements of the Investment Company
Act applicable to business development companies, except as
otherwise described in the Prospectus.
2.11 BUSINESS DEVELOPMENT COMPANY. The Company has elected to be
regulated as a business development company under the
Investment Company Act and has not withdrawn that election,
and the Commission has not ordered that such election be
withdrawn nor to the best of the Company's knowledge have
proceedings to effectuate such withdrawal been initiated or
threatened by the Commission. All required action has or will
have been taken by the Company under the Acts, the Exchange
Act, and the Rules and Regulations thereof to make the public
offering and consummate the sale of the Shares as provided in
this Agreement.
-5-
<PAGE>
2.12 LITIGATION. Except as disclosed in the Registration Statement
or the Prospectus, there is no action, suit or proceeding
before or by any court or governmental agency or body,
domestic or foreign, now pending or threatened, against or
affecting the Company or its Subsidiaries which (a) is
required to be disclosed in the Registration Statement or the
Prospectus or which might result in any material adverse
change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the
Company and its Subsidiary considered as one enterprise, or
which might materially and adversely affect the properties or
assets thereof; or (b) which might be expected to materially
and adversely affect the consummation of the transactions
contemplated by this Agreement. All pending legal or
governmental proceedings to which the Company or any of its
Subsidiaries is a party or of which any of their respective
properties or assets is the subject which are not described in
the Registration Statement, including ordinary routine
litigation incidental to the Company's business, could not
reasonably be expected to result in a material adverse change
in the condition, financial or otherwise, or the earnings,
business affairs or business properties of the Company and its
Subsidiaries considered as one enterprise.
2.13 CONTRACTS. There are no contracts or documents of the Company
or its Subsidiaries which are required to be described in the
Registration Statement or the Prospectus, or to be filed as
exhibits thereto, by the Act or by the Rules and Regulations
which have not been accurately described in all material
respects and filed as exhibits to the Registration Statement.
The contracts so described in the Prospectus are in full force
and effect on the date hereof. Neither the Company nor any of
its Subsidiaries is in material breach of or material default
under, and, to the Company's knowledge, no other party is in
material breach of or material default under, any of such
contracts.
2.14 CAPITAL STOCK. All outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance
with all federal, state and foreign securities laws, were not
issued in violation of, or subject to, any preemptive rights
or other rights to subscribe for or purchase securities (other
than such preemptive rights or other rights to subscribe for
or purchase securities as were fully complied with or
expressly waived or with respect to the violation of which the
right to make claim is barred by the applicable statute of
limitations). The authorized and outstanding capital stock of
the Company conforms in all material respects to the
statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly
state the substance of the instruments defining the
capitalization of the Company). Except as set forth in the
Prospectus, no options, warrants or other rights to purchase,
agreements or other obligations to issue, or agreements or
other rights to convert any obligation into, any shares of
capital stock of the Company, have been granted or entered
into by the Company, as the case may be, with respect to any
of the Company's securities.
2.15 AUTHORIZATION OF SHARES. The Shares to be purchased from the
Company hereunder have been duly authorized for issuance and
sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor
in accordance with the terms of this Agreement, will be duly
and validly issued and fully paid and nonassessable. The
Warrant Shares have been duly authorized for
-6-
<PAGE>
issuance and sale to the Underwriters pursuant to this
Agreement and, when issued and delivered by the Company
against payment therefor in accordance with the terms of the
Warrant Agreement and the warrant to be granted to the
Underwriters under the Warrant Agreement (the "Underwriters'
Warrant"), will be duly and validly issued and fully paid and
nonassessable. No preemptive right, co-sale right,
registration right, right of first refusal or other similar
right of stockholders exists with respect to any of the Shares
or the Warrant Shares, or the issuance and sale thereof other
than those that have been expressly waived prior to the date
hereof and those that will automatically expire upon the
consummation of the transactions contemplated on the Closing
Date. No further approval or authorization of any stockholder,
the Board of Directors or others is required for the issuance
and sale or transfer of the Shares except as may be required
under the Act, the Exchange Act or under state or other
securities or Blue Sky laws. Except as disclosed in or
contemplated by the Prospectus and the financial statements of
the Company (including the notes thereto) included in the
Prospectus, the Company has no outstanding options to
purchase, or any preemptive rights or other rights to
subscribe for or to purchase, any securities or obligations
convertible into, or any contracts or commitments to issue or
sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the
Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately
and fairly presents the information required to be shown with
respect to such plans, arrangements, options and rights. The
shares of Common Stock reserved for issuance upon exercise of
the Company's outstanding options and warrants have been duly
and validly authorized and are sufficient in number to meet
the exercise requirements of such options and warrants.
2.16 FINANCIAL STATEMENTS. Arthur Andersen LLP, which has examined
the financial statements (together with related schedules and
notes) of the Company filed with the Commission as a part of
the Registration Statement and which are included in the
Prospectus, are independent accountants within the meaning of
the Act and the Rules and Regulations. The audited financial
statements of the Company, together with the related
schedules and notes, and the unaudited financial information,
forming part of the Registration Statement and Prospectus,
fairly present the financial position and the results of
operations of the Company at the respective dates and for
the respective periods to which they apply. All audited
financial statements, together with the related schedules
and notes, and the unaudited financial information, filed
with the Commission as part of the Registration Statement,
have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the
periods involved except as may be otherwise stated therein.
The selected and summary financial data included in the
Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with
the audited financial statements presented therein. No
other financial statements or schedules are required to be
included in the Registration Statement.
2.17 NO ADVERSE MATERIAL CHANGE. Since the respective dates as of
which information is given in the Registration Statement and
the Prospectus, except as otherwise stated
-7-
<PAGE>
therein (a) there has been no material adverse change in the
condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company, whether
or not arising in the ordinary course of business; (b) there
have been no transactions entered into by the Company other
than those in the ordinary course of business, which are
material with respect to the Company; (c) there has been no
obligation that is material to the Company, direct or
contingent, incurred by the Company or any Subsidiary, except
obligations incurred in the ordinary course of business; (d)
there has been no change in the capital stock of the Company;
(e) there has been no change in the outstanding indebtedness
of the Company which is material to the Company; (f) there has
been no dividend or distribution of any kind declared, paid or
made by the Company on behalf of any class of its respective
capital stock; or (g) there has been no change in any federal,
state, foreign or other laws, rules, or regulations (or
interpretations thereof) applicable to the business of the
Company that would have a material adverse effect on the
Company, and, to the knowledge of the Company, no such change
is pending other than as described in the Prospectus.
2.18 PROPERTY; VALIDITY OF AGREEMENTS. Except as described in the
Prospectus, (a) the Company and its Subsidiaries have good and
marketable title to all properties and assets described in the
Prospectus as owned by them, free and clear of all liens,
charges, encumbrances or restrictions of any kind or those not
material, individually or in the aggregate, to the business of
the Company and its Subsidiaries considered as a whole; (b)
the agreements to which the Company is a party described in
the Prospectus are valid agreements, enforceable by the
Company, except as the enforcement thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws affecting creditors' rights generally or
by general equitable principles; and (c) the Company has valid
and enforceable leases for the properties described in the
Prospectus as leased by it except as enforcement may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable
principles.
2.19 TAX RETURNS; PAYMENTS. All federal, state, local and foreign
tax returns required to be filed by the Company or its
Subsidiaries in any jurisdiction have been filed. All material
taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due
from the Company or any of its Subsidiaries have been paid
other than those being contested in good faith and for which
adequate reserves have been provided or those currently
payable without penalty or interest. Adequate charges,
accruals and reserves have been provided for in the financial
statements referred to in paragraph 2.16 above in respect of
all federal, state, local and foreign taxes for all periods as
to which the tax liability of the Company or any of its
Subsidiaries has not been finally determined or remains open
to examination by applicable taxing authorities.
2.20 LABOR MATTERS. No labor dispute with the employees of the
Company or any of its Subsidiaries exists or is imminent. The
Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal
suppliers, manufacturers, contractors or customers which might
be expected to result in any
-8-
<PAGE>
material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business
prospects of the Company and its Subsidiaries considered as
one enterprise. No collective bargaining agreement exists with
any of the Company's employees and, to the Company's
knowledge, no such agreement is imminent.
2.21 INTELLECTUAL PROPERTY. The Company and its Subsidiaries own or
possess, or can acquire on reasonable terms, the patents,
patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names
presently employed by them in connection with the business now
operated by them. Neither the Company nor any of its
Subsidiaries has received any notice or is otherwise aware of
any infringement of or conflict with asserted rights of others
with respect to any patent or proprietary rights or of any
facts or circumstances which would render any patent and
proprietary rights invalid or inadequate to protect the
interest of the Company or any of its Subsidiaries therein,
and which infringement or conflict (if the subject of any
unfavorable decision, ruling or finding) or invalidity or
inadequacy singly or in the aggregate, would result in any
material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business
prospects of the Company and any of its Subsidiaries
considered as one enterprise.
2.22 COMPLIANCE WITH LAWS. The Company and its Subsidiaries are in
compliance in all material respects with all applicable laws,
statutes, ordinances, rules or regulations, the enforcement of
which, individually or in the aggregate, would be reasonably
expected to have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or
business prospects of the Company and its Subsidiaries
considered as one enterprise.
2.23 AMEX LISTING. The Common Stock has been approved for listing
on the American Stock Exchange, Inc., subject to official
notice of issuance.
2.24 OFFERING MATERIALS. The Company has not distributed and will
not distribute prior to the Closing Date or on any date on
which Option Shares are to be purchased, as the case may be,
any offering material in connection with the offering and sale
of the Shares other than the Prospectus, the Registration
Statement and other materials permitted by the Acts.
2.25 PROHIBITED PAYMENTS. The Company has not at any time during
the last five years (a) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any
contribution in violation of law, or (b) made any payment to
any foreign, federal or state governmental officer or
official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted
by the laws of the United States or any jurisdiction thereof.
2.26 SELLING PRACTICES. The Company has not taken and will not
take, directly or indirectly, any action designed to or that
might be reasonably expected to cause or result in
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stabilization or manipulation of the price of the Common Stock
to facilitate the sale or resale of the Shares. The Company
has not effected any sales of securities required to be
disclosed in Form N-2 under the Acts, other than as disclosed
in the Registration Statement.
2.27 LOCK-UP AGREEMENTS. The Company has agreed in writing not to
offer to sell, sell short, pledge, hypothecate or otherwise
sell or dispose of any shares of Common Stock of the Company,
or to issue any option or warrants to purchase any shares of
Common Stock of the Company or any securities convertible into
or exchangeable for shares of Common Stock without the prior
written consent of Capital West, for a period expiring one
hundred-eighty (180) days after the effective date of the
Registration Statement, except (a) the Company may grant
options under the Company's 2000 Stock Plan pursuant to its
terms and as described in the Prospectus, (b) the Company may
issue Option Shares pursuant to the over-allotment option as
described in paragraph 8 hereof, and (c) the Company may issue
Warrant Shares pursuant to the Warrant Agreement. Each officer
and director of the Company, each member of the advisory board
of the Company, and the Other Stockholders (as defined below)
have agreed in writing not to offer to sell, contract to sell,
sell short, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to any shares of Common Stock of
the Company, any options or warrants to purchase any shares of
Common Stock of the Company, or any securities convertible
into or exchangeable for shares of the Common Stock owned
directly by such person or with respect to which such person
has the power of disposition without the prior written consent
of Capital West, for a period expiring three years after the
effective date of the Registration Statement, except after the
expiration of one year from the effective date of the
Registration Statement (a) each officer, director, and each
Other Stockholder may sell or otherwise dispose of up to 10%
of the shares of Common Stock owned by such person or
entity,(b) if the market price per share of Common Stock is at
least two times the initial public offering price per share of
Common Stock for a period of 20 consecutive trading days at
any time after such year, then each officer, director, and
each other stockholder may dispose of any or all shares of
Common Stock owned by such person or entity subject to
applicable securities laws, and (c) the lock-up agreement will
terminate with respect to each non-employee director of the
Company and each member of the advisory board of the Company.
For purposes of this Agreement, the term "Other Stockholders"
means Cary M. Grossman, the Grossman Family Limited
Partnership, and Clifford E. McFarland.
2.28 ENVIRONMENTAL COMPLIANCE. Except as described in the
Registration Statement, (a) neither the Company nor any of its
Subsidiaries is in violation of any federal, state, local or
foreign laws or regulations relating to pollution or
protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater,
land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the
release or threatened release of chemicals, pollutants,
contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Environmental
Materials") or to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of
Environmental Materials (collectively, the "Environmental
Laws"), except
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such violations as would not, singly or in the aggregate, have
a material adverse effect on the condition, financial or
otherwise, or the earnings, business affairs or business
prospects of the Company and its Subsidiary considered as one
enterprise, and (b) there are no events or circumstances that
could form the basis of an order for clean-up or remediation,
or an action, suit or proceeding by any private party or
governmental body or agency, against or affecting the Company
or its Subsidiaries relating to any Environmental Materials or
the violation of any Environmental Laws, which, singly or in
the aggregate, could reasonably be expected to have a material
adverse effect on the condition, financial or otherwise, or
the earnings, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise.
2.29 INTERNAL CONTROLS. The Company and its Subsidiaries maintain a
system of internal accounting controls sufficient to provide
reasonable assurances that (a) transactions are executed in
accordance with management's general or specific
authorizations; (b) transactions are recorded as necessary to
permit preparation of financial statements in conformity with
generally accepted accounting principles as in effect in the
United States and to maintain asset accountability; (c) access
to assets is permitted only in accordance with management's
general or specific authorization; and (d) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with
respect to any differences.
2.30 TRANSACTIONS WITH AFFILIATES. There are no outstanding loans,
advances (except normal advances for business expenses in the
ordinary course of business) or guarantees of indebtedness by
the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families
of any of them, except as disclosed in the Registration
Statement and the Prospectus. Neither the Company nor any
employee or agent of the Company has made any payment or
transfer of any funds or assets of the Company or conferred
any personal benefit by use of the Company's assets, or
received any funds, assets or personal benefit in violation of
any law, rule or regulation.
2.31 TRANSFER TAXES. On the Closing Date and upon delivery of the
Option Shares, as applicable, all transfer and other taxes
(other than income taxes) that are required to be paid in
connection with the sale and transfer of the Shares to the
Underwriters will have been paid by the Company.
2.32 ERISA COMPLIANCE. The Company does not currently have, and has
never had, any pension plan subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations
thereunder and/or the equivalent of such legislation in Canada
("ERISA"). No "reportable event" (as defined in ERISA) has
occurred with respect to any "pension plan" (as defined in
ERISA) for which the Company would have any liability. The
Company has not incurred, and does not expect to incur,
liability under (a) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (b)
Sections 412 or 4971 of the Internal Revenue Code of 1986, as
amended, including the regulations and published
interpretations thereunder (the "Code"). Each "pension plan"
for which the Company would have any liability that is
intended to be
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qualified under Section 401(a) of the Code is so qualified in
all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of
such qualification.
2.33 OFFICER'S CERTIFICATES. Any certificate signed by any officer
of the Company and delivered to the Underwriters or to counsel
for the Underwriters shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters
covered thereby.
3. PURCHASE, SALE, AND DELIVERY OF SHARES. On the basis of the representations
and warranties contained in this Agreement and subject to the terms and
conditions herein set forth, at the Closing Date (as defined below) the Company
agrees to sell to each Underwriter, severally, and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company,
respectively, at a purchase price per share of $________ [PURCHASE PRICE =
OFFERING PRICE - 9%] per Share, the number of Shares set forth in Schedule "1"
hereto (subject to adjustment as provided in paragraph 11) ("Purchased Shares"):
3.1 DELIVERY OF CERTIFICATES. On the Closing Date the Company will
deliver to the Underwriters definitive certificates for the
Purchased Shares to be purchased by the Underwriters pursuant
to this paragraph 3 upon payment of the purchase price
therefor by the several Underwriters. The certificates for the
Purchased Shares to be so delivered will be made available to
Capital West at the offices of Capital West Securities, Inc.,
211 N. Robinson, 2nd Floor, One Leadership Square, Oklahoma
City, Oklahoma 73102 (the "Capital West Offices") or at such
other place as shall be agreed upon by the Underwriters and
the Company. The certificates for the Purchased Shares to be
so delivered will be made available to Capital West at the
Capital West Offices or at such other location as Capital West
may reasonably request for checking at least one business day
prior to the Closing Date and will be in such names and
denominations as Capital West may request. If the Underwriters
so elect, delivery of the Purchased Shares may be made by
credit through full fast transfer to the accounts at
Depository Trust Company designated by the Underwriters.
3.2 PAYMENT OF PURCHASE PRICE. The purchase price for the
Purchased Shares to be purchased by the Underwriters pursuant
to this paragraph 3 will be payable by certified or official
bank check in next day funds, payable to the order of the
Company. It is understood that Capital West, individually and
not as representative of the several Underwriters, may (but
shall not be obligated to) make payment of the purchase price
on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by Capital West prior to
the Closing Date for the Purchased Shares to be purchased by
such Underwriter or Underwriters. Any such payment by Capital
West shall not relieve any such Underwriter or Underwriters of
any of its or their obligations hereunder.
3.3 CLOSING DATE. Delivery of the definitive certificates by the
Company and payment of the purchase price of the Underwriter
will occur at the Capital West Offices or at such other place
as shall be agreed upon by the Underwriters and the Company,
at 9:30 a.m. (Oklahoma City time) on the fourth business day
following the effective date of
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the Registration Statement (or at such time and date to which
payments and delivery shall have been postponed pursuant to
paragraph 11), such time and date of payment and delivery
being herein called the "Closing Date."
3.4 OFFERING. After the Registration Statement becomes effective,
the several Underwriters intend to offer the Purchased Shares
to the public as set forth in the Prospectus.
3.5 INFORMATION PROVIDED BY UNDERWRITERS. The information set
forth in the last paragraph on the front cover page (insofar
as such information relates to the Underwriters) and under
"Underwriting" in any preliminary prospectus and in the final
form of Prospectus filed pursuant to Rule 424(b) constitutes
the only information furnished by the Underwriters to the
Company for inclusion in any preliminary prospectus, the
Prospectus or the Registration Statement. Capital West, on
behalf of the respective Underwriters, represents and warrants
to the Company that the statements made therein do not include
any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to
make such statements, in the light of the circumstances in
which they were made, not misleading.
4. FURTHER COVENANTS OF THE COMPANY. The Company covenants with each of
Underwriters as follows:
4.1 EFFECTIVE REGISTRATION STATEMENT. The Company will cause the
Registration Statement and any amendment thereof, if not
effective at the time and date that this Agreement is executed
and delivered by the parties hereto, to become effective as
promptly as possible (other than any Rule 462(b) Registration
Statement to be filed by the Company, which if filed after the
effectiveness of this Agreement will become effective no later
than 4:30 p.m., Houston, Texas time, on the date of this
Agreement). The Company will notify Capital West, promptly
after it shall receive notice thereof, of the time when (a)
the Registration Statement or any subsequent amendment to the
Registration Statement has become effective or (b) any
supplement to the Prospectus has been filed, and (c) if the
Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, when the
Rule 462(b) Registration Statement has become effective.
4.2 ADDITIONAL INFORMATION. If the Company omitted information
from the Registration Statement at the time it was originally
declared effective in reliance upon Rule 430A(a) of the Rules
and Regulations, the Company will provide evidence
satisfactory to Capital West that the Prospectus contains such
information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1)
or (4) of Rule 424(b) of the Rules and Regulations or as part
of a post-effective amendment to such Registration Statement
as originally declared effective which is declared effective
by the Commission. If for any reason the filing of the final
form of Prospectus is required under Rule 424(b)(3) of the
Rules and Regulations, the Company will provide evidence
satisfactory to Capital West that the Prospectus contains such
information and has been filed with the Commission within the
time period prescribed. The Company will notify Capital West
promptly of any
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<PAGE>
request by the Commission for the amending or supplementing of
the Registration Statement or Prospectus or for additional
information.
4.3 AMENDMENTS AND SUPPLEMENTS. Promptly upon Capital West's
request, the Company will prepare and file with the Commission
any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of counsel for the several
Underwriters, may be necessary or advisable in connection with
the distribution of the Shares by the Underwriters. The
Company will promptly prepare and file with the Commission,
and promptly notify Capital West of the filing of, any
amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or
omissions, if, at any time when a prospectus relating to the
Shares is required to be delivered under the Acts, any event
shall have occurred as a result of which the Prospectus or any
other prospectus relating to the Shares as then in effect
would include any untrue statement of a material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If
any Underwriter is required to deliver a prospectus nine
months or more after the effective date of the Registration
Statement in connection with the sale of the Shares, the
Company will prepare promptly upon request, but at the expense
of such Underwriter, such amendment or amendments to the
Registration Statement and such prospectus or prospectuses as
may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act. The Company will file no
amendment or supplement to the Registration Statement or
Prospectus which shall not previously have been submitted to
Capital West a reasonable time prior to the proposed filing
thereof or to which Capital West shall reasonably object in
writing, subject, however, to compliance with the Acts, the
Rules and Regulations thereunder and the provisions of this
Agreement.
4.4 STOP ORDERS. The Company will advise Capital West, promptly
after it shall receive notice or obtain knowledge thereof of
the issuance of any stop order by the Commission suspending
the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose. The
Company will promptly use its best efforts to prevent the
issuance of any stop order or to obtain its withdrawal at the
earliest possible moment if such stop order should be issued.
4.5 BLUE SKY QUALIFICATION. The Company will use its best efforts
to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as Capital West may
designate and to continue such qualifications in effect for so
long as may be required for purposes of the distribution of
the Shares. Notwithstanding the foregoing, the Company will
not be required to submit to the general jurisdiction of any
State. In each jurisdiction in which the Shares shall have
been qualified as above provided, the Company will make and
file such statements and reports in each year as are or may be
reasonably required by the laws of such jurisdiction.
4.6 COPIES OF REGISTRATION STATEMENT AND PROSPECTUS. The Company
will furnish Capital West, as soon as available, copies of the
Registration Statement (three of which will be signed and
which will include all exhibits), each preliminary prospectus,
the Prospectus and any amendments or supplements to such
documents, including any
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prospectus prepared to permit compliance with Section 10(a)(3)
of the Act, all in such quantities as Capital West may from
time to time reasonably request.
4.7 EARNINGS STATEMENT. The Company will make generally available
to its stockholders as soon as practicable, but in any event
not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the
effective date of the Registration Statement, an earnings
statement (which will be in reasonable detail but need not be
audited) complying with the provisions of Section 11(a) of the
Act and covering a 12-month period beginning after the
effective date of the Registration Statement.
4.8 REPORTS TO STOCKHOLDERS AND UNDERWRITERS. The Company will
furnish to its stockholders, as soon as practicable after the
end of each respective period, annual reports (including
consolidated financial statements audited by independent
certified public accountants) and unaudited consolidated
quarterly reports of operations for each of the first three
quarters of the fiscal year. For a period of five years after
the effective date of the Registration Statement, the Company
will furnish to the several Underwriters hereunder, upon
request (a) concurrently with furnishing such annual and
quarterly reports to its stockholders, consolidated statements
of operations of the Company for each of the first three
quarters in the form furnished to the Company's stockholders;
(b) concurrently with furnishing to its stockholders, a
consolidated balance sheet of the Company as of the end of
such fiscal year, together with consolidated statements of
operations, of stockholders' equity, and of cash flows of the
Company for such fiscal year, accompanied by a copy of the
certificate or report thereon of independent accountants; (c)
as soon as they are available, copies of all reports and
financial statements furnished to or filed with the
Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"); (d) every
material press release and every material news item or article
in respect of the Company or its affairs which was released or
prepared by the Company (excluding, in each case customary
product-related press releases and articles); and (e) any
additional information of a public nature concerning the
Company, or its business which Capital West may reasonably
request. For a period of five years from the date of the
Registration Statement, the Company will furnish to Capital
West and, upon request, to each of the other Underwriters, as
soon as available, a copy of each report of the Company mailed
to holders of the Common Stock or publicly filed with the
Commission or any automated quotation system or national
securities exchange on which any class of securities of the
Company is listed. The Company will in a timely manner file
reports with the Commission pursuant to and as required by the
Exchange Act. As long as the Company is a business development
company under the Investment Company Act, the Company will
file, in a timely manner, all reports with the Commission
pursuant to, and as required by, the Investment Company Act.
4.9 PROCEEDS. The Company will apply the net proceeds from the
sale of the Shares being sold by it in the manner set forth
under the caption "Use of Proceeds" in the Prospectus.
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4.10 TRANSFER AGENT AND REGISTRAR. The Company will maintain a
transfer agent and, if necessary under the jurisdiction of
incorporation of the Company, a registrar (which may be the
same entity as the transfer agent) for its Common Stock.
4.11 EXPENSES OF UNDERWRITERS. If the transactions contemplated
hereby are not consummated by reason of any failure, refusal
or inability on the part of the Company to perform any
agreement on its part to be performed hereunder or to fulfill
any condition of the Underwriters' obligations hereunder, or
if this Agreement is terminated under paragraphs 11 or 12, the
Company will reimburse the several Underwriters for all
out-of-pocket accountable expenses (including reasonable fees
and disbursements of counsel for the several Underwriters)
actually incurred by the Underwriters in investigating,
preparing to market or marketing the Shares.
4.12 CERTAIN PRESS RELEASES. If at any time during the 90-day
period after the Registration Statement becomes effective, any
rumor, publication or event relating to or affecting the
Company shall occur as a result of which in Capital West's
opinion the market price of the Common Stock has been or is
likely to be materially affected (regardless of whether such
rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written
notice from Capital West advising the Company to the effect
set forth above, forthwith prepare, consult with Capital West
concerning the substance of, and disseminate a press release
or other public statement, reasonably satisfactory to Capital
West, responding to or commenting on such rumor, publication
or event.
4.13 NO REGISTRATION OF PLAN SHARES. During a period of 30 days
from the effective date of the Registration Statement, the
Company will not file a registration statement registering
shares under any employee benefit plan.
4.14 UNDERTAKINGS. The Company will comply with all provisions of
all undertakings contained in the Registration Statement.
5. This Paragraph Intentionally Left Blank.
6. EXPENSES.
6.1 PAYMENT. The Company agrees with each Underwriter that the
Company will pay and bear all costs and expenses in connection
with (a) the preparation, printing, filing and mailing of the
Registration Statement and prospectus in its preliminary and
final forms and any amendments thereto; (b) listing the
Company's Common Stock, including the Shares with the American
Stock Exchange, Inc. or the NASDAQ National Market System or
Small Cap Market; (c) the printing and mailing of this
Agreement and related documents; (d) the issuance, transfer
and delivery of the Shares; (e) the qualification, if
required, of the Shares under securities laws of those states
in which the Company and Capital West agree to offer the
Shares, including the costs of printing and mailing the "Blue
Sky" surveys and the disbursement and fees of counsel to the
Underwriters retained to qualify the Shares in the various
states and to prepare "Blue Sky" surveys if necessary; and (f)
the Company's travel in connection with
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informational meetings for the brokerage community and
institutional investors. The Company shall reimburse Capital
West for all reasonable fees, expenses and costs (including
but not limited to, Capital West's counsel) incurred by
Capital West relating to qualifying the Shares under the
various state Blue Sky statutes.
6.2 EXPENSE ALLOWANCE. Capital West shall receive from the
Company, for itself and not as representative of the
Underwriters, a nonaccountable expense allowance equal to 2
1/2% of the aggregate public offering price of Shares sold to
the Underwriters in connection with the offering, reduced by
any amounts advanced by the Company to Capital West pursuant
to the terms of the Letter of Understanding dated December 22,
1999. The Company shall pay to Capital West the balance of the
nonaccountable expense allowance on the Closing Date.
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters
to purchase and pay for Shares as provided herein shall be subject to the
accuracy, as of the date hereof and the Closing Date and any later date on which
Option Shares are to be purchased (the "Option Closing Date"), as the case may
be, of the representations and warranties of the Company herein, to the
performance by the Company of its obligations hereunder, and to the following
additional conditions:
7.1 EFFECTIVE REGISTRATION STATEMENT. The Registration Statement
shall have become effective under the Acts not later than 4:30
p.m., Houston, Texas time on the date hereof, or with the
consent of the Underwriters, at a later time and date, not
later, however, than 4:30 p.m., Houston, Texas time on the
first business day following the date hereof, or at such later
time and date as may be approved by a majority in interest of
the Underwriters. No stop order suspending the effectiveness
of the Registration Statement shall have been issued under
either of the Acts or proceedings therefor initiated or
threatened by the Commission and any request on the part of
the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise)
shall have been complied with to the reasonable satisfaction
of counsel to the Underwriters. If the Company has elected to
rely upon Rule 430A of the Rules and Regulations, the price of
the Shares and any price-related information previously
omitted from the effective Registration Statement pursuant to
such Rule 430A shall have been transmitted to the Commission
for filing pursuant to Rule 424(b) of the Rules and
Regulations within the prescribed time period, and prior to
the Closing Date the Company shall have provided evidence
satisfactory to the Underwriters of such timely filing, or a
post-effective amendment providing such information shall have
been promptly filed and declared effective in accordance with
the requirements of Rule 430A of the Rules and Regulations.
7.2 BLUE SKY QUALIFICATION. Qualification under the securities
laws of such states as Capital West may deem necessary to the
success of the underwriting of the issue and sale of the
Shares upon the terms and conditions set forth in this
Agreement or contemplated by this Agreement and containing no
provisions unacceptable to Capital West will have been
secured, and no stop order (or the equivalent thereof) will be
in effect denying or suspending effectiveness of such
qualification, nor will any stop order proceedings (or the
equivalent thereof) with respect thereto be instituted or
pending or threatened under such laws.
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7.3 DOCUMENTS; PROCEEDINGS. At the Closing Date and the Option
Closing Date, if any, (a) counsel for the Underwriters shall
have been furnished with such documents and opinions as they
may require for the purpose of enabling them to pass upon the
issuance and sale of the Shares as contemplated herein and
related proceedings or in order to evidence the accuracy of
any of the representations and warranties, or the fulfillment
of any of the conditions, herein contained; and (b) all
proceedings taken by the Company in connection with the
issuance and sale of the Shares as herein contemplated shall
be satisfactory in form and substance to the Underwriters and
counsel for the Underwriters.
7.4 NO MATERIAL ADVERSE CHANGE. There shall not have been, since
the date or since the respective dates as of which information
is given in the Registration Statement and the Prospectus, any
change in the condition (financial or otherwise), earnings,
operations, business affairs or business prospects of the
Company and its Subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business
which, in Capital West's sole judgment, is material and
adverse and that makes it, in Capital West's sole judgment,
impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus.
7.5 OFFICER'S CERTIFICATE. The Underwriters shall have received a
certificate of the President or Vice President of the Company
and of the chief financial or chief accounting officer of the
Company, dated as of the Closing Date, to the effect that (a)
there has been no material adverse change as described in
paragraph 7.4 above; (b) the representations and warranties in
paragraph 2 hereof are true and correct with the same force
and effect as though expressly made at and as of the Closing
Date; (c) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Date; and (d) no stop
order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose
have been initiated or threatened by the Commission or any
blue sky jurisdiction.
7.6 DELIVERIES. At the Closing Date, the Underwriters shall have
received:
7.6.1 OPINION OF COMPANY COUNSEL. The opinion,
dated as of the Closing Date of Andrews &
Kurth L.L.P. and/or Sutherland, Asbill &
Brennan, L.L.P., counsel for the Company, in
form and substance satisfactory to counsel
for the Underwriters, to the following
effect:
(a) The Company has been duly incorporated and
is validly existing as a corporation in good
standing under the laws of the State of
Delaware;
(b) The Company has corporate power and
authority to own, lease and operate its
properties and to conduct its business as
described in the Registration Statement and
the Prospectus and to enter into and perform
its obligations under this Agreement, the
Warrant Agreement, and any Lock-up Agreement
between any Underwriter and the
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Company, and to issue, sell and deliver to
the Underwriters the Firm Shares, the Option
Shares, and the Warrant Shares, as the case
may be, to be issued and sold by it
hereunder or pursuant to the Warrant
Agreement;
(c) The Company is duly qualified to do business
as a foreign corporation and is in good
standing in specified jurisdictions where
such qualification is required as a result
of the location of its properties or nature
of its business makes qualification
necessary, except where failure to qualify
as a foreign corporation would not have a
material adverse effect on the Company;
(d) At the Closing Date, after giving effect to
the sale of the Purchased Shares, the
authorized capital stock of the Company is
as set forth in the Prospectus under the
caption "Capitalization" as of the dates
stated therein; the issued and outstanding
shares of Common Stock have been duly
authorized and validly issued and are fully
paid and nonassessable and have not been
issued in violation of any preemptive right
contained in the charter or bylaws of the
Company or, to our knowledge after due
inquiry, any co-sale right, registration
right, right of first refusal or other
similar right (other than such preemptive
rights or other rights to subscribe for or
purchase securities as were fully complied
with or expressly waived or with respect to
the violation of which the right to make a
claim is barred by the applicable statute of
limitation);
(e) The Firm Shares and the Option Shares have
been duly and validly authorized for
issuance and sale to the Underwriters
pursuant to this Agreement and, when issued
and delivered by the Company pursuant to
this Agreement against payment therefor in
accordance with the terms hereof, will be
validly issued, fully paid and
nonassessable, and will not be issued in
violation of any preemptive right under the
charter or bylaws of the Company or, to our
knowledge after due inquiry, any co-sale
right, right of first refusal or other
similar right. The stockholders of the
Company do not have any preemptive rights
under the charter or bylaws of the Company
to purchase any of the Shares and, to our
knowledge, after due inquiry, there are no
contractual preemptive rights in favor of
the stockholders of the Company to purchase
the Shares.
(f) The Warrant Shares reserved for issuance
upon the exercise of the Warrant Agreement
have been duly and validly authorized and
are sufficient in number to meet the
exercise requirements thereof, and such
Warrant Shares, when issued upon exercise,
will be duly and validly issued, fully paid
(assuming exercise in accordance with the
Warrant Agreement and receipt by the Company
of the exercise price thereof) and
nonassessable;
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(g) The shares of Common Stock reserved for
issuance upon the exercise of the Company's
outstanding options have been duly and
validly authorized and are sufficient in
number to meet the exercise requirements of
such options, and such shares of Common
Stock, when issued upon exercise, will be
duly and validly issued, fully paid
(assuming exercise in accordance with the
governing instruments therefor and receipt
by the Company of the exercise price
thereof) and nonassessable;
(h) The issuance of the Warrant Shares to be
purchased under the Warrant Agreement, and
the shared to be purchased pursuant to the
Company's outstanding options are not
subject to any preemptive right under the
charter or bylaws of the Company, and, to
our knowledge after due inquiry, no co-sale
right, right of first refusal, or any other
similar rights arising by operation of law
or otherwise;
(i) Each Subsidiary of the Company, including
MGCO has been duly incorporated and is
validly existing as a corporation and is in
good standing under the laws of the
jurisdiction of its incorporation, has full
corporate power and authority to own, lease
and operate its properties and to conduct
its business as described in the
Registration Statement, and is duly
qualified as a foreign corporation to
transact business and is in good standing in
every jurisdiction in which, to our
knowledge after due inquiry, the
Subsidiary's business requires such
qualification; all of the issued and
outstanding capital stock of each such
Subsidiary have been duly authorized and
validly issued, is fully paid and
nonassessable and is, to our knowledge after
due inquiry, owned by the Company.
(j) This Agreement and the Warrant Agreement
have been duly authorized by all necessary
corporate action on the part of the Company
and have been duly executed and delivered by
the Company and, assuming due authorization,
execution and delivery by the Underwriters,
are valid and binding agreements of the
Company, except insofar as indemnification
and contribution provisions may be limited
by applicable law or equitable principles,
and except as enforceability may be limited
by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting
creditors' rights generally or any general
equitable principles;
(k) The Registration Statement has been declared
effective under the Acts, and the related
Form 8-A has been declared effective under
the Exchange Act; any required filing of the
Prospectus pursuant to Rule 424(b) has been
made in the manner and within the time
period required by Rule 424(b) and no stop
order suspending the effectiveness of the
Registration Statement has been issued under
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either of the Acts or proceedings therefor
have been initiated or are pending or
threatened by the Commission;
(l) The Registration Statement, Prospectus and
each amendment or supplement to the
Registration Statement and Prospectus, as of
their respective effective or issue dates
(other than the financial statements and
supporting schedules included therein, as to
which no opinion need be rendered) complied
as to form in all material respects with the
requirements of the Acts and the applicable
Rules and Regulations;
(m) The terms and provisions of the capital
stock of the Company conform in all material
respects to the description thereof
contained in the Prospectus under the
caption "Description of Capital Stock;"
(n) To their knowledge after due inquiry, there
are no outstanding options, warrants,
convertible securities, or other rights to
acquire from the Company any capital stock,
except as described in the Registration
Statement;
(o) Except as set forth in the Prospectus, there
is not, to their knowledge after due
inquiry, pending or threatened any action,
suit, proceeding, inquiry or investigation,
to which the Company or any of its
Subsidiaries is a party, or to which the
property of the Company or its Subsidiaries
is subject, before or brought by any court
or government agency or body, which might
reasonably be expected to result in any
material adverse change in the condition,
financial or otherwise, or in the earnings,
business affairs or business prospects of
the Company and each of its Subsidiaries
considered as one enterprise, or which might
reasonably be expected to materially and
adversely affect the properties or assets
thereof or the consummation of this
Agreement or the performance by the Company
of its obligations hereunder;
(p) The information in the Prospectus under the
captions "Risk Factors," We are subject to
government regulation because of our status
as a business development company, "-The
securities in which we invest are generally
illiquid and we may not be able to sell our
investments," "-transactions with affiliates
may be limited," "Business-Governmental
Regulation," "Investment Company Act
Regulations," "Management-2000 Stock Plan,"
"Shares Eligible for Resale," and
"Description of Capital Stock" in the
Prospectus to the extent that such items
constitute matter of law, summaries of legal
matters, descriptions of statutes, licenses,
rules or regulations, documents or
proceedings, or legal conclusions, has been
reviewed by such counsel and is correct in
all material respects;
(q) Except as specified in the Prospectus, no
authorization, approval, consent or order of
any court or governmental authority or
agency
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(other than under the Acts or the
Rules and Regulations, which have been
obtained, or as may be required under the
securities or blue sky laws of the various
states) is required in connection with the
due authorization, execution and delivery of
this Agreement and the Warrant Agreement or
for the offering, issuance or sale of the
Shares to the Underwriters; the execution,
delivery and performance of this Agreement
and the Warrant Agreement and the
consummation of the transactions
contemplated herein and therein and
compliance by the Company with its
obligations hereunder and thereunder will
not, whether with or without the giving of
notice or lapse of time or both, conflict
with or constitute a breach or violation of,
or default under, or result in the creation
or imposition of any lien, charge or
encumbrance upon any property or assets of
the Company or its Subsidiary pursuant to,
any material contract, indenture, mortgage,
loan agreement, note, lease or other
instrument listed as an exhibit to the
Registration Statement nor will such action
result in any violation of the provisions of
the charter or bylaws of the Company, or any
applicable U.S. federal or state law,
administrative regulation or court decree
applicable to the Company or its Subsidiary;
(r) With the exception of the Warrant Agreement,
to our knowledge after due inquiry, no
holder of any security of the Company has
any right to require registration of any
shares of Common Stock or any other security
of the Company;
(s) The shares of capital stock of the Company
outstanding prior to the issuance of the
Purchased Shares have been duly authorized,
validly issued, fully paid and nonassessable
and such shares conform to the description
confirmed in the Prospectus under the
heading "Description of Capital Stock." The
issuance of shares of capital stock pursuant
to the Exchange (as defined in Section 7.15
hereof) does not require registration under
the Securities Act of 1933, as amended;
(t) To their knowledge after due inquiry, except
as described in the Prospectus, no person,
corporation, trust, partnership, association
or other entity has the right to include
and/or register any securities of the
Company in the Registration Statement,
require the Company to file any registration
statement or, if filed, to include any
security in such registration statement;
(u) The Company has elected to be regulated as a
business development company under the
provisions of the Investment Company Act
applicable to business development
companies, and the Commission has not
ordered that such election be withdrawn nor
to such counsel's knowledge have proceedings
to effectuate such withdrawal been initiated
or threatened by the Commission;
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<PAGE>
(v) Nothing has come to our attention which
leads us to believe that the Company is not
in compliance in any material respect with
the Investment Company Act as a business
development company;
(w) All actions under the Investment Company
Act, the Securities Act and the Exchange Act
necessary to execute and consummate this
Agreement, the Warrant Agreement, the public
offering contemplated by this Agreement and
sale of Shares pursuant to this Agreement
and the Warrant Agreement have been taken as
of the Closing Date; and
(x) The provisions of the Certificate of
Incorporation and Bylaws of the Company
comply as to form in all material respects
with the Investment Company Act and the
rules and regulations thereunder.
In rendering such opinion, such counsel may rely as
to matters of fact (but not as to legal conclusions),
to the extent they deem proper, on certificates of
responsible officers of the Company and public
officials. Such opinion shall not state that it is to
be governed or qualified by, or that it is otherwise
subject to, any treatise, written policy or other
document relating to legal opinions.
In rendering such opinions, such counsel will be
entitled to assume that the consideration paid by
Capital West for the Firm Shares, Option Shares and
Warrant Shares represent fair market value.
In giving its opinion required by this paragraph
7.6.1, Andrews & Kurth L.L.P., shall additionally
state that nothing has come to their attention that
would lead them to believe that the Registration
Statement, at the time it became effective, contained
an untrue statement of a material fact or omitted to
state a material fact required to be stated therein
or necessary to make the statements therein not
misleading or that the Prospectus, at the effective
date of the Registration Statement (unless the term
"Prospectus" refers to a prospectus which has been
provided to the Underwriters by the Company for use
in connection with the offering of the Shares which
differs from the Prospectus declared effective by the
Commission, in which case at the time it is first
provided to the Underwriters for such use) or at the
Closing Date, included an untrue statement of a
material fact or omitted to state a material fact
necessary in order to make the statements therein, in
the light of the circumstances under which they were
made, not misleading. Such opinion may state that
such counsel does not assume any responsibility for
the accuracy, completeness or fairness of the
statements contained in the Registration Statement
and the Prospectus except as otherwise expressly
provided in such opinion, and such counsel need
express no opinion or belief as to the financial
statements, schedules, and other financial or
statistical data included in the Registration
Statement or Prospectus.
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<PAGE>
The opinion issued by Sutherland, Asbill Brennan,
L.L.P. shall provide that such opinion may be relied
upon by Conner & Winters, A Professional Corporation.
7.6.2 LOCK-UP AGREEMENTS. The Underwriters shall have
obtained duly executed and delivered "lock-up"
letters from the Company, each of the Company's
officers, directors, advisory board members, and the
Other Stockholders whereby each such person agrees
not to sell, issue, pledge, hypothecate or otherwise
transfer, any of such person's shares of Common Stock
in the market as described in paragraph 2.27 of this
Agreement, which "lock-up" letters are legal, valid
and binding obligations of the parties thereto,
enforceable against each such party and any
subsequent holder of the securities subject thereto
in accordance with its terms.
7.6.3 OPINION OF UNDERWRITERS' COUNSEL. The opinion, dated
as of Closing Date, of Conner & Winters, A
Professional Corporation, counsel for the
Underwriters, in form and substance satisfactory to
Capital West, with respect to the sufficiency of all
such corporate proceedings and other legal matters
relating to this Agreement and the transactions
contemplated hereby as Capital West may reasonably
require, and the Company shall have furnished to such
counsel such papers, opinions and information as they
request to enable them to pass upon such matters.
7.7 AUDITORS' FIRST LETTER. At the time of the execution of this
Agreement, the Underwriters shall have received from Arthur
Andersen LLP a letter dated such date, in form and substance
satisfactory to the Underwriters, to the following effect.
(a) They are independent public accountants with respect
to the Company and each of its Subsidiaries within
the meaning of the Act and the Rules and Regulations;
(b) It is their opinion that the balance sheet of the
Company and the financial statements of MGCO included
in the Registration Statement and covered by their
opinion therein comply as to form in all material
respects with the applicable accounting requirements
of the Acts and the Rules and Regulations;
(c) Based upon limited procedures set forth in detail in
such letter, nothing has come to their attention
which causes them to believe that, at a specified
date not more than three days prior to the date of
this Agreement, (i) the audited balance sheet of the
Company and the audited financial statements of MGCO
included in the Registration Statement do not comply
as to form in all material respects with the
applicable accounting requirements of the Acts and
the Rules and Regulations or is not presented in
conformity with generally accepted accounting
principles applied on a basis substantially
consistent with that of the other audited financial
statements included in the Registration Statement; or
(ii) at a specified date not more than three days
prior to the date of this Agreement, there has been
any change in the capital stock of the
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Company and MGCO or any increase in the combined long
term debt of the Company and MGCO or any decrease in
combined net current assets or net assets as compared
with the amounts shown in the audited balance sheet
of the Company, dated April 19, 2000, or in the
audited Statements of Financial Condition of MGCO,
dated January 14, 2000, both of which are included in
the Registration Statement, or, during the period
from January 1, 2000 to a specified date not more
than three days prior to the date of this Agreement,
there were any decreases, as compared with the
corresponding period in the preceding year, in
combined revenues, net income or net income per share
of MGCO except in all instances for changes,
increases or decreases which the Registration
Statement and the Prospectus disclose have occurred
or may occur; and
(d) In addition to the examination referred to in their
opinion and the limited procedures referred to in
clause (c) above, they have carried out certain
specified procedures, not constituting an audit, with
respect to certain amounts, percentages and financial
information which are included in the Registration
Statement and Prospectus and which are specified by
the Underwriters, and have found such amounts,
percentages and financial information to be in
agreement with the relevant accounting, financial and
other records of the Company and MGCO identified in
such letter;
7.8 AUDITORS' SECOND LETTER. At the Closing Date, the Underwriters
shall have received from Arthur Andersen LLP a letter, dated
as of the Closing Date, to the effect that they reaffirm the
statements made in the letter furnished pursuant to paragraph
7.7, except that the specified date referred to shall be a
date not more than three days prior to the Closing Date and,
if the Company has elected to rely on Rule 430A of the
Securities Act Regulations, to the further effect that they
have carried out procedures as specified in paragraph 7.7 with
respect to certain amounts, percentages and financial
information specified by the Underwriters and deemed to be a
part of the Registration Statement pursuant to Rule 430(A)(b)
and have found such amounts, percentages and financial
information to be in agreement with the records specified in
such paragraph 7.7.
7.9 AMEX LISTING. At the Closing Date, the Common Stock shall have
been approved for listing on the American Stock Exchange,
Inc., subject to official notice of issuance.
7.10 EXERCISE OF OPTION. If the Underwriters exercise their option
provided in paragraph 8 hereof to purchase all or any portion
of the Option Shares, the representations and warranties of
the Company contained herein and the statements in any
certificates furnished by the Company hereunder shall be true
and correct as of the Option Closing Date and, at the Option
Closing Date, the Underwriters shall have received:
7.10.1 OFFICERS CERTIFICATES. A certificate, dated the
Option Closing Date, of the President or a Vice
President of the Company and of the Chief Financial
or Chief Accounting Officer of the Company confirming
that the certificate
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delivered at the Closing Date pursuant to
paragraph 7.5 hereof remains true and correct as of
the Option Closing Date (except that all references
in such Section to "Closing Date" shall be deemed
to refer to the "Option Closing Date").
7.10.2 OPINION OF COMPANY COUNSEL. The opinions of Andrews &
Kurth L.L.P., counsel for the Company, in form and
substance satisfactory to counsel for the
Underwriters, dated the Option Closing Date, relating
to the Option Shares and otherwise to the same effect
as the opinion required by paragraph 7.6.1 hereof
(except that all references in such paragraph to
"Closing Date" shall be deemed to refer to the
"Option Closing Date").
7.10.3 OPINION OF UNDERWRITERS' COUNSEL. The opinion of
Conner & Winters, A Professional Corporation, counsel
for the Underwriters, dated the Option Closing Date,
relating to the Option Shares to be purchased on the
Option Closing Date and otherwise to the same effect
as the opinion required by paragraph 7.6.3 hereof
(except that all references in such paragraph to
"Closing Date" shall be deemed to refer to the
"Option Closing Date").
7.10.4 AUDITORS LETTER. A letter from Arthur Andersen LLP
in form and substance satisfactory to the
Underwriters and dated the Option Closing Date,
substantially the same in form and substance as the
letter furnished to the Underwriters pursuant to
paragraph 7.7 hereof, except that the "specified
date" in the letter furnished pursuant to this
paragraph 7.10.4 shall be a date not more than three
days prior to the Option Closing Date.
7.11 WARRANT AGREEMENT. The Company and Capital West shall have
entered into the Warrant Agreement, and the Company shall have
sold to Capital West the warrants contained in the Warrant
Agreement which shall be in the form attached as an exhibit to
the Warrant Agreement.
7.12 462(b) REGISTRATION STATEMENT. If the Company is required to
file a Rule 462(b) Registration Statement after the
effectiveness of this Agreement, such Rule 462(b) Registration
Statement shall have become effective by 4:30 P.M., Houston,
Texas time, on the date of this Agreement.
7.13 NO STOP ORDER. No stop order suspending the effectiveness of
the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or
shall be pending before or contemplated by the Commission.
7.14 NASD. The National Association of Securities Dealers, Inc.,
(a) upon review of the of the terms of the public offering of
the Shares, shall not have objected to the fairness and
reasonableness of the underwriting terms and arrangements as
proposed in the Agreement or in any related underwriting
agreement, and (b) shall have approved in writing the change
of ownership of MGCO resulting in MGCO becoming a wholly owned
subsidiary of the Company.
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<PAGE>
7.15 SUBSIDIARIES. The Company shall have acquired all of the
issued and outstanding capital stock and all rights in, or to
acquire, the capital stock of MGCO in a transaction qualifying
for non-recognition treatment under Section 351 of the Code
and in a manner as described in the Prospectus (the
"Exchange").
If any condition specified in this paragraph 7 is not fulfilled when
and as required to be fulfilled, this Agreement may be terminated by
Capital West by notice to the Company at any time at or prior to
Closing Date, and such termination shall be without liability of any
party to any other party except as provided in paragraph 4 and except
that paragraphs 4.11 and 9 shall survive any such termination and
remain in full force and effect.
8. OPTION SHARES.
8.1 GRANT OF OPTION. On the basis of the representations and
warranties herein contained, but subject to the terms and
conditions herein set forth, the Company hereby grants to the
Underwriters, for the purpose of covering over-allotments in
connection with the distribution and sale of the Shares only,
a non-transferable option (the "Option") to purchase up to an
aggregate 285,000 Option Shares at the purchase price per
share for the Firm Shares set forth in paragraph 3 hereof less
the expense allowance provided in paragraph 6.2 hereof.
8.2 EXERCISE OF OPTION. The Option may be exercised by Capital
West on behalf of the several Underwriters on one occasion in
whole or in part during the period of 45 days from and after
the date on which the Shares are initially offered to the
public, by giving notice to the Company. At the discretion of
Capital West, the number of Option Shares to be purchased by
each Underwriter upon the exercise of the Option will be the
same proportion of the total number of Option Shares to be
purchased by the several Underwriters pursuant to the exercise
of the Option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule "1" hereto) bears to the
total number of Firm Shares purchased by the several
Underwriters (set forth in Schedule "1" hereto), adjusted by
the Underwriters in such manner as to avoid fractional shares.
8.3 CERTIFICATES FOR OPTION SHARES. Delivery of definitive
certificates for the Option Shares to be purchased by the
Underwriters pursuant to the exercise of the option granted by
this paragraph 8 will be made against payment of the purchase
price therefor by the Underwriters by certified or official
bank check or checks drawn in same day funds, payable to the
order of the Company. Such delivery and payment shall take
place at the offices of Capital West, 211 N. Robinson, 2nd
Floor, Oklahoma City, Oklahoma 73102 or at such other place as
may be agreed upon between the Underwriters and the Company on
the Closing Date, if written notice of the exercise of such
option is received by the Company not later than three full
business days prior to the Closing Date. The certificates for
the Options Shares so to be delivered will be made available
to Capital West at such office or other location including,
without limitation, in Oklahoma City, as Capital West may
reasonably request for checking at least two full business
days prior to the date of payment and delivery and will be in
such names and denominations as Capital West may request, such
request to be made
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<PAGE>
at least three full days prior to such date of payment and
delivery. If Capital West so elects, delivery of the Shares
may be made by credit through full fast transfer to the
accounts at Depository Trust Company by the Underwriters. It
is understood that Capital West, individually, and not as the
representative of the Underwriters, may (but shall not be
obligated to) make payment of the purchase price on behalf of
any Underwriter or Underwriters whose check or checks shall
not have been received by Capital West prior to the date of
payment and delivery for the Option Shares to be purchased by
such Underwriter or Underwriters. Any such payment by Capital
West shall not relieve any Underwriters of any of its or their
obligations hereunder.
8.4 CONDITIONS PRECEDENT. Upon exercise of any option provided for
in paragraph 8.1 hereof, the obligations of the Underwriters
to purchase such Option Shares will be subject (as of the date
hereof and as of the date of payment for such Option Shares)
to the accuracy of and compliance with the representations and
warranties of the Company herein, to the accuracy of the
statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the
Company of their respective obligations hereunder, and to the
condition that all proceedings taken at or prior to the
payment date in connection with the sale and transfer of such
Option Shares must be satisfactory in form and substance to
Capital West and to Underwriters' counsel, and Capital West
shall have been furnished with all such documents,
certificates and opinions as Capital West may reasonably
request in order to evidence the accuracy and completeness of
any of the representations, warranties or statements, the
performance of any of the covenants of the Company or the
compliance with any of the conditions herein contained.
9. INDEMNIFICATION AND CONTRIBUTION.
9.1 INDEMNIFICATION OF UNDERWRITERS. The Company agrees to
indemnify and hold harmless each Underwriter against any
losses, claims, damages or liabilities, joint or several, as
incurred, to which such Underwriter may become subject under
the Acts or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or
are based upon (a) any breach of any representation, warranty,
agreement or covenant of the Company herein contained, or (b)
any untrue statement or alleged untrue statement made by the
Company in paragraph 2 hereof, or (c) any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus, the
Prospectus or any amendment or supplement thereto, or in any
blue sky application or other document executed by the Company
specifically for that purpose or based upon written
information furnished by the Company filed in any state or
other jurisdiction in order to qualify any or all of the
Shares under the securities laws thereof (any such
application, documents or information being hereinafter called
a "Blue Sky Application"), or (d) the omission or alleged
omission to state in the Registration Statement or any
amendment thereto a material fact required to be stated
therein or necessary to make the statements therein not
misleading, or the omission or alleged omission to state in
any preliminary prospectus, the Prospectus or any supplement
thereto or in any Blue Sky Application a material fact
required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under
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which they were made, not misleading. The Company will
reimburse each Underwriter on a monthly basis for any legal or
other reasonable expenses as incurred by such Underwriter in
connection with investigating or defending against or
appearing as a third-party witness in connection with any such
loss, claim, damage, liability or action, notwithstanding the
possibility that payments for such expenses might later be
held to be improper, in which case the person receiving them
shall promptly refund them. Notwithstanding the foregoing, the
Company will not be liable in any such case to the extent, but
only to the extent, that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission
made in the Registration Statement, such preliminary
prospectus or the Prospectus, or any amendment or supplement,
in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter
specifically for use in the preparation thereof and, provided
further, that the indemnity agreement provided in this
paragraph 9.1 with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter from whom the
person asserting any losses, claims, charges, liabilities or
litigation based upon any untrue statement or alleged untrue
statement of material fact or omission or alleged omission to
state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected
has not been sent or given to such person within the time
required by the Act and the Rules and Regulations thereunder,
unless such failure is the result of noncompliance by the
Company with paragraph 4.5 hereof.
9.2 INDEMNIFICATION OF COMPANY. Subject to the limitations
contained in this paragraph 9.2, each Underwriter severally,
but not jointly, shall indemnify and hold harmless the Company
against any losses, claims, damages or liabilities, as
incurred, to which the Company may become subject, under the
Acts or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or
are based upon (a) any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration
Statement, preliminary prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) in any Blue Sky
Application, or (c) the omission or alleged omission to state
in the Registration Statement or any amendment thereto a
material fact required to be stated therein or necessary to
make the statements therein not misleading, or the omission or
alleged omission to state in any preliminary prospectus, the
Prospectus or any supplement thereto or in any Blue Sky
Application a material fact required to be stated therein or
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The
Underwriters, severally, but not jointly, will reimburse any
legal or other expenses reasonably incurred by the Company in
connection with investigation or defending against any such
loss, claim, damage, liability or action. Notwithstanding the
foregoing, such indemnification by each Underwriter shall be
available in each such case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement
or omission or alleged omission in the Registration Statement,
preliminary prospectus, the Prospectus or any amendment or
supplement thereto, or in any Blue Sky Application was made in
reliance upon and in conformity with written information
furnished to the Company through the
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Underwriters by or on behalf of such Underwriter specifically
for use in the preparation thereof.
9.3 INDEMNIFICATION PROCEDURE. Promptly after receipt by an
indemnified party under paragraph 9.1 or 9.2 above of notice
of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to
be made against the indemnifying party under such subsection,
notify the indemnifying party in writing of the claim or the
commencement of that action; the failure to notify the
indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under
such subsection. If any such claim or action shall be brought
against an indemnified party, and it shall notify the
indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it
wishes, jointly with any other similarly notified indemnifying
party, to assume the defense thereof with counsel reasonably
satisfactory to the indemnified party; provided, however, if
the defendants in any such action include both the indemnified
parties and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be legal
defenses available to it and/or other indemnified parties
which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal
defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. After
notice from the indemnifying party to the indemnified party of
its election to assume the defense of such claim or action,
the indemnifying party shall not be liable to the indemnified
party under such subsection for any legal or other expenses
subsequently incurred by the indemnified party in connection
with the defense thereof unless (a) the indemnified party
shall have employed separate counsel in accordance with the
proviso to the preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel (together with
appropriate local counsel) approved by the indemnifying party,
representing all the indemnified parties under paragraph 9.1
and 9.2 hereof who are parties to such action), (b) the
indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of
commencement of the action, or (c) the indemnifying party has
authorized the employment of counsel for the indemnified party
at the expense of the indemnifying party.
9.4 CONTRIBUTION. In order to provide for just and equitable
contribution in any action in which a claim for
indemnification is made pursuant to this paragraph 9 for which
it is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the
expiration of time to appeal or the denial of the last right
of appeal) that such indemnification may not be enforced in
such case notwithstanding the fact that this paragraph 9
provides for indemnification in such case, all the parties
hereto shall contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after
contribution from others) in such proportion so that the
Underwriters are responsible pro rata for the portion
represented by the percentage that the underwriting discount
bears to the initial public offering price, and the Company is
responsible for the remaining portion; provided,
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however, that (a) no Underwriter shall be required to
contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter, and
(b) no person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to
a contribution from any person who is not guilty of such
fraudulent misrepresentation. This subparagraph 9.4 shall not
be operative as to any Underwriter to the extent that the
Company has received indemnity under this paragraph 9.
9.5 AFFILIATES. The obligations of the Company under this
paragraph 9 shall be in addition to any liability which the
Company may otherwise have, and shall extend, upon the same
terms and conditions, to each officer and director of each
Underwriter and to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations
of the Underwriters under this paragraph 9 shall be in
addition to any liability that the respective Underwriters may
otherwise have, and shall extend, upon the same terms and
conditions, to each director of the Company (including any
person who, with his consent, is named in the Registration
Statement as about to become a director of the Company), to
each officer of the Company who has signed the Registration
Statement and to each person, if any, who controls the Company
within the meaning of the Securities Act, in either case,
whether or not such person is a party to any action or
proceeding.
9.6 ACKNOWLEDGMENT. The parties to this Agreement hereby
acknowledge that they are sophisticated business persons who
were represented by counsel during the negotiations regarding
the provisions hereof including without limitation the
provisions of this paragraph 9, and are fully informed
regarding said provisions. They further acknowledge that the
provisions of this paragraph 9 fairly allocate the risks in
light of the ability of the parties to investigate the Company
and its business in order to assure that adequate disclosure
is made in the Registration Statement and Prospectus as
required by the Act and the Exchange Act. The parties are
advised that federal or state public policy, as interpreted by
the courts in certain jurisdictions, may be contrary to
certain of the provisions of this paragraph 9, and the parties
hereto hereby expressly waive and relinquish any right or
ability to assert such public policy as a defense to a claim
under this paragraph 9 and further agree not to attempt to
assert any such defense.
10. REPRESENTATIONS, WARRANTIES, AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, covenants and agreements of the Company contained
in this Agreement (including, without limitation, the agreements of the Company
set forth in paragraphs 4 and 5 hereof, or contained in certificates of officers
of the Company submitted pursuant hereto, and the indemnity and contribution
agreements contained in paragraph 9 hereof, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, or any of
its officers, controlling persons or directors and shall survive delivery of the
Shares to the several Underwriters hereunder or termination of this Agreement.
11. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail
to take up and pay for the number of Shares agreed by such Underwriter or
Underwriters to be purchased hereunder
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upon tender of such Shares in accordance with the terms hereof, and if the
aggregate number of Shares which such defaulting Underwriter or Underwriters
so agreed but failed to purchase does not exceed 10% of the Shares, the
remaining Underwriters shall be obligated, severally in proportion to their
respective commitments hereunder, to take up and pay for the Shares of such
defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so
defaults and the aggregate number of Shares which such defaulting Underwriter
or Underwriters agreed but failed to take up and pay for exceeds 10% of the
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Shares which the defaulting Underwriter
or Underwriters so agreed but failed to purchase, the Closing Date shall be
postponed for twenty-four hours to allow the several Underwriters the
privilege of substituting within twenty-four hours (including non-business
hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such
underwriter or underwriters shall have been substituted as aforesaid by such
postponed Closing Date, the Closing Date may, at the option of the Company,
be postponed for a further twenty-four hours, if necessary to allow the
Company the privilege of finding another underwriter or underwriters,
satisfactory to Capital West, to purchase the Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase. If it shall be
arranged for the remaining Underwriters or substituted underwriters to take
up the Shares of the defaulting Underwriter or Underwriters as provided in
this paragraph, (a) the Company shall have the right to postpone the time of
delivery for a period of not more than seven full business days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and
the Company agrees promptly to file any amendments to the Registration
Statement or supplements to the Prospectus which may thereby be made
necessary, and (b) the respective number of Shares to be purchased by the
remaining Underwriters and substitute underwriters shall be taken as the
basis of their underwriting obligation. If the remaining Underwriters shall
not take up and pay for all such Shares so agreed to be purchased by the
defaulting Underwriter or Underwriters or substitute another underwriter or
underwriters as aforesaid and the Company shall not find or shall not elect
to seek another underwriter or underwriters for such Shares as aforesaid,
then this Agreement shall terminate.
11.1 EFFECT OF TERMINATION. In the event of any termination of this
Agreement pursuant to the preceding paragraph of this
paragraph 11, neither the Company shall be liable to any
Underwriter (except as provided in paragraphs 6 and 9 hereof)
nor shall any Underwriter (other than an Underwriter who shall
have failed, otherwise than for some reason permitted under
this Agreement, to purchase the number of Shares agreed by
such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters
for damages, if any, resulting from such default) be liable to
the Company (except to the extent provided in paragraphs 6 and
9 hereof).
11.2 UNDERWRITER DEFINED. The term "Underwriter" in this Agreement
shall include any person substituted for an Underwriter under
this paragraph.
12. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION.
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<PAGE>
12.1 EFFECTIVE DATE. This Agreement shall become effective at the
later of (a) execution of this Agreement, or (b) when
notification of the effectiveness of the Registration
Statement has been released by the Commission.
12.2 TERMINATION. Capital West shall have the right to terminate
this Agreement by giving notice as hereinafter specified at
any time at or prior to the Closing Date (a) if the Company
shall have failed, refused or been unable, to perform any
agreement on its part to be performed, or because any other
condition of the Underwriters' obligations hereunder required
to be fulfilled by the Company is not fulfilled including,
without limitation, any change in the financial condition,
earnings, operations, business, management, technical staff,
or business prospects of the Company from that set forth in
the Registration Statement or Prospectus which, in Capital
West's sole judgment, is material and adverse, or (b) if
trading on the American Stock Exchange or the Nasdaq Stock
Market or the Nasdaq Stock Market SmallCap shall have been
suspended, or minimum or maximum prices for trading shall have
been fixed, or maximum ranges for prices for securities shall
have been required on the American Stock Exchange or the
Nasdaq Stock Market or the Nasdaq Stock Market SmallCap, by
the American Stock Exchange, the Nasdaq Stock Market, or the
Nasdaq Stock Market SmallCap or by order of the Commission or
any other governmental authority having jurisdiction, or if a
banking moratorium shall have been declared by federal,
Delaware, or Oklahoma authorities, or (c) if on or prior to
the Closing Date, or on or prior to any later date on which
Option Shares are to be purchased, as the case may be, the
Company shall have sustained a loss by strike, fire, flood,
earthquake, accident or other calamity of such character as to
interfere materially and adversely with the conduct of the
business and operations of the Company regardless of whether
or not such loss shall have been insured, or (d) if there
shall have been a material adverse change in the general
political or economic conditions or financial markets in the
United States as in Capital West's reasonable judgment makes
it inadvisable or impracticable to proceed with the offering,
sale and delivery of the Shares, or (e) if on or prior to the
Closing Date, or on or prior to any later date on which Option
Shares are to be purchased, as the case may be, there shall
have been an outbreak or escalation of hostilities or other
international or domestic calamity, crises or material adverse
change in political, financial or economic conditions, the
effect of which on the financial markets of the United States
is such as to make it in Capital West's reasonable judgment,
inadvisable to proceed with the marketing of the Shares. In
the event of termination pursuant to this paragraph 12.2, the
Company shall remain obligated to pay costs and expenses
pursuant to paragraphs 4.11, 6 and 9 hereof.
12.3 NOTIFICATION. If Capital West elects to prevent this Agreement
from becoming effective or to terminate this Agreement as
provided in this paragraph 12, Capital West shall promptly
notify the Company by telephone or telecopy, in each case
confirmed by letter. If the Company shall elect to prevent
this Agreement from becoming effective, the Company shall
promptly notify Capital West by telephone or telecopy, in each
case, confirmed by letter.
13. NOTICES. All notices and other communications hereunder shall be in writing
and shall be deemed to have been given if mailed or transmitted by any standard
form of telecommunication.
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<PAGE>
Notices to the Underwriters shall be directed to the Underwriters in care of
Capital West Securities, Inc., 211 N. Robinson, 2nd Floor, One Leadership
Square, Oklahoma City, Oklahoma 73102, attention of Robert O. McDonald,
Robert G. Rader, or Gregory M. Jones; notices to the Company shall be
directed to it at 9821 Katy Freeway, Suite 500, Houston, Texas, attention of
Cary M. Grossman, Chief Executive Officer.
14. PARTIES. This Agreement shall inure to the benefit of and be binding upon
the several Underwriters and the Company and their respective executors,
administrators, successors, and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any person or corporation,
other than the parties hereto and their respective executors, administrators,
successors, and assigns and the controlling persons and officers and directors
referred to in paragraph 9 hereof any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provisions herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the parties hereto and their respective executors,
administrators, successors, and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or corporation.
No purchaser of the Shares from any Underwriter shall be construed to be a
successor by reason merely of such purchase.
15. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Oklahoma applicable to agreements made
and to be performed in said State, without regard to conflict of laws
principles. Specified times of day refer to Central Standard Time.
16. COUNTERPARTS. This Agreement may be signed in several counterparts, each of
which will constitute an original.
17. BINDING ARBITRATION. Each party to this Agreement agrees that any dispute or
controversy arising between any of the parties to this agreement, or any person
or entity in privity therewith, out of the transactions effected and
relationships created pursuant to this Agreement and each other agreement
created in connection herewith, including any dispute or controversy regarding
the formation, terms, or construction of this Agreement, regardless of kind or
character, must be resolved through binding arbitration. Each party to this
Agreement agrees to submit such dispute or controversy to arbitration before the
American Arbitration Association (the "Association") in Oklahoma City, Oklahoma,
and further agrees to be bound by the determination of an arbitration panel
consisting of three persons. If demand for arbitration is made, each party will
have the right to select one independent arbitrator. If the party upon whom the
demand for arbitration is served fails to select an arbitrator within 20 days,
then the Association may select a second arbitrator upon application by either
party. The two arbitrators shall select a third arbitrator. If the two
arbitrators fail to select a third arbitrator within 20 days, the third
arbitrator may be selected and appointed by the Association upon application by
either party. The arbitrators' decision concerning the claim, controversy or
dispute, including allocation among the parties of costs and expenses associated
with the arbitration, shall be final and binding on the parties and judgment on
the award may be entered in any court of competent jurisdiction. Any party to
this Agreement may bring an action, including a summary or expedited proceeding,
to compel arbitration of any such dispute or controversy in a court of competent
jurisdiction and, further, may seek provisional or ancillary remedies including
temporary or injunctive relief in connection with such dispute or controversy in
a court of competent jurisdiction, provided that the dispute or controversy is
ultimately resolved through binding arbitration conducted in accordance with the
terms and conditions of this section.
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<PAGE>
18. HEADINGS. The headings herein are for purposes of reference only and shall
not limit or otherwise affect the meaning of any of the provisions hereof.
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<PAGE>
If the foregoing correctly sets forth your understanding of our
agreement, please sign in the space provided below for that purpose, whereupon
this instrument, along with all counterparts, will become a binding agreement
among the several Underwriters and the Company in accordance with its terms.
Very truly yours,
MGi2, INC.
By:
--------------------------------------
Name
------------------------------
Title
-----------------------------
CONFIRMED AND ACCEPTED, as of the date first above written:
CAPITAL WEST SECURITIES, INC.,as
Representative of the Underwriters
By:
--------------------------------------
Robert O. McDonald, Chairman
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<PAGE>
SCHEDULE 1
ALLOCATION OF SHARES TO BE PURCHASED
UNDERWRITER NUMBER OF SHARES TO BE PURCHASED
Capital West Securities, Inc. [________________]
211 North Robinson, Suite 200
One Leadership Square
Oklahoma City, Oklahoma 73102
I-Bankers Securities, Inc. [________________]
122 W. Carpenter Freeway
Suite 645
Irving, Texas 75039
Westport Resources Investment Services, Inc. [________________]
315 Post Road West
Westport, CT 06880
APS Financial Corporation [________________]
1301 Capital at Texas
Suite B-220
Austin, Texas 78746
<PAGE>
1,900,000 Shares
Common Stock
MGi2, INC.
(a Delaware corporation)
AGREEMENT AMONG UNDERWRITERS
April ___, 2000
Capital West Securities, Inc., as Representative
One Leadership Square, 2nd Floor
211 North Robinson
Oklahoma City, Oklahoma 73102
Gentlemen:
This letter confirms the agreement among you, I-Bankers Securities,
Inc., Westport Resources Investment Services, Inc., APS Financial Corporation,
and other members of the Underwriting Group named in Schedule "1" attached
hereto and made a part hereof (individually, the "Underwriter", and
collectively, the "Underwriters"), with respect to the purchase by the
Underwriters severally from MGi2, Inc. (the "Company") of 1,900,000 shares of
Common Stock (the "Securities") pursuant to the Underwriting Agreement of even
date herewith between the Company and you, as the managing underwriter (the
"Underwriting Agreement"). The number of Securities to be purchased by each
Underwriter from the Company will be determined in accordance with paragraph 3
and Schedule "1" of the Underwriting Agreement. It is understood that changes
may be made by those who are to be Underwriters and in the respective numbers of
Securities to be purchased by them, but that the Underwriting Agreement will not
be changed without our consent, except as provided herein and in the
Underwriting Agreement. The obligations of the Underwriters to purchase the
number of Securities set opposite their respective names in Schedule "1" to the
Underwriting Agreement, are herein called their "underwriting obligations." The
number of Securities set opposite our respective names in Schedule "1" to the
Underwriting Agreement are herein called "our Securities."
1. DEFINITIONS. For purposes of this Agreement the following definitions
will be applicable:
1.1 MANAGER'S CONCESSION. The term "Manager's Concession" means
the compensation to you for acting as Manager, as provided in
paragraph 2 of this letter of not less than ____% of the
underwriting discount. The Manager's Concession will include
the right to a portion of the warrants to be issued pursuant
to the Underwriting Agreement and the right to the full
non-accountable expenses to be paid pursuant to the
Underwriting Agreement.
<PAGE>
1.2 UNDERWRITING CONCESSION. The term "Underwriting Concession"
means compensation to the Underwriters for assuming the
underwriting risk of not less than ____% of the underwriting
discount.
1.3 DEALER'S CONCESSION. The term "Dealer's Concession" means
compensation to Dealers, who are members of the Selling Group
and will, as to Dealers who have executed an agreement with
you, be not less than ____% of the underwriting discount.
1.4 DEALER'S REALLOWANCE CONCESSION. The term "Dealer's
Reallowance Concession" means the compensation allowed Dealers
by Underwriters, other than you, and will be one-half of the
Dealer's Concession.
1.5 UNDERWRITING DISCOUNT. It is contemplated that the
underwriting discount will be 9% of the Offering Price (as
defined below). You, in your absolute discretion, will
determine, within the foregoing limitations, the precise
allocation of the underwriting discount and will notify us of
same at least 24 hours prior to the execution of the
Underwriting Agreement.
2. AUTHORITY AND COMPENSATION OF REPRESENTATIVE.
2.1 AUTHORITY. We hereby authorize you, as our Representative and
on our behalf, (a) to enter into the Underwriting Agreement
with the Company substantially in the form of Exhibit "A"
attached hereto, but with such changes therein as in your
judgment are not materially adverse to the Underwriters; (b)
to exercise all the authority and discretion vested in the
Underwriters and in you by the provisions of the Underwriting
Agreement; and (c) to take all such action as you, in your
discretion, may deem necessary or advisable in order to carry
out the provisions of the Underwriting Agreement and this
Agreement and the sale and distribution of the Securities.
Notwithstanding the foregoing, the time within which the
Registration Statement is required to become effective
pursuant to the Underwriting Agreement will not be extended
more than 48 hours without the approval of a majority in
interest of the Underwriters (including you). We authorize
you, in executing the Underwriting Agreement on our behalf, to
set forth in Schedule "1" of the Underwriting Agreement as our
commitment to purchase the number of Securities (which will
not be substantially in excess of the number of Securities
included in your invitation to participate unless we have
agreed otherwise) included in a wire, telex, or similar means
of communication transmitted by you to us at least 24 hours
prior to the commencement of the offering as our finalized
underwriting participation.
2.2 COMPENSATION. As our share of the compensation for your
services hereunder, we will pay you, and we authorize you to
charge to our account, a sum equal to the Manager's Concession
relating to that particular Group Sale or sale to the Dealers.
2
<PAGE>
3. PUBLIC OFFERING.
3.1 OFFERING PRICE; COMMENCEMENT OF OFFERING. A public offering of
the Securities is to be made, as herein provided, as soon
after the Registration Statement relating thereto becomes
effective as in your judgment is advisable. The Securities
will be initially offered to the public at the public offering
price of $____ per share. You will advise us by telegraph or
telephone when the Securities are released for offering. We
authorize you, as Representative of the Underwriters, after
the initial public offering, to vary the public offering
price, in your sole discretion, by reason of changes in
general market conditions or otherwise. The public offering
price of the Securities at any time in effect is herein called
the "Offering Price."
3.2 PROSPECTUS DELIVERY. We hereby agree to deliver all
preliminary and final Prospectuses as required for compliance
with the provisions of Rule 15c2-8 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and
Section 5(b) of the Securities Act of 1933, as amended (the
"Securities Act"). You have heretofore delivered to us such
preliminary Prospectuses as have been requested by us, receipt
of which is hereby acknowledged, and will deliver such final
Prospectuses as will be requested by us.
4. OFFERING TO DEALERS AND GROUP SALES.
4.1 GROUP SALES. We authorize you to reserve for offering and
sale, and on our behalf to sell, to institutions or other
retail purchasers (the "Group Sales") and to dealers selected
by you (the "Dealers") all, or any part of, our Securities as
you may determine. Such sales of Securities, if any, will be
made (a) in the case of Group Sales, at the Offering Price,
and (b) in the case of sales to Dealers, at the Offering Price
less the Dealer's Concession.
4.2 PROPORTION AND CONCESSION. Any Group Sales will be, as nearly
as practicable, in proportion to the underwriting obligations
of the respective Underwriters. Any sales to Dealers made for
our account will be, as nearly as practicable, in the ratio
that the Securities reserved for our account for offering to
Dealers bears to the aggregate of all Securities of all
Underwriters, including you, so reserved. On any Group Sales
or sales to Dealers made by you on our behalf, we will be
entitled to receive only the Underwriter's Concession relating
to that particular Group Sale or sale to the Dealers.
4.3 DIRECT SALES; UNSOLD SECURITIES. You agree to notify us not
less than 24 hours prior to the commencement of the public
offering as to the number of Securities, if any, which we may
retain for direct sale. Prior to the termination of this
Agreement, you may reserve for offering and sale, as herein
before provided, any Securities remaining unsold theretofore
retained by us and we may, with your consent, retain any
Securities remaining unsold theretofore reserved by you.
3
<PAGE>
4.4 AGREEMENTS WITH DEALERS. Sales to Dealers shall be made under
a Selected Dealers Agreement, attached hereto as Exhibit "B"
and by this reference incorporated herein. We authorize you to
determine the form and manner of any communications with
Dealers, and to make such changes in the Selected Dealers
Agreement, as you may deem appropriate. In the event that
there will be any such agreements with Dealers, you are
authorized to act as manager thereunder, and we agree, in such
event, to be governed by the terms and conditions of such
agreements. Each Underwriter agrees that it will not offer any
of the Securities for sale at a price below the Offering Price
or allow any concession therefrom, except as herein otherwise
provided. We, as to our Securities, may enter into agreements
with Dealers, but any Dealer's Reallowance Concession will not
exceed half of the Dealer's Concession.
4.5 NASD MEMBERS. It is understood that any person to whom an
offer may be made pursuant to paragraph 4, will be a member of
the National Association of Securities Dealers, Inc. (the
"NASD") or dealers or institutions with their principal place
of business located outside of the United States, its
territories or possessions, and who are not eligible for
membership under Section 1 of the Bylaws of the NASD who agree
to make no sales within the United States, its territories or
possessions, or to persons who are nationals thereof, or
residents therein, and, in making sales, to comply with the
NASD's Rules of Fair Practice.
4.6 PUBLIC ADVERTISEMENT. We authorize you to determine the form
and manner of any public advertisement of the Securities.
4.7 OFFERS PRIOR TO EFFECTIVENESS. Nothing contained in this
Agreement will be deemed to restrict our right, subject to the
provisions of this paragraph 4, to offer our Securities prior
to the effective date of the Registration Statement.
Notwithstanding the foregoing, any such offer will be made in
compliance with any applicable requirements of the Securities
Act and the Exchange Act and the rules and regulations of the
Securities and Exchange Commission (the "Commission")
thereunder, and of any applicable state securities laws.
5. REPURCHASES IN THE OPEN MARKET. Any Securities sold by us (otherwise than
through you) which, prior to the termination of this Agreement, or such earlier
date as you may determine, shall be contracted for or purchased in the open
market by you on behalf of any Underwriter or Underwriters, shall be repurchased
by us on demand at a price equal to the cost of such purchase plus commissions
and taxes, if any, on redelivery. Any Securities delivered on such repurchase
need not be the identical Securities originally sold by us. In lieu of delivery
of such Securities to us, you may (a) sell such Securities in any manner for our
account and charge us with the amount of any loss or expense, or credit us with
the amount of any profit, less any expense, resulting from such sale, or (b)
charge our account with an amount not in excess of the concession to Dealers on
such Securities.
4
<PAGE>
6. DELIVERY AND PAYMENT. We agree to deliver to you, at or before 9:00 a.m.
Oklahoma City Time, on the Closing Date referred to in the Underwriting
Agreement, at your office, a certified or bank cashier's check payable to your
order for the Offering Price of the Securities less Dealer's Concession of the
Securities which we retained for direct sale by us, the proceeds of which check
will be delivered to you, in the manner provided in the Underwriting Agreement,
to or for the account of the Company against delivery of certificates for such
Securities to you for our account. You are authorized to accept such delivery
and to give receipts therefor. You may advance funds for Securities which have
been sold or reserved for sale to retail purchasers or Dealers for our account.
If we fail (whether or not such failure shall constitute a default hereunder) to
deliver to you, or you fail to receive, our check and/or payment for sales made
by you for our account for the Securities which we have agreed to purchase, you,
individually and not as Representative of the Underwriters, are authorized (but
will not be obligated) to make payment, in the manner provided in the
Underwriting Agreement to, or for the account of, the Company for such
Securities for our account. Any such payment by you will not relieve us of any
of our obligations under the Underwriting Agreement or under this Agreement, and
we agree to repay you on demand the amount so advanced for our account. We
further agree as follows:
(a) We agree, on demand, to take up and pay for, or to deliver to,
you funds sufficient to pay at cost any Securities of the
Company purchased by you for our account pursuant to the
provisions of paragraph 10 hereof, and to deliver to you on
demand any Securities sold by you for our account, pursuant to
any provision of this Agreement;
(b) We authorize you to deliver our Securities, and any other
Securities purchased by you for our account, pursuant to the
provisions of paragraph 10 hereof, against sales made by you
for our account pursuant to any provision of this Agreement;
(c) Upon receipt by you of payment for the Securities sold by us
and/or through you for our account, you will remit to us
promptly an amount equal to the Underwriting Concession on
such Securities. You agree to cause to be delivered to us, as
soon as practicable after the Closing Date referenced in the
Underwriting Agreement, such part of our Securities purchased
on such Closing Date as will not have been sold or reserved
for sale by you for our account; and
(d) If any Securities reserved for sale in Group Sales or to
Dealers will not be purchased and paid for in due course as
contemplated hereby, we agree to accept delivery when tendered
by you of any Securities so reserved for our account and not
so purchased and pay you the Offering Price less the Dealer's
and Underwriting Concessions.
7. AUTHORITY TO BORROW. We authorize you to advance your funds for our account
(charging current interest rates) and to arrange loans for our account for the
purpose of carrying out this Agreement, and in connection therewith, to execute
and deliver any notes or other instruments, and to hold, or pledge as security
therefor, all or any part of our Securities of the Company purchased hereunder
for our account. Any lending bank is hereby authorized to accept your
5
<PAGE>
instructions as Representative in all matters relating to such loans. Any part
of our Securities held by you, may be delivered to us for carrying purposes, and
if so delivered, will be redelivered to you upon demand.
8. ALLOCATION OF EXPENSE AND LIABILITY. We authorize you to charge our account
with, and we agree to pay (a) all transfer taxes on sales made by you for our
account, except as herein otherwise provided, and (b) our proportionate share
(based on our underwriting obligations) of all expenses in excess of those
reimbursed by the Company incurred by you in connection with the purchase,
carrying and distribution, or proposed purchase and distribution, of the
Securities and all other expenses arising under the terms of the Underwriting
Agreement or this Agreement. Your determination of all such expenses and your
allocation thereof will be final and conclusive. Funds for our account at any
time in your hands, as our Representative, may be held in your general funds
without accountability for interest. As soon as practicable after the
termination of this Agreement, the net credit or debit balance in our account,
after proper charge and credit for all interim payments and receipts, will be
paid to or paid by us. However, you may reserve from distribution an amount to
cover possible additional expenses chargeable to the several Underwriters.
9. LIABILITY FOR FUTURE CLAIMS. Neither any statement by you, as Representative
of the Underwriters, of any credit or debit balance in our account nor any
reservation from distribution to cover possible additional expenses relating to
the Securities will constitute any representation by you as to the existence or
nonexistence of possible unforeseen expenses or liabilities of or charges
against the several Underwriters. Notwithstanding the distribution of any net
credit balance to us or the termination of this Agreement, or both, we will be,
and remain liable for, and will pay on demand (a) our proportionate share (based
on our underwriting obligations) of all expenses and liabilities which may be
incurred by, or for the accounts of the Underwriters, including any liability
which may be incurred by the Underwriters or any of them, and (b) any transfer
taxes paid after such settlement on account of any sale or transfer for our
account.
10. STABILIZATION. We authorize you, until the termination of this Agreement,
(a) to make purchases and sales of the Securities, in the open market or
otherwise, for long or short account, and on such terms, and at such prices as
you, in your discretion, may deem desirable, (b) in arranging for sales of
Securities, to over-allot, and (c) either before or after the termination of
this Agreement, to cover any short position incurred pursuant to this paragraph
10, subject, however, to the applicable rules and regulations of the Commission
under the Exchange Act. All such purchases, sales and over-allotments will be
made for the accounts of the several Underwriters as nearly as practicable in
proportion to their respective underwriting obligations.
10.1 NOTIFICATION. If you engage in any stabilizing transactions as
representative of the underwriters, you will promptly notify
us of that fact and in like manner you agree to promptly
notify and file with us any stabilizing transaction in
accordance with the requirements of Rule 17a-2(d) under the
Exchange Act.
10.2 UNSOLD SECURITIES. We agree to advise you from time to time,
upon request, until the settlement of accounts hereunder, of
the number of Securities at the time
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retained by us unsold, and we will upon request sell to you,
for the accounts of one or more of the several Underwriters,
such number of our unsold Securities as you may designate, at
the Offering Price less such amount, not in excess of the
concession to Dealers, as you may determine.
11. OPEN MARKET TRANSACTIONS. We agree that, except with your consent and except
as herein provided upon advice from you, we will not make purchases or sales on
the open market or otherwise, or attempt to induce others to make purchases or
sales, either before or after the purchase of the Securities, and prior to the
completion (as defined in Regulation M of the Exchange Act) of our participation
in the distribution, we will otherwise comply with Regulation M. Nothing
contained in this paragraph 11 will prohibit us from acting as broker or agent
in the execution of unsolicited orders of customers for the purchase or sale of
any securities of the Company.
12. BLUE SKY. Prior to the initial offering by the Underwriters, you will inform
us as to the states under the respective securities or Blue Sky laws of which it
is believed that the Securities have been qualified or are exempt for sale, but
you do not assume any responsibility or obligation as to the accuracy of such
information or as to the right of any Underwriter or Dealer to sell the
Securities in any jurisdiction. We will not sell any Securities in any other
state or jurisdiction, and we will not sell Securities in any state or
jurisdiction unless we are qualified or licensed to sell securities in such
state or jurisdiction. We authorize you, if you deem it inadvisable in arranging
sales of Securities for our account hereunder, to sell any of our Securities to
any particular Dealer or other buyer, because of the securities or Blue Sky laws
of any jurisdiction, to sell our Securities to one or more other Underwriters at
the Offering Price less, in the case of a sale to any Dealer, such amount, not
in excess of the concession to Dealers thereon, as you may determine. The
transfer tax on any such sales among Underwriters shall be treated as an expense
and charged to the respective accounts of the several Underwriters, in
proportion to their respective underwriting obligations.
13. DEFAULT BY UNDERWRITERS.
13.1 DEFAULT. Default by one or more Underwriters, in respect to
their obligations under the Underwriting Agreement shall not
release us from any of our obligations. In case of such
default by one or more Underwriters, you are authorized to
increase, pro rata, with the other non-defaulting
Underwriters, the number of defaulted Securities which we will
be obligated to purchase from the Company. Notwithstanding the
foregoing, the aggregate amount of all such increases for all
Underwriters will not exceed 10% of such Securities. If the
aggregate number of the Securities not taken up by such
defaulting Underwriters exceeds 10%, you are further
authorized, but are not be obligated, to arrange for the
purchase by other persons, who may include yourselves, of all
or a portion of the Securities not taken up by such
Underwriters. In the event any such increases or arrangements
are made, the respective numbers of Securities to be purchased
by the non-defaulting Underwriters and by any such other
person or persons shall be taken as the basis for the
underwriting obligations under this Agreement. However, this
will not, in
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any way, affect the liability of any defaulting Underwriters
to the other Underwriters for damages resulting from such
default.
13.2 PROPORTIONATE SHARES. In the event of default by one or more
Underwriters in respect of their obligations under this
Agreement to take up and pay for any Securities purchased by
you for their respective accounts, pursuant to paragraph 10
hereof, or to deliver any such Securities sold or
over-allotted by you for their respective accounts pursuant to
any provisions of this Agreement, and to the extent that
arrangements will not have been made by you for other persons
to assume the obligations of such defaulting Underwriter or
Underwriters, each non-defaulting Underwriter will assume its
proportionate share of the aforesaid obligations of each such
defaulting Underwriter without relieving any such Underwriter
of its liability therefor.
14. TERMINATION OF AGREEMENT. Unless earlier terminated by you, the provisions
of paragraphs 3, 4, 5, 7, 10, and 11 of this Agreement will, except as otherwise
provided therein, terminate 30 full business days after the effective date of
the Registration Statement herein referenced, but may be extended by you for an
additional period or periods not exceeding 30 full business days in the
aggregate. You may, however, terminate this Agreement, or any provisions hereof,
at any time by written or telegraphic notice to us.
15. GENERAL POSITION OF THE REPRESENTATIVE. In taking action under this
Agreement, you will act only as agent of the several Underwriters. Your
authority as Representative of the several Underwriters will include the taking
of such action as you may deem advisable in respect of all matters pertaining to
any and all offers and sales of the Securities, including the right to make any
modifications which you consider necessary or desirable in the arrangements with
Dealers or others. You shall be under no liability for, or in respect of, the
value of the Securities or the validity or the form thereof, the Registration
Statement, the Prospectus, the Underwriting Agreement, or other instruments
executed by the Company or others of any agreement on its or their part; nor
will you, as such Representative or otherwise, be liable under any of the
provisions hereof, or for any matters connected herewith, except for want of
good faith, and except for any liability arising under the Securities Act; and
no obligation not expressly assumed by you as such Representative herein will be
implied from this Agreement. In representing the Underwriters hereunder, you
shall act as the representative of each of them respectively. Nothing herein
contained will constitute the several Underwriters partners with you or with
each other, or render any Underwriter liable for the commitments of any other
Underwriter, except as otherwise provided in paragraph 13 hereof. The
commitments and liabilities of each of the several Underwriters are several in
accordance with their respective underwriting obligations and are not joint.
16. ACKNOWLEDGMENT OF REGISTRATION STATEMENT, ETC. We hereby confirm that we
have examined the Registration Statement (including all amendments thereto)
relating to the Securities as heretofore filed with the Commission, that we are
familiar with the amendment(s) to the Registration Statement and the final form
of Prospectus proposed to be filed, that we are willing to accept the
responsibilities of an underwriter thereunder, and that we are willing to
proceed as
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<PAGE>
therein contemplated. We further confirm that the statements made under the
heading "Underwriting" in such proposed final form of Prospectus are correct and
we authorize you so to advise the Company on our behalf. We understand that the
aforementioned documents are subject to further change and that we will be
supplied with copies of any amendment or amendments to the Registration
Statement and of any amended Prospectus promptly, if and when received by you,
but the making of such changes and amendments will not release us or affect our
obligations hereunder or under the Underwriting Agreement.
17. INDEMNIFICATION. Each Underwriter, including you, agrees to indemnify and
hold harmless each other Underwriter and each person who controls any other
Underwriter within the meaning of Section 15 of the Securities Act to the extent
of their several commitments under the Underwriting Agreement and upon the terms
that such Underwriter agrees to indemnify and hold harmless the Company as set
forth in paragraph 9 of the Underwriting Agreement. The Agreement contained in
this paragraph 17 will survive any termination of this Agreement Among
Underwriters.
18. CAPITAL REQUIREMENTS. We confirm that our ratio of aggregate indebtedness to
net capital is such that we may, in accordance with and pursuant to Rule 15c3-1,
promulgated by the Commission under the Exchange Act, agree to purchase the
number of Securities we may be obligated to purchase under any provision of the
Underwriting Agreement or this Agreement.
19. MISCELLANEOUS.
19.1 QUESTIONNAIRE. We have transmitted herewith a completed
Underwriters' Questionnaire on the form thereof supplied by
you.
19.2 NOTICE. Any notice hereunder from you to us or from us to you
will be deemed to have been duly give if sent by registered
mail, telegram, teletype, telex, telecopier, graphic scan, or
other written form of telecommunication. Notices to us shall
be directed to our at address as set forth in the Underwriting
Agreement. Notices to you shall be directed to Robert O.
McDonald, Robert G. Rader, or Gregory M. Jones, at Capital
West Securities, Inc., 211 North Robinson, 2nd Floor, One
Leadership Square, Oklahoma City, Oklahoma 73102.
19.3 NASD MEMBERSHIP. You hereby confirm that you are registered as
a broker-dealer with the Commission and that you are a member
of the NASD and we confirm that we are either a member of the
NASD or a foreign broker-dealer not eligible for membership
under Section I of the Bylaws of the NASD, who agrees to make
no sales within the United States, its territories or
possessions, or to persons who are nationals thereof or
residents therein, and, in making sales, to comply with the
requirements of the NASD's Interpretation with Respect to Free
Riding and Withholding, and with Sections 2730, 2740 and 2420
to the extent applicable to foreign nonmember brokers or
dealers, and Section 2750 of the NASD's Rules of Fair
Practice.
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19.4 COMPLIANCE WITH LAWS. We will comply with all applicable
federal laws, the laws of the states or other jurisdictions
concerned and the Rules and Regulations of the NASD,
including, but not limited to, Section 2740 of the Rules of
Fair Practice.
19.5 COUNTERPARTS. This instrument may be signed by the
Underwriters in various counterparts which together will
constitute one and the same agreement among all the
Underwriters and will become effective as between us at such
time as you confirm same by returning an executed copy to us,
and thereafter, as to us and the other Underwriters, upon
execution by them of counterparts which are confirmed by you.
In no event, however, will we have any liability under this
Agreement if the Underwriting Agreement is not executed.
Please confirm that the foregoing correctly states the understanding
between us by signing and returning to us a counterpart hereof.
Very truly yours,
I-BANKERS SECURITIES, INC.
By
--------------------------------------
Name:
-------------------------------
Title:
------------------------------
WESTPORT RESOURCES INVESTMENT
SERVICES, INC.
By
--------------------------------------
Name:
-------------------------------
Title:
------------------------------
APS FINANCIAL CORPORATION
By
--------------------------------------
Name:
-------------------------------
Title:
------------------------------
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By
--------------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
By
--------------------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
By
--------------------------------------
Name:
-------------------------------
Title:
------------------------------
Confirmed as of the date first above written.
CAPITAL WEST SECURITIES, INC.
As Representative
By
----------------------------------
Robert O. McDonald, Chairman
11
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WARRANT AGREEMENT
March 28, 2000
Capital West Securities, Inc.
211 N. Robinson, Suite 200
One Leadership Square
Oklahoma City, Oklahoma 73102
Ladies and Gentlemen:
MGi2, Inc., a Delaware corporation (the "Company"), does hereby issue
and sell to Capital West Securities, Inc. ("Capital West") or any permitted
assigns thereof warrants (the "Warrants") to purchase up to an aggregate of
190,000 shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), subject to adjustment and the terms and conditions contained in
this Agreement.
1. ISSUANCE OF WARRANTS; EXERCISE PRICE. The Warrants, which are in the form
attached hereto as Exhibit "A," are issued to Capital West concurrently with the
execution of this Agreement in consideration of the services Capital West has
performed for the Company and the payment by Capital West to the Company of the
sum of $5,000.00, the receipt and sufficiency of which are hereby acknowledged
by the Company. Capital West, or such other holder or holders of the Warrants to
whom transfer is authorized in accordance with the terms of this Agreement,
shall have the right to purchase up to an aggregate of 190,000 shares of Common
Stock at an exercise price per share of Common Stock equal to 165% of the public
offering price per share of Common Stock as set forth in the Company's Form N-2
Registration Statement, Registration No.333-95905 (the "Registration
Statement"), as declared effective by the U.S. Securities & Exchange Commission
(the "Exercise Price"). The number, character and Exercise Price of such shares
of Common Stock covered by the Warrants are subject to adjustment as hereinafter
provided. The term "Common Stock" includes, unless the context otherwise
requires, the stock and other securities and property receivable upon exercise
of the Warrants.
2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to
Capital West and to each subsequent holder of the Warrants the following.
2.1 AUTHORITY. This Agreement has been duly authorized, executed
and delivered by the Company and constitutes the valid and
binding obligation of the Company enforceable in accordance
with its terms. Neither the issuance of the Warrants nor the
issuance of the shares of Common Stock issuable upon exercise
of the Warrants will result in a breach or violation of any
terms or provisions of, or constitute a default under, any
contract, indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument to which the Company is a
party or by which the Company is bound, the Certificate of
Incorporation or Bylaws of the Company, or any law, order,
rule, regulation or decree of any government, governmental
instrumentality or court, domestic or foreign, or result in
the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company.
<PAGE>
2.2 COMPLIANCE WITH LAWS. No consent, approval, authorization or
order of any court or governmental agency or body is required
for the sale and issuance of the Warrants or the sale and
issuance of the shares of Common Stock issuable upon exercise
of the Warrants, except such as have been obtained or the
restrictions on transferability as may be required under the
Securities Act of 1933, as amended (the "1933 Act"), and such
as may be required under state securities or blue sky laws in
connection with the issuance of the Warrants and the shares of
Common Stock issuable upon exercise of the Warrants. Upon
exercise of the Warrants by the holder thereof, the shares of
Common Stock with respect to which the Warrants are exercised
will be validly issued, fully paid, and non-assessable, and
good and marketable title to such shares of Common Stock will
be delivered to such holder free and clear of all liens,
encumbrances, equities, claims or preemptive or similar
rights.
2.3 REPORTING. During the term of this Agreement, the Company will
make timely filings of all periodic and other reports and
forms and other materials required (but only to the extent
required) to be filed with the Commission pursuant to the 1933
Act, the Investment Company Act of 1940, as amended (the
"Investment Company Act"), or the Securities Exchange Act of
1934, as amended (the "Exchange Act") (the 1933 Act,
Investment Company Act and the Exchange Act being collectively
called the "Acts"), and with any national securities exchange
or quotation system upon which any of the securities of the
Company may be listed.
3. NOTICES OF RECORD DATE. In the event of (a) any taking by the Company of a
record date with respect to the holders of any class of securities of the
Company for purposes of determining which of such holders are entitled to
dividends or other distributions (other than regular quarterly dividends), or
any right to subscribe for, purchase or otherwise acquire shares of stock of any
class or any other securities or property, or to receive any other right, (b)
any capital reorganization of the Company, or reclassification or
recapitalization of capital stock of the Company or any transfer in one or more
related transactions of all or a majority of the assets or revenue or income
generating capacity of the Company to, or consolidation or merger of the Company
with or into, any other entity or person, or (c) any voluntary or involuntary
dissolution or winding up of the Company, then and in each such event the
Company will mail or cause to be mailed to each holder of the Warrants at the
time outstanding a notice specifying, as the case may be, the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and stating the amount and character of such dividend, distribution or
right; or the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, conveyance, dissolution,
liquidation or winding-up is to take place and the time, if any is to be fixed,
as of which the holders of record of Common Stock (or any other class of stock
or securities of the Company, or another issuer pursuant to paragraph 6,
receivable upon the exercise of the Warrants) will be entitled to exchange their
shares of Common Stock (or such other stock or securities) for securities or
other property deliverable upon such event. Any such notice will be deposited in
the United States mail, postage prepaid, at least ten days prior to the date
therein specified, and the holders(s) of the Warrant(s) may exercise the
Warrant(s) and participate in such event as a registered holder of Common Stock,
upon exercise of the Warrant(s) so held, within the ten day period from the date
of mailing of such notice.
4. NO IMPAIRMENT. The Company will not, by amendment of its organizational
documents or
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through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other action, avoid or seek to
avoid the observance or performance of any of the terms of this Agreement or of
the Warrants, but will at all times in good faith take any and all action as may
be necessary in order to protect the rights of the holders of the Warrants
against impairment. Without limiting the generality of the foregoing, the
Company (a) will at all times reserve and keep available, solely for issuance
and delivery upon exercise of the Warrants, shares of Common Stock issuable from
time to time upon exercise of the Warrants, (b) will not increase the par value
of any shares of stock receivable upon exercise of the Warrants above the amount
payable in respect thereof upon such exercise, and (c) will take all such action
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and non-assessable stock upon the exercise of the
Warrants, or any of them.
5. EXERCISE OF WARRANTS. At any time and from time to time on and after the
first anniversary of the date that the U.S. Securities & Exchange Commission
(the "Commission") declares effective the Registration Statement and expiring at
5:00 p.m., Houston, Texas time, on the fifth anniversary from the date that the
Commission declared effective the Registration Statement, Warrants may be
exercised as to all or any portion of the whole number of shares of Common Stock
covered by the Warrants by the holder thereof. If such expiration date falls on
a Saturday, Sunday, or on a legal holiday on which federal banks are required to
be closed, then the Warrants may be exercised until 5:00 p.m. Houston, Texas
time on the next succeeding business day.
5.1 METHOD OF EXERCISE. The Warrants may be exercised by delivery
to the Company at the Company's principal offices of (a) the
Warrants to be exercised, (b) executed written Election to
Purchase Common Stock for shares to be purchased in the form
attached hereto as Exhibit "B" and (c) except as otherwise
provided in this paragraph 5.1, a certified check payable to
the order of the Company in the amount required for purchase
of the shares as to which the Warrant is being exercised.
Warrants may be exercised without the payment of cash to the
Company by delivery to the Company of (y) the Warrants to be
exercised, and (z) the executed Election to Purchase Common
Stock in the form attached as Exhibit "B", pursuant to which
the holder thereof elects to exercise the Warrants or any
portion thereof by implementing the cashless exercise
procedure, and upon such cashless exercise the holder shall
receive upon such surrender of the Warrant(s) (and without any
payment in cash) that number of shares of Common Stock equal
to the product of the number of shares of Common Stock
obtainable upon exercise of the Warrant(s) (or the portion
thereof as to which the exercise relates) multiplied by a
fraction, (i) the numerator of which is the difference between
the then Current Value (as defined in this paragraph 5.3) of
one full share of Common Stock on the date of exercise and the
Exercise Price, and (ii) the denominator of which is the
Current Value of one full share of Common Stock on the date of
exercise.
5.2 ISSUANCE OF CERTIFICATE. Upon the exercise of a Warrant in
whole or in part, the Company will within five business days
thereafter, at its expense (including the payment by the
Company of any applicable issue or transfer taxes), cause to
be issued in the name of and delivered to the Warrant holder a
certificate or certificates for the number of fully paid and
non-assessable shares of Common Stock to which such
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<PAGE>
holder is entitled upon exercise of the Warrant. If such
holder is entitled to a fractional share, in lieu thereof such
holder will be paid a cash amount equal to such fraction,
multiplied by the Current Value of one full share of Common
Stock on the date of exercise. Certificates for shares of
Common Stock issuable by reason of the exercise of the Warrant
or Warrants will be dated and will be effective as of the date
of the surrendering of the Warrant for exercise,
notwithstanding any delays in the actual execution, issuance
or delivery of the certificates for the shares so purchased.
If a Warrant (or Warrants) is exercised as to less than the
aggregate amount of all shares of Common Stock issuable upon
exercise of all Warrants held by such person, the Company will
issue a new Warrant to the holder of the Warrant so exercised
covering the aggregate number of shares of Common Stock as to
which Warrants remain unexercised.
5.3 CURRENT VALUE DEFINED. For purposes of this Agreement,
"Current Value" means (a) the average of the means between the
closing bid and asked prices of the Common Stock in the
over-the-counter market for 20 consecutive business days
commencing 30 business days before the date of such notice,
(b) if the Common Stock is quoted on the Nasdaq SmallCap
Market, the average of the means of the daily closing bid and
asked prices of the Common Stock as quoted on the Nasdaq
SmallCap Market for 20 consecutive business days commencing 30
business days before the date of such notice, (c) if the
Common Stock is listed on any national securities exchange or
the Nasdaq National Market System, the average of the daily
closing prices of the Common Stock as published on such
national securities exchange or quoted the Nasdaq National
Market System, as applicable, for 20 consecutive business days
commencing 30 business days before the date of such notice or
(d) if none of the foregoing valuation methods are applicable,
the Appraised Value (as defined below).
5.4 APPRAISAL VALUE DEFINED. For the purposes of this Agreement,
"Appraised Value" is the value determined in accordance with
the following procedures. For a period of five business days
after the date of an event (a "Valuation Event") requiring
determination of Current Value at a time when no public market
exists for the Common Stock (the "Negotiation Period"), each
party to this Agreement agrees to negotiate in good faith to
reach agreement upon the Appraised Value of the securities or
property at issue, as of the date of the Valuation Event,
which will be the fair market value of such securities or
property, without premium for control or discount for minority
interests, illiquidity or restrictions on transfer. If the
parties are unable to agree upon the Appraised Value of such
securities or other property by the end of the Negotiation
Period, then the Appraised Value of such securities or
property will be determined for purposes of this Agreement by
a recognized appraisal or investment banking firm mutually
agreeable to the holders of the Warrants and the Company (the
"Appraiser"). If the holders of the Warrants and the Company
cannot agree on an Appraiser within two business days after
the end of the Negotiation Period, the Company, on the one
hand, and the holders of the Warrants, on the other hand, will
each select an Appraiser within 10 business days after the end
of the Negotiation Period and those two Appraisers will select
10 days after the end of the Negotiation Period an independent
Appraiser to determine the fair market value of such
securities
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<PAGE>
or property, without premium for control or discount for
minority interests. Such independent Appraiser will be
directed to determine fair market value of such securities or
property as soon as practicable, but in no event later than 30
days from the date of its selection. The determination by an
Appraiser of the fair market value will be conclusive and
binding on all parties to this Agreement. Appraised Value of
each share of Common Stock at a time when(a) the Company is
not a reporting company under the Exchange Act and(b) the
Common Stock is not traded in the organized securities
markets, will, in all cases, be calculated by determining the
Appraised Value of the entire Company taken as a whole and
dividing that value by the number of shares of Common Stock
then outstanding, without premium for control or discount for
minority interests, illiquidity or restrictions on transfer.
The costs of the Appraisers will be borne by the Company. In
no event will the Appraised Value of the Common Stock be less
than the per share consideration received or receivable with
respect to the Common Stock or securities or property of the
same class in connection with a pending transaction involving
a sale, merger, recapitalization, reorganization,
consolidation, or share exchange, dissolution of the Company,
sale or transfer of all or a majority of its assets or revenue
or income generating capacity, or similar transaction.
6. PROTECTION AGAINST DILUTION.
6.1 STOCK DIVIDENDS; SUBDIVISIONS; RECLASSIFICATION. If, at any
time or from time to time after the date of this Agreement,
the Company (a) pays a dividend or make a distribution on its
Common Stock in shares of Common Stock, (b) subdivides its
outstanding shares of Common Stock into a greater number of
shares, (c) combines its outstanding shares of Common Stock
into a smaller number of shares, or (d) issues by
reclassification of its Common Stock any shares of any other
class of capital stock of the Company, the number of shares of
Common Stock issuable upon exercise of the Warrants and the
Exercise Price in effect immediately prior to such event will
be adjusted so that, upon exercise of the Warrants, the holder
will be entitled to purchase, without additional consideration
therefor, the number of shares of Common Stock or other
capital stock of the Company which the holder would have owned
or been entitled to purchase immediately following the
happening of any of the events described above in this
paragraph 6.1 had the Warrants been exercised and the holder
become the holder of record of the shares of Common Stock
issuable upon exercise of the Warrants immediately prior to
the record date fixed for the determination of stockholders
entitled to receive such dividend or distribution or the
effective date of such subdivision, combination or
reclassification at an Exercise Price equal to the aggregate
consideration which the holder would have had to pay for such
shares of Common Stock immediately prior to such event divided
by the number of shares of Common Stock the holder is entitled
to receive immediately after such event. An adjustment made
pursuant to this paragraph 6.1 will become
effective immediately after the record date in the case of a
dividend or distribution and will become effective immediately
after the effective date in the case of a subdivision,
combination or reclassification.
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<PAGE>
6.2 CERTAIN SALES. Except as provided in paragraph 6.4, if, at any
time or from time to time after the date of this Agreement,
the Company issues or sells any shares of Common Stock for a
consideration per share less than the Exercise Price in effect
immediately prior to such issuance or sale, the Exercise Price
will be adjusted as of the date of such issuance or sale to be
the price determined by dividing (a) the sum of (i) the number
of shares of Common stock outstanding immediately prior to
such issuance or sale multiplied by the Exercise Price plus
(ii) the consideration received by the Company upon such
issuance or sale by (b) the total number of shares of Common
Stock outstanding after such issuance or sale.
6.3 CERTAIN OPTIONS AND WARRANTS. Except as provided in paragraph
6.4, if, at any time or from time to time after the date of
this Agreement, the Company issues or sells any rights,
options, warrants, or other securities entitling the holders
thereof to purchase Common Stock or to convert such securities
into Common Stock at a price per share (determined by dividing
(a) the total amount, if any, received or receivable by the
Company in consideration of the issuance or sale of such
rights, options, warrants or other securities plus the total
amount, if any, payable to the Company upon exercise or
conversion thereof (the "Total Consideration") by (b) the
number of additional shares of Common Stock issuable upon
exercise or conversion of such securities) which is less than
the Exercise Price in effect on the date of such issuance or
sale, the Exercise Price will be adjusted as of the date of
such issuance or sale to be the price determined by dividing
(a) the sum of (i) the number of shares of Common Stock
outstanding on the date of such issuance or sale multiplied by
the Exercise Price in effect immediately prior thereto plus
(ii) the Total Consideration by (b) the sum of (i) the number
of shares of Common Stock outstanding on the date of such
issuance or sale plus (ii) the maximum number of additional
shares of Common Stock issuable upon exercise or conversion of
such securities.
6.4 OPTION PLANS. No adjustment in the Exercise Price will be
required in the case of (a) the grant by the Company of stock
options to employees of the Company under the Company's 2000
Stock Plan to the extent such grants do not exceed an
aggregate of 650,000 shares of Common Stock and such grants
are in accordance with the Company's 2000 Stock Plan, or (b)
the issuance of shares of Common Stock upon the exercise of
stock options (i) referred to in clause (a) hereof or (ii)
granted by the Company which grant had triggered an adjustment
in the Exercise Price.
6.5 MERGERS; CONSOLIDATION; SALE. In case of any consolidation or
merger to which the Company is a party other than a merger or
consolidation in which the Company is the continuing
corporation, or in case of any sale or conveyance to another
entity of all or substantially all of the property of the
Company as an entirety or substantially as an entirety, or in
the case of any statutory exchange of securities with another
entity (including any exchange effected in connection with a
merger of any other corporation with the Company), the holders
of the Warrants will have the right thereafter, upon exercise
of the Warrants, to receive the kind and amount of securities,
cash or other property which the holder would have owned or
been entitled to receive immediately after such consolidation,
merger, statutory exchange, sale or conveyance had the
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Warrants been exercised immediately prior to the effective
date of such consolidation, merger, statutory exchange, sale
or conveyance, and, in any such case, if necessary,
appropriate adjustment will be made in the application
thereafter of the provisions of this paragraph 6 with respect
to the rights and interests of the holders of the Warrants so
that the provisions of this paragraph 6 thereafter will be
correspondingly applicable, as nearly as may reasonably be, to
such securities and other property. The provisions of this
paragraph 6.5 will similarly apply to successive
consolidations, mergers, statutory, exchanges, sales or
conveyances. Notice of any such consolidation, merger,
statutory exchange, sale or conveyance, and of said provisions
so proposed to be made, will be mailed to the holders of the
Warrants not less than 10 days prior to such event. A sale of
all, or substantially all, of the assets of the Company for a
consideration consisting primarily of securities will be
deemed a consolidation or merger for the foregoing purposes.
6.6 REQUIREMENTS FOR ADJUSTMENTS. No adjustment of the Exercise
Price will be required unless such adjustment would require an
increase or decrease of at least $0.05; provided, however,
that any adjustments which by reason of this paragraph 6.6 are
not required to be made will be carried forward and taken into
account in any subsequent adjustment, and provided further,
that adjustments will be required and made in accordance with
the provisions of this paragraph 6 (other than this paragraph
6.6) not later than such time as may be required in order to
preserve the tax-free nature of a distribution to the holder.
All calculations under this paragraph 6 will be made to the
nearest cent or to the nearest 1/100th of a share, as the case
may be. Anything in this paragraph 6 to the contrary
notwithstanding, the Company will be entitled to make such
reductions in the Exercise Price, in addition to those
required by this paragraph 6, as it will deem to be advisable
in its discretion in order that any stock dividend,
subdivision of shares or distribution of rights to purchase
stock or securities convertible or exchangeable for stock
hereafter made by the Company to its shareholders will not be
taxable.
6.7 CERTIFICATE OF ADJUSTMENT. Whenever the Exercise Price is
adjusted as provided in this paragraph 6 and upon any
modification of the rights of any holder of Warrants in
accordance with this paragraph 6, the Company promptly will
prepare or obtain, a certificate setting forth (a) the
Exercise Price and the number of the shares of Common Stock
issuable upon exercise of the Warrants after such adjustment
or modification, and (b) a brief statement of the facts
requiring such adjustment or modification and the manner of
computing the same, and will cause copies of such certificate
to be mailed promptly to the holders of Warrants.
6.8 CERTAIN CASH DIVIDENDS. If the Board of Directors of the
Company declares any dividend or other distribution in cash
with respect to the Common Stock, other than out of earned
surplus, or net profits for the fiscal year in which such
dividend is declared, the Company will mail notice thereof to
the holders of the Warrants not less than 15 days prior to the
record date fixed for determining shareholders entitled to
participate in such dividend or other distribution.
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6.9 CONSIDERATION DEFINED. For purposes of this paragraph 6, if
any shares of Common Stock, options or securities entitling
the holders thereof to purchase Common Stock will be, or are
to be, sold or issued by the Company for cash, the net
proceeds received by the Company will be deemed to be the
consideration received by the Company therefor. If any shares
of Common Stock, options or securities entitling the holders
thereof to purchase Common Stock or to convert such securities
into Common Stock will be, or are to be, sold or issued for a
consideration other than cash, the amount of the
consideration, other than cash received by the Company, will
be deemed to be the fair value of such consideration as
determined in good faith by the Board of Directors of the
Company, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the
Company in connection therewith.
7. REGISTRATION RIGHTS.
7.1 DEMAND RIGHTS. The Company agrees that, upon written request
given to the Company at any time on or after the first
anniversary of the effective date of the Registration
Statement and expiring at 5:00 p.m., Houston, Texas time, on
the fifth anniversary of the effective date of the
Registration Statement, from the holder or holders of not less
than 51% of the shares of Common Stock subject to the then
outstanding Warrants and Common Stock acquired upon exercise
of the Warrants and not resold (excluding Warrants and Warrant
Shares, if any, held by the Company, and any affiliate,
director, officer, or employee of the Company), it will,
within 45 days after receipt of such notice, promptly prepare,
file and diligently prosecute to effectiveness, an appropriate
filing with the Commission of a registration statement
covering all of such shares under the Acts, and the
appropriate registration statements or applications under the
securities laws of such states as such holders, in their
discretion, will determine, and will use its best efforts to
have such registration statement and application (including
both the registration under the Acts and the registration or
application made under the various state securities laws)
declared effective as soon as practicable after the filing
thereof and to remain effective and current for a period of at
least 180 days (exclusive of any period during which the
prospectus included therein does not meet the requirements of
the Acts) and will take all other action necessary or
appropriate to cause the prospectus included therein to be
available for the sale of such shares from time to time during
such period by the holders thereof in ordinary brokerage
transactions in the over-the-counter market or on any national
securities exchange on which the Common Stock is then listed.
At least 15 days prior to such filing, the Company will give
written notice of such proposed filing to each registered
holder of any of the Warrants at the holders' addresses
appearing on the records of the Company and to each registered
holder of Common Stock purchased from the exercise of any
Warrants at such holder's address appearing on the Company
records, and will offer to include in such registration
statement any proposed distribution of such Common Stock held
or to be held by each such registered holder; provided,
however, that except as provided in paragraph 7.5, the Company
need not effect the registration of the sale or distribution
of Common Stock purchased upon exercise of Warrants under this
paragraph 7.1 more
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<PAGE>
than once; provided further, that the inclusion of any shares
of Common Stock issuable upon the exercise of the Warrants in
the Registration Statement shall not be counted or considered
for the purposes of this paragraph 7.1. Notwithstanding the
foregoing, the rights of the holders of the Warrants and the
Warrant Shares acquired upon exercise of the Warrants under
this paragraph 7.1 shall expire at such time as each
registered holder of the Warrants and the Warrant Shares shall
have received from counsel to the Company, which counsel must
be reasonably acceptable to Capital West, an unqualified
written legal opinion, which opinion must be reasonably
satisfactory to Capital West and its counsel, that all such
holders have the unqualified right under all applicable
securities laws to immediately and at any time after the date
of such opinion freely trade and sell, without any
restrictions or limitations under any applicable securities
laws, all of the Warrant Shares then held and purchasable upon
the exercise of the Warrants by all such holders.
7.2 EXPENSES. All expenses, disbursements and fees (including, but
not limited to, fees and expenses of counsel for the Company,
special auditing fees specifically attributable to the sale by
the selling holder or holders of Common Stock, printing
expenses (including all necessary copies of the registration
statement and prospectuses contained therein), registration
and filing fees and blue sky fees and expenses, and fees and
charges of the Company's transfer agent and registrar for
services rendered in connection therewith) will be borne by
the Company; provided, however, that the Company will not be
required to pay for any expenses of any registration
proceeding begun (in which case holders will bear such
expenses) if the registration request is subsequently
withdrawn at any time at the request of the holder or holders
of not less than 51% of the shares issued and issuable upon
exercise of the Warrants, unless such withdrawal is due to the
misconduct of the Company or due to an unforeseen material
adverse change in the business, properties, prospects or
financial condition of the Company occurring prior to the
effectiveness of the registration statement, in which case the
Company will continue to bear such expenses.
7.3 OFFERING MATERIALS. In connection with any registration under
the Act and specified state securities law pursuant to this
Agreement, the Company will, without charge, furnish each
holder whose shares are registered thereunder with copies of
the registration statement and all amendments thereto and
will, without charge, supply each such holder with copies of
any preliminary and final prospectus included therein in such
quantities as may be necessary for the purposes of such
proposed sale or distribution that the holder or holders may
reasonably request.
7.4 HOLDER INFORMATION. In connection with any registration of
shares pursuant to this paragraph 7, the holders whose shares
are being registered will furnish the Company with such
information concerning such holders and the proposed sale or
distribution as will be required for use in the preparation of
such registration statement and applications.
7.5 PIGGYBACK RIGHTS. If any time following one year after the
effective date of the Registration Statement and expiring on
the fifth anniversary of the effective date of
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<PAGE>
the Registration Statement, the Company proposes to file a
registration statement under the Acts or any of them covering
a proposed sale of shares of Common Stock or any other
securities of the Company, (other than registration statements
under a Form S-8 (or successor forms) to register interests in
employee benefit plans or Form S-4 (or successor forms) to
register securities issued in connection with mergers or
acquisitions), the Company will (a) give to each holder who
then owns any Warrants or any shares of Common Stock acquired
pursuant to the exercise of Warrants notice of such proposed
registration at least 30 days prior to the filing of the
registration statement, (b) upon the written request of each
such holder given to the Company at least 10 days prior to
such filing, include within the coverage of such registration
statement all shares of Common Stock subject to the Warrants
or acquired upon exercise of the Warrants which it has been so
requested to include, (c) use its best efforts to cause such
registration statement to become effective under the Acts as
soon as practicable and (d) take all other action necessary
under any Federal or state law or regulation of any
governmental authority to permit all shares of Common Stock
subject to the Warrants or acquired upon the exercise of the
Warrants which it has been so requested to include within the
coverage of such registration statement to be sold or
otherwise disposed of, and maintain such in compliance with
each such Federal and state law and regulation of any
governmental authority for a period not less than 180 days
(exclusive of any periods during which the prospectus included
therein does not meet the requirements of the Acts); provided
however, that the Company may withdraw or cease proceeding
with the registration if it shall withdraw or cease proceeding
with the registration of such securities originally proposed
to be registered. All expenses, disbursements and fees
(including, but without limitation, fees and expenses of
counsel, auditing fees, printing expenses, Commission filing
fees and expenses, but excluding any underwriting discounts or
commissions) incurred in connection with the registration by
the Company of the sale of any shares for any such holder
under this paragraph 7.5 will be borne by the Company.
8. INDEMNIFICATION; CONTRIBUTION.
8.1 INDEMNIFICATION OF WARRANT HOLDERS. The Company will indemnify
and hold harmless Capital West and each holder of the Warrants
and of Common Stock registered pursuant to paragraph 7 of this
Agreement with the Commission, or under the Registration
Statement, or under any Blue Sky Law or regulation and each
officer, director, employee or representative of Capital West
and such holder (individually each of the foregoing, an
"Indemnified Holder", and collectively the foregoing the
"Indemnified Holders") against any losses, claims, damages, or
liabilities, joint or several, to which any of the Indemnified
Holders may become subject under the Acts or otherwise,
insofar as such losses, claims, damages, or liabilities (or
actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus, registration
statement, prospectus, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, and will reimburse each Indemnified Holder for any
legal or other expenses reasonably
10
<PAGE>
incurred by the Indemnified Holder in connection with
investigating or defending any such action or claim regardless
of the negligence of any such Indemnified Holder; provided,
however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, or liability
arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any
preliminary prospectus, registration statement or prospectus,
or any such amendment or supplement thereto, in reliance upon
and in conformity with written information furnished to the
Company by such Indemnified Holder expressly for use therein.
8.2 INDEMNIFICATION OF THE COMPANY. Each holder of Common Stock
registered pursuant to paragraph 7 of this Agreement will,
severally and not jointly, indemnify and hold harmless the
Company against any losses, claims, damages, or liabilities to
which the Company may become subject under the Acts insofar as
such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact
contained in any such preliminary prospectus, registration
statement or prospectus, or any amendment or supplement
thereto, registering shares of Common Stock pursuant to
paragraph 7 of this Agreement or arise out of or are based
upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to
make the statements therein not misleading, in each case to
the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission
was made in any such preliminary prospectus, registration
statement or prospectus, or any amendment or supplement
thereto, in reliance upon and in conformity with written
information furnished to the Company by such holder expressly
for use therein.
8.3 PROCEDURE FOR INDEMNIFICATION. Promptly after receipt by an
indemnified party under paragraphs 8.1 or 8.2 of the
commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the
indemnifying party under either such subsection, notify the
indemnifying party in writing of the commencement thereof; but
the omission so to notify the indemnifying party will not
relieve it from any liability that it may otherwise have to
any indemnified party. If any such action shall be brought
against any indemnified party and such indemnified party
notifies the indemnifying party of the commencement thereof,
the indemnifying party will be entitled to assume the defense
thereof by notice in writing to the indemnified party using
counsel reasonably satisfactory to the indemnified party.
After notice from the indemnifying party to such indemnified
party of its election to assume the defense thereof, using
counsel reasonably satisfactory to the indemnified party, the
indemnifying party will not be liable to such indemnified
party for any legal expenses of other counsel or any other
expense, in each case subsequently incurred by such
indemnified party, in connection with the defense thereof
other than reasonable costs of investigation incurred prior to
the assumption by the indemnifying party, unless such expenses
have been specifically authorized in writing by the
indemnifying party, the indemnifying party has failed to
assume the defense and employ counsel reasonably satisfactory
to the indemnified party , or the named parties to any such
action include both the indemnified party and the indemnifying
party and such
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<PAGE>
indemnified party has been advised by counsel that the
representation of such indemnified party and the indemnifying
party by the same counsel would be inappropriate due to actual
or potential differing interests between them, in each of
which cases the fees of counsel for the indemnified party will
be paid by the indemnifying party.
8.4 CONTRIBUTION. If the indemnification provided for in this
paragraph 8 is unavailable or insufficient to hold harmless an
indemnified party under paragraphs 8.1 or 8.2 in respect of
any losses, claims, damages, or liabilities (or action in
respect thereof) referred to therein, then each indemnifying
party will contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits
received by the Company and the holder or holders from this
Agreement and from the offering of the shares of Common Stock.
If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law, then
each indemnifying party will contribute to such amount paid or
payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but
also the relative fault of the Company and the holders in
connection with the statement or omissions that resulted in
such losses, claims, damages, or liabilities (or actions in
respect thereof), as well as any other relevant equitable
considerations. The relative fault will 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 the Company or the holder and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the holders agree that it would not be just
and equitable if contribution pursuant to this paragraph 8.4
were determined by pro rata allocation (even if the holders
were treated as one entity for such purpose) or by any other
method of allocation that does not take into account the
equitable considerations referred to above in this paragraph
8.4. Except as provided in paragraph 8.3, the amount paid or
payable by an indemnified party as a result of the losses,
claims, damages, or liabilities (or actions in respect
thereof) referred to above in this paragraph 8.4 will be
deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with
investigation or defending any such action or claim. No person
guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) will be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation. Notwithstanding any provision in
this paragraph 8.4 to the contrary, no holder will be liable
for any amount, in the aggregate, in excess of the net
proceeds to such holder from the sale of such holder's shares
(obtained upon exercise of Warrants) giving rise to such
losses, claims, damages, or liabilities.
8.5 RIGHTS CUMULATIVE. The obligations of the Company under this
paragraph 8 will be in addition to any liability that the
Company may otherwise have and will extend, upon the same
terms and conditions, to each person, if any, who controls any
holder of Warrants within the meaning of the Act. The
obligations of the holders of Common Stock under this
paragraph 8 will be in addition to any liability that such
holders may
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<PAGE>
otherwise have and will extend, upon the same terms and
conditions to each person, if any, who controls the Company
within the meaning of the Acts.
9. STOCK EXCHANGE LISTING. If the Company lists its Common Stock on any national
securities exchange or the NASDAQ National Market System or Small Cap Market,
the Company will, at its expense, also list on such exchange or the NASDAQ,
whichever is applicable, all shares of Common Stock issuable pursuant to the
Warrants.
10. SPECIFIC PERFORMANCE. The Company stipulates that remedies at law, in money
damages, available to the holder or holders of the Warrants, or of a holder or
holders of Common Stock issued pursuant to exercise of the Warrants, in the
event of any default or threatened default by the Company in the performance of
or compliance with any of the terms of this Agreement are not and will not be
adequate. Therefore, the Company agrees that the terms of this Agreement may be
specifically enforced by a decree for the specific performance of any agreement
contained herein or by an injunction (without providing a bond) against a
violation or threatened violation of any of the terms hereof or otherwise.
11. SUCCESSORS AND ASSIGNS; BINDING EFFECT. This Agreement will be binding upon
and inure to the benefit of Capital West and the Company and their respective
successors and permitted assigns.
12. NOTICES. Any notice hereunder will be given by registered or certified mail,
if to the Company at its principal office located at 9821 Katy Freeway, Suite
500, Houston, Texas 77024, if to Capital West to the attention of Robert O.
McDonald, Robert G. Rader, or Gregory M. Jones at its principal office located
at One Leadership Square, Suite 200, 211 North Robinson, Oklahoma City,
Oklahoma, 73102, and, if to any of the other holders, to their respective
addresses shown in the Warrant ledger of the Company, provided that any holder
may at any time on three days' written notice to the Company designate or
substitute another address where notice is to be given. Notice will be deemed
given and received after a certified or registered letter, properly addressed
with postage prepaid, is deposited in the U.S. mail.
13. SEVERABILITY. Every provision of this Agreement is intended to be severable.
If any term or provision hereof is illegal or invalid for any reason whatsoever,
such illegality or invalidity will not affect the remainder of this Agreement.
14. ASSIGNMENT; REPLACEMENT OF WARRANTS. If the Warrant or Warrants are
assigned, in whole or in part, the Warrants will be surrendered at the principal
office of the Company, and thereupon, in the case of a partial assignment, a new
Warrant will be issued to the holder thereof covering the number of shares not
assigned, and the assignee will be entitled to receive a new Warrant covering
the number of shares so assigned. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction, or mutilation of
any Warrant and appropriate bond or indemnification protection, the Company will
issue a new Warrant of like tenor. Except as contemplated by paragraph 7 of this
Agreement, the Warrants will not be transferred, sold, or otherwise hypothecated
by Capital West or any other person and the Warrants will be nontransferable,
except to (a) one or more persons, each of which on the date of transfer is an
officer of or partner in Capital West; (b) to one or more of the underwriters
participating in the IPO as set forth in the Registration Statement or any
officer or partner of such underwriter, (c) a partnership or partnerships, the
partners of which are
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Capital West or any of the underwriters referred to in (b) above and one or
more persons, each of whom on the date of transfer is an officer of Capital
West or any of the underwriters referred to in (b) above; (d) a successor to
Capital West in merger or consolidation;(e) a purchaser of all or
substantially all of Capital West's assets; or(f) a person that receives a
Warrant upon death of a holder pursuant to will, trust, or the laws of
intestate succession which assignee shall be bound by the provisions of this
Section 14. Upon such assignment, Capital West or the holder, whichever is
applicable, will execute the form attached hereto as Exhibit C and deliver
such to the Company.
15. GOVERNING LAW. This Agreement will be governed and construed in accordance
with the laws of the State of Delaware without giving effect to the principles
of choice of laws thereof.
16. DEFINITION. All references to the word "you", and to "Capital West" in this
Agreement will be deemed to apply with equal effect to any persons or entities
to whom Warrants have been assigned or transferred in accordance with the terms
hereof, and, where appropriate, to any persons or entities holding shares of
Common Stock issuable upon exercise of Warrants.
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17. HEADINGS. The headings herein are for purposes of reference only and will
not limit or otherwise affect the meaning of any of the provisions hereof.
Very truly yours,
MGi2, Inc.
By:
-----------------------------------------
Cary M. Grossman, Chief Executive Officer
Accepted as of April ____, 2000.
CAPITAL WEST SECURITIES, INC.
By:
------------------------------
Robert O. McDonald, Chairman
15
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MGi2, INC. 2000 STOCK PLAN
SECTION 1. PURPOSE OF THE PLAN.
The MGi2, Inc. 2000 Stock Plan (the "Plan") is intended to promote the
interests of MGi2, Inc., a Delaware corporation (the "Company"), by encouraging
officers, Employees, Directors and Advisory Board Members of the Company and its
Affiliates to acquire or increase their equity interest in the Company and to
provide a means whereby they may develop a sense of proprietorship and personal
involvement in the development and financial success of the Company, and to
encourage them to remain with and devote their best efforts to the business of
the Company thereby advancing the interests of the Company and its stockholders.
The Plan is also contemplated to enhance the ability of the Company and its
Affiliates to attract and retain the services of individuals who are essential
for the growth and profitability of the Company.
SECTION 2. DEFINITIONS.
As used in the Plan, the following terms shall have the meanings set forth
below:
"Advisory Board Member" shall mean any individual who is a member of the
advisory board of the Company.
"Affiliate" shall mean (i) any entity that, directly or through one or more
intermediaries, is controlled by the Company and (ii) any entity in which the
Company has a significant equity interest, as determined by the Committee.
"Award" shall mean any Option, Restricted Stock Grant, Phantom Shares,
Bonus Shares, Other Stock-Based Award or Cash Award.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document approved by the Committee and evidencing any Award, which
may, but need not, be executed or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Bonus Shares" shall mean an award of Shares granted pursuant to Section
6(e) of the Plan.
"Cash Award" shall mean an award payable in cash granted pursuant to
Section 6(g) of the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time, and the rules and regulations thereunder.
<PAGE>
"Committee" shall mean the compensation committee of the Board or any
committee of the Board designated, from time to time, by the Board to act as the
Committee under the Plan comprised solely of qualified directors appointed by
the Board of Directors of the Company. A qualified director is any member of the
board of directors who shall not be deemed to be an "interested person" as
defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended
(the "1940 Act").
"Director" shall mean each individual who is a member of the Board, other
than an Employee.
"Director Option" shall mean an NQO granted under Section 6(b) of the Plan.
"Employee" shall mean any employee of the Company or an Affiliate or any
person who has been extended an offer of employment by the Company or an
Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" shall mean, with respect to Shares, the closing price
of a Share quoted on the principal United States securities exchange registered
under the Exchange Act on which such stock is listed, or if the Shares are not
listed on any such stock exchange, the last sale price, or if none is reported,
the highest closing bid quotation on the Nasdaq National Market or any successor
system then in use on the date of grant, or if none are available on such day,
on the next preceding day for which quotations are available, or if no such
quotations are available, the fair market value on the date of grant of a Share
as determined in good faith by the Committee. In the event the Shares are not
publicly traded at the time a determination of its fair market value is required
to be made hereunder, the determination of fair market value shall be made in
good faith by the Committee.
"Incentive Stock Option" or "ISO" shall mean an option granted under
Section 6(a) of the Plan that is intended to qualify as an "incentive stock
option" under Section 422 of the Code or any successor provision thereto.
"Non-Qualified Stock Option" or "NQO" shall mean an option granted under
Sections 6(a) or 6(b) of the Plan that is not intended to be an Incentive Stock
Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
"Other Stock-Based Award" shall mean an award granted pursuant to Section
6(h) of the Plan that is not otherwise specifically provided for, the value of
which is based in whole or in part upon the value of a Share.
"Participant" shall mean any Employee, Advisory Board Member or Director
granted an Award under the Plan.
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<PAGE>
"Person" shall mean individual, corporation, partnership, limited liability
company, association, joint-stock company, trust, unincorporated organization,
government or political subdivision thereof or other entity.
"Phantom Shares" shall mean an Award of the right to receive Shares issued
at the end of a Restricted Period which is granted pursuant to Section 6(f) of
the Plan.
"Restricted Period" shall mean the period established by the Committee with
respect to an Award during which the Award either remains subject to forfeiture
or is not exercisable by the Participant.
"Restricted Stock" shall mean any Share, prior to the lapse of restrictions
thereon, granted under Sections 6(c) of the Plan.
"Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from time
to time.
"SEC" shall mean the Securities and Exchange Commission, or any successor
thereto.
"Shares" or "Common Shares" or "Common Stock" shall mean the common stock
of the Company, $0.01 par value, and such other securities or property as may
become the subject of Awards of the Plan.
"Substitute Award" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by (i) a company
acquired by the Company or one or more of its Affiliates, or (ii) a company with
which the Company or one or more of its Affiliates combines.
SECTION 3. ADMINISTRATION.
The Plan shall be administered by the Committee. A majority of the
Committee shall constitute a quorum, and the acts of the members of the
Committee who are present at any meeting thereof at which a quorum is present,
or acts unanimously approved by the members of the Committee in writing, shall
be the acts of the Committee. Subject to the terms of the Plan and applicable
law, and in addition to other express powers and authorizations conferred on the
Committee by the Plan, the Committee, subject to Board approval, shall have full
power and authority to: (i) designate Participants; (ii) determine the type or
types of Awards to be granted to a Participant; (iii) determine the number of
Shares to be covered by, or with respect to which payments, rights, or other
matters are to be calculated in connection with, Awards; (iv) determine the
terms and conditions of any Award; (v) determine whether, to what extent, and
under what circumstances Awards may be settled or exercised in cash, Shares,
other securities, other Awards or other property, or canceled, forfeited, or
suspended and the method or methods by which Awards may be settled, exercised,
canceled, forfeited, or suspended; (vi) determine whether, to what extent,
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and under what circumstances cash, Shares, other securities, 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 Committee; (vii) interpret and administer the Plan and any instrument or
agreement relating to an Award made under the Plan; (viii) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it
shall deem appropriate for the proper administration of the Plan; and (ix)
make any other determination and take any other action that the Committee
deems necessary or desirable for the administration of the Plan. Unless
otherwise expressly provided in the Plan, all designations, determinations,
interpretations, and other decisions under or with respect to the Plan or any
Award shall be within the sole discretion of the Committee, may be made at
any time and shall be final, conclusive, and binding upon all Persons,
including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Award, any stockholder and any Employee. All decisions
made by the Committee in administering the Plan shall be subject to Board
review.
SECTION 4. SHARES AVAILABLE FOR AWARDS.
(a) SHARES AVAILABLE. Subject to adjustment as provided in Section 4(c),
the number of Shares with respect to which Awards may be granted under the Plan
shall be 650,000. If any Award is forfeited or otherwise terminates or is
canceled without the delivery of Shares, then the Shares covered by such Award,
to the extent of such forfeiture, termination or cancellation, shall again be
Shares with respect to which Awards may be granted.
(b) SOURCES OF SHARES DELIVERABLE UNDER AWARDS. Any Shares delivered
pursuant to an Award may consist, in whole or in part, of authorized and
unissued Shares or of treasury shares.
(c) ADJUSTMENTS. In the event that the Committee determines that any
dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares such
that an adjustment is determined by the Committee to be appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee shall, in such manner as
it may deem equitable, adjust any or all of (i) the number and type of Shares
(or other securities or property) with respect to which Awards may be granted,
(ii) the number and type of Shares (or other securities or property) subject to
outstanding Awards, and (iii) the grant or exercise price with respect to any
Award or, if deemed appropriate, make provision for a cash payment to the holder
of an outstanding Award; provided, that the number of Shares subject to any
Award denominated in Shares shall always be a whole number.
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SECTION 5. ELIGIBILITY.
Any Employee, Advisory Board Member or Director shall be eligible to be
designated a Participant; in addition, a Director shall automatically be a
Participant pursuant to Section 6(b).
SECTION 6. AWARDS.
(a) OPTIONS. Subject to the provisions of the Plan, the Committee shall
have the authority to determine the Participants to whom Options shall be
granted, the number of Shares to be covered by each Option (no individual may
receive Options with respect to more than 250,000 Shares during any calendar
year), the purchase price therefor and the conditions and limitations applicable
to the exercise of the Option, including the following terms and conditions and
such additional terms and conditions, as the Committee shall determine, that are
not inconsistent with the provisions of the Plan.
(i) EXERCISE PRICE. The purchase price per Share purchasable under
an Option shall be determined by the Committee at the time the Option is
granted; except that the purchase price shall not be less than the Fair
Market Value of a Share of Common Stock on the Grant Date.
(ii) TIME AND METHOD OF EXERCISE. The Committee shall determine the
time or times at which an Option may be exercised in whole or in part, and
the method or methods by which, and the form or forms (which may include,
without limitation, cash, check acceptable to the Company, a
"cashless-broker" exercise (through procedures approved by the Company),
other securities or other property, including a note, or any combination
thereof, having a Fair Market Value on the exercise date equal to the
relevant exercise price) in which payment of the exercise price with
respect thereto may be made or deemed to have been made.
(iii) INCENTIVE STOCK OPTIONS. The terms of any Incentive Stock Option
granted under the Plan shall comply in all respects with the provisions of
Section 422 of the Code, or any successor provision, and any regulations
promulgated thereunder. Incentive Stock Options may be granted only to
Employees of the Company and its "parent corporation" and "subsidiary
corporations," as defined in Section 424 of the Code.
(iv) DATE OF GRANT. The date on which the Committee approved the
grant of any Option to a Participant shall be the date of issuance of
such Option; provided, however, that if (1) any such action by the
Committee does not constitute approval thereof by both (A) a majority of
the Company's directors who have no financial interest in such action
and (B) a majority of the Company's directors who are not "interested
persons" (as defined in Section 2(a)(19) of the Investment Company Act
of 1940, as amended (the "1940 Act")) of the Company and (2) such
approval is at such time required by Section 61(a)(3)(B)(i)(I) or other
applicable provision of the 1940 Act, then the grant of any
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Option by such action shall not be effective, and there shall be no
issuance of such Option, until there has been approval of such action by
(A) a majority of the Company's directors who have no financial interest
in such action, and (B) a majority of the Company's directors who are
not "interested persons" of the Company, on the basis that such issuance
is in the best interests of the Company, and its stockholders, and the
last date on which such required approval is obtained shall be the date
of such Option.
(b) DIRECTOR OPTIONS. Subject to Section 6(b)(viii) below, each Director
automatically shall be a Participant and receive Options as provided below. A
Director shall not be eligible to receive any other Award under the Plan, other
than the automatic Director Option grants pursuant to this Section 6(b).
(i) INITIAL GRANTS. Each Director who serves in such capacity
immediately following the closing of the initial public offering of the
Shares may receive an NQO for such number of Shares, as determined by the
Committee, not to exceed 25,000 (subject to adjustment pursuant to Section
4(c)). Each individual who is elected or appointed as a Director for the
first time after such date shall automatically receive, on the date of his
or her election or appointment, an NQO for such number of Shares, as
determined by the Committee, not to exceed 25,000 (subject to adjustment
pursuant to Section 4(c)).
(ii) ANNUAL GRANTS. Each Director who serves in such capacity on the
day following the Annual Meeting of the Stockholders of the Company in each
year that this Plan is in effect, beginning with the 2001 Annual Meeting
(other than a Director who received a grant pursuant to Section 6(b)(i) on
the preceding day), shall automatically receive on such day an NQO for such
number of Shares, not to exceed 5,000 (subject to adjustment pursuant to
Section 4(c)).
(iii) EXERCISE PRICE. Subject to adjustment pursuant to Section 4(c),
the purchase price per Share purchasable under a Director Option shall be
the Fair Market Value per Share at the time the Director Option is granted.
(iv) VESTING.
a. Each Director Option granted pursuant to Section 6(b)(i)
shall vest over three years; provided however, if a Director is not
re-elected to serve as Director such grant shall be 100% vested
(exercisable) on the date that such Director is not re-elected.
b. Each Director Option granted pursuant to Section 6(b)(ii)
shall be 100% vested (exercisable) on the date of grant of such
Director Option.
(v) METHOD OF EXERCISE. A Director Option may be exercised in
whole or in part by cash, check acceptable to the Company, a
"cashless-broker" exercise (through
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procedures approved by the Company), or any combination thereof, having
a Fair Market Value on the exercise date equal to the relevant exercise
price.
(vi) TERM. Each Director Option shall expire 10 years (or such
shorter period as may be established by the Committee) from its date of
grant, but shall be subject to earlier termination as follows: Director
Options, must be exercised within three months of the date the
Participant ceases to serve as a member of the Board, unless such
termination results from the Participant's death or disability, in which
case the Participant's Director Options may be exercised by the
Participant's legal representative or the person to whom the
Participant's rights shall pass by will or the laws of descent and
distribution, as the case may be, within one year from the date of
termination; provided, however, that such event shall not extend the
normal expiration date of such Director Options.
(vii) AUTOMATIC LIMITS. In the event that the number of Shares
available for grants under this Plan is insufficient to make all automatic
grants provided for in paragraphs (i) or (ii) above on the applicable date,
then all Directors who are entitled to a grant on such date shall share
ratably in the number of Shares then available for grant under this Plan,
and shall have no right to receive a grant with respect to the deficiencies
in the number of available Shares and all future grants under this Section
6(b) shall terminate.
(viii) Under Section 6(b), the Grant Date shall be the date of
issuance of such option; provided, however, that if (1) the proposal to
issue such options has not been approved by order of the U.S. Securities
and Exchange Commission (the "SEC") and (2) such approval is required at
such time by Section 61(a)(3)(B)(i)(II) or other applicable provision of
the 1940 Act, then the grant of any option by such action shall not be
effective, and there shall be no issuance of such option, until there has
been approval of such proposal by order of the SEC on the basis that the
terms of the proposal are fair and reasonable and do not involve
overreaching of the Company or its stockholders, and the date on which such
required approval is obtained shall be the date of issuance of such option.
(c) RESTRICTED STOCK. Subject to the provisions of the Plan, the Committee
shall have the authority to determine the Participants to whom Restricted Stock
shall be granted, the number of Shares of Restricted Stock to be granted to each
such Participant, the duration of the Restricted Period during which, and the
conditions, including the performance criteria, if any, under which, the
Restricted Stock may be forfeited to the Company, and the other terms and
conditions of such Awards.
(i) DIVIDENDS. Dividends paid on Restricted Stock may be paid
directly to the Participant, may be subject to risk of forfeiture and/or
transfer restrictions during any period established by the Committee or
sequestered and held in a bookkeeping cash account (with or without
interest) or reinvested on an immediate or deferred basis in additional
shares of Common Stock, which credit or shares may be subject to the
same restrictions as the
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underlying Award or such other restrictions, all as determined by the
Committee in its discretion.
(ii) REGISTRATION. Any Restricted Stock may be evidenced in such
manner as the Committee shall deem appropriate, including, without
limitation, book-entry registration or issuance of a stock certificate or
certificates. In the event any stock certificate is issued in respect of
Restricted Stock granted under the Plan, such certificate shall be
registered in the name of the Participant and shall bear an appropriate
legend referring to the terms, conditions, and restrictions applicable to
such Restricted Stock.
(iii) FORFEITURE AND RESTRICTIONS LAPSE. Except as otherwise
determined by the Committee or the terms of the Award or other agreement
that granted the Restricted Stock, upon termination of a Participant's
employment (as determined under criteria established by the Committee) for
any reason during the applicable Restricted Period, all Restricted Stock
shall be forfeited by the Participant and re-acquired by the Company. The
Committee may, when it finds that a waiver would be in the best interests
of the Company and not cause such Award, if it is intended to qualify as
performance based compensation under Section 162(m) of the Code, to fail to
so qualify under Section 162(m) of the Code, waive in whole or in part any
or all remaining restrictions with respect to such Participant's Restricted
Stock. Unrestricted Shares, evidenced in such manner as the Committee shall
deem appropriate, shall be issued to the holder of Restricted Stock
promptly after the applicable restrictions have lapsed or otherwise been
satisfied.
(iv) TRANSFER RESTRICTIONS. During the Restricted Period, Restricted
Stock will be subject to the limitations on transfer as provided in Section
6(j)(iii).
(v) LIMIT. The maximum number of Shares of Restricted Stock that
may be granted to any Participant during any year shall not exceed
250,000 Shares.
(d) BONUS SHARES. The Committee shall have the authority, in its
discretion, to grant Bonus Shares to Participants. Each Bonus Share shall
constitute a transfer of an unrestricted Share to the Participant, without other
payment therefor.
(e) PHANTOM SHARES. The Committee shall have the authority to grant Awards
of Phantom Shares to Participants upon such terms and conditions as the
Committee may determine.
(i) TERMS AND CONDITIONS. Each Phantom Share Award shall
constitute an agreement by the Company to issue or transfer a specified
number of Shares or pay an amount of cash equal to a specified number of
Shares, or a combination thereof to the Participant in the future,
subject to the fulfillment during the Restricted Period of such
conditions, if any, as the Committee may specify at the date of grant.
During the Restricted Period, the Participant shall not have any right
to transfer any rights under the subject Award,
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shall not have any rights of ownership in the Phantom Shares and shall
not have any right to vote such shares.
(ii) DIVIDEND EQUIVALENTS. Any Phantom Share award may provide
that an amount equal to any or all dividends or other distributions paid
on Shares during the Restricted Period be credited in a cash bookkeeping
account (without interest) or that equivalent additional Phantom Shares
be awarded, which account or shares may be subject to the same
restrictions as the underlying Award or such other restrictions as the
Committee may determine.
(iii) LIMIT. The maximum number of Phantom Shares that may be awarded
to any Participant during any year shall not exceed 250,000 Phantom Shares.
(f) CASH AWARDS. The Committee shall have the authority to determine the
Participants to whom Cash Awards shall be granted, the amount, and the terms or
conditions, if any, of such Award. A Cash Award may be granted (simultaneously
or subsequently) separately or in tandem with another Award and may entitle a
Participant to receive a specified amount of cash from the Company upon such
other Award becoming taxable to the Participant, which cash amount may be based
on a formula relating to the anticipated taxable income associated with such
other Award and the payment of the Cash Award.
(g) OTHER STOCK-BASED AWARDS. The Committee may also grant to Participants
an Other Stock-Based Award, which shall consist of a right which is an Award
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to, Shares as is deemed by the Committee to be
consistent with the purposes of the Plan. Subject to the terms of the Plan, the
Committee shall determine the terms and conditions of any such Other Stock-Based
Award.
(h) REPLACEMENT GRANTS. Awards may be granted from time to time in
substitution for similar awards held by employees of other corporations who
become Participants as the result of a merger or consolidation of the employing
corporation with the Company or any subsidiary, or the acquisition by the
Company or any subsidiary of the assets of the employing corporation, or the
acquisition by the Company or any subsidiary or an Affiliate of stock of the
employing corporation. The terms and conditions of substitute Awards granted may
vary from the terms and conditions set forth in the Plan, to the extent the
Committee, at the time of grant, deems it appropriate to conform, in whole or in
part, to the provisions of awards in substitution for which they are granted.
(i) GENERAL.
(i) AWARDS MAY BE GRANTED SEPARATELY OR TOGETHER. Awards may, in the
discretion of the Committee, be granted either alone or in addition to, in
tandem with, or in substitution for any other Award granted under the Plan
or any award granted
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under any other plan of the Company or any Affiliate; except that with
respect to any Other Stock-Based Award which may be deemed to be a stock
appreciation right (an "SAR"), such SAR shall only be issued in tandem
with Options awarded or granted under the Plan. Awards granted in
addition to or in tandem with other Awards or awards granted under any
other plan of the Company or any Affiliate may be granted either at the
same time as or at a different time from the grant of such other Awards
or awards.
(ii) FORMS OF PAYMENT BY COMPANY UNDER AWARDS. Subject to the
terms of the Plan and of any applicable Award Agreement, payments or
transfers to be made by the Company or an Affiliate upon the grant,
exercise or payment of an Award may be made in such form or forms as the
Committee shall determine, including, without limitation, cash, Shares,
other securities, other Awards or other property, or any combination
thereof, and may be made in a single payment or transfer, in
installments, or on a deferred basis, in each case in accordance with
rules and procedures established by the Committee. Such rules and
procedures may include, without limitation, provisions for the payment
or crediting of reasonable interest on installment or deferred payments.
(iii) LIMITS ON TRANSFER OF AWARDS.
(A) Except as provided in (C) below, each Award, and each right
under any Award, shall be exercisable only by the Participant during
the Participant's lifetime, or, if permissible under applicable law,
by the Participant's guardian or legal representative as determined by
the Committee.
(B) Except as provided in (C) below, no Award and no right under
any such Award may be assigned, alienated, pledged, attached, sold or
otherwise transferred or encumbered by a Participant otherwise than by
will or by the laws of descent and distribution (or, in the case of
Restricted Stock, to the Company) and any such purported assignment,
alienation, pledge, attachment, sale, transfer or encumbrance shall be
void and unenforceable against the Company or any Affiliate.
(C) Notwithstanding anything in the Plan to the contrary, to the
extent specifically provided by the Committee with respect to a grant,
a Nonqualified Stock Option may be transferred to immediate family
members or related family trusts, limited partnerships or similar
entities or Persons or on such terms and conditions as the Committee
may establish.
(iv) TERM OF AWARDS. The term of each Award shall be for such period
as may be determined by the Committee; provided, that in no event shall the
term of any Award exceed a period of 10 years from the date of its grant.
(v) SHARE CERTIFICATES. All certificates for Shares or other
securities of the Company or any Affiliate delivered under the Plan
pursuant to any Award or the exercise
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thereof shall be subject to such stop transfer orders and other
restrictions as the Committee may deem advisable under the Plan or the
rules, regulations, and other requirements of the SEC, any stock
exchange upon which such Shares or other securities are then listed, and
any applicable Federal or state laws, and the Committee may cause a
legend or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(vi) CONSIDERATION FOR GRANTS. Awards may be granted for no cash
consideration or for such consideration as the Committee determines
including, without limitation, such minimal cash consideration as may be
required by applicable law.
(vii) DELIVERY OF SHARES OR OTHER SECURITIES AND PAYMENT BY
PARTICIPANT OF CONSIDERATION. No Shares or other securities shall be
delivered pursuant to any Award until payment in full of any amount
required to be paid pursuant to the Plan or the applicable Award Agreement
(including, without limitation, any exercise price, tax payment or tax
withholding) is received by the Company. Such payment may be made by such
method or methods and in such form or forms as the Committee shall
determine, including, without limitation, cash, Shares, other securities,
other Awards or other property, withholding of Shares, cashless-broker
exercise with simultaneous sale, or any combination thereof; provided that
the combined value, as determined by the Committee, of all cash and cash
equivalents and the Fair Market Value of any such Shares or other property
so tendered to the Company, as of the date of such tender, is at least
equal to the full amount required to be paid pursuant to the Plan or the
applicable Award Agreement to the Company.
SECTION 7. AMENDMENT AND TERMINATION.
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:
(i) AMENDMENTS TO THE PLAN. The Board or the Committee may amend,
alter, suspend, discontinue, or terminate the Plan without the consent of
any stockholder, Participant, other holder or beneficiary of an Award, or
other Person; provided, however, notwithstanding any other provision of the
Plan or any Award Agreement, without the approval of the stockholders of
the Company no such amendment, alteration, suspension, discontinuation, or
termination shall be made that would increase the total number of Shares
available for Awards under the Plan, except as provided in Section 4(c) of
the Plan.
(ii) AMENDMENTS TO AWARDS. The Committee may waive any conditions or
rights under, amend any terms of, or alter any Award theretofore granted,
provided no change in any Award shall reduce the benefit to Participant
without the consent of such Participant. Notwithstanding the foregoing,
with respect to any Award intended to qualify as performance-based
compensation under Section 162(m) of the Code, no adjustment shall be
authorized to the extent such adjustment would cause the Award to fail to
so qualify.
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SECTION 8. GENERAL PROVISIONS.
(a) NO RIGHTS TO AWARDS. Except as provided in Section 6(b), no Participant
or other Person shall have any claim to be granted any Award, there is no
obligation for uniformity of treatment of Participants, or holders or
beneficiaries of Awards and the terms and conditions of Awards need not be the
same with respect to each recipient.
(b) WITHHOLDING. The Company or any Affiliate is authorized to withhold
from any Award, from any payment due or transfer made under any Award or under
the Plan or from any compensation or other amount owing to a Participant the
amount (in cash, Shares, other securities, Shares that would otherwise be issued
pursuant to such Award, other Awards or other property) of any applicable taxes
payable in respect of an Award, its exercise, the lapse of restrictions thereon,
or any payment or transfer under an Award or under the Plan and to take such
other action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes. In addition, the Committee may
provide, in an Award Agreement, that the Participant may direct the Company to
satisfy such Participant's tax obligation through the withholding of Shares
otherwise to be acquired upon the exercise or payment of such Award.
(c) NO RIGHT TO EMPLOYMENT. The grant of an Award shall not be construed as
giving a Participant the right to be retained in the employ of the Company or
any Affiliate. Further, the Company or an Affiliate may at any time dismiss a
Participant from employment, free from any liability or any claim under the
Plan, unless otherwise expressly provided in the Plan or in any Award Agreement.
(d) GOVERNING LAW. The validity, construction, and effect of the Plan and
any rules and regulations relating to the Plan shall be determined in accordance
with the laws of the State of Delaware, (without regard to principles of
conflicts of laws) and applicable federal law.
(e) SEVERABILITY. If any provision of the Plan or any Award is or becomes
or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as
to any Person or Award, or would disqualify the Plan or any Award under any law
deemed applicable by the Committee, such provision shall be construed or deemed
amended to conform to the applicable laws, or if it cannot be construed or
deemed amended without, in the determination of the Committee, materially
altering the intent of the Plan or the Award, such provision shall be stricken
as to such jurisdiction, Person or Award and the remainder of the Plan and any
such Award shall remain in full force and effect.
(f) OTHER LAWS. The Committee may refuse to issue or transfer any Shares or
other consideration under an Award if, acting in its sole discretion, it
determines that the issuance of transfer or such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary in
connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary.
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(g) NO TRUST OR FUND CREATED. Neither the Plan nor the Award shall create
or be construed to create a trust or separate fund of any kind or a fiduciary
relationship between the Company or any Affiliate and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments from
the Company or any Affiliate pursuant to an Award, such right shall be no
greater than the right of any general unsecured creditor of the Company or any
Affiliate.
(h) NO FRACTIONAL SHARES. No fractional Shares shall be issued or delivered
pursuant to the Plan or any Award, and the Committee shall determine whether
cash, other securities, or other property shall be paid or transferred in lieu
of any fractional Shares or whether such fractional Shares or any rights thereto
shall be canceled, terminated, or otherwise eliminated.
(i) HEADINGS. Headings are given to the Sections and subsections of the
Plan solely as a convenience to facilitate reference. Such headings shall not be
deemed in any way material or relevant to the construction or interpretation of
the Plan or any provision thereof.
(j) PARACHUTE TAX GROSS-UP. To the extent that the grant, payment, or
acceleration of vesting or payment, whether in cash or stock, of any Award made
to a Participant under the Plan (a "Benefit") is subject to an excise tax under
Section 4999(a) of the Code (a "Parachute Tax"), the Company may, if approved by
the Committee, pay such person an amount of cash (the "Gross-up Amount") such
that the "net" Benefit received by the person under this Plan, after paying all
applicable Parachute Taxes (including those on the Gross-up Amount) and any
taxes on the Gross-up Amount, shall be equal to the Benefit that such person
would have received if such Parachute Tax had not been applicable.
SECTION 9. EFFECTIVE DATE OF THE PLAN.
The Plan shall be effective as of the date of its approval by the Board and
stockholders of the Company.
SECTION 10. TERM OF THE PLAN.
No Award shall be granted under the Plan after the 10th anniversary of the
effective date of the Plan. However, unless otherwise expressly provided in the
Plan or in an applicable Award Agreement, any Award granted prior to such
termination, and the authority of the Board or the Committee to amend, alter,
adjust, suspend, discontinue, or terminate any such Award or to waive any
conditions or rights under such Award, shall extend beyond such termination
date.
SECTION 11. COMPLIANCE WITH THE INVESTMENT COMPANY ACT.
Notwithstanding the foregoing, for so long as the Company is a regulated
business development company under the 1940 Act:
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(i) The Plan shall be implemented in accordance with the provisions
of the 1940 Act and no grants or Awards may be made in violation of the
provisions of the 1940 Act;
(ii) The effectiveness of the Plan as to any type of Award that is
prohibited under the 1940 Act without SEC relief shall not occur until the
SEC shall issue an order or no-action letter granting relief to allow the
Company to grant such Award pursuant to the Plan;
(iii) Any grants and Awards made in violation of the 1940 Act will be
null and void.
SECTION 12. LOANS BY THE COMPANY
Upon the exercise of any Option, the Company, at the request of an officer,
and subject to the approval of both (a) a majority of the Company's directors
who each has no financial interest in such loan and (b) a majority of the
Company's directors who each is not an "interested person," as defined in
Section 2(a)(19) of the Act, of the Company on the basis that such loan is in
the best interests of the Company and its stockholders (whether such approval is
by the Committee or otherwise), may lend to such officer, as of the date of
exercise, an amount equal to the exercise price of such option; provided, that
such loan (a) shall have a term of not more than ten years, (b) shall become due
within sixty days after the recipient of the loan ceases to be an officer of the
Company, (c) shall bear interest at a rate no less than the prevailing rate
applicable to 90-day United States Treasury bills at the time the loan is made,
and (d) shall be fully collateralized at all times, which collateral may include
securities issued by the Company. Loan terms and conditions may be changed by
the Committee to comply with applicable IRS, Department of the Treasury and SEC
regulations.
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CORPORATE CUSTODY AGREEMENT
This agreement is between the UNDERSIGNED as Principal and Southwest Bank
of Texas, N.A. ("Southwest") as Agent.
1. DELIVERY AND OWNERSHIP OF THE PROPERTY. Principal may deliver from
time to time property acceptable to Southwest to be held in accordance with this
agreement. Principal is the owner of all property held pursuant to this
agreement, and Southwest is acting as agent of the Principal for the purposes
set forth below.
2. INVESTMENTS. Southwest shall invest, sell, reinvest, and make other
disposition of property only upon the instructions of Principal or of any
Investment Adviser employed by Principal and shall undertake the collection of
any item held as the same matures. Instructions may be oral, in writing or in
any other form acceptable to Southwest, and Principal assumes all risks
resulting from action taken by Southwest in good faith on such instructions.
Southwest shall not be required to comply with any direction to purchase
securities unless there is sufficient cash available, or with any direction to
sell securities unless such securities are held in the account at the time in
deliverable form. Expenses incurred in effecting any of the foregoing
transactions shall be charged to the account.
3. INCOME. Southwest shall receive the income on the property held by it
and after payment of expenses remit the net income as Principal may instruct.
4. STATEMENTS. Southwest shall furnish periodically to Principal
statements of assets and statements of receipts and disbursements and shall
furnish annually data for the preceding year to assist Principal in preparing
returns for income tax purposes on the property held by Agent.
5. NOMINEE. Southwest may register all or any part of the property in a
nominee of Southwest, or may retain it unregistered and in bearer form.
6. PAYMENT OF TAXES. Principal is responsible for the payment of all
taxes assessed on or with respect to any property held by Agent and any income
received and agrees to hold Southwest harmless.
7. COMPENSATION. The compensation of Southwest shall be in accordance
with its established fee schedules in effect from time to time. Southwest shall
be entitled to reimbursement for expenses.
8. WITHDRAWAL OF PROPERTY AND TERMINATION OF AGREEMENT. Principal may
withdraw any and all property held hereunder upon giving Southwest written
notice. The final withdrawal of all property held by Agent shall terminate this
agreement. Southwest shall have the right to terminate this agreement at any
time upon giving the Principal written notice. Southwest shall
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deliver the property as soon as practicable upon either a withdrawal or
termination, but prior to delivery may require re-registration of any
property held in nominee form.
9. AUTHORITY OF PRINCIPAL. Principal certifies that it has corporate
authority to enter into this agreement. A certified copy of a resolution
authorizing the opening of the account and stating the names of the corporate
officers duly authorized to act on behalf of Principal is attached hereto.
Southwest is authorized to follow any and all instructions received by it from
such person or persons until receipt by it of a certified copy of a new
resolution conferring such authority upon another person or persons.
10. LAW GOVERNING. The laws of Texas shall govern the interpretation of
this agreement.
11. GENERAL INFORMATION. The Corporation Tax Identification Number is
76-0631884.
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This agreement shall bind the respective successors and assigns of the
Principal and Agent. Principal and Southwest have executed this agreement in
duplicate on the dates set forth below.
PRINCIPAL
MGi2, Inc.
ATTEST:
By:
- ------------------------------------- -------------------------------------
Name: Evans S. Attwell
Title: Senior Vice President
Date: April 10, 2000
AGENT:
Southwest Bank of Texas, N.A.
ATTEST:
By:
- ------------------------------------- -------------------------------------
Name: ----------------------------------
Title: Authorized Officer
Date: April , 2000
<PAGE>
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between MGi2,
Inc., a Delaware corporation (the "Company"), and Cary M. Grossman
("Executive") is hereby entered into and effective as of the ____ day of
April, 2000, as follows:
In consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed
as follows:
AGREEMENTS
1. SUPERCEDES OTHER EMPLOYMENT AGREEMENTS
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company or its subsidiaries and
Executive.
2. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Executive as Chief Executive Officer
of the Company. As such, Executive shall have responsibilities, duties and
authority reasonably accorded to, expected of and consistent with Executive's
position as Chief Executive Officer of the Company and will report directly
to the Board of Directors of the Company (the "Board"). Executive hereby
accepts this employment upon the terms and conditions herein contained and,
subject to paragraph 2(c), agrees to devote substantially all of his
business-related time, attention and efforts to promote and further the
business and interests of the Company and its affiliates.
(b) Executive shall faithfully adhere to all lawful policies
established by the Company.
(c) Executive shall not, during the term of his employment
hereunder, be engaged in any other business activity pursued for gain, profit
or other pecuniary advantage if such activity interferes in any material
respect with Executive's duties and responsibilities hereunder. The foregoing
limitations shall not be construed as prohibiting Executive from (i) making
personal investments in such form or manner as will neither require his
services in the operation or affairs of the companies or enterprises in which
such investments are made; (ii) participating in professional development
activities; or (iii) acting as a director of other corporations provided such
representation does not adversely impact the Executive's duties hereunder.
(d) Executive cannot be required by the Company to relocate unless
the Executive consents to such relocation. The Executive's refusal to
relocate shall not be considered "cause" for termination. Furthermore,
Executive shall not be required to commute to another location or travel
extensively in lieu of relocation.
<PAGE>
3. COMPENSATION. For all services rendered by Executive, the Company
shall compensate Executive beginning upon the consummation of the initial
public offering of the common stock of the Company (the "IPO") as follows:
(a) BASE SALARY. The base salary payable to Executive shall be
$175,000.00 per year commencing upon the consummation of the IPO, and payable
on a regular basis in accordance with the Company's standard payroll
procedures but not less than monthly. Such base salary may be increased (but
not decreased) from time to time, at the discretion of the Board, in light of
Executive's annual review, position, responsibilities and performance.
(b) BONUS. Executive shall receive an annual bonus to be determined
by the Board.
(c) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION.
Executive shall be entitled to receive additional benefits and compensation
from the Company in such form and to such extent as specified below:
(i) Payment of all premiums for coverage for Executive and his
dependent family members under health, hospitalization, disability,
dental, life and other insurance plans that the Company may have in
effect from time to time (all in an amount not less than such benefits
provided to other Company executives).
(ii) Reimbursement for all business travel and other
out-of-pocket expenses and professional dues and fees reasonably
incurred by Executive in the performance of his services pursuant to
this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Executive upon submission of any
request for reimbursement, and in a format and manner consistent with
the Company's expense reporting policy.
(iii) Other executive perquisites as may be available to or
deemed appropriate for Executive by the Board and Executive shall be
eligible for participation in all other Company-wide employee benefits
as are available from time to time.
(iv) Reimbursement for all operating costs associated with one
automobile including, without limitation, repairs, maintenance and
insurance.
(v) Payment of all premiums for a disability policy in favor
of Executive having substantially the same terms as the disability
policy benefitting the Executive and existing as of the date hereof.
(vi) Three weeks paid vacation per year.
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(d) Notwithstanding anything contained herein to the contrary, at no
time shall the amount of Base Salary plus the Bonus for any one year paid or
payable to the Executive exceed the sum of $500,000.
4. TERM; TERMINATION; RIGHTS ON TERMINATION. (a) The term of this
Agreement shall begin on the consummation of the IPO and continue for three
(3) years (the "Term"), and, unless terminated sooner as herein provided,
shall continue thereafter on a year-to-year basis ("Renewal Period") on the
same terms and conditions contained herein in effect as of the time of
renewal. This Agreement and Executive's employment may be terminated in any
one of the followings ways:
(i) DEATH. The death of Executive shall immediately terminate this
Agreement with no severance compensation due to Executive's estate.
(ii) DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, Executive shall have been absent from his full-time
duties hereunder for four (4) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of
such four (4) month period, but which shall not be effective earlier than the
last day of such four (4) month period), the Company may terminate
Executive's employment hereunder, provided that Executive is unable to resume
his full-time duties at the conclusion of such notice period. Also, Executive
may terminate his employment hereunder if his health should become impaired
to an extent that makes the continued performance of his duties hereunder
hazardous to his physical or mental health or his life, provided that
Executive shall have furnished the Company with a written statement from a
qualified doctor to such effect and provided, further, that, at the Company's
request made within thirty (30) days of the date of such written statement,
Executive shall submit to an examination by a doctor selected by the Company
who is reasonably acceptable to Executive or Executive's doctor and such
doctor shall have concurred in the conclusion of Executive's doctor. In the
event this Agreement is terminated as a result of Executive's disability,
Executive shall receive from the Company, in a lump-sum payment due within
ten (10) days of the effective date of termination, the base salary at the
rate then in effect for whatever time period is remaining under the Initial
Term (as hereinafter defined) of this Agreement, provided that such period
shall not exceed one (1) year.
(iii) GOOD CAUSE. The Company may terminate the Agreement thirty
(30) days after written notice to Executive for good cause, which shall be:
(i) Executive's breach of any material provision of this Agreement
(continuing for ten (10) days after receipt of written notice of need to
cure); (ii) Executive's gross negligence in the performance or intentional
nonperformance (continuing for ten (10) days after receipt of written notice
of need to cure) of any of Executive's material duties and responsibilities
hereunder which is harmful or injurious to the Company; (iii) Executive's
dishonesty, fraud or misconduct with respect to the business or affairs of
the Company or its subsidiaries which materially and adversely affects the
operations or reputation of the Company or its subsidiaries; (iv) Executive's
conviction of a felony crime; or (v) alcohol abuse
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<PAGE>
or a confirmed positive illegal drug test result. In the event of a
termination for good cause, as enumerated above, Executive shall have no
right to any severance compensation but shall receive all compensation due
and payable through the date of termination.
(iv) WITHOUT CAUSE. At any time after the commencement of
employment, Executive may, without cause, and without Good Reason terminate
this Agreement and Executive's employment, effective thirty (30) days after
written notice is provided to the Company. Should Executive be terminated by
the Company without cause or should Executive terminate with Good Reason
during the Term, Executive shall receive from the Company, in a lump-sum
payment due on the effective date of termination, the base salary at the rate
then in effect for whatever time period is remaining under the Initial Term
of this Agreement or for one (1) year, whichever amount is greater. If
Executive resigns or otherwise terminates his employment without cause,
rather than the Company terminating his employment pursuant to this paragraph
4(a)(iv), or if Executive terminates without Good Reason, Executive shall
receive no severance compensation.
Executive shall have "Good Reason" to terminate this Agreement and
his employment hereunder upon the occurrence of any of the following events:
(a) Executive experiences a significant reduction in authority,
responsibilities or duties to a position of less stature or importance within
the Company than the position described in paragraph 1 hereof (b) a material
breach of this Agreement by the Company that is not due to the act or actions
of the Executive and which continues for thirty (30) days after receipt of
written notice of breach is received by the Company from the Employee or (c)
Executive is required to support (by action or silence) conduct which
constitutes dishonesty, fraud or willful misconduct with respect to the
business or affairs of the Company or its subsidiaries which is not due to
the act or actions of the Executive.
(v) END OF TERM OR RENEWAL PERIOD. This Agreement and the Employee's
employment may be terminated as of the end of the Term or any Renewal Period
upon thirty (30) days written notice by the Company or the Executive to the
other party prior to the end of the Term or any Renewal Period. If this
Agreement is terminated as of the end of the Term or any Renewal Period,
Executive shall receive no severance compensation but shall be entitled to
receive all compensation due and payable through the date of termination.
Upon termination of this Agreement for any reason provided above,
Executive shall be entitled to receive all compensation earned and/or accrued
and all benefits and reimbursements due and/or accrued through the effective
date of termination. Additional compensation subsequent to termination, if
any, will be due and payable to Executive only to the extent and in the
manner expressly provided above or in paragraph 11. All other rights and
obligations of the Company and Executive under this Agreement shall cease as
of the effective date of termination, except that the Executive's obligations
under paragraphs 5, 6, 7 and 8 herein and the Company's obligations with
respect to stock grants, stock options, and severance shall survive such
termination in accordance with their terms.
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<PAGE>
(b) CHANGE IN CONTROL OF THE COMPANY. In the event of a "Change in
Control" of the Company (as defined below) during the Term or any extension
or renewal thereof, refer to paragraph 11 below.
(c) TREATMENT OF STOCK OPTIONS AND STOCK OPTION GRANTS. Any unvested
portion of any awards of stock options or stock grants pursuant to this
Agreement in connection with Executive's employment shall be treated in the
following manner in the event of a termination of Executive's employment.
(i) If Executive's employment is terminated by the Company for
cause or if Executive resigns or terminates his employment other than
for Good Reason, then any unvested portion of any awards of stock
options or stock grants shall lapse or shall be forfeited.
(ii) If Executive's employment is terminated by the Company
without cause or if Executive terminates his employment for Good
Reason, then any unvested portion of any awards of stock options or
stock grants shall immediately vest to their fullest extent
(notwithstanding any vesting provisions to the contrary) and Executive
shall be entitled to all rights and privileges associated with such
awards (subject to applicable securities laws and regulations and terms
of any applicable stock option agreements).
(iii) If Executive's employment is terminated pursuant to a
"Change in Control," then the stock options and stock awards shall be
treated in the manner provided in paragraph 11 hereof.
5. RETURN OF COMPANY PROPERTY. All records, designs, patents,
business plans, financial statements, manuals, memoranda, lists and other
property delivered to or compiled by Executive by or on behalf of the
Company, its subsidiaries or their representatives, vendors or customers
which pertain to the business of the Company or its subsidiaries shall be and
remain the property of the Company or its subsidiaries, as the case may be,
and be subject at all times to their discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company or its subsidiaries which is collected by Executive shall be
delivered promptly to the Company without request by it upon termination of
Executive's employment.
6. INVENTIONS. Executive shall disclose promptly to the Company any
and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made
by Executive, solely or jointly with another, during the period of
employment, and which are directly related to the business or activities of
the Company and which Executive conceives as a result of his employment by
the Company. Executive hereby assigns and agrees to assign all his interests
therein to the Company or its nominee. Whenever
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<PAGE>
requested to do so by the Company, Executive shall execute any and all
applications, assignments or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
7. TRADE SECRETS. Executive agrees that he will not, during or after
the Term of this Agreement with the Company, disclose the specific terms of
the Company's or its subsidiaries' relationships or agreements with their
respective significant vendors or customers or any other significant and
material trade secret of the Company or its subsidiaries, whether in
existence or proposed, to any person, firm, partnership, corporation or
business for any reason or purpose whatsoever, except in connection with (a)
any legal proceeding of the Company in which such disclosure is required to
be made by the Company (b) obtaining the advice of outside consultants
engaged by the Company (c) discussions with the Company's outside auditors
(d) obtaining or maintenance of the Company's credit facility or (e)
otherwise with the consent of the Company's Board of Directors.
8. CONFIDENTIALITY.
(a) Executive acknowledges and agrees that all Confidential
Information (as defined below) of the Company is confidential and a valuable,
special and unique asset of the Company that gives the Company an advantage
over its actual and potential, current and future competitors. Executive
further acknowledges and agrees that Executive owes the Company a fiduciary
duty to preserve and protect all Confidential Information from unauthorized
disclosure or unauthorized use, that certain Confidential Information
constitutes "trade secrets" under applicable laws, and that unauthorized
disclosure or unauthorized use of the Company's Confidential Information
would irreparably injure the Company.
(b) Both during the term of Executive's employment and after the
termination of Executive's employment for any reason (including wrongful
termination), Executive shall hold all Confidential Information in strict
confidence, and shall not use any Confidential Information except for the
benefit of the Company, in accordance with the duties assigned to Executive.
Executive shall not, at any time (either during or after the term of
Executive's employment), disclose any Confidential Information to any person
or entity (except other employees of the Company who have a need to know the
information in connection with the performance of their employment duties),
or copy, reproduce, modify, decompile or reverse engineer any Confidential
Information, or remove any Confidential Information from the Company's
premises, without the prior written consent of the board of directors of the
Company or a committee thereof comprised of a majority of nonemployee
directors, or permit any other person to do so. In the event Executive is
requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or other
process) to disclose any Confidential Information, Executive will provide the
Company with immediate written notice of any such request or requirement so
that the Company may seek an appropriate protective order, seek with
Executive's cooperation to narrow the request
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<PAGE>
or demand or waive Executive's compliance with the provisions of this
Agreement. If, failing the entry of a protective order or the receipt of a
waiver hereunder, Executive is, in the opinion of his counsel, compelled to
disclose Confidential Information, Executive may disclose only that portion
of the Confidential Information which Executive's counsel advises Executive
in writing that Executive is compelled to disclose and Executive will
exercise his or her best efforts to obtain assurance that confidential
treatment will be accorded such Confidential Information. In any event,
Executive will not oppose action by the Company to obtain an appropriate
protective order or other reliable assurance that confidential treatment will
be accorded the Confidential Information. Executive shall take reasonable
precautions to protect the physical security of all documents and other
material containing Confidential Information (regardless of the medium on
which the Confidential Information is stored). This Agreement applies to all
Confidential Information, whether now known or later to become known to
Executive.
(c) Upon the termination of Executive's employment with the Company
for any reason, and upon request of the Company at any other time, Executive
shall promptly surrender and deliver to the Company all documents and other
written material of any nature containing or pertaining to any Confidential
Information and shall not retain any such document or other material. Within
five days of any such request, Executive shall certify to the Company in
writing that all such materials have been returned.
(d) As used in this Agreement, the term "Confidential Information"
shall mean any information or material known to or used by or for the Company
(whether or not owned or developed by the Company and whether or not
developed by Executive) that is not generally known to the public.
Confidential information includes, but is not limited to, the following: all
trade secrets of the Company; all information that the Company has marked as
confidential or has otherwise described to Executive (either in writing or
orally) as confidential; all nonpublic information concerning the Company's
products, services, prospective products or services, research, product
designs, prices, discounts, costs, marketing plans, marketing techniques,
market studies, test data, customers, customer lists and records, suppliers
and contracts; all Company business records and plans; all Company personnel
files; all financial information of or concerning the Company; all
information relating to operating system software, application software,
software and system methodology, hardware platforms, technical information,
inventions, computer programs and listings, source codes, object codes,
copyrights and other intellectual property; all technical specifications; any
proprietary information belonging to the Company; all computer hardware or
software manual; all training or instruction manuals; and all data and all
computer system passwords and user codes.
9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to
the Company that the execution of this Agreement by Executive and his
employment by the Company and the performance of his duties hereunder will
not violate or be a breach of any agreement with a former employer, client or
any other person or entity. Further, Executive agrees to indemnify the Company
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for any claim, including, but not limited to, attorneys' fees and expenses of
investigation, by any such third party that such third party may now have or
may hereafter come to have against the Company based upon or arising out of
any non-competition agreement, invention or secrecy agreement between
Executive and such third party which was in existence as of the date of this
Agreement.
10. ASSIGNMENT; BINDING EFFECT. Executive understands that he has
been selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Executive agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement.
Subject to the preceding two (2) sentences and the express provisions of
paragraph 11 below, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their respective
heirs, legal representatives, successors and assigns.
11. CHANGE IN CONTROL.
(a) Unless he elects to terminate this Agreement pursuant to
subsections b, c or d below, Executive understands and acknowledges that the
Company may be merged or consolidated with or into another entity and that
such entity shall automatically succeed to the rights and obligations of the
Company hereunder or that the Company may undergo another type of Change in
Control. In the event such a merger or consolidation or other Change in
Control (as defined herein) is initiated prior to the end of the Term or any
extension or renewal thereof, then the provisions of this paragraph 11 shall
be applicable.
(b) In the event of a Change in Control wherein the Company and
Executive have not received written notice at least five (5) business days
prior to the date of the event giving rise to the Change in Control from the
successor to all or a substantial portion of the Company's business and/or
assets that such successor is willing as of the closing to assume and agrees
to perform the Company's obligations under this Agreement in the same manner
and to the same extent that the Company is hereby required to perform, then
Executive may, at Executive's sole discretion, elect to terminate Executive's
employment on such Change in Control by providing written notice to the
Company prior to the closing of the transaction giving rise to the Change in
Control. In such case, the applicable provisions of paragraph 4(a)(iv) will
apply as though the Company had terminated Executive without cause during the
Initial Term; however, the amount of the lump sum severance payment due
Executive pursuant to this paragraph 11(b) shall be the amount calculated
under the terms of paragraph 4(a)(iv).
(c) In any Change in Control situation, Executive may, at
Executive's sole discretion, elect to terminate Executive's employment upon
the effective date of such Change in Control by providing written notice to
the Company at least ten (10) business days prior to the closing of the
transaction (or ten (10) business days after receipt of notice of such
transaction, whichever is later) giving rise to the Change in Control. In
such case, the applicable provisions of paragraph 4(a)(iv)
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will apply as though the Company had terminated Executive without cause
during the Initial Term; however, the amount of the lump sum severance
payment due Executive pursuant to this paragraph 11(c) shall be the amount
calculated under the terms of paragraph 4(a)(iv).
(d) If, on or within one year following the effective date of a
Change in Control the Company terminates Executive's employment other than
for cause or if Executive's employment with the Company is terminated by the
Company within three months before the effective date of a Change in Control
other than for cause and it is reasonably demonstrated that such termination
(i) was at the request of a third party that has taken steps reasonably
calculated to effect a Change in Control, or (ii) otherwise arose in
connection with or anticipation of a Change in Control, then Executive shall
receive from Company, in a lump sum payment due on the effective date of
termination, the same amount which Executive would have received pursuant to
a termination under paragraph 4(a)(iv).
(e) Solely for purposes of applying paragraph 4 under the
circumstances described in (b) above, the effective date of termination will
be the closing date of the transaction giving rise to the Change in Control
and all compensation, reimbursements and lump-sum payments due Executive must
be paid in full by the Company at or prior to such closing.
(f) A "Change in Control" shall be deemed to have occurred if:
(i) after the IPO, any person, other than the Company or
benefit plan of the Company, acquires, directly or indirectly, the
beneficial ownership (as defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended) of any voting security of the Company
and immediately after such acquisition such person is, directly or
indirectly, the beneficial owner of voting securities representing
forty (40%) or more of the total voting power of all of the
then-outstanding voting securities of the Company;
(ii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization or reorganization of the Company, or
consummation of any such transaction if stockholder approval is not
obtained, other than any such transaction which would result in at
least fifty-one percent (51%) of the total voting power represented by
the voting securities of the surviving entity outstanding immediately
after such transaction being beneficially owned by at least fifty-one
percent (51%) of the holders of outstanding voting securities of the
Company immediately prior to the transactions with the voting power of
each such continuing holder relative to other such continuing holders
not substantially altered in the transaction; or
(iii) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a
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substantial portion of the Company's assets (i.e., fifty (50%) or more
of the total assets of the Company).
(g) Executive shall be fully "grossed up" by the Company or its
successor for any excise taxes that Executive incurs under Section 4999 of
the Internal Revenue Code of 1986 (as well as for income tax on the "gross
up" amount, as a result of any Change in Control. Such amount will be due and
payable by the Company on the date of the Change of Control.
(h) Upon the occurrence of a Change of Control, any unvested portion
of any awards of stock options or stock grants pursuant to this Agreement or
otherwise shall immediately vest and become exercisable to their fullest
extent (notwithstanding any vesting periods specified elsewhere) and
Executive shall be entitled to all rights and privileges associated with such
awards (subject to applicable securities laws and regulations). With respect
to option awards which vest pursuant to this paragraph, Executive shall have
a period of not less than twelve (12) months from the date of vesting in
which to exercise such options.
12. COMPLETE AGREEMENT. This Agreement is not a promise of future
employment. Executive has no oral representations, understandings or
agreements with the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This
written Agreement is the final, complete and exclusive statement and
expression of the agreement between the Company and Executive and of all the
terms of this Agreement, and it cannot be varied, contradicted or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of the Company and
Executive, and no term of this Agreement may be waived except by a writing
signed by the party waiving the benefit of such Term.
13. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: c/o MGi2, Inc.
9821 Katy Freeway
Suite 500
Houston, Texas 77024
To Executive: Cary M. Grossman
13719 Taylorcrest
Houston, Texas 77079
Notice shall be deemed given and effective on the earlier of three (3) days
after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested,
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or when actually received. Either party may change the address for notice by
notifying the other party of such change in accordance with this paragraph 13.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall
be given to the intent manifested by the portion held invalid or inoperative.
The paragraph headings herein are for reference purposes only and are not
intended in any way to describe, interpret, define or limit the extent or
intent of the Agreement or of any part hereof.
15. ARBITRATION. With the exception of paragraphs 7 and 8, any
unresolved dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three (3) arbitrators in Houston, Texas, in accordance with the
National Rules for the Resolution of Employment Disputes of the American
Arbitration Association ("AAA") then in effect, provided that the parties may
agree to use arbitrators other than those provided by the AAA. The
arbitrators shall not have the authority to add to, detract from or modify
any provision hereof nor to award punitive damages to any injured party. The
arbitrators shall have the authority to order back pay, severance
compensation, vesting of options and grants (or cash compensation in lieu of
vesting of options), reimbursement of legal fees and costs, including those
incurred to enforce this Agreement, and interest thereon in the event the
arbitrators determine that Executive was terminated without disability or
good cause, as described in paragraphs 4(a)(ii) and 4(a)(iii), respectively,
or that the Company has otherwise materially breached this Agreement. A
decision by a majority of the arbitration panel shall be final and binding.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The direct expense of any arbitration proceeding shall be borne
by the Company.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
17. COUNTERPARTS. This Agreement may be executed simultaneously in
two (2) or more counterparts, each of which shall be deemed an original and
all of which together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"EXECUTIVE"
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CARY M. GROSSMAN
"COMPANY"
MGi2, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
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EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between MGi2,
Inc., a Delaware corporation (the "Company"), and Clifford E. McFarland
("Executive") is hereby entered into and effective as of the ____ day of
April, 2000, as follows:
In consideration of the mutual promises, terms, covenants and
conditions set forth herein and the performance of each, it is hereby agreed
as follows:
AGREEMENTS
1. SUPERCEDES OTHER EMPLOYMENT AGREEMENTS
This Agreement hereby supersedes any other employment agreements or
understandings, written or oral, between the Company or its subsidiaries and
Executive.
2. EMPLOYMENT AND DUTIES.
(a) The Company hereby employs Executive as President of the
Company. As such, Executive shall have responsibilities, duties and authority
reasonably accorded to, expected of and consistent with Executive's position
as President of the Company and will report directly to the Board of
Directors of the Company (the "Board"). Executive hereby accepts this
employment upon the terms and conditions herein contained and, subject to
paragraph 2(c), agrees to devote substantially all of his business-related
time, attention and efforts to promote and further the business and interests
of the Company and its affiliates.
(b) Executive shall faithfully adhere to all lawful policies
established by the Company.
(c) Executive shall not, during the term of his employment
hereunder, be engaged in any other business activity pursued for gain, profit
or other pecuniary advantage if such activity interferes in any material
respect with Executive's duties and responsibilities hereunder. The foregoing
limitations shall not be construed as prohibiting Executive from (i) making
personal investments in such form or manner as will neither require his
services in the operation or affairs of the companies or enterprises in which
such investments are made; (ii) participating in professional development
activities; or (iii) acting as a director of other corporations provided such
representation does not adversely impact the Executive's duties hereunder.
(d) Executive cannot be required by the Company to relocate unless
the Executive consents to such relocation. The Executive's refusal to
relocate shall not be considered "cause" for termination. Furthermore,
Executive shall not be required to commute to another location or travel
extensively in lieu of relocation.
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3. COMPENSATION. For all services rendered by Executive, the Company
shall compensate Executive beginning upon the consummation of the initial
public offering of the common stock of the Company (the "IPO") as follows:
(a) BASE SALARY. The base salary payable to Executive shall be
$175,000.00 per year commencing upon the consummation of the IPO, and payable
on a regular basis in accordance with the Company's standard payroll
procedures but not less than monthly. Such base salary may be increased (but
not decreased) from time to time, at the discretion of the Board, in light of
Executive's annual review, position, responsibilities and performance.
(b) BONUS. Executive shall receive an annual bonus to be determined
by the Board.
(c) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION.
Executive shall be entitled to receive additional benefits and compensation
from the Company in such form and to such extent as specified below:
(i) Payment of all premiums for coverage for Executive and his
dependent family members under health, hospitalization, disability,
dental, life and other insurance plans that the Company may have in
effect from time to time (all in an amount not less than such benefits
provided to other Company executives).
(ii) Reimbursement for all business travel and other
out-of-pocket expenses and professional dues and fees reasonably
incurred by Executive in the performance of his services pursuant to
this Agreement. All reimbursable expenses shall be appropriately
documented in reasonable detail by Executive upon submission of any
request for reimbursement, and in a format and manner consistent with
the Company's expense reporting policy.
(iii) Other executive perquisites as may be available to or
deemed appropriate for Executive by the Board and Executive shall be
eligible for participation in all other Company-wide employee benefits
as are available from time to time.
(iv) Reimbursement for all operating costs associated with one
automobile including, without limitation, repairs, maintenance and
insurance.
(v) Payment of all premiums for a disability policy in favor
of Executive having substantially the same terms as the disability
policy benefitting the Executive and existing as of the date hereof.
(vi) Three weeks paid vacation per year.
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(d) Notwithstanding anything contained herein to the contrary, at no
time shall the amount of Base Salary plus the Bonus for any one year paid or
payable to the Executive exceed the sum of $500,000.
4. TERM; TERMINATION; RIGHTS ON TERMINATION. (a) The term of this
Agreement shall begin on the consummation of the IPO and continue for three
(3) years (the "Term"), and, unless terminated sooner as herein provided,
shall continue thereafter on a year-to-year basis ("Renewal Period") on the
same terms and conditions contained herein in effect as of the time of
renewal. This Agreement and Executive's employment may be terminated in any
one of the followings ways:
(i) DEATH. The death of Executive shall immediately terminate this
Agreement with no severance compensation due to Executive's estate.
(ii) DISABILITY. If, as a result of incapacity due to physical or
mental illness or injury, Executive shall have been absent from his full-time
duties hereunder for four (4) consecutive months, then thirty (30) days after
receiving written notice (which notice may occur before or after the end of
such four (4) month period, but which shall not be effective earlier than the
last day of such four (4) month period), the Company may terminate
Executive's employment hereunder, provided that Executive is unable to resume
his full-time duties at the conclusion of such notice period. Also, Executive
may terminate his employment hereunder if his health should become impaired
to an extent that makes the continued performance of his duties hereunder
hazardous to his physical or mental health or his life, provided that
Executive shall have furnished the Company with a written statement from a
qualified doctor to such effect and provided, further, that, at the Company's
request made within thirty (30) days of the date of such written statement,
Executive shall submit to an examination by a doctor selected by the Company
who is reasonably acceptable to Executive or Executive's doctor and such
doctor shall have concurred in the conclusion of Executive's doctor. In the
event this Agreement is terminated as a result of Executive's disability,
Executive shall receive from the Company, in a lump-sum payment due within
ten (10) days of the effective date of termination, the base salary at the
rate then in effect for whatever time period is remaining under the Initial
Term (as hereinafter defined) of this Agreement, provided that such period
shall not exceed one (1) year.
(iii) GOOD CAUSE. The Company may terminate the Agreement thirty
(30) days after written notice to Executive for good cause, which shall be:
(i) Executive's breach of any material provision of this Agreement
(continuing for ten (10) days after receipt of written notice of need to
cure); (ii) Executive's gross negligence in the performance or intentional
nonperformance (continuing for ten (10) days after receipt of written notice
of need to cure) of any of Executive's material duties and responsibilities
hereunder which is harmful or injurious to the Company; (iii) Executive's
dishonesty, fraud or misconduct with respect to the business or affairs of
the Company or its subsidiaries which materially and adversely affects the
operations or reputation of the Company or its subsidiaries; (iv) Executive's
conviction of a felony crime; or (v) alcohol abuse
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or a confirmed positive illegal drug test result. In the event of a
termination for good cause, as enumerated above, Executive shall have no
right to any severance compensation but shall receive all compensation due
and payable through the date of termination.
(iv) WITHOUT CAUSE. At any time after the commencement of
employment, Executive may, without cause, and without Good Reason terminate
this Agreement and Executive's employment, effective thirty (30) days after
written notice is provided to the Company. Should Executive be terminated by
the Company without cause or should Executive terminate with Good Reason
during the Term, Executive shall receive from the Company, in a lump-sum
payment due on the effective date of termination, the base salary at the rate
then in effect for whatever time period is remaining under the Initial Term
of this Agreement or for one (1) year, whichever amount is greater. If
Executive resigns or otherwise terminates his employment without cause,
rather than the Company terminating his employment pursuant to this paragraph
4(a)(iv), or if Executive terminates without Good Reason, Executive shall
receive no severance compensation.
Executive shall have "Good Reason" to terminate this Agreement and
his employment hereunder upon the occurrence of any of the following events:
(a) Executive experiences a significant reduction in authority,
responsibilities or duties to a position of less stature or importance within
the Company than the position described in paragraph 1 hereof (b) a material
breach of this Agreement by the Company that is not due to the act or actions
of the Executive and which continues for thirty (30) days after receipt of
written notice of breach is received by the Company from the Employee or (c)
Executive is required to support (by action or silence) conduct which
constitutes dishonesty, fraud or willful misconduct with respect to the
business or affairs of the Company or its subsidiaries which is not due to
the act or actions of the Executive.
(v) END OF TERM OR RENEWAL PERIOD. This Agreement and the Employee's
employment may be terminated as of the end of the Term or any Renewal Period
upon thirty (30) days written notice by the Company or the Executive to the
other party prior to the end of the Term or any Renewal Period. If this
Agreement is terminated as of the end of the Term or any Renewal Period,
Executive shall receive no severance compensation but shall be entitled to
receive all compensation due and payable through the date of termination.
Upon termination of this Agreement for any reason provided above,
Executive shall be entitled to receive all compensation earned and/or accrued
and all benefits and reimbursements due and/or accrued through the effective
date of termination. Additional compensation subsequent to termination, if
any, will be due and payable to Executive only to the extent and in the
manner expressly provided above or in paragraph 11. All other rights and
obligations of the Company and Executive under this Agreement shall cease as
of the effective date of termination, except that the Executive's obligations
under paragraphs 5, 6, 7 and 8 herein and the Company's obligations with
respect to stock grants, stock options, and severance shall survive such
termination in accordance with their terms.
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(b) CHANGE IN CONTROL OF THE COMPANY. In the event of a "Change in
Control" of the Company (as defined below) during the Term or any extension
or renewal thereof, refer to paragraph 11 below.
(c) TREATMENT OF STOCK OPTIONS AND STOCK OPTION GRANTS. Any unvested
portion of any awards of stock options or stock grants pursuant to this
Agreement in connection with Executive's employment shall be treated in the
following manner in the event of a termination of Executive's employment.
(i) If Executive's employment is terminated by the Company for
cause or if Executive resigns or terminates his employment other than
for Good Reason, then any unvested portion of any awards of stock
options or stock grants shall lapse or shall be forfeited.
(ii) If Executive's employment is terminated by the Company
without cause or if Executive terminates his employment for Good
Reason, then any unvested portion of any awards of stock options or
stock grants shall immediately vest to their fullest extent
(notwithstanding any vesting provisions to the contrary) and Executive
shall be entitled to all rights and privileges associated with such
awards (subject to applicable securities laws and regulations and terms
of any applicable stock option agreements).
(iii) If Executive's employment is terminated pursuant to a
"Change in Control," then the stock options and stock awards shall be
treated in the manner provided in paragraph 11 hereof.
5. RETURN OF COMPANY PROPERTY. All records, designs, patents,
business plans, financial statements, manuals, memoranda, lists and other
property delivered to or compiled by Executive by or on behalf of the
Company, its subsidiaries or their representatives, vendors or customers
which pertain to the business of the Company or its subsidiaries shall be and
remain the property of the Company or its subsidiaries, as the case may be,
and be subject at all times to their discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company or its subsidiaries which is collected by Executive shall be
delivered promptly to the Company without request by it upon termination of
Executive's employment.
6. INVENTIONS. Executive shall disclose promptly to the Company any
and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made
by Executive, solely or jointly with another, during the period of
employment, and which are directly related to the business or activities of
the Company and which Executive conceives as a result of his employment by
the Company. Executive hereby assigns and agrees to assign all his interests
therein to the Company or its nominee. Whenever
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requested to do so by the Company, Executive shall execute any and all
applications, assignments or other instruments that the Company shall deem
necessary to apply for and obtain Letters Patent of the United States or any
foreign country or to otherwise protect the Company's interest therein.
7. TRADE SECRETS. Executive agrees that he will not, during or after
the Term of this Agreement with the Company, disclose the specific terms of
the Company's or its subsidiaries' relationships or agreements with their
respective significant vendors or customers or any other significant and
material trade secret of the Company or its subsidiaries, whether in
existence or proposed, to any person, firm, partnership, corporation or
business for any reason or purpose whatsoever, except in connection with (a)
any legal proceeding of the Company in which such disclosure is required to
be made by the Company (b) obtaining the advice of outside consultants
engaged by the Company (c) discussions with the Company's outside auditors
(d) obtaining or maintenance of the Company's credit facility or (e)
otherwise with the consent of the Company's Board of Directors.
8. CONFIDENTIALITY.
(a) Executive acknowledges and agrees that all Confidential
Information (as defined below) of the Company is confidential and a valuable,
special and unique asset of the Company that gives the Company an advantage
over its actual and potential, current and future competitors. Executive
further acknowledges and agrees that Executive owes the Company a fiduciary
duty to preserve and protect all Confidential Information from unauthorized
disclosure or unauthorized use, that certain Confidential Information
constitutes "trade secrets" under applicable laws, and that unauthorized
disclosure or unauthorized use of the Company's Confidential Information
would irreparably injure the Company.
(b) Both during the term of Executive's employment and after the
termination of Executive's employment for any reason (including wrongful
termination), Executive shall hold all Confidential Information in strict
confidence, and shall not use any Confidential Information except for the
benefit of the Company, in accordance with the duties assigned to Executive.
Executive shall not, at any time (either during or after the term of
Executive's employment), disclose any Confidential Information to any person
or entity (except other employees of the Company who have a need to know the
information in connection with the performance of their employment duties),
or copy, reproduce, modify, decompile or reverse engineer any Confidential
Information, or remove any Confidential Information from the Company's
premises, without the prior written consent of the board of directors of the
Company or a committee thereof comprised of a majority of nonemployee
directors, or permit any other person to do so. In the event Executive is
requested or required (by oral questions, interrogatories, requests for
information or documents, subpoena, civil investigative demand or other
process) to disclose any Confidential Information, Executive will provide the
Company with immediate written notice of any such request or requirement so
that the Company may seek an appropriate protective order, seek with
Executive's cooperation to narrow the request
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or demand or waive Executive's compliance with the provisions of this
Agreement. If, failing the entry of a protective order or the receipt of a
waiver hereunder, Executive is, in the opinion of his counsel, compelled to
disclose Confidential Information, Executive may disclose only that portion
of the Confidential Information which Executive's counsel advises Executive
in writing that Executive is compelled to disclose and Executive will
exercise his or her best efforts to obtain assurance that confidential
treatment will be accorded such Confidential Information. In any event,
Executive will not oppose action by the Company to obtain an appropriate
protective order or other reliable assurance that confidential treatment will
be accorded the Confidential Information. Executive shall take reasonable
precautions to protect the physical security of all documents and other
material containing Confidential Information (regardless of the medium on
which the Confidential Information is stored). This Agreement applies to all
Confidential Information, whether now known or later to become known to
Executive.
(c) Upon the termination of Executive's employment with the Company
for any reason, and upon request of the Company at any other time, Executive
shall promptly surrender and deliver to the Company all documents and other
written material of any nature containing or pertaining to any Confidential
Information and shall not retain any such document or other material. Within
five days of any such request, Executive shall certify to the Company in
writing that all such materials have been returned.
(d) As used in this Agreement, the term "Confidential Information"
shall mean any information or material known to or used by or for the Company
(whether or not owned or developed by the Company and whether or not
developed by Executive) that is not generally known to the public.
Confidential information includes, but is not limited to, the following: all
trade secrets of the Company; all information that the Company has marked as
confidential or has otherwise described to Executive (either in writing or
orally) as confidential; all nonpublic information concerning the Company's
products, services, prospective products or services, research, product
designs, prices, discounts, costs, marketing plans, marketing techniques,
market studies, test data, customers, customer lists and records, suppliers
and contracts; all Company business records and plans; all Company personnel
files; all financial information of or concerning the Company; all
information relating to operating system software, application software,
software and system methodology, hardware platforms, technical information,
inventions, computer programs and listings, source codes, object codes,
copyrights and other intellectual property; all technical specifications; any
proprietary information belonging to the Company; all computer hardware or
software manual; all training or instruction manuals; and all data and all
computer system passwords and user codes.
9. NO PRIOR AGREEMENTS. Executive hereby represents and warrants to
the Company that the execution of this Agreement by Executive and his
employment by the Company and the performance of his duties hereunder will
not violate or be a breach of any agreement with a former employer, client or
any other person or entity. Further, Executive agrees to indemnify the Company
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for any claim, including, but not limited to, attorneys' fees and expenses of
investigation, by any such third party that such third party may now have or
may hereafter come to have against the Company based upon or arising out of
any non-competition agreement, invention or secrecy agreement between
Executive and such third party which was in existence as of the date of this
Agreement.
10. ASSIGNMENT; BINDING EFFECT. Executive understands that he has
been selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Executive agrees, therefore, that he
cannot assign all or any portion of his performance under this Agreement.
Subject to the preceding two (2) sentences and the express provisions of
paragraph 11 below, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their respective
heirs, legal representatives, successors and assigns.
11. CHANGE IN CONTROL.
(a) Unless he elects to terminate this Agreement pursuant to
subsections b, c or d below, Executive understands and acknowledges that the
Company may be merged or consolidated with or into another entity and that
such entity shall automatically succeed to the rights and obligations of the
Company hereunder or that the Company may undergo another type of Change in
Control. In the event such a merger or consolidation or other Change in
Control (as defined herein) is initiated prior to the end of the Term or any
extension or renewal thereof, then the provisions of this paragraph 11 shall
be applicable.
(b) In the event of a Change in Control wherein the Company and
Executive have not received written notice at least five (5) business days
prior to the date of the event giving rise to the Change in Control from the
successor to all or a substantial portion of the Company's business and/or
assets that such successor is willing as of the closing to assume and agrees
to perform the Company's obligations under this Agreement in the same manner
and to the same extent that the Company is hereby required to perform, then
Executive may, at Executive's sole discretion, elect to terminate Executive's
employment on such Change in Control by providing written notice to the
Company prior to the closing of the transaction giving rise to the Change in
Control. In such case, the applicable provisions of paragraph 4(a)(iv) will
apply as though the Company had terminated Executive without cause during the
Initial Term; however, the amount of the lump sum severance payment due
Executive pursuant to this paragraph 11(b) shall be the amount calculated
under the terms of paragraph 4(a)(iv).
(c) In any Change in Control situation, Executive may, at
Executive's sole discretion, elect to terminate Executive's employment upon
the effective date of such Change in Control by providing written notice to
the Company at least ten (10) business days prior to the closing of the
transaction (or ten (10) business days after receipt of notice of such
transaction, whichever is later) giving rise to the Change in Control. In
such case, the applicable provisions of paragraph 4(a)(iv)
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will apply as though the Company had terminated Executive without cause
during the Initial Term; however, the amount of the lump sum severance
payment due Executive pursuant to this paragraph 11(c) shall be the amount
calculated under the terms of paragraph 4(a)(iv).
(d) If, on or within one year following the effective date of a
Change in Control the Company terminates Executive's employment other than
for cause or if Executive's employment with the Company is terminated by the
Company within three months before the effective date of a Change in Control
other than for cause and it is reasonably demonstrated that such termination
(i) was at the request of a third party that has taken steps reasonably
calculated to effect a Change in Control, or (ii) otherwise arose in
connection with or anticipation of a Change in Control, then Executive shall
receive from Company, in a lump sum payment due on the effective date of
termination, the same amount which Executive would have received pursuant to
a termination under paragraph 4(a)(iv).
(e) Solely for purposes of applying paragraph 4 under the
circumstances described in (b) above, the effective date of termination will
be the closing date of the transaction giving rise to the Change in Control
and all compensation, reimbursements and lump-sum payments due Executive must
be paid in full by the Company at or prior to such closing.
(f) A "Change in Control" shall be deemed to have occurred if:
(i) after the IPO, any person, other than the Company or
benefit plan of the Company, acquires, directly or indirectly, the
beneficial ownership (as defined in Section 13(d) of the Securities
Exchange Act of 1934, as amended) of any voting security of the Company
and immediately after such acquisition such person is, directly or
indirectly, the beneficial owner of voting securities representing
forty (40%) or more of the total voting power of all of the
then-outstanding voting securities of the Company;
(ii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization or reorganization of the Company, or
consummation of any such transaction if stockholder approval is not
obtained, other than any such transaction which would result in at
least fifty-one percent (51%) of the total voting power represented by
the voting securities of the surviving entity outstanding immediately
after such transaction being beneficially owned by at least fifty-one
percent (51%) of the holders of outstanding voting securities of the
Company immediately prior to the transactions with the voting power of
each such continuing holder relative to other such continuing holders
not substantially altered in the transaction; or
(iii) the stockholders of the Company shall approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or a
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substantial portion of the Company's assets (i.e., fifty (50%) or more
of the total assets of the Company).
(g) Executive shall be fully "grossed up" by the Company or its
successor for any excise taxes that Executive incurs under Section 4999 of
the Internal Revenue Code of 1986 (as well as for income tax on the "gross
up" amount, as a result of any Change in Control. Such amount will be due and
payable by the Company on the date of the Change of Control.
(h) Upon the occurrence of a Change of Control, any unvested portion
of any awards of stock options or stock grants pursuant to this Agreement or
otherwise shall immediately vest and become exercisable to their fullest
extent (notwithstanding any vesting periods specified elsewhere) and
Executive shall be entitled to all rights and privileges associated with such
awards (subject to applicable securities laws and regulations). With respect
to option awards which vest pursuant to this paragraph, Executive shall have
a period of not less than twelve (12) months from the date of vesting in
which to exercise such options.
12. COMPLETE AGREEMENT. This Agreement is not a promise of future
employment. Executive has no oral representations, understandings or
agreements with the Company or any of its officers, directors or
representatives covering the same subject matter as this Agreement. This
written Agreement is the final, complete and exclusive statement and
expression of the agreement between the Company and Executive and of all the
terms of this Agreement, and it cannot be varied, contradicted or
supplemented by evidence of any prior or contemporaneous oral or written
agreements. This written Agreement may not be later modified except by a
further writing signed by a duly authorized officer of the Company and
Executive, and no term of this Agreement may be waived except by a writing
signed by the party waiving the benefit of such Term.
13. NOTICE. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: c/o MGi2, Inc.
9821 Katy Freeway
Suite 500
Houston, Texas 77024
To Executive: Clifford E. McFarland
13903 St. Mary's Lane
Houston, Texas 77079
Notice shall be deemed given and effective on the earlier of three (3) days
after the deposit in the U.S. mail of a writing addressed as above and sent
first class mail, certified, return receipt requested,
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or when actually received. Either party may change the address for notice by
notifying the other party of such change in accordance with this paragraph 13.
14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held
invalid or inoperative, the other portions of this Agreement shall be deemed
valid and operative and, so far as is reasonable and possible, effect shall
be given to the intent manifested by the portion held invalid or inoperative.
The paragraph headings herein are for reference purposes only and are not
intended in any way to describe, interpret, define or limit the extent or
intent of the Agreement or of any part hereof.
15. ARBITRATION. With the exception of paragraphs 7 and 8, any
unresolved dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a
panel of three (3) arbitrators in Houston, Texas, in accordance with the
National Rules for the Resolution of Employment Disputes of the American
Arbitration Association ("AAA") then in effect, provided that the parties may
agree to use arbitrators other than those provided by the AAA. The
arbitrators shall not have the authority to add to, detract from or modify
any provision hereof nor to award punitive damages to any injured party. The
arbitrators shall have the authority to order back pay, severance
compensation, vesting of options and grants (or cash compensation in lieu of
vesting of options), reimbursement of legal fees and costs, including those
incurred to enforce this Agreement, and interest thereon in the event the
arbitrators determine that Executive was terminated without disability or
good cause, as described in paragraphs 4(a)(ii) and 4(a)(iii), respectively,
or that the Company has otherwise materially breached this Agreement. A
decision by a majority of the arbitration panel shall be final and binding.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction. The direct expense of any arbitration proceeding shall be borne
by the Company.
16. GOVERNING LAW. This Agreement shall in all respects be construed
according to the laws of the State of Texas.
17. COUNTERPARTS. This Agreement may be executed simultaneously in
two (2) or more counterparts, each of which shall be deemed an original and
all of which together shall constitute but one and the same instrument.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"EXECUTIVE"
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CLIFFORD E. McFARLAND
"COMPANY"
MGi2, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
---------------------------------
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INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT is made as of _______________, 2000, and
is entered into by and between MGi2, Inc., a Delaware corporation (the
"Company"), and _______________ ("Indemnitee").
R E C I T A L S:
WHEREAS, the bylaws of the Company provide for the indemnification of
the Company's directors and officers to the maximum extent permitted from time
to time under applicable law and, along with the Delaware General Corporation
Law, contemplate that the Company may enter into agreements with respect to such
indemnification; and
WHEREAS, the Board of Directors of the Company has concluded that it is
reasonable, prudent and in the best interests of the Company's stockholders for
the Company to contractually obligate itself to indemnify certain of its
Authorized Representatives (defined below) so that they will serve or continue
to serve with greater certainty that they will be adequately protected.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Indemnitee hereby agree as follows:
1. DEFINITIONS. For purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires, the following terms
shall have the following respective meanings:
"Authorized Representative" means (i) a director, officer,
employee, agent or fiduciary of the Company or any Subsidiary and (ii)
a person serving at the request of the Company or any Subsidiary as a
director, officer, employee, fiduciary or other representative of
another Enterprise.
"Enterprise" means any corporation, partnership, limited
liability company, association, joint venture, trust, employee benefit
plan or other entity.
"Expenses" means all expenses, including (without limitation)
reasonable fees and expenses of counsel.
"Liabilities" means all liabilities, including (without
limitation) the amounts of any judgments, fines, penalties, excise
taxes and amounts paid in settlement.
<PAGE>
"Proceeding" means any threatened, pending or completed claim,
action (including any action by or in the right of the Company), suit
or proceeding (whether formal or informal, or civil, criminal,
administrative, legislative, arbitrative or investigative) in respect
of which Indemnitee is, was or at any time becomes, or is threatened to
be made, a party, witness, subject or target, by reason of the fact
that Indemnitee is or was an Authorized Representative or a prospective
Authorized Representative.
"Subsidiary" means, at any time, (i) any corporation of which
at least a majority of the outstanding voting stock is owned by the
Company at such time, directly or indirectly through subsidiaries, and
(ii) any other Enterprise in which the Company, directly or indirectly,
owns more than a 50% equity interest at such time.
2. INTERPRETATION. (a) In this Agreement, unless a clear contrary
intention appears:
(i) the singular number includes the plural number and VICE
VERSA;
(ii) reference to any gender includes each other gender;
(iii) the words "HEREIN," "HEREOF" and "HEREUNDER" and other
words of similar import refer to this Agreement as a whole and not to
any particular Section or other subdivision;
(iv) unless the context indicates otherwise, reference to any
Section means such Section hereof; and
(v) the words "INCLUDING" (and with correlative meaning
"INCLUDE") means including, without limiting the generality of any
description preceding such term.
(b) The Section headings herein are for convenience only and
shall not affect the construction hereof.
(c) No provision of this Agreement shall be interpreted or
construed against any party solely because that party or its legal
representative drafted such provision.
(d) In the event of any ambiguity, vagueness or other similar
matter involving the interpretation or meaning of this Agreement, this Agreement
shall be liberally construed so as to provide to Indemnitee the full benefits
contemplated hereby.
(e) If the indemnification to which Indemnitee is entitled as
respects any aspect of any claim varies between two or more provisions of this
Agreement, that provision providing the most comprehensive indemnification shall
apply.
-2-
<PAGE>
3. LIMITATION ON PERSONAL LIABILITY. To the fullest extent permitted by
applicable law (including the Investment Company Act of 1940, as amended (the
"Investment Company Act")), Indemnitee shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director of the Company, PROVIDED that the foregoing shall not eliminate or
limit the liability of Indemnitee (i) for any breach of Indemnitee's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law relating to
unlawful dividend payments and unlawful stock purchases or redemptions or (iv)
for any transaction from which Indemnitee derived an improper personal benefit.
4. INDEMNITY. (a) Subject to the following provisions of this
Agreement, the Company shall hold harmless and indemnify Indemnitee to the
fullest extent permitted by applicable law existing (now/or hereafter adopted)
against all Expenses and Liabilities actually incurred by Indemnitee in
connection with any Proceeding; PROVIDED, HOWEVER, notwithstanding anything
herein to the contrary, that no indemnity or contribution for Expenses and
Liabilities or advances therefor shall be paid by the Company pursuant to this
Agreement:
(i) for amounts actually paid to Indemnitee pursuant to one or
more policies of directors and officers liability insurance maintained
by the Company or pursuant to a trust fund, letter of credit or other
security or funding arrangement provided by the Company; PROVIDED,
HOWEVER, that if it should subsequently be determined that Indemnitee
is not entitled to retain any such amount, this clause (i) shall no
longer apply to such amount;
(ii) in respect of remuneration paid to Indemnitee if it shall
be determined by a final judgment or other final adjudication that
payment of such remuneration was in violation of applicable law;
(iii) on account of Indemnitee's conduct which is finally
adjudged to constitute willful misconduct or to have been knowingly
fraudulent, deliberately dishonest or from which the Indemnitee derives
an improper personal benefit; or
(iv) on account of any suit in which final judgment is
rendered against Indemnitee for an accounting of profits made from the
sale or purchase by Indemnitee of securities of the Company pursuant to
the provisions of Section 16(b) of the Securities Exchange Act of 1934,
as amended.
(v) for amounts which the Indemnitee cannot be indemnified
under the provisions of the Investment Company Act, for so long as the
Company is regulated as a business development company under the
Investment Company Act; or
(vi) for amounts which the Indemnitee cannot be indemnified
under the laws of the State of Delaware.
-3-
<PAGE>
(b) If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for only a portion (but not, however, for the
total amount) of any Expenses or Liabilities actually incurred by Indemnitee in
connection with any Proceeding, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses and Liabilities to which Indemnitee
is entitled. If the indemnification provided for herein in respect of any
Expenses or Liabilities actually incurred by Indemnitee in connection with any
Proceeding is finally determined by a court of competent jurisdiction to be
prohibited by applicable law, then the Company, in lieu of indemnifying
Indemnitee, shall, subject to the limitations contained in this Agreement,
contribute to the amount paid or payable by Indemnitee as a result of such
Expenses and Liabilities in such proportion as is appropriate to reflect (i) the
relative benefits received by the Company on the one hand and Indemnitee on the
other hand from the events, circumstances, conditions, happenings, actions or
transactions from which such Proceeding arose, (ii) the relative fault of the
Company (including its other Authorized Representatives) on the one hand and of
Indemnitee on the other hand in connection with the events, circumstances and
happenings which resulted in such Expenses and Liabilities, such relative fault
to be determined by reference to, among other things, the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
the events, circumstances and/or happenings resulting in such Expenses and
Liabilities, and (iii) any other relevant equitable considerations, it being
agreed that it would not be just and equitable if such contribution were
determined by pro rata or other method of allocation which does not take into
account the foregoing equitable considerations.
(c) The indemnification provided herein shall be applicable only to
Proceedings commenced after the date hereof, regardless, however, of whether
they arise from acts, omissions, facts or circumstances occurring before or
after the date hereof.
(d) The indemnification provided herein shall be applicable whether or
not negligence of Indemnitee is alleged or proved, and regardless of whether
such negligence be contributory or sole if permitted by applicable law.
(e) Amounts paid by the Company to Indemnitee under this Section 4 are
subject to refund by Indemnitee as provided in Section 8.
5. NOTIFICATION AND DEFENSE OF CLAIMS. (a) Promptly after the receipt
by Indemnitee of notice of the commencement of any Proceeding, Indemnitee will,
if a claim in respect thereof is to be made against the Company under this
Agreement, notify the Company of the commencement of such Proceeding; PROVIDED,
HOWEVER, that the omission to so notify the Company will not relieve the Company
(i) from any liability which it may have to Indemnitee under this Agreement
unless, and then only to the extent that, such omission results in insufficient
time being available to permit the Company or its counsel to effectively defend
against or make timely response to any loss, claim, damage, liability or expense
resulting from such Proceeding or otherwise has a material adverse effect on the
Company's ability to promptly deal with such loss, claim, damage, liability or
expense or (ii) from any liability which it may have to Indemnitee otherwise
than under this Agreement.
-4-
<PAGE>
(b) The following provisions shall apply with respect to any such
Proceeding as to which Indemnitee notifies the Company of the commencement
thereof:
(i) The Company shall be entitled to participate therein at
its own expense.
(ii) Except as otherwise provided below, to the extent it may
elect to do so, the Company (jointly with any other indemnifying party
similarly notified) will be entitled to assume the defense thereof,
with counsel of its own selection reasonably satisfactory to
Indemnitee. After notice from the Company to Indemnitee of its election
so to assume the defense thereof, the Company will not be liable to
Indemnitee under this Agreement for any Expenses subsequently incurred
by Indemnitee in connection with the defense of such Proceeding other
than reasonable costs of investigation or as otherwise provided below.
Indemnitee shall have the right to employ separate counsel in such
Proceeding but the fees and expenses of such counsel incurred after
notice from the Company of its assumption of the defense thereof shall
be at the expense of Indemnitee unless (1) the employment of separate
counsel by Indemnitee has been authorized by the Company; (2)
Indemnitee shall have reasonably concluded that there may be a conflict
of interest between the Company and Indemnitee in the conduct of the
defense of such Proceeding; or (3) the Company shall not in fact have
employed counsel to assume the defense of such Proceeding, in each of
which cases the reasonable fees and expenses of Indemnitee's counsel
shall be borne by the Company. The Company shall not be entitled to
assume the defense of any Proceeding brought by or on behalf of the
Company or as to which Indemnitee shall have made the conclusion
provided for in (2) above. Nothing in this subparagraph (ii) shall
affect the obligation of the Company to indemnify Indemnitee against
Expenses and Liabilities paid in settlement for which it is otherwise
obligated hereunder.
(iii) The Company shall not be liable to indemnify Indemnitee
under this Agreement for any amounts paid in settlement of any
Proceedings or claims effected without its prior written consent. The
Company shall not settle any Proceeding or claim in any manner which
would impose any penalty or limitation on Indemnitee without
Indemnitee's prior written consent. Neither the Company nor Indemnitee
will unreasonably withhold or delay its consent to any proposed
settlement.
6. ADVANCEMENT OF EXPENSES, ETC. If requested to do so by Indemnitee
with respect to any Proceeding, the Company shall advance to or for the benefit
of Indemnitee, prior to the final disposition of such Proceeding, the Expenses
actually incurred by Indemnitee in investigating, defending or appealing such
Proceeding, except as otherwise provided in Section 4 hereof. Any judgments,
fines or amounts to be paid in settlement of any Proceeding shall also be
advanced by the Company upon request by Indemnitee, except as otherwise provided
in Section 4 hereof. Advances made by the Company under this Section 6 are
subject to refund by Indemnitee as provided in Section 8.
-5-
<PAGE>
7. RIGHT OF INDEMNITEE TO BRING SUIT. (a) If a claim for
indemnification or a claim for an advance under this Agreement is not paid in
full by the Company within 30 days after receipt by the Company from Indemnitee
of a written request or demand therefor, Indemnitee may bring suit against the
Company to recover the unpaid amount of the claim. If, in any such action,
Indemnitee makes a prima facie showing of entitlement to indemnification under
this Agreement, the Company shall have the burden of proving that
indemnification is not required under this Agreement. The only defense to any
such action shall be that indemnification is not required by this Agreement or
allowed under applicable law.
(b) In the event that any action is instituted by Indemnitee to enforce
Indemnitee's rights or to collect monies due to Indemnitee under this Agreement
and if Indemnitee is successful in such action, the Company shall reimburse
Indemnitee for all Expenses incurred by Indemnitee with respect to such action.
8. REPAYMENT OBLIGATION OF INDEMNITEE. If the Company advances or pays
any amount to Indemnitee under Section 4, 6 or 7 and if it shall thereafter be
finally adjudicated that Indemnitee was not entitled to be indemnified hereunder
for all or any portion of such amount, Indemnitee shall promptly repay such
amount or such portion thereof, as the case may be, to the Company. If the
Company advances or pays any amount to Indemnitee under Section 4, 6 or 7 and if
Indemnitee shall thereafter receive all or a portion of such amount under one or
more policies of directors and officers liability insurance maintained by the
Company or pursuant to a trust fund, letter of credit or other security or
funding arrangement provided by the Company, Indemnitee shall promptly repay
such amount or such portion thereof, as the case may be, to the Company.
9. LIMITATION FOR DISABLING CONDUCT.
(a) Notwithstanding anything to the contrary in Section 3 or 4 hereof,
the Company may not indemnify any director or officer of the Company against any
liability, nor shall any director or officer of the Company be exculpated from
any liability, to the Company or its stockholders to which such director or
officer might otherwise be subject by reason of "disabling conduct" (as
hereinafter defined). Accordingly, each determination with respect to the
permissibility of indemnification of a director or officer of the Company
because such director or officer has met the applicable standard of conduct
shall include a determination that the liability for which such indemnification
is sought did not arise by reason of such person's disabling conduct. The
determination required by this Section 9(a) may be based on:
(i) a final decision on the merits by a court or other body
before whom the action, suit or proceeding was brought that the person
to be indemnified was not liable by reason of disabling conduct; or
(ii) in the absence of such a decision, a reasonable
determination, based on a review of the facts, that the person to be
indemnified was not liable by reason of such person's disabling conduct
by: (A) the vote of a majority of a quorum of directors who are
-6-
<PAGE>
"disinterested, non-party directors" (as hereinafter defined); or (B)
an "independent legal counsel" (as hereinafter defined) in a written
opinion. In making such determination, such disinterested, non-party
directors or independent legal counsel, as the case may be, may deem
the dismissal for insufficiency of evidence of any disabling conduct of
either a court action or an administrative proceeding against a person
to be indemnified to provide reasonable assurance that such person was
not liable by reason of disabling conduct.
(b) For the purpose of this Section 9:
(i) "disabling conduct" of a director or officer shall mean
such person's willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office
or any other conduct prohibited under Section 17(h) of the Investment
Company Act or any other applicable securities laws;
(ii) "disinterested, non-party director" shall mean a director
of the Company who is neither an "interested person" of the Company as
defined in Section 2(a)(19) of the Investment Company Act nor a party
to the action, suit or proceeding in connection with which
indemnification is sought;
(iii) "independent legal counsel" shall mean an
attorney-at-law admitted to practice in one or more jurisdictions of
the United States who is not, and for at least two (2) years prior to
his or her engagement to render the opinion in question has not been,
employed or retained by the Company, by any investment adviser to or
principal underwriter for the Company, or by any person affiliated with
any of the foregoing; and
(c) The Company may advance legal fees and other expenses to or for the
benefit of a director or officer of the Company pursuant to Section 6 hereof so
long as, in addition to the other requirements therefor, the Company either:
(i) obtains security for the advance from the Indemnitee;
(ii) has insurance against losses arising by reason of lawful
advances; or
(iii) it shall be determined, pursuant to the means set forth
in Section 9(a)(ii) hereof, that there is reason to believe that the
Indemnitee ultimately will be found entitled to indemnification.
10. CHANGES IN LAW. If any change after the date of this Agreement in
any applicable law, statute or rule expands the power of the Company to
indemnify Authorized Representatives, such change shall be within the purview of
Indemnitee's rights and the Company's obligations under this Agreement. If any
change after the date of this Agreement in any applicable law, statute or rule
narrows the right of the Company to indemnify an Authorized Representative, such
change shall,
-7-
<PAGE>
to the fullest extent permitted by applicable law, leave this Agreement and the
parties' rights and obligations hereunder unaffected.
11. CONTINUATION OF INDEMNITY. All agreements and obligations of the
Company hereunder shall continue during the period Indemnitee is an Authorized
Representative, and shall continue after Indemnitee has ceased to occupy such
position or have such relationship so long as Indemnitee shall be subject to any
possible Proceeding.
12. NONEXCLUSIVITY. The indemnification and other rights provided by
any provision of this Agreement shall not be deemed exclusive of any other
rights to which Indemnitee may be entitled under (i) any statutory or common
law, (ii) the Company's certificate of incorporation, (iii) the Company's
bylaws, (iv) any other agreement or (v) any vote of stockholders or
disinterested directors or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while occupying any of the
positions or having any of the relationships referred to in this Agreement.
Nothing in this Agreement shall in any manner affect, impair or compromise any
indemnification Indemnitee has or may have by virtue of any agreement previously
entered into between Indemnitee and the Company.
13. SEVERABILITY. If any provision of this Agreement shall be held to
be invalid, illegal or unenforceable (i) the validity, legality or
enforceability of the remaining provisions of this Agreement shall not be in any
way affected or impaired thereby and (ii) to the fullest extent possible, the
provisions of this Agreement shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable. Each
provision of this Agreement is a separate and independent portion of this
Agreement.
14. MODIFICATION AND WAIVER. No supplement, modification or amendment
of this Agreement shall be binding unless executed in writing by both of the
parties. No waiver of any of the provisions of this Agreement shall be binding
unless executed in writing by the person making the waiver nor shall such waiver
constitute a continuing waiver.
15. NOTICES. All notices, requests, demands and other communications
hereunder shall be in writing and shall be addressed (i) if to the Company, at
its principal office address as shown on the signature page hereof or such other
address as it may have designated by written notice to Indemnitee for purposes
hereof, directed to the attention of the Secretary and (ii) if to Indemnitee, at
Indemnitee's address as shown on the signature page hereof or to such other
address as Indemnitee may have designated by written notice to the Company for
purposes hereof. Each such notice or other communication shall be deemed to have
been duly given if (a) delivered by hand and receipted for by the party to whom
said notice or other communication shall have been directed, (b) transmitted by
facsimile transmission, at the time that receipt of such transmission is
confirmed, or (c) mailed by certified or registered mail with postage prepaid,
on the third business day after the date on which it is so mailed.
-8-
<PAGE>
16. GOVERNING LAW. This Agreement shall be deemed to be a contract made
under, and shall be governed by and construed and enforced in accordance with,
the internal laws of the State of Delaware without regard to principles of
conflicts of law.
17. HEIRS, SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding
upon, inure to the benefit of and be enforceable by (i) Indemnitee and
Indemnitee's personal or legal representatives, executors, administrators,
heirs, devisees and legatees and (ii) the Company and its successors and
assigns. This Agreement shall not inure to the benefit of any other person or
Enterprise.
(b) The Company agrees to require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used herein, the term "Company" shall include any successor
to its business and/or assets as aforesaid which executes and delivers the
assumption and agreement provided for in this Section 17 or which otherwise
becomes bound by all terms and provisions of this Agreement by operation of law.
-9-
<PAGE>
ENTERED into on the day and year first above written.
THE COMPANY:
MGI2, INC.
By:
-----------------------------------------------
Name: Cary M. Grossman
Title: Chairman of the Board, Chief Executive
Officer and Chief Financial Officer
Address: 9821 Katy Freeway, Suite 500
Houston, Texas 77024
Telecopier: 713-464-1827
INDEMNITEE:
--------------------------------------------------
<PAGE>
MGI2, INC. LOCK-UP AGREEMENT
Capital West Securities, Inc.
One Leadership Square, Suite 200
211 North Robinson
Oklahoma City, Oklahoma 73102
Attention: Mr. Robert O. McDonald
Re: MGI2, INC. (THE "COMPANY")
Ladies and Gentlemen:
The Company proposes to carry out a public offering (the "Offering")
of its common stock (the "Common Stock") for which Capital West Securities,
Inc. ("Capital West") will act as the managing underwriter, as more fully
described in our Form N-2 Registration Statement, No.333-95905, as amended
("Registration Statement"). The Company recognizes that the Offering will
benefit the Company by, among other things, raising additional capital for
its operations. We acknowledge that Capital West is relying on our
representations and agreements contained in this letter in carrying out the
Offering and in entering into underwriting arrangements with the Company with
respect to the Offering.
In consideration of the foregoing, the Company hereby agrees that
the Company will not, without the express written consent of Capital West,
offer to sell, contract to sell, or otherwise sell, issue, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Transfer") any
shares of Common Stock, any options or warrants to purchase any shares of
Common Stock or any securities convertible into, or exchangeable for, shares
of Common Stock (collectively, "Securities") for a period commencing on the
date of this Agreement and continuing for a period of one hundred-eighty
(180) days after the date of this Agreement, except the Company may (a) grant
to Capital West the warrants to purchase Common Stock as described in the
Registration Statement, (b) grant to the underwriters the option to purchase
additional shares of Common Stock for the purpose of covering over-allotments
in the Offering as described in the Registration Statement, (c) grant options
to purchase up to 650,000 shares of Common Stock under the Company's 2000
Stock Plan as described in the Registration Statement and (d) issue shares of
Common Stock pursuant to the proper exercise of such warrants and options.
The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the Transfer by the Company of shares of Common Stock or Securities, except
in compliance with the foregoing restrictions. Capital West, acting alone and
in its sole discretion, may waive any provisions of this Agreement without
notice to any third party.
<PAGE>
This agreement is irrevocable and will be binding on the Company and
the respective successors and assigns of the Company.
Dated ____________________, 2000.
MGi2, Inc.
By
---------------------------------
Cary M. Grossman,
Chief Executive Officer
2
<PAGE>
Lock-Up Agreement
(NON-EMPLOYEE DIRECTORS)
Capital West Securities, Inc.
One Leadership Square, Suite 200
211 North Robinson
Oklahoma City, Oklahoma 73102
Attention: Mr. Robert O. McDonald
Re: MGI2, INC. (THE "COMPANY")
Ladies and Gentlemen:
The Company proposes to carry out a public offering (the "Offering") of
common stock of the Company (the "Common Stock") for which Capital West
Securities, Inc. ("Capital West") will act as the managing underwriter, as more
fully described in the Company's Form N-2 Registration Statement, No.333-95905,
as amended ("Registration Statement"). The undersigned, as a non-employee
director of the Company, recognizes that the Offering will be of benefit to the
undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that Capital
West is relying on the representations and agreements of the undersigned
contained in this letter in carrying out the Offering and in entering into
underwriting arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not, without the express written consent of Capital West,
offer to sell, contract to sell, sell short or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Transfer") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into, or exchangeable for, shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired directly by
the undersigned or with respect to which the undersigned has or hereafter
acquires the power of disposition, for a period commencing on the date of this
Agreement and continuing for a period of one year after the date of this
Agreement.
The undersigned also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent and registrar against the
Transfer of shares of Common Stock or Securities held by the undersigned, except
in compliance with the foregoing restrictions. Capital West, acting alone and in
its sole discretion, may waive any provisions of this Agreement without notice
to any third party.
<PAGE>
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned.
Dated _____________________, 2000.
--------------------------------------------
PRINTED NAME OF HOLDER
By
------------------------------------------
SIGNATURE
--------------------------------------------
PRINTED NAME OF PERSON SIGNING (AND INDICATE
CAPACITY OF PERSON SIGNING IF SIGNING AS
CUSTODIAN, TRUSTEE, OR ON BEHALF OF AN
ENTITY)
2
<PAGE>
Lock-Up Agreement
(OFFICERS, EMPLOYEE DIRECTORS AND CERTAIN MAJOR SHAREHOLDERS)
Capital West Securities, Inc.
One Leadership Square, Suite 200
211 North Robinson
Oklahoma City, Oklahoma 73102
Attention: Mr. Robert O. McDonald
Re: MGI2, INC. (THE "COMPANY")
Ladies and Gentlemen:
The Company proposes to carry out a public offering (the "Offering") of
common stock of the Company (the "Common Stock") for which Capital West
Securities, Inc. ("Capital West") will act as the managing underwriter, as more
fully described in the Company's Form N-2 Registration Statement, No.333-95905
as amended ("Registration Statement"). The undersigned, as a __________________
of the Company, recognizes that the Offering will be of benefit to the
undersigned and will benefit the Company by, among other things, raising
additional capital for its operations. The undersigned acknowledges that you are
relying on the representations and agreements of the undersigned contained in
this letter in carrying out the Offering and in entering into underwriting
arrangements with the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not, without the express written consent of Capital West,
offer to sell, contract to sell, sell short or otherwise sell, dispose of, loan,
pledge or grant any rights with respect to (collectively, a "Transfer") any
shares of Common Stock, any options or warrants to purchase any shares of Common
Stock or any securities convertible into, or exchangeable for, shares of Common
Stock (collectively, "Securities") now owned or hereafter acquired directly by
the undersigned or with respect to which the undersigned has or hereafter
acquires the power of disposition, for a period commencing on the date of this
Agreement and continuing for a period of three years after the date of this
Agreement. Notwithstanding the foregoing sentence, after the expiration of one
year from the date of this Agreement, (a) the undersigned may Transfer up to 10%
of the shares of Common Stock owned by the undersigned, and (b) if the market
price per share of our common stock is at least two times the initial public
offering price per share of our Common Stock for a period of 20 consecutive
trading days at any time after such year, then the undersigned may dispose of
any or all shares of Common Stock owned by the undersigned subject to applicable
securities laws.
The undersigned also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent and registrar against the
Transfer of shares of Common Stock or Securities held by the undersigned, except
in compliance with the foregoing restrictions. Capital
<PAGE>
West, acting alone and in its sole discretion, may waive any provisions of
this Agreement without notice to any third party.
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned.
Dated _____________________, 2000.
--------------------------------------------
PRINTED NAME OF HOLDER
By
-----------------------------------------
SIGNATURE
--------------------------------------------
PRINTED NAME OF PERSON SIGNING (AND INDICATE
CAPACITY OF PERSON SIGNING IF SIGNING AS
CUSTODIAN, TRUSTEE, OR ON BEHALF OF AN
ENTITY)
2
<PAGE>
Lock-Up Agreement
(MEMBERS OF THE ADVISORY BOARD)
Capital West Securities, Inc.
One Leadership Square, Suite 200
211 North Robinson
Oklahoma City, Oklahoma 73102
Attention: Mr. Robert O. McDonald
Re: MGI2, INC. (THE "COMPANY")
Ladies and Gentlemen:
The Company proposes to carry out a public offering (the "Offering") of
common stock of the Company (the "Common Stock") for which you will act as the
underwriters, as more fully described in the Company's Form N-2 Registration
Statement, No.333-95905 as amended ("Registration Statement"). The undersigned,
as a member of the Advisory Board of the Company, recognizes that the Offering
will be of benefit to the undersigned and will benefit the Company by, among
other things, raising additional capital for its operations. The undersigned
acknowledges that you are relying on the representations and agreements of the
undersigned contained in this letter in carrying out the Offering and in
entering into underwriting arrangements with the Company with respect to the
Offering.
In consideration of the foregoing, the undersigned hereby agrees that
the undersigned will not, without the express written consent of Capital West
Securities, Inc., offer to sell, contract to sell, sell short or otherwise sell,
dispose of, loan, pledge or grant any rights with respect to (collectively, a
"Transfer") any shares of Common Stock, any options or warrants to purchase any
shares of Common Stock or any securities convertible into, or exchangeable for,
shares of Common Stock (collectively, "Securities") now owned or hereafter
acquired directly by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of disposition, for a period commencing on
the date of this Agreement and continuing for a period of one year after the
date of this Agreement.
The undersigned also agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent and registrar against the
Transfer of shares of Common Stock or Securities held by the undersigned, except
in compliance with the foregoing restrictions. Capital West, acting alone and in
its sole discretion, may waive any provisions of this Agreement without notice
to any third party.
<PAGE>
This agreement is irrevocable and will be binding on the undersigned
and the respective successors, heirs, personal representatives, and assigns of
the undersigned.
Dated _____________________, 2000.
-------------------------------------------
PRINTED NAME OF HOLDER
By
-----------------------------------------
SIGNATURE
-------------------------------------------
PRINTED NAME OF PERSON SIGNING (AND INDICATE
CAPACITY OF PERSON SIGNING IF SIGNING AS
CUSTODIAN, TRUSTEE, OR ON BEHALF OF AN
ENTITY)
2
<PAGE>
Exhibit 99(l)
April 21, 2000
Board of Directors
MGi2, Inc.
9821 Katy Freeway, Suite 500
Houston, Texas 77024
Gentlemen:
We have acted as counsel to MGi2, Inc., a Delaware corporation (the
"Company"), in connection with the preparation and filing with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933,
as amended (the "Act"), of the Registration Statement on Form N-2 filed by
the Company with the Commission on February 1, 2000, as amended on March 14,
2000 (the "Registration Statement"), with respect to the offering and sale by
the Company of up to 2,375,000 shares (the "Shares") of common stock, par
value $.01 per share (the "Common Stock"), of the Company. This opinion also
relates to any registration statement of the Company relating to the
registration of additional shares of Common Stock pursuant to Rule 462(b)
under the Act.
We have examined originals or copies of (i) the Certificate of
Incorporation of the Company; (ii) the Bylaws of the Company; (iii) certain
resolutions of the Board of Directors and the stockholders of the Company;
and (iv) such other documents and records as we have deemed necessary and
relevant for purposes hereof. We have relied upon certificates of public
officials and officers of the Company as to certain matters of fact relating
to this opinion and have made such investigations of law as we have deemed
necessary and relevant as a basis hereof. We have not independently verified
any factual matter relating to this opinion.
We have assumed the genuineness of all signatures, the authenticity
of all documents, certificates and records submitted to us as copies, and the
conformity to original documents, certificates and records of all documents,
certificates and records submitted to us as copies.
Based upon the foregoing, and subject to the limitations and
assumptions set forth herein, and having due regard for such legal
considerations as we deem relevant, we are of the opinion that:
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MGi2, Inc.
April 21, 2000
Page 2
1. The Company is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Delaware.
2. The issuance of the Shares has been duly authorized, and when
issued and delivered by the Company against payment therefor as described in
the Registration Statement, such Shares will be validly issued, fully paid
and nonassessable.
The foregoing opinion is based on and is limited to the General
Corporation Law of the State of Delaware and the relevant laws of the United
States of America, and we render no opinion with respect to the laws of any
other jurisdiction.
We hereby consent to the filing of this opinion with the Securities
and Exchange Commission as Exhibit l to the Registration Statement and to the
reference to this firm under the caption "Legal Matters" in the prospectus
contained in the Registration Statement. By giving such consent, we do not
admit that we are included within the category of persons whose consent is
required under Section 7 of the Securities Act or the rules and regulations
issued thereunder. This opinion may be incorporated by reference in a
registration statement of the Company relating to the registration of
additional shares of Common Stock pursuant to Rule 462(b) under the
Securities Act, in which case the opinions expressed herein will apply to the
additional shares registered thereunder.
Very truly yours,
/s/ Andrews & Kurth LLP
1213/2610/2716
<PAGE>
EXHIBIT N(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports on MGi2, Inc. and McFarland, Grossman & Company, Inc. and to all
references to our Firm included in or made a part of this registration
statement.
/s/ Arthur Andersen LLP
Houston, Texas
April 21, 2000
<PAGE>
EXHIBIT N(2)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report (and to all references to our Firm)
dated January 22, 1999, on the financial statements of McFarland Grossman &
Company, Inc. in MGi2, Inc.'s Registration Statement on Form N-2.
/s/ WEINSTEIN SPIRA & COMPANY, P.C.
Weinstein Spira & Company, P.C.
Houston, Texas
April 21, 2000
<PAGE>
MGI2, INC.
CODE OF ETHICS
APRIL 7, 2000
SECTION 1: STATEMENT OF PURPOSE AND APPLICABILITY
(A) COVERED ENTITY. MGi2, Inc., a Delaware corporation (the
"Company"), has elected to be regulated as a business
development company (a "BDC") under the Investment Company Act
of 1940, as amended (the "1940 Act").
(B) STATEMENT OF PURPOSE
(l) INTRODUCTION. As a registered investment company, an
investment company regulated as a BDC has a fiduciary
duty to its shareholders, a duty that is recognized
under the federal securities laws and regulations
governing the Company's operations. In particular,
the 1940 Act establishes as a matter of federal law
the fiduciary status of affiliates of an investment
company VIS-A-VIS such company and regulates and
controls the relationship between an investment
company, its officers and employees, its investment
advisers, and officers and employees of such
advisers. The 1940 Act specifically prohibits certain
types of financial transactions involving, directly
or indirectly, both an investment company and its
investment adviser or officers or employees of such
adviser unless prior approval is obtained from the
U.S. Securities and Exchange Commission (the "SEC").
An underlying policy of the 1940 Act is to prohibit
any person who is connected with an investment
company or an investment adviser of such company from
deriving hidden profit from his or her association
with such company. The 1940 Act, among other things,
prohibits persons affiliated with an investment
company from engaging in practices that constitute
fraud or deceit upon the company or its shareholders,
including the practice of its directors, officers, or
employees or of any investment manager, investment
adviser, or their employees of trading privately
(I.E., for their own accounts) in securities at a
time when the investment company is caused to trade
in the same securities in order to benefit these
affiliated persons. Thus, the 1940 Act requires
investment company directors, officers, and employees
as well as investment managers and advisers,
employees of investment managers and advisers and
other affiliates to serve the company with undivided
loyalty.
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(2) CODE OF ETHICS. Rule 17j-1, promulgated by the SEC
pursuant to Section 17(j) of the 1940 Act and made
applicable to BDCs by Section 59 of the 1940 Act,
makes it unlawful for affiliated persons of the
Company: (i) to employ any device, scheme or artifice
to defraud the Company; (ii) to make to the Company
any untrue statement of a material fact or omit to
state to the Company a material fact necessary in
order to make the statements made, in light of the
circumstances under which they are made, not
misleading; (iii) to engage in any act, practice, or
course of business that operates or would operate as
a fraud or deceit upon the Company; or (iv) to engage
in any manipulative practice with respect to the
Company.
Rule 17j-1 also requires investment companies and
their investment advisers (including subadvisers) and
principal underwriters to adopt written codes of
ethics reasonably designed to prevent their officers
and directors, as well as any employees who
participate in the selection of a company's portfolio
securities or who have access to information
regarding a company's impending purchases and sales
of portfolio securities, from engaging in conduct
prohibited by the rule as described in (i) - (iv)
above. Therefore, the Company has adopted the conduct
standards contained in this Code of Ethics ("Code")
for such individuals.
This Code is based upon the following general
fiduciary principles:
(a) the duty at all times to place the interests
of shareholders first;
(b) the requirement that all personal securities
transactions be conducted consistent with
the Code and in such a manner as to avoid
any actual or potential conflict of interest
or any abuse of an individual's position of
trust and responsibility; and
(c) the fundamental standard that investment
company personnel should not take
inappropriate advantage of their positions.
(3) SCOPE OF THE CODE. This Code constitutes the Code of
Ethics of the Company. This Code covers the conduct
(including the personal securities transactions) of
each officer and director of the Company, as well as
of any employees of the Company who participate in
the selection of the Company's portfolio securities
or who have access to information regarding the
Company's impending purchases and sales of portfolio
securities.
SECTION II: DEFINITIONS
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(A) ACCESS PERSON. "Access Person" means any director (including
an Advisory Board member), officer, or "Advisory Person" of
the Company.
(B) ADVISER. "Adviser" means any individual or entity that may
from time to time serve as an investment adviser to the
Company (or an investment subadviser to the Company or an
Adviser).
(C) ADVISORY PERSON. "Advisory person" of the Company means: (i)
any employee of the Company or of any company in a control
relationship to the Company, who, in connection with his or
her regular functions or duties, makes, participates in, or
obtains information regarding the purchase or sale of a
security by the Company, or whose functions relate to the
making of any recommendations with respect to such purchases
or sales; (ii) any director, officer, or employee of the
Adviser, or of any company in a control relationship with such
an entity, which director, officer, or employee, in connection
with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase
or sale of a security by the Company, or whose functions
relate to the making of any recommendations with respect to
such purchases or sales; and (iii) any natural person in a
control relationship to the Company who obtains information
concerning recommendations made to the Company with regard to
the purchase or sale of security.
A person does not become an "Advisory Person" simply by virtue
of normally assisting in the preparation of public reports, or
receiving public reports, but not receiving information about
current recommendations or trading of securities; or obtaining
knowledge in a single instance of current recommendations or
trading activity; or infrequently and inadvertently obtaining
such knowledge.
(D) BENEFICIAL INTEREST. "Beneficial Interest" includes any
entity, person, trust, or account with respect to which an
Access Person exercises investment discretion or provides
investment advice. A beneficial interest shall be presumed to
include all accounts in the name of or for the benefit of the
Access Person, his or her spouse, dependent children, or any
person living with him or her or to whom he or she contributes
economic support.
(E) BENEFICIAL OWNERSHIP. "Beneficial Ownership" shall be
determined in accordance with Rule 16a-l(a)(2) under the
Securities Exchange Act of 1934, except that the determination
of direct or indirect Beneficial Ownership shall apply to all
securities, and not just EQUITY securities, that an Access
Person has or acquires. Rule 16a-1(a)(2) provides that the
term "beneficial owner" means any person who, directly or
indirectly, through any contract, arrangement, understanding,
relationship, or otherwise, has or shares a direct or indirect
pecuniary interest in any equity security. Therefore, an
Access Person may be deemed to have
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Beneficial Ownership of securities held by members of his or
her immediate family sharing the same household, or by certain
partnerships, trusts, corporations, or other arrangements.
(F) CONTROL. "Control" shall have the same meaning as that set
forth in Section 2(a)(9) of the 1940 Act. Generally, control
means the power to exercise a controlling influence on the
management or policies of a company, unless such power is
solely the result of an official position with such company.
(G) COVERED SECURITY. "Covered Security" means a security as
defined in Section 2(a)(36) of the 1940 Act, except that it
does not include (i) direct delegations of the Government of
the United States; (ii) banker's acceptances, bank
certificates of deposit, commercial paper and high quality
short-term debt instruments, including repurchase agreements;
and (iii) shares issued by open-end registered investment
companies.
(H) DESIGNATED OFFICER. "Designated Officer" shall mean the
officer of the Company designated by the Board of Directors
from time to time to be responsible for management of
compliance with this Code. The Designated Officer may appoint
a designee to carry out certain of his or her functions
pursuant to this Code.
(I) DISINTERESTED DIRECTOR. "Disinterested Director" means a
director of the Company who is not an "interested person" of
the Company within the meaning of Section 2(a)(19) of the 1940
Act.
(J) COMPANY. The "Company" means MGi2, Inc., a Delaware
corporation.
(K) PURCHASE OR SALE OF A COVERED SECURITY. "Purchase or sale of a
Covered Security" includes, among other things, the writing of
an option to purchase or sell a Covered Security, or the use
of a derivative product to take a position in a Covered
Security.
SECTION III: STANDARDS OF CONDUCT
(A) GENERAL STANDARDS
(1) No Access Person shall engage, directly or
indirectly, in any business transaction or
arrangement for personal profit that is inconsistent
with the best interests of the Company or its
shareholders; nor shall he or she make use of any
confidential information gained by reason of his or
her employment by or affiliation with the Company or
an Adviser or affiliates thereof in order to derive a
personal profit for himself or herself or for any
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Beneficial Interest, in violation of the fiduciary
duty owed by the Company's affiliates to the Company
or its shareholders.
(2) Any Access Person recommending or authorizing the
purchase or sale of a Covered Security by the Company
shall, at the time of such recommendation or
authorization, disclose any Beneficial Interest in or
Beneficial Ownership of such Covered Security or the
issuer thereof.
(a) his or her Beneficial Ownership of any
Covered Securities of such issuer;
(b) any transaction he or she contemplates in
such Covered Securities;
(c) any position that he or she holds with such
issuer;
(d) any present or proposed business
relationship that he or she (or any
Beneficial Interest of his or hers) may have
with the issuer or its affiliates.
(3) No Access Person shall dispense any information
concerning securities holdings or securities
transactions of the Company to anyone outside the
Company, without obtaining prior written approval
from the Designated Officer, the equivalent officer
of the Adviser, or such person or persons as these
individuals may designate to act on their behalf.
Notwithstanding the preceding sentence, such Access
Person may dispense such infor- mation without
obtaining prior written approval:
(a) when there is a public report containing the
same information;
(b) when such information is dispensed in
accordance with compliance procedures
established to prevent conflicts of interest
between the Company and its affiliates;
(c) when such information is reported to
directors of the Company; or
(d) in the ordinary course of his or her duties
on behalf of the Company.
(4) All personal securities transactions should be
conducted consistent with this Code and in such a
manner as to avoid actual or potential conflicts of
interest, the appearance of a conflict of interest,
or any abuse of an individual's position of trust and
responsibility within the Company.
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(B) PROHIBITED TRANSACTIONS
(1) GENERAL PROHIBITION. No Access Person shall purchase
or sell, directly or indirectly, any Covered Security
in which he or she has, or by reason of such
transaction acquires, any direct or indirect
Beneficial Ownership and which such Access Person
knows or should have known at the time of such
purchase or sale:
(a) is being considered for purchase or sale by
the Company, or
(b) is being purchased or sold by the Company.
(2) INITIAL PUBLIC OFFERINGS AND PRIVATE PLACEMENTS. No
Advisory Person shall purchase, directly or
indirectly, any Covered Securities in which he or she
by reason of such transaction acquires any direct or
indirect Beneficial Ownership pursuant to an initial
public offering, private placement or other private
offering of Covered Securities, UNLESS such Access
Person shall have obtained prior written approval for
such purpose from the Designated Officer. A record of
any decision to approve the request, and the reasons
underlying the decision, must be maintained for at
least five years after the end of the fiscal year in
which the approval is granted. In determining whether
such prior approval shall be granted, the Designated
Officer shall take into account whether the
opportunity to purchase such Covered Securities is
being offered to such Advisory Person because of his
or her position with the Company, and whether the
opportunity to purchase such Covered Securities
should be reserved for the Company. Advisory Persons
who purchase Covered Securities pursuant to such
prior approval shall disclose that investment if they
later become aware of or play a part in the Company's
subsequent consideration of an investment in the
issuer of the Covered Securities. In such
circumstances, the Company's decision to purchase
Covered Securities of the issuer shall be subject to
an independent review by an Advisory Person with no
personal interest in the issuer.
(3) BLACKOUT PERIODS
(a) OPEN ORDER BLACKOUT PERIOD. No Access Person
shall purchase or sell, directly or
indirectly, any Covered Securities in which
he or she has, or by reason of such
transaction acquires, any direct or indirect
Beneficial Ownership on any day during which
the Company has a pending "buy" or "sell"
order in that same Covered Security until
that order is executed or withdrawn.
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(b) FIFTEEN DAY BLACKOUT PERIOD. No Advisory
Person shall purchase or sell, directly or
indirectly, any Covered Securities in which
he or she has, or by reason of such
transaction acquires, any direct or indirect
Beneficial Ownership within seven days
before and after the Company trades in that
Covered Security.
(4) SHORT-TERM TRADING. No Advisory Person shall profit
in the purchase and sale, or sale and purchase,
directly or indirectly, of the same (or equivalent)
Securities in which he or she has, or by reason of
such transaction acquires, any direct or indirect
Beneficial Ownership within 60 calendar days.
Exceptions to this short-term trading prohibition may
be made on a case-by-case basis with the prior
written approval of the Designated Officer when no
abuse appears to be involved and the equities of the
situation strongly support such an exception.
(5) GIFTS. No Advisory Person may accept, directly or
indirectly, any gift, favor, or service of more than
a DE MINIMIS value from any person with whom he or
she transacts business on behalf of the Company under
circumstances when to do so would conflict with the
Company's best interests or would impair the ability
of such person to be completely disinterested when
required, in the course of business, to make
judgments and/or recommendations on behalf of the
Company.
(6) SERVICE AS DIRECTOR. No Advisory Person shall serve
on the board of directors of a publicly traded
company without prior written authorization of the
Designated Officer based upon a determination that
the board service would be consistent with the
interests of the Company and its shareholders.
(C) EXEMPTED TRANSACTIONS. The prohibitions of Sections III(A) and
(B) of this Code shall not apply to the following
transactions, although the reporting provisions of Section
IV(B) of this Code, which requires mandatory reporting of
Covered Securities transactions by certain Access Persons,
will continue to apply to such transactions where applicable:
(1) Purchases or sales effected in any account over which
the Access Person has no direct or indirect influence
or control.
(2) Purchases or sales of Covered Securities that are not
eligible for purchase or sale by the Company.
(3) Purchases or sales that are non-volitional on the
part of either the Access Person or the Company.
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(4) Purchases that are part of an automatic dividend
reinvestment plan.
(5) Purchases effected upon the exercise of rights issued
by an issuer pro rata to all holders of a class of
its Covered Securities, to the extent such rights
were acquired from such issuer, and sales of such
rights so acquired.
(6) Purchases or sales that receive the prior approval of
the Designated Officer because the Designated Officer
has determined that particular purchase or sale to be
only remotely potentially harmful to the Company,
because they would be very unlikely to affect a
highly institutional market, or because they clearly
are not related economically to the Covered
Securities to be purchased, sold, or held by the
Company.
SECTION IV: PROCEDURES TO IMPLEMENT CODE OF ETHICS
The following procedures have been established to assist Access Persons
in avoiding a violation of this Code, and to assist the Company in
preventing, detecting, and imposing sanctions for violations of this
Code. Every Access Person must follow these procedures. Questions
regarding these procedures should be directed to the Designated
Officer.
(A) PRE-CLEARANCE OF SECURITY TRANSACTIONS. No Advisory Person
shall purchase or sell, directly or indirectly, any Covered
Security in which he or she has, or by reason of such
transaction acquires, any direct or indirect Beneficial
Ownership, unless such purchase or sale has been pre-cleared
by the Designated Officer. Such pre-clearance shall be
effective for five days.
(B) REPORTING REQUIREMENTS.
(1) APPLICABILITY
All Access Persons are subject to the reporting
requirements set forth in Section IV(B)(2) except:
(a) with respect to transactions effected for, and
Covered Securities held in, any account over which
the Access Person has no direct or indirect influence
or control;
(b) a Disinterested Director who would be required to
make a report solely by reason of being a Director
need not make an initial holdings report or an annual
holdings report. Furthermore, such Disinterested
Director need not make a quarterly transaction report
unless the Director knew or, in the ordinary course
of fulfilling his or her official duties as a
Director, should have known that during the 15-day
period immediately
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before or after the Director's transaction in a
Covered Security, the Company purchased or sold the
Covered Security, or the Company considered
purchasing or selling the Covered Security;
(c) an Access Person to an investment adviser need
not make a quarterly transaction report to the
investment adviser if all the information in the
report would duplicate that contained in reports
required under Rule 204-2 of the Investment Advisers
Act; or
(d) an Access Person need not make a quarterly
transaction report if the report would duplicate
information contained in broker trade confirmations
or account statements received by the Company with
respect to the Access Person.
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(2) REPORT TYPES
(a) INITIAL HOLDINGS REPORT. An Access Person must
file an initial report not later than 10 days after
person becomes an Access Person. The initial report
must (i) contain the title, number of shares and
principal amount of each Covered Security in which
the Access Person had any direct or indirect
beneficial ownership when the person became an Access
Person; (ii) identify any broker, dealer or bank with
whom the Access Person maintained an account in which
any Covered Securities were held for the direct or
indirect benefit of the Access Person as of the date
the person became an Access Person, and (iii)
indicate the date that the report is filed with the
Designated Person. A copy of the report is attached
hereto as Exhibit B.
(b) QUARTERLY TRANSACTIONS REPORT. An Access Person
must file a quarterly transaction report not later
than 10 days after the end of a calendar quarter.
With respect to any transaction made during the
reporting quarter, the quarterly transaction report
must contain (i) the transaction date, title,
interest date and maturity date (if applicable), the
number of shares and the principal amount of each
Covered Security; (ii) the nature of the transaction;
(iii) the price of the Covered Security at which the
transaction occurred; (iv) the name of the broker,
dealer or bank through which the transaction was
effected; and (v) the date that the report is
submitted by the Access Person. With respect to any
account established by an Access Person during the
reporting quarter in which Covered Securities were
held, the Access Person must report the date the
account was established and the date the report is
submitted. A copy of the report is attached hereto as
Exhibit C.
(c) ANNUAL HOLDINGS REPORT. An Access Person must
file annually an annual holdings report. The annual
report must contain (i) the title, number of shares,
and principal amount of each Covered Security in
which the Access Person had any direct or indirect
beneficial ownership; (ii)the name of any broker,
dealer or bank in which any Covered Securities are
held for the direct or indirect benefit of the Access
Person; and (iii) the date the report is submitted. A
copy of the report is attached hereto as Exhibit D.
(d) CONFIRMATIONS AND ACCOUNT STATEMENTS. Every
Advisory Person shall direct his or her broker to
provide to the Designated Officer (i) duplicate
confirmations of all transactions in any Covered
Security in which he or she has, or by reason of such
transaction acquires, any direct
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or indirect Beneficial Ownership, and (ii) copies of
periodic statements for all investment accounts in
which they have Beneficial Ownership.
(e) COMPANY AND INVESTMENT ADVISER REPORTS. No less
frequently than annually, the Company and any
investment adviser, if applicable, must furnish to
the Board of Directors and the Board of Directors
must consider, a written report that:
(i) describes any issues arising under the
Code of Ethics or procedures since the last
report to the Board of Directors, including
but no limited to, information about
material violations of the code or
procedures and sanctions imposed in response
to the material violations; and
(ii) certifies that the Company and
investment adviser, if applicable, has
adopted procedures reasonably necessary to
prevent Access Persons from violating the
code.
(3) DISCLAIMER OF BENEFICIAL OWNERSHIP. Any report
required under this Section IV may contain a
statement that the report shall not be construed as
an admission by the person submitting such duplicate
confirmation or account statement or making such
report that he or she has any direct or indirect
beneficial ownership in the Covered Security to which
the report relates.
(4) REVIEW OF REPORTS. The reports, duplicate
confirmations, and account statements required to be
submitted under this Section IV shall be delivered to
the Designated Officer. The Designated Officer shall
review such reports, duplicate confirmations, and
account statements to determine whether any
transactions recorded therein constitute a violation
of the Code of Ethics. Before making any
determination that a violation has been committed by
any Access Person, such Access Person shall be given
an opportunity to supply additional explanatory
material. The Designated Officer shall maintain
copies of the reports, confirmations, and account
statements as required by Rule 17j-1(d).
(5) ACKNOWLEDGMENT AND CERTIFICATION. Upon becoming an
Access Person and annually thereafter, all Access
Persons shall sign an acknowledgment and
certification of their receipt of and intent to
comply with this Code in the form attached hereto as
Exhibit A and return it to the Designated Officer.
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(6) RECORDS. The Company shall maintain records with
respect to this Code in the manner and to the extent
set forth below, which records may be maintained on
microfilm under the conditions described in Rule
31a-2(f)(1) under the 1940 Act and shall be available
for examination by representatives of the Securities
and Exchange Commission.
(a) A copy of this Code and any other Code of
Ethics of the Company that is, or at any
time within the past five years has been, in
effect shall be preserved in an easily
accessible place.
(b) A record of any violation of this Code and
of any action taken as a result of such
violation shall be preserved in an easily
accessible place for a period of not less
than five years following the end of the
fiscal year in which the violation occurs.
(c) A copy of each report made or duplicate
confirmation or account statement received
pursuant to this Code shall be preserved for
a period of not less than five years from
the end of the fiscal year in which it is
made, the first two years in an easily
accessible place.
(d) A list of all persons who are, or within the
past five years have been, required to
submit duplicate confirmations or account
statements or to make reports pursuant to
this Code shall be maintained in an easily
accessible place.
(7) CONFIDENTIALITY. All reports of Covered Securities
transactions, duplicate confirmations, account
statements, and any other information filed with the
Company or furnished to any person pursuant to this
Code shall be treated as confidential, but are
subject to review as provided herein and by
representatives of the SEC.
(8) DUAL REPORTING OBLIGATIONS. Employees, officers and
directors of an Adviser subject to substantially
similar reporting obligations set forth under the
Adviser's code of ethics are not subject to the
reporting requirements set forth in this Code.
SECTION V: SANCTIONS
Upon determination that a violation of this Code has occurred, the
Board of Directors of the Company may impose such sanctions as it deems
appropriate, including, among other things, a letter of censure or suspension or
termination of the employment of the violator. All violations of this Code and
any sanctions imposed with respect thereto shall be periodically reported to the
Board of Directors of the Company.
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SECTION VI: MONITORING OF SERVICE PROVIDERS
The Designated Officer of the Company shall, prior to effectiveness of
this Code, and periodically thereafter as appropriate, verify that each
investment adviser has adopted a code of ethics and that such code of ethics
meets all applicable legal requirements and is consistent with the goals and
scope of this Code of Ethics. Prior to initially retaining the services of an
investment adviser, the Board of Directors, including a majority of the
Disinterested Directors, must approve the code of ethics of the investment
adviser. Before the Board of Directors can consider the investment adviser's
code of ethics, the investment adviser must certify to the Board that it has
adopted procedures reasonably necessary to prevent Access Persons from violating
the investment adviser's code of ethics. The Board of Directors must also
approve a material change to a code of ethics no later than six months after
adoption of the material change.
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EXHIBIT A
ACKNOWLEDGMENT AND CERTIFICATION
I acknowledge receipt of the Code of Ethics of the MGi2, Inc. I have
read and understand such Code of Ethics and agree to be governed by it at all
times Further, if I have been subject to the Code of Ethics during the preceding
year, I certify that I have complied with the requirements of the Code of Ethics
and have disclosed or reported all personal securities transactions required to
be disclosed or reported pursuant to the requirements of the Code of Ethics.
-----------------------------------
(signature)
-----------------------------------
(please print name)
Date:
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EXHIBIT B
INITIAL HOLDINGS REPORT
Name Date
----------------------- ---------------------
NAME OF ISSUER NUMBER OF SHARES PRINCIPAL AMOUNT
I certify that the foregoing is a complete and accurate list of all
securities in which I have any Beneficial Ownership.
--------------------------------
Signature
-15-
<PAGE>
EXHIBIT C
QUARTERLY TRANSACTION REPORT
Name Date
----------------------- ---------------------
<TABLE>
<CAPTION>
DATE NAME OF NUMBER INTEREST MATURITY PRINCIPAL TYPE OF NAME OF
ISSUER OF DATE DATE AMOUNT TRANSACTION BROKER/
------ SHARES ---- ---- ------ ----------- DEALER/
------ BANK
-------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
I certify that the foregoing is a complete and accurate list of all
securities in which I have any Beneficial Ownership.
--------------------------------
Signature
-16-
<PAGE>
EXHIBIT D
ANNUAL HOLDINGS REPORT
Name Date
----------------------- ---------------------
<TABLE>
<CAPTION>
NAME OF ISSUER NUMBER OF SHARES PRINCIPAL AMOUNT NAME OF
- -------------- ---------------- ---------------- BROKER/DEALER/BANK
------------------
<S> <C> <C> <C>
</TABLE>
I certify that the foregoing is a complete and accurate list of all
securities in which I have any Beneficial Ownership.
--------------------------------
Signature
-17-
<PAGE>
EXHIBIT E
PERSONAL SECURITIES ACCOUNT INFORMATION
Name Date
----------------------- ---------------------
<TABLE>
<CAPTION>
SECURITIES
FIRM NAME AND ADDRESS ACCOUNT NUMBER ACCOUNT NAME(S)
- --------------------- -------------- ---------------
<S> <C> <C>
</TABLE>
I certify that the foregoing is a complete and accurate list of all
securities accounts in which I have any Beneficial Ownership.
-------------------------------
Signature
-18-
