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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
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For the fiscal year ended March 31, 1997
Commission File number 0-12705
APPLIED DATA COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 95-2828385
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State or other jurisdiction IRS Employer Identification
of incorporation Number
Registrant's address: 16 Technology, #118, Irvine, California 92714
Registrant's telephone number, including area code: (714) 453-4660
Securities registered pursuant to Section 12 (b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE OF WHICH REGISTERED
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), or (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
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Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [X]
State the aggregate market value of shares of common stock held by
non-affiliates of the registrant based on the last reported price of such stock
as of June 27, 1997: $1,000,000 (estimated)
Number of shares of common stock issued as of June 27, 1997: 9,951,835.
Stock issuer's revenues for its most recent fiscal year: $427,206
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PART 1
ITEM 1 DESCRIPTION OF BUSINESS
BACKGROUND
Applied Data Communications, Inc. ("ADC" or "the Company") was organized under
the laws of the state of Delaware on July 5, 1972. It was founded by Walter J.
("Pat") Kane and William R. Ott, to develop mini-computer technology for the
communications industry.
In 1976, the Company developed the industry's first floppy diskette duplicator.
During the period from 1974 until 1993, the Company was engaged primarily in the
manufacture and sale of equipment used in duplicating computer software on
floppy disk media, which was the industry's principal means of distributing
computer software to resellers and end users. The Company's sale of such
duplicating equipment increased to $12.3 million in 1983, permitting public
offering of the Company's stock. During the period of 1974 to 1993, the
Company's sales of duplicating equipment totaled $50.0 million, resulting in an
installed base of over 5,000 units.
Within the subsequent two years, the Company experienced a decline of sales in
its principal market for diskette duplication equipment and experienced
saturation and declining profitability. The Company initiated an acquisition
program to broaden its product base and initiated five acquisitions between 1986
and 1989.
Continued maturation of the market for disk duplicating equipment, coupled the
challenges of integrating the businesses acquired caused substantial drain on
the Company's management and financial resources. In 1991, Messrs. Kane and Ott
began a reorganization of the Company and its transition to that of a full
service provider of duplication and fulfillment services.
Activities focused on 1) downsizing the organization and greatly restricting
expenditures to levels consistent with anticipated revenues and existing
resources, 2) restructuring financial obligations, particularly equipment
leases, 3) obtaining outside investment capital, 4) repositioning the Company
with its potential customers as a service provider, 5) adjusting to
unanticipated inability of two large customers to meet their payment obligations
to ADC and 6) selectively adding personnel.
The financial demands of such transition were substantial, and involved
reduction in staffing, suspension/deferral of many activities, including annual
outside audits and ADC's status as a reporting company under the Securities Act
of 1934, and its stock ceased active trading. During such period Messrs. Kane,
Ott and others provided additional funding in the amount of approximately $3.2
million, in addition to lesser amounts from other individuals, and obtained
outside funding for equipment incidental to providing such duplicating and
fulfillment services
Plans to transition into CD manufacturing in 1995 were impacted by delayed
receipt of investor funding and financial difficulties experienced by certain of
the Company's customers. This caused default on investor notes and other
obligations. The management and founders initiated several actions
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in 1996, which reflected their continued belief in the potential of CD
manufacturing and the desire to restore value to creditors and shareholders
alike. These included 1) assembling a new management team and Board of
Directors, 2) raising over $1.0 million in new equity, 3) exchanging $3.2
million in debt for equity, 4) developing a business plan for CD-ROM
manufacture, including negotiating $1.2 million in equipment purchases to
support such plan, 5) obtained $420,000 in interim financing. The Company is
currently negotiating for permanent equipment financing and continuing a private
placement of preferred stock, as the basis for implementing its operating plan
for CD-ROM manufacture.
PRODUCTS AND SERVICES:
ADC provides a wide range of software duplication and fulfillment services for
major software producing firms serving general computer users and users within
the specific fields of educational and entertainment software. The range of
these services encompasses the following elements:
* On-line order entry
* Duplication of diskettes, including purchase, production, printing and
affixing of labels
* Duplication of CD-ROM disks on a subcontract basis, including multi-
color silk screen (printing) processing
* Packaging of diskettes and CD-ROMs
* Procurement of packaging materials
* "Fulfillment" (assembly/stuffing/mailing) of final packages including
duplicated diskettes and printed material
* On line inventory status and reporting
* On line shipping information
TECHNOLOGICAL CHANGE:
Coincident with the development of faster computer processing capability at an
affordable cost has come development of "multimedia" applications programs which
combine presentation of information using words, enhanced pictures or symbols
(including moving pictures) and sound. This technology has become increasingly
complex, involving larger and more complex applications programs, which, in
turn, have necessitated faster processors and internal "architecture," and more
internal memory for their installation and operation. Further, although
software manufacturing and distribution has historically involved either 5 1/4"
or 3 1/2" floppy diskettes, the technology exists for the computer software
industry to change its manufacturing and distribution techniques and deliver
software programs and manuals electronically, via modem, satellite, or fiber
optic transmissions, or through other media, such as CD-ROM, short hand for
"compact disk, read only memory". The Company intends to use a significant
portion of the funds raised through the private placement of its Preferred Stock
in fiscal year 1997 to acquire the capability to reproduce software using CD-ROM
presses.
Electronic distribution of software products has not achieved widespread
adoption, in part because of potential problems, including the perceived
increased likelihood of piracy (i.e., illegal copying of software programs),
inventory controls and accounting controls such as verifiable means of
determining the number of copies made and collection of amounts due from
customers. Software publishers may also be concerned that such methods will
limit their ability to track and market to end
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users. As these problems are addressed the demand for electronic distribution
will likely increase, which could cause reduction in the growth in demand, or a
decline in current production and distribution methodologies. Management
believes that by keeping current with the electronic distribution market and
using a portion of the net proceeds of its private placement, it will be able to
adapt to changes in distribution techniques.
MARKETS:
The market for the Company's present and anticipated software duplication
services is large, at approximately $7.0 billion (source International Data
Corporation). It includes organizations seeking to augment their own software
duplication capabilities, businesses seeking to outsource their entire
duplication services and organizations which have no mass duplication
capabilities (SIC Code 7379).
The Company's marketing plan involves positioning itself as a full service
provider of software duplication services including related packaging and
fulfillment functions. This will include duplication of software on diskettes,
tape and CD-ROM media (including multi-color silk screen printing on CD-ROMs).
"Fulfillment" activities will include creation/manufacture of packaging,
stuffing and insertion of material into the marketing package, warehousing and
physical distribution. The Company's initial geographic focus will be the
Southern California market, including the "Irvine Spectrum" development, which
includes 2,500 technology oriented firms. Marketing communication will include
resumption of local advertising and use of duplication brokers, targeting both
existing customers and new sales prospects, several of which have conditionally
approved the Company as a potential CD-ROM source.
The Company believes "outsourcing" of these activities will permit the Company's
customers to focus their energies on software development, establishing the
Company's value to such customers. The Company also believes its ability to
offer both diskette and CD-ROM duplication will offer economies in (i)
marketing, through offering either/both forms of media, (ii) purchasing, through
lower packaging prices, and (iii) storage and distribution economies, since
diskette/CD-ROM may involve storage in the same facility and distribution in the
same package. Further, through use of state-of-the-art equipment, production
rates and quality levels will be higher, and related costs will be lower.
Management believes these benefits, and the growing trend in outsourcing will
allow the Company to attract major software developers as clients. The Company
intends to use a portion of the proceeds of this Offering to expand its software
duplication capabilities.
DVD TECHNOLOGY:
With recent breakthroughs in technology, the CD-ROM disk, using the digital
video disk ("DVD") format, is now capable of storing enough megabytes of digital
information to run a full feature length (133 minute) movie. The immediate
benefits to the viewer will be greatly enhanced picture resolution along with
full digital sound. More broadly, it will offer enhanced performance, higher
capacity and lower cost in all areas of computer and home entertainment. It is
anticipated that DVD technology will eventually replace the VHS tape format and
become an industry standard for home video entertainment. DVD technology became
available to the general public in March 1997, with "ramp up" anticipated to
begin in the third quarter of calendar 1997.
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At this time ADC has current state-of-the-art CD-ROM manufacturing equipment on
order which will be delivered subject to ADC's finalizing a financing commitment
it has received from an equipment leasing company. This equipment will be DVD
capable with minimal engineering upgrades, allowing it to produce not only
current conventional formats but also new DVD formats. This will allow ADC the
immediate advantage over its competitors in that the equipment currently owned
by many of its competitors cannot manufacture to the specifications of the new
DVD format. New equipment must be purchased which is not only a major capital
expenditure, but also involves times for delivery which approach 3-6 months
currently, depending on the manufacturer and other seasonal factors.
COMPETITION:
Management believes that the software duplication services market is fragmented
and that no single company controls this market. This, in part, is due to the
regional nature of the duplication services market, where shipping costs,
relative to the cost of the entire delivered software product, and desire by the
software customer to effect fast turnaround and maintain close working
relationships, has caused business to be conducted within relatively close
geographic proximity between customer and vendor. Within that context, the
Company's primary current market is the Southern California region, from Los
Angeles to San Diego. Current competitors within the Company's market area
involving diskette duplication include Discopy Labs/Etc., Omni Multimedia of
Boston, Copyright, Inc. and Tapette, Inc. Management believes that competition
in the software duplication services market is based primarily on four key
factors: price, capacity, service and quality of performance. The barriers to
entry into the diskette duplication market are relatively low, so that
competitors with or without significant economic resources could enter the
software duplication services market at any time.
In contrast, management also believes that the barriers to entry into the
market, with regard to manufacturing CD-ROM products, will be greater than the
barriers to entry in the diskette duplication services market due to the
significantly higher cost ($2.0 million) of CD-ROM manufacturing equipment in
comparison to that used for duplicating software on diskettes. This will
constitute a barrier to entry to the Company's competitors (once the Company
acquires CD-ROM manufacturing equipment). Competition within the CD-ROM market
segment is based on similar considerations, with more restrictive production
tolerances as relate to the production of compact disk media.
The Company competes with regional software duplicators, such as Discopy
Labs/Etc., Disk Manufacturing Inc. (a subsidiary of Quixote Corporation) and
Imperial Printing Corp., along with a number of small independent service
providers, to provide the aforementioned services to large- and medium- sized
software publishing firms, as well as to provide overflow manufacturing
services. The Company also expects that large national printing companies and
regional printing companies may eventually expand their services and provide
software duplication services for small- and medium-sized software publishers.
The Company's strategy is to compete on the basis of its quality (including
accuracy) reliability, service and price. The Company's success will depend on
its ability to obtain contracts with software publishers. To do so, the Company
must maintain its quality and level of service and continue to enhance its
software duplication process to keep pace with any technological changes (see
"Technology Changes"). Many companies are capable of providing software
duplication services on
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diskettes, and the Company's clients could also decide to perform software
duplication at their own facilities. Many of the Company's competitors are well
established and have substantially greater resources than does the Company.
CUSTOMER PROFILE:
The Company's primary services involve providing software duplication and
related packaging and fulfillment services to software publishers. Since the
Company initiated a transition in its principal business focus from
manufacturing equipment for duplication of software to that of being a provider
of software duplication services, it has focused most of its early marketing
efforts on low to moderate volume software publishers. These software products
are typically general interest utilities or general use application software for
either DOS ("IBM"/"clone") or Macintosh (Apple) computers. Since the Company
initiated this transition in 1993, it has established a customer base of
approximately 50 active customers.
The Company's customer base includes software developers producing both
(i) general interest utility software programs and (ii) education/entertainment
("edutainment") programs. The former are sold via retail outlet and mail order
to the general public. Order quantities for this type of software typically
exceed 50,000 units and involve duplication of software on one to two 3 1/2"
floppy diskettes, purchase and printing of label, envelope and box and inserting
the foregoing with a customer provided instructional manual for return to the
customer for distribution. The Company believes its current duplication and
packaging capacity, low overhead and procurement costs through arrangements with
its associated print and packaging vendors, allows ADC to offer among the most
competitive prices in the industry for orders of this volume.
A second major focus of the Company's marketing activity is involves education
or entertainment ("edutainment") software. Customers/developers in this market
often license the software reproduction rights to characters such as Charles
Schultz's PEANUTS and Hanna-Barbera Inc.'s FLINTSTONES, which are incorporated
in an entertainment software package, including diskette, book and related
material. The Company provides diskette duplication and label printing and
affixing the label to the diskette. Due to the proximity of the Hollywood
production studios to these software manufacturers, and to the Company, this
type of situation typifies many opportunities available in the Company's
principal marketing area.
SALES AND MARKETING:
The Company markets its software duplication services through its sales force of
two persons, plus the part time efforts of its Chief Executive Officer, as well
as through a network of sales brokers within its market area. The Company's
internal sales force is paid a base salary plus commission based on sales
volume. Its network of brokers are compensated solely upon sales volume
generated, and typically paid at rates of 3-5% of such sales. In addition, the
Company also advertises in the local yellow pages and other local print media,
and generates sales based upon such activities.
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MANUFACTURING:
The Company provides all of its diskette duplication services at its facility in
Irvine California. The Company purchases diskettes and other materials in bulk
quantities from various suppliers located in the United States, principally in
the Southern California area. The principal supplies used include diskettes,
labels and sleeves. The Company endeavors to acquire diskettes, labels and
sleeves on a volume discount basis. The Company has multiple suppliers of these
materials and management believes that these materials could be obtained
elsewhere if needed without a significant delay or increased cost.
ADC's operations consist of receiving diskettes and other customer supplied
materials, including the master diskettes which contain the software to be
replicated, degaussing (formatting) diskettes if necessary, and copying software
from the master diskette onto the blank diskette, through the use of its high
speed duplicating equipment. Copied software, on diskettes, is then packaged as
instructed by the Company's customers, for shipment to the customer or a
location designated by such customer. In addition, some of the Company's
customers may also request that the Company insert instructional or other
promotional materials into the package, which operations are provided by the
Company, and generally involve a combination of hand labor and automated
methods. The Company also arranges for printing of various materials included
in the complete package, and for the production of software materials using
CD-ROM media, in which cases the Company engages the services of outside vendors
to provide such capabilities not yet provided by the Company.
CD-ROM PROJECT:
As a part of the Company's plan to provide CD-ROM manufacturing and duplication
services, management intends to use a portion of the net proceeds of this
offering to install a state-of-the-art CD manufacturing system. This could
include press/finish line (creating the disk, imprinting software, coating
disk), "silk screen" printing system (for imprinting marketing or other
information on the disk surface) and certain material handling and quality
assurance equipment. Management estimates that the cost to acquire and install
such a state-of-the-art system is "scaleable" to different size levels,
dependent on the requirements of the market, but that a minimum configuration,
including printing and automated packaging handling equipment would cost
approximately $1.8 million for a single line configuration (capacity, 20,000
units/day), excluding leasehold improvements. Assuming the addition of
equipment necessary to double this capacity to 40,000 units/day, the incremental
investment could be an additional $1.2 million. The Company has initiated
discussions with several equipment financing companies relative to the possible
financing of such equipment, and received a tentative commitment from two such
companies to finance a single cavity production line (cost $1.0-1.2 million).
No assurance can be given that such financing will be available to fund this
equipment acquisition or that, if available, will be on terms favorable to the
Company. The Company may also use a portion of future equity or debt financings
to provide additional funds for such expansion, although there can be no
assurance that such financing will occur or be on terms favorable to the
Company. Management believes that in order to be competitive, the Company will
need to have access to the most advanced duplication and shipping systems
available.
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PATENTS AND LICENSES:
The Company holds no patents or licenses.
EMPLOYEES:
At March 31, 1997, the Company employed 4 persons on a permanent basis, of whom
2 were administrative personnel, including the Company's Chief Executive
Officer, Walter J. Kane, and two were involved in sales and customer support.
The Company also retains additional labor support on an as needed and temporary
basis as required for production support. In addition, the Company supplements
its permanent production staff with outside workers hired on a temporary basis
to accommodate peak load or "rush job" production requirements. The Company's
operations are conducted in an area where it has experienced no difficulty in
obtaining such temporary workers. None of the Company's employees is
represented by a labor union. The Company has experienced no work stoppages and
the Company believes that its employee relations are excellent.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal executive, administrative and manufacturing operations
are located in office facilities of 8,000 square feet, in an industrial park
located in Irvine, California. The leases for this facility is due to expire in
January 1998. The Company believes that its planned expansion into production
of CD-ROM media will necessitate a relocation of its current facilities to
accommodate new production equipment and expanded manufacturing and support
operations. The Company executed in May, 1997, a multiple year lease for an
office/production facility, of 14,400 square feet and anticipates relocation in
July, 1997.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to several creditor lawsuits and is the subject of
certain liens and judgments related to its failure to make necessary payments on
its financial obligations on a timely basis. These obligations involve various
creditors including two leasing partnerships ("Partnerships"), its noteholders
and certain of its trade creditors. Regarding obligations to the Partnerships,
the Company has completed an exchange of its Common Stock for outstanding debt
obligations to the Partnerships and provided other considerations pursuant to an
agreement with the Partnerships not to execute on two judgments currently
outstanding against the Company.
The Company is also subject to judgments totaling approximately $150,000
involving various trade creditors and noteholders. The Company has implemented
repayment programs with such creditors and is current in its payments under such
programs.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the fiscal year ended March 31, 1997, the Company did not hold an annual
meeting, and there were no matters submitted for a vote of the Company's
security holders.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There has been no active market for the Company's Common Stock since 1989. The
Company has initiated several private placements of its Common Stock, pursuant
to which such shares, or their equivalent, have been sold at an equivalent price
per common share of $.25. The Company initiated a private placement of its
preferred stock "Series A" in October 1996 at a price of $5.00 per share of
preferred stock. The preferred stock is convertible into common stock of the
Company at the rate of five shares of common stock for each share of preferred
stock held.
The number of stockholders of record on June 27, 1997 was approximately 400,
including CEDE and Kray & Co, who act as fiduciaries.
During the fiscal years ended March 31, 1997 and 1996, the Company neither
declared nor paid any cash dividends. The Company does not anticipate the
payments of cash dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following tables set forth for the fiscal years indicated, certain financial
data of the Company and should be read in conjunction with the financial
statements and notes appearing elsewhere in this Form 10-KSB.
SELECTED FINANCIAL DATA
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Year Ended March 31
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1997 1996
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(Audited) (Audited)
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INCOME STATEMENT DATA
Revenues $427,206 $1,433,877
Loss before taxes (1,212,251) (1,183,497)
Net Loss ($1,212,251) ($1,183,497)
Net Loss per Common share ($.13) ($.18)
Weighted Average 9,378,896 6,691,835
Common Shares Outstanding
As of March 31,
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1997 1996
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BALANCE SHEET DATA
Working capital ($4,987,624) ($7,141,457)
Total assets $129,450 $238,097
Stockholders' deficit ($4,759,785) ($7,141,477)
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The following discussion of the Company's financial condition and results of
operations should be read in conjunction with the financial statements and the
notes thereto appearing elsewhere in this annual report.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1997
Revenues
Revenues for the year ended March 31, 1997 were $427,206, down $1,006,671
(70.2%) from $1,433,877 reported in the comparable period of the prior year.
Revenues for the current period reflect both lower unit volume and unit prices.
Sales in 1997 were significantly lower than in the prior year due to loss of the
Company's two largest customers. The Company is hopeful of regaining these
accounts and its involvement in the CD-ROM industry through implementation of a
plan to begin manufacturing CD-ROM media.
Cost of Sales
Cost of sales of $325,042, or 76.1% of revenues in 1997, compares to $862,941 in
the prior year, or 60.2% of sales. The higher percentage cost of sales in the
current year reflects increasing price competition and lower resulting product
margins.
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Sales, General and Administrative Expenses
Sales, general and administrative expenses for the current year were $857,151 or
200.6% of sales, compared to $865,201 (60.2% of sales) reported during the prior
year. Operating expenses in 1997 reflect the additional staffing required to
position the Company for its planned transition into CD-ROM manufacture and
expenses related to raising capital. Management compensation (including related
payroll taxes) approximated $305,000 for the current year, as compared with
$210,000 for the prior year.
Interest Expense
Interest expense of $457,264, is down $431,968 (48.6%) from $889,232 in 1996.
The reduction in current year interest expense reflects cessation of interest
accrual regarding approximately $3.2 million in debt owed two related parties
(see "Transactions with Related Parties") and conversion of such debts to equity
during the year.
Net Loss
Net loss for the fiscal year ended March 31, 1997 was $1,212,251 (283.7% of
sales) compared to a loss of $1,183,497 (82.5% of sales) for the prior year.
This equates to losses of $.13 and $.18 per share, respectively. Average shares
outstanding were approximately 9.4 million and 6.7 million, respectively. The
higher average number of shares in the current year reflect conversion of long
term debts into equity and an increase in shares due to a private placement
currently in progress.
RESULTS OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1996
Revenues
The Company recorded revenues of $1,433,877 in 1996 compared to $929,165 for
1995. The increase of $504,712 or 54.3% resulted from a concerted effort to
increase software duplication sales, in particular the acquisition of two major
new accounts
Cost of Sales
Cost of sales of $862,941 or 60.2% of revenues in 1996 compares to $476,458, or
51.2% of sales in 1995. The 1996 increase in cost of sales is due primarily to
obtaining two significant new customers and the lower prices offered by the
Company.
Sales, General and Administrative Expenses
Sales, general and administrative expenses of $865,201 (60.3% of sales) compare
to $1,000,011 (107.6% of sales) in the prior year. The higher level of costs in
1995 reflects significant write off of uncollectable accounts receivable.
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Interest Expense
Interest expense of $889,232 compares to $338,944 in the prior year. The
increase was due to higher average borrowings in 1996.
Net Loss
Net loss for the current fiscal year was $1,183,497 or approximately $.18 per
share. This compares with a loss of $1,088,195 or $0.14 per share for the prior
fiscal year. The weighted average number of shares outstanding was 6,691,835
and 6,161,425.
LIQUIDITY AND CAPITAL RESOURCES:
During 1997, the Company continued to experience a significant level of
operating losses. Net cash used in operating activities in the current period
was $1,170,808, compared with net cash used of $167,624 in the prior year.
Operations were funded through a combination of increased debt and additional
equity. The Company also exchanged $2.9 million in debt for a combination of
common and preferred stock.
The Company's ability to operate effectively during the past several years has
been constrained by the extremely low level of its financial resources and by an
increasingly competitive market for diskette duplication. To rectify this, the
Company initiated the following actions:
- - Raising $500,000 in additional cash equity (FY96).
- - Converting $1.4 million in loans to equity, which reduced cash outflow
$55,000 per month.
- - Converting $1.5 million founder debt to equity, and negotiated a
deferral of $1.4 million in additional debt.
- - Expanding operating management and Board of Directors.
- - Initiating a strategic plan including equipment sourcing/financing.
- - Initiating $2.5 million private placement offering, raising $400,000
(FY97).
These steps significantly improved the Company's liquidity and balance sheet and
permitted development of a strategic business plan to transition into CD-ROM
production. Funds raised in the private placement have allowed the Company to
reduce its past obligations to trade creditors although the Company requires
continued equity funding to complete existing payment programs as well as to
accumulate the funds necessary to initiate CD-ROM manufacture. .
In the meantime, the Company's operating cash environment continues to reflect a
shortfall in revenues from existing products to cover its cash needs, including
costs related to repositioning the business to convert to CD-ROM production. It
will continue to minimize cash outflows and rely on existing credit facilities
with its primary lender until it achieves positive cash flow. The Company is
hopeful that this will begin in late 1997.
Impact of Inflation
The Company does not believe the impact of inflation is significant in its
business.
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Forward Looking Statements
Any statements that are not historical facts contained in this Report are
forward looking statements that involve risks and uncertainties, including but
not limited to those relating to demand for the Company's services, pricing,
market acceptance, competition, the effect of economic conditions, the results
of financing efforts, the Company's ability to complete proposed transactions
and negotiate terms with its creditors, and other risks.
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ITEM 7. FINANCIAL STATEMENTS
The Financial Statements of the Company required by this Item, begin at page F-1
of this report.
INDEX TO FINANCIAL STATEMENTS F-1
Financial Statements
Report of Independent Accountants F-2
Balance Sheet as of March 31, 1997 F-3
Statements of Operations, For The Years Ended March 31, 1997 F-4
and 1996
Statements of Stockholders' Deficit For The Years Ended F-5
March 31, 1997 and 1996
Statements of Cash Flows For The Years Ended F-7
March 31, 1997 and 1996
Notes to Financial Statements F-8
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APPLIED DATA COMMUNICATIONS, INC.
Financial Statements
March 31, 1997
F-1
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Applied Data Communications, Inc.
We have audited the accompanying balance sheet of Applied Data Communications,
Inc. as of March 31, 1997, and the related statements of operations,
stockholders' deficit and cash flows for each of the two years in the period
ended March 31, 1997. 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 Applied Data Communications,
Inc. as of March 31, 1997 and the results of its operations and cash flows for
each of the two years in the period ended March 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company's continued operating losses, limited capital
and stockholders' deficit raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to this matter are also
described in Note 8. The accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
CACCIAMATTA ACCOUNTANCY CORPORATION
Irvine, California
June 27, 1997
F-2
<PAGE>
APPLIED COMMUNICATIONS, INC.
Balance Sheet
March 31, 1997
--------------
ASSETS
Current assets:
Cash 9,112
Accounts receivable 79,498
Inventories 8,376
Other 4,625
----------
Total current assets 101,611
Equipment, net of accumulated depreciation of $76,936 27,839
----------
$ 129,450
----------
----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable to related parties, including accrued interest $ 4,186,098
Accounts payable 482,044
Accrued expenses 421,093
----------
Total current liabilities 5,089,235
----------
Commitments and contingencies -
Stockholders' deficit:
Preferred stock -Series A, 500,000 shares authorized, $.01 par
value; 80,790 shares issued and outstanding 808
Preferred stock -Series B, 200,000 shares authorized, $.01 par
value; 15,370 shares issued and outstanding 154
Preferred stock -Series C, 150,000 shares authorized, $.01 par
value; 68,404 shares issued and outstanding 684
Common stock - 10,000,000 shares authorized, $.01 par
value; 9,951,835 shares issued and outstanding 99,518
Common stock (Junior) - 500,000 shares authorized, $.01 par
value; 0 shares issued and outstanding -
Additional paid-in capital - preferred 1,939,304
Additional paid-in capital - common 9,839,797
Accumulated deficit (16,840,050)
----------
Total stockholders' deficit (4,959,785)
----------
$ 129,450
----------
----------
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
Statements of Operations
Year ended March 31,
------------------------------
1997 1996
------------ -------------
Net revenues $ 427,206 $ 1,433,877
Cost of sales 325,042 862,941
------------- -------------
Gross profit 102,164 570,936
Selling, general and administrative expenses 857,151 865,201
------------- -------------
Loss from operations (754,987) (294,265)
Interest expense 457,264 889,232
------------- -------------
Net loss $ (1,212,251) $ (1,183,497)
------------- -------------
------------- -------------
Net loss per common share $ (0.13) $ (0.18)
------------- -------------
------------- -------------
Weighted average number of common shares
outstanding 9,398,896 6,691,835
------------- -------------
------------- -------------
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
APPLIED DATA COMMUNICATIONS, INC.
Statements of Stockholders' Deficit
Years ended March 31, 1997 and 1996
<TABLE>
<CAPTION>
Series A Series B Series C
Preferred stock Preferred stock Preferred stock
Shares Amount Shares Amount Shares Amount
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1995 - $ - - $ - - $ -
Stock issued for
services rendered
Stock issued for cash
Net loss for 1996
-------------------------------------------------------------------------------------------------------
Balance at March 31, 1996 - - - - - -
Stock issued for cash
Conversion of debt to stock
Stock issued as collateral 68,404 684
Conversion of debt to stock 15,370 154
Stock issued for cash 80,790 808
Conversion of debt to stock
Net loss for 1997
-------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 80,790 $ 808 15,370 $ 154 68,404 $ 684
------------------------- ------------------------- ------------------------
------------------------- ------------------------- ------------------------
</TABLE>
<TABLE>
<CAPTION>
Common Stock
Shares Amount
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at March 31, 1995 6,096,341 $ 60,963
Stock issued for
services rendered 65,000 650
Stock issued for cash 2,000,000 20,000
Net loss for 1996
- -------------------------------------------------------------------------------------------------
Balance at March 31, 1996 8,161,341 81,613
Stock issued for cash 375,000 3,750
Conversion of debt to stock 1,388,447 13,884
Stock issued as collateral
Conversion of debt to stock
Stock issued for cash
Conversion of debt to stock 27,047 271
Net loss for 1997
- -------------------------------------------------------------------------------------------------
Balance at March 31, 1997 9,951,835 $ 99,518
--------------------------------
--------------------------------
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Additional Additional
Paid-in Paid-in Total
Capital - Capital - Accumulated Stockholders'
Preferred Common Deficit Deficit
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at March 31, 1995 $ - $7,909,109 $ (14,444,302) $ (6,474,231)
Stock issued for
services rendered 15,600 16,250
Stock issued for cash 480,000 500,000
Net loss for 1996 (1,183,497) (1,183,497)
Balance at March 31, 1996 - 8,404,708 (15,627,799) (7,141,478)
Stock issued for cash 33,750 37,500
Conversion of debt to stock 1,374,563 1,388,447
Stock issued as collateral (684) -
Conversion of debt to stock 1,536,846 1,537,000
Stock issued for cash 403,142 403,950
Conversion of debt to stock 26,776 27,047
Net loss for 1997 (1,212,251) (1,212,251)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 1997 $ 1,939,304 $9,839,797 $ (16,840,050) $ (4,959,785)
--------------- ------------- ------------------ -----------------
--------------- ------------- ------------------ -----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31,
----------------------------------
1997 1996
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,212,251) $ (1,183,497)
Adjustments to reconcile net income to net cash used by
operating activities:
Common stock issued for services - 16,250
Depreciation 31,668 31,668
(Increase) decrease in assets:
Accounts receivable 27,114 134,435
Inventories 58,477 13,717
Other assets (1,525) (3,500)
Increase (decrease) in liabilities:
Accounts payable (202,401) (196,403)
Accrued expenses 102,644 124,484
------------- -------------
Net cash used by operating activities (1,196,274) (1,062,846)
------------- -------------
Cash flows from investing activities: - -
------------- -------------
Cash flows from financing activities:
Increase in notes payable 915,495 930,622
Payments on notes payable (154,533) (364,802)
Proceeds from issuance of Series B Preferred stock 403,950 -
Proceeds from issuance of Common stock 37,500 500,000
------------- -------------
Net cash provided by financing activities 1,202,412 1,065,820
------------- -------------
Net increase in cash 6,138 2,974
Cash, beginning of year 2,974 -
------------- -------------
Cash, end of year $ 9,112 $ 2,974
------------- -------------
------------- -------------
Supplemental disclosure of non-cash investing
and financing activities:
Notes converted to common stock $ 1,415,494 $ -
Notes converted to preferred stock - Series B $ 1,537,000 $ -
Cash paid during the year for interest $ 36,645 $ 8,492
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
Notes to Financial Statements
March 31, 1997
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Applied Data Communications, Inc. (the "Company") is a Delaware Corporation
incorporated in 1972. The Company provides to software developers and
distributors 1) mass duplicating computer software on floppy disk media, 2)
transfer of stored data from one media to another and 3) support involving
printing, packaging, inserting materials and related functions. The majority of
the Company's customers are located in Southern California.
MAJOR CUSTOMERS
In 1997 the two largest customers accounted for 34% of sales and 7% of accounts
receivable at March 31, 1997. In 1996 the four largest customers accounted for
66% of sales and 59% of accounts receivable at March 31, 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
INVENTORIES
Inventories are reported at the lower of cost (determined on the first-in-first-
out method) or market. Inventories primarily consisted of computer disks and
labels at March 31, 1997.
EQUIPMENT
Equipment is recorded at cost. Depreciation is provided over the estimated
useful lives of the related assets using the straight-line method.
REVENUE RECOGNITION
Revenues from product sales are recognized at time of shipment.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) 109, "Accounting for Income Taxes." Under the asset
and liability method of SFAS 109, deferred income taxes are recognized for the
tax consequences of temporary differences by applying enacted statutory rates
applicable to future years to the difference between the financial statement
carrying amounts and the tax basis of existing assets and liabilities.
F-8
<PAGE>
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
The Company accounts for compensation costs related to employee stock options
and other forms of employee stock-based compensation plans in accordance with
the requirements of Accounting Principles Board Opinion 25 ("APB 25"). APB 25
requires compensation costs for stock based compensation plans to be recognized
based on the difference, if any, between the fair market value of the stock on
the date of the grant and the option exercise price. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
established a fair value-based method of accounting for compensation costs
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of APB 25 if certain pro forma disclosures are made. SFAS
123 is effective for fiscal years beginning after December 15, 1995. The
Company adopted the provisions of pro forma disclosure requirements of SFAS 123
in fiscal 1997. Options granted to non-employees are recognized at their
estimated fair value at the date of grant.
NET LOSS PER SHARE
Loss per share is computed based on the weighted average shares of common stock
outstanding for the period. Loss per share excludes the effect of outstanding
stock options because the effect of such inclusion would be antidilutive.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments, consisting principally of notes
payable, are based on interest rates available to the Company and comparison to
quoted prices. The fair value of these financial instruments approximates
carrying value.
NOTE 2 - NOTES PAYABLE TO RELATED PARTIES, INCLUDING ACCRUED INTEREST
Various notes payable to shareholders, members of the Board and
management, and employees. Interest rates range from 7.7% to 10%.
All notes are past due, and are secured by all assets of the Company.
Notes payable $ 3,129,851
Accrued interest 1,056,247
------------
$ 4,186,098
------------
------------
F-9
<PAGE>
NOTE 3 - PREFERRED STOCK
SERIES A
The Series A enjoys the same rights and privileges of the common stock,
including one vote for each of the 5 shares of common stock into which the
Series A can be converted. Holders of the Series A preferred shares will
receive a 10 percent Series A Preferred Stock dividend on March 31, 1998 and
1999.
SERIES B
The Series B enjoys the same rights and privileges of the common stock,
including one vote for each of the 100 shares of common stock into which the
series B can be converted.
SERIES C
The Series C enjoys the same rights and privileges of the common stock and can
be converted into common stock on a one to one ratio. Each share of Series C
preferred has a voting right equivalent to 100 shares of common.
NOTE 4 - CONVERSION OF DEBT TO STOCK
In 1993 the Company borrowed, from two investment partnerships ("Partnerships"),
$1,270,000 and subsequently defaulted on its obligations. In 1995 these
Partnerships received judgments totaling $1,388,447 against the Company. The
Company and the Partnerships subsequently agreed to exchange such defaulted debt
for common stock of the Company at a rate of one share of common stock for each
dollar owed. This exchange was completed on July 18, 1996. In addition, the
Company agreed to expand its Board of Directors from one to five, with three
seats to be held by designees of the Partnerships. Simultaneously, Walter J.
Kane, the Company's President, executed a proxy in favor of the Partnerships
conveying voting control over the Company by pledging 68,404 shares of Series C
Preferred Stock.
In 1997 the Company and its President agreed to satisfy various advances made by
the President aggregating $1,537,000 by the issuance of 15,370 shares of Series
B Preferred Stock convertible into 1,537,000 shares of common stock.
NOTE 5 - STOCK OPTIONS
EMPLOYEE OPTIONS
On July 15, 1996, the Company granted non-qualified options to purchase 26,500
shares of its Series B Preferred Stock for $25.00 per share which approximated
market price. Of these options, 18,500 were granted to Walter J. Kane, the
Company's president; of these, 8,500 are fully vested, with the remaining 10,000
options vesting at a rate of 2,500 per year beginning March 31, 1998. The
remaining 8,000 options have been granted to key employees and directors. Of
these, 3,500 are vested and 4,500 vest over three years beginning March 31,
1998. None of these options has been canceled or exercised.
F-10
<PAGE>
NOTE 5 - STOCK OPTIONS (CONTINUED)
The following information applies to employee options outstanding at March 31,
1997:
Average Weighted Weighted
remaining average average
Number contractual exercise Number exercise
outstanding life (years) price exercisable price
----------- ------------ -------- ----------- --------
Options 26,500 7.3 $ 25.00 12,000 $ 25.00
----------- ------------ -------- ----------- --------
----------- ------------ -------- ----------- --------
Statement of Financial Accounting Standards 123, "Accounting for Stock Based
Compensation" encourages, but does not require, companies to record compensation
cost for stock-based compensation plans at fair value. The Company has chosen
to continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
an employee must pay to acquire the stock.
Had compensation cost been determined based on the fair value of the options at
the grant dates consistent with the method of SFAS 123, the Company's net loss
and loss per share would have been:
1997 1996
------------- -------------
Net loss
As reported $ (1,212,251) $ (1,183,497)
Pro forma $ (1,561,405) $ (1,183,497)
Primary loss per share
As reported $ (0.13) $ (0.18)
Pro forma $ (0.17) $ (0.18)
These pro forma amounts may not be representative of future disclosures because
they do not take into effect pro forma compensation expense related to grants
made before 1996. In addition, potential deferred tax benefits of approximately
$119,000 in 1997 have not been reflected in the pro forma amounts due to the
uncertainty of realizing any benefit. The fair value of these options was
estimated at the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions for 1997:
Expected life (years) 6-10
Risk-free interest rate 6.00%
Volatility 100%
The weighted fair value of options granted during the year ended March 31, 1997
for which the exercise price approximated the market price on the grant date was
$20.41.
F-11
<PAGE>
NOTE 5 - STOCK OPTIONS (CONTINUED)
OTHER OPTIONS
The Company granted options to non-employee related parties for consulting
services as follows:
July 1996 - 3,000 Series B preferred shares exercisable at $25.00 per share,
expiring August 2000.
November 1994 - 100,000 common shares exercisable at $.25 per share expiring
November 1997.
The exercise price at the time of grant approximated market price.
NOTE 6 - INCOME TAXES
A reconciliation between the actual income tax benefit and the statutory rate
follows:
1997 1996
--------------------- -------------------
Amount % Amount %
--------------------- -------------------
Computed income tax
benefit at statutory rate $ 412,000 34 $ 402,000 34
Operating loss with no
current tax benefit (412,000) (34) (402,000) (34)
---------- ----------
Income tax benefit $ - $ -
---------- ----------
---------- ----------
At March 31, 1997, the Company had a net operating loss carryforward for federal
tax purposes of approximately $14,550,000 which, if unused to offset future
taxable income, will expire between 2001 and 2012, and approximately $7,275,000
for California purposes which will expire, if unused, between 1999 and 2007.
A valuation allowance has been recognized for 1997 and 1996 to offset the
related deferred tax assets due to the uncertainty of realizing any benefit
therefrom. During 1997, no changes occurred in the conclusions regarding the
need for a 100% valuation allowance in all tax jurisdictions
Significant components of the Company's deferred tax assets as of March 31, 1997
and 1996 are as follows:
1997 1996
------------ ------------
Net operating loss carryforwards $ 4,950,000 $ 4,537,000
Valuation allowance (4,950,000) (4,537,000)
------------ ------------
Net deferred tax assets $ - $ -
------------ ------------
------------ ------------
F-12
<PAGE>
NOTE 7 - LITIGATION
The Company is the subject of certain liens and judgments related to its failure
to make timely payments on its financial obligations. These obligations involve
various creditors including two leasing partnerships, certain note holders and
certain trade creditors. The partnerships have agreed to convert their debt to
common stock, but still hold a judgment pending the Company's attainment of
certain pre-agreed performance objectives. The Company's president also agreed
to a conversion of debt to preferred stock. See Note 4 for a description of
these transactions. Other note holders have agreed to repayment terms over the
next three years, and have been offered debt to stock conversion terms
comparable to those of the partnerships. The Company has negotiated repayment
programs with trade creditors who hold judgments of approximately $150,000 and
is current in its payments under such programs.
NOTE 8 - GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has reported significant losses
for the last several years and revenues from existing products do not provide
sufficient cash to cover current operating needs. The Company has increasingly
relied on related party borrowings to meet obligations and all of these
borrowings are past due.
The Company has been engaged in continuous efforts to formulate a restructuring
plan. Management is in the process of adding CD-ROM manufacturing and
duplication services to its product line. Additionally, the Company is taking
measures to increase revenues of its existing products and services. Management
is (i) attempting to raise additional funds through a private placement of the
Company's Series A preferred stock, and additional borrowings to be used to
purchase new machinery used in the CD-ROM process and (ii) continuing to
institute operational changes intended to lower operating costs and limit
corporate overhead. The impact of these measures and changes will not be
realized until the third quarter of fiscal 1997, at the earliest.
NOTE 9 - SUBSEQUENT EVENTS
SERIES A PREFERRED STOCK
In April 1997 the Company issued 17,600 shares of its Series A preferred stock
for $88,000 in a private placement.
BRIDGE FINANCING
In May 1997 the Company obtained approximately $400,000 in bridge financing.
Interest on this note is 8.875% and the due date is November 1, 1997. The note
is secured by the general assets of the Company and is convertible into
preferred stock at the rate of one share for each $1 of principal.
FACILITIES LEASE
Subsequent to year end, the Company signed a lease for a new facility in Santa
Ana, California. The lease term is 36 months beginning July 1, 1997 at a rate
of $7,500 per month.
F-13
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The current audit is the Company's first audit since the fiscal year ended
March 31, 1989. The Company has selected a firm of outside accountants
previously unknown to it and which focuses its practice on smaller and
emerging business firms similar to the Company. The Company has had no
disagreements with its current auditors or with its predecessors on
accounting and financial disclosure.
15
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The directors and executive officers of the Company, their ages, and the
positions they hold are set forth below. The directors of the Company are
elected by the Company's stockholders and hold office until the next annual
meeting of stockholders and until successors are elected and qualified, or until
their earlier resignation or removal from office. The Company's Bylaws, as
amended and restated, provide that vacancies on the Board of Directors may be
filled by a majority of the remaining directors, though less than a quorum, or
by a sole remaining director.
Messrs. Garlock, Hawkins and Haffer were elected to the Board on July 18, 1996
pursuant to the terms of an Agreement dated December 16, 1995 between the
Company, Walter J. Kane, as an individual, and certain leasing partnerships, and
will serve as directors until the Company meets certain performance objectives
(see "Certain Transactions -- Agreements Respecting Corporate Control"). All
corporate officers serve at the discretion of the Board of Directors.
<TABLE>
<CAPTION>
Officer/
Name Age Director Since Position
- ---- --- -------------- --------
<S> <C> <C> <C>
Walter J. Kane. 58 1972 Chief Executive
16 Technology, Suite 118 Officer, Director and
Irvine, CA 92718 Chairman of the Board
Michael Hawkins 46 1996 Director and
16 Technology, Suite 118 designate as Executive
Irvine, CA 92718 Vice President
Barry K. Sugden, Jr. 54 1996 Chief Financial Officer
16 Technology, Suite 118 and Treasurer
Irvine, CA 92718
Thomas W. Garlock 41 1996 Director
1850 Pratt Rd.
Jackson Hole WY 83001
John F. Fuini, Sr. 70 1996 Director
3020 Old Ranch Parkway, Suite 300
Seal Beach, CA 90740
Douglas P. Haffer 49 1996 Director
1 Post St., Suite 1
San Francisco, CA 94104
</TABLE>
WALTER J. KANE. Mr. Kane is a co-founder of the Company and has been Chairman
and Chief
16
<PAGE>
Executive Officer since its inception in July, 1973. From October 1970 until
July 1973, he was President of Data Handling Corporation of Tustin, California,
a manufacturer of magnetic tape subsystems for the mini computer market. From
October 1969, until October 1970, he was Operations Manager of Vanguard Data
Systems, Inc., a manufacturer of key-to-tape machines. From June 1962 until
June 1968 he was employed by NCR, Inc. a manufacturer of computer systems in
various engineering positions, with the final position of Manager of New Product
Development for the Peripherals Division. Coincidentally, he was simultaneously
a consultant to various start up firms in the technology field. He holds a BS
from Engineering from the University of California at Berkeley and an MBA in
Finance from the University of Southern California. He is an active member of
the American Electronics Associates and a registered Professional Engineer in
the State of California.
MICHAEL HAWKINS. Mr. Hawkins was elected to the Board of Directors on July 18,
1996 pursuant to the Agreement dated December 16, 1995 by and between Multimedia
Disk Duplicators, Star Media Partners, L.P., the Company and Walter J. Kane (see
"Certain Transactions - Agreements Respecting Corporate Control"). Also
pursuant to such Agreement, Mr. Hawkins will, at a future date to be determined,
be elected as Executive Vice President of the Company. Mr. Hawkins has been a
consultant to the Company since January 1996. From April 1994 until January
1996, he was a consultant to Applied Environmental, Inc., of San Diego, CA, an
environmental consulting firm. From October 1989, until December 1993, he was
a consultant to Celluland, Inc. of Southern California, a distributor of
consumer electronics products. From May 1985 until October 1989 he was employed
by Mac Guide Magazine, Inc., of Lakewood, CO, Inc. a software publisher, in the
position of Marketing Director and manager of business development, responsible
for producing CD-ROM products. Prior to that period, he held marketing
positions with Zond Systems, a California wind energy developer and was a staff
Research Associate at the University of California, Los Angeles. He holds a
B.S. in Science and Mathematics from the University of South Carolina.
BARRY K. SUGDEN, JR. Mr. Sugden is the Chief Financial Officer and Treasurer of
the Company and has held that position since he joined the Company in January
1996. From August 1992 until December 1995, he was Chief Financial Officer of
DMI, Inc., a computer systems company in Irvine, California. From January 1989
to August 1992, he was an independent financial consultant. From August 1986
until January 1989, he was Chief Financial Officer for Calay Systems, a computer
systems firm. Previously, he held financial management positions with Lear
Siegler, Chamberlain Manufacturing, Rockwell International, Coopers & Lybrand,
First National Bank of Chicago, and Kidder Peabody & Co. Mr. Sugden received a
B.A. in economics from Ohio University and an M.B.A. from Harvard University.
He is a Director of American Charities Telephone Services, Inc. a start up
telecommunications firm.
THOMAS W. GARLOCK. Mr. Garlock was elected to the Board of Directors on
July 18, 1996 pursuant to the Agreement dated December 16, 1995 by and between
Multimedia Disk Duplicators, Star Media Partners, L.P., the Company and Walter
J. Kane (see "Certain Transactions - Agreements Respecting Corporate Control").
Mr. Garlock is President of Blue Star Finance Corporation, an investment company
based in Malibu, California, which arranges venture financing for businesses.
JOHN F. FUINI, SR. Mr. Fuini is a director of the Company and has held that
position since his election to the Board of Directors on July 18, 1996.
Mr. Fuini is President of Interim Capital, Inc., a provider of secured financing
with principal offices in Seal Beach, California.
17
<PAGE>
DOUGLAS P. HAFFER. Mr. Haffer was elected to the Board of Directors on July 18,
1996 pursuant to the Agreement dated December 16, 1995 by and between Multimedia
Disk Duplicators, Star Media Partners, L.P., the Company and Walter J. Kane (see
Certain Transactions - Agreements Respecting Corporate Control). Mr. Haffer is
an attorney practicing law in San Francisco, California, who has represented Mr.
Thomas Garlock, MultiMedia Finance Corporation and their affiliates.
OTHER KEY INDIVIDUALS
DAVID M. BESSE. Mr. Besse joined the Company in November 1981 and has held
various sales management positions since that time and is currently the
Company's Sales Manager. He has over twenty five years experience in computer
systems, sales and technical support management. From October 1968 until
November 1981, he was employed by Unisys Corporation, a manufacturer of computer
systems, with final position as branch manager. Previously, he was in the
United States Air Force from 1964 to 1968. He holds a B.S. in Business
Administration from the University of Phoenix.
P. ROGER SAVILLE. Mr. Saville joined the Company in 1993, and has held various
sales and marketing positions since that time. He has over twenty five years
experience in sales and marketing management positions in the electronics field.
This includes MDB Systems (commercial and computer interconnections), Thorson
Company (computer peripherals), Melabs and Varian Associates (microwave
components) and three previous years of service with the Company. He also
founded and managed a business accounting software firm for nine years. He
holds a B.S. in Physics from California State University at Fresno with
additional studies in business and accounting.
CORPORATE ADVISORS
CHARLES P. GIBBONS. Mr. Gibbons is an investor in the Company and since 1992
has been President and a co-founding principal in A. M. Razo & Company, a firm
specializing in merger and acquisition and corporate finance activities for
emerging growth enterprises. Mr. Gibbons provides counsel on matters relating
to financial strategies and fund raising activities. Prior to his involvement
with A. M. Razo & Company, Mr. Gibbons had been in the commercial banking field
for 20 years, holding senior lending positions with Bank of America, Crocker
Bank, Sumitomo Bank and Manufacturers Bank. He holds a B.S. degree in Business
Administration and an M.B.A. from Pepperdine University.
JON ROBERTSON. Mr. Robertson is an attorney and is in his tenth year of
practice. He is a founding partner of Gelber, Darling & Robertson, a law firm
which specializes in general corporate and business law and litigation.
Mr. Robertson advises on matters involving business litigation and other general
business matters. Prior to his involvement with Gelber, Darling & Robertson,
Mr. Robertson was previously associated for 5 years with McDermott, Will &
Emery, and McKenna, Conner & Cuneo. He holds a B.A. degree in Philosophy from
Pomona College and a J.D. degree from the University of Southern California.
18
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION:
The following table sets forth certain information as to (i) each of the
executive officers or directors of the Company whose aggregate remuneration
exceeded $60,000, and (ii) all officers and directors as a group, for services
to the Company in all capacities during the fiscal year ended March 31, 1997.
SUMMARY COMPENSATION TABLE
Annual Compensation
<TABLE>
<CAPTION>
Fiscal Other Annual
Name and Principal Position Year Salary Bonus Compensation
- --------------------------- ---- ------ ----- ------------
<S> <C> <C> <C> <C>
Walter J. Kane.............. 1997 $ 150,000 -0- $ 10,000(2)
President, Chief Executive 1996 150,000 -0- $ 10,000(2)
Officer(1) and Director 1995 150,000 -0- $ 10,000(2)
</TABLE>
(1) A portion of Mr. Kane's salary is accrued and unpaid, in the following
amounts: 1997: $150,000; 1996: $150,000, and 1995: $108,648. The
Company and Mr. Kane have agreed in principle to convert $258,648 of the
unpaid salary into equity.
(2) Use of a Company leased vehicle.
COMPENSATION OF DIRECTORS:
The directors of the Company received no cash compensation for their services as
directors during fiscal years 1997 or 1996.
Walter J. Kane, as a director of the Company and as its Chief Executive Officer,
has received compensation in the form of stock option grants as described more
fully below (see "Stock Option Grants"). During fiscal year 1997 (through July
1, 1997) Mr. Kane received no cash compensation as an officer and director of
the Company.
Michael M. Hawkins, as a director of the Company, has received compensation in
the form of stock option grants as described more fully below (see "Stock Option
Grants"). Mr. Hawkins received compensation as a consultant to the Company in
fiscal year 1996 totaling $6,200 and $67,505 in fiscal year 1997.
Thomas W. Garlock, as a director of the Company, has received compensation in
the form of stock option grants as described more fully below (see "Stock Option
Grants"). Mr. Garlock has received compensation as a consultant to the Company
in fiscal years 1994 through 1996 totaling $348,812 and received approximately
$60,000 in fiscal 1997.
John F. Fuini, Sr., as a director of the Company, received no direct
compensation from the Company as a director. Mr. Fuini is the President and the
sole stockholder and director of Interim Capital, Inc.
19
<PAGE>
Interim Capital, Inc. has been granted stock options as described more fully
below (see "Stock Option Grants" and "Recent Financings"). Interim Capital,
Inc. has been paid by the Company for providing accounts receivable financing in
fiscal year 1996 not more than approximately $75,000.
Douglas P. Haffer, as a director of the Company, has received compensation in
the form of stock option grants as described more fully below (see "Stock Option
Grants"). Mr. Haffer has been paid by the Company for legal services rendered
on behalf of MultiMedia Disk Duplicators and Star Media Partners, L.P. in fiscal
years 1995 and 1996 totaling $22,468 through July 31, 1996.
Barry K. Sugden, Jr., as a former director of the Company and as its Chief
Financial Officer, has received compensation in the form of stock option grants
as described more fully below (see "Stock Option Grants"). Mr. Sugden received
compensation of $2,500 during fiscal year 1996, and additional compensation of
$46,800 in fiscal year 1997.
INDEMNIFICATION OF DIRECTORS AND OFFICERS:
Currently, the Company does not maintain officers' and directors' liability
insurance. Reasonable Director fees and other compensation will be established
by a vote of the Board of Directors. The Company may acquire officers' and
directors' liability insurance after the Offering in the event that affordable
insurance coverage may be obtained. Under Delaware law and the Company's
by-laws, an officer or director of the Company may be entitled to
indemnification from the Company against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with a pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative if such officer or director
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company, and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. Under the Company's Certificate of Incorporation, no director of the
Company shall be liable to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability:
(i) for any breach of the director'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; or
(iii) for any transaction from which the director derives improper
personal benefit.
The Company has entered into indemnity agreements with each of its current
directors and officers (and former directors and officers) requiring the Company
to provide the maximum indemnification permitted by Delaware law.
20
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table will identify, as of March 31, 1997, the number and
percentage of outstanding shares of Common Stock owned by (I) each person known
to the Company who owns more than five percent of the outstanding Common Stock,
(ii) each officer and director, and (iii) officers and directors of the Company
as a group.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table identifies, as of July 1, 1997, the number and percentage of
outstanding shares of stock (or options exercisable now or to become exercisable
before November 1, 1996) owned by (i) each person known to the Company who owns
more than five percent of the outstanding Common Stock, (ii) each director, and
(iii) officers and directors of the Company as a group:
<TABLE>
<CAPTION>
Common Series B Series C Total Common
Name and Address Stock Preferred Stock Preferred Stock Equivalent (1)
of Beneficial Owner Shares % Shares % Shares % Shares %
- ------------------- ---------------- ------------------ ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Walter J. Kane (2)(3)(4) 1,724,041 17.4 33,870 N/A -0- -0- 5,111,041 25.8
Interim Capital, Inc. (5) 1,425,000 14.4 2,500 N/A -0- -0- 1,675,000 10.0
3020 Old Ranch Parkway
Suite 300
Seal Beach, CA 90740
Leasing Partnerships (6) 1,388,447 14.0 -0- -0- 68,404 100.0 8,228,847 50.1
c/o MultiMedia Finance
Corporation
5947 Trancas Canyon Road
Malibu, CA 90265
Michael Hawkins (7) -0- -0- 2,500 N/A -0- -0- 250,000 1.5
Blue Star
Financial Corporation (8) -0- -0- 500 N/A -0- -0- 50,000 0.3
P.O. Box 30394
Jackson, WY 83001-0600
Thomas W. Garlock (9) -0- -0- 500 N/A -0- -0- 50,000 0.3
c/o Blue Star
Financial Corporation
P.O. Box 30394
Jackson, WY 83001-0600
Douglas P. Haffer (10) -0- -0- 500 N/A -0- -0- 50,000 0.3
369 Pine Street, Suite 400
San Francisco, CA 94104
Barry K. Sugden, Jr. (11) -0- -0- 2,500 N/A -0- -0- 250,000 1.5
<CAPTION>
21
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Officers and Directors
as a Group (6 Persons) 4,537,488 45.7 42,870 100.0 68,404 100.0 15,664,888 75.6
</TABLE>
(1) Based on voting power of Common Stock and Common Stock equivalency of
Preferred shares.
(2) The 1,724,041 Common shares held by Mr. Kane include 24,500 shares held by
the wife and children of Mr. Kane. Mr. Kane has sole dispositive and
voting power over all of such shares.
(3) 33,870 shares of Series B Preferred Stock includes (i) 15,370 shares issued
to Mr. Kane in an exchange of equity and cash for outstanding debt of
$1,537,000 owed by the Company to Mr. Kane, and (ii) 18,500 shares subject
to stock options.
(4) Does not include 68,404 shares of Series C Preferred Stock, over which Mr.
Kane has sole dispositive power. Voting power over all of such shares (at
100 votes per share) has been granted to the Leasing Partnerships by proxy
from Mr. Kane.
(5) Includes 2,500 shares of Series B Preferred Stock subject to vested stock
options. Such 2,500 shares, if issued pursuant to an exercise of such
stock options, would constitute less than 2% of total voting power.
(6) The Leasing Partnerships are comprised of Star Media Partners, L.P., a
California limited partnership, which beneficially owns 733,325 of such
shares, and MultiMedia Disk Duplicators, a California limited partnership,
which beneficially owns 655,122 of such shares. On December 19, 1995 the
Company executed an agreement with the Leasing Partnerships and Walter J.
Kane, as an individual, pursuant to which the Company agreed to the
election to its Board of Directors, Messrs. Thomas W. Garlock, Michael
Hawkins and Douglas P. Haffer, as nominees of the Leasing Partnerships.
Also pursuant to such agreement, Mr. Kane agreed to deliver to the Leasing
Partnerships proxies for such number of shares of voting stock of the
Company owned or controlled by Mr. Kane as would give the Leasing
Partnerships, by outright ownership or control by proxy, voting control of
at least 50.1% of the outstanding stock of the Company. Upon receipt of
such payment by the Leasing Partnerships, the nominees of the Leasing
Partnerships shall resign from the Company's Board of Directors.
(7) 2,500 shares of Series B Preferred Stock subject to a stock option held by
Mr. Hawkins. Such 2,500 shares, if issued pursuant to an exercise of such
stock option, would constitute less than 2% of total voting power.
(8) 500 shares of Series B Preferred Stock subject to a stock option held by
Blue Star Financial Corporation, of which Thomas W. Garlock is President.
Such 500 shares, if issued pursuant to an exercise of such stock option,
would constitute less than 1% of total voting power.
(9) 500 shares of Series B Preferred Stock subject to a stock option held by
Thomas W. Garlock, President of Blue Star Financial Corporation. Such 500
shares, if issued pursuant to exercise of such stock option, would
constitute less than 1% of the voting power.
22
<PAGE>
(10) 500 shares of Series B Preferred Stock subject to a stock option held by
Mr. Haffer. Such 500 shares, if issued pursuant to an exercise of such
stock option, would constitute less than 1% of total voting power.
(11) 2,500 shares of Series B Preferred Stock subject to a stock option held by
Mr. Sugden. Such 2,500 shares, if issued pursuant to an exercise of such
stock option, would constitute less than 2% of total voting power.
STOCK OPTION GRANTS
The following table identifies, as of June 27, 1997, the number of outstanding
stock options exercisable now or to become exercisable before September 27, 1997
owned by (i) each person known to the Company who owns more than five percent of
the outstanding Common Stock, (ii) each director, and (iii) officers and
directors of the Company as a group:
<TABLE>
<CAPTION>
Number of
Common
Equivalent
Shares % of Total Exercise
Underlying Options or Base
Options Granted to Price Expiration
Name Granted (#)(1) Employees ($/Share) Date (2)
---- ---------------- ---------- ----------- --------------
<S> <C> <C> <C>
Walter J. Kane 600,000 (3) 0.25 Not applicable
Walter J. Kane 1,250,000 (4) 0.25 Not applicable
Michael Hawkins 250,000 (5) 0.25 Not applicable
Thomas W. Garlock 50,000 (6) 0.25 03/31/98
Douglas P. Haffer 50,000 (7) 0.25 07/15/01
Interim Capital, Inc. 250,000 (8) 0.25 08/29/00
Barry K. Sugden, Jr. 250,000 (5) 0.25 Not applicable
Randy Knapp 50,000 (6) 0.25 03/31/98
David M. Besse 50,000 (9) 0.25 Not applicable
P. Roger Saville 50,000 (9) 0.25 Not applicable
Rosemarie Sepeda 50,000 (9) 0.25 Not applicable
Blue Star Financial Corporation 50,000 (10) 0.25 11/30/97
</TABLE>
(1) Options to purchase a number of shares of Preferred Stock equivalent to
2,950,000 shares of Common Stock as of the date of this Memorandum have
been granted to employees, directors and certain affiliates of the Company.
The 2,950,000 Common share equivalent does not take into consideration the
effect, if any, of a change in the conversion price of Preferred Stock (see
"Description of Securities - Preferred Stock").
23
<PAGE>
(2) All options accelerate on death, permanent disability, or termination of
employment either involuntarily for any reason or voluntarily, and except
as otherwise noted, shall terminate three months from the date of
occurrence of any of the foregoing.
(3) These options represent 12 annual option grants of 50,000 shares each for
the years 1984 through 1995. Such options were ratified by the
Compensation Committee of the Board of Directors on July 15, 1996.
(4) These options shall vest at the rate of 250,000 per year through March 31,
2002, commencing March 31, 1997. Such options were ratified by the
Compensation Committee of the Board of Directors on July 15, 1996.
(5) These options are for the purchase of an aggregate of 250,000 shares of
Common Stock. Such options were ratified by the Compensation Committee of
the Board of Directors on July 15, 1996.
(6) These options were granted July 15, 1996.
(7) These options were granted July 15, 1996.
(8) These options were granted pursuant to an Agreement dated September 29,
1995 between the Company and Interim Capital, Inc. The grant of such
options was ratified by the Board of Directors on July 15, 1996.
(9) These options are for the purchase of an aggregate of 1,500 shares of
Series B Preferred Stock, which are equivalent to an aggregate of 150,000
shares of Common Stock into which such shares of Series B Preferred Stock,
in certain circumstances, may be converted.
(10) These options are for the purchase of an aggregate of 500 shares of Series
B preferred Stock pursuant to an Agreement dated July 15, 1996 between the
Company and Blue Star Financial Corporation.
24
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
COMPANY DEBT OWED TO WALTER J. KANE:
In November, 1995, Mr. Walter J. Kane, Chief Executive Officer of the Company
sold 250,000 shares owned by him personally, at a price per share of $.20, for
total proceeds of $50,000, to Interim Capital, Inc., a provider of financing to
the Company. Mr. Kane used the proceeds from this sale of securities to
discharge $10,000 in obligations he had personally paid on behalf of the
Company. As a consequence, the Company is obligated to Mr. Kane in the amount
of $10,000. Mr. Kane has agreed to convert the amount owed him into Common
Stock of the Company at a price per share of $1.00.
In past years Mr. Kane made loans to the Company in cash totaling an aggregate
of $724,631 for the purpose of collateralizing or discharging certain
obligations of the Company. Interest on such loans totaled approximately
$255,715 as of August 31, 1996. Further, the Company is indebted to Mr. Kane
for the value of certain property and assets that Mr. Kane gave up to
collateralize or discharge certain obligations of the Company. Mr. Kane and the
Board of Directors have determined that the fair market value of such property
and assets was aggregately approximately $442,000, with $116,502 in accrued
interest. These amounts, combined with the accrued and unpaid salary owed to
Mr. Kane for the fiscal years 1994 through 1996 in the amount of $338,401, total
approximately $1,877,249 which was owed by the Company to Mr. Kane. The Company
and Mr. Kane have agreed to exchange such debt owed to Mr. Kane into shares of
the Company's Series B Preferred Stock, convertible into Common Stock, at an
exchange rate equivalent to $1.00 per share of Common Stock. Accordingly, to
date, $1,537,000 thereof has been exchanged into 15,370 shares of Series B
Preferred Stock.
AGREEMENTS RESPECTING CORPORATE CONTROL:
The Company and Walter J. Kane (as an individual) have entered into an
agreement, dated December 16, 1995 (the "Agreement") with MultiMedia Disk
Duplicators, a California limited partnership and Star Media Partners, L. P., a
California limited partnership (collectively, the "Partnerships") in connection
with the judgments obtained by the Partnerships in actions filed in Orange
County Superior Court in 1995 (the "Judgments"). Pursuant to the Agreement the
Partnerships have agreed not to execute on the Judgments in exchange for the
issuance of 1,388,447 shares of Common Stock by the Company to the Partnerships,
the execution by Kane of a proxy for the voting rights of the shares of the
Company's stock owned by Kane and the assumption of the control of the
management of the Company by the Partnerships, or a designee thereof. These
actions were effected on July 31, 1996. When the Company reaches certain
pre-agreed performance objectives, Partnership designees serving as members of
the Company's Board of Directors will resign such positions, and the proxy
provided by Walter J. Kane will be returned to him. Further, once the
provisions of the Agreement have been met, an acknowledgment of Satisfaction of
Judgment is to be filed with the Orange County Superior Court and with the
appropriate county recorder and the Secretary of State if necessary.
See "Recent Financings-Leasing Partnerships" and "Recent Financings-Sales of
Common Stock to Interim Capital, Inc."
25
<PAGE>
CONSULTING AGREEMENT WITH BLUE STAR FINANCIAL CORPORATION:
Blue Star Financial Corporation ("Blue Star"), a venture capital company of
which Thomas W. Garlock is President, and the Company are parties to a
consulting agreement which provides for a one (1) year consulting term and an
aggregate of $120,000.00 of consulting fees to be paid by the Company for the
period ending July 1997. Also the Company has granted Blue Star an option to
purchase up to 500 shares of the Company's Preferred Stock, Series B, at $25.00
per share, expiring August 2000.
BORROWINGS FROM FINANCIAL INSTITUTIONS:
During the period from 1988 to 1993, the Company initiated several borrowings
from various financial institutions. These institutions required, as a
condition of such financings, that the Company provide collateral in the form of
securities, real estate or other assets. The Company obtained such collateral
from several of the Company's officers, directors and other insiders. When such
borrowings came due for payment, the Company was unable to make payment in cash,
and the lending institutions liquidated the collateral in satisfaction of the
Company's then outstanding financial obligations. As a consequence, the Company
is indebted to eight of such individuals. These include Walter J. Kane, the
Company's Chief Executive Officer, in the amount of $1,877,249. During the
second quarter of fiscal year 1997, $1,537,000 of such debt owed to Mr. Kane was
converted to equity at an exchange rate equivalent to $1.00 per common share.
In addition, the Company has currently outstanding four loans totaling $581,369,
which have as security second mortgages on various real estate properties owned
by three individuals, including Walter J. Kane, the Company's Chief Executive
Officer.
26
<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item
Number Description of Document
- ------ -----------------------
A. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH
S-1 REGISTRATION STATEMENT. Reference is hereby made to
Registration Statement No. Z-86654, including Post-Effective
Amendments 1 through 2, and to the exhibits listed under
Item 16 and filed as a part of such Registration Statement.
All of such exhibits are previously filed and are incorporated
herein by this reference, specifically including, without
limitation:
(i) Exhibit 3.1 thereof incorporated herein --
Certificate of Incorporation of the Company as currently
in effect, consisting of Certificate of Incorporation
filed on July 5, 1972, and Certificate of Amendment of
Certificate of Incorporation filed April 28, 1973 and
Certificate of Amendment of Certificate of Incorporation
filed September 19, 1983 --
(ii) Exhibit 3.2 thereof incorporated herein --
Bylaws of the Company, as currently in effect --
(iii) Exhibit 10.6 thereof incorporated herein --
Incentive Junior Common Stock Option and Restricted
Junior Common Stock Purchase Plan-1983 --
(iv) Exhibit 10.7 thereof incorporated herein --
Specimen of Incentive Junior Common Stock Option
Agreement --
27
<PAGE>
(v) Exhibit 10.6 thereof incorporated herein --
Specimen of Restricted Junior Common Stock Purchase
Agreement --
(vi) Exhibit 10.9 thereof incorporated herein --
Lease dated February 28, 1979 between the Registrant and
Palais Group for the Registrant's principal executive and
manufacturing facilities --
(vii) Exhibit 10.10 thereof incorporated herein --
Specimen of International Distributor Agreement in the
form as entered into between Applied Data International,
Inc. and distributors covering the following countries:
Japan; Taiwan; Holland; Belgium and Luxembourg;
Australia; The United Kingdom and Ireland; Italy; the
provinces of Ontario and Quebec, Canada; Denmark; India;
Norway; Sweden and Finland; Republic of Korea; Hong Kong
and Macao; France; Singapore; South Africa; and
Switzerland --
(viii) Exhibit 10.11 thereof incorporated herein --
$1,000,000 note dated May 9, 1983 between Registrant and
Security Pacific National Bank with personal guarantees
of Mr. Kane and Mr. Ott, together with all related
security agreements --
(ix) Exhibit 10.12 thereof incorporated herein --
$300,000 note dated April 12, 1983 between Applied Data
International, Inc. and Security Pacific National Bank,
together with all related security agreements --
(x) Exhibit 10.13 thereof incorporated herein --
Letter dated August 30, 1983 for the commitment by
Security Pacific National Bank to make loans up to an
aggregate of $1,200,000 based upon qualifying accounts
receivable together with the related security agreements --
(xi) Exhibit 10.14 thereof incorporated herein --
Supplier Agreement dated November 11, 1982 between
Registrant and Avnet-Electronics together with
supplemental letters --
28
<PAGE>
(xii) Exhibit 10.15 thereof incorporated herein --
Agreement dated October 29, 1982, for the purchase of
Registrant's Robotic Disk Handler --
(xiii) Exhibit 10.16 thereof incorporated herein --
Final Agreement dated September 2, 1983 between
Registrant and Kode, Inc., for the manufacture of
Registrant's Time Interval Analyzer Equipment --
(xiv) Exhibit 10.17 thereof incorporated herein --
Form of Wall's purchase and repurchase agreement --
(xv) Exhibit 10.18 thereof incorporated herein --
Form of final Agreement dated November 9, 1983 for the
Purchase of the sub-5 1/4" Disk Handling System --
(xvi) Exhibit 22 thereof incorporated herein --
Subsidiaries of Registrant: Applied Data International
Inc., incorporated October 29, 1979 and Applied Data
Communications, GmbH, incorporated May 1983 --
B. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH
S-8 REGISTRATION STATEMENT. Reference is hereby made to
Registration Statement on Form S-8, No. 2-90474, filed with
the Commission in April 1984 and to the exhibits listed and
filed therewith. The exhibits thereto are incorporated herein
as follows:
(i) Exhibit 4.1 thereof incorporated herein --
Incentive Stock Option and Nonqualified Stock Option
Plan --
(ii) Exhibit 4.2 thereof incorporated herein --
Form of Incentive Option Agreement (1983 Plan) --
(iii) Exhibit 4.3 thereof incorporated herein --
Form of Nonqualified Option Agreement (1983 Plan) --
(iv) Exhibit 4.4 thereof incorporated herein --
1976 Employee Qualified Stock Option Plan, together with
Amendment to Option Agreement 1976 Plan --
29
<PAGE>
(v) Exhibit 4.5 thereof incorporated herein --
Form of Employee Stock Option Agreement together with
Amendment to Option Agreement 1976 Plan --
C. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED MARCH 31,
1984. Reference is hereby made to the Annual Report on
Form 10-K filed with the Commission on or about June 28, 1984
and to the exhibits listed and filed therewith. The exhibits
thereto are incorporated herein as follows:
(i) Exhibit 10.19 thereof incorporated herein -- Lease
dated February 13, 1984 between Registrant and Teters covering
additional industrial building of approximately 21,000 square
feet. --
D. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH ANNUAL
REPORT ON FORM 10-K FOR FISCAL YEAR ENDED MARCH 31, 1985.
Reference is hereby made to the Annual Report on Form 10-K filed
with the Commission on or about June 10, 1985 and to the
exhibits listed and filed therewith. The exhibits thereto are
incorporated herein as follows:
(i) Exhibit 10.20 thereof incorporated herein -- Final
Agreement dated February 7, 1985 for the purchase of the 5 1/4"
Disk Handling System. --
(ii) Exhibit 10.21 thereof incorporated herein --
Sublease dated April 2, 1985 between Registrant and Nash
Nutritional Products, Inc. covering industrial building
leased by Registrant from Teters. --
E. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH ANNUAL
REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 1986.
Reference is hereby made to the Annual Report on Form 10-K
filed with the Commission on or about June 28, 1986 and to
the exhibits listed and filed therewith. The exhibits thereto
are incorporated herein as follows:
(i) Exhibit 10.22 thereof incorporated herein --
Settlement Agreement and Mutual Release among Registrant,
Odetics, Inc. and Kode, a Division of Odetics, Inc. --
30
<PAGE>
(i) Exhibit 10.23 thereof incorporated herein -- Final
Agreement executed January 14, 1986, but dated December 20,
1985, for the purchase of assets pertaining to the line of
scanning products of Dataload, Inc. --
(ii) Exhibit 10.24 thereof incorporated herein -- Final
Agreement dated January 16, 1986 between Registrant and
Manufacturing Techniques Corporation for the exclusive
distribution rights to certain existing and future products. --
F. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH THE
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31,
1987:
(i) Exhibit 4.6 -- Stock Option Plan for Non-Employee
Directors --
(ii) Exhibit 10.25 -- Agreement dated October 14, 1986,
as amended October 22, 1986, between the Company, KJ Instruments,
Inc., Richard Kontrimas, Michael F. Juliff and Bridge
Associates, Inc., for the purchase of assets of KJ Instruments,
Inc. --
(iii) Exhibit 10.26 -- Agreement dated June 1987 among
the Company and the owners of shares of Dateline Technology,
Inc. --
(iv) Exhibit 10.27 -- Juliff Employment Agreement --
G. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH THE
CURRENT REPORT ON FORM 8-K FILED ON OCTOBER 7, 1987:
(i) Exhibit 10.26.1 -- Amendment to Agreement of
Purchase and Sale of Stock dated September 23, 1987, among
the Registrant, Dateline Technology, Inc. and the shareholders
of Dateline Technology, Inc. --
(ii) Exhibit 10.26.2 -- Instrument of Adjustment to the
Purchase Price and Endorsement to Debt dated September 23,
1987 among the Registrant, Dateline Technology, Inc. and the
shareholders of Dateline Technology, Inc. --
31
<PAGE>
H. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH THE
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31,
1988:
(i) Exhibit 4.7 -- Key Executives' Stock Option Plan,
comprised of resolutions adopted by the Board of Directors on
May 1, 1987, and form of Nonstatutory Option Agreement --
(ii) Exhibit 10.28 -- Form of M. Jack VanderWeerd
Employment Agreement --
(iii) Exhibit 10.29 -- Indemnification Agreement dated
December 21, 1987, among the Registrant, Walter J. Kane and
William R. Ott --
(iv) Exhibit 10.30 -- Form of Warrant for the Purchase
of Common Stock dated December 21, 1987, issued to Walter J. Kane
by the Registrant --
(v) Exhibit 10.31 -- Form of Warrant for the Purchase
of Common Stock dated December 21, 1987, issued to
William R. Ott by the Registrant --
(vi) Exhibit 10.32 -- Loan Agreement, dated September 8,
1987, between the Registrant and the National Bank of Southern
California, together with Promissory Note and Commercial
Security Agreement --
(vii) Exhibit 10.33 -- Indemnification Agreement, dated
May 16, 1988, among the Registrant, Walter J. Kane and
William R. Ott --
(viii) Exhibit 10.34 -- Warrant for the Purchase of
Common Stock, dated May 16, 1988, issued to Walter J. Kane by
the Registrant --
(ix) Exhibit 10.35 -- Form of Warrant for the Purchase
of Common Stock, dated May 16, 1988, issued to William R. Ott
by the Registrant --
(x) Exhibit 10.36 -- Form of Promissory Note dated
May 16, 1988, from Registrant to Messrs, Walter J. Kane and
William R. Ott in the principal amount of $331,000 --
I. INCORPORATED BY REFERENCE AND PREVIOUSLY FILED WITH THE
ANNUAL REPORT ON FORM 10K FOR THE FISCAL YEAR ENDED MARCH 31, 1989
(i) Exhibit 10.37 -- Agreement dated July 19, 1986
among the Registrant, Mark L. Mesher, and Axes Robotics Corp.
(ii) Exhibit 24 -- Consent of Arthur Young & Company.
J. INCLUDED IN THIS REPORT ON FORM 10K:
32
<PAGE>
10.38 Certificate of Designation, Series A Preferred Stock, dated September
11, 1996
10.39 Certificate of Designation, Series B Preferred Stock, dated September
11, 1996
10.40 Certificate of Designation, Series C Preferred Stock, dated September
11, 1996
10.41 Amendment to Certificate of Designation, Series A Preferred Stock,
dated September 16, 1996
10.42 Amendment to Certificate of Designation, Series B Preferred Stock,
dated September 16, 1996
10.43 Amendment to Certificate of Designation, Series C Preferred Stock,
dated September 16, 1996
10.44 Equipment Lease Agreement (s), between MultiMedia Disk Duplicators and
the Company, dated December 14, 1993, with modification.
10.45 Equipment Lease Agreement(s) between Star Media Partners and the
Company, dated May 3, 1994, with modification.
10.46 Settlement of Judgment, between MultiMedia Disk Duplicators and Star
Media Partners and the Company, dated December 16, 1995.
10.47 Form of Non Qualified Stock Option Agreement, for non qualified
options declared on pages 23 if this Form 10-KSB (Compensatory Plan
or Arrangement)
(b) REPORTS ON FORM 8K
None
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Applied Data Communications, Inc.
Date July 3, 1997 By /s/ Walter J. Kane
------------------------------ ------------------------------
Walter J. Kane
President
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Walter J. Kane July 3, 1997
------------------------ Walter J. Kane ------------
--------------
President, Chief
Executive Officer
Chairman of the Board
/s/ Michael Hawkins July 3, 1997
------------------------ Michael Hawkins ------------
---------------
Executive Vice President
Director
/s/ Thomas Garlock July 3, 1997
------------------------ Thomas Garlock ------------
--------------
Director
/s/ Douglas P. Haffer July 3, 1997
------------------------ Douglas P. Haffer ------------
-----------------
Director
/s/ John Fuini July 3, 1997
------------------------ John Fuini ------------
----------
Director
/s/ Barry K. Sugden, Jr. July 3, 1997
------------------------ Barry K. Sugden, Jr. ------------
--------------------
Chief Financial Officer
and Assistant Secretary
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CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF
SERIES A PREFERRED STOCK
OF
APPLIED DATA COMMUNICATIONS, INC.,
a Delaware corporation
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
Applied Data Communications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that, pursuant to the authority contained in Article 4 of its
Certificate of Incorporation, and in accordance with the provisions of Section
151 of the General Corporation Law of the State of Delaware, its Board of
Directors has adopted the following resolution creating a series of its
Preferred Stock designated as Series A Preferred Stock:
RESOLVED, that a series of the class of authorized Preferred Stock of the
Corporation be, and hereby is, created, and that the designation and amount
thereof and the voting powers, preferences and relative, participating,
optional and other special rights of the shares of such series, and the
qualifications, limitations or restrictions thereof, are as follows:
BE IT RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, the Board of
Directors does hereby provide for the issue of a series of Preferred Stock, $.01
par value per share, of the Corporation, to be designated "Series A Preferred
Stock" (hereinafter referred to as the "Series A Preferred Stock"), consisting
of 500,000 shares, and to the extent that the voting powers, designations,
preferences, limitations, restrictions and relative rights of the Series A
Preferred Stock are not stated and expressed in the Certificate of
Incorporation, does hereby fix and herein state and express such voting powers,
designations, preferences, limitations, restrictions and relative rights as
follows (all terms used herein which are defined in the Certificate of
Incorporation shall be deemed to have the meanings provided therein):
1. Designation and Amount. The shares of such series shall be designated
as "Series A Preferred Stock" and the number of shares constituting such series
shall be 500,000. Such number of shares may be decreased by resolution of the
Board of Directors; provided, that no decrease shall
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reduce the number of shares of Series A Preferred Stock to a number less than
the number of shares of Series A Preferred Stock then outstanding or reserved
for issuance.
2. Dividends. The holders of Series A Preferred Stock shall be entitled
to receive, out of the assets of the Corporation legally available for
distribution to holders of the Corporation's Series A Preferred Stock, whether
such assets are capital, surplus, or earnings (hereinafter called the "Available
Funds"), as and when received by holders of the Common Stock of the Corporation
or any other class of stock of the Corporation ranking junior to the Series A
Preferred Stock or on a parity with the Series A Preferred Stock, dividends in
an amount equal to the amount of any dividends payable to holders of the Common
Stock of the Corporation or any other class of the Corporation ranking junior to
or on a parity with the Series A Preferred Stock, based on the largest number of
full shares of Common Stock into which a holder's shares of Series A Preferred
Stock could be converted immediately prior to the record date for the payment of
such dividend. No dividend may be declared and paid upon shares of Common Stock
or any other class of stock of the Corporation ranking junior to Series A
Preferred Stock unless the Series A Preferred Stock was converted into Common
Stock before the record date of such dividend or the date the amount of such
dividend is simultaneously paid or deposited into trust for the payment or
retirement thereof. Dividends, if any, on Series A Preferred Stock shall not be
cumulative, and no declared and unpaid dividend on Series A Preferred Stock
shall bear interest.
3. Liquidation, Dissolution or Winding Up.
(a) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary
("Liquidation"), the holders of each share of Series A Preferred Stock shall be
entitled to receive out of the Available Funds, as and when any sums shall be
paid or any assets distributed among the holders of shares of Common Stock, an
amount or value (such amount or value as described immediately below is
hereinafter called the "Series A Preference Price") equal to the sums payable to
holders of Common Stock of the Corporation, based on the largest number of full
shares of Common Stock into which a holder's shares of Series A Preferred Stock
could be converted immediately prior to the record date for such distribution
(subject to adjustment if the Series A Preferred Stock of the Corporation shall
be changed into a different number of shares, whether by recapitalization,
reclassification or otherwise, and then and in each such event the holder of
shares of Series A Preferred Stock shall have the right thereafter to receive
upon Liquidation such same amount aggregately receivable immediately prior to
reorganization, reclassification or other change of the number of shares of
Series A Preferred Stock apportioned among the number of shares into which such
shares of Series A Preferred Stock are changed) plus in each case, any and all
declared but unpaid dividends on such shares. If the Available Funds shall be
insufficient to permit the payment in full to all holders of the Series A
Preferred Stock and all shares on a parity with the Series A Preferred Stock the
full amounts (including all dividends accrued and unpaid) to which they shall be
entitled by reason of such Liquidation of the Corporation, then there shall be
paid to the holders of the Series A Preferred Stock in connection with such
Liquidation of the Corporation, an amount equal to product derived by
multiplying the amount of Available Funds times a fraction, the numerator of
which shall be the full amount to which the holders of the Series A Preferred
Stock shall be entitled by reason of such Liquidation of the Corporation and the
denominator of which shall be the total amount which would have been distributed
by reason of such Liquidation of the Corporation with respect to all Preferred
Stock of any series and Common Stock then outstanding had the Corporation
possessed sufficient assets to pay the maximum amount which the holders of all
such stock would be entitled to receive in connection with such Liquidation of
the Corporation.
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The voluntary sale, conveyance, lease, exchange or transfer of all or
substantially all the property or assets of the Corporation, or the merger or
consolidation of the Corporation into or with any other corporation, or the
merger of any other corporation into the Corporation, or any purchase of all
or substantially all of the shares of any class or series of stock of the
Corporation, shall not be deemed to be a Liquidation of the Corporation for
the purposes of this Section, provided that so long as such transaction does
not result in the issuance or creation of any shares of Preferred Stock of
the Corporation, or of any successor, except any shares of Preferred Stock
that rank junior (as defined elsewhere in these resolutions) to the shares of
Series A Preferred Stock as to dividends and as to the distribution of assets
upon dissolution, liquidation or winding up. Provided, however, if more than
50% (by value as determined in good faith by the Board of Directors) of the
consideration received in such a transaction by holders of the Corporation's
Common Stock consists of cash, notes payable in cash or Marketable Stock (as
defined below), the transaction will be deemed to be a Liquidation for
purposes of this Section. The phrase "all or substantially all" as used in
this definition in reference to a class of the Corporation's capital stock
means 66y% or more of the aggregate outstanding amount. The phrase "all or
substantially all" as used in this definition in reference to the property,
business or assets of the Corporation shall mean assets of a corporation as
are quantitatively vital to the operations of the Corporation and
substantially affects the existence and purpose of the Corporation. As used
herein, the term "Marketable Stock" means the Corporation's Common Stock or
common stock of any corporation that is the successor to all or substantially
all of the business or assets of the Corporation or of the ultimate parent of
such successor, which is (or will, upon distribution thereof, be) listed or
quoted on the New York Stock Exchange, the American Stock Exchange, or the
Nasdaq National Market or the Nasdaq Small Cap Market.
The holder of any shares of Series A Preferred Stock shall not be entitled
to receive any payment of the full balance owed for such shares under this
Section until such holder shall cause to be delivered to the Corporation (i) the
certificate(s) representing such shares of Series A Preferred Stock and
(ii) transfer instrument(s) satisfactory to the Corporation and sufficient to
transfer such shares of Series A Preferred Stock to the Corporation free of any
adverse interest. No interest shall accrue on any payment upon Liquidation
after the due date thereof.
After the Series A Preference Price shall have been paid in full to the
holders of the Series A Preferred Stock, or funds necessary for such payment
shall have been set aside by the Corporation in trust for the account of holders
of the Series A Preferred Stock and available for such payment, the remaining
assets of the Corporation available for distribution to stockholders shall be
distributed among the holders of Common Stock and any other class of stock of
the Corporation ranking junior to the Series A Preferred Stock, and the holders
of shares of the Series A Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation.
(b) Property. Whenever the distribution provided for herein shall be
paid in property other than cash, the value of such distribution shall be the
fair market value of such property as determined in good faith by the Board of
Directors of the Corporation.
4. Series A Preferred Stock Voting Rights. The holders of Series A
Preferred Stock shall not have any voting rights if, whether at or prior to the
effective time of the act with respect to which such vote would otherwise be
required, all outstanding shares of Series A Preferred Stock shall have
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<PAGE>
been converted into Common Stock. Subject to the foregoing sentence, the
Series A Preferred Stock shall have voting rights as follows:
(a) Voting in General. Except to the extent that requirements of law
supersede the limitations on voting rights in the Certificate of Incorporation
or these resolutions and as otherwise set forth herein, the shares of Series A
Preferred Stock shall be entitled to voted equally with the shares of Common
Stock and all other voting shares of any class or series (based on the number of
votes that may be granted thereto by their governing documents). Each holder of
Series A Preferred Stock shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the bylaws of
this Corporation, and shall be entitled to vote, together with holders of Common
Stock and all other shares of stock with general voting rights, as a single
class, with respect to any questions upon which holders of Common Stock have the
right to vote. Each holder of Series A Preferred Stock shall be entitled to
that number of votes equal to the largest number of whole shares of Common
Stock into which such holder's shares of Series A Preferred Stock could be
converted, pursuant to the provisions of Section hereof, at the record date
for the determination of stockholders entitled to vote on such matter or,
if no such record date is established, at the date such vote is taken or any
written consent of stockholders is solicited.
(b) Series A Class Voting Rights. From the date on which any shares
of Series A Preferred Stock are first issued and so long as any shares of
Series A Preferred Stock remain outstanding, the vote or consent of the holders
of at least a majority of the shares of Series A Preferred Stock outstanding at
the time (voting separately as a class) given in person or by proxy, either in
writing or at any special or annual meeting called for the purpose, shall be
necessary to permit, effect or validate any one or more of the following:
(i) The authorization, creation or issuance (whether by creation
or amendment of an existing class or series of Preferred Stock), or any increase
in the authorized or issued amount, of any class or series of stock (including
any class or series of Preferred Stock) ranking prior (as that term is
hereinafter defined) to the Series A Preferred Stock; or
(ii) The Amendment, alteration or repeal, whether by merger,
consolidation or otherwise, of any of the provisions of the Certificate of
Incorporation or of these resolutions which would alter or change the powers,
preferences, or special rights of the shares of the Series A Preferred Stock so
as to affect them adversely, in any material respect; provided, however, that
the creation and issuance of other series of Preferred Stock ranking junior to
or on a parity with the Series A Preferred Stock with respect to the payment of
dividends and the distribution of assets upon liquidation, dissolution or
winding up, shall not be deemed to adversely affect such powers, preferences, or
special rights, and provided, further, that the unanimous vote or consent of the
shares of the Series A Preferred Stock outstanding shall be necessary to effect
any amendment to these resolutions that would (A) except as otherwise permitted
by Section, increase the Conversion Price; or (B) reduce or eliminate the
entitlement to cash dividends, if any, payable on the shares of the Series A
Preferred Stock.
For purposes of these resolutions, any class or classes of stock of the
Corporation shall be deemed to rank:
(A) prior to the Series A Preferred Stock as to dividends
or as to distribution of assets upon liquidation, dissolution or winding up if
the holders of such class shall be
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<PAGE>
entitled to the receipt of dividends or amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in preference or
priority to the holders of Series A Preferred Stock;
(B) on a parity with the Series A Preferred Stock as to
dividends or as to distribution of assets upon liquidation, dissolution or
winding up, whether or not the dividend rates, dividend payment dates, or
liquidation prices per shares thereof be different from those of the Series A
Preferred Stock, if such stock or series shall be the Series A Preferred Stock
or if the holders of such class of stock and the Series A Preferred Stock shall
be entitled to the receipt of dividends or of amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion to
their respective dividend rates or liquidation prices, without preference or
priority one over the other; and
(C) junior to the Series A Preferred Stock as to dividends
or as to the distribution of assets upon liquidation, dissolution or winding up,
if such class shall be Common Stock or if holders of the Series A Preferred
Stock shall be entitled to receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in preference
or priority to holders of stock of such class.
5. Conversion Rights. The holders of the Series A Preferred Stock shall
have the following conversion rights:
(a) General. Subject to and in compliance with the provisions of
this Section, any shares of the Series A Preferred Stock may, at the option of
the holder, be converted at any time or from time to time into fully-paid and
nonassessable shares (calculated as to each conversion to the largest whole
share) of Common Stock provided, however, that such conversion shall be
conditioned upon and subject to the prior approval by the board and the
requisite vote of holders of voting stock of an amendment of the Corporation's
Certificate of Incorporation that provides for additional shares of authorized
and unissued Common Stock at least sufficient for conversion of the Preferred
Stock then outstanding or reserved for issuance. The number of shares of
Common Stock to which a holder of Series A Preferred Stock shall be entitled
upon conversion, subject to the payment of cash in lieu of fractional shares as
provided in Section, shall be determined as provided in Section.
(b) Conversion Rate. The conversion rate per share of Series A
Preferred Stock in effect at any time (the "Conversion Rate") shall be the
quotient obtained by dividing (a) $10 x (1 + (N/3650)) by (b) the Conversion
Price, as provided in Section, where N equals the number of days between (i)
the date on which the shares of Series A Preferred Stock were purchased and
(ii) the applicable date of conversion for the shares of Series A Preferred
Stock for which conversion is being elected.
(c) Conversion Price. The Conversion Price shall be initially Two
Dollars and 00 Cents ($2.00), subject to adjustment as provided elsewhere in
this Section 5.
(d) Mechanics of Conversion. Each holder of Series A Preferred
Stock, who desires to convert the same into shares of Common Stock, subject
to the provisions of this Section, shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of
any transfer agent for the Common Stock, and shall give written notice to the
Corporation at its principal office that such holder elects to convert the
same and shall state therein the number of shares
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<PAGE>
of Series A Preferred Stock being converted. Thereupon the Corporation shall
promptly issue and deliver at such office to such holder a certificate or
certificates for the number of shares of Common Stock to which such holder is
entitled and shall promptly pay in cash all declared but unpaid dividends on
the shares of Series A Preferred Stock being converted or, if the Corporation
is legally or financially unable to pay such dividends in cash, pay in Common
Stock (valued at the Common Stock's fair market value at the time of
surrender as determined in good faith by the Board) all declared but unpaid
dividends on the shares being converted. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the certificate representing the shares to be converted, and the
person entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such
shares of Common Stock on such date (the "Conversion Date"). The Series A
Preferred Stock may be converted in any whole number multiple of one (1)
share.
(e) Cash in Lieu of Fractional Shares. No fractional shares of
Common Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series A Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of the
Series A Preferred Stock, the Corporation shall pay to the holder of the shares
of Series A Preferred Stock which were converted a cash adjustment in respect
and in lieu of such fractional shares in an amount equal to the same fraction
of the fair market value per share of the Common Stock (as determined in a
reasonable good faith manner by the Board of Directors) at the close of
business on the Conversion Date. The determination as to whether or not any
fractional shares which are issuable shall be based upon the total number of
shares of Series A Preferred Stock being converted at any one time by any
holder thereof, not upon each share of Series A Preferred Stock being converted.
(f) Adjustments in Certain Customary Events.
(i) Dividends. In the event the Corporation shall make or
issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities of
the Corporation other than shares of Common Stock or in assets (excluding cash
dividends or distributions), then and in each such event provision shall be made
so that the holders of the Series A Preferred Stock shall receive upon
conversion thereof in addition to the number of shares of Common Stock
receivable thereupon, the number of securities or such other assets of the
Corporation which they would have received had their Series A Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including
the Conversion Date (as that term is defined in Section), retained such
securities or such other assets receivable by them as aforesaid during such
period, giving application to all adjustments called for during such period
under this Section with respect to the rights of the holders of the Series A
Preferred Stock.
(ii) Recapitalization or Reclassification. If the Common Stock
of the Corporation shall be changed into the same or different number of shares
of any class or classes of stock of the Corporation, whether by
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend provided for elsewhere in the
Certificate of Incorporation or these resolutions, or a reorganization, merger,
consolidation or sale of assets provided for elsewhere in the Certificate of
Incorporation or these resolutions), then and in each such event the holder of
shares of Series A Preferred Stock shall have the right thereafter to convert
such shares into
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the kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares of
Series A Preferred Stock would have been converted (taking into account all
accrued and unpaid dividends and interest with respect to such Series A
Preferred Stock) immediately prior to such reorganization, reclassification
or change, all subject to further adjustment as provided herein.
(iii) Merger or Sale of Assets. If at any time or from time
to time there shall be a merger or consolidation of the Corporation with or into
another corporation (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares or
Common Stock of the Corporation), or the sale of all or substantially all of the
Corporation's properties and assets to any other person followed by a
liquidation of the Corporation, then, as a part of such transaction, provision
shall be made so that each holder of a share of Series A Preferred Stock then
outstanding shall have the right thereafter to convert such share only into the
kind and amount of securities, cash and other property of the Corporation, or of
the successor corporation resulting from such merger or consolidation,
receivable upon such consolidation, merger, sale or transfer by a holder of the
number of shares of Common Stock of the Corporation into which such share of
Series A Preferred Stock might have been converted immediately prior to such
consolidation, merger, sale or transfer, assuming such holder of Common Stock of
the Corporation is not an entity with which the Corporation consolidated or into
which the Corporation merged or which merged into the Corporation or to which
such sale or transfer was made, as the case may be (a "constituent entity"), or
an affiliate of a constituent entity. If necessary in any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section with respect to the rights of the holders of the Series A Preferred
Stock after such transaction to the end that the provisions of this Section
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of the Series A Preferred Stock) shall be
applicable after that event in a manner corresponding as nearly as may be
practicable in relation to any shares of stock or other securities or property
thereafter deliverable on the conversion of the shares. The above provisions
shall similarly apply to successive consolidations, mergers, sales or transfers.
(iv) Sale of Shares below Conversion Price.
(A) General. If the Corporation issues or sells, or is
deemed by the express provisions of Section to have issued or sold, Additional
Shares of Common Stock (as hereinafter defined), other than as provided
elsewhere in Section or upon a subdivision or combination of shares of Common
Stock as provided in Section, for an Effective Price (as hereinafter defined)
less than the then existing Conversion Price for the Series A Preferred Stock
then and in each such case the then existing Conversion Price for the Series A
Preferred Stock shall be reduced, as of the opening of business on the date of
such issue or sale, by the Corporation to the Effective Price for each such
Additional Share of Common Stock so issued.
(B) Amount and Kind of Consideration. For the purpose of
making any adjustment required under this Section, the consideration received by
the Corporation for any issue or sale of securities shall (A) to the extent it
consists of cash be computed at the net amount of cash received by the
Corporation after the deduction of any expenses payable by the Corporation and
any underwriting or similar commissions, compensation, or concessions paid or
allowed by the Corporation in connection with such issue or sale, (B) to the
extent it consists of property other than cash, be
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computed at the fair value of that property as determined in good faith by
the Board, and (C) if Additional Shares of Common Stock, Convertible
Securities (as hereinafter defined) or rights or options to purchase either
Additional Shares of Common Stock or Convertible Securities are issued or
sold together with other stock or securities or other assets of the
Corporation for a consideration which covers both, be computed as the portion
of the consideration so received that may be reasonably determined in good
faith by the Board to be allocable to such Additional Shares of Common Stock,
Convertible Securities or rights or options.
(C) Convertible Securities. For the purpose of the
adjustment required under this Section, if the Corporation issues or sells any
rights or options for the purchase of, or stock or other securities convertible
into, Additional Shares of Common Stock (such convertible stock or securities
being hereinafter referred to as "Convertible Securities") and if the Effective
Price of such Additional Shares of Common Stock is less than the Conversion
Price then in effect for the Series A Preferred Stock, then in each case the
Corporation shall be deemed to have issued at the time of the issuance of such
rights or options or Convertible Securities the maximum number of Additional
Shares of Common Stock issuable upon exercise or conversion thereof and to have
received as consideration for the issuance of such shares an amount equal to the
total amount of the consideration, if any, received by the Corporation for the
issuance of such rights or options or Convertible Securities, plus, in the case
of such rights or options, the minimum amounts of consideration, if any, payable
to the Corporation upon the exercise of such rights or options, plus, in the
case of Convertible Securities, the minimum amounts of consideration, if any,
payable to the Corporation (other than by cancellation of liabilities or
obligations evidenced by such Convertible Securities) upon the conversion
thereof. No further adjustment of the Conversion Price for the Series A
Preferred Stock shall be made as a result of the actual issuance of Additional
Shares of Common Stock on the exercise of any such rights or options or the
conversion of any such Convertible Securities. If any such rights or options or
the conversion privilege represented by any such Convertible Securities shall
expire or otherwise terminate without having been exercised, the Conversion
Price for the Series A Preferred Stock adjusted upon the issuance of such
rights, options or Convertible Securities shall be readjusted to the Conversion
Price for the Series A Preferred Stock which would have been in effect had an
adjustment been made on the basis that the only Additional Shares of Common
Stock so issued were the Additional Shares of Common Stock, if any, actually
issued or sold on the exercise of such rights or options or rights of conversion
of such Convertible Securities, and such Additional Shares of Common Stock, if
any, were issued or sold for the consideration actually received by the
Corporation upon such exercise, plus the consideration, if any, actually
received by the Corporation for the granting of all such rights or options,
whether or not exercised, plus the consideration received for issuing or selling
the Convertible Securities actually converted, plus the consideration if any,
actually received by the Corporation (other than by cancellation of liabilities
or obligations evidenced by such Convertible Securities) on the conversion of
such Convertible Securities.
(D) Options and Rights to Purchase. For the purpose of the
adjustment required under this Section, if the Corporation issues or sells any
rights or options for the purchase of Convertible Securities and if the
Effective Price of the Additional Shares of Common Stock underlying such
Convertible Securities is less than the Conversion Price then in effect for the
Series A Preferred Stock, then in each such case the Corporation shall be deemed
to have issued at the time of the issuance of such rights or options the maximum
number of Additional Shares of Common
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Stock issuable upon conversion of the total amount of Convertible Securities
covered by such rights or options and to have received as consideration for
the issuance of such Additional Shares of Common Stock an amount equal to the
amount of consideration, if any, received by the Corporation for the issuance
of such rights or options, plus the minimum amounts of consideration, if any,
payable to the Corporation upon the exercise of such rights or options and
plus the minimum amount of consideration, if any, payable to the Corporation
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion of such Convertible Securities.
No further adjustment of the Conversion Price shall be made as a result of
the actual issuance of the Convertible Securities upon the exercise of such
rights or options or upon the actual issuance of Additional Shares of Common
Stock upon the conversion of such Convertible Securities. The provisions of
Section above for the readjustment of the Conversion Price for the Series A
Preferred Stock upon the expiration of rights or options or the rights of
conversion represented by Convertible Securities shall apply mutatis mutandis
to the rights, options and Convertible Securities referred to in this Section.
(E) Certain Definitions. "Additional Shares of Common
Stock" shall mean all shares of Common Stock issued by the Corporation after the
issuance date of the Series A Preferred Stock, whether or not subsequently
reacquired or retired by the Corporation, other than (A) up to 2,500,000 shares
of Common Stock issued or deemed issued to employees or directors of or
consultants and advisers to the Corporation or any Subsidiary pursuant to any
stock purchase or stock option plans or other arrangements approved by the Board
prior to the date hereof plus (B) up to an additional 250,000 options, purchase
rights or grants of shares of Common Stock per fiscal year, cumulatively, after
the issuance date of the Series A Preferred Stock; provided, however, if at any
time or from time to time after the issuance date of the Series A Preferred
Stock the Corporation effects a subdivision or combination of the outstanding
Common Stock or makes a dividend or other distribution payable in additional
shares of Common Stock, then the aggregate number of shares specifically
excluded from the definition of Additional Shares of Common Stock shall be
increased or decreased appropriately to reflect such subdivision, combination,
dividend, or other distribution. The "Effective Price" of Additional Shares
of Common Stock shall mean the quotient determined by dividing the total of
(a) the number of shares of Common Stock outstanding prior to the issuance or
deemed issuance or sale plus the number of Additional Shares of Common Stock
issued or sold, or deemed to have been issued or sold by the Corporation under
Section, into (b) the consideration received, or deemed to have been received
by the Corporation, for such issue and all previous issues under Section, for
such and all previous Additional Shares of Common Stock following the original
issue date of the Series A Preferred Stock.
(v) Certificate as to Adjustments. In each case of an
adjustment or readjustment of the Conversion Rate or Conversion Price, the
Corporation will furnish each holder of Series A Preferred Stock with a
certificate, executed by its chief executive officer and its chief financial
officer showing such adjustment or readjustment, and stating in detail the facts
upon which such adjustment or readjustment is based. The Corporation in any
such instance may, and in every instance upon the request of the holders of a
majority of the Series A Preferred Stock the Corporation will, cause its
independent public accountants to confirm the accuracy of such adjustment or
readjustment. Any adjustment so confirmed shall be for all purposes hereof
conclusively be deemed to be an appropriate adjustment.
(g) Transfer Taxes. The Corporation will pay any and all documentary
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of shares of Common Stock on conversions of shares of Series A
Preferred Stock pursuant hereto; provided, however, that the Corporation shall
not be required to pay any tax which may be payable in respect of any transfer
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involved in the issue or delivery of shares of Common Stock in a name other
than that of the holder of the shares of Series A Preferred Stock to be
converted and no such issue or delivery shall be made unless and until the
person requesting such issue or delivery has paid to the Corporation the
amount of any such tax or has established, to the satisfaction of the
Corporation, that such tax has been paid.
(h) Shares To Be Validly Issued, etc. The Corporation covenants that
all shares of Common Stock which may be issued upon conversions of shares of
Series A Preferred Stock will upon issue be duly and validly issued, fully paid
and non-assessable, free of all liens and charges and not subject to any
preemptive rights.
(i) Partial Conversion. In the event some but not all of the shares
of Series A Preferred Stock represented by a certificate or certificates
surrendered by a holder are converted, the Corporation shall execute and deliver
to or on the order of the holder, at the expense of the Corporation, a new
certificate representing the number of shares of Series A Preferred Stock which
were not converted.
(j) Reservation of Common Stock. The Corporation shall at all times
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the shares of the
Series A Preferred Stock, such number of its shares of Common Stock as shall
from time to time be sufficient to effect the conversion of all outstanding
shares of the Series A Preferred Stock, and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series A Preferred
Stock, the Corporation shall take such corporate action as may be necessary to
increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
6. Automatic Conversion.
(a) Public Offering. Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock based on the then
effective Conversion Rate for the Series A Preferred Stock immediately upon the
closing of a public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended, covering the offering and sale of
Common Stock for the account of the Corporation in which the Common Stock is
approved for listing, upon notice of issuance, on the New York Stock, Exchange,
American Stock Exchange, Nasdaq National Market or Nasdaq Small Cap Market;
provided, however, that such conversion shall be conditioned upon and subject to
the prior approval by the board and the requisite vote of holders of voting
stock of an amendment of the Corporation's Certificate of Incorporation that
provides for additional shares of authorized and unissued Common Stock at least
sufficient for conversion of the Preferred Stock then outstanding or reserved
for issuance, and payment, or declaration and setting aside of a sum sufficient
for payment, by the Corporation of all declared but unpaid dividends, if any, on
the outstanding Series A Preferred Stock payable in cash or Common Stock (valued
at the Common Stock's fair market value), or both.
(b) Mechanics of Conversion. Upon the occurrence of an event
specified in Section above, the outstanding shares of Series A Preferred Stock
shall be converted automatically without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Corporation or its transfer agent; provided, however, that
the
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Corporation shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon such conversion unless the certificates
evidencing such shares of Series A Preferred Stock are either delivered to the
Corporation or its transfer agent as provided below, or the holder notifies
the Corporation or its transfer agent that such certificates have been lost,
stolen or destroyed and executes an agreement satisfactory to the Corporation
to indemnify the Corporation from any loss incurred by it in connection with
the certificates. Upon the occurrence of such automatic conversion of
Series A Preferred Stock, the holders of Series A Preferred Stock shall
surrender the certificates representing such shares at the office of the
Corporation or any transfer agent for the Common Stock. Thereupon, there
shall be issued and delivered to such holder promptly at such office and in
its name as shown on such surrendered certificate or certificates, a
certificate or certificates for the number of whole shares of Common Stock
into which the shares surrendered were convertible on the date on which such
automatic conversion occurred, and the Corporation shall promptly pay the
holder in cash in lieu of any fractional share of Common Stock (calculated at
the Common Stock's Market Price, as defined in Section 5(f)(iv)(E) above, as
of the date of such conversion). Upon conversion of any holder after the
record date but before the payment date for any dividend, the Corporation
shall pay the holder on account of such dividend payment on the payment date
notwithstanding prior conversion.
7. Redemption. The shares of Series A Preferred Stock are not redeemable
as a matter of right of the Corporation or the holder.
8. No Reissuance of the Series A Preferred Stock. No share or shares of
the Series A Preferred Stock acquired by the Corporation by reason of
redemption, purchase, conversion or otherwise shall be reissued. The
Corporation may from time to time take such appropriate corporate action as
may be necessary to reduce the authorized number of shares of the Series A
Preferred Stock accordingly.
9. Notices of Record Dates. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or to receive any other right, or any capital
reorganization of the Corporation, any reclassification or recapitalization of
the capital stock of the Corporation, any merger or consolidation of the
Corporation, or any transfer of all or substantially all of the assets of the
Corporation to any other corporation, or any other entity or person, or any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, then and in each such event the Corporation shall mail or cause to
be mailed to each holder of Series A Preferred Stock a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right and a description of such dividend, distribution or right,
(ii) the date on which any such reorganization, reclassification,
recapitalization, transfer, consolidation, merger, dissolution, liquidation or
winding up is expected to become effective, (iii) the time, if any, that is to
be fixed, as to when the holders of record of Common Stock (or other securities)
shall be entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least 30
days prior to the date specified in such notice on which such action is to be
taken.
10. Common Stock. All rights accruing to the outstanding shares of the
Corporation not expressly provided for to the contrary herein shall be vested
in the Common Stock.
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IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Designation, Preferences and Rights of Series A Preferred Stock to be duly
executed by its Chairman of the Board, President, Chief Executive Officer and
Secretary and who has duly attested and has caused its corporate seal to be
affixed hereto this 11th day of September, 1996.
APPLIED DATA COMMUNICATIONS, INC.
By: /s/ Walter J. ("Pat") Kane
-----------------------------------
Walter J. ("Pat") Kane, Chairman of
the Board, President, Chief Executive
Officer and Secretary
(Corporate Seal)
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CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF
SERIES B PREFERRED STOCK
OF
APPLIED DATA COMMUNICATIONS, INC.,
a Delaware corporation
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
Applied Data Communications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies that, pursuant to the authority contained in
Article 4 of its Certificate of Incorporation, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors has adopted the following resolution
creating a series of its Preferred Stock designated as Series B Preferred
Stock:
RESOLVED, that a series of the class of authorized Preferred Stock of
the Corporation be, and hereby is, created, and that the designation and
amount thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, are as
follows:
BE IT RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation by the Certificate of Incorporation, the Board
of Directors does hereby provide for the issue of a series of Preferred
Stock, $.01 par value per share, of the Corporation, to be designated
"Series B Preferred Stock" (hereinafter referred to as the "Series B Preferred
Stock"), consisting of 200,000 shares, and to the extent that the voting
powers, designations, preferences, limitations, restrictions and relative
rights of the Series B Preferred Stock are not stated and expressed in the
Certificate of Incorporation, does hereby fix and herein state and express
such voting powers, designations, preferences, limitations, restrictions and
relative rights as follows (all terms used herein which are defined in the
Certificate of Incorporation shall be deemed to have the meanings provided
therein):
1. Designation and Amount. The shares of such series shall be
designated as "Series B Preferred Stock" and the number of shares constituting
such series shall be 200,000. Such number of shares may be decreased by
resolution of the Board of Directors; provided, that no decrease shall
<PAGE>
reduce the number of shares of Series B Preferred Stock to a number less than
the number of shares of Series B Preferred Stock then outstanding or reserved
for issuance.
2. Dividends. The holders of Series B Preferred Stock shall be
entitled to receive, out of the assets of the Corporation legally available
for distribution to holders of the Corporation's Series B Preferred Stock,
whether such assets are capital, surplus, or earnings (hereinafter called the
"Available Funds"), after the payment of any dividends payable on Series A
Preferred Stock, and as and when received by holders of the Common Stock of
the Corporation or any other class of stock of the Corporation ranking junior
to the Series B Preferred Stock, dividends in an amount equal to the amount of
any dividends payable to holders of the Common Stock of the Corporation or
any other class of the Corporation ranking junior to Series B Preferred Stock,
based on the largest number of full shares of Common Stock into which a
holder's shares of Series B Preferred Stock could be converted immediately
prior to the record date for the payment of such dividend. No dividend may
be declared and paid upon shares of Common Stock or any other class of stock
of the Corporation ranking junior to the Series B Preferred Stock unless the
Series B Preferred Stock was converted into Common Stock before the record
date of such dividend or the date the amount of such dividend is
simultaneously paid or deposited into trust for the payment or retirement
thereof. Dividends, if any, on Series B Preferred Stock shall not be
cumulative, and no declared and unpaid dividend on Series B Preferred Stock
shall bear interest.
3. Liquidation, Dissolution or Winding Up.
(a) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary ("Liquidation"), the holders of each share of Series B Preferred
Stock shall be entitled to receive out of the Available Funds, as and when
any sums shall be paid or any assets distributed among the holders of shares
of Common Stock, an amount or value (such amount or value as described
immediately below is hereinafter called the "Series B Preference Price") equal
to the sums payable to holders of Common Stock of the Corporation, based on
the largest number of full shares of Common Stock into which a holder's
shares of Series B Preferred Stock could be converted immediately prior to the
record date for such distribution (subject to adjustment if the Series B
Preferred Stock of the Corporation shall be changed into a different number
of shares, whether by recapitalization, reclassification or otherwise, and
then and in each such event the holder of shares of Series B Preferred Stock
shall have the right thereafter to receive upon Liquidation such same amount
aggregately receivable immediately prior to reorganization, reclassification
or other change of the number of shares of Series B Preferred Stock
apportioned among the number of shares into which such shares of Series B
Preferred Stock are changed) plus in each case, any and all declared but
unpaid dividends on such shares. If the Available Funds shall be
insufficient to permit the payment in full to all holders of the Series B
Preferred Stock the full amounts (including all dividends accrued and unpaid)
to which they shall be entitled by reason of such Liquidation of the
Corporation, then there shall be paid to the holders of the Series B Preferred
Stock in connection with such Liquidation of the Corporation, an amount equal
to product derived by multiplying the amount of Available Funds times a
fraction, the numerator of which shall be the full amount to which the
holders of the Series B Preferred Stock shall be entitled by reason of such
Liquidation of the Corporation and the denominator of which shall be the
total amount which would have been distributed by reason of such Liquidation
of the Corporation with respect to all Preferred Stock of any series and
Common Stock then outstanding had the Corporation possessed sufficient assets
to pay the maximum amount which the holders of all such stock would be
entitled to receive in connection with such Liquidation of the Corporation.
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<PAGE>
The voluntary sale, conveyance, lease, exchange or transfer of all or
substantially all the property or assets of the Corporation, or the merger or
consolidation of the Corporation into or with any other corporation, or the
merger of any other corporation into the Corporation, or any purchase of all
or substantially all of the shares of any class or series of stock of the
Corporation, shall not be deemed to be a Liquidation of the Corporation for
the purposes of this Section, provided that so long as such transaction does
not result in the issuance or creation of any shares of Preferred Stock of
the Corporation, or of any successor, except any shares of Preferred Stock
that rank junior (as defined elsewhere in these resolutions) to the shares of
Series B Preferred Stock as to dividends and as to the distribution of assets
upon dissolution, liquidation or winding up. Provided, however, if more than
50% (by value as determined in good faith by the Board of Directors) of the
consideration received in such a transaction by holders of the Corporation's
Common Stock consists of cash, notes payable in cash or Marketable Stock (as
defined below), the transaction will be deemed to be a Liquidation for
purposes of this Section. The phrase "all or substantially all" as used in
this definition in reference to a class of the Corporation's capital stock
means 66% or more of the aggregate outstanding amount. The phrase "all or
substantially all" as used in this definition in reference to the property,
business or assets of the Corporation shall mean assets of a corporation as
are quantitatively vital to the operations of the Corporation and
substantially affects the existence and purpose of the Corporation. As used
herein, the term "Marketable Stock" means the Corporation's Common Stock or
common stock of any corporation that is the successor to all or substantially
all of the business or assets of the Corporation or of the ultimate parent of
such successor, which is (or will, upon distribution thereof, be) listed or
quoted on the New York Stock Exchange, the American Stock Exchange, or the
Nasdaq National Market or the Nasdaq Small Cap Market.
The holder of any shares of Series B Preferred Stock shall not be
entitled to receive any payment of the full balance owed for such shares
under this Section until such holder shall cause to be delivered to the
Corporation (i) the certificate(s) representing such shares of Series B
Preferred Stock and (ii) transfer instrument(s) satisfactory to the
Corporation and sufficient to transfer such shares of Series B Preferred Stock
to the Corporation free of any adverse interest. No interest shall accrue on
any payment upon Liquidation after the due date thereof.
After the Series B Preference Price shall have been paid in full to the
holders of the Series B Preferred Stock, or funds necessary for such payment
shall have been set aside by the Corporation in trust for the account of
holders of the Series B Preferred Stock and available for such payment, the
remaining assets of the Corporation available for distribution to
stockholders shall be distributed among the holders of Common Stock and any
other class of stock of the Corporation ranking junior to the Series B
Preferred Stock, and the holders of shares of the Series B Preferred Stock
will not be entitled to any further participation in any distribution of
assets by the Corporation.
(b) Property. Whenever the distribution provided for herein shall
be paid in property other than cash, the value of such distribution shall be
the fair market value of such property as determined in good faith by the
Board of Directors of the Corporation.
4. Series B Preferred Stock Voting Rights. The holders of Series B
Preferred Stock shall not have any voting rights if, whether at or prior to
the effective time of the act with respect to which such vote would otherwise
be required, all outstanding shares of Series B Preferred Stock shall have
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<PAGE>
been converted into Common Stock. Subject to the foregoing sentence, the
Series B Preferred Stock shall have voting rights as follows:
(a) Voting in General. Except to the extent that requirements of
law supersede the limitations on voting rights in the Certificate of
Incorporation or these resolutions and as otherwise set forth herein, the
shares of Series B Preferred Stock shall be entitled to voted equally with the
shares of Common Stock and all other voting shares of any class or series
(based on the number of votes that may be granted thereto by their governing
documents). Each holder of Series B Preferred Stock shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting
in accordance with the bylaws of this Corporation, and shall be entitled to
vote, together with holders of Common Stock and all other shares of stock
with general voting rights, as a single class, with respect to any questions
upon which holders of Common Stock have the right to vote. Each holder of
Series B Preferred Stock shall be entitled to that number of votes equal to
the largest number of whole shares of Common Stock into which such holder's
shares of Series B Preferred Stock could be converted, pursuant to the
provisions of Section hereof, at the record date for the determination of
stockholders entitled to vote on such matter or, if no such record date is
established, at the date such vote is taken or any written consent of
stockholders is solicited.
(b) Series B Class Voting Rights. From the date on which any
shares of Series B Preferred Stock are first issued and so long as any shares
of Series B Preferred Stock remain outstanding, the vote or consent of the
holders of at least a majority of the shares of Series B Preferred Stock
outstanding at the time (voting separately as a class) given in person or by
proxy, either in writing or at any special or annual meeting called for the
purpose, shall be necessary to permit, effect or validate any amendment,
alteration or repeal, whether by merger, consolidation or otherwise, of any
of the provisions of the Certificate of Incorporation or of these resolutions
which would alter or change the powers, preferences, or special rights of the
shares of the Series B Preferred Stock so as to affect them adversely, in any
material respect; provided, however, that the creation and issuance of any
other series of Preferred Stock, whether ranking prior to, junior to or on a
parity with the Series B Preferred Stock with respect to the payment of
dividends and the distribution of assets upon liquidation, dissolution or
winding up, or with respect to any other privilege, preference, right or
restriction whatsoever, shall not be deemed to adversely affect such powers,
preferences, or special rights, and provided, further, that the unanimous
vote or consent of the shares of the Series B Preferred Stock outstanding
shall be necessary to effect any amendment to these resolutions that would
(A) except as otherwise permitted by Section, increase the Conversion Price;
or (B) reduce or eliminate the entitlement to cash dividends, if any, payable
on the shares of the Series B Preferred Stock.
For purposes of these resolutions, any class or classes of stock of the
Corporation shall be deemed to rank:
(A) prior to the Series B Preferred Stock as to dividends or
as to distribution of assets upon liquidation, dissolution or winding up if
the holders of such class shall be entitled to the receipt of dividends or
amounts distributable upon liquidation, dissolution or winding up, as the
case may be, in preference or priority to the holders of Series B Preferred
Stock;
(B) on a parity with the Series B Preferred Stock as to
dividends or as to distribution of assets upon liquidation, dissolution or
winding up, whether or not the dividend rates, dividend payment dates, or
liquidation prices per shares thereof be different from those of the
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<PAGE>
Series B Preferred Stock, if such stock or series shall be the Series B
Preferred Stock or if the holders of such class of stock and the Series B
Preferred Stock shall be entitled to the receipt of dividends or of amounts
distributable upon liquidation, dissolution or winding up, as the case may
be, in proportion to their respective dividend rates or liquidation prices,
without preference or priority one over the other; and
(C) junior to the Series B Preferred Stock as to dividends or
as to the distribution of assets upon liquidation, dissolution or winding up,
if such class shall be Common Stock or if holders of the Series B Preferred
Stock shall be entitled to receipt of dividends or of amounts distributable
upon liquidation, dissolution or winding up, as the case may be, in
preference or priority to holders of stock of such class.
5. Conversion Rights. The holders of the Series B Preferred Stock
shall not have voluntary conversion rights. Each share of Series B
Preferred Stock shall automatically be converted into shares of Common Stock
based on the then effective Conversion Rate for the Series B Preferred Stock
immediately upon the filing with the Delaware Secretary of State (after the
approval by the Board and by the requisite vote of holders of voting stock),
of an amendment of the Corporation's Certificate of Incorporation that
provides for additional shares of authorized and unissued Common Stock
sufficient for conversion of the Series B Preferred Stock then outstanding,
and all other then outstanding convertible securities and any other
outstanding rights, options and warrants to acquire Common Stock and payment,
or declaration and setting aside of a sum sufficient for payment, by the
Corporation of all declared but unpaid dividends, if any, on the outstanding
Series B Preferred Stock payable in cash or Common Stock (valued at the Common
Stock's fair market value), or both.
(a) General. Subject to and in compliance with the provisions of
this Section, all shares of the Series B Preferred Stock shall automatically,
be converted at any time or from time to time into fully-paid and
nonassessable shares (calculated as to each conversion to the largest whole
share) of Common Stock, provided, however, that such conversion shall be
conditioned upon and subject to the prior approval by the board and the
requisite vote of holders of voting stock of an amendment of the
Corporation's Certificate of Incorporation that provides for additional
shares of authorized and unissued Common Stock at least sufficient for
conversion of the Preferred Stock then outstanding or reserved for issuance.
The number of shares of Common Stock to which a holder of Series B Preferred
Stock shall be entitled upon conversion, subject to the payment of cash in
lieu of fractional shares as provided in Section, shall be as provided in
Section.
(b) Conversion Rate. Subject to adjustments as provided elsewhere
in this Section 5, the conversion rate per share of Series B Preferred Stock
in effect at any time (the "Conversion Rate") shall be the quotient obtained
by dividing (a) $25 x (1 + (N/3650)) by (b) the Conversion Price, as provided
in Section, where N equals the number of days between (i) the date on which
the shares of Series B Preferred Stock were purchased and (ii) the applicable
date of conversion for the shares of Series B Preferred Stock for which
conversion is being elected.
(c) Conversion Price. The Conversion Price shall be initially
Twenty-Five Cents ($0.25), subject to adjustments as provided elsewhere in
this Section 5.
(d) Mechanics of Conversion. Upon the occurrence of an event
specified in Section 5. above, the outstanding shares of Series B Preferred
Stock shall be converted automatically
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<PAGE>
without any further action by the holders of such shares and whether or not
the certificates representing such shares are surrendered to the Corporation
or its transfer agent; provided, however, that the Corporation shall not be
obligated to issue certificates evidencing the shares of Common Stock
issuable upon such conversion unless the certificates evidencing such shares
of Series B Preferred Stock are either delivered to the Corporation or its
transfer agent as provided below, or the holder notifies the Corporation or
its transfer agent that such certificates have been lost, stolen or destroyed
and executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with the certificates.
Upon the occurrence of such automatic conversion of Series B Preferred Stock,
the holders of Series B Preferred Stock shall surrender the certificates
representing such shares at the office of the Corporation or any transfer
agent for the Common Stock. Thereupon, there shall be issued and delivered
to such holder promptly at such office and in its name as shown on such
surrendered certificate or certificates, a certificate or certificates for
the number of whole shares of Common Stock into which the shares surrendered
were convertible on the date on which such automatic conversion occurred, and
the Corporation shall promptly pay the holder in cash in lieu of any
fractional share of Common Stock. Upon conversion of any holder after the
record date but before the payment date for any dividend, the Corporation
shall pay the holder on account of such dividend payment on the payment date
notwithstanding prior conversion.
(e) Cash in Lieu of Fractional Shares. No fractional shares of
Common Stock or scrip representing fractional shares shall be issued upon the
conversion of shares of Series B Preferred Stock. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of
the Series B Preferred Stock, the Corporation shall pay to the holder of the
shares of Series B Preferred Stock which were converted a cash adjustment in
respect and in lieu of such fractional shares in an amount equal to the same
fraction of the fair market value per share of the Common Stock (as
determined in a reasonable good faith manner by the Board of Directors) at
the close of business on the Conversion Date. The determination as to
whether or not any fractional shares which are issuable shall be based upon
the total number of shares of Series B Preferred Stock being converted at any
one time by any holder thereof, not upon each share of Series B Preferred
Stock being converted.
(f) Adjustments in Certain Customary Events.
(i) Dividends. In the event the Corporation shall make or
issue, or fix a record date for the determination of holders of Common Stock
entitled to receive, a dividend or other distribution payable in securities
of the Corporation other than shares of Common Stock or in assets (excluding
cash dividends or distributions), then and in each such event provision shall
be made so that the holders of the Series B Preferred Stock shall receive upon
conversion thereof in addition to the number of shares of Common Stock
receivable thereupon, the number of securities or such other assets of the
Corporation which they would have received had their Series B Preferred Stock
been converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and including
the Conversion Date (as that term is defined in Section), retained such
securities or such other assets receivable by them as aforesaid during such
period, giving application to all adjustments called for during such period
under this Section with respect to the rights of the holders of the Series B
Preferred Stock.
(ii) Recapitalization or Reclassification. If the Common
Stock of the Corporation shall be changed into the same or different number
of shares of any class or classes of
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<PAGE>
stock of the Corporation, whether by recapitalization, reclassification or
otherwise (other than a subdivision or combination of shares or stock
dividend provided for elsewhere in the Certificate of Incorporation or these
resolutions, or a reorganization, merger, consolidation or sale of assets
provided for elsewhere in the Certificate of Incorporation or these
resolutions), then and in each such event the holder of shares of Series B
Preferred Stock shall have the right thereafter to convert such shares into
the kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares of
Series B Preferred Stock would have been converted (taking into account all
accrued and unpaid dividends and interest with respect to such Series B
Preferred Stock) immediately prior to such reorganization, reclassification
or change, all subject to further adjustment as provided herein.
(iii) Merger or Sale of Assets. If at any time or from
time to time there shall be a merger or consolidation of the Corporation with
or into another corporation (other than a merger which does not result in any
reclassification, conversion, exchange or cancellation of outstanding shares
or Common Stock of the Corporation), or the sale of all or substantially all
of the Corporation's properties and assets to any other person followed by a
liquidation of the Corporation, then, as a part of such transaction,
provision shall be made so that each holder of a share of Series B Preferred
Stock then outstanding shall have the right thereafter to convert such share
only into the kind and amount of securities, cash and other property of the
Corporation, or of the successor corporation resulting from such merger or
consolidation, receivable upon such consolidation, merger, sale or transfer
by a holder of the number of shares of Common Stock of the Corporation into
which such share of Series B Preferred Stock might have been converted
immediately prior to such consolidation, merger, sale or transfer, assuming
such holder of Common Stock of the Corporation is not an entity with which
the Corporation consolidated or into which the Corporation merged or which
merged into the Corporation or to which such sale or transfer was made, as
the case may be (a "constituent entity"), or an affiliate of a constituent
entity. If necessary in any such case, appropriate adjustment shall be made
in the application of the provisions of this Section with respect to the
rights of the holders of the Series B Preferred Stock after such transaction
to the end that the provisions of this Section (including adjustment of the
Conversion Price then in effect and the number of shares purchasable upon
conversion of the Series B Preferred Stock) shall be applicable after that
event in a manner corresponding as nearly as may be practicable in relation
to any shares of stock or other securities or property thereafter deliverable
on the conversion of the shares. The above provisions shall similarly apply
to successive consolidations, mergers, sales or transfers.
(iv) Certificate as to Adjustments. In each case of an
adjustment or readjustment of the Conversion Rate or Conversion Price, the
Corporation will furnish each holder of Series B Preferred Stock with a
certificate, executed by its chief executive officer and its chief financial
officer showing such adjustment or readjustment, and stating in detail the
facts upon which such adjustment or readjustment is based. The Corporation
in any such instance may, and in every instance upon the request of the
holders of a majority of the Series B Preferred Stock the Corporation will,
cause its independent public accountants to confirm the accuracy of such
adjustment or readjustment. Any adjustment so confirmed shall be for all
purposes hereof conclusively be deemed to be an appropriate adjustment.
(g) Transfer Taxes. The Corporation will pay any and all
documentary stamp or similar issue or transfer taxes payable in respect of
the issue or delivery of shares of Common Stock on
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<PAGE>
conversions of shares of Series B Preferred Stock pursuant hereto; provided,
however, that the Corporation shall not be required to pay any tax which may
be payable in respect of any transfer involved in the issue or delivery of
shares of Common Stock in a name other than that of the holder of the shares
of Series B Preferred Stock to be converted and no such issue or delivery
shall be made unless and until the person requesting such issue or delivery
has paid to the Corporation the amount of any such tax or has established, to
the satisfaction of the Corporation, that such tax has been paid.
(h) Shares To Be Validly Issued, etc. The Corporation covenants
that all shares of Common Stock which may be issued upon conversions of
shares of Series B Preferred Stock will upon issue be duly and validly issued,
fully paid and non-assessable, free of all liens and charges and not subject
to any preemptive rights.
(i) Partial Conversion. In the event some but not all of the
shares of Series B Preferred Stock represented by a certificate or
certificates surrendered by a holder are converted, the Corporation shall
execute and deliver to or on the order of the holder, at the expense of the
Corporation, a new certificate representing the number of shares of Series B
Preferred Stock which were not converted.
(j) Reservation of Common Stock. The Corporation shall at all
times reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series B Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of
all outstanding shares of the Series B Preferred Stock, and if at any time the
number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of the
Series B Preferred Stock, the Corporation shall take such corporate action as
may be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
6. Redemption. The shares of Series B Preferred Stock are not
redeemable as a matter of right of the Corporation or the holder.
7. No Reissuance of the Series B Preferred Stock. No share or shares
of the Series B Preferred Stock acquired by the Corporation by reason of
purchase, conversion or otherwise shall be reissued. The Corporation may
from time to time take such appropriate corporate action as may be necessary
to reduce the authorized number of shares of the Series B Preferred Stock
accordingly.
8. Notices of Record Dates. In the event of any taking by the
Corporation of a record of the holders of any class of securities for the
purpose of determining the holders thereof who are entitled to receive any
dividend or other distribution, or to receive any other right, or any capital
reorganization of the Corporation, any reclassification or recapitalization
of the capital stock of the Corporation, any merger or consolidation of the
Corporation, or any transfer of all or substantially all of the assets of the
Corporation to any other corporation, or any other entity or person, or any
voluntary or involuntary dissolution, liquidation or winding up of the
Corporation, then and in each such event the Corporation shall mail or cause
to be mailed to each holder of Series B Preferred Stock a notice specifying
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right and a description of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up
8
<PAGE>
is expected to become effective, (iii) the time, if any, that is to be fixed,
as to when the holders of record of Common Stock (or other securities) shall
be entitled to exchange their shares of Common Stock (or other securities)
for securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at least
30 days prior to the date specified in such notice on which such action is to
be taken.
9. Common Stock. All rights accruing to the outstanding shares of the
Corporation not expressly provided for to the contrary herein shall be vested
in the Common Stock.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Designation, Preferences and Rights of Series B Preferred Stock to be duly
executed by its Chairman of the Board, President, Chief Executive Officer and
Secretary and who has duly attested and has caused its corporate seal to be
affixed hereto this 11th day of September, 1996.
APPLIED DATA COMMUNICATIONS, INC.
By: /s/ Walter J. ("Pat") Kane
------------------------------------
Walter J. ("Pat") Kane, Chairman of
the Board, President, Chief Executive
Officer and Secretary
(Corporate Seal)
9
<PAGE>
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF
SERIES C PREFERRED STOCK
OF
APPLIED DATA COMMUNICATIONS, INC.,
A DELAWARE CORPORATION
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
Applied Data Communications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies that, pursuant to the authority contained in
Article 4 of its Certificate of Incorporation, and in accordance with the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, its Board of Directors has adopted the following resolution
creating a series of its Preferred Stock designated as Series C Preferred
Stock:
RESOLVED, that a series of the class of authorized Preferred Stock of
the Corporation be, and hereby is, created, and that the designation and
amount thereof and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such
series, and the qualifications, limitations or restrictions thereof, are as
follows:
BE IT RESOLVED, that pursuant to the authority vested in the Board
of Directors of the Corporation by the Certificate of Incorporation, the
Board of Directors does hereby provide for the issue of a series of
Preferred Stock, $.01 par value per share, of the Corporation, to be
designated "Series C Preferred Stock" (hereinafter referred to as the
"Series C Preferred Stock"), consisting of 150,000 shares, and to the
extent that the voting powers, designations, preferences, limitations,
restrictions and relative rights of the Series C Preferred Stock are not
stated and expressed in the Certificate of Incorporation, does hereby
fix and herein state and express such voting powers, designations,
preferences, limitations, restrictions and relative rights as follows
(all terms used herein which are defined in the Certificate of
Incorporation shall be deemed to have the meanings provided therein):
1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series C Preferred Stock" and the number of shares
constituting such series shall be 150,000. Such number of shares may be
decreased by resolution of the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series C
<PAGE>
Preferred Stock to a number less than the number of shares of Series C
Preferred Stock then outstanding or reserved for issuance.
2. DIVIDENDS. The holders of Series C Preferred Stock shall not
be entitled to receive any dividends.
3. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) LIQUIDATION PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary ("Liquidation"), the holders of each share of Series C
Preferred Stock shall be entitled to receive out of funds legally
available therefor (the "Available Funds"), as and when any sums shall
be paid or any assets distributed among the holders of shares of Common
Stock, an amount or value (such amount or value as described immediately
below is hereinafter called the "Series C Preference Price") equal to
the sums payable to holders of Common Stock of the Corporation, based on
the largest number of full shares of Common Stock into which a holder's
shares could be converted immediately prior to the record date for such
distribution (subject to adjustment if the Series C Preferred Stock of
the Corporation shall be changed into a different number of shares,
whether by recapitalization, reclassification or otherwise, and then and
in each such event the holder of shares of Series C Preferred Stock
shall have the right thereafter to receive upon redemption such same
amount aggregately receivable immediately prior to reorganization,
reclassification or other change of the number of shares of Series C
Preferred Stock apportioned among the number of shares into which such
shares of Series C Preferred Stock are changed). If the Available Funds
shall be insufficient to permit the payment in full to all holders of
the Series C Preferred Stock the full amounts (including all dividends
accrued and unpaid) to which they shall be entitled by reason of such
Liquidation of the Corporation, then there shall be paid to the holders
of the Series C Preferred Stock in connection with such Liquidation of
the Corporation, an amount equal to product derived by multiplying the
amount of Available Funds times a fraction, the numerator of which shall
be the full amount to which the holders of the Series C Preferred Stock
shall be entitled by reason of such Liquidation of the Corporation and
the denominator of which shall be the total amount which would have been
distributed by reason of such Liquidation of the Corporation with
respect to all Preferred Stock of any series and Common Stock then
outstanding had the Corporation possessed sufficient assets to pay the
maximum amount which the holders of all such stock would be entitled to
receive in connection with such Liquidation of the Corporation.
The voluntary sale, conveyance, lease, exchange or transfer of all
or substantially all the property or assets of the Corporation, or the
merger or consolidation of the Corporation into or with any other
corporation, or the merger of any other corporation into the
Corporation, or any purchase of all or substantially all of the shares
of any class or series of stock of the Corporation, shall not be deemed
to be a Liquidation of the Corporation for the purposes of this Section,
provided that so long as such transaction does not result in the
issuance or creation of any shares of Preferred Stock of the
Corporation, or of any successor, except any shares of Preferred Stock
that rank junior (as defined elsewhere in these resolutions) to the
shares of Series C Preferred Stock as to dividends and as to the
distribution of assets upon
2
<PAGE>
dissolution, liquidation or winding up. Provided, however, if more than
50% (by value as determined in good faith by the Board of Directors) of
the consideration received in such a transaction by holders of the
Corporation's Common Stock consists of cash, notes payable in cash or
Marketable Stock (as defined below), the transaction will be deemed to
be a Liquidation for purposes of this Section. The phrase "all or
substantially all" as used in this definition in reference to a class of
the Corporation's capital stock means 66y% or more of the aggregate
outstanding amount. The phrase "all or substantially all" as used in
this definition in reference to the property, business or assets of the
Corporation shall mean assets of a corporation as are quantitatively
vital to the operations of the Corporation and substantially affects the
existence and purpose of the Corporation. As used herein, the term
"Marketable Stock" means the Corporation's Common Stock or common stock
of any corporation that is the successor to all or substantially all of
the business or assets of the Corporation or of the ultimate parent of
such successor, which is (or will, upon distribution thereof, be) listed
or quoted on the New York Stock Exchange, the American Stock Exchange,
or the Nasdaq National Market or the Nasdaq Small Cap Market.
The holder of any shares of Series C Preferred Stock shall not be
entitled to receive any payment of the full balance owed for such shares
under this Section until such holder shall cause to be delivered to the
Corporation (i) the certificate(s) representing such shares of Series C
Preferred Stock and (ii) transfer instrument(s) satisfactory to the
Corporation and sufficient to transfer such shares of Series C Preferred
Stock to the Corporation free of any adverse interest. No interest
shall accrue on any payment upon Liquidation after the due date thereof.
After the Series C Preference Price shall have been paid in full to
the holders of the Series C Preferred Stock, or funds necessary for such
payment shall have been set aside by the Corporation in trust for the
account of holders of the Series C Preferred Stock and available for
such payment, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among the holders of
Common Stock and any other class of stock of the Corporation ranking
junior to the Series C Preferred Stock, and the holders of shares of the
Series C Preferred Stock will not be entitled to any further
participation in any distribution of assets by the Corporation.
(b) PROPERTY. Whenever the distribution provided for herein
shall be paid in property other than cash, the value of such
distribution shall be the fair market value of such property as
determined in good faith by the Board of Directors of the Corporation.
4. SERIES C PREFERRED STOCK VOTING RIGHTS. The holders of Series
C Preferred Stock shall not have any voting rights if, whether at or
prior to the effective time of the act with respect to which such vote
would otherwise be required, all outstanding shares of Series C
Preferred Stock shall have been converted into Common Stock. Subject to
the foregoing sentence, the Series C Preferred Stock shall have voting
rights as follows:
(a) VOTING IN GENERAL. Except to the extent that
requirements of law supersede the limitations on voting rights in the
Certificate of Incorporation or
3
<PAGE>
these resolutions and as otherwise set forth herein, the shares of
Series C Preferred Stock shall be entitled to voted equally with the
shares of Common Stock and all other voting shares of any class or
series. Each holder of Series C Preferred Stock shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of this Corporation, and shall be
entitled to vote, together with holders of Common Stock and all other
shares of stock with general voting rights, as a single class, with
respect to any questions upon which holders of Common Stock have the
right to vote. Each holder of Series C Preferred Stock shall be
entitled to one hundred (100) votes per share of Series C Preferred
Stock.
(b) SERIES C CLASS VOTING RIGHTS. From the date on which any
shares of Series C Preferred Stock are first issued and so long as any
shares of Series C Preferred Stock remain outstanding, the vote or
consent of the holders of at least a majority of the shares of Series C
Preferred Stock outstanding at the time (voting separately as a class)
given in person or by proxy, either in writing or at any special or
annual meeting called for the purpose, shall be necessary to permit,
effect or validate any amendment, alteration or repeal, whether by
merger, consolidation or otherwise, of any of the provisions of the
Certificate of Incorporation or of these resolutions which would alter
or change the powers, preferences, or special rights of the shares of
the Series C Preferred Stock so as to affect them adversely, in any
material respect; PROVIDED, HOWEVER, that the creation and issuance of
any other series of Preferred Stock, whether ranking prior to, junior to
or on a parity with the Series C Preferred Stock with respect to the
payment of dividends and the distribution of assets upon liquidation,
dissolution or winding up, shall not be deemed to adversely affect such
powers, preferences, or special rights, and PROVIDED, FURTHER, that the
unanimous vote or consent of the shares of the Series C Preferred Stock
outstanding shall be necessary to effect any amendment to these
resolutions that would reduce the Series C Redemption Price.
For purposes of these resolutions, any class or classes of stock of
the Corporation shall be deemed to rank:
(A) prior to the Series C Preferred Stock as to
dividends or as to distribution of assets upon liquidation, dissolution
or winding up if the holders of such class shall be entitled to the
receipt of dividends or amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in preference or priority
to the holders of Series C Preferred Stock;
(B) on a parity with the Series C Preferred Stock
as to dividends or as to distribution of assets upon liquidation,
dissolution or winding up, whether or not the dividend rates, dividend
payment dates, or redemption or liquidation prices per shares thereof be
different from those of the Series C Preferred Stock, if such stock or
series shall be the Series C Preferred Stock or if the holders of such
class of stock and the Series C Preferred Stock shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation,
dissolution or winding up, as the case may be, in proportion to their
respective dividend rates or liquidation prices, without preference or
priority one over the other; and
4
<PAGE>
(C) junior to the Series C Preferred Stock as to
dividends or as to the distribution of assets upon liquidation,
dissolution or winding up, if such class shall be Common Stock or if
holders of the Series C Preferred Stock shall be entitled to receipt of
dividends or of amounts distributable upon liquidation, dissolution or
winding up, as the case may be, in preference or priority to holders of
stock of such class.
5. CONVERSION RIGHTS. The holders of the Series C Preferred
Stock shall have the following conversion rights:
(a) GENERAL. Subject to and in compliance with the
provisions of this Section , any shares of the Series C Preferred Stock
may, at the option of the holder, be converted at any time or from time
to time into fully-paid and nonassessable shares (calculated as to each
conversion to the largest whole share) of Common Stock, provided,
however, that such conversion shall be conditioned upon and subject to
the prior approval by the board and the requisite vote of holders of
voting stock of an amendment of the Corporation's Certificate of
Incorporation that provides for additional shares of authorized and
unissued Common Stock at least sufficient for conversion of the
Preferred Stock then outstanding or reserved for issuance. The number
of shares of Common Stock to which a holder of Series C Preferred Stock
shall be entitled upon conversion, subject to the payment of cash in
lieu of fractional shares as provided in Section , shall be as provided
in Section .
(b) CONVERSION RATE. The conversion rate per share of Series
C Preferred Stock in effect at any time (the "Conversion Rate") shall be
the quotient obtained by dividing (a) $100 x (1 + (N/3650)) by (b) the
Conversion Price, calculated as provided in Section , where N equals
the number of days between (i) the date on which the shares of Series C
Preferred Stock were purchased and (ii) the applicable date of
conversion for the shares of Series C Preferred Stock for which
conversion is being elected.
(c) CONVERSION PRICE. The Conversion Price shall be
initially One Dollar and 00 Cents ($1.00).
(d) MECHANICS OF CONVERSION. Each holder of Series C
Preferred Stock, who desires to convert the same into shares of Common
Stock, subject to the provisions of this Section , shall surrender the
certificate or certificates therefor, duly endorsed, at the office of
the Corporation or of any transfer agent for the Common Stock, and shall
give written notice to the Corporation at its principal office that such
holder elects to convert the same and shall state therein the number of
shares of Series C Preferred Stock being converted. Thereupon the
Corporation shall promptly issue and deliver at such office to such
holder a certificate or certificates for the number of shares of Common
Stock to which such holder is entitled and shall promptly pay in cash
all declared but unpaid dividends on the shares of Series C Preferred
Stock being converted or, if the Corporation is legally or financially
unable to pay such dividends in cash, pay in Common Stock (valued at the
Common Stock's fair market value at the time of surrender as determined
in good faith by the Board) all declared but unpaid dividends on the
shares being converted. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such
5
<PAGE>
surrender of the certificate representing the shares to be converted,
and the person entitled to receive the shares of Common Stock issuable
upon such conversion shall be treated for all purposes as the record
holder of such shares of Common Stock on such date (the "Conversion
Date"). The Series C Preferred Stock may be converted in any whole
number multiple of one (1) share.
(e) CASH IN LIEU OF FRACTIONAL SHARES. No fractional shares
of Common Stock or scrip representing fractional shares shall be issued
upon the conversion of shares of Series C Preferred Stock. Instead of
any fractional shares of Common Stock which would otherwise be issuable
upon conversion of the Series C Preferred Stock, the Corporation shall
pay to the holder of the shares of Series C Preferred Stock which were
converted a cash adjustment in respect and in lieu of such fractional
shares in an amount equal to the same fraction of the fair market value
per share of the Common Stock (as determined in a reasonable good faith
manner by the Board of Directors) at the close of business on the
Conversion Date. The determination as to whether or not any fractional
shares which are issuable shall be based upon the total number of shares
of Series C Preferred Stock being converted at any one time by any
holder thereof, not upon each share of Series C Preferred Stock being
converted.
(f) ADJUSTMENTS IN CERTAIN CUSTOMARY EVENTS.
(i) DIVIDENDS. In the event the Corporation shall make
or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a dividend or other distribution
payable in securities of the Corporation other than shares of Common
Stock or in assets (excluding cash dividends or distributions), then and
in each such event provision shall be made so that the holders of the
Series C Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon,
the number of securities or such other assets of the Corporation which
they would have received had their Series C Preferred Stock been
converted into Common Stock on the date of such event and had they
thereafter, during the period from the date of such event to and
including the Conversion Date (as that term is defined in Section ),
retained such securities or such other assets receivable by them as
aforesaid during such period, giving application to all adjustments
called for during such period under this Section with respect to the
rights of the holders of the Series C Preferred Stock.
(ii) RECAPITALIZATION OR RECLASSIFICATION. If the Common
Stock of the Corporation shall be changed into the same or different
number of shares of any class or classes of stock of the Corporation,
whether by recapitalization, reclassification or otherwise (other than a
subdivision or combination of shares or stock dividend provided for
elsewhere in the Certificate of Incorporation or these resolutions, or a
reorganization, merger, consolidation or sale of assets provided for
elsewhere in the Certificate of Incorporation or these resolutions),
then and in each such event the holder of shares of Series C Preferred
Stock shall have the right thereafter to convert such shares into the
kind and amount of shares of stock and other securities and property
receivable upon such reorganization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares
of Series C Preferred Stock would have been converted (taking into
account all accrued and unpaid
6
<PAGE>
dividends and interest with respect to such Series C Preferred Stock)
immediately prior to such reorganization, reclassification or change,
all subject to further adjustment as provided herein.
(iii) MERGER OR SALE OF ASSETS. If at any time or from
time to time there shall be a merger or consolidation of the Corporation
with or into another corporation (other than a merger which does not
result in any reclassification, conversion, exchange or cancellation of
outstanding shares or Common Stock of the Corporation), or the sale of
all or substantially all of the Corporation's properties and assets to
any other person followed by a liquidation of the Corporation, then, as
a part of such transaction, provision shall be made so that each holder
of a share of Series C Preferred Stock then outstanding shall have the
right thereafter to convert such share only into the kind and amount of
securities, cash and other property of the Corporation, or of the
successor corporation resulting from such merger or consolidation,
receivable upon such consolidation, merger, sale or transfer by a holder
of the number of shares of Common Stock of the Corporation into which
such share of Series C Preferred Stock might have been converted
immediately prior to such consolidation, merger, sale or transfer,
assuming such holder of Common Stock of the Corporation is not an entity
with which the Corporation consolidated or into which the Corporation
merged or which merged into the Corporation or to which such sale or
transfer was made, as the case may be (a "constituent entity"), or an
affiliate of a constituent entity. If necessary in any such case,
appropriate adjustment shall be made in the application of the
provisions of this Section with respect to the rights of the holders of
the Series C Preferred Stock after such transaction to the end that the
provisions of this Section (including adjustment of the Conversion Price
then in effect and the number of shares purchasable upon conversion of
the Series C Preferred Stock) shall be applicable after that event in a
manner corresponding as nearly as may be practicable in relation to any
shares of stock or other securities or property thereafter deliverable
on the conversion of the shares. The above provisions shall similarly
apply to successive consolidations, mergers, sales or transfers.
6. REDEMPTION. The shares of Series C Preferred Stock are not
redeemable as a matter of right of the Corporation or the holder.
7. NO REISSUANCE OF THE SERIES C PREFERRED STOCK. No share or
shares of the Series C Preferred Stock acquired by the Corporation by
reason of redemption, purchase, conversion or otherwise shall be
reissued. The Corporation may from time to time take such appropriate
corporate action as may be necessary to reduce the authorized number of
shares of the Series C Preferred Stock accordingly.
8. NOTICES OF RECORD DATES. In the event of any taking by the
Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to
receive any dividend or other distribution, or to receive any other
right, or any capital reorganization of the Corporation, any
reclassification or recapitalization of the capital stock of the
Corporation, any merger or consolidation of the Corporation, or any
transfer of all or substantially all of the assets of the Corporation to
any other corporation, or any other entity or person, or any voluntary
or involuntary dissolution, liquidation or winding up of the
Corporation, then and in each such event the Corporation shall mail or
cause to
7
<PAGE>
be mailed to each holder of Series C Preferred Stock a notice specifying
(i) the date on which any such record is to be taken for the purpose of
such dividend, distribution or right and a description of such dividend,
distribution or right, (ii) the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up is expected to become effective,
(iii) the time, if any, that is to be fixed, as to when the holders of
record of Common Stock (or other securities) shall be entitled to
exchange their shares of Common Stock (or other securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding up. Such notice shall be mailed at
least 30 days prior to the date specified in such notice on which such
action is to be taken.
9. COMMON STOCK. All rights accruing to the outstanding shares
of the Corporation not expressly provided for to the contrary herein
shall be vested in the Common Stock.
IN WITNESS WHEREOF, the undersigned has caused this Certificate of
Designation, Preferences and Rights of Series C Preferred Stock to be duly
executed by its Chairman of the Board, President, Chief Executive Officer and
Secretary and who has duly attested and has caused its corporate seal to be
affixed hereto this 11th day of September, 1996.
APPLIED DATA COMMUNICATIONS, INC.
By: /s/ Walter J. ("Pat") Kane
-----------------------------------
Walter J. ("Pat") Kane, Chairman of
the Board, President, Chief Executive
Officer and Secretary
(Corporate Seal)
8
<PAGE>
AMENDMENT TO CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES A PREFERRED STOCK OF
APPLIED DATA COMMUNICATIONS, INC.
A DELAWARE CORPORATION
(Pursuant to Section 242 of the General Corporation Law
of the State of Delaware)
Applied Data Communications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that, pursuant to the authority contained in Article 4 of its
Certificate of Incorporation, and in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware, no shares of Series
A Preferred Stock have been issued and its Board of Directors has adopted the
following resolution amending the Certificate of Designation, Preferences and
Rights of Series A Preferred Stock of the Corporation filed with the Secretary
of State of the State of Delaware on September 16, 1996 (the "Certificate of
Designation of Series A Preferred Stock"):
RESOLVED, that Sections 5.(b) and 5.(c) of the Certificate of
Designation of Series A Preferred Stock be amended to read as follows:
"(b) CONVERSION RATE. The conversion rate per share of
Series A Preferred Stock in effect at any time (the
"Conversion Rate") shall be the quotient obtained by
dividing (a) $5.00 by (b) the Conversion Price, as provided
in Section . To the extent that a holder of Series A
Preferred Stock elects to convert shares of Series A
Preferred Stock into shares of Common Stock on a date after
March 31, 1998 but before March 31, 1999, the number of
shares of Common Stock issuable upon conversion as provided
above shall be adjusted by multiplying the number of shares
of Common Stock issuable by 110%. To the extent that a
holder of Series A Preferred Stock elects to convert shares
of Series A Preferred Stock into shares of Common Stock on a
date after March 31, 1999, the number of shares of Common
Stock issuable upon conversion as provided above shall be
adjusted by multiplying the number of shares of Common Stock
issuable by 120%.
(c) CONVERSION PRICE. The Conversion Price shall be
initially One Dollar and 00 Cents ($1.00), subject to
adjustment as provided elsewhere in this Section 5."
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Amendment to
Certificate of Designation, Preferences, and Rights of Series A Preferred Stock
to be duly executed by its President, Chief Executive Officer and Secretary on
this 27th day of September, 1996.
APPLIED DATA COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Walter J. Kane
------------------------------
Walter J. Kane, President,
Chief Executive Officer and Secretary
<PAGE>
AMENDMENT TO CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES B PREFERRED STOCK OF
APPLIED DATA COMMUNICATIONS, INC.
A DELAWARE CORPORATION
(Pursuant to Section 242 of the General Corporation Law
of the State of Delaware)
Applied Data Communications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that, pursuant to the authority contained in Article 4 of its
Certificate of Incorporation, and in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware, 15,370 shares of
Series B Preferred Stock have been issued and its Board of Directors and the
sole stockholder of Series B Preferred Stock have adopted the following
resolution amending the Certificate of Designation, Preferences and Rights of
Series B Preferred Stock of the Corporation filed with the Secretary of State of
the State of Delaware on September 16, 1996 (the "Certificate of Designation of
Series B Preferred Stock"):
RESOLVED, that Sections 5.(b) and 5.(c) of the Certificate of
Designation of Series B Preferred Stock be amended to read as follows:
"(b) CONVERSION RATE. The conversion rate per share of Series B
Preferred Stock in effect at any time (the "Conversion Rate") shall be
the quotient obtained by dividing (a) $100.00 by (b) the Conversion
Price, as provided in Section .
(c) CONVERSION PRICE. The Conversion Price shall be initially
One Dollar and 00 Cents ($1.00), subject to adjustment as provided
elsewhere in this Section 5."
IN WITNESS WHEREOF, the undersigned has caused this Amendment to
Certificate of Designation, Preferences, and Rights of Series B Preferred Stock
to be duly executed by its President, Chief Executive Officer and Secretary on
this 27th day of September, 1996.
APPLIED DATA COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Walter J. Kane
------------------------------
Walter J. Kane, President,
Chief Executive Officer and Secretary
<PAGE>
AMENDMENT TO CERTIFICATE OF
DESIGNATION, PREFERENCES AND RIGHTS OF
SERIES C PREFERRED STOCK OF
APPLIED DATA COMMUNICATIONS, INC.
A DELAWARE CORPORATION
(Pursuant to Section 242 of the General Corporation Law
of the State of Delaware)
Applied Data Communications, Inc., a corporation organized and existing
under the General Corporation Law of the State of Delaware (the "Corporation"),
hereby certifies that, pursuant to the authority contained in Article 4 of its
Certificate of Incorporation, and in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware, 68,404 shares of
Series C Preferred Stock have been issued and its Board of Directors and all of
the stockholders of Series C Preferred Stock have adopted the following
resolution amending the Certificate of Designation, Preferences and Rights of
Series C Preferred Stock of the Corporation filed with the Secretary of State of
the State of Delaware on September 16, 1996 (the "Certificate of Designation of
Series C Preferred Stock"):
RESOLVED, that Sections 5.(b) and 5.(c) of the Certificate of
Designation of Series C Preferred Stock be amended to read as follows:
"(b) CONVERSION RATE. The conversion rate per share of
Series C Preferred Stock in effect at any time (the
"Conversion Rate") shall be the quotient obtained by
dividing (a) $1.00 by (b) the Conversion Price, as provided
in Section .
(c) CONVERSION PRICE. The Conversion Price shall be
initially One Dollar and 00 Cents ($1.00), subject to
adjustment as provided elsewhere in this Section 5."
IN WITNESS WHEREOF, the undersigned has caused this Amendment to
Certificate of Designation, Preferences, and Rights of Series C Preferred Stock
to be duly executed by its President, Chief Executive Officer and Secretary on
this 27th day of September, 1996.
APPLIED DATA COMMUNICATIONS, INC.,
a Delaware corporation
By: /s/ Walter J. Kane
------------------------------
Walter J. Kane, President,
Chief Executive Officer and Secretary
<PAGE>
INDEPENDENT SALES AGREEMENT
Multimedia Disk Duplicators II
THIS INDEPENDENT CONTRACTOR SALES AGREEMENT (this "agreement") is made and
entered into as of the 27th day of July, 1993, between Applied Data
Communications, Inc. ("Client"), and Market Winning Strategies, Inc.
("Contractor"), with respect to the following facts:
A. Contractor proposes to offer to a limited number of selected
persons meeting specific criteria an aggregate of 70 units ("Units") each
of interest in a limited partnership known as Multimedia Disk Duplicators
II (the "Partnership") to be formed for the purposes of purchasing various
items of equipment from the Client that will compose the elements to
duplicate and produce an expansion system for the duplication, and
reproduction of digial magnetic tape, floppy disks, C. D. ROM disks and
various other media used for digital storage. The Units will be sold for
$6,110.65 each for a total of $427,745.00 .
B. The Client will, after the purchase of the aforementioned equipment
by the Partnership, lease back the equipment under the terms and conditions
of a separate lease agreement
C. Contractor proposes to form a NEWCO as the general partner of the
Partnership.
D. Client desires to engage Contractor, and Contractor desires to
represent Client, in the funding through the proposed Partnership of the
lease of the equipment as detailed in Appendix A to this agreement.
NOW THEREFORE, the parties agree as follows:
1. ENGAGEMENT, Client hereby engages Contractor to solicit subscriptions to
units, and Contractor agrees to use its best efforts to solicit such
subscriptions, all in accordance with the terms of this agreement and the
offering materials prepared by the Contractor after the execution of this
agreement (the "Materials") . Contractor accepts such engagement and agrees that
at all times it will faithully, industriously
1
<PAGE>
and to the best of its ability, experience an talents perform to the reasonable
satisfaction of the Client all of the duties which may be assigned to it in
accordance with this agreement. Client agrees to cooperate with Contractor in
the performance of Contractors duties under this agreement, to comply with all
reasonable requests for support in the placement of the Units and other support
as may be reasonably requested by Contractor and to provide access to all
pertinent documents and financial information as is reasonably necessary to the
performance of Contractors duties.
2. TERM, The term of this agreement shall commence as of the date hereof and
shall expire on December 31, 1993 or unless sooner terminated as provided in
paragraph 7 below.
3. SALES, No sale of units shall be regarded as effective unless and until
equipment is delivered to partnership and lease is executed by Client. Client
reserves the right to refuse the sale of a Unit or Units at any time for any
reason.
4. COMPENSATION TO CONTRACTOR, As full compensation for Contractors services
under this agreement, Client agrees to pay Contractor a commission of 15% of the
full sales price (including purchase price, freight, taxes and all other costs)
of equipment purchased by the Partnership from the Client. The commission shall
be paid by the Client concurrently with payment by the Partnership. Contractor
represents that the commission is sufficient to support all costs and normal
expenses required to effect the funding and offering of Units of the
Partnership.
5. REPRESENTATIONS OF THE CONTRACTOR, Contractor represents, warrants and
covenants to Client as follows:
5.1 Contractor is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it was formed, with all
requisite power and authority to enter into this agreement and carry out its
obligations hereunder, and this agreement is valid and binding upon the
Contractor.
5.2 Contractor shall provide potential purchasers of Units only
with copies of the Materials and any other sales literature approved in
advance by Client. Contractor by way of the offering document the level
2
<PAGE>
of risk that the purchase of limited partnership Units may carry.
5.3 Contractor shall make no representation, guarantee or
promise to any potential purchaser which is not contained in
Materials. To the extent violation of the previous sentence any
representations are made to prospective purchasers other than those
contained in the Materials, Contractor will refrain from making any
untrue statement of a material fact or omit to state a material fact
necessary to prevent any statement made from being misleading as to
the offering of Units or any or any matters set forth in or
contemplated by the Materials.
5.4 Contractor will refrain from offering or selling any Units
by means of any form of general solicitation or advertisement,
including any communication published in any newspaper, magazine, or
similar medium, any computer on line service, or any radio or
television broadcast; and
5.5 Prior to the sale of any Units to prospective purchaser,
Contractor shall have reasonable grounds to believe and shall in
fact believe that such purchaser meets the suitability standards set
forth in the Materials.
6. INDEMNITY, Client shall indemnify and hold harmless Contractor,
the Partnership and all of their representative agents and
representatives (collectively, the "Indemnitees") from and against
any and all loss, cost, expense, obligation and liability
whatsoever, including but not limited to reasonable attorneys" fees
and costs, which may be incurred by any indemnitee arising out of or
resulting from, or in any way connected to (i) any breach of any
representation, warranty or covenant of Client made in this
agreement, or (ii) any purported violation of any federal or state
securities laws, rules or regulations.
7. TERMINATION, This agreement shall be terminated on the occurrence
of any of the following events;
7.1 If the contractor or Client shall cease to maintain a going
business, becomes insolvent or bankrupt, makes an assignment for the
benefit of the creditors, files a petition bankruptcy, or a petition
is filed seeking Contractor's adjudication as a bankrupt, or
7.2 If Contractor fails to perform any obligation or
discharge any
3
<PAGE>
duties arising hereunder or fails to adhere to Client's standards of
professional ethics and practices, as determined by Client in the sole but good
faith discretion.
Termination under this paragraph shall be effective immediately upon receipt of
written notice from the terminating party stating the cause of such termination.
8. DELIVERY OF MATERIALS, On the expiration or earlier termination of this
agreement, Contractor shall immediately turn over all Materials and information
in Contractor's possession or under its control relating to the performance of
his responsibilities under this agreement, whether delivered to Contractor by
Client or developed by Contractor itself, including but not limited to all video
tapes, audio tapes, films, notebooks, analyses, reports, designs, drawings,
models, samples, layouts, customer lists, business plans, financial statements
and proposals to clients and all other materials and information.
9. ASSIGNMENT, The rights granted herein to Contractor shall not be assigned by
Contractor under any circumstances whatsoever without the prior written consent
of the Client.
10. INDEPENDENT CONTRACTOR, This agreement shall in no way be construed as an
appointment of Contractor as an employee of the Client for any purpose
whatsoever, nor as a partnership or joint venture between Client and Contractor.
Client shall not be liable for (and Contractor shall indemnify, defend, save and
hold harmless Client from and against) any liability incurred by Contractor.
Contractor is an independent contractor engaged in its own and entirely separate
business. Contractor shall be responsible for the payment of all of its own
expenses (including but not limited to income taxes, franchise taxes, license
fees, wages, payroll taxes and costs of services, materials, supplies, rent and
overhead). Contractor shall not be entitled to any wages, fringe benefits or
other compensation which Client may provide to its own employees. Contractor
shall not be entitled to be covered by or entitled to the benefit of any laws or
agreements regarding employment, unemployment benefits, workers' compensation,
disability insurance or medical insurance in connection with its engagement by
Client pursuant to this agreement. Except as provided in this agreement,
Contractor is under the contract of client as to the result of the contractor's
work only and not as to the means by which such result is accomplished.
4
<PAGE>
11. NOTICES, Any and all notices, demands or other communications required or
permitted to be given hereunder by a party (any of which a "Notice") shall be in
writing and shall be validly given or made to the other party if served either
personally, by telecopy, by deposit in the United States mail, certified or
registered, first class postage prepaid, returned receipt requested, or by
overnight delivery service to any address in the United States or Canada. If
such notice be served personally, by telecopy or overnight delivery service,
service shall be conclusively deemed made at the time of receipt. If such notice
is made by mail, such notice shall be conclusively deemed given forty-eight (48)
hours after deposit thereof. Any such notice shall be addressed to the recipient
party at the address of the party set fourth bellow. Any party may change its
address for the purpose of receiving notices or may designate additional persons
to receive notices by written notice given in the manner aforesaid to the other
party.
12. ATTORNEYS' FEES. In the event any legal action or proceeding is brought by
any party to enforce, defend or construe such party's obligations hereunder, the
prevailing party shall be entitled to its reasonable costs and expenses
including legal fees incurred in connection with such action or proceeding.
13. APPLICABLE LAW. This Agreement shall be subject to and governed by the laws
of the State of California.
14. ARBITRATION Any dispute arising under or by virtue of this Agreement or any
difference of opinion between the parties hereto concerning their rights and
obligations under this Agreement, shall be finally resolved through binding
arbitration by a single party arbitrator to be mutually selected by both parties
to the dispute. Such arbitration proceedings shall take place in Irvine,
California in accordance with the applicable rules of the American Arbitration
Association. The decision of the arbitration proceedings shall be final and
binding upon both parties.
15. SEVERABILITY. Every provision in 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 shall not affect the validity of the remainder
hereof.
16. CAPTIONS. The captions or headings in this Agreement are inserted for
convenience and identification only and are in no way intended to describe,
interpret,
5
<PAGE>
define, or limit the scope, extent, or intent of this Agreement or any
provisions hereof.
16. INVALID PR0VISI0NS. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions herein, and
this Agreement shall be construed as if such invalid or unenforceable
provisions were omitted.
17. ENTIRE AGREEMENT, This instrument contains the entire agreement of the
parties with respect to this subject matter, and may not be amended without
the prior written agreement of both parties.
WHEREFORE, this Agreement is executed by and between the parties hereto as of
the date first above-written in the City of Tustin, County of Orange, State
of California.
APPLIED DATA COMMUNICATIONS INC. MARKET WINNING STRATEGIES, INC.
(Client) (Contractor)
By /s/ Walter J. "Pat" Kane By
---------------------------- -------------------------------
Its President Its President
---------------------------- ------------------------------
Date 7/27/93 Date 7-27-93
6
<PAGE>
EXHIBIT "A"
EQUIPMENT for MULTIMEDIA DISK DUPLICATORS I
Equipment for Sale/Leaseback
- -------------------------------------------------------------------------------
Unit
Item Qty Model # Description Price Ext.
1 4 ADC DL2-1/LLP Four channel 3.5" diskette $46,850 $187,400
duplicator with 2 LLP's
2 2 ADC DL2-1/RDH 8/5 Four channel 51/4" diskette 41,850 $ 82,700
duplicator with 2 RDH 8/5
3 2 ADC CD2500 Multiple Spindle Tape 82,750 $165,500
Cartridge Duplicators
4 1 ADC DDQ-100 Duplication Diskette 15,995 $ 15,995
Qualifier with Printer
5 1 Dennison System Automatic Labeler 17,000 $ 17,000
900
6 1 Macintosh Label Maker/Printer 4,995 4,995
Image Writer II
7 1 ADC C7500 Dual Position Diskette 15,000 15,000
Certifier
8 1 Auto-Package Line Automatic Packaging Line 100,000 100,000
with Conveyor
--------
Total: $610,515
--------
7
<PAGE>
INDEPENDENT SALES AGREEMENT
Multimedia Disk Duplicators I
THIS INDEPENDENT CONTRACTOR SALES AGREEMENT (this "agreement") is made and
entered into as of the 27th day of July, 1993, between Applied Data
Communications, Inc. ("Client"), and Market Winning Strategies, Inc.
("Contractor"), with respect to the following facts:
A. Contractor proposes to offer to a limited number of selected
persons meeting specific criteria an aggregate of 70 units ("Units") each
of interest in a limited partnership known as Multimedia Disk Duplicators I
(the "Partnership") to be formed for the purposes of purchasing various
items of equipment from the Client that will compose the elements to
package duplicate and produce a system for the duplication, reproduction
and inspection of digital magnetic tape, floppy disks, C. D. ROM disks and
various other media used for digital storage. The Units will be sold for
$8,721.65 each for a total of $610,515.00.
B. The Client will, after the purchase of the aforementioned equipment
by the Partnership, lease back the equipment under the terms and conditions
of a separate lease agreement
C. Contractor proposes to form a NEWCO as the general partner of the
Partnership.
D. Client desires to engage Contractor, and Contractor desires to
represent Client, in the funding through the proposed Partnership of the
lease of the equipment as detailed in Appendix A to this agreement.
NOW THEREFORE, the parties agree as follows:
1. ENGAGEMENT, Client hereby engages Contractor to solicit subscriptions to
units, and Contractor agrees to use its best efforts to solicit such
subscriptions, all in accordance with the terms of this agreement and the
offering materials prepared by the Contractor after the execution of this
agreement (the "Materials"). Contractor accepts such engagement and agrees that
at all times it will faithfully, industriously
1
<PAGE>
and to the best of its ability, experience an talents perform to the reasonable
satisfaction of the Client all of the duties which may be assigned to it in
accordance with this agreement. Client agrees to cooperate with Contractor in
the performance of Contractors duties under this agreement, to comply with all
reasonable requests for support in the placement of the Units and other support
as may be reasonably requested by Contractor and to provide access to all
pertinent documents and financial information as is reasonably necessary to the
performance of Contractors duties.
2. TERM, The term of this agreement shall commence as of the date hereof and
shall expire on December 31, 1993 or unless sooner terminated as provided in
paragraph 7 below.
3. SALES, No sale of units shall be regarded as effective unless and until
equipment is delivered to partnership and lease is executed by Client. Client
reserves the right to refuse the sale of a Unit or Units at any time for any
reason.
4. COMPENSATION TO CONTRACTOR, As full compensation for Contractors services
under this agreement, Client agrees to pay Contractor a commission of 15% of the
full sales price (including purchase price, freight, taxes and all other costs)
of equipment purchased by the Partnership from the Client. The commission shall
be paid by the Client concurrently with payment by the Partnership. Contractor
represents that the commission is sufficient to support all costs and normal
expenses required to effect the funding and offering of Units of the
Partnership.
5. REPRESENTATIONS OF THE CONTRACTOR, Contractor represents, warrants and
covenants to Client as follows:
5.1 Contractor is an entity duly organized, validly existing and in good
standing under the laws of the jurisdiction in which it was formed, with all
requisite power and authority to enter into this agreement and carry out its
obligations hereunder, and this agreement is valid and binding upon the
Contractor.
5.2 Contractor shall provide potential purchasers of Units only with copies
of the Materials and any other sales literature approved in advance by Client.
Contractor by way of the offering document the level
2
<PAGE>
of risk that the purchase of limited partnership Units may carry.
5.3 Contractor shall make no representation, guarantee or promise to any
potential purchaser which is not contained in Materials. To the extent violation
of the previous sentence any representations are made to prospective purchasers
other than those contained in the Materials, Contractor will refrain from making
any untrue statement of a material fact or omit to state a material fact
necessary to prevent any statement made from being misleading as to the offering
of Units or any or any matters set forth in or contemplated by the Materials.
5.4 Contractor will refrain from offering or selling any Units by means of
any form of general solicitation or advertisement, including any communication
published in any newspaper, magazine, or similar medium, any computer on line
service, or any radio or television broadcast; and
5.5 Prior to the sale of any Units to prospective purchaser, Contractor
shall have reasonable grounds to believe and shall in fact believe that such
purchaser meets the suitability standards set forth in the Materials.
6. INDEMNITY, Client shall indemnify and hold harmless Contractor, the
Partnership and all of their representative agents and representatives
(collectively, the "Indemnitees") from and against any and all loss, cost,
expense, obligation and liability whatsoever, including but not limited to
reasonable attorneys" fees and costs, which may be incurred by any indemnitee
arising out of or resulting from, or in any way connected to (i) any breach of
any representation, warranty or covenant of Client made in this agreement, or
(ii) any purported violation of any federal or state securities laws, rules or
regulations.
7. TERMINATION, This agreement shall be terminated on the occurrence of any of
the following events;
7.1 If the contractor or Client shall cease to maintain a going business,
becomes insolvent or bankrupt, makes an assignment for the benefit of the
creditors, files a petition bankruptcy, or a petition is filed seeking
Contractor's adjudication as a bankrupt, or
7.2 If Contractor fails to perform any obligation or discharge any
3
<PAGE>
duties arising hereunder or fails to adhere to Client's standards of
professional ethics and practices, as determined by Client in the sole but good
faith discretion.
Termination under this paragraph shall be effective immediately upon receipt of
written notice from the terminating party stating the cause of such termination.
8. DELIVERY OF MATERIALS, On the expiration or earlier termination of this
agreement, Contractor shall immediately turn over all Materials and information
in Contractor's possession or under its control relating to the performance of
his responsibilities under this agreement, whether delivered to Contractor by
Client or developed by Contractor itself, including but not limited to all video
tapes, audio tapes, films, notebooks, analyses, reports, designs, drawings,
models, samples, layouts, customer lists, business plans, financial statements
and proposals to clients and all other materials and information.
9. ASSIGNMENT, The rights granted herein to Contractor shall not be assigned by
Contractor under any circumstances whatsoever without the prior written consent
of the Client.
10. INDEPENDENT CONTRACTOR, This agreement shall in no way be construed as an
appointment of Contractor as an employee of the Client for any purpose
whatsoever, nor as a partnership or joint venture between Client and Contractor.
Client shall not be liable for (and Contractor shall indemnify, defend, save and
hold harmless Client from and against) any liability incurred by Contractor.
Contractor is an independent contractor engaged in its own and entirely separate
business. Contractor shall be responsible for the payment of all of its own
expenses (including but not limited to income taxes, franchise taxes, license
fees, wages, payroll taxes and costs of services, materials, supplies, rent and
overhead). Contractor shall not be entitled to any wages, fringe benefits or
other compensation which Client may provide to its own employees. Contractor
shall not be entitled to be covered by or entitled to the benefit of any laws or
agreements regarding employment, unemployment benefits, workers' compensation,
disability insurance or medical insurance in connection with its engagement by
Client pursuant to this agreement. Except as provided in this agreement,
Contractor is under the contract of client as to the result of the contractor's
work only and not as to the means by which such result is accomplished.
4
<PAGE>
11. NOTICES, Any and all notices, demands or other communications required or
permitted to be given hereunder by a party (any of which a "Notice") shall be
in writing and shall be validly given or made to the other party if served
either personally, by telecopy, by deposit in the United States mail,
certified or registered, first class postage prepaid, returned receipt
requested, or by overnight delivery service to any address in the United
States or Canada. If such notice be served personally, by telecopy or
overnight delivery service, service shall be conclusively deemed made at the
time of receipt. If such notice is made by mail, such notice shall be
conclusively deemed given forty-eight (48) hours after deposit thereof. Any
such notice shall be addressed to the recipient party at the address of the
party set fourth bellow. Any party may change its address for the purpose of
receiving notices or may designate additional persons to receive notices by
written notice given in the manner aforesaid to the other party.
12. ATTORNEYS' FEES. In the event any legal action or proceeding is
brought by any party to enforce, defend or construe such party's obligations
hereunder, the prevailing party shall be entitled to its reasonable costs and
expenses including legal fees incurred in connection with such action or
proceeding.
13. APPLICABLE LAW. This Agreement shall be subject to and governed by the
laws of the State of California.
14. ARBITRATION Any dispute arising under or by virtue of this Agreement or
any difference of opinion between the parties hereto concerning their rights
and obligations under this Agreement, shall be finally resolved through
binding arbitration by a single party arbitrator to be mutually selected by
both parties to the dispute. Such arbitration proceedings shall take place in
Irvine, California in accordance with the applicable rules of the American
Arbitration Association. The decision of the arbitration proceedings shall be
final and binding upon both parties.
15. SEVERABILITY. Every provision in 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 shall not affect the
validity of the remainder hereof.
16. CAPTIONS. The captions or headings in this Agreement are inserted for
convenience and identification only and are in no way intended to describe,
interpret,
5
<PAGE>
define, or limit the scope, extent, or intent of this Agreement or any
provisions hereof.
16. INVALID PROVISIONS. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions herein, and
this Agreement shall be construed as if such invalid or unenforceable
provisions were omitted.
17. ENTIRE AGREEMENT, This instrument contains the entire agreement of the
parties with respect to this subject matter, and may not be amended without
the prior written agreement of both parties.
WHEREFORE, this Agreement is executed by and between the parties hereto as of
the date first above-written in the City of Tustin, County of Orange, State
of California.
APPLIED DATA COMMUNICATIONS INC. MARKET WINNING STRATEGIES, INC.
(Client) (Contractor)
By /s/ Walter J. "Pat" Kane By /s/ illegible
------------------------------ --------------------------------
Its President Its President
----------------------------- -------------------------------
Date 7/27/93 Date 7/27/93
6
<PAGE>
Agreement
This Agreement is entered into by and between MULTIMEDIA DISK DUPLICATORS, A
CALIFORNIA LIMITED PARTNERSHIP and STAR MEDIA PARTNERS, L. P., A CALIFORNIA
LIMITED PARTNERSHIP (hereinafter collectively referred to as the "Partnerships")
on the one hand and APPLIED DATA COMMUNICATIONS, A DELAWARE CORPORATION
(hereinafter "ADC") and WALTER J. KANE, an individual (hereinafter "Kane") on
the other this 16th day of December, 1995.
RECITALS
1. On August 20, 1995 the Partnerships filed actions against ADC and Kane in
Orange County Superior Court for possession of personal property, breach of
contract, enforcement of continuing guaranty, and for damages. (MULTIMEDIA DISK
DUPLICATORS V. ADC AND KANE, OCSC No. 752044 and STAR MEDIA PARTNERS L.P. V. ADC
AND KANE OCSC No. 742046).
2. On November 13, 1995 ADC and Kane executed Stipulations to Judgment in those
matters which Stipulation included the requirement that ADC re-commence monthly
payments to the Partnerships in the amounts set forth therein beginning on
October 6, 1995 and running to February, 1997.
3. ADC made the October 6, 1995 payments more than two weeks after the due date
for such payment and has not made any payments for November or December, 1995.
4. On December 13, 1995 the Partnerships submitted to Judge Frederick Horn (in
matter number 752046) and Judge Robert J. Polis (in matter number 752044) for
signature Judgments on Stipulation for Entry of Judgment. The judgments were
in the amount of $733,325.03 (case number 742046) and $655,122.46 (case number
752044) for a total of $1,388,447.49. Both judges indicated that said Judgments
would be signed forthwith and mailed to the Partnerships after filing with the
clerk of the court.
5. ADC and Kane desire that the Partnerships not execute on said judgments and
the Partnerships have agreed that, subject to the provisions set forth herein
and any contingencies described or implied hereunder, they will not execute on
said judgment.
1
<PAGE>
BASED ON THESE AND OTHER CONSIDERATIONS, THE RECEIPT OF WHICH IS HEREBY
ACKNOWLEDGED BY THE PARTIES, SAID PARTIES HAVE AGREED AS FOLLOWS:
1. ISSUANCE OF SHARES. The Partnerships shall up to 1.7 million shares of
the already issued and authorized shares of common stock in ADC. The
Partnerships, in their sole and absolute discretion, will advise ADC and
Kane promptly of the precise number of shares to be given to them. The
figures set forth in this section are based upon representations made to
the Partnerships by ADC and Kane that there are approximately 6.5 million
shares of common stock of ADC currently issued and outstanding. ADC and
Kane, and any and all officers, employers, and agents of ADC and Kane will
immediately undertake all steps necessary for the shares described in this
section to be issued to the Partnerships.
2. DIVISION OF SHARES. Of the shares issued to the Partnerships under the
provisions of paragraph 1, 52.8 percent will be issued to Star Media
Partners, L.P., a California limited partnership and 47.2 percent will be
issued to MultiMedia Disk Duplicators, a California limited partnership.
3. PROXY FROM KANE. In order to implement the intent of the parties that
the Partnerships assume voting control of the outstanding shares of ADC
stock, immediately upon execution of this Agreement Kane will deliver to
the Partnerships his proxy for the voting rights to all shares he owns or
controls in ADC to the extent that, at all times subsequent to the
execution of this Agreement, the Partnerships will own outright or have the
proxies for at least 50.1% of the voting shares of ADC. Kane agrees to
execute any and all documents, agreements, and forms reasonably necessary
to implement this provision.
3a. CEDING BACK OF PROXY BY PARTNERSHIPS. Should the Partnerships receive
compensation from ADC and Kane, either in moneys or in the publicly traded
share price of unrestricted common stock in ADC which they may at that time
own equal to the judgments referred herein plus any accrued interest
thereon, then the Proxy described in paragraph 3 shall by revoked and the
voting
2
<PAGE>
rights of shares owned or controlled by Kane shall be returned to him.
4. CORPORATE RECORDS. Immediately upon execution of this Agreement,
Kane and ADC will provide to the Partnerships, or any designee of the
Partnerships, all corporate records of ADC including, but not limited to,
articles of incorporation, By-Laws, records and lists of shareholders,
minutes of meetings, and the like. In addition, immediately upon
execution of this Agreement, ADC and Kane will provide to the Partnerships
or any designee a list of all creditors of ADC and Kane and the nature and
amount of any such indebtedness.
5. MANAGEMENT CONTROL. Immediately upon execution of this Agreement
the Partnerships, or a designee thereof, shall assume control of the
management of ADC. It is also acknowledged that between the execution of
this Agreement and January 1, 1996 there will be an interim period during
which time the procedures and personnel to implement this change of
management control may not yet be in place. During any such interim
period, however, the Partnerships, or their designee, must approve all
material decisions of management including, but not limited to, the
following:
a. Contracts with customers in excess of $25,000.00
b. Contract with vendors in excess of $10,000.00
c. Employment or consultancy contracts
d. All payments on accounts payable in excess of $2,500.00
e. All adjustments to accounts receivable
f. Receipt of any and all moneys from customers, factorers,
or any other source
g. Negotiations with creditors of any kind
During this interim period, ADC and Kane shall, on a daily basis, report
to the Partnerships or their designee on all material aspects of the
operations of the company, including, but not limited to, the following:
a. All collections from any source
b. All deposits to any accounts
c. All expenses paid and an accounting of said expenses
6. IMPLEMENTATION OF CONTROL PROVISIONS OF THIS AGREEMENT. In
furtherance of the specific intent of the parties that
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<PAGE>
the Partnerships, or their designee[s] shall take control of the
management and control the majority of the votes on the Board of
Directors immediately upon the execution of this Agreement, the parties
agree that, prior to January 1, 1996, they will execute a definitive
agreement encompassing the following:
a. Appointment of that number of directors to ADC's Board of
Directors which gives the Partnerships a majority of the
votes on said Board;
b. Creation of a management team (in a form as yet
undetermined) in which the Partnerships designee or
designees shall approve, authorize, and review all
matters normally approved, authorized, or reviewed by
ADC's management
7. PAYDOWNS OF JUDGMENT. At any time between the execution of this
Agreement and February 28, 1997 ADC and Kane may elect to pay to the
Partnerships all or part of the $1,388,447.49 principal plus interest owed
to the Partnerships by reason of the aforementioned judgments. Upon any
such payments to the Partnerships, the Partnerships will return to ADC
a pro-rata number of shares issued to them pursuant to the provisions of
paragraph one. The exact number of shares to be so returned per dollar
paid will be determined when the number of shares issued to the
Partnerships is known but will be based on a formula so that, if ADC and
Kane repay all the principal and interest of the judgment, the
Partnerships will still own a total of 425,000 shares of ADC. Except as
described herein, and unless the Partnerships terminate the Stay of
execution of the Judgment for the reasons described in paragraph 8 or for
any other reason provided by law, ADC and Kane will not be required to
make any further lease payments to the Partnerships.
8. ADDITIONAL FINANCING. After this Agreement is executed and those
provisions which must be implemented immediately thereafter are, in fact,
implemented, MultiMedia Finance Corporation "MFC"), the general partner of
MultiMedia Disk Duplicators, will, subject to conducting the necessary
amount of due diligence it deems appropriate, undertake its best efforts
to raise a minimum of $150,000 for the on-going operations of ADC.
Thereafter, and again subject to all elements of this Agreement and those
other agreements necessarily flowing herefrom being implemented, and
4
<PAGE>
again subject to due diligence on its part, MFC will undertake its best
efforts to raise additional funds, through a Reg D or similar offering, to
assist ADC in securing a new CD ROM press for its on going business. The
parties recognize that, in order to proceed with these funding proposals,
several additional Agreements must be further negotiated and executed and
that an opinion of counsel for the Partnerships and for MFC in connection
with such additional financing operations must first be obtained. PROVIDED,
HOWEVER that nothing in this section shall be construed as requiring MFC or
anyone else related to any entity which may be a party or signatory to this
Agreement, to actually engage in such financing activities nor create any
cause or claim by ADC, Kane, or any other party against MFC or anyone else by
reason of any failure to participate in, or raise the moneys, described
herein. In addition, it is agreed that MFC must agree to any alternative
sources of funding ADC and Kane may arrange and, further, that MFC shall not
unreasonably withhold its consent for any such funding.
9. PAYMENTS OUT OF INITIAL FUNDING. ADC and Kane agree and acknowledge
that, from the initial moneys raised under the terms of section 6, if any,
the new management of ADC created by this Agreement shall be permitted, at
its sole discretion, to repay loans made to it by third parties for the
purpose of permitting ADC to make prior payments on the leases between
itself and the Partnerships.
10. AGREEMENT TO STAY EXECUTION ON JUDGMENTS; BASES FOR TERMINATING STAY.
This Agreement contains terms that must be implemented immediately and those
which require the preparation of additional documentation, the conduct of
further due diligence, or the negotiation of additional terms. The parties
agree to (i) use their best efforts to carry out the intent of this Agreement
to (ii) expeditiously and in good faith execute any required documents and
negotiate any additional matters, and (iii) to refrain from any activities
which might interfere with the intent of this Agreement. PROVIDED, HOWEVER,
that should ADC and Kane materially breach the provisions of this Agreement
or any Agreement flowing herefrom, or should the Partnerships determine, at
any time, that ADC and Kane (i) are not acting in good faith (ii) are
delaying implementation of any provision hereof, (iii) have misrepresented
any material fact to the Partnerships or any of their officers, partners,
employees, counsel, agents or assigns or (iv) are preventing the
Partnerships from exercising their best efforts or due
5
<PAGE>
diligence, or if for any other reason it appears to the Partnerships that the
intent of this Agreement cannot be implemented, the Partnerships may, without
further notice and in their sole and absolute discretion, execute fully on
the Judgments described previously herein.
11. BOARD MEETING. A special Board of Directors meeting shall be called by
Kane immediately upon execution of this Agreement and shall be held within
the shortest time permissible under the By-Laws of ADC at which meeting the
terms and conditions of this Agreement shall be approved and the provisions
set forth herein be implemented.
12. SUBSEQUENT AGREEMENTS. This Agreement contemplates that subsequent
agreements between the parties will be executed forthwith. Except as to the
extent as specifically provided for herein, or to the extent specifically set
forth in any subsequent agreement, the provisions of this Agreement shall
remain in full force and effect and the parties hereto are obligated to fully
perform those acts and obligations set forth herein.
13 MISCELLANEOUS
13.1 This Agreement is executed in the State of California and shall be
interpreted under the procedural and substantive laws of California existing
as of the date of execution without regard to principles of conflicts of
laws.
13.2 Each Party to this Agreement has cooperated in its drafting and
preparation. Hence, in any construction to be made of this Agreement, the
same shall not be construed against any Party on the basis that such Party
was the drafter.
13.3 Should any provision of this Agreement be declared or determined by
any court to be illegal or invalid as a result of any action or proceeding
the validity of the remaining parts, terms, or provisions shall not be
affected thereby and any said illegal or invalid part, term or provision
shall be deemed not to be a part of this Agreement.
13.4 This Agreement sets forth the entire agreement between the Parties
hereto relating to the subject matters herein, and to the extent that it may
conflict with or contradict any such agreements or
6
<PAGE>
understandings, fully supersedes any and all prior agreements or
understandings between the Parties hereto, if any, pertaining to the subject
matter hereof. This Agreement may be amended only be a writing signed by all
Parties and their respective attorneys.
13.5 The titles of the various paragraphs are intended solely for
convenience of reference, and are not intended and shall not be deemed for
any purpose whatsoever to modify, explain or place any construction upon any
of the provisions of this Agreement and shall not affect the meaning or
interpretation of this Agreement.
13.6 In any action brought to enforce any provision(s) of this
agreement, in addition to any other relief granted, the prevailing Party
shall recover its reasonable costs of enforcement, including without
limitation, costs and reasonable attorneys fees incurred therein as
provided by California Civil Code Section 1717.
13.7 This Agreement may be executed in multiple copies and by separate
counterparts and each such signed copy shall be deemed an original hereof.
WHEREFORE, the parties hereto execute this Agreement in the City of Irvine,
County of Orange, State of California as of the date first above written.
Applied Data Communications MultiMedia Disk Duplicators
a Delaware corporation a California Limited Partnership
By /s/ Walter J. Kane By /s/ Thomas Garlock
--------------------------------- ---------------------------------
Walter J. Kane Thomas Garlock, President
MultiMedia Finance Corporation
General Partner
Walter J. Kane Star Media Partners, L.P.
A California Limited Partnership
/s/ Walter J. Kane By /s/ Thomas Garlock
- ----------------------------------- ---------------------------------
Thomas Garlock, President
Media Capital Associates, Inc
General Partner
7
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
Agreement #
------
THE SECURITIES ISSUABLE PURSUANT TO THE TERMS OF THIS STOCK OPTION AGREEMENT
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN
ACQUIRED BY THE HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE
SECURITIES ACT OF 1933, AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
THIS NONQUALIFIED STOCK OPTION AGREEMENT, made as of this day of,
199__ between APPLIED DATA COMMUNICATIONS, INC., a Delaware corporation
(hereinafter referred to as the "Company"), and (hereinafter
referred to as the "Optionee"),
W I T N E S S E T H T H A T:
The Company desires, by affording the Optionee an opportunity to purchase
shares of Common Stock in the Company ("Common Stock"), as hereinafter provided,
to insure the retention of services of Optionee and to provide Optionee with
incentives to devote his utmost effort and skill to the advancement and
betterment of the Company.
A G R E E M E N T
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants hereinafter set
forth, the parties hereby agree as follows:
1. Grant of Option. The Company hereby grants to the Optionee the right
and option ("Option") to purchase all or any part of an aggregate of
(such number being subject to adjustment as provided in Paragraph 7 hereof)
shares of the Stock (sometimes herein referred to as the "Shares")
on the terms and conditions herein set forth. The Option granted herein is a
"nonqualified option" within the meaning of the Internal Revenue Code of the
United States.
2. Term of Option. The term of the Option shall commence on
(the "Grant Date") and all rights to purchase Shares hereunder shall
remain in effect indefinitely, subject to earlier termination as provided
herein. Subject to the option (without obligation) of the Company to repurchase
shares under Section 9 below, all options granted hereunder may be exercised as
follows: percent (___%) of the options granted hereby shall be
immediately vested as of the Grant Date. An additional percent (___%)
of the options granted hereby shall vest annually on the anniversary of the
Grant Date. Without in any way detracting from the obligation of the Company
<PAGE>
to issue shares upon exercise hereof, the holder of the Option shall not have
any of the rights of a shareholder with respect to any shares of Common Stock
not actually issued and delivered to him.
3. Purchase Price. The purchase price of the shares of Common Stock
covered by the Option shall be $_____ per share. The purchase price shall be
paid in full at the time of exercise (i)in cash, or by certified check or by
bank draft; (ii)subject to any legal restrictions and obligations regarding the
purchase of shares for promissory notes or evidences of indebtedness, by
delivery of Optionee's promissory note in the form attached as Exhibit A or
Exhibit B and (at the election of the Company) secured by a Pledge Agreement of
the shares purchased or other security in the form of Exhibit C; (iii)subject to
any legal restrictions on the acquisition or purchase of its shares by the
Company, by the delivery of shares of Common Stock of the Company which shall be
deemed to have a value to the Company equal to the aggregate fair market value
of such shares determined in accordance with Section 5 of the Plan; or (iv)any
combination of (i), (ii) or (iii) above. To the full extent permitted by the
laws of Delaware and the Bylaws of the Company, the Company agrees to accept
promissory notes pursuant to Section 3(ii) above and not hereafter to amend any
charter documents or make commitments which will prohibit this obligation of the
Company.
4. Nontransferability. Without the prior written consent of the Company,
the Option shall not be transferable otherwise than by will or the laws of
descent and distribution, and the Option may be exercised, during the lifetime
of the Optionee, only by him. More particularly (but without limiting the
generality of the foregoing), the Option may not be assigned, transferred,
pledged or hypothecated in any way, shall not be assignable by operation of law
and shall not be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition of
the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
5. Termination of Employment/Acceleration of Option. If the Optionee
shall cease to be employed by the Company or its Affiliates or of an entity
issuing or assuming an Option hereunder for any reason and shall not have fully
exercised this Option, then any shares subject to the Option which have not
vested as of the date of cessation of the Optionee's employment shall become
immediately vested and exercisable as of such date of cessation of the
Optionee's employment, and may be exercised at any time within three (3) months
after the date of such cessation but in any event no later than the date of
expiration of the option period, by the Optionee, or in the event of the
Optionee's death, by the executors or administrators of the Optionee's estate or
by any person or persons who shall have acquired the Option directly from the
Optionee by bequest or inheritance. At the end of such three-month period, the
Option, to the extent it remains unexercised, shall terminate immediately and
become void and of no effect.
6. Other Expirations. In addition to any other event causing an
expiration or termination of this Option, this Option shall expire and all
rights to purchase shares shall cease (to the extent not theretofore terminated
or expired as herein provided) upon the effective date of the dissolution or
liquidation of the Company or upon a merger, consolidation, separation or
reorganization of the Company with one or more entities, corporate or otherwise,
as a result of which the Company is not the surviving entity, or of a sale of
substantially all of the property or shares of the Company to another entity,
corporate or otherwise; provided, however, that subject to the ability of the
Optionee to exercise this Option at any time in accordance with all other
provisions hereof, the Company may, in its discretion, and immediately prior to
any such transaction, cause a new option to be substituted for this
2
<PAGE>
Option or cause this Option to be assumed by a successor entity or a parent or
subsidiary of such entity; and such new option shall apply to all shares issued
in addition to or substitution, replacement or modification of the shares of
Common Stock theretofore covered by this Option; provided that
(1) the excess of the aggregate fair market value of the securities, if
any (or the products or proceeds thereof), subject to the option immediately
after the substitution or assumption over the aggregate option price of such
securities shall not be less than the excess of the aggregate fair market value
of all securities subject to the option immediately before such substitution or
assumption over the aggregate option price of such securities, and
(2) the new option or the assumption of the existing option shall not
extend the vesting period or give the Optionee less in benefits than he had
under the old option or prior to such assumption, and
(3) an appropriate adjustment of the original option price shall be made
among original shares subject to the option and any additional shares or other
securities issued in substitution, replacement or modification thereof.
If no provision is made for the assumption of this Option, or the substitution
for this Option of new options as hereinabove provided, then the Company shall
cause written notice to be given to the Optionee of the proposed transaction not
less than thirty (30) days prior to the anticipated effective date thereof, and
provided that this Option is exercisable under the terms of Sections 2 and 5
above, the Optionee shall have the right to exercise this Option at any time
prior to the effective date of the proposed transaction.
7. Adjustments. In the event that the outstanding shares of Common Stock
of the Company are hereafter increased or decreased or changed into or exchanged
for a different number or kind of shares or other securities of the Company by
reason of merger, consolidation or reorganization in which the Company is the
surviving corporation or of a recapitalization, stock split, combination of
shares, reclassification, reincorporation, stock dividend (in excess of 2%), or
other change in the capital structure of the Company, then the number and class
of shares subject to this Option and the Repurchase Option in Section 9, below,
and the purchase price per share (but not the total purchase price), shall all
be proportionately adjusted so that, upon exercise of this Option, the Optionee
shall receive the number and class of shares he would have received had he been
the holder of the number of shares of Common Stock in the Company, for which
this Option is being exercised, on the date of such change or increase or
decrease in the number or class of issued shares of Common Stock in the Company.
Adjustments under this paragraph shall be made by the Board of Directors of the
Company, or a committee thereof so empowered by the Board of Directors, whose
determination with respect thereto shall be final and conclusive. No fractional
share shall be issued under this Option or upon any such adjustment.
8. Method of Exercising Option. Subject to the terms and conditions of
this Nonqualified Stock Option Agreement, this Option may be exercised by
written notice to the Company, at its principal office in the State of
California, which presently is located at 16 Technology Drive, Suite 118,
Irvine, California 92718. Such notice shall state the election to exercise the
Option and the number of shares in respect of which it is being exercised and
shall be signed by the person or persons so exercising the Option. Such notice
shall be accompanied by payment in cash, certified check, bank
3
<PAGE>
draft, promissory note or notes in the form of Exhibit A or Exhibit B, or
certificates for shares of the Common Stock of the Company equal to, in the
aggregate, the full purchase price of such shares, and the Company shall deliver
a certificate or certificates representing the shares subject to such exercise
as soon as practicable after the notice shall be received. The certificate or
certificates for the shares as to which the Option shall have been so exercised
shall be registered in the name of the person or persons so exercising the
Option and shall be delivered as provided above to or upon the written order of
the person or persons exercising the Option. In the event the Option shall be
exercised by any person or persons other than the Optionee in accordance with
the terms hereof, such notice shall be accompanied by appropriate proof of the
right of such person or persons to exercise the Option. All shares that shall
be purchased upon the exercise of the Option as provided herein shall be fully
paid and nonassessable.
9. Representations and Warranties of Optionee.
(a) Optionee represents and warrants that this Option is being
acquired by Optionee for Optionee's personal account, for investment purposes
only, and not with a view to the distribution, resale or other disposition
thereof.
(b) Optionee acknowledges that the Company may issue Shares upon the
exercise of the Option without registering such Shares under the Securities Act
of l933, as amended (the "Act"), on the basis of certain exemptions from such
registration requirement. Accordingly, Optionee agrees that Optionee's exercise
of the Option may be expressly conditioned upon Optionee's delivery to the
Company of an investment certificate including such representations and
undertakings as the Company may reasonably require in order to assure the
availability of such exemptions, including a representation that Optionee is
acquiring the Shares for investment and not with a present intention of selling
or otherwise disposing thereof and an agreement by Optionee that the
certificates evidencing the Shares may bear a legend indicating such
non-registration under the Act and the resulting restrictions on transfer.
Optionee acknowledges that, because Shares received upon exercise of an Option
may be unregistered, Optionee may be required to hold the Shares indefinitely
unless they are subsequently registered for resale under the Act or an exemption
from such registration is available.
(c) Optionee acknowledges receipt of a copy of the Plan and
understands that all rights and obligations connected with this Option are set
forth in this Agreement and in the Plan.
10. Restrictive Legends. Optionee hereby acknowledges that federal
securities laws and the securities laws of the state in which Optionee resides
may require the placement of certain restrictive legends upon the Shares issued
upon exercise of this Option, and Optionee hereby consents to the placing of any
such legends upon certificates evidencing the Shares as the Company, or its
counsel, may deem necessary or advisable, including a legend in substantially
the form as follows:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT
AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933, AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER.
4
<PAGE>
11. Restricted Property Elections. Optionee understands that Section 83
of the Internal Revenue Code may be applicable to the Shares purchased upon
exercise of this Option and that certain elections may be made by Optionee in
connection therewith. Optionee acknowledges that the Company has no
responsibility or liability with respect to such elections.
12. General. The Company shall at all times during the term of the Option
reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of this Nonqualified Stock Option
Agreement, shall pay all original issue and transfer taxes with respect to the
issue and transfer of shares pursuant hereto and all other fees and expenses
necessarily incurred by the Company in connection therewith, and will from time
to time use its best efforts to comply with all laws and regulations, which, in
the opinion of counsel for the Company, shall be applicable thereto.
13. No Agreement to Retain as Employee. Nothing in this Agreement shall
be construed to constitute or be evidence of any agreement or understanding,
express or implied, on the part of the Company or its parent or any subsidiary,
to retain the Optionee as an employee of the Company, its parent or any
subsidiary.
14. General Provisions. Notwithstanding any other provisions of this
Agreement, the Company shall not be required to issue or deliver any certificate
or certificates for shares of stock upon the exercise of this Option prior to
fulfillment of all of the following conditions:
(a) The listing or approval for listing upon notice of issuance, of such
shares on any securities exchange as may at the time be the market for the
Company's Common Stock;
(b) Any registration or other qualification of such shares under any state
or federal law or regulation, or the maintaining in effect of any such
registration or other qualification which the Board of Directors of the Company
shall, in its absolute discretion upon the advice of counsel, deem necessary or
advisable; and
(c) The obtaining of any other consent, approval or permit from any state
or federal governmental agency which the Board of Directors of the Company
shall, in its absolute discretion upon the advice of counsel, determine to be
necessary or advisable.
5
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Nonqualified Stock Option
Agreement to be duly executed by its officers thereunto duly authorized, and the
Optionee has hereunto set his hand, all as of the day and year first above
written.
"THE COMPANY" APPLIED DATA COMMUNICATIONS, INC.
By:
------------------------------
Its:
------------------------------
"OPTIONEE"
------------------------------
[Name of Optionee]
6
<PAGE>
EXHIBIT A
Agreement #
-----
TERM PROMISSORY NOTE
Without interest prior to
maturity and 10% after maturity.
, 19
----- ---
Irvine, California
$
----------
For value received, the undersigned promises to pay to APPLIED DATA
COMMUNICATIONS, INC. (the "Company") the sum of Dollars ($ ) in full
by or before , 19__ , the 5th anniversary date of the date of the
Nonqualified Stock Option Agreement exercised in whole or in part by the
delivery of this Promissory Note to the Company.
The undersigned shall have the right to prepay said principal amount at any
time in whole or in part without penalty and prior to maturity without interest.
This Note shall mature and the entire outstanding principal, together with
interest which then shall commence to accrue at 10% per annum, simple, shall be
due and payable if any one or more of the following events shall have occurred:
(a) The making by the undersigned of any assignment for the benefit of
creditors or the filing by or against the undersigned of any petition in
bankruptcy if such proceedings not be discharged within ninety (90) days of any
such making or filing.
7
<PAGE>
(b) The occurrence of any Termination Date as defined in Section 9 of the
Nonqualified Stock Option Agreement dated as of , 19___ between the
undersigned and the Company.
If any installment of principal and/or interest is not paid when due, the
holder hereof may, at its option, declare the entire principal balance of this
Note immediately due and payable.
If legal action is instituted for the collection of this Note, the
undersigned promises to pay such sum as the Court may adjudge reasonable as
attorneys' fees.
This Note is given pursuant to that certain Nonqualified Stock Option
Agreement numbered and dated as of , 199__ , between the Company
and the undersigned and is subject to all of the terms, rights and remedies set
forth therein.
This Note may be secured by a Pledge Agreement dated the date hereof
between the Company and the undersigned.
-------------------------
8
<PAGE>
EXHIBIT B
Agreement #
-----
DEMAND PROMISSORY NOTE
Without interest prior to
maturity and 10% after maturity.
, 19
----- ---
Irvine, California
$
----------
For value received, the undersigned promises to pay to APPLIED DATA
COMMUNICATIONS, INC. (the "Company") the sum of Dollars ($ ) in full
on demand made by Applied Data Communications, Inc. at any time following
, 19__ , the date of the Nonqualified Stock Option Agreement exercised in
whole or in part by the delivery of this Promissory Note to the Company.
The undersigned shall have the right to prepay said principal amount at any
time in whole or in part without penalty and prior to maturity without interest.
This Note shall mature and the entire outstanding principal, together with
interest which then shall commence to accrue at 10% per annum, simple, shall be
due and payable if any one or more of the following events shall have occurred:
(a) The making by the undersigned of any assignment for the benefit of
creditors or the filing by or against the undersigned of any petition in
bankruptcy if such proceedings not be discharged within ninety (90) days of any
such making or filing.
(b) The occurrence of any Termination Date as defined in Section 9 of the
Nonqualified Stock Option Agreement dated as of , 199__ between the
undersigned and the Company.
9
<PAGE>
If any installment of principal and/or interest is not paid when due, the
holder hereof may, at its option, declare the entire principal balance of this
Note immediately due and payable.
If legal action is instituted for the collection of this Note, the
undersigned promises to pay such sum as the Court may adjudge reasonable as
attorneys' fees.
This Note is given pursuant to that certain Nonqualified Stock Option
Agreement numbered and dated as of , 199__ between the Company and the
undersigned and is subject to all of the terms, rights and remedies set forth
therein.
This Note may be secured by a Pledge Agreement dated the date hereof
between the Company and the undersigned.
-------------------------
10
<PAGE>
EXHIBIT C
Agreement #
-----
PLEDGE AGREEMENT
UNDER
NONQUALIFIED STOCK OPTION AGREEMENT
THIS PLEDGE AGREEMENT ("Agreement") is executed as of this day of
, 19__ , between APPLIED DATA COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and ("Purchaser").
W I T N E S S E T H :
For the considerations and undertakings set forth herein, the parties do
hereby agree as follows:
1. To secure payment to the Company of a promissory note ("Note") in the
face amount of ___________________ Dollars ($ ), and extensions or renewals
thereof, which was executed concurrently with the execution of this Pledge
Agreement pursuant to a Nonqualified Stock Option Agreement ("Stock Option
Agreement"), Purchaser hereby assigns and grants to the Company a security
interest in ( ) shares ("Shares") of the $.01 par value Common Stock
of the Company acquired under the Stock Option Agreement, together with
securities (if any) other than such Shares, all described as follows:
Issuer Certificate No. No. of Shares Registered Owner
- ------ --------------- ------------- ----------------
Purchaser does hereby deposit with the Company, as pledge holder, such
certificates, together with duly executed stock transfer powers.
2. Subject to any obligations of Purchaser under the Stock Option
Agreement, the Company agrees that within a reasonable time after all or any
portion of the Note is paid by Purchaser, the Company shall release and deliver
to Purchaser the number of Shares held hereunder for which such payment was
received. The Company, in its discretion, may release portions of the Shares
upon
11
<PAGE>
periodic principal payments or deposit of other or additional security
under the Note. All Shares released and delivered to Purchaser shall be free
and clear of the restrictions of this Pledge Agreement.
3. Unless and until Purchaser defaults in his performance under the terms
of the Note, the terms of this Pledge Agreement and/or the terms of the Stock
Option Agreement, the Shares held by the Company at any time under this Pledge
Agreement shall remain registered in the name of Purchaser on the records of the
Company, and Purchaser may vote the Shares on all corporate questions (if the
same shall be entitled to voting rights) and shall be entitled to receive all
dividends and other amounts accruing as a result of his ownership of the Shares.
4. In the event the Purchaser defaults in the performance of any of the
terms of the Note, this Pledge Agreement or the Stock Option Agreement, the
Company may exercise any and all rights which it may have under the California
Uniform Commercial Code or any other applicable statute, case, ruling,
regulation or law; subject, however, to all permits, orders, consents, rules and
regulations of the California Commissioner of Corporations and the Securities
and Exchange Commission and the Federal Reserve Board relating hereto, to which
Purchaser agrees to be bound.
5. If during the term of this Pledge Agreement the Company should become
a party to any merger, consolidation or other reorganization, this Pledge
Agreement shall be adjusted so as to apply to the securities to which a holder
of the Shares subject to this Pledge Agreement would have been entitled upon
such merger, consolidation or reorganization; and, if during the term of this
Pledge Agreement the Company shall be dissolved or its existence otherwise
terminated, then that portion of the assets and consideration to which a holder
of the Shares subject to this Pledge Agreement would have been entitled in such
transaction shall be the subject matter of this Pledge Agreement for the
remainder of its term. This Section 5 shall in no way limit the right of the
Company to repurchase shares under the Stock Option Agreement.
6. This Pledge Agreement shall inure to the benefit of and be binding
upon the heirs, executors and administrators of the parties hereto.
7. The rights, powers and remedies given to the Company by this Agreement
shall be in addition to all rights, powers and remedies given to the Company
under the Stock Option Agreement or any statute or rule of law. Any forbearance
or failure or delay by the Company in exercising any right, power or remedy
hereunder shall not be deemed to be a waiver of such right, power or remedy, or
any single or partial exercise of any right, power or remedy shall not preclude
the further exercise thereof.
8. The Board of Directors or the Stock Committee may demand and receive
payment or additional security if for any reason the collateral hereunder is
insufficient to meet minimum requirements established under federal or state
securities or banking regulations or as may be necessary to bring the Note and
the security into compliance with any such law or regulations. Any failure of
Purchaser to meet any such demand shall be deemed a default under this Pledge
Agreement and under the Note secured hereby.
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
APPLIED DATA COMMUNICATIONS, INC.
By:
------------------------------
Its:
------------------------------
PURCHASER
------------------------------
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> MAR-31-1997
<CASH> 9,112
<SECURITIES> 0
<RECEIVABLES> 79,498
<ALLOWANCES> 0
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0
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</TABLE>
